Thursday, May 13, 2010

Gulf Oil Spill Is Spoiling Tourism

Gushing Crude Halts Some Travel

The oil spill in the Gulf of Mexico is causing some travelers to alter their plans, say researchers and hotels.

A survey conducted by the Knowland Group May 3 and 4 of 50 hotel properties along the Gulf Coast found that 35% of respondents say the oil spill has prompted potential guests to cancel their reservations. Many of the hotels surveyed said they are concerned that more cancellations and deferred arrivals are in the offing in coming weeks. The Knowland Group is a data-collection company that tracks activity at thousands of hotels world-wide. Of the hotels surveyed, 42% said the spill has hurt their ability to book future events. Sixty-two percent said they are accommodating travelers by not holding groups to a contract clause that prevents them from canceling reservations.

The Holiday Inn Express in Long Beach, Miss., initially had eight cancellations for Memorial Day weekend because of the oil spill but says the vacancies have since been filled.

As oil reached parts of the Louisiana shore last week, federal and state authorities began closing areas to the public. The U.S. Fish and Wildlife Service closed the Breton National Wildlife Refuge. Among the places barred were the Chandeleur Islands, a chain of barrier islands in the extreme east of the state. The National Oceanic and Atmospheric Administration closed about 5% of Gulf of Mexico waters to fishers. Projections for the oil's trajectory for Thursday show the spill is expected to continue edging closer to the shore.

Some resorts on Florida's Gulf Coast not yet touched by the crude say travelers are still flowing in. The Sandestin Golf & Beach Resort near Destin, Fla., between Panama City and Pensacola, reported fewer cancellations than it expected and has received inquiries from travelers whose trips were set back or put in question by the oil spill. To reassure future guests about their reservations, the hotel is streaming live footage from a webcam with a view of the beach and is allowing leisure travelers to cancel reservations up to 24 hours before travel.

How to Avoid Checked-Bag Fees

Some frequent travelers now have one more way to save on baggage fees—their credit-card loyalty programs.

Starting June 1, American Express Delta SkyMiles credit-card holders will enjoy a waiver on first checked-bag fees for themselves and for as many as eight travelers on their reservations.

With Delta's first checked-bag fee starting at $25, each way, the fee waivers could add up to a round-trip saving of $100 for a couple and $200 for a family of four. Card holders will receive a first checked-bag-fee waiver upon check-in. The waivers will be given to card members with a Gold, Platinum or Reserve Delta SkyMiles credit card. Oversized- and overweight-baggage charges still apply.

The fee waiver comes at a time when most airlines charge for checked bags and after Spirit Airlines announced it would become the first airline to charge for carry-on luggage in overhead bins.

Starting Aug. 1, travelers carrying bags that do not fit under the seat in front of them will have to pay as much as $45 per carry-on bag at the gate. The fee is reduced to $30 for those who pay online, on the phone or at check-in and it is further reduced to $20 online for members of Spirit's $9 Fare Club, which levies an annual membership fee of $39.95.

Daily Discounts

Through a new website, DailyGetaways.com, nearly 50 American destinations and travel brands are offering discounts of as much as 50%. The offer is called Discover America Daily Getaways and is a promotion of the U.S. Travel Association sponsored by American Express. It runs through June 4.

Major credit-card holders can choose from among travel packages involving hotels, airlines, rental cars, attractions, theme parks and other businesses.

American Express card holders may participate in a daily members-only auction from now through June 4 in which they can bid on travel packages arranged by two dozen cities. The auctions begin each day at 10 a.m. and end at 10 p.m., Eastern Standard Time.

One deal open to all card holders that becomes available Thursday costs $2,500 and includes two nights at a Best Western hotel in Charlotte, N.C. and a half day at Michael Waltrip Racing's Raceworld in Cornelius, N.C. The motor-racing attraction includes a private tour for two, lunch with driver Michael Waltrip, autographed merchandise and the chance to observe the pit crew practice.

Associated Press

Punta Cana, in the Dominican Republic. JetBlue now flies there.

Briefs

• The California Travel and Tourism Commission has collaborated with Southwest Airlines in an online marketing promotion called California—The Game. At visitcalifornia.com/game, Southwest will give away a pair of round-trip airline tickets each week through June 21. The promotion features two grand prizes for which entries will be accepted through June 27: a Southern California Ultimate Family Getaway and a Northern California Wine, Dine and Culture Getaway. Consumers earn more entries by playing a virtual board game, with the objective of traveling around California.

• JetBlue Airways has added service to Punta Cana, its fourth city in the Dominican Republic. Daily nonstop flights are available between Punta Cana International Airport and New York's JFK. Weekly flights are available from Boston's Logan International Airport. Many resorts in the Dominican Republic are offering reduced rates for bookings made through May 20. Visit jetblue.com/vacations.

Obama's Ex-Auto Czar Says GM May Have Stretched Truth About Loan Repayment

President Obama's former auto czar has nothing but praise for General Motors' new chief executive, Ed Whitacre, but he acknowledged this week that the auto giant may have "slightly elasticized the reality of things" by airing an ad claiming it had repaid its government loans "in full."

President Obama's former auto czar has nothing but praise for General Motors' new chief executive, Ed Whitacre, but he acknowledged this week that the auto giant may have "slightly elasticized the reality of things" by airing an ad claiming it had repaid its government loans "in full."

The ad, which aired on multiple channels, was taken off the air amid a complaint with the Federal Trade Commission filed by a conservative think tank alleging that the company is lying about its health in a way that dupes consumers.

Steve Rattner, who was the auto czar last year, told reporters on Monday that GM may have stretched the truth, the Detroit News reported. But he also took his hat off to Whitacre.

"We should all wake up and thank God we have him. The guy's a hero," Rattner said, according to the newspaper.

But several Republican lawmakers accused GM of misleading the public.


GM had been running an ad on all the major networks claiming the company repaid its $6.7 billion U.S. government loan "with interest five years ahead of the original schedule."

Whitacre can be seen in the ad walking through an auto plant as he touts the company's progress.

But some lawmakers, and even the inspector general for the bailout fund GM borrowed from, pointed out that General Motors repaid the bailout money by dipping into a separate pot of bailout money. They said the company did not actually use its own earnings to make the early payment and questioned why executives made such a big deal out of it.

Even GM has admitted that it repaid the loan with other government money, but it says a year ago "nobody thought we'd be able to pay this back."

The Competitive Enterprise Institute filed a formal complaint with the FTC last week, urging the agency to investigate the GM ad campaign because it could give consumers a false sense of confidence in the company.

"If I applied for a car loan using GM's financially misleading approach, I'd be tossed out of the dealership on my ear," Sam Kazman, CEI's general counsel, said in a statement.

"GM might argue that its ad is literally accurate, but the fact is it's completely misleading," said Hans Bader, CEI counsel.

The Federal Trade Commission's truth-in-advertising laws prohibit ads that are "likely to mislead consumers."

But CEI's lawsuit has drawn criticism from an unlikely source: the libertarian-leaning Cato Institute.

Walter Olson, a senior fellow in constitutional studies, echoed the argument of free-market advocates who contend laws or regulations banning misleading advertising can endanger constitutional rights to free speech by "letting agencies and courts second-guess the content of 'issue ads' and speech on topics of public controversy."

"To begin with, it encourages advocates to turn to the law to silence disagreeable speech rather than muster their best arguments to rebut it," Olson wrote in a blog posting. "Despite its current dependence on government, GM is in every relevant legal sense a private company, so any precedents forged against it will wind up applying to every other private enterprise that might wish to advertise on matters of public controversy."

Olson cited a "grotesque" example in which MoveOn.org and Common Cause "actually petitioned the FTC to institute a complaint against Fox News over its use of the slogan 'Fair and Balanced,' since (they said) the network was neither."

"Some zealous enforcers would love for the FTC to do more to regulate speech by American business

on matters of public concern, and it seems to me the last thing we should do is encourage such a trend," he said.

California Is More Likely to Default than Iceland or Iraq

The Federal Reserve isn't the only one who owns credit default swaps betting that California will default.

As Ed Harrison points out, credit default traders have now ranked California in the list of top 10 governments most likely to default, with a 20% default probability:

Most recent numbers: 11 May 2010

highest-default-probailities-2010-05-05

California has pushed ahead of Iceland and Iraq, which were on the top 10 list last week:

Last Week’s Numbers: 06 May 2010

highest-default-probailities-2010-05-05

Central banks and other savvy players now look to credit default swaps as the primary economic indicator for judging an entity's health (and see this and this).

And in February, Jamie Dimon - chairman of JP Morgan Chase - warned that American investors should be more worried about the risk of default of the state of California than of Greece's current debt woes.

On the other hand, Dow Jones pointed out in March:

Greece and California face similar challenges: each needs to cut spending and raise taxes to cover a hefty budget shortfall even as their economies are struggling to recover from the sharp global downturn.

But there are significant differences that make California a safer bet for U.S. investors--the key being that California must balance its budget, can't declare municipal bankruptcy and would likely receive support from the federal government as a last resort.

***

"California is a deficit problem, Greece is a debt problem," said Matt Fabian, senior municipal analyst at Municipal Market Advisors. "Greece needs current market access in order not to default on their debt. In California, all the debt is fully funded and debt service is well below 10% of the state's expenses."

Similarly, Michael Connor argues today that California is very different from countries like Greece:
California is so not Greece.

That's the broadly held view in the $2.8 trillion U.S. municipal bond market ....

"It's wacky," said municipal debt analyst Jeffrey Cleveland at Payden & Rygel. "Just look at the ratio of debt to state gross domestic product. It's 10 percent for California and somewhere between 104 percent and 150 percent for Greece."

California's economy, at $1.845 trillion, dwarfs Greece's and on a stand-alone basis and would be the world's eighth-largest. It is the biggest borrower in the U.S. municipal market, which states and local governments use to fund roads, sewers and other infrastructure.

Most muni debt comes with tax-free interest and is often bought by rich Americans looking for tax savings.

***

Munis, whose total returns have smartly outperformed U.S. Treasuries in the last half year, have also become increasingly attractive to foreign institutional investors since 2009's roll-out of Build America Bonds and their fatter taxable yields.

State governments in the United States, from tiny Rhode Island to huge California, do face daunting yearly budget crises and long-term pension and health care obligations that may require $1 trillion or more to fund over time.

***

But institutional investors, analysts, ratings agencies and finance officials say a Greek-style collapse of a state government in the United States is immensely remote, despite some parallels in exploding pension obligations and aging populations.

"California is not Greece," said Tom Dresslar, a spokesman for California's state treasurer. "Greece's budget deficit in 2009 was 13.6 percent of its GDP. Our budget deficit, at $20 billion, was 1.1 percent of our GDP."

LAST STATE DEBT DEFAULT DURING GREAT DEPRESSION

No state, including California, with $83 billion of general obligation, lease-based revenue and other long-term debt, has defaulted on interest payments or principal of municipal debt since Arkansas did during the 1930s, according to Payden & Rygel's Cleveland.

Overall default rates by U.S. municipal issuers between 1970 and 2009 totaled just 0.06 percent, according to a study by Moody's Investors Service, the same agency that rattled global markets last week with a report saying some European banks would be weakened by the Greek debt crisis.

That 0.06 percent 10-year cumulative default rate included no state general obligation stumbles, versus a 2.50 percent default rate over the same four decades among issuers of investment-grade corporate debt.

Then, too, many of the commonly taken routes to relief from debt commitments are barred to state governments. With the exception of Vermont, they cannot legally run deficits like the U.S. federal government and are prohibited from filing for Chapter 9 bankruptcy petition, a rarely used U.S. legal tactic open to some municipal issuers.
"It is not possible for the plight of one state to take down the rest," Peter Hayes, a managing director at BlackRock Inc, said in a newsletter. "We would also argue that the current fiscal crisis is not a debt problem."

Debt service, such as interest payments among the 50 U.S. state governments, typically runs at just 3 percent of each state's annual expenditures, according to the U.S. Bureau of Economic Analysis.

"California debt is different from Greek debt," said Kenneth Naehu, a managing director at Bel Air Investment Advisors in Los Angeles. "Our debt service is so small a part of our budget that it is minuscule, and it gets a top priority. For California, restructuring debt is not possible, but for Greece it may be the best thing."
In any event, Governor Schwarzenegger is enacting "terrible" budget cuts to try to close the budget gap.

But forming a public bank would be the best way for California to be able to dig its way out of the hole. See this, this and this.

Federal judge blocks Gov. David Paterson from imposing furloughs on 100,000 state workers

A state worker holds a sign during a rally against Gov. David Paterson's furlough plan outside the Capitol in Albany, N.Y.
Groll/AP
A state worker holds a sign during a rally against Gov. David Paterson's furlough plan outside the Capitol in Albany, N.Y.

ALBANY - No furloughs ... for now.

A federal judge in Albany on Wednesday temporarily halted Gov. Paterson's plan to furlough 100,000 state workers, saying employees could face "irreparable harm" from a 20% pay cut.

The Legislature reluctantly backed Paterson's furlough plan Monday, rather than risk a government shutdown.

Paterson pushed the one-day-a-week furlough to save $30 million a week as lawmakers work to close a $9.2 billion budget gap and finalize a spending plan.

Judge Lawrence Kahn set a hearing on the dispute for May 26. The furloughs were to start Monday.

Some state agencies had prepared for the furloughs, with the Department of Motor Vehicles slated to close on Fridays and the Lottery Division to shutter on Wednesdays.

A disappointed Paterson vowed to fight on. "Until we go to court, the state workforce will not be making any sacrifice in our budget reduction plan, and that's unfortunate," he said.

Labor unions were relieved.

Public Employees Federation President Kenneth Brynien said Kahn's decision "will allow state services to continue uninterrupted and prevent hardships to the taxpayers who depend on them."

The labor groups scored another victory over Paterson yesterday, forcing him to rescind pay hikes to staffers amid growing outrage.

Paterson told the Daily News he was unaware the raises were given to five staffers, saying, "I don't get into the weeds here."

He defended the raises as "modest increases" for people who took on more responsibilities, but he recognized the pay hikes would be a distraction as he battled the unions over furloughs.

"We know that it will be a tactic of the unions to distract everyone from the fact that they have offered nothing in terms of savings to the state," Paterson said.

He predicted the unions were prepared to "bleed this issue for weeks" so the public would hear only "about five workers who got increases pursuant to a promotion instead of 100,000 workers who haven't given a dime toward our workforce reductions."

The raises, he said, totaled $40,000, while the unions have rejected $250 million in concessions.

Paterson pushed for furloughs after union groups refused to give back their 4% raises this year - or agree to a one-week pay lag.

He declined to say if he'd pursue layoffs as an alternative.

The unions and many lawmakers, including Assembly Speaker Sheldon Silver (D-Manhattan) and Senate Democratic Conference Leader John Sampson, argued the furloughs were illegal because they were not collectively bargained.

Kahn cited the Legislature's stance as a key reason for his decision, saying it appears "the bill is contrary to the [law] and public policy."

The U.S. Government Is About To Get Hit With 'The Perfect Storm' Of Debt

Hearing President Obama’s economic peptalks, you might be under the impression that the U.S. needs to keep spending for just a little while longer to stimulate the economy – but then will swear off big deficits.

Reinforcing the point, to address concerns stirred by a Congressional Budget Office (CBO) forecast that the U.S. government will accumulate total deficits in excess of $6 trillion over the next decade, in February President Obama issued an executive order to create a bipartisan fiscal commission. The commission’s task is to deliver recommendations to the president by December 1 for limiting future deficits to 3% of GDP. (The FY 2009 deficit approached 10% of GDP. The FY 2010 deficit will probably go even higher.)

It’s our contention that the president’s fiscal commission is mostly for show; the 3% limit is just a hoop for the clowns to jump through. U.S. government finances are now past the point of no return; the U.S. government lacks not just the will but the ability to close the gap between revenue and expenditure.

At The Casey Report, we like to focus on facts. Unfortunately, when it comes to government debt, the facts aren't pretty. They show that the country is already sliding towards financial collapse and hyperinflation in a way not dissimilar to the Weimar Republic.

Let’s first look at recent history to see how reliable CBO forecasts have been. In 1999 the CBO issued its 10-year forecast for 2000-2009 (see charts below). It looked as though we were heading into ten years of prosperity that would rescue us from little worries like the trillions in unfunded liabilities of Social Security and Medicare.

As you can see in the charts titled “CBO Revenue Projections 2000 - 2009” and “CBO Outlay Projections 2000 - 2009,” the CBO expected a budget surplus in every year from 2000 to 2009. And not just that, but that the surpluses would grow at an annual rate of more than 13% and would accumulate to $2.5 trillion over the decade.

Casey Chart

The next charts titled “Actual Federal Government Receipts 2000 - 2009” and “Actual Federal Government Outlays 2000 - 2009” show how wrong the CBO’s forecast was. One reason it went wrong was that the CBO naively assumed that the abnormally rapid rate of economic growth experienced in the 1990s would continue. It didn't.

Casey Chart

A second reason is that the “conservative” Bush administration went on a spending spree – passing Medicare drug coverage and No Child Left Behind, to name two big tickets. While the CBO anticipated ending the past decade with a net budget surplus of $2.6 trillion, the U.S. government actually accumulated the largest deficit ever, a staggering $3.2 trillion. So the difference between the CBO forecast and eventual fact was only $5.8 trillion. (And that's not counting for off-balance sheet unfunded liabilities, such as $60 to $70 trillion for Medicare and Social Security.)

So what does the CBO foresee for the coming decade? And how far from reality is that foresight likely to stray?

In January, the CBO released “The Budget and Economic Outlook: Fiscal Years 2010 to 2020.” This long-term forecast expects the U.S to accumulate an additional $7.4 trillion in deficits during the eleven years beginning with 2010, which reflects an average annual deficit of about $670 billion.

Casey Chart

The picture painted by the CBO is by no means rosy, but we think the facts could prove to be much worse. We have already demonstrated that the CBO's assumptions can be wildly off the mark, and there are many ways for things to go wrong in the years just ahead. Here are three of the big ones.

The Revenue Landmine

The Congressional Budget Office projects total federal revenue of $2.2 trillion in 2010, a 3.3% increase from 2009, under the assumption that current laws and policies remain in effect.

Because of several tax provisions set to expire in December 2010 and what the CBO sees as a strengthening economic recovery, it projects that revenue will rise substantially after 2010, increasing by about 23% in 2011 and by another 11% in 2012.

According to the CBO’s projections, revenue will continue rising nonstop from 2013 through 2020 and will reach 20.2% of GDP. Almost all of the increase is attributed to expected growth in individual income tax receipts.

This forecast relies on the CBO’s expectation that the unemployment rate will average slightly above 10% in the first half of 2010 and then turn downward in the second half of the year. As the economy expands further, predicts the CBO, the rate of unemployment will then continue declining until, in 2016, it reaches 5%, the level that the CBO considers full employment.

The CBO projects annual government receipts to better than double between 2010 and 2020, growing at an average annual rate of 7.8%.

How do these growth projections compare with actual history?

Actual data from 2000 through 2009 show that over the last decade federal government receipts grew at an average annual rate of 0.9%. And the total increase in government revenue between 2000 and 2009 was only 3.9%. Even if we go back to 2007 and 2008, when tax receipts were at all-time highs, the increase from year 2000 levels was only about 25%.

Given the historical record, are we really supposed to believe government revenue will grow at an average annual clip of nearly 8% from now until 2020?

Comparing data during the first four months of fiscal 2009 to the same period for 2010, government receipts are down more than $80 billion, or 10.4%, from the same period the year before. And remember, 2009 revenues were about 17% below those in 2007 and 2008.

There are countless plausible reasons that revenue might disappoint and not grow as rapidly as the CBO projects – the main ones being that the economy may not expand as expected and that the employment picture won't be as pretty as predicted.

So what happens to projected deficits if instead of growing more than 100% between now and 2020, government revenues only increase by, say, 50% (still a generous amount given recent history)?

Assuming revenue in 2010 matches 2009 and then grows by a total of 50% over the 10 years that follow, the accumulated deficits for the period would be $17.5 trillion, or about $10 trillion more than projected by the CBO.

The Interest Expense Landmine

Whether you’re an individual, a business, or the government, when you spend more money than you make, there is only one way to close the gap – by taking on debt and paying interest.

Until the end of 2008, the government's cost of funding its debt had been growing steadily, at about 11% per year, as both interest rates and the size of the debt were rising. When the financial crisis hit full throttle in 2008, interest rates headed toward zero and the government's net interest expense for 2009 dropped 26%, even though total debt was still growing.

The CBO projects that gross federal debt will continue to grow in the coming years, eventually topping $25 trillion by 2020 or nearly double where it stood at the end of 2009. And the CBO pins most of its hopes of financing the debt on the public’s savings.

Casey Chart

While the CBO acknowledges that interest rates will have to rise to cover the next decade's $10 trillion deficit, its rate estimates are cheerful in the extreme. The CBO expects the 3-month Treasury bill rate to average 1.9% in 2010, fall to 1.5% in 2011, and then hold steady near 2% for the rest of the decade. The projection for yields on the 10-year Treasury note is 3.9% in 2010, 4.5% in 2011, and then slowly increasing to 5.3% by 2020.

This paints a rather congenial picture for future interest rates. History, however, provides a much bleaker outlook. The chart below shows that interest rates can go much higher than what the CBO expects, and can go there quickly.

Casey Chart

During the high-inflation 1970s, interest rates were volatile, but the overall trend was up, up, up. From 1971 to 1981, rates on both short-term and long-term debt averaged an increase of about one percentage point per year, to a peak of 15.5% on the 3-month bill and 15.3% on the 10-year note.

While the CBO does assume that interest rates will rise over the next decade, a few key factors suggest its assumptions are wishful.

The first issue is debt management. The Treasury will be issuing bills, notes, and bonds in unprecedented quantities. At the same time the administration plans to run trillion-dollar-plus deficits, the glut from past government expenditures is catching up. In the next four years, over $4.8 trillion worth of marketable Treasury debt will mature. As portfolios get packed with U.S. government IOUs, the Treasury will have to offer higher and higher rates to induce investors to accept more IOUs from the same issuer.

In fiscal 2009, the Treasury held over 290 auctions issuing more than $8 trillion in marketable securities. The auctions have been primarily focused on shorter-term maturity debt, which will make it progressively more difficult to roll over debt in the coming years.

The second major issue for the Treasury is foreigners. For decades the U.S. has relied on foreigners to purchase its debt; they now own roughly 50% of the outstanding debt held by the public. We may already be approaching the point at which they say, “Enough!” China’s holdings of Treasuries peaked in May 2009, and they have been buying Treasuries in much smaller doses since then.

In December, Japan reemerged as the top holder of Treasury debt, and the U.K. has been the third-place holder for most of the last decade. Both Japan and the U.K. have been buying more Treasuries, but the rest of the world has followed China in throttling back on purchases. The only way to continue luring foreigners back to U.S. Treasury debt will be with richer compensation, i.e., higher interest rates.

What happens to the CBO budget projections if their interest rate outlook is wrong? What happens if, for example, interest rates rise at the same pace they did in the 1970s? The result would be horrendous.

The blue in the chart below is the actual historical interest expense on all the federal government’s outstanding debt. The green line shows the CBO’s projected interest expense. Even their conservative estimate has total interest expense tripling over the next decade. The red line is our estimate assuming annual increases in interest rates of one percentage point. By our estimate, this would add $3.6 trillion in cumulative interest expenses by 2020.

Casey Chart

And with the higher interest expense, total federal debt would climb to almost $35 trillion in 2020.

The Military Spending Landmine

The CBO views the wars in Iraq and Afghanistan as either guaranteed victories or swift departures. Rather than basing estimates on historical data, the CBO chooses unrepresentative and misleading growth rates for defense spending. Making matters worse, a middle road or a war escalation isn't considered in the budget outlook. CBO estimates fall into three groups: optimistic, rosy, and snake oil.

Optimistic. The first forecast assumes funding will follow the annual growth rate for nominal GDP, estimated to be 4.4% per year.

That rate is highly unlikely. In practice, there is no correlation between defense spending and GDP growth. As wars wax and wane, so does defense spending, regardless of GDP. Since 1985, the ratio of defense spending to GDP has ranged from 3.0% to 6.1%, and since 2001, the trend has been upward, not flat as the CBO predicts.

Rosy. Under this assumption, total defense spending increases at the rate of inflation, which the CBO with a straight face assumes will average 1.1% for the next ten years.

Snake Oil. The last CBO estimate freezes nominal spending at the 2010 level (with the exception of certain minor programs). Essentially, it would let inflation eat away at total military spending.

The CBO estimates of total military spending from 2010 to 2020 that come out of its three assumptions are:

  • 2010 Spending Frozen Estimate: $7.5 trillion
  • Inflation-Adjusted Estimate at 1.1%: $8.1 trillion
  • Nominal GDP Growth Estimate at 4.4%: $9.0 trillion

We have redone the CBO projections for military spending based on scenarios we consider more realistic. Without assuming any new wars, our most conservative projection still outpaces CBO estimates by nearly 3 trillion dollars. The three scenarios are:

Growing at the 1999-2009 rate. Military outlays grew at 8.5% during this period.

Growing at the 2002-2010 rate. Military outlays grew at 9.4%.

New War rate. From 2002 to 2004, two wars pumped the growth rate for military spending to 14.06% per year. In this calculation, we assume a new war from 2011 to 2013 raising growth rates to that level; then growth returns to the 1999-2009 rate of 8.5%.

Our estimates of total military spending from 2010 to 2020 in our three scenarios are:

  • Growing at the 1999-2009 8.5% rate: $11.8 trillion
  • Growing at the 2002-2010 9.4% rate: $12.4 trillion
  • Growing at the New War rate: $13.5 trillion

Compared to the CBO’s largest estimate, $9.0 trillion, these projections are $2.8 to $4.5 trillion greater.

So what happens to the CBO’s projected deficits if the only revision we make is to assume military spending growth at the more plausible 2002 – 2010 rate of 9.4%? The U.S. government's average annual deficit over the next eleven years would exceed $1 trillion, and the accumulated deficit would exceed $11.6 trillion.

The Perfect Storm

So what happens if the government hits all three landmines – the revenue landmine, the interest expense landmine, and the military spending landmine?

If (1) federal revenues only increase by 50% from now until 2020, (2) interest rates rise by one percentage point per year, and (3) military spending continues to increase at the same rate as it did from 2002 to 2010, by 2020, the U.S. government would be running a deficit of $4.2 trillion per year.

And with the Perfect Storm's rising deficits, total debt would accumulate at an accelerating pace. In 2020 it would reach $50 trillion – double what the CBO is projecting.

Casey Chart

At $50 trillion, the national debt would be 208% of the CBO’s projected GDP for 2020, and the 2020 deficit would be $4.2 trillion, or 17% of projected GDP. The interest expense on U.S. debt alone would represent 12% of 2020 GDP and 55% of the total federal budget.

And this only takes into account the three potential landmines outlined in this article. There is much more that could materially change the landscape of the federal budget in the next ten years. The most notable factors not accounted for in our analysis are the entitlement programs – Social Security and Medicare – which are likely to make the government's debt problem significantly worse as the baby boomers start to retire. No matter how many times we shake the Magic 8-Ball, it keeps coming back with the same reading: “Outlook not so good.”

Iceland: Int'l Arrest Warrant Against Top Bank Official

An Interpol notice on Tuesday said Einarsson was wanted on charges of counterfeiting, forgery and fraud.

Einarsson, who lives in London, was said to be reluctant to come to Reykjavik for fear of being arrested and Icelandic authorities have refused to offer any assurances.

Curiously, in December, Britain's Serious Fraud Office had opened an investigation into suspected fraud by Kaupthing while trying to attract British investors to its high interest deposit accounts.

On May 6 two former top officials of Kaupthing, formerly Iceland’s largest bank, were called in for questioning by Iceland’s special prosecutor and were then detained in isolation at the main Litla-Hrauni prison in the southern part of the country.

Hreidar Mar Sigurdsson, former CEO of Kaupthing, was placed on 12 days in remand, while Magnus Gudmundsson, former director of the bank in Luxembourg, was remanded to seven days in custody.

Kaupthing, Glitnir Bank hf and Landsbanki Islands hf collapsed in October 2008 after running up total debts worth 61 billion US dollars, calculated as being equivalent to 12 times the country’s GDP.

The government was compelled to take over the three banks and seek an International Monetary Fund bailout as Iceland fell into a deep economic slump, triggering public outrage.

Special Prosecutor Olafur Thor Hauksson was appointed in January last year to investigate suspected criminal actions around the time of the collapse of the banks in October 2008.

'We are researching alleged market abuse by Sigurdsson and Gudmundsson, along with illegal loan granting and breach of trust,' said Bjorn Thorvaldsson, one of the prosecutors who works at the Office of the Special Prosecutor (OSP), when asked why the two men were taken into custody.

Two months after Hauksson started his term in office, Norwegian-French investigative judge Eva Joly, who uncovered the Elf oil company fraud case, became Hauksson’s advisor. She has been continually pressing for more funds and more personnel to push the process onwards.

However, the arrests would not have been possible had it not been for the Parliamentary Althingi’s Special Investigation Committee (SIC), which published its report on the causes behind the 2008 collapse of the Icelandic banks on Apr. 12.

The authors of the report interviewed people from banks, government ministries, the Financial Supervisory Authority (FSA), the Central Bank of Iceland (CBI) and other bodies, although it states that 'the Commission was not expected to address possible criminal conduct of the directors of the banks in their operations'.

Amongst other things, the report summary says: 'The banks had invested their funds in their own shares', and 'the banks held a lot of their own shares as collateral for their lending. With share prices declining, the quality of their loan portfolio declined. This could in turn affect the banks’ performance and, consequently, the price of their stock. Additionally, the employees of the banks in many cases owned significant shares in their own bank, sometimes even financed by the bank itself.'

Hauksson’s team used information found in the report, widely acclaimed by Icelanders as thorough and hard-hitting, to build on its case for questioning Sigurdsson and Gudmundsson.

According to the Icelandic State Broadcasting Service at a meeting between Joly and Icelandic Prime Minister Johanna Sigurdardottir, four days after the publication of the SIC report, Joly said he was pleased with it and called it 'extremely well researched’’ and giving ‘’investigating bodies a true picture of the lead-up to the economic collapse'.

Top Kaupthing officials expected to be interviewed this week include Ingolfur Helgason and Steingrimur Arason, who now run the financial advisory company Consortium in Luxembourg. They arrived in Iceland on Monday.

Officials of companies that Kaupthing had been dealing with immediately before the collapse of the bank have also been interviewed.

Thorvaldur Gylfason, economics professor at the University of Iceland, has publicly encouraged the Icelandic authorities 'to seek assistance from Poland on how to deal with the seven politicians and public officials found by the SIC to have ‘shown neglect’, a polite way of referring to gross dereliction of duty.'

'The Polish parliament recently passed legislation to curtail the self-dealt pensions and related privileges of 40,000 former agents of the security services. Their pensions had on average been three times those of ordinary Poles. In view of human rights considerations and retroactivity, such legislation needs to be carefully crafted,’’ Gylfason said.

Gylfason reference was to the main conclusions of the SIC that Geir Haarde, Arni Mathiesen and Bjorgvin Sigurdsson — then prime minister, finance minister and minister of business affairs respectively — showed negligence 'by omitting to respond in an appropriate fashion to the impending danger for the Icelandic economy that was caused by the deteriorating situation of the banks.'

© Inter Press Service (2010) — All Rights Reserved

Economist Tim Madden: The PIIGS Brief: understanding how oligarchs rig, loot our economies. 3 of 4

Tim Madden is an economist with expertise on credit and banking. Tim and I are colleagues in lobbying government for public banking, with concentration in the US for state-owned banks (and here). The good news is that structural solutions to our economic controlled demolition are obvious and simple; and explained beautifully by many of America’s brightest historical minds. The bad news is that we’re still mired in oligarchic looting of our economies.

Tim’s following article explains collusion of government and judicial “leadership” to facilitate criminal looting through parasitic credit practices. This four-part article explains the principle and law, details a legal example of criminal looting with “official” collusion, and applies this to our international economy.
Tim can be reached at: timothypmadden@gmail.com
For a US face to what Americans are discovering as rigged-casino economics, also consider Fred Burks’ work, like this one.
The article is in four parts (links will be added; one each day: Part 1, Part 2, Part 3, Part 4).
Hell claims his right, and with a roaring voice
Says, “Faustus, come; thine hour is almost come!”
- Christopher Marlowe, The Tragical History of the Life and Death of Doctor Faustus
Canadian courts use Thomson to turn centuries of civil and criminal law upside down
Rather than submit to its own legal and lawful limitations, however, the Canadian (Ontario) court of appeal in Thomson nominally (and unanimously) protected the solicitors from the financial consequences of their technically illegal/criminal/racketeering actions, by ruling that the Criminal Code does not expressly prohibit the making of agreements to receive interest at a criminal rate, but only provides for severe punishment for those who do so. Accordingly, it concluded, such contracts are "not fundamentally illegal" (emphasis added):
...Section 347,... provides only for punishment of persons agreeing to receive interest at criminal rates but does not prohibit agreements providing for such rates....
"The purpose of [s. 347] is to punish everyone who enters into an agreement or arrangement to receive interest at a criminal rate. It does not expressly prohibit such behaviour, nor does it declare such an agreement or arrangement to be void. The penalty is severe, and designed to deter persons from making such agreements. ... It is designed to protect borrowers ... It is not designed to prevent persons from entering into lending transactions per se.... Therefore the agreement is not fundamentally illegal."
The Court’s decision was to give Thomson Associates Inc. everything that it asked for, and converted its $75,000 civil claim (promissory note) into a $75,000 (plus costs) court-money-order judgement against Carpenter.
In so doing the Court itself committed a precisely defined and unambiguous racketeering offence (laundering proceeds of crime) contrary to ss. 462.31(1), in material part (emphasis added):
s. 462.31 (1) Every one [the Court] commits an offence who… alters, disposes of or otherwise deals with, in any manner and by any means, any property [$75,000 promissory note] or any proceeds of any property with intent toconvert that property [to a judgement money order] or those proceeds and knowing that all or part of that property or of those proceeds was obtained or derived directly or indirectly as a result of (a) the commission in Canada of an enterprise crime offence [“there is no doubt that the corporate plaintiff committed an offence under s. 347(1)(a) by entering into an agreement or arrangement to receive interest at a criminal rate”]
The Court of Appeal then tidied-up the socio-economic loose ends that would result from its larger decision.
In the above-mentioned Snell v. Unity Finance the English appeal court spelled-out the underlying legal obligation of the lower court (and of all courts), at p. 59: (emphasis added):
The principle of law is clear. The courts, which exercise the judicial power of the Crown, will not enforce a contract that Parliament, which exercises the legislative power of the Crown, has made unlawful.
While constructively suppressing over 400 years of English and Canadian jurisprudence, however, that had been submitted to and at least discussed by, the trial judge, in support of the above relationship, the Ontario Court of Appeal instead simply stated its reasons for asserting that the principle henceforth no longer exists in Canada:
In my opinion, [the court system’s own recent decisions] illustrate the breadth of a court’s discretion in determining whether or not a contract tainted by illegality under s. 347 is enforceable. They also illustrate the extent of the departure by the courts from the former view that public policy rendered entire contracts unenforceable if illegality was present...
In total the appeal court first ruled that it was not subverting the lawful primacy of Parliament because there was "no illegal purpose" inherent to the violation of s. 347 and that accordingly the otherwise criminal agreement "is not fundamentally illegal". It then concluded that it is no longer bound by the laws of Parliament because of its own decision not to apply them in terms of the same contract(s) which is "tainted by illegality under s. 347" and where "illegality [is] present".
The Court’s reasoning is objectively false (non sequitur) and on its face (prima facie) what is called a fraud upon a power, a legally recognized form of internal treason. The commercial/merchant court cannot argue that it has these immense new powers that render it superior-in-law to the legislature, by the mere expedient of asserting them, while neglecting to mention that it has never possessed any such power in fact or in law.
Also, the court was and remains necessarily in breach of its bond(s).
More new rules/powers as fallout control
The appeal court then cited Royal Bank of Canada v. Grobman (1977), 83 D.L.R.(3d) 415, wherein the trial judge in that case had employed a chain of reasoning and/or list of factors considered to arrive at the conclusion that a mortgage taken as additional security after the fact by a bank did not invalidate the original transaction notwithstanding that the amount of the advance had been in excess of the 75% market-value-ratio permitted under the Bank Act for credit secured by a mortgage. The judge ruled (quite erroneously) that the Bank Act limitation was intended solely to protect the bank’s shareholders and that a finding of unenforceabilty would hurt those very shareholders. Despite this manifest error in the court’s premise, however, it was dealing with a specialized piece of legislation which expressly states that it applies only to banks chartered under it (i.e., civil legislation and not criminal).
The Court of Appeal took the citation entirely out of context and, without even mentioning the original circumstances, asserted it as equally applicable to the criminal violation in Thomson.
The Court held that it is henceforth the law in Canada that a court may suppress a defendant's (borrower’s) right of due process so as to aid a commercial lender to enforce a criminal contract based on the judge's personal assessment of (emphasis added):
The serious consequences of invalidating the contract, the social utility of those consequences, and a determination of the class of persons for whom the [criminal] prohibition was enacted...
An interesting question: what is the “social utility” of a party’s right of due process? And what are the consequences of a ruling by the Supreme Court of Canada that corporations are not the class of persons to whom the criminal law is intended to apply?
As mentioned, the unanimous decision of the Ontario Court of Appeal was then ratified as the law across Canada upon refusal of leave to appeal by the Supreme Court in February of 1990 (normally the Supreme Court will refuse leave to appeal a unanimous decision of a provincial appellate court, and at that point it takes on the legal status of a decision of the Supreme Court itself, and becomes binding on all courts in Canada. Also the SCC does a thorough vetting of the issues under the Application for leave to appeal process). This way the appeal court decision becomes a de facto SCC decision but without attracting the media attention of a direct decision of the SCC.
Then, rather than bury the decision and never make reference to it again, for the next seven years (to 1997 (and forward)) courts across Canada embraced it with apparent universal approval and expressly followed and applied it in more than fifty additional written judgements, both entrenching and expanding on the commercial/merchant (Admiralty) courts’ newly-self-declared powers, into insurance law, securities law, condominium law, etc. and generally into all areas of law. See for example:
BCORP Financial v Baseline Resort Developments Inc. (1990), 46 B.C.L.R. (2d) 89 (B.C. S.C.); J.D.M. Capital Ltd. V. Smith (1997) , 39 B.C.L.R. (3d) 340 (B.C.S.C.); Loghlean v. McNabb, [1997] I.L.R. I-3482 (Ont. Gen. Div.); Milani v. Banks (1997), 32 O.R. (3d) 557 (Ont. C.A.); Pilan Properties Ltd. & Carpentry Ltd. V. Masnyk (April 2, 1996), Doc. 27695/91/U (Ont. Gen. Div.); 271053 N.B. Ltd. V. Burton (1996), 183 N.B.R. (2d) 155 (N.B. C.A.); Keevil v. PT Southern Cross Aqua Culture Indonesia (1995), 15 B.C.L.R. (3d) 45 B.C.S.C.); Olympic Enterprises Ltd. V. Dover Financial Corp. (1995), 147 N.S.R. (2d) 121 (N.S. S.C.); Barrie v. 687844 Ontario Ltd. (1994), 43 R.P.R. (2d) 267 (Ont. Gen. Div.); Hajek v. Riedelsheimer (March 2, 1994), Doc. CA C12640 (Ont. C.A.); Painter v. 745100 Ontario Ltd. (January 14, 1994), Doc. Hamilton 955/89 (Ont. Gen. Div.); Standard Trust v. Brillinger (September 19, 1994), Doc. CA C9872 (Ont. C.A.); T.F.P. Investments Inc. (Trustee of) v. Beacon Realty Co. (1994), 17 O.R (3d) 687 (Ont. C.A.); Terracan Capital Corp. v. Pine Projects Ltd. (1993), 75 B.C.L.R. (2d) 256 (B.C. C.A.); Ingram v. Dorian (1992), 22 R.P.R. (2d) 198, (Ont. Gen. Div.); Kebet Holdings Ltd. v. 351173 B.C. Ltd. (1992) 25 R.P.R. (2d) 174, (B.C. S.C. [In Chambers]); Terracan Capital Corp. v. Pine Projects Ltd. (1991), 20 R.P.R. (2d) 187 (B.C. S.C.); Affordable Payday Loans v. Harrison, 2002 ABPC 104, [2003] 2 W.W.R. 757 (Alta. Prov. Ct.); 1512759 Ontario Ltd. v. OLE Canada Inc., 2002 CarswellOnt 4060 (Ont. S.C.J.); Dunlap v. Iveszic, 2001 CarswellOnt 2656 (Ont. S.C.J.); Garland v. Consumers’ Gas Co., 2001 CarswellOnt 4244, [2001] O.J. No. 4651 (Ont. C.A.); Fernandez v. Colucci, 2000 CarswellOnt 5225 (Ont. S.C.J.); Degelder Construction Co. v. Dancorp Developments Ltd., 1998 Carswell B.C. 2246 [1999] 5 W.W.R. 797 (S.C.C.); L & M Downtown Legal Services Inc. v. Ontario Realty Corp. 1998 CarswellOnt 322, [1998] O.J. No. 379 (Ont. Gen. Div. [Commercial List]; Roberts v. Buhr, 1998 CarswellBC 1962 (B.C. S.C.);
More importantly, of course, these decisions define official commercial policy of the courts in Canada so as to affect virtually every commercial contract in the country. The fifty-plus decisions that followed were, and remain, a clear and unambiguous message to the legal community that anything goes.
“Technical deficiencies” added to courts’ self-proclaimed new powers
Once the commercial courts had opened the flood gates to generally illegal and now even criminal/racketeering provisions in civil/commercial contracts and financial securities, they were logically/practically compelled to keep expanding their asserted powers to differentiate between various classes of offenders.
Then, as a critical expansion of the courts’ new role, in 1997 the Ontario Court of Appeal unanimously reversed an Ontario trial judge while concurrently demonstrating mens rea, or guilty mind, with respect to its constructive/de facto coup against the Parliament of Canada inherent to the earlier Thomson decision.
In Beer et als. v. Townsgate Developments I, et als. [1997] 152 D.L.R. (4th) 671, certain purchasers of condominium units (Beer et. als. (and others)) were already suing the developer/vendor for rescission (legal nullification/cancellation) of contracts-of-sale due to (conventional) fraud and/or misrepresentation, when it came to light during the trial that the developer/vendor had also not been licensed as directly required by provincial statute. The trial judge held the contracts-of-sale to be void and unenforceable therefore, and more-so because, citing Thomson, the provincial statute (s. 6) expressly prohibits the sale of any units by an unlicensed vendor (emphasis added):
6. No person shall act as a vendor or builder unless he is registered by the Registrar under this Act.
The trial judge noted that these particular contracts “are fundamentally illegal” under the reasoning of Thomson. Again citing Thomson she concluded that the provincial legislation is “a clear and unambiguous prohibition” against sale prior to registration, and that such “prohibition in s. 6 of the Act is fundamental to the nature and purpose of the regulatory scheme”.
At that point the vendor’s mainstream solicitors became liable for the financial losses. The vendor then appealed to the Ontario Court of Appeal, which then unanimously overturned the trial judge/decision by radically expanding and complimenting the new doctrine of “not fundamentally illegal”. From the headnote summary, at p. 671 (emphasis added):
On appeal to the Ontario Court of Appeal, held, allowing the appeal [i.e., reversing the trial decision], the effect of the breach of the statute was not to render the contracts void. Public policy required that contracts should not be rendered void on account of technical deficiencies.
Ever since, the commercial courts in Canada have adopted a duology for dealing with illegal provisions in commercial contracts and especially financial securities. If the provision is criminal, then they cite Thomson as authority for the doctrine of not fundamentally illegal, and enforce the contract anyway.
Alternatively, if the illegal provision is expressly prohibited by statute, then they cite Beer et als. as authority for enforcing the contract anyway on the ground that the otherwise illegal contract should not be rendered void on account of such technicalities or technical deficiencies.
There exists in Canada as a result a literal and codified two-tiered civil/money justice system that turns on the person of the offender.
From the above, the result is clear where the plaintiff is financially superior to the defendant. When the technical (and even unintentional) offender is weaker than the other party, however, then the law still retains its centuries-old principles, as is made equally clear by the following newspaper account of those principles (the point being that the principle is so clear that they would not even go to court over it).
A Toronto-area man had a paid-up life insurance policy when he was taken hostage as an innocent bystander at a botched robbery attempt. He was then murdered by the bandits and his body dumped in a field. Because his death had been caused by a criminal act, a routine autopsy was ordered by the police which revealed that the man had suffered a mild previous heart attack of which he himself had apparently not been aware. The insurance company accordingly declared the life insurance policy/ contract null and void because, unintentionally or otherwise, the man had made a factually inaccurate declaration on the original application:
Life policy void, widow told
The Canadian Press - Toronto
A woman whose husband was slain last fall has been denied his $50,000 life insurance policy. *** Since [the insured] hadn’t told the insurance company about a previous heart attack, the policy was ruled invalid. *** "He was murdered" the 56-year-old widow said Monday. "Somebody took my future. And now the (life insurance) security blanket has been pulled out from under me." *** [The insured] was killed last Sept. 14, [1994] when armed robbers used his vehicle as a getaway car after fleeing a shoot-out at a sports store in nearby Oshawa, Ont. *** His body was found in nearby Pickering last January. The case is still under investigation. *** After his death, [his wife] was sent a letter from Metropolitan Life Insurance Co. declaring her husband’s policy "null, clear and void" along with a check for $2,700 for reimbursed premiums. *** A Metropolitan Life spokesman said the company wouldn’t have insured [the man] in the first place if proper medical information had been provided. *** The company first learned about [the] heart attack when police sent in his file a few months ago, said Jim Hiller, an agent in Whitby, Ont., for the insurer. "Do we make an exception and pay out the money or go by the rules and the law," asked Hiller, who said the decision has caused him some sleepless nights.
The most revealing aspect of the two cases together is their respective treatment of the concept of due process as nominally guaranteed under Canada’s Charter of Rights and Freedoms.
In the latter case, the victim was the widow of a murdered bystander whose death was totally unrelated to what would prove to be a factual inaccuracy in his insurance contract. The essential position of the insurance company was that such is irrelevant because due process effectively voids the contract from the outset (and this remains true with or without the victim’s knowledge of the heart attack). The death benefits under the contract are the property of the owners of the insurance company, and they shall not be deprived thereof "except by due process of law". There is effectively a multi-billion-dollar stand-alone insurance industry in Canada and the rest of the world that systematically voids insurance contracts after the fact (i.e., only after a claim is made) on the basis of such technicalities. It is a major source of de facto income for all insurance companies.
But where a mainstream corporate lender commits half a dozen prima facie racketeering offences, aided and abetted by its equally criminal mainstream solicitors, then such is not sufficient to void the contract, because such racketeering offences are not fundamentally illegal, and public policy demands that such contracts should not be rendered void on account of such technicalities as the criminal law, and the lender is not of the class of persons to whom the racketeering laws were intended to apply.


Part 4 tomorrow...

Kevin MacDonald: Does Jewish financial misbehavior have anything to do with being Jewish?

Kevin MacDonald: As expected, the fraud charges brought against Goldman Sachs by the SEC and now the Senate hearings are producing a lot of anxiety in Jewish quarters. Back in January, Michael Kinsley wrote an article telling us how to think about the Jewish angle in the financial meltdown (“How to Think About: Jewish Bankers”). The question for Kinsley isn’t whether negative qualities of Jewish bankers or the bad behavior of Jewish firms like Goldman have anything to do with being Jewish.

The question is whether anyone who criticizes Goldman is an anti-Semite:

Because Goldman is thought of as a “Jewish” firm, and because it dominates the financial industry, criticism of Goldman, or of bankers generally, is often accused of being anti-Semitic. Commentators including Rush Limbaugh and Maureen Dowd have been so accused. When, if ever, are such accusations fair?”

So Kinsley passes his Geiger Counter over non-Jews like Limbaugh and Dowd and passes judgment on their moral worthiness. Any link between Jewishness and misbehavior is automatically out of bounds for serious discussion: “Certainly any explicit suggestion that Goldman’s alleged misbehavior and its Jewishness are related in any way is anti-Semitic.”

This statement draws on a general reluctance to ascribe negative traits as being reasonably associated with a certain group. But this can easily be seen to be just another example of political-correctness think. What if indeed a particular group is more likely to engage in some sort of bad behavior? For example, J. Philippe Rushton and Glayde Whitney have claimed on the basis of a rather powerful theory and a considerable amount of data that Blacks are prone to criminality and this is true wherever there are Blacks — whether in Africa, North America, South America, or the Caribbean.

If indeed that is true or at least reasonable, then it would also be reasonable to say being Black contributes to the likelihood that a certain group of Blacks are criminals — that a considerable part of the explanation for the criminality of these particular Blacks stems from their group membership. It would certainly not imply that all Blacks or even anywhere near all Blacks are criminals. Just that Blacks are more likely than other groups to be involved in certain kinds of crime — Rushton and Whitney would argue for a strong role of their common genetic ancestry.

Or take a presumably benign example: It’s well known that the Ashkenazi Jewish mean IQ higher than the European mean. If then one finds that Jews are highly overrepresented in a particular high-IQ occupation, say among mathematicians, then it is certainly reasonable to explain this as partly due to the general traits of the group, as writers ranging from Charles Murray, Henry Harpending and Greg Cochran, and I have argued

Can such an argument be made Jewish involvement in financial scandals has something to do with being Jewish? Back in the 1980s a major financial scandal revolved around Michael Milken. Much of the discussion of the Jewish role in this financial scandal centered around the book Den of Thieves by James B. Stewart. Jewish activist Alan Dershowitz called Den of Thievesan “anti-Semitic screed” and attacked a review by Michael M. Thomas in the New York Times Book Review because of his “gratuitous descriptions by religious stereotypes.” Thomas’s review contained the following passage:

James B. Stewart . . . charts the way through a virtual solar system of peculation, past planets large and small, from a metaphorical Mercury representing the penny-ante takings of Dennis B. Levine’s small fry, past the middling ($10 million in inside-trading profits) Mars of Mr. Levine himself, along the multiple rings of Saturn — Ivan F. Boesky, his confederate Martin A. Siegel of Kidder, Peabody, and Mr. Siegel’s confederate Robert Freeman of Goldman, Sachs — and finally back to great Jupiter: Michael R. Milken, the greedy billion-dollar junk-bond kingdom in which some of the nation’s greatest names in industry and finance would find themselves entrapped and corrupted.

Thomas was attacked as an anti-Semite simply for mentioning so many Jewish names all in one paragraph. His defense was to note that “If I point out that nine out of 10 people involved in street crimes are black, that’s an interesting sociological observation. If I point out that nine out of 10 people involved in securities indictments are Jewish, that is an anti-Semitic slur. I cannot sort out the difference. . . .”

I can’t sort out the difference either. And once again, the current financial meltdown has revealed a large role for Jewish companies and Jewish money managers who engineered the meltdown and profited handsomely from it.

Kinsley acknowledges that Jews predominate on Wall St. and it’s okay to criticize a Jewish firm like Goldman Sachs — but only if there is no mention that Jewishness has anything to do with it.

Sometimes the stereotype about Jews and money takes a harsher form: Jews are greedy, they lie, cheat and steal for money, they have undue influence with the government, which they cultivate and exploit ruthlessly, and so on. In recent weeks, many have said this sort of thing about Goldman Sachs, but with no reference to Jews. Are they all anti-Semites? No. It ought to be possible to criticize Goldman in the harshest possible terms–if you think that’s warranted–without being tarred as an anti-Semite.

So is it possible to frame an argument that bad behavior in the financial realm does indeed have something to do with Jewishness? Note that this is quite different from showing that Jewishness is involved in the creation of culture — the argument of The Culture of Critique. There it was only necessary to show that a movement was dominated by Jews who identified as Jews and saw their work as advancing Jewish interests.

As I see it, the argument has two parts:

1.) Judaism as a group evolutionary strategy has always had a strong element of ingroup/outgroup thinking. Entirely different moral standards are applicable inside and outside the group. The result is that the Jewish moral universe is particularistic and the attitude toward non-Jews is purely instrumental — aimed at maximizing personal benefit with no moral concerns about the consequences to non-Jews. For example, a common pattern in traditional societies was that Jews allied themselves with exploitative non-Jewish elites.

The evolutionary aspects of this situation are obvious. Jews were the ideal intermediary for any exploitative elite precisely because their interests, as a genetically segregated group, were maximally divergent from those of the exploited population. Such individuals are expected to have maximal loyalty to the rulers and minimal concerns about behaving in a purely instrumental manner, including exploitation, toward the rest of the population. (A People that Shall Dwell Alone, Ch. 5)

2.) One would then have to show that actual Jewish behavior reflected the double moral standard that is ubiquitous in Jewish religious writing. There is in fact a long history of anti-Jewish attitudes focused around the charge that Jews are misanthropes with negative personality traits who are only too willing to exploit non-Jews. This history is summarized in Ch. 2 of Separation and Its Discontents, beginning with the famous quote from Tacitus, “Among themselves they are inflexibly honest and ever ready to show compassion, though they regard the rest of mankind with all the hatred of enemies.” Among the more illustrious observers are the following (see here for the complete passage, p. 46 ff):

  • Immanual Kant: Jews are “a nation of usurers . . . outwitting the people amongst whom they find shelter. . . . They make the slogan ‘let the buyer beware’ their highest principle in dealing with us.”
  • Economic historian Werner Sombart: “With Jews [a Jew] will scrupulously see to it that he has just weights and a just measure; but as for his dealings with non-Jews, his conscience will be at ease even though he may obtain an unfair advantage.”
  • Jewish historian Heinrich Graetz: “[The Polish Jew] took a delight in cheating and overreaching, which gave him a sort of joy of victory. But his own people he could not treat in this way: they were as knowing as he. It was the non-Jew who, to his loss, felt the consequences of the Talmudically trained mind of the Polish Jew.”
  • Sociologist Max Weber: “As a pariah people, [Jews] retained the double standard of morals which is characteristic of primordial economic practice in all communities: What is prohibited in relation to one’s brothers is permitted in relation to strangers.”
  • Zionist Theodor Herzl: Anti-Semitism is “an understandable reaction to Jewish defects” brought about ultimately by gentile persecution: Jews had been educated to be “leeches” who possessed “frightful financial power”; they were “a money-worshipping people incapable of understanding that a man can act out of other motives than money.”
  • Edward A. Ross: “The authorities complain that the East European Hebrews feel no reverence for law as such and are willing to break any ordinance they find in their way. . . . The insurance companies scan a Jewish fire risk more closely than any other. Credit men say the Jewish merchant is often “slippery” and will “fail” in order to get rid of his debts. For lying the immigrant has a very bad reputation. In the North End of Boston “the readiness of the Jews to commit perjury has passed into a proverb.”

Edmund Connelly has reviewed the work of two academic historians, Paul Johnson (A History of the Jews) and Albert Lindemann (Esau’s Tears: Modern Anti-Semitism and the Rise of the Jews), who “have shown that this pattern of Jewish deception and fraud in pursuit of wealth and its legitimacy within the Jewish community have a long history.”

The key point is the legitimacy of fraud within the Jewish community. Successful fraudsters are not shunned but rather become pillars of the community:

Reflecting the legitimacy of white collar crime in the wider Jewish community in the contemporary world, [Michael] Milken is a pillar of the Jewish community in Los Angeles and a major donor to Jewish causes. Indeed, this is part of a pattern: Ivan Boesky donated $20 million to the library at the Jewish Theological Seminary. And the notorious Marc Rich has donated millions of dollars to a wide range of Jewish causes, including Birthright Israel, a program designed to increase Jewish identification among young Jews. The list of people supporting Rich’s pardon by Bill Clinton was “a virtual Who’s Who of Israeli society and Jewish philanthropy.” A rabbi concerned about the ethics of these practices notes, “it is a rare Jewish organization that thinks carefully about the source of a donor’s money. … The dangerous thing is not that people make moral mistakes, but that we don’t talk about it.”

The idea is that the Jewish financial elite sees the non-Jewish world in instrumental terms — as objects with no moral value. As I noted earlier,

there is a strong suggestion that the financial elite behaved much more like an organized crime syndicate than as an elite with a sense of civic responsibility or commitment to the long term viability of the society. Whereas organized crime stems from the lower levels of society, this meltdown was accomplished at the very pinnacle of society — the Ivy League grads …, the wealthy financial firms and investment rating agencies, the strong connections with government that facilitated the bailout and failed to provide scrutiny while it was happening. It seems highly doubtful that all this would have happened with the former WASP elite.

In psychological terms, these Jews are behaving in a sociopathic manner toward the non-Jewish world. That is, they have no concern for the moral consequences of their actions — no empathy or concern for victims. Recent neuroscience data shows that people are quite capable of having a great deal of empathy and concern for people in their ingroup while having no empathy at all toward outsiders, especially if they are highly ethnocentric. This implies that a strongly identified Jew could be the epitome of a well-socialized, empathic group member when he is among Jews, but treat the rest of the world in a cold and calculating manner and have no remorse or empathy for the victims.

Nor would such a person have any concerns about the long-term future of the society he lives in. Richard Spencer discusses the fact that so many of our politicians are sociopaths (my favorite example is Winston Churchill), noting that “Aristocrats governed with a healthy, long-term goal in mind: they wanted their great grandchildren to inherit a prosperous, powerful realm.”

It can safely be asserted that concerns about the long-term health of the society are not uppermost in the minds of our financial elite.

Concerns that Wall Street is socially irresponsible are widespread now. Just last week I saw CNBC reporter David Faber asking Lloyd Blankfein of Goldman Sachs whether Wall Street was good for America. Is it serving any positive social function? — with the implication that it’s at least reasonable to think it isn’t. Such a question would have been inconceivable a couple years ago. Rather than producing any tangible goods or allocating financing in a way that benefits good businesses, Matt Taibbi’s analogy seems to hit home: “The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

As Kinsley notes, this analogy was immediately deemed anti-Semitic by the usual thought police: “This sentence, many have charged, goes beyond stereotypes about Jews and money, touches other classic anti-Semitic themes about Jews as foreign or inhuman elements poisoning humanity and society, and—to some critics—even seems to reference the notorious ‘blood libel’ that Jews use the blood of Christian babies to make matzoh.”

It also conjures up a strong image of economic parasitism, another ancient anti-Jewish theme: the financial sector as not producing products or wealth, but extracting wealth to the detriment of the society as a whole.

The problem for Kinsley and like-minded people is trying to seriously rebut the claim that the socially destructive behavior of the predominantly Jewish financial elite does in fact fit a strong historic pattern of Jewish ethical behavior vis á vis the non-Jewish society — behavior that is well grounded in Jewish religious ethics.

In any case, it is a very troubling sign indeed for the US that the financial sector is vastly outpacing the rest of the economy in corporate earnings as well as in executive compensation — especially when it’s being run by a group of people who have sociopathic attitudes toward non-Jewish America.

Peter Schiff Tuesday May 11, 2010 CNBC Fast Money

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Deficit Landmines Dead Ahead!

Hearing President Obama’s economic peptalks, you might be under the impression that the U.S. needs to keep spending for just a little while longer to stimulate the economy – but then will swear off big deficits.
Reinforcing the point, to address concerns stirred by a Congressional Budget Office (CBO) forecast that the U.S. government will accumulate total deficits in excess of $6 trillion over the next decade, in February President Obama issued an executive order to create a bipartisan fiscal commission. The commission’s task is to deliver recommendations to the president by December 1 for limiting future deficits to 3% of GDP. (The FY 2009 deficit approached 10% of GDP. The FY 2010 deficit will probably go even higher.)
It’s our contention that the president’s fiscal commission is mostly for show; the 3% limit is just a hoop for the clowns to jump through. U.S. government finances are now past the point of no return; the U.S. government lacks not just the will but the ability to close the gap between revenue and expenditure.
At The Casey Report, we like to focus on facts. Unfortunately, when it comes to government debt, the facts aren’t pretty. They show that the country is already sliding towards financial collapse and hyperinflation in a way not dissimilar to the Weimar Republic.
Let’s first look at recent history to see how reliable CBO forecasts have been. In 1999 the CBO issued its 10-year forecast for 2000-2009 (see charts below). It looked as though we were heading into ten years of prosperity that would rescue us from little worries like the trillions in unfunded liabilities of Social Security and Medicare.
As you can see in the charts titled “CBO Revenue Projections 2000 – 2009” and “CBO Outlay Projections 2000 – 2009,” the CBO expected a budget surplus in every year from 2000 to 2009. And not just that, but that the surpluses would grow at an annual rate of more than 13% and would accumulate to $2.5 trillion over the decade.

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The next charts titled “Actual Federal Government Receipts 2000 – 2009” and “Actual Federal Government Outlays 2000 – 2009” show how wrong the CBO’s forecast was. One reason it went wrong was that the CBO naively assumed that the abnormally rapid rate of economic growth experienced in the 1990s would continue. It didn’t.

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A second reason is that the “conservative” Bush administration went on a spending spree – passing Medicare drug coverage and No Child Left Behind, to name two big tickets. While the CBO anticipated ending the past decade with a net budget surplus of $2.6 trillion, the U.S. government actually accumulated the largest deficit ever, a staggering $3.2 trillion. So the difference between the CBO forecast and eventual fact was only $5.8 trillion. (And that’s not counting for off-balance sheet unfunded liabilities, such as $60 to $70 trillion for Medicare and Social Security.)
So what does the CBO foresee for the coming decade? And how far from reality is that foresight likely to stray?
In January, the CBO released “The Budget and Economic Outlook: Fiscal Years 2010 to 2020.” This long-term forecast expects the U.S to accumulate an additional $7.4 trillion in deficits during the eleven years beginning with 2010, which reflects an average annual deficit of about $670 billion.

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The picture painted by the CBO is by no means rosy, but we think the facts could prove to be much worse. We have already demonstrated that the CBO’s assumptions can be wildly off the mark, and there are many ways for things to go wrong in the years just ahead. Here are three of the big ones.


The Revenue Landmine

The Congressional Budget Office projects total federal revenue of $2.2 trillion in 2010, a 3.3% increase from 2009, under the assumption that current laws and policies remain in effect.
Because of several tax provisions set to expire in December 2010 and what the CBO sees as a strengthening economic recovery, it projects that revenue will rise substantially after 2010, increasing by about 23% in 2011 and by another 11% in 2012.
According to the CBO’s projections, revenue will continue rising nonstop from 2013 through 2020 and will reach 20.2% of GDP. Almost all of the increase is attributed to expected growth in individual income tax receipts.
This forecast relies on the CBO’s expectation that the unemployment rate will average slightly above 10% in the first half of 2010 and then turn downward in the second half of the year. As the economy expands further, predicts the CBO, the rate of unemployment will then continue declining until, in 2016, it reaches 5%, the level that the CBO considers full employment.
The CBO projects annual government receipts to better than double between 2010 and 2020, growing at an average annual rate of 7.8%.
How do these growth projections compare with actual history?
Actual data from 2000 through 2009 show that over the last decade federal government receipts grew at an average annual rate of 0.9%. And the total increase in government revenue between 2000 and 2009 was only 3.9%. Even if we go back to 2007 and 2008, when tax receipts were at all-time highs, the increase from year 2000 levels was only about 25%.
Given the historical record, are we really supposed to believe government revenue will grow at an average annual clip of nearly 8% from now until 2020?
Comparing data during the first four months of fiscal 2009 to the same period for 2010, government receipts are down more than $80 billion, or 10.4%, from the same period the year before. And remember, 2009 revenues were about 17% below those in 2007 and 2008.
There are countless plausible reasons that revenue might disappoint and not grow as rapidly as the CBO projects – the main ones being that the economy may not expand as expected and that the employment picture won’t be as pretty as predicted.
So what happens to projected deficits if instead of growing more than 100% between now and 2020, government revenues only increase by, say, 50% (still a generous amount given recent history)?
Assuming revenue in 2010 matches 2009 and then grows by a total of 50% over the 10 years that follow, the accumulated deficits for the period would be $17.5 trillion, or about $10 trillion more than projected by the CBO.


The Interest Expense Landmine

Whether you’re an individual, a business, or the government, when you spend more money than you make, there is only one way to close the gap – by taking on debt and paying interest.
Until the end of 2008, the government’s cost of funding its debt had been growing steadily, at about 11% per year, as both interest rates and the size of the debt were rising. When the financial crisis hit full throttle in 2008, interest rates headed toward zero and the government’s net interest expense for 2009 dropped 26%, even though total debt was still growing.
The CBO projects that gross federal debt will continue to grow in the coming years, eventually topping $25 trillion by 2020 or nearly double where it stood at the end of 2009. And the CBO pins most of its hopes of financing the debt on the public’s savings.

While the CBO acknowledges that interest rates will have to rise to cover the next decade’s $10 trillion deficit, its rate estimates are cheerful in the extreme. The CBO expects the 3-month Treasury bill rate to average 1.9% in 2010, fall to 1.5% in 2011, and then hold steady near 2% for the rest of the decade. The projection for yields on the 10-year Treasury note is 3.9% in 2010, 4.5% in 2011, and then slowly increasing to 5.3% by 2020.
This paints a rather congenial picture for future interest rates. History, however, provides a much bleaker outlook. The chart below shows that interest rates can go much higher than what the CBO expects, and can go there quickly.

During the high-inflation 1970s, interest rates were volatile, but the overall trend was up, up, up. From 1971 to 1981, rates on both short-term and long-term debt averaged an increase of about one percentage point per year, to a peak of 15.5% on the 3-month bill and 15.3% on the 10-year note.
While the CBO does assume that interest rates will rise over the next decade, a few key factors suggest its assumptions are wishful.
The first issue is debt management. The Treasury will be issuing bills, notes, and bonds in unprecedented quantities. At the same time the administration plans to run trillion-dollar-plus deficits, the glut from past government expenditures is catching up. In the next four years, over $4.8 trillion worth of marketable Treasury debt will mature. As portfolios get packed with U.S. government IOUs, the Treasury will have to offer higher and higher rates to induce investors to accept more IOUs from the same issuer.
In fiscal 2009, the Treasury held over 290 auctions issuing more than $8 trillion in marketable securities. The auctions have been primarily focused on shorter-term maturity debt, which will make it progressively more difficult to roll over debt in the coming years.
The second major issue for the Treasury is foreigners. For decades the U.S. has relied on foreigners to purchase its debt; they now own roughly 50% of the outstanding debt held by the public. We may already be approaching the point at which they say, “Enough!” China’s holdings of Treasuries peaked in May 2009, and they have been buying Treasuries in much smaller doses since then.
In December, Japan reemerged as the top holder of Treasury debt, and the U.K. has been the third-place holder for most of the last decade. Both Japan and the U.K. have been buying more Treasuries, but the rest of the world has followed China in throttling back on purchases. The only way to continue luring foreigners back to U.S. Treasury debt will be with richer compensation, i.e., higher interest rates.
What happens to the CBO budget projections if their interest rate outlook is wrong? What happens if, for example, interest rates rise at the same pace they did in the 1970s? The result would be horrendous.
The blue in the chart below is the actual historical interest expense on all the federal government’s outstanding debt. The green line shows the CBO’s projected interest expense. Even their conservative estimate has total interest expense tripling over the next decade. The red line is our estimate assuming annual increases in interest rates of one percentage point. By our estimate, this would add $3.6 trillion in cumulative interest expenses by 2020.

And with the higher interest expense, total federal debt would climb to almost $35 trillion in 2020.


The Military Spending Landmine

The CBO views the wars in Iraq and Afghanistan as either guaranteed victories or swift departures. Rather than basing estimates on historical data, the CBO chooses unrepresentative and misleading growth rates for defense spending. Making matters worse, a middle road or a war escalation isn’t considered in the budget outlook. CBO estimates fall into three groups: optimistic, rosy, and snake oil.


Optimistic.
The first forecast assumes funding will follow the annual growth rate for nominal GDP, estimated to be 4.4% per year.
That rate is highly unlikely. In practice, there is no correlation between defense spending and GDP growth. As wars wax and wane, so does defense spending, regardless of GDP. Since 1985, the ratio of defense spending to GDP has ranged from 3.0% to 6.1%, and since 2001, the trend has been upward, not flat as the CBO predicts.


Rosy.
Under this assumption, total defense spending increases at the rate of inflation, which the CBO with a straight face assumes will average 1.1% for the next ten years.


Snake Oil.
The last CBO estimate freezes nominal spending at the 2010 level (with the exception of certain minor programs). Essentially, it would let inflation eat away at total military spending.
The CBO estimates of total military spending from 2010 to 2020 that come out of its three assumptions are:

  • 2010 Spending Frozen Estimate: $7.5 trillion
  • Inflation-Adjusted Estimate at 1.1%: $8.1 trillion
  • Nominal GDP Growth Estimate at 4.4%: $9.0 trillion

We have redone the CBO projections for military spending based on scenarios we consider more realistic. Without assuming any new wars, our most conservative projection still outpaces CBO estimates by nearly 3 trillion dollars. The three scenarios are:


Growing at the 1999-2009
rate. Military outlays grew at 8.5% during this period.


Growing at the 2002-2010 rate.
Military outlays grew at 9.4%.


New War rate.
From 2002 to 2004, two wars pumped the growth rate for military spending to 14.06% per year. In this calculation, we assume a new war from 2011 to 2013 raising growth rates to that level; then growth returns to the 1999-2009 rate of 8.5%.
Our estimates of total military spending from 2010 to 2020 in our three scenarios are:

  • Growing at the 1999-2009 8.5% rate: $11.8 trillion
  • Growing at the 2002-2010 9.4% rate: $12.4 trillion
  • Growing at the New War rate: $13.5 trillion

Compared to the CBO’s largest estimate, $9.0 trillion, these projections are $2.8 to $4.5 trillion greater.
So what happens to the CBO’s projected deficits if the only revision we make is to assume military spending growth at the more plausible 2002 – 2010 rate of 9.4%? The U.S. government’s average annual deficit over the next eleven years would exceed $1 trillion, and the accumulated deficit would exceed $11.6 trillion.


The Perfect Storm

So what happens if the government hits all three landmines – the revenue landmine, the interest expense landmine, and the military spending landmine?
If (1) federal revenues only increase by 50% from now until 2020, (2) interest rates rise by one percentage point per year, and (3) military spending continues to increase at the same rate as it did from 2002 to 2010, by 2020, the U.S. government would be running a deficit of $4.2 trillion per year.
And with the Perfect Storm’s rising deficits, total debt would accumulate at an accelerating pace. In 2020 it would reach $50 trillion – double what the CBO is projecting.

At $50 trillion, the national debt would be 208% of the CBO’s projected GDP for 2020, and the 2020 deficit would be $4.2 trillion, or 17% of projected GDP. The interest expense on U.S. debt alone would represent 12% of 2020 GDP and 55% of the total federal budget.
And this only takes into account the three potential landmines outlined in this article. There is much more that could materially change the landscape of the federal budget in the next ten years. The most notable factors not accounted for in our analysis are the entitlement programs – Social Security and Medicare – which are likely to make the government’s debt problem significantly worse as the baby boomers start to retire. No matter how many times we shake the Magic 8-Ball, it keeps coming back with the same reading: “Outlook not so good.”
It is not the bus you see that runs you over. That’s why spotting oncoming trends is essential to navigating your financial health out of harm’s way and onto the path to profits. Which is exactly what The Casey Report will do for you each and every month. Learn more here