The press may have ignored this story, but it will certainly impact you. I am talking about the recent increase in the debt ceiling. As part of the last debt ceiling debacle, the Congress put automatic triggers in place that allows the debt ceiling to increase another $1,200,000,000,000 (that’s what a trillion looks like). What does this mean to you? The recent increase obligates you to $52,409. That is what every American owes for this debt. This is not the amount owed for the total US debt, just the recent increase to the debt ceiling. Think about you much equity you have in your home, money you have in your bank account, and the size of your portfolio. Now subtract $52K.  Rick Santelli does a great job of breaking this down further to put it in perspective.

No words necessary (hat tip Paul Deitz)

I am a big fan of Kyle Bass. He is one of the few guys that seems to be able to take a 30,000 foot view of the world’s economy. He then breaks it down into very common sense and 8th grade math. His viewpoint is we are mathematically screwd.

Bass lays out the case that Japan will be next on deck after Europe blows (and it will). Rather than get into the stats, just watch the two videos. It is well worth your time.

Warren Buffett, the famed investor and head of Berkshire Hathaway, always seems to produce humorous quips in a folksy way that teach a lesson. I saw this courtesy of My Investing Notebook.

“I could end the deficit in 5 minutes. You just pass a law that says that anytime there is a deficit of more than 3% of GDP all sitting members of congress are ineligible for reelection.”

By George, I think he’s got it.

From an article on Yahoo News, many states are already clamoring that the recent budget cuts be rescinded due to an uptick in state tax revenues. As an example, Wisconsin is “projecting” an additional $636 million in revenue for the upcoming fiscal year. So many groups are pressuring the governor to relax the projected cuts, which hit education particularly hard. The same arguments are being made in Ohio, Colorado, New Jersey, and other states.

My parents were school teachers so I certainly don’t like to see education cut, but this is the same short term focus that got the states in fiscal despair. It is true that revenues have improved across many states. Retail sales, a large contributor to states tax revenue, are back to the 2008 or pre-recessionary levels. Of course, retail sales are not inflation adjusted so the total sales volume is back to the highs, but the quantity of goods purchased is still down. This means that the growth is due to inflation, not consumption demand. This fact is irrelevant to states as the tax revenues are based on total dollar sales. In other words, inflation helps the states, but hurts its citizens.

Since so much of the gain is due to inflation, these revenues could disappear if we experience any form of deflation in prices. This is still possible as the economy’s natural tendency is to delever due to our excessive debt levels. Inflation has reared its ugly head due to the Federal Reserves loose monetary actions, which are due to slow at the end of June. These gains could also evaporate if we hit another recession – another form of deflation.

My real complaint is the states mentioned in the article as well as a large majority not mentioned face massive unfunded liabilities through the promised pension obligations. New Jersey alone faces over $4 Billion in unfunded liabilities for its pension. This may seem like chump change when the Federal government deals with trillion dollar debts, but that amount is substantial for a state.

Again, I don’t want to come off as a miser, but as a financial planner, I prefer to see our elected officials build a bit of a buffer in the budget, just as I like to see clients do. If I had a client who saw their revenue drop rapidly and had no savings, I would go ballistic (in as polite a fashion as I could) if they told me they were increasing their spending due to a small increase in income. I would be on them to build a safety net for the next possible downturn, especially in an economy that is as shaky as this one.

Here is a video from Tech Ticker discussing how the Social Security Administration released details last Friday about how Medicare will be financially defunct by 2024. This is a train wreck in the making. We can act now with some nasty castor oil or be forced into worse remedies when the train hits the wall. I know this is a hotbed political issue, but it does not matter if you are a Democrat, Republican, Socialist, Libertarian, Communist or Bull Moose Party member. Our government is bankrupting this country. Every American will feel it through reduced purchasing power as our dollar depreciates or loses value.

My fix for Medicare (an all insurance) is to create a large deductible, possibly $5,000. For the truly despondent (about 12% of seniors), we can refund this deductible through a refundable tax credit. However, this upfront deductible will get all Americans to become consumers. We will question testing and search out the low cost (but effective) provider. We will also start to see a more preventative environment. Right now, Americans run to the doctor and undertake unneeded tests because they don’t see the bill. We just figure someone else is paying. If we had to hand over our cash on the spot, we would start thinking differently.

This isn’t to say that there aren’t other issues that need addressing like medical malpractice reform, pharmaceutical costs, etc., but this one move will radically alter the cost structure for medicine.

Here is a chart from Richard Russell of Dow Theory Letters (h/t Investment Postcards). No real commentary needed.

As the celebrations continue in Egypt after President/dictator Hosni Mubarak fled the nation, we need to examine the real lessons behind the revolution. The mainstream media portrays this strictly as fight for freedom. The press isn’t reporting on the real reason for the uprising: economics. Egypt has been under Mubarak’s rule since he claimed power under martial law after President Sadat was assassinated. If this was an uprising motivated solely by freedom, the Egyptian people would have demanded years ago that Mubarak remove the martial law and hold elections. It was economic reasons that prompted this call for freedom.

Egypt has a typical state controlled economy. Close to 30% of the employed citizens work for the government. This is usually a sure sign of a defunct economic system. Beyond this, the unemployment rate hovers between 20% and 30%. This level of unemployment is not due to the skill or education level of the Egyptian people. They are a highly educated workforce. These dynamics have been in place for several years though. So these facts alone haven’t prompted the revolt. The coup de grace was inflationary pressures. If you are unemployed or under-employed and prices for staples rise dramatically, it really hurts. Again, the press is making this out to be a revolution based solely on a need for freedom. Make no mistake if inflation was subdued, Egypt would not have revolted. Certainly, freedom is something the Egyptians have probably desired for a long time. It just never prompted a revolt until the economic situation became dire.

What lessons can Americans draw from this? One, the inflation issue is going to have large repercussions, and it is due to the Federal Reserve, and other central banks. The price of commodities has skyrocketed between 50% and 75% in the past year. Commodity prices ordinarily respond to demand/supply dynamics. If demand increases and supply remains constant, prices will rise. Certainly, the world’s demand for commodities has increased with the addition of China, India, and other emerging countries. However, demand hasn’t increased 50% over the past year. The commodities market, along with other assets such as stocks, are subject to speculation. Over the long term, demand/supply dynamics will control the price of commodities, but speculation can retard the price over the short term. This is precisely what the Fed’s money printing and low interest rate policy is creating.

As the Fed funnels money into the economy, these dollars are going to find a place to sit. It isn’t going to be traditional interest bearing vehicles since these instruments pay so little. The money is heading into the stock and commodity markets. It is pushing up prices above the natural demand/supply levels. The low interest rate environment created by the Fed is also forcing investors into these riskier assets to find a higher yield or return. So the average retiree is leaving money markets and CDs in search of a livable dividend. The big lesson here is we need to end the Federal Reserve. Since its inception in 1913, the US dollar has lost 95% of its value relative to goods and services. You would not experience this deterioration of purchasing power if we had a currency backed by gold and/or silver. If we continue to let the Fed run the show, we will really start to feel the inflation.

Egypt is a canary in the coal mine. Even before Murbarak fell, Tunisia and Yemen faced uprisings. Lebanon had protests as well. This will spread to other countries, and it will cause disruptions to the economy either through lower worldwide GDP growth or oil production. Further, we could find that these power vacuums are filled by less friendly regimes to the US.

Fed Chairman Ben Bernanke argued that the inflation hasn’t affected America as measured by the government’s Consumer Price Index (CPI), and that foreign countries have the tools to mitigate inflation through central banking policies. This is naive. Let’s ignore the fact that the true inflation most Americans experience is substantially higher than the stated CPI rate (the calculation of CPI is a post for another day). Eventually, the inflation experienced by other countries will come home to roost here in the US. If China, India, or any other country experiences substantive inflation, the wages of their citizens will eventually rise. As these employees build our electronics, clothing, and other items, the companies will have to increase their prices to pay for the higher employee costs, and, of course, the loftier commodity prices.  We will experience the foreigners inflation eventually.

The second lesson deals with our government budget. We have been providing Egypt with approximately $1.7 Billion in aid every year for Mubarak’s reign. Mubarak’s regime received over $60 Billion of yours and my tax dollars. He now has bank accounts containing billions of dollars. Obviously, our gifted tax dollars didn’t go to the Egyptian people. Egypt isn’t the only country raking in our hard earned dollars, which probably only enrich the controlling parties. Here is a chart of our foreign aid by country. Iraq and Afghanistan receive large gifts from us each year, but you will probably be astounded at how many countries are on our dole. Even Russia receives $1.2 Billion per year from the US. Isn’t this the country that was our mortal enemy a couple decades ago? Isn’t this the country building massive wealth with its oil fields? Their debt to GDP burden is substantially lower than ours, yet we give them billions every year.

We need to stop all aid to countries…all countries. One, we can’t afford to help out as we are broke. Two, the money is stolen by the ruling elite. It never gets to the intended parties. Even the humanitarian aid we provide many countries finds its way into the wrong hands, just as it did in Egypt.

While we celebrate the voice of the people being heard in Egypt, let’s not ignore the lessons from Mubarak’s downfall.

There has been considerable buzz on the web and the blogosphere about last week’s segment on 60 Minutes detailing the potential issues with municipal bonds. It all comes down to enormous budget deficits of the states. According to the segment, Illinois is already borrowing 50% of its annual expenditures – clearly unsustainable. One important area finally seeing some sunlight is government pensions (and benefits).

Most taxpayers generally assume the state and local government deficit problems are due to poor spending habits on useless government programs or welfare benefits. While government spending is never as efficient as the private sector, the real reason states are insolvent is due to government employee pensions. Apparently, taxpayers are oblivious to this fact.  One site focusing on the government pension problems is Mish’s Global Economic Trends by investment advisor Mike Shedlock. I highly recommend Mish’s site for anyone who wants to be enlightened on this problem.

Mish posted a study done by the Florida League Of Cities, Inc. where this organization found that the majority of taxpayers failed to understand how generous police and firefighter pensions were. Initially, most felt pensions and benefits for these groups were too low. When presented with actual data, the taxpayers overwhelmingly felt benefits were too high.

The government employee unions have certainly done their job for their paying members. With deep financial pockets, these unions were able to buy politicians so that the politicians voted for overly generous pensions and benefits. Since politicians only care about the next election, not the longer term future, they sacrificed state budgets for campaign contributions and political endorsements. Now the piper is requiring payment, and we don’t have the money.

As the Florida League of Cities study shows, most people admire public servants, especially firefighters and police officers who put their life on the line for our benefit. Anyone who questions the pay and benefits of these servants is characterized as a heartless curmudgeon. If you read Mish’s post or the actual study, you will see the benefits for Florida’s firefighters and police are insane: pensions as high as pre-retirement income, overtime increasing pensions, full retirement at 20 years, to name a few.

The town I live in, Bel Air, Maryland, shows how the system has morphed from the public servants serving the public to the exact opposite. The town has a small workforce since it is a small town, population about 10,000. Recently, the town commissioners had a vote slated to raise pensions for a select group of employees nearing retirement – about 9-15 employees. The problem is the parties recommending the raises were not independent of the beneficiary employees. The town commissioners were going to approve the measure based on a suspect recommendation. The commissioners were questioned at this meeting, and they clearly had no idea of the costs or the conflicted recommendation. Fortunately, it didn’t pass, but it would have if a select group of local, informed citizens hadn’t objected.  This example shows how the public servants are creating a reality where they are being served by the public.

The time has come for the public to awake from its ignorance nap to see what is happening. As the state and local budget issues worsen, the taxpayers must demand that public benefits and pensions be modified and brought in line with the private sector and, more importantly, reality.

A good video from the National Inflation Association on the unintended consequences of government action (hat tip Daily Capitalist). If you read any of my posts on Cash for Clunkers, you will see I did not like the idea for many of the reasons cited in this video.