CBS 60 Minutes: "Day of Reckoning Is at Hand!"
Martin D. Weiss Ph.D. | Monday, December 27, 2010 at 7:30 am
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At this very moment, cities and states all across this country are facing their day of reckoning, with far-reaching consequences for the economy, investors and every American citizen.
This morning, I will show why this day is so urgent, how to protect yourself and even how to profit from the crisis. But first ...
Some Dire Warnings from the Past
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Back in the 1930s, when my father and his brothers were beginning their career on Wall Street, the finances of thousands of cities and dozens of states were in shambles.
More than $5.5 billion or 30% of their bonds defaulted.
Nearly all slashed or even shut down schools, libraries — even police and fire stations.
Dad's colleagues on Wall Street had said it could never happen. But it did.
Four decades later, when I was in Brazil in 1970, I saw a similar phenomenon.
City budgets were gutted.
Public buildings were sold off to the highest bidder.
Public employees and other creditors waiting for up to six months to get paid.
Today those same cities in Brazil are in much better shape. But, unfortunately, we cannot say the same for our cities and states in the United States.
Indeed, more recently, when I predicted that rich states like California and New York — plus thousands of cities of all sizes around the country — would suffer a similar crisis ...
Moody's, S&P and Fitch
Scoffed and Growled
Moody's, S&P and Fitch are paid huge fees by thousands of state and local governments for giving them ratings that are typically overinflated.
They're paid additional fees for rating the insurance companies that supposedly guarantee the municipal bond payments for investors.
And then they rake in all those fees year after year simply by maintaining ratings that are often based on grossly outdated data.
Now, that municipal bond ratings farce — based on payola and riddled with conflicts of interest — is collapsing for three reasons:
First, it's collapsing because the entire concept of municipal bond insurance — riddled with the same conflicts — has crumbled, just as I warned in The Ultimate Safe Money Guide.
Two of the largest bond insurers — Ambac and FGIC — are already bankrupt, with FGIC now subject to possible liquidation by New York State regulators.
And MBIA Inc., the only surviving bond insurer among the Big Three, has just been downgraded by three notches to B- — deep into junk territory.
Result: Hundreds of thousands of investors who bought insured bonds are now vulnerable. They thought they were buying protection against default. Instead they got little more than a pig in the poke.
Second, it's collapsing because many cities are years behind in providing accurate financial data ... while their finances have deteriorated in a matter of months.
Consequently, a large portion of the data is not only grossly outdated ... it's downright wrong, failing to properly reflect the recent sharp deterioration in local finances.
Third, the muni bond ratings farce is collapsing because of the disastrous situation on the ground. Consider these excerpts from 60 Minutes:
In the two years since the "great recession" wrecked their economies and shriveled their income, the states have collectively spent nearly a half a trillion dollars more than they collected in taxes. There is also a trillion-dollar hole in their public pension funds.
The states have been getting by on billions of dollars in federal stimulus funds, but the day of reckoning is at hand. The debt crisis is already making Wall Street nervous, and some believe that it could derail the recovery, cost a million public employees their jobs and require another big bailout package that no one in Washington wants to talk about.
"The most alarming thing about the state issue is the level of complacency," Meredith Whitney, one of the most respected financial analysts on Wall Street and one of the most influential women in American business, told correspondent Steve Kroft. ...
"It has tentacles as wide as anything I've seen. I think next to housing this is the single most important issue in the United States, and certainly the largest threat to the U.S. economy."
Next, 60 Minutes provides a rundown of the woes of states. It's shocking. But it barely scratches the surface:
California, which faces a $19 billion budget deficit next year, has a credit rating approaching junk status. It now spends more money on public employee pensions than it does on the state university system, which had to increase its tuition by 32 percent.
Arizona is so desperate it sold off the state capitol, Supreme Court building and legislative chambers to a group of investors and now leases the buildings from their new owner. The state also eliminated Medicaid funding for most organ transplants.
Then there's New Jersey. It has the highest taxes in the country, a $10 billion deficit and a depressed economy when first-year Governor Chris Christie took office. But after looking at the books, he decided to walk away from a long-planned and much-needed project with New York and the federal government to build a rail tunnel into Manhattan. It would have helped the economy and given employment to 6,000 construction workers.
Gov. Christie acknowledged that's a lot of jobs. ... "The bottom line is I don't have the money. And you know what? I can't pay people for those jobs if I don't have the money to pay them. Where am I getting the money? I don't have it. I literally don't have it. ... The day of reckoning has arrived. That's it. And it's gonna arrive everywhere. Timing will vary a little bit, depending upon which state you're in, but it's comin'."
But if You Think California and New Jersey
Are in Bad Shape, Wait Till You See Illinois!
60 Minutes also interviewed Illinois state paymaster Hynes — a man who currently has about $5 billion in outstanding bills in his office and not enough money in the state's coffers to pay them.
Care to know how far he's behind in paying his bills?
Six months — precisely the situation I witnessed decades earlier in Brazil.
And care to know how many people are clamoring for the money? Consider his response to that precise question by the 60 Minutes interviewer: "Tens of thousands if not hundreds of thousands of people waiting to be paid by the state. Pretty much anybody who has any interaction with state government, we owe money to," Hynes said.
That includes:
- University of Illinois, which is owed $400 million.
- Small businessmen, such as Mayur Shah, who owns a pharmacy in Chicago and has been waiting months for $200,000 in Medicaid payments.
- 2,000 not-for-profit organizations that are owed a billion dollars by the state.
- And many more creditors.
The big problem:
The more the cities and states slash their budgets ... the more it sinks their local economies ... and the more additional cuts they have to make.
That's why we at the Sound Dollar Committee are so passionate about re-evaluating this country's monetary and economic policies. Our country's leaders are following the mistakes of the past, and are not learning from them. We need to change course and now.
Good luck and God bless!
Martin
Grand Compromise or Great Conspiracy?
by Martin D. Weiss Ph.D. on December 13, 2010
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When Americans went to the polls last month, many thought they were voting for a return of fiscal sanity in Washington. And with fiscal sanity, we’d have far better assurance of bond-market stability.
Instead, three houses of ill repute — two on Capitol Hill and one on Pennsylvania Avenue — are joining to deliver one of the most wanton, deficit-busting, bond-wrecking bills of all time.
What most people seem to overlook is that there are actually two bills in the works. There’s the bill Congress will pass this year. And there’s the bill you and I will have to pay next year, the year after, and perhaps till the day we die.
President Obama and the Republican leadership are calling it a “grand compromise to stimulate the economy.”
In reality, it’s little more than a great conspiracy to slaughter our nation’s finances.
The sad irony is that nearly all key decision-makers in Washington — including some you and I may have voted for — are feasting on the spoils:
- The Republican leadership is getting the biggest prize — the extension of all Bush-era tax cuts.
- The White House is walking away with its own choice morsels — a 13-month extension of unemployment benefits, a major cut in payroll taxes, and more.
- And even rebellious Democrats are rebelling with a goal: To get a few leftovers for themselves as well.
Nearly every leader in Washington has blood-red ink on his hands!
None of the deal-makers have assumed responsibility for our future or our children’s future!
To read more, go to moneyandmarkets.com.
The Solution to the Government Debt Problem Is Well Known
by Claus Vogt on December 1, 2010
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"Europe needs a new culture of stability," and added, "A better monitoring system of the national budget would be needed for all European Union member countries."
She even addressed the cause of the European debt crisis when she said many EU countries lived beyond their measures.
Merkel obviously has recognized the root of the over indebtedness problem many European countries — and the U.S. — face. But does this recognition mean that the problems will be solved?
Unfortunately, no.
You see, there is still no political will to implement prudent monetary and fiscal policies. Not in Europe, not in the U.S. And it's easy to understand why ...
Voters do not want to want to tighten their belts! They've always counted on government goodies to keep the party going. And politicians want to be (re)elected. So they have no incentive to implement prudent, long-term policies if they come with short-term hardships.
However, generally speaking ...
A "Culture of New stability" Is
Easy to Establish
A return to sound money; the reintroduction of a prudent global monetary system would make budget deficits quickly disappear. Politicians would have to accept budget restrictions. They would have to stop their spending binge and return to soberness.
Moreover, under a sound money regime the often bemoaned massive international economic imbalances would not exist. And we wouldn't experience the huge speculative bubbles like we've had in the past.
The "after us the deluge" policy, which has become the credo since President Nixon abandoned the Bretton Woods monetary system, would have never been possible with sound money.
To read more, go to moneyandmarkets.com.
Fed Money Printing Getting Even Wilder
by Martin Weiss on November 15, 2010
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I've seen a lot of crazy monetary shenanigans in my lifetime — in Brazil, Japan and elsewhere.
But I've never seen anything quite like the explosion of out-and-out money printing we're witnessing in the United States today.
Look. Back in 1999, Fed Chairman Alan Greenspan poured money into the economy to help soften the impact of the feared Y2K bug. Monetary experts thought he had gone wild.
Two years later — this time in response to the 9-11 terrorist attacks — Greenspan did it again. He ran the money printing presses and tried to flood the banking system with liquidity. They said he had gone wilder.
But the piles of money Greenspan printed during those two episodes are anthills in comparison to the mountains Ben Bernanke is printing today.
Below are the numbers. They're mindboggling.
#1 — Y2K. Between October 6, 1999 and January 12, 2000, the Fed pumped in $73 billion in three months (based on the Fed's measure of the U.S. monetary base).
#2 — 9-11. In the days immediately following the attacks through September 19, 2001, Greenspan rushed to pump $40 billion into the U.S. economy — one of the largest amounts ever recorded for such a short period.
#3 — QE1. In response to the debt crisis of 2008-2009, the Fed embarked on its first round of "quantitative easing" — buying bonds to pump more money into the economy.
As a direct result, the monetary base exploded by $1.3 trillion from September of 2008 to February of 2009.
That was nearly 18 times larger than the Y2K episode and 32 times larger than the 9-11 money pumping.
#4 — QE2. Bernanke's Fed just announced a second round of quantitative easing (QE2) slated to be smaller than the first — $600 billion.
So based on the idea that it's smaller, apologists for the Fed want you to believe that all is OK — that it's nothing more than a "relatively moderate" maneuver.
That's baloney! Pure hogwash!
Why? Because the QE1 and QE2 money printing is cumulative.
In other words ...
The $600 billion of new money printing, which Bernanke just announced on November 3, is being piled on TOP of his first round of money printing.
Is this standard operating procedure for the Fed?
Heck no!
In fact, soon after the Y2K and 9-11 money printing binges, Greenspan's Fed immediately sucked all the extra funds out of the economy: He promptly REVERSED those two money printing binges!
Bernanke has been promising something similar — the so-called "exit strategy." But where did the exit strategy go?
My view: It probably never existed to begin with. Instead, it's bound to go down in history as one of the greatest broken promises of all time.
Worse, it's very possible Bernanke's real plan was not to exit. It was to dive in even deeper, and that's exactly what he's doing right now — all based on the lame excuse that "inflation is too low."
To read more, go to www.moneyandmarkets.com.
Your Money Could Be Worth 39%
Less Than You Think!
by Larry Edelson on November 15, 2010
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These days it seems that almost everyone I know is playing it ultra safe in their investments. Generally, that's a good thing that I whole-heartedly endorse.
But with Washington and the Federal Reserve hell bent on devaluing the dollar — and succeeding at it — being safe with your investments is one of the most dangerous, riskiest things you can do.
For instance, suppose you put $100,000 in a money market account earning 4% a year back on January 1, 2002. Compounded daily, you'd have $143,247.16 as of yesterday.
But over that same time period, the dollar has lost almost 39% of its international purchasing power. So, what one dollar bought in 2002, will only buy roughly $0.61 worth of goods and services today.
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In other words, in terms of its current purchasing power, that $143,247.16 in savings that you accumulated and thought you protected so wisely — is really worth only $87,380 — nearly 39% less than you thought!
Put another way, your original $100,000 is worth almost $13,000 less than what it was worth in 2002!
Great deal, eh? A safe investment that actually ended up destroying a good portion of your money.
Moreover, going forward, this kind of shrinkage in the true value and purchasing power of your money is only going to get worse, especially if you invest in Treasury notes or bonds, which are now starting to plunge in value because of the Fed's incessant money printing.
Reason: The dollar will continue to fall ... the value of your bonds will fall as the dollar sinks ... and you'll ultimately lose much more.
That's especially true now, not only in the aftermath of Ben Bernanke's massive money printing spree, but also because the latest G-20 meetings are a joke and will do nothing to prevent the dollar from falling more.
To read more, go to www.uncommonwisdomdaily.com.
Two Videos from Dan Mitchell on Spending
and How to Balance the Budget
by Martin D. Weiss, Ph.D. on November 11, 2010
The problem is spending not deficits:
This video shows how simple it would be to balance the budget by restraining spending:
Welcome to the Sound Dollar Committee's Blog!
by Martin D. Weiss, Ph.D. on August 25, 2010
We are excited to launch this new platform to keep you informed on efforts to support sound fiscal policy for the country, including breaking news, analysis and commentary from leading economists and policymakers. We hope this platform will encourage interaction and dialogue with our activists.
With much debate in Washington centered around the expiration of the Bush tax cuts, I would like to bring to your attention this excellent commentary from our Advisory Committee Member Dr. Dan Mitchell: http://danieljmitchell.wordpress.com/2010/07/30/peter-ferraras-too-nice-attack-on-phony-washington-budget-deals/
Best,
Martin
