Saving Nation: You Know you Have a Fiscal Problem When Saving Money Actually Becomes a Detriment to the Health of our Economy.
In George Orwell’s dystopian 1984, doublethink was the ability for someone to hold two mutually contradictory beliefs, and accepting them both. We have now entered into the world when Americans actually saving money is bad for the health of our consumption economy. War is peace. Saving is spending. Our Ministry of Truth is the Federal Reserve and U.S. Treasury telling us that going into debt and devaluing our U.S. dollar is actually good for the health of our country. The only minor caveat is that it is good for a very small section of our country in particular the crew on Wall Street Oceania.
It is hard to utter the following phrase because we haven’t heard it in so long. Americans are abruptly spending less than they earn. As I’ve talked about before with U.S. Savings Bonds the U.S. government is purposely trying to keep you from saving. This is simply one piece of the puzzle but in the middle of 2008, the U.S. Treasury suddenly lowered the ceiling of how much money could be invested in U.S. Savings I-Bonds for each calendar year from $30,000 to $5,000. That is incredibly steep. It isn’t like I-Bonds were garnering 11 percent year over year returns like Bernard Madoff but they were simply keeping pace with inflation. In fact, with the current CPI readings, I-Bonds will probably be yielding 1 to 2 percent on the next readjustment since they adjust bi-annually. My point is, our government is really trying to encourage people to spend beyond their means.
Just think about the entire concept of the Troubled Asset Relief Program (TARP). The first tranche of $350 billion was funneled to banks to help their capital ratios to encourage lending. None of this happened. In fact, banks merely hoarded the money:
So what is happening is banks are simply not lending money. This is the doublethink world we live in now. We are expected to believe that giving money to banks, banks who are part of the reasons for this economic crisis, is going to actually help us in the long run. The problem with TARP is there is no clear objective. First, it was slated as a method of purchasing bad assets from the housing collapse. Next, it morphed into the U.S. taking a stake in many large banks. The last morsel was given to the U.S. auto industry. Now, we are back to square one with the TARP. Another $350 billion but no clear idea of how we are going to spend it since the first tranche was squandered and as you can see above, is simply sitting idly in excess reserves.
The savings rate for November spiked 2.8 percent. This is up from the amazing zero at the start of 2008. Here is a chart of the savings rate:
This decade we actually went negative for the first time since data started being gathered in 1959. This is a reason why this recession is already giving us signs that it will be the most prolonged recession since World War II. Many Americans have no buffer of savings to protect them from a job loss. That is why many states are seeing their unemployment insurance funds being depleted at astronomical rates. But let us show this chart with the expansion of debt over this same time:
This also coincides with my analysis that the roots of the housing bubble started way back 30 years ago. It started back then because this is the tipping point where Americans not only became comfortable with debt, but they started confusing debt with wealth. Unfortunately our Federal Reserve and U.S. Treasury are making this same mistake spending money we don’t have on bailing out banks and other projects that will simply harm our country in the long run.
The fact that over two-thirds of our economy is based on consumption does not bode well. In fact, we are now in a debt unraveling spiral. Take a look at the bankruptcy of Circuit City:
“NEW YORK (CNNMoney.com) — Bankrupt electronics retailer Circuit City Inc. said Friday it will close its remaining 567 U.S. stores and sell all its merchandise.
The company said it has 34,000 employees.
The company said the sale would begin Saturday and run until March 31, pending court approval.
The retailer’s Web site and call center will cease to operate after Jan. 18.
Circuit City said employees will receive 60 days notice of the termination.
Employees who are laid off earlier will get pay and benefits for the 60-day period beginning Friday, the retailer said.”
So here is the 1984 scenario at hand. Fundamentally saving money is good for you individually. But the fact that you are not blowing money on plasma TVs or new surround sound systems will cost 34,000 employees their jobs. These people will not be able to spend at local restaurants, will have a harder time making their bills, and ultimately have a hard time coping in this environment. This isn’t to say you should go out and spend but this shows the tragedy which our government has set us up with when they proclaimed 30 years ago that deficits don’t matter.
They do because now, we are big borrowers from Japan and China and they will not be content keeping our gig going when their countries are accumulating savings with a growing middle class that wants to see their homegrown currency appreciate. If you don’t think this 30 year debt mindset is correct, let us look at our federal surplus or deficit:
This is why history is so important. What we’ve been living in is a debt induced hyper charged economy that has saddled our nation with $49 trillion in various forms of debt. And this debt will be growing with more TARP spending, further bailouts, and major fiscal stimulus. This is money we do not have. We are now relying much too heavily on foreign nations to keep our spending going. In this case however, Americans are being forced to save and this is the only way to correct our damaged balance sheet. The government looks to be spending more than we have for the foreseeable future. If our foreign borrowers get tired with low rates, there will be economic havoc and a run on the U.S. dollar isn’t completely out of the question.
On an individual level, you should save. We can’t speak for everyone but it is time to get our budget in order and protect what has made this country strong. I doubt that any of us believes that one of our inalienable rights is to spend beyond our means.
If you enjoyed this post click here to subscribe to a complete feed and stay up to date with today’s challenging market!Fiscal Situation of 50 States: Combined Budget Gaps Estimated at $350 Billon for 2010 and 2011.
It is simply stunning that 44 states are facing shortfalls either for this fiscal year, or will come up short in 2010 or 2011. This puts virtually the entire country in a difficult financial situation. It is hard to understand how the media feels that the federal government is somehow better able to get money from people than states. The federal government’s largest income source is the federal income tax; yet this is income from employees in those same states were fiscal problems are running deep. The government is also going to have a challenging time taxing someone with no job right?
The combined budget gaps for the remainder of this fiscal year and then those of 2010 and 2011 are a stunning $350 billion. This number is simply jaw dropping and Wednesday’s horrific retail sales numbers tell us that this recession is already going to be the worst since World War II and possibly since the Great Depression. First, let us take a look at the situation on a map:
Source: Center on Budget and Policy Priorities
You’ll notice that the only state with a sizable population without a budget shortfall is Texas. The rest of the country is virtually in the same predicament. You also need to remember that many states project these figures. That is, many are probably too optimistic in their assessments. The retail numbers that came out today tell us that many states are going to be dealing with a horrible budget situation. That is why in the upcoming fiscal stimulus package there is a large portion dedicated to state relief.
Looking at the data, it looks like many states are just too optimistic and are betting on the 2nd half recovery which will not happen. This crisis runs deep and the actions taken by the Federal Reserve and U.S. Treasury put our U.S. dollar at risk. If there is a run on the dollar, it will leave us as a nation with very few options. State and local governments stand to receive $160 billion in federal aid with the new stimulus plan. But you have to ask where is this money coming from? Printing money.
I’ve combined the state data into a list to make it more viewable. Let us break down the problems by state for the 2009 fiscal year:
First, 4 states with the most dire housing markets those of California, Arizona, Nevada, and Florida made the top 12 on the list. In fact, the number one state and most populace state in our nation California has the most troubling housing market in the nation that won’t see a bottom for many more years. Florida has a similar makeup to California in that it went down the path of toxic mortgages that are now going to be setting on new terms at the most dire time in our fragile economy.
Even should the states receive $160 billion from the historical stimulus plan, that will only address this current fiscal year. As analyst estimate, we are expecting additional fiscal shortfalls in 2010 and 2011 which will be on par or even worse than the current situation. Is the federal government prepared to do another major fiscal program when this occurs?
States with Highest GDP and Largest Population in Worst Shape
In a previous article I discussed that 40 percent of our country’s GDP comes from 5 states. Most of the population lives in these states as well but the important thing to note is that most of these states are also running with the deepest budget problems including California and Florida. Here is a look at employment situation in these states:
What people tend to forget is that these states have large consumers. So with retail sales falling off a cliff, how is this going to impact workers across state lines that ship merchandise to these locations? We are all connected. In fact, that is why $50 trillion in global wealth has evaporated since this financial crisis started.
Here are more estimates put out with the assumption that the economy improves in the second half of 2009:
Source: Center on Budget and Policy Priorities
I really don’t see the stock market popping back up and we are now off 9% in only 6 sessions. This again reinforces the notion that market volatility is supremely high in unhealthy markets. Until market volatility stabilizes, we can expect more of the same. Keep in mind that many states rely on state income taxes which many people are gearing up for in the next few months and states are going to find the following:
(a) Drop in personal state income tax revenues
(b) Capital gains falling off a cliff
(c) Continued weak sales revenue
This is going to stun states on the downside. Expect states to have a fuller picture by the end of April. In addition, many states are already exhausting unemployment insurance so instead of money coming in, it is going out. This is a recipe for a long and prolonged recession which will be more like a minor depression.
State Income Taxes
Some states have no personal income tax which on a plus side draws more employers but also puts a noose on services for their population. In challenging times these states have fewer revenue sources to draw upon. Here is a list of those states with no personal income tax:
*Source: CNN Money
Then you have states with high sales taxes and these states normally bet on good times always remaining. These states will face major gaps as we now see that retail sales falling for 6 straight months and by big drops is going to choke off another revenue stream:
So here you’ll see a state like Texas with no personal income tax but a relatively high sales tax. With retail sales faltering even more resilient states will start feeling the pinch.
The bottom line is the places to find money are running out. We will need to cut back as a nation. We simply have no choice. Sure the U.S. Treasury and Fed can run the printing presses but this will do little good. The fiscal situation of most 50 states are deeply troubling. The aggregate of the 50 states is our country. You will need to prepare for a challenging few years. Simple things you can do is stay away from debt, think twice about common mainstream investing ideas, and save money. These are simple steps. Our government is still in that spending mode even though they are asking of you to be prudent.
