Fiddling While Rome Burns

The expression "fiddling while Rome burns" may not be historically accurate, but the meaning of the expression, which is "to occupy oneself with unimportant matters and neglect priorities during a crisis," is an appropriate way to describe the leadership of President Obama when it comes to the budget crisis.

Back on Feb. 12th President Obama sent his $3.7 trillion fiscal 2012 budget plan to Congress.  Since the President's State of the Union speech announcing his intention to freeze spending at this unsustainable level there has been a fire burning in congress.  Yet the the President's leadership has been absent. Obama is seriously risking that growing possibility that a government shutdown will be the defining moment for his presidency.

It's been said, "For now, Obama is content to let lawmakers snipe at each other, with a little more than a week before the March 4 shutdown deadline."  Does he think that congress, a dysfunctional partisan body that is as divided as ever can reach a decision on the most contentious and enormous political challenge in a generation without leadership?

The parties are not negotiating! They are arguing over $60 billion out of a $3.7 trillion budget!    They have drawn battle lines and Washington can't agree on cutting even 2% of the budget! Time is on the side of the Republicans and the Tea Party since if a continuous spending resolution is not passed much of the Federal Government will automatically come to a screeching halt. 

As both parties in congress play a game of chicken, betting the other will blink first, the risk is rising. "Shutdown" is fast becoming the buzzword used by both parties in Washington, and those covering the situation. Each party believes Americans will blame the other for any shutdown. But I doubt most Americans have given much thought to the impact of either budget option (a shutdown or major cuts) on the Nation and the State's operations?  While Washington is "fiddling" the States are going up in flames!

I don't care how good a speaker Obama is, when the Feds and the States face the inevitable reality that they have to restructure labor agreements, health benefits, and retirement packages/pensions there is nothing the President can say that millions of Americans expecting those entitlements will want to hear!  Try to imagine angry protests and job actions across the nation backed by the likes of the Teamsters, AFL-CIO, Rail Unions, Teachers Unions, The TSA, Police Unions, Postal Workers, and dozens of others. According to a 2/24/11 Article in NPR, "In fact, he (Obama) has only made one comment on the union battles, and that was last week."

Obama is fiddling, so when the flames rise up we better hope the firemen don't go on strike!!

Other Related Stories:
Shutdown Is No Joke - NPR
What Would a Government Shutdown Look Like - PBS
Memories of 1995 Haunt GOP 
State Budget Crisis Looms Over Governor Meeting  
Opinion: Wisconsin Exposes Deeper State Budget Crisis
Will California Fall Into 'The Black Hole'?

Going To Get Ugly

The budget crisis, which up to this point has been merely a debate, is about to become full blown crisis.  By March 4th the federal government needs to pass a Continuing Resolution (CR) in order to fund continuing federal government operations for the rest of the 2011 fiscal year, while making the largest single discretionary spending cut in the history of the nation. If the CR is not enacted before the current funding measure’s deadline of March 4^th, Congress must pass another short-term funding resolution or else risk a government-wide shutdown.  


The current CR is making its way through congress and about to end up on the President's desk for signature contains some $100 billion in cuts and the President has already promised to veto it because it has cuts the President doesn't support.  But those cuts don't even begin to touch entitlements and the Pentagon budget!  There is simply NO WAY we can seriously deal with our national deficit and debt without doing so!   And, since the Federal government still lacks the will or wear-with-all to tackle the 1.5 trillion deficit, the stage is set for the next big standoff - the vote to raise the Debt Ceiling.


Federal debt could exceed the current limit by as early as April 2011. If Republicans don't raise the limit, they risk defaulting on the country's debt obligations, which would be disastrous for the economy.  By the same token, the Tea Party is digging in its heels and will use the threat of a filibuster to stop a bill to raise the Debt Ceiling as a means to get what it considers serious spending cuts. It's going to get ugly.

Because States must balance their budgets and because they lack a mechanism for buying their own debt, like Washington has through the Federal Reserve, the budget shortfalls have become a critical problem that have to be addressed. What's begun to happen at the State level in Wisconsin is the beginning of what will be going on across the country. In order to address their State budget shortfalls one State house after another is squaring off against those trying to protect their entitlements (pensions, medicare, social security, union contracts, collective bargaining, etc.).  It's going to get ugly.

It's going to get ugly as unions, pensioners, teachers, police, transportation workers, government employees, and other large groups of citizens have their livelihoods threatened.  It's going to get ugly as municipal bond holders discover that their believed to be secure investments are being devalued.  It's going to get ugly as property owners face the threat of large tax increases. It's going to get ugly when higher property taxes combined with accelerated property tax sales and foreclosures combined with fewer buyers force another leg down in housing prices.

As all these citizen groups protests mount in cities, towns, and state capitals across the nation it will seem like there is unrest everywhere which will create a very uneasy feeling. Some protesters are bound to take extreme actions and one crazy action will inspire another.  Events could easily spiral and protests could put an unmanageable strain on safety officers to control crowds and the disruption they cause to traffic and the regular function of government, transportation, and other services.  It's going to get ugly when workers protesting their cuts decide to walk out on their jobs. It's going to get ugly when the protesters are the same people responsible for handling the protests. It's going to get ugly when teacher walkouts close schools and parents who need to go to work have to deal with children who should be in school.

As the daily news coverage of the protests and government gridlock and other consequences brought on by the budget battles takes over the media there will be a growing feeling of uneasiness in our country and this will take a severe toll on consumer confidence. It's going to get ugly as the budget crisis begins to take its toll on consumer spending and in turn threatens the economic recovery.  It's going to get ugly when the stock market prices in this change in reality.  It's going to get ugly when a previously rising stock prices change their direction and declining prices start taking back the wealth effect that Bernanke and the Federal Reserve has tried so hard to bring about. It's going to get very ugly when markets and economies around the world recognize that what is going on in America is a threat to world's economy!  It's going to get very ugly when sovereign debt problems, yet unresolved, become critical and unsustainable, and now the they have to factor in the USA's problems!

Related Articles:
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Hidden Debt Makes Government Insolvent
Bankruptcy Laws for States
Gov to Feds: Avoid causing states any more pain
Obama says government shutdown imperils economy
US Budget Gap is Top Worry of NABE Economists

Keeping It Real

WARNING:  This post is about stuff people don't talk about.  It contains scenes that could be offensive.

Mary and I haven't gotten out of the house together for 8 days. Mary's chemo regiment is high (strongest drugs and high dosage) and the effects are cumulative, so after round 4 a week ago last Thursday, we haven't been able to get out of the house together until yesterday.  Our first trip out was to the plastic surgeon to start planning for breast reconstruction.  It was exciting on a few levels.  One, just to get out together.  Two, the idea of moving to the forth phase of a five phase breast cancer experience. 

I figure there are five phases to cancer: 


Phase I - Holy shit, We have cancer:  The news of this disease hits you between the eyes.  It's a bombshell.  You're stunned and confused and scared.  You go from shock to what the f' do we do now!? Your mind races non-stop as you try to figure out and come to terms with your new reality. 
Phase II - The Battle:  Kill the cancer with chemotherapy. As of this post, that's the phase we're in. In this phase you have to mentally prepare yourself to fight for your life!  It's us against it!  You have to accept that it's gonna be tough. One of the things that gave me confidence that we could face this is that I know Mary is a strong and courageous warrior.  And, I was determined to stand by her side and help her fight the fight in any way I could.
Phase III - Amputation:  In a battle there are injuries.  We learned early on in the battle that we're going to lose the breast. 
Phase IV - Healing: Breast reconstruction is the first step in the process of getting back to normal.  At least a "new normal."  You're looking up and looking ahead and it feels so good!
Phase V - Live:  Live life with profound appreciation of how precious it is.  Live with the awareness that at any moment any one of us could have it all taken away.  Live life with the recognition of what matters and what doesn't matter. We're lucky that Mary's breast cancer is hormone positive because that gives us drug options to keep the cancer from coming back!

One of the important common denominators that is helping us get through it all is humor.  What's so funny about this?  You'd be surprised!  There's a lot of funny stuff!  Seeing yourself or your wife bald can be funny.  Wearing your wife's wig is funny.  Watching a man draw on your wife's breast is funny.  Heck, it looked like the surgeon drew eyes where here nipples are (there I said it).  I'm sitting there in a room with another guy, and my wife's breasts are staring at me.  Can't you see the funny in that?!  Mary and I will be laughing about that experience for years to come.

I realize that it's weird and awkward to talk about this stuff.  But it's real. Would you rather I talk about the economy? (Don't answer that.)  Shit, Mary's last blog post was about the awful constipation she's experiencing from the chemo.  Who talks about being constipated, let alone their wife's breast surgery?  WE DO!  We do because it's our life.  If we were traveling across Europe, we'd talk about that.  If we purchased a new pet we'd talk about that. But we're not doing that.  What we're doing is surviving cancer! 

There is as much to cry about as there is to laugh about in life.  Frankly, I think either reaction is applicable to the same situation.  I can cry about the doctors cutting away my wife's breasts and replacing them with a "facsimile" as he called it.  Either reaction, seeing the humor and/or seeing the sad is OK!!    

We are just trying to "keep it real."  Keeping it real is our way of keeping it honest.  It's our way of sharing our lives, which is also an invitation to our friends to share their lives with us!

The Mighty Dollar ... Really?

The USA $ is the worlds reserve currency. Where ever you travel, they'll take your USA dollars. And every country keeps USA dollars in reserve. When ever there is a crisis in the world, the term "flight to safety" is synonymous with the purchase of Treasury Bills. And while the dollar has weakened against the UK pound and the euro, we remain the worlds most trusted currency. But what if that were to change? What if a flight to safety were not to translate into Treasury Bill purchases? Or what if countries like China decided the "mighty dollar" wasn't so mighty after-all and started to reduce their holdings?

These questions are hardly improbable! To the contrary, there are economists around the world who are warning of this possibility. If it were not for the fact that there are huge problems with euro member countries finances too, the dollar would be even weaker against the euro than it already is! China which funds our debt, does so because American imports are critical to their factories. But as their massive population raises its level of consumption the need for USA imports will diminish and the potential desire to finance our debt may wain. The Chinese may be planning for this which may explain why that they've been staying much shorter in their T-bill terms they purchase (e.g. more 2 yr, 5 yr. and less 20 yr. and 30 yr.).

Rumors have been circulating for years about the collapse of the USA dollar and its replacement with a new currency that would join the USA and Canadian dollar and the Mexican peso. That seems unlikely to me, but the mighty dollar doesn't have to collapse altogether for us to have some very serious problems. All that has to happen is for the USA dollar to lose its luster.

If the world starts to favor other currencies and shy away from USA T-Bills. Rising T-Bill interest rates would push up interest rates and USA borrowing costs. In turn, our massive budget deficit and debt would be far more expensive to carry. This effect would compound the challenge of balancing our budget!

Put it all together and this is a possible sequence of events: Interest rates on T-Bills rise to attract their sale causing Federal debt costs to rise. The government is forced to dramatically raise taxes and cut even more spending. The combination of higher interest rates and higher taxes and large fiscal spending cuts would represent an enormous drag on GDP. As the economy slips so would tax revenues. At that point we've created a terrible negative spiral! Add in the expectant massive stock market reaction. Add in the likelihood that consumer and business spending would cease up. Add it all up and we have an economic disaster! But this disaster would make the last "financial crisis" and recession look like the preview to the real show, a depression!

Far fetched? Not really. It could literally begin overnight. All it would take is for the collective concern that already exists over the way the USA is dealing with its deficit, to morph into collective fear over our ability to deal with our debt. Fear often turns into panic. Panic turns into over-reaction. Over-reaction results in a sell-off. If that happens, then we're off to races!

There is an alternative scenario. A much more positive one, thank goodness. But I'll save that for another time.

NOTE: Since publishing this post I find it interesting that this last week in February, despite world tensions that rippled through the world and USA stock market, there was not the classic strengthening in the US Dollar that we typically see. 

Related articles:
Three Investing Gurus See Dark Days Ahead for the Dollar
Traders 'Short' Dollars As Currency Loses Attraction
Debt Facts
The Dollar: Safe haven no more 
Truth-0-Meter:  USA Debt Compared to Other Countries

Stimulus In Reverse

We are about to face an important test! Can the economic recovery, which is undeniably underway, withstand the reverse of stimulus that not long ago rescued us from the financial crisis. Here's what I mean by Stimulus In Reverse:

• Rising Interest Rates
• Giant Fiscal Cuts (Federal and State)
• Less Monetary Easing
• Expiring Tax Breaks and Increasing Tax Rates
• Increased Fees, Fines, and Every Other Tax Substitute
  
• Diminished Government Support for Home Ownership
• Opening the Mortgage Foreclosure Floodgates
• A Challenging Municipal Borrowing Market
• Reduction of Long term Unemployment Benefits
• Tightening in China
• Worldwide Fiscal Austerity

During the crisis from Fall 2008 - Winter 2010, these monetary & fiscal forces provided a tailwind for the recovery. But now we're entering a phase of policy changes that are turning off the stimulus faucet and efforts to balance budgets. The populous opinion is that the spending is unsustainable. Since the 2010 election, the pendulum is swinging back over to austerity.

The question is whether or not we maintain the positive momentum in the economy, or if we'll slip back to negative growth. I don't think anyone really has the answer. Personally, I think it could go either way. A lot will depend on something called "animal spirits." In other words, consumer and business confidence will be the driver.

If the mood turns sour and consumers hunker down once again, the recent wealth creation in the stock market would suffer a big reduction, growth would dip and unemployment would rise.

In some respects the economy is more vulnerable now that it was in 2008. At that time the Federal government was allowed much more freedom to step in than it would have today. Fed Chair Bernanke and Treasury Secretary Geitner have warned us numerous times of the danger of withdrawing stimulus to fast. But they've also warned us that we're on a collision course if we don't get our fiscal house in order. You might say we're dammed if we do and we're dammed if we don't cut government debt and deficits.

Surely, there is a balancing act going on. If we lean to much over to the fiscal conservatism side we will pull the rug out from under the recovery; on the other hand, if we don't rein in out-of-control government deficit spending we'll face a crisis in the debt markets.

Unfortunately, there is no magic formula that we can use to get the mix of of cuts and stimulus just right. We'll know whether or not if we got it right when the markets and the data tell us. But if the leadership does get it wrong, the big question will be, "What can they do to fix it?"

Obama's 2011-12 budget kicks off a debate that will ultimately prove to be a test if the economy can withstand Stimulus in Reverse.

Related articles:
Goldman Sees Danger in US Budget Cuts
GDP: Economy slows on cuts from state and local government

Regret < Acceptance > Fear

One of the most amazing qualities of my wife Mary is how she is coping with her cancer. She's never complained, but she could. She's never expressed fear, but she could. She's felt lousy, but she just lays down. The road ahead is hard and scary, but she's never brought it up. How would I describe her state of mind?

Many of us focus on two things - things we wish were different and/or things we worry about happening. It could be people that have let us down in the past or we are afraid will in the future, or a situation that didn't go the way we wanted it to or we're afraid won't in the future. Stuff from the past - call that regret. Stuff in the future - call that fear.

Regret and fear have been called thieves. They rob our spirit and steal possibilities.

Mary has the wonderful ability to stay centered in a state-of-mind that I'll call acceptance. Mary accepts a lot of things that she knows she can not change. She accepts me. Thank you Mary!! She accepts our children. And they love her for it. She accepts her past, and her future. How wonderful and amazing that is!!

A Giant Flush - It's About Time!

The worst recession since the 1930s has caused the steepest decline in state tax receipts on record. As States start to work on their 2012 budget this July, they face cumulative budget shortfalls from the economic crisis and recession from 2009 to 2012 that are projected to total $556 Billion! (Again, this is the States' shortfall, NOT the Federal deficit! And, it doesn't include the States' unfunded pension obligations)

Businesses responded early in the recession, cutting labor and other expenses, preserving their cash, and taking other steps to gird themselves for hard times. States failed to respond when they should have to the recession. Conversely, with the Federal government on a spending spree that bailed out States with money for medicaid, unemployment benefits, and money to retain workers, States borrowed more and drew down reserves and failed to make hard budget decisions and to confront unions.

The public sector recovery lags behind the private sector, so while the economy is on the rebound, public sector fiscal woes are reaching the breaking point. It was written in a Feb. 2011 article from the Center on Budget and Policy Priorities, "Unemployment remains above 9 percent, and many economists expect it to remain at high levels throughout 2011 and beyond. Continued sluggish job growth will keep state income tax receipts at low levels and increase demand for Medicaid and other essential services that states provide. High unemployment and economic uncertainty, combined with households’ diminished wealth due to fallen property values, will continue to depress consumption; thus, sales tax receipts also will remain low. These factors suggest that state budget gaps will continue to be significantly larger than in the last recession, and last longer."

Projected shortfalls for 2012 alone represent nearly a 20% gap. And this estimate was prepared BEFORE the GOP recently announced proposed cuts of nearly 20% in non-defense Federal spending which will no-doubt impact State's funding!! The States have blown through their reserves already and their costs for services and safety net programs have gone up due to the recession and high unemployment! So the trillion dollar question is HOW ARE STATES GOING TO MAKE UP THE DIFFERENCE?!

While I don't have data, it is a logical assumption that fiscal problems at the Federal and State level are effecting County, City, Town, and Village operations AS WELL AS schools across the Country as well. As the States make their cuts we can certainly expect it to effect local services and education funding. And with record snow falls this year you know the clean-up costs are way above what was originally budgeted when 2011 budgets were done. HOW IS YOUR STATE, COUNTY, CITY, TOWN, VILLAGE, AND SCHOOL DISTRICT GOING TO MAKE UP THE DIFFERENCE?!

It's not quite budget season for States and municipalities. July is when most of State budgets take effect for the next fiscal year. So States are only beginning to gather their data in order to work up their budgets. But you can be sure there will be some desperate moves when those planning meetings come round.

Ordinarily government and school districts, with their tax powers, just raise revenue (taxes) to keep on spending. While they will be forced to look for additional revenue, there's no way Government can or will close the gap with taxes. Neither the economy or the politics will tolerate that approach. Government has to focus on the spending side! So it's a given that nearly every State program, every operating line item, and every government funded job will be under scrutiny. IT'S ABOUT TIME!

Government has no choice - it has to scrutinize and cut anything and everything! And this has to include the obligations they've got to pensions and prior labor contracts, even if it takes changes to the laws to allow States to file bankruptcy. Excesses in municipal and government related retirement compensation and benefits need to be adjusted to fairly share the pain of the past excesses in spending! IT'S ABOUT TIME!

The cuts in spending that need to be enacted at every level of government will be like a giant flush sending waste down the drain. If America plays this recession right we may just get find ourselves with a far more efficient Government that will serve us better for years to come.

As we enter the next wave of prosperity and the tax revenues pick up again Government can start to do something that households and businesses have been doing for the last 12-24 months - using savings to start paying down our debt! Wow, imagine that. IT'S ABOUT TIME!