Fracking — A New Bubble for a New Year

January 23rd, 2015
JANUARY 22, 2015

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Another year is under way, and we are in the midst of yet another central bank-induced credit bubble. This time, the culprit is shaping up to be the oil and gas industry. Hydraulic fracturing, or “fracking,” has seen a marked rise in usage in the United States over the last six years. It represented a new and innovative way to extract hydrocarbons from rock formations deep underground. Many may be tempted to say that the emergence of fracking, as well as the jobs it has created, is further evidence of the free market at work. However, as David Stockman makes clear in this excellent article, the fracking bubble would never have materialized if not for artificially low interest rates instituted by the Federal Reserve in the advent of the 2007–2009 financial crisis.

Oil and natural gas exploration and extraction via hydraulic fracturing is a highly capital-intensive venture. Given that the shelf life of a typical oil well is only two years, these firms need to establish new ones as maintaining existing wells proves too expensive. If not for the six years of Zero Interest Rate Policy (ZIRP) and several rounds of Quantitative Easing (QE) from the Federal Reserve, many of these upstart wildcatting firms would not be able to sustain the cost of exploration and extraction. Having record low borrowing costs has led to massive increases in production, and an influx of new jobs in the field due to economies of scale. In fact, a large percentage of the job gains we have seen since 2008 have been in the fracking industry.

The situation bears strong similarities to the inflating of the housing bubble from 2002–2007. Overproduction due to expectations of increasing demand because of the false impression of a strong economy, a large spike in job growth in the sector that will surely reverse as the bubble bursts, and companies (oil and gas wildcatters in place of homebuilders) issuing large sums of debt to fund their seemingly profitable ventures. However, just as in the case with the housing bubble, this boom was not induced by market fundamentals and an increased demand to feed this increase in supply. Firms, able to see energy as an indispensable sector just as housing, began directing their resources there and had no reason to believe oil prices would crash (sound familiar?).

Now companies and media outlets are scrambling to discover what the break-even oil prices are, because as the price continues to fall so does the collateral underpinning the large sums of bank debt. It is also worth mentioning that these oil and gas companies comprise approximately 17 percent of the overall high-yield debt market. This is a debt market for businesses with shorter track records of debt service and lower credit ratings, and offers slightly higher interest rates than standard investment-grade corporate bond markets in order to compensate the investor for heightened risk of default. A wave of defaults from these fracking companies would lead to ripples in the overall high-yield debt market, contributing to a market sell-off in the asset class that drives bond prices down sharply and inversely raises borrowing costs for other firms in the junk bond space.

Given the tentative strategy of the Federal Reserve in raising the benchmark interest rate, a sudden and unexpected increase in borrowing costs for businesses in the high-yield debt space is a serious cause for concern. The potential damage could be severe, as many of those bubble-created jobs would be in jeopardy. Whatever the result, the slowly unwinding fracking bubble should serve as a stark reminder about the importance of the Austrian business cycle theory. Years of QE and ZIRP have recreated an asset bubble in our economy with tremendous implications, and as the specific asset class may continue to change the same underlying problem of malinvestment and misallocation of resources will persist if central bankers do not change course.

 

Original article can be found here.

Markets Restrain Bank Fraud, But Central Banks Enable It

January 23rd, 2015
JANUARY 20, 2015

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Originally, paper money was not regarded as money but merely as a representation of a commodity (namely, gold). Various paper certificates represented claims on gold stored with the banks. Holders of paper certificates could convert them into gold whenever they deemed necessary. Because people found it more convenient to use paper certificates to exchange for goods and services, these certificates came to be regarded as money.

Paper certificates that are accepted as the medium of exchange open the scope for fraudulent practices. Banks could now be tempted to boost their profits by lending certificates that were not covered by gold. In a free-market economy, a bank that overissues paper certificates will quickly find out that the exchange value of its certificates in terms of goods and services will fall. To protect their purchasing power, holders of the overi-ssued certificates naturally attempt to convert them back to gold. If all of them were to demand gold back at the same time, this would bankrupt the bank. In a free market then, the threat of bankruptcy would restrain banks from issuing paper certificates unbacked by gold. Mises wrote on this in Human Action,

People often refer to the dictum of an anonymous American quoted by Tooke: “Free trade in banking is free trade in swindling.” However, freedom in the issuance of banknotes would have narrowed down the use of banknotes considerably if it had not entirely suppressed it. It was this idea which Cernuschi advanced in the hearings of the French Banking Inquiry on October 24, 1865: “I believe that what is called freedom of banking would result in a total suppression of banknotes in France. I want to give everybody the right to issue banknotes so that nobody should take any banknotes any longer.”

This means that in a free-market economy, paper money cannot assume a “life of its own” and become independent of commodity money.

The government can, however, bypass the free-market discipline. It can issue a decree that makes it legal (or effectively legal) for the over-issued bank not to redeem paper certificates into gold. Once banks are not obliged to redeem paper certificates into gold, opportunities for large profits are created that set incentives to pursue an unrestrained expansion of the supply of paper certificates. The uncurbed expansion of paper certificates raises the likelihood of setting off a galloping rise in the prices of goods and services that can lead to the breakdown of the market economy.

Central Banks Protect Private Banks from the Market

To prevent such a breakdown, the supply of the paper money must be managed. The main purpose of managing the supply is to prevent various competing banks from overissuing paper certificates and from bankrupting each other. This can be achieved by establishing a monopoly bank, i.e., a central bank-that manages the expansion of paper money.

To assert its authority, the central bank introduces its paper certificates, which replace the certificates of various banks. (The central bank’s money purchasing power is established on account of the fact that various paper certificates, which carry purchasing power, are exchanged for the central bank money at a fixed rate. In short, the central bank paper certificates are fully backed by banks’ certificates, which have a historical link to gold.)

The central bank paper money, which is declared as the legal tender, also serves as a reserve asset for banks. This enables the central bank to set a limit on the credit expansion by the banking system. Note that through ongoing monetary management, i.e., monetary pumping, the central bank makes sure that all the banks can engage jointly in the expansion of credit out of “thin air” via the practice of fractional reserve banking. The joint expansion in turn guarantees that checks presented for redemption by banks to each other are netted out, because the redemption of each will cancel the other redemption out. In short, by means of monetary injections, the central bank makes sure that the banking system is “liquid enough” so that banks will not bankrupt each other.

Central Banks Take Over Where Inflationist Private Banks Left Off

It would appear that the central bank can manage and stabilize the monetary system. The truth, however, is the exact opposite. To manage the system, the central bank must constantly create money “out of thin air” to prevent banks from bankrupting each other. This leads to persistent declines in money’s purchasing power, which destabilizes the entire monetary system.

Observe that while, in the free market, people will not accept a commodity as money if its purchasing power is subject to a persistent decline. In the present environment, however, central authorities make it impractical to use any currency other than dollars even if suffering from a steady decline in its purchasing power.

In this environment, the central bank can keep the present paper standard going as long as the pool of real wealth is still expanding. Once the pool begins to stagnate — or, worse, shrinks — then no monetary pumping will be able to prevent the plunge of the system. A better solution is of course to have a true free market and allow commodity money to assert its monetary role.

The Boom-Bust Connection

As opposed to the present monetary system in the framework of a commodity-money standard, money cannot disappear and set in motion the menace of the boom-bust cycles. In fractional reserve banking, when money is repaid and the bank doesn’t renew the loan, money evaporates (leading to a bust). Because the loan has originated out of nothing, it obviously couldn’t have had an owner. In a free market, in contrast, when true commodity money is repaid, it is passed back to the original lender; the money stock stays intact.

Original post can be found here.

3 Takeaways from Cisco’s Cyber Security Report

January 23rd, 2015

 

If you paid attention in history class you remember learning the U.S. economy has gone from one based on farming to industrial manufacturing to a services-oriented economy.

Mirroring that transformation, companies developed new business strategies in order to succeed and so as to contend with shifts as they presented themselves. However, just as companies have responded to those changes. so too have hackers and attackers responded to shifts in the cyber security world.

In order to profit from greater and needed spending, investors must understand the shifting dynamic underway in cyber attacks and how that impacts both the way victims, both corporate and individual, need to respond. In short, it means understanding several key points unearthed in Cisco System’s (CSCO) Cisco 2015 Annual Security Report that was released earlier on Tuesday. The report, which presents the research, insights, and perspectives provided by Cisco® Security Research and other security experts within Cisco, explores the ongoing race between attackers and defenders, and how users are becoming ever-weaker links in the security chain.

The business community looks to spend $86 billion on information security globally by 2016, up from $62 billion in 2012, according to market research firm Gartner Group. That shows an important realization among businesses. And for investors, that’s far greater growth potential from one sector than we’re seeing in the larger global economy given the combined forecast cuts from both the World Bank and the International Monetary Fund (IMF).

Recently the World Bank raised its 2015 growth forecast for the U.S. to +3.2% from +3.0%, but at the same time indicated the Eurozone will grow at only 1.1% and Japan at 1.2% this year. According to the IMF, the world economy will now grow by 3.5% in 2015 and 3.7% in 2016, down from the institution’s October forecast that put growth at of 3.8% and 4.0%, respectively. Much like the World Bank, the IMF revised its estimate for U.S. economic growth to 3.6% this year, up 0.5%. Some quick sandbox math infers the IMF cut its outlook for the three other economic horsemen that are China, the Eurozone and Japan.

Some of the key findings from the Cisco report include:

Attackers have become more proficient at taking advantage of gaps in security to evade detection and conceal malicious activity. This means attackers are being savvy in the how, where and when they are launching attacks. Through the first eleven months of 2014, spam volume increased 250% year over year according to Cisco’s data. Another strategy that is increasingly being used is malvertising (malicious advertising) that works through web browser add-ons to distribute malware and unwanted applications. Cisco notes that the use of malvertising also means that attackers are buying advertising to deliver malware — a very different strategy than what has been done before. According to Cisco Security Research, the most vulnerable companies to web malware attacks like these are pharmaceutical and chemical, media and publishing, manufacturing, transportation and shipping, and aviation.

The malvertising-focused strategy is part of a larger shift in the nature of attacks from the corporate entity — networks, servers and the like — to the user of a computer, tablet or smartphone. Why attack the user? Because he or she is the entry point into a company or other institutions assets through tactics like sending him or her a fake request for a password reset that leaves one open to identity theft and other subsequent attacks. This is particularly true given the adoption of Bring Your Own Device, the Cloud, and desktop virtualization clients.

Just as attackers have upped their game, companies need to respond, but in a more holistic and strategic way rather than simply addressing each attack as it happens. According to the Cisco Security Capabilities Benchmark Study, 91% of organizations have an executive with direct responsibility for security, but what’s really needed is a shift in thinking about security at the business unit and Board level that includes understanding cyber security’s role in the business and as a differentiator when it comes to competitors, customers and partners. These needs are underscored by findings from the Cisco Security Capabilities Benchmark report – while 90% of companies are confident about their security policies and procedures, 54% have had to manage public scrutiny following a security breach. Discussion on what controls are in place, what the reporting process is, what detection and remediation policies are and more at the Board level are likely to help change a company’s security strategy from simply deploying for the latest threat to one that is more transparent, far less visible and much more informative to the Board, the company’s business units and its chief information security officer.

If I had to boil the report down into one key thought it would be that society in one form or another has always had crime. Over time criminals have gotten smarter, their methods more sophisticated, and that has forced companies, citizens and other institutions to get smarter in order to fend them off. The same is true with cyber security.

Original Article can be found here

A Useful Republican Economic Agenda For the Next Two Years

January 9th, 2015

By Harvey Golub January 6, 2015

As the new Congress convenes today, the Republican leadership would be well served to look back at the last election results. The election was not just a negative one. Voters sent a strong message that the pursuit of economic growth should be a national economic objective. They demonstrated their understanding that economic growth alone will lead to more jobs, higher wages and greater opportunity. Americans also sent a message that the President’s path to achieve economic equality has resulted in either greater inequality, or by making everyone uniformly poorer.

So what should the new Republican majority propose in the next two years? The realities with which the GOP House and Senate leadership must now deal is that the Democrats will once again try to paint the Republicans as out of touch bigots who are only interested in helping big business and the already wealthy. They will try to paint the Republicans as anti-Hispanic, anti-African-American, anti-any help for the middle class, anti-women, and pro war.

In response, GOP legislators should first and foremost stop the advancement of Obama economics, whenever possible; they must put forth a legislative agenda that will show the nation that they are able to govern; they must focus a great deal of their effort on showing people how their agenda would help individual people; they must remain calm and not react to the bait from the president and advice from individuals who want the Republicans, as Stalin put it, to sell the rope that will be used to hang them; they must avoid internecine warfare within the party; and the Senate and House Republicans must learn to work together, which also means that Senate Republicans must remember that House Republicans are their allies and not the Senate Democrats. To bring home this point, John Boehner and Mitch McConnell should hold joint bi-weekly press conferences and explain what they are doing and why they are doing it.

Let me illustrate what could be the elements of a sensible legislative agenda to meet these objectives:

1. Deal with the horrifying problem of teenage unemployment - particularly among African- American and Hispanic youths whose unemployment rates were 28% and 16% respectively in November. Economists know that raising the minimum wage increases unemployment in these groups, but sadly the public believes otherwise thanks to the Democratic Party and most of the media.

A sensible way of reducing labor costs for businesses and increasing take home pay for these young people is to pass legislation exempting individuals (everyone through age 22) and their employers from paying any income taxes on wages, any social security or unemployment insurance taxes, any state disability taxes and any Obamacare taxes or fines. Businesses should not have to count these young workers among the number of employees requiring health insurance coverage. These changes would increase the incentives of young people to find jobs, and would encourage employers to hire them.

2. Deal with the massive problem of what to do with the illegal immigrants already in this country, without having to pass an unwieldy, complex omnibus immigration law covering every problem. No sane person wants to simply deport those illegal immigrants – 10 or 15 million well integrated people who are obeying the law, working hard and paying their taxes.

While immigrating illegally to the United States is unlawful, it’s an act that is hard to undo over time. But there ought to be a statute of limitations (similarly to what we have for crimes other than treason or murder). It certainly should not be rewarded, but it should be forgiven after a reasonable time. Perhaps after 10 years? Millions would be eligible, though this forgiveness should not include people who have committed additional crimes, including lying or tax evasion. It should not be a prelude to becoming a citizen, but instead should offer some sort of alternate legal status.

The difficulty is to accomplish this without encouraging new people to break the law by coming here illegally and try to outlast the time requirements. Any reform bill should deal with that possible outcome by strengthening border security, providing a guest worker program, and deporting the rest.

3. Restore the trust in the institutions of government by dealing with the scandals caused by the IRS and the Veteran’s Administration, and by reforming the regulations and civil service rules governing federal employees. The regulatory and administrative bodies in the Department of Justice, the Federal Communication Commission, the Environmental Protection Agency and a host of other agencies are equally guilty of overreach, excessive regulation and unfair actions.

While the actions of the VA and IRS have caught the attention of the public, policies directed at them should cover all federal departments and agencies. These actions should narrowly increase the power of managers to punish and fire federal employees who break the law or are simply incompetent. These steps are necessary to begin to restore the public’s trust.

4. Deal with the generally acknowledged dysfunction in the Affordable Care Act, by eliminating the tax on medical devices, eliminating the individual mandate, and eliminating the employer mandate. The president will certainly veto these laws, but the public would support these actions and the Democrats in Congress will have to go on record with their votes.

5. Deal with the available opportunities to increase the nation’s energy production, by passing the Keystone pipeline, opening up Federal lands for exploration and production, and by allowing the export of crude oil and natural gas. These laws will be broadly popular, and if passed will help keep prices down and fuel a new major export business. Again, the President will probably veto these pieces of legislation, but once more Democrats will be the ones to block popular legislations.

The U.S. has the resources to use the current increase in energy production to make America more self-sufficient, and capitalize on this advantage to boost economic growth and create millions of jobs.

Whether or not these proposed laws are vetoed or not, is not the point. They are the elements of an agenda that can speak to Americans and show what Republicans can do. The GOP could not legitimately be cast as the party of no, with such a positive, effective agenda.

Mr. Golub, a former Chairman and CEO of American Express, currently serves on the Board of Trustees of the American Enterprise Institute.

Original article can be found here

American Freedom Alliance

January 9th, 2015

AFA logo

The American Freedom Alliance is a non-political, non-aligned movement which promotes, defends and upholds Western values and ideals. The Alliance sponsors conferences, publishes opinions, distributes information and creates networking groups to identify threats to Western civilization and to motivate, educate and unite citizens in support of that cause.

Failing Grades: 

The Crisis in Teaching on Our University Campuses

An International Conference

Throughout the Western world, the University, once an institution revered for its openness, transparency and breadth of expression, has become a narrow corner where only views which conform to the politically correct zeitgeist are tolerated. The infusion of ideology into the curriculum, coupled with the unwillingness of university administrations to enforce their own standards of academic excellence, has transformed many of these institutions into little more than hollow intellectual shells, given over to a monochromatic view of the world, deprived of balance.

Perhaps the most important question that arises from this sad state of affairs is: what are the consequences of the collapse of basic academic standards? What are our students actually learning and if students fear to express contrarian views, is there hope for our democratic future which depends upon collective discussion, a plurality of views and the oxygen of broad debate for its survival?

With speakers drawn from academic institutions around the world, this conference will begin with the presentation of a scathing California Association of Scholars’ report on the University of California, demonstrating the extent of the crisis and its cost to our future. It will then engage in a discussion about how these imbalances might be addressed both within the University structure and beyond it and conclude with a review of the efflorescence of new on-line vehicles for tertiary education which hove much closer to the classical ideal of an informed and balanced university education.

This conference, a sequel to our 2008 conference How Free Is the University? will offer an unprecedented overview of the state of the modern University and how its significant crises and challenges can be addressed.

Avi Davis will be joining me this Saturday on Your Financial Advisor! You can listen live from anywhere Saturday morning at 8am on AM 930 WFMD by logging on to www.wfmd.com and clicking the “listen live” button! If you can’t tune into the show, there will be a podcast available the week following the show here.

Avi Davis

About the Author: Avi Davis – President

Avi Davis is an attorney, journalist, travel journalist, commentator, documentarian and President of the American Freedom Alliance.

He was born in Melbourne, Australia where he graduated from the David Derham School of Law (Hons.) at Monash University in 1981. Since his arrival in Los Angeles in 1984, he has served as the Director of the Streisand Center for Jewish Cultural Arts and Director of the American Associates of Ben-Gurion University, Los Angeles. For seven years, in the 1990s, he was the president of his own consulting company, based in Beverly Hills, which raised capital for the Israeli Internet industry.

 

As a journalist, Mr. Davis’ commentary, travel writing and sports writing has appeared in opinion pieces, feature articles, letters and book reviews in such periodicals as the Wall Street Journal, Los Angeles Times, Chicago Tribune, USA Today, Christian Science Monitor, San Francisco Chronicle, Jerusalem Post, Washington Times, Melbourne Age, The Daily Telegraph, The Australian, Los Angeles Jewish Journal, Jewish Spectator, New York Jewish Week, among many other papers and magazines. He is the former literary editor of the Jewish Spectator. His radio commentary is heard regularly throughout North America and he has been a television commentator on the Middle East for CNN, Fox News and Adelphia Cable.

In 2003-04 he studied at the Kennedy School of Government at Harvard University.

The Coming Nationalization of Retirement

December 10th, 2014

SAN ANTONIO, Texas — More than 200 years ago, our country was founded under the concept of self-government. No longer would a “holier than thou” benefactor dictate how the masses should live their lives. The king had been replaced by the individual. Every single citizen was guaranteed the natural right to “life, liberty and the pursuit of happiness.” The government ceased controlling the people. Instead, the people controlled the government.

This concept was new. It was vastly different from other nations of the time. But the codification of this new-found freedom was not guaranteed. In fact, the first attempt failed, and a new constitution would be required. Nothing more shows the concern of the everyday inhabitants than the story of the woman who asked Benjamin Franklin, as he exited Independence Hall, “Sir, what type of government do we have?”

“A republic, if you can keep it,” replied the aged statesmen.

If the Founding Fathers returned today, would they agree whether or not we have “kept it”?

It seems as though the voters, over the years, have been slowly giving it away. Now, I’m no expert in medical services, so I can’t comment on the nationalization of health care that many others have vociferously complained about. I am, however, knowledgeable enough about the retirement services industry to know the ultimate nationalization of that industry will have devastating consequences – not only to the industry itself, but to the average American worker.

Marcia Wagner spoke eloquently on the topic at the CFDD conference here (“A multitude of threats to retirement system“) and she painted a picture that might startle our Founding Fathers.

How and why have we gotten this far? And is the nationalization of retirement as crazy as it sounds?

The bashing of the retirement industry, and 401(k) plans in particular, began in earnest shortly after the market drop of 2008-09. This drip-drip-drip campaign soon merged with the (successful) class warfare strategy of the last election. Empowered by this shift in public discussion, opportunistic politicians saw an avenue to reverse perhaps the greatest legacy of the 1980s – the 401(k) plan.

Much has been said about the amount of people who are currently not covered by retirement plans. The blame has been placed on the shoulders of the 401(k). That this overstates the amount of employees (or the lack thereof) covered prior to the advent of the 401(k) is a truth conveniently ignored. Yes, there may be too few people covered by retirement plans, but the fault lies not with the 401(k). Yet we now see government-based solutions, both those coming from the Senate as well as those offered by the states, that appear to address a problem that doesn’t exist while ignoring a problem that does exist.

The real retirement problem isn’t lack of coverage, it’s over-coverage, or, more appropriately, over-promising.

We’re seeing this in the City of Detroit and select cities in California today. The mainstream press reports the future may feature similar problems in New York City, Los Angeles, as well as the entire state of Illinois. I refer, of course, to the problem of public-sector retirement plans. Local politicians, in hopes of gaining re-election, pledged ever-higher benefits to key public employee constituencies. In exchange for those current-day votes, they mortgaged their municipality’s future. As in the case of Detroit and Stockton, California, the impact has been shattering.

Despite this knowledge, the electoral success of vilifying “the rich” has moved from salaries to retirement plans. The term “Romney-Sized IRA” was not created out of endearment.

Ironically, rather than generating jealousy among the typical retirement saver, it has sparked interest in learning the answer to “How can I Romney-Size my IRA?”

This “can-do” zest – a.k.a. “The American Spirit” – goes unnoticed by Washington and the various state capitals.

As a result, we have proposals from Senate Democrats to outright takeover the private retirement plan industry. Rather than offer a knee-jerk response, Senate Republicans have countered with offers that only slightly tone down the extremes of the opposition.

Even (former?) Tea Party darling Marco Rubio (naively?)  proposed a government-based retirement solution. And let’s not forget the states, who seek to override ERISA and create their own hodge-podge set of rules for allowing private parties to join the state retirement system. (Hmm, isn’t that why they created ERISA in the first place and, by the way, how well do you understand all those state-based 529 rules?)

It goes without saying the unintended consequence of these proposals will have a disastrous impact on the ability for Americans to save for retirement. Just look at the results the last time we fiddled with cutting back retirement savings incentives in the 1986 tax reform.

Annual contributions dropped dramatically. This hurt (and will again hurt) everyone, especially the low-wage employees it’s purported to help. Worse, it sacrifices future government revenues in exchange for buying votes – er – reducing the budget deficit today (sound familiar?).

One must seriously question the motives of any politician willing to take such a large risk with the future retirement of millions of workers when there’s a much safer and proven alternative available (401(k) MEPs).

Sure, laugh at me. Say it’ll never happen. But remember this – didn’t you laugh eight years ago at the idea of anyone seriously considering nationalizing the nation’s health care industry? Not only did Washington pass this legislation, but key industry players, having found a way to profit from it, are enabling it. Why can’t the same thing happen to our retirement?

There is, however, reason to hope. Notice the one component of government left out of this discussion – the House. Nothing gets passed without the House. As long as we still have a bastion of die-hard Tea Party representatives influencing the majority’s leadership, it’s doubtful we will be nationalizing anything very soon.

Besides that, there’s an election in a couple of weeks. And we all have an opportunity to make our own individual choice. Let’s hope America hasn’t lost the spirit of self-responsibility.

After all, we don’t want to upset our Founding Fathers, do we?

 

The article was written By:  of Benefitspro which was published: October 16, 2014

More D.C. Lies on Debt and Spending

December 9th, 2014

DECEMBER 9, 2014 - Mark Brandly
”Recently, the Treasury Department secretary asserted that “The President’s policies and a strengthening U.S. economy have resulted in a reduction of the U.S. budget deficit of approximately two-thirds — the fastest sustained deficit reduction since World War II.” And, “the deficit in FY 2014 (FY 2014 stands for Fiscal Year 2014. Note that the government’s fiscal year ended on September 30.) fell to $483 billion.”

Many people fell for this claim, including Nobel prize winning economist Paul Krugman. “So you heard it here first: while you weren’t looking, and the deficit scolds were doing their scolding, the deficit problem (such as it was) was being mostly solved.”

Federal Borrowing Continues

Apparently Krugman failed to read the rest of the Treasury report. Page one of this same report clarifies the issue, saying “the increase in borrowing included $483 billion in borrowing to finance the deficit and $314 billion in borrowing related to other transactions.” “Total federal borrowing from the public increased by $798 billion.” The Treasury Department’s own numbers tell us that widely reported deficit number is a lie.

This $798 billion deficit is a more accurate deficit number for FY 2014. According to the Treasury Department’s report on Public Debt to the Penny, the fiscal year 2014 debt increased $1,085.9 billion. This, however, includes the increase in intragovernmental debt of $277.2 billion. So the annual debt to the public increased by $808.7 billion. While there is a minor difference in these numbers, we can agree that the annual deficit was about $800 billion, not $483 billion.

What Is Intragovernmental Debt?

One accurate fact about the Treasury secretary’s statement is that he ignores intragovernmental debt. The federal government currently has over $5 trillion of intragovernmental debt The feds, over the years, have collected $5 trillion in taxes and then spent this tax revenue. However, before they spent this money, they loaned it to themselves. They count the money they lent to themselves as intragovernmental debt. Only governments believe that loaning yourself money is legitimate debt. The Treasury Department’s recent statement justifiably ignores this bookkeeping deception.

The $808.7 billion debt increase is a 6.7 percent one year increase in the debt. It’s an average of $2.2 billion of additional debt per day or $92 million of borrowing for every hour of the year. This equates to around $2500 of debt per capita, about $10,000 of additional debt for the average family of four.

The Burden of Debt Remains Huge

The past two administrations have a history of record deficits. According to the Treasury Department, during George W. Bush’s term, the debt held by the public, again I’m ignoring the intragovernmental debt, increased from $3,339.3 billion to $7,551.9 billion.The eight years of Bush budgets began on September 30, 2001 and ended on September 30, 2009. Obama’s fifth budget year ended on September 30, 2014 That’s an eight year increase of $4,212.6 billion or a 126 percent increase during the Bush years.Admittedly, a small part of spending in the last Bush budget may be attributed to the 2009 Obama stimulus package. For Obama’s first five years in office the debt to the public increased to $12,785 billion. That’s a five year increase of 69 percent or an average annual increase of $1,046.6 billion. This total public debt of $12,785 billion amounts to about $40,000 for every man, woman, and child in the country.

The table below shows the trends for the amount of debt and the annual increase in the debt since 2001 (in $billions).

While the annual deficit has recently trended downward, a look at the 2014 budget makes it difficult to sustain the claim that the deficit problem has been solved.

The Daily Treasury Statement for September 30, 2014 provides us with details about the FY 2014 budget. The largest line item in Treasury Deposits is the Public Debt Cash Issues of $7,519.5 billion. This is the total amount of gross government borrowing for 2014. The government tends to issue short-term debt that quickly rolls over in order to save on interest payments. The federal government borrowed this $7.5 trillion in 2014 to pay bonds as they came due, to pay for the interest on those bonds, and to pay for the remaining budget deficit. While the debt increased only $800 billion, the federal government needs to find lenders that are willing to loan it at least $7.5 trillion annually. That number will jump as the debt increases in the future.

Low Interest Rates — Or Else

In order to take advantage of low interest rates, the feds are rolling over more than half of their debt annually. The problem with that strategy is that interest rates may not remain this low for long. On the spending side of the Treasury statement we see that 2014 interest payments totaled $223.3 billion. Over the last several years, as the debt has increased, interest payments have remained relatively stable. Since September 2001, the debt held by the public has increased 283 percent, yet interest payments on that debt have only increased 37 percent. That’s because interest rates have collapsed as the debt has increased.

If interest rates return to a more historically normal average, interest payments will explode. The average interest rate on the debt for September 2014 was 2 percent. Even without an increase in the debt, if the average interest rate on the debt returns to its pre-recession September 2007 level, the annual debt payment would be over $500 billion. Given the monetary policies of the past several years, interest rates could easily increase to their September 2000 averages. If that happens, the interest on the current amount of debt would be more than $700 billion.

Given the projected increases in the debt, it wouldn’t be surprising to see annual interest payments more than quadruple in the next several years. David Walker, the former head of the Government Accountability Office, concludes that by 2022 “interest payments will become the single largest expenditure” in the government’s budget.See Walker’s Comeback America, p.15. Walker’s projection is based on a GAO budget simulation.Comeback America, p.15. Walker’s projection is based on a GAO budget simulation.

Entitlements Aren’t Going Away

Entitlements are the other major budget issue. For 2014, Social Security Benefits outlays were $905.8 billion. Medicare and Medicaid spending added up to $900.4 billion ($295.7 billion for Medicaid and $604.7 billion for Medicare). Payments for these entitlements are projected to dramatically increase in the coming years as the number of recipients for these programs increase due to the aging US population. A large part of the growth in the fiscal gap is due to the large projected deficits from these programs.

As seen in the table above, the budget deficit trended downward since peaking in 2009, although it slightly increased in 2014. While budget projections tell us this downward trend may continue for the next few years, the deficit problem has not been eliminated.

Interest payments and entitlement payments will soon skyrocket. The next recession will bring about more stimulus packages. Politicians will buy votes by adding new spending programs to the budget and will be reluctant to pay for their spending with additional tax revenues. We will again see record budget deficits.

 Mises Institute

The Original Source of this article can be found here

The Colder War

November 21st, 2014

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How the massive power shift in Russia threatens the political dominance of the United States

There is a new cold war underway, driven by a massive geopolitical power shift to Russia that went almost unnoticed across the globe. In The Colder War: How the Global Energy Trade Slipped from America’s Grasp, energy expert Marin Katusa takes a look at the ways the western world is losing control of the energy market, and what can be done about it.

Russia is in the midst of a rapid economic and geopolitical renaissance under the rule of Vladimir Putin, a tenacious KGB officer turned modern-day tsar. Understanding his rise to power provides the keys to understanding the shift in the energy trade from Saudi Arabia to Russia. This powerful new position threatens to unravel the political dominance of the United States once and for all.

  • Discover how political coups, hostile takeovers, and assassinations have brought Russia to the center of the world’s energy market
  • Follow Putin’s rise to power and how it has led to an upsetting of the global balance of trade
  • Learn how Russia toppled a generation of robber barons and positioned itself as the most powerful force in the energy market
  • Study Putin’s long-range plans and their potential impact on the United States and the U.S. dollar

If Putin’s plans are successful, not only will Russia be able to starve other countries of power, but the BRIC countries (Brazil, Russia, India, and China) will replace the G7 in wealth and clout. The Colder War takes a hard look at what is to come in a new global energy market that is certain to cause unprecedented impact on the U.S. dollar and the American way of life.

Marin-Katusa

Meet the Author:

Marin Katusa is one of the leading experts on–and most successful portfolio managers in–the energy and resource exploration sectors.

Katusa has rubbed elbows with energy ministers, generals, oligarchs, and billionaires all over the world. He’s strapped on a flak jacket to survey lucrative projects in Russia, Iraq, Ukraine, Kuwait, Mongolia, Kosovo, Colombia, and many other dangerous yet resource-rich jurisdictions that require the protection of heavily armed private security forces.

Starting out as a mathematics professor, Katusa left academics to apply his models to portfolio management. His funds are among the top-performing in the resource sector over the last five years in Canada. He’s a regular contributor to the Business News Network (BNN), and has been interviewed by global media outlets such as CNBC, RT, CBC, Bloomberg, and Forbes.

Katusa first became interested in the energy sector through investing. He began in mining, shifted to Uranium, and began to see the unconventional energy sector as a much bigger story.

Since 2007, Katusa has been serving as the chief energy investment strategist for Casey Research. He is one of the most active financiers for early-stage, junior resource companies in Canada, and was the lead financier in the first two financings for Cuadrilla Resources, now one of the largest and most successful unconventional natural-gas plays in the UK. He also structured the financing and the sale of Turkana and the world-class 10BB oil block in Kenya to Africa Oil, a Lundin-held company with a market capitalization of over C$2 billion. Katusa is a founding director of Copper Mountain, Canada’s third-largest copper mine.

Over the years, Katusa has been involved in raising over C$1 billion in capital for early-stage and producing resource companies.

Katusa speaks fluent Serbian and Croatian, and is conversant in Russian. A graduate of the University of British Columbia, he lives in Vancouver.

Marin Katusa will be joining me this Saturday on Your Financial Advisor! You can listen live from anywhere Saturday morning at 8am on AM 930 WFMD by logging on to www.wfmd.com and clicking the “listen live” button! If you can’t tune into the show, there will be a podcast available the week following the show here.

 

 

 

Three Things a Tesla Teaches Us about Stewardship

November 19th, 2014

FWE

 

Dr. Anne Bradley | Nov 19, 2014

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The Tesla is becoming an increasingly frequent sight in the area in which I live, as are many other kinds of electric vehicles. Commercially, this technology is relatively new, but despite the political undertones inevitable to any discussion involving environmental technology, it can teach us a lot about our call to stewardship.

The Importance of Innovation

Oil is scarce, and electric vehicles offer creative ways to steward this diminishing resource. We should, as with all things, try to use resources as efficiently we can. This doesn’t mean that we will completely eliminate its use.

In fact, according to freelancer Michael Schirber in an article for LiveScience.com, “Even if cars soon start running entirely on electricity or hydrogen, they’ll still need 100 gallons or more of oil to make their plastic parts, such as seats, dashboards, bumpers, and engine components.”

Due to considerations of weight, plastic is greatly preferred over steel or aluminum in auto production. Because of this, oil is an inevitable component of even electric vehicles. Electric cars do not eliminate the demand for oil, but they do make us use it more effectively.

Similarly, as electric vehicle technology develops, it requires us to think innovatively about how we use electricity. We will experience surges in the demand for electricity during the early stages of electric vehicle adaptation, but this forces us to think about how we use this and other resources.

According to the MIT Technology Review, “Plugging in an electric vehicle is, in some cases, the equivalent of adding three houses to the grid. That has utilities in California—where the largest number of electric vehicles [is] sold—scrambling to upgrade the grid to avoid power outages.”

There are certain times during the day during which electricity use eclipses the rest of the day, generally after people get home from work and use energy to cook dinner and source their TV. Newsworthy events also trigger spikes in electricity usage, and the demand for the electricity necessary to charge car batteries would mimic those spikes. As technology continues to develop, these issues will likely be resolved.

The Tesla—and electric vehicle technology in general—will spark other areas of innovation. As researchers and developers explore new kinds of transportation, discussions about how we are to use our resources have already begun.

The Place of Creative Destruction

Creative destruction is the process by which industrial technology and capabilities morph to address growing needs in the economy. The fact that technology is constantly developing and adapting to meet new needs is easy to overlook. Often, the process happens so quickly that we don’t notice.

Sometimes it’s a bit more painful. The debate surrounding the transition from traditional car to electric vehicle shares undeniable similarities with the transition from horse and buggy to the early car. The automobile solved significant environmental and sanitation issues inherent to the use of the horse as a key means of transportation.

Simultaneously, it eliminated the need for certain craftsmen involved in the making of buggies and wagons. The demand for smiths and carpenters decreased as automobiles became more popular. Ultimately, these jobs were recouped in the automobile industry, but training and adaptation had to take place first.

It is still too soon to know how the story of the electric vehicle will unfold, but it’s safe to guess that it will include a similar process of destruction and adaptation.

Practical Stewardship

As has been referenced earlier, we’ve been called to fulfill the cultural mandate by being faithful stewards of our resources. In instances like this, where there are many considerations of financial means, logistical needs, and other variables, there may not be a right or wrong approach.

Depending on her constraints, a mom might opt for a minivan. Another individual might need a pick-up truck, given his or her resources and calling. If we’re going to choose to use our resources in one way or another, we need to be able to justify our decisions and become informed.

The fundamentally important lesson of stewardship brought to us through economics is about finding innovative ways to use our scarce resources.  The market process has and continues to help us do this. We now have many more “substitutes” than we did even thirty years ago, including hybrids, increasing public transportation, telework, and electric cars.

How we decide to steward our resources can aid or detract from fostering an entrepreneurial and innovative environment that promotes healthy relationships with those around us.

We each have been entrusted with a specific realm that we are called to tend. For some, this may fall within a department at work, for others their discipline at school, or for some it may be the home.

Each comes with a set of challenges and rewards, and it’s possible to fulfill our calling in these areas well or poorly. We were made by a creative God, and we are called to probe into an issue or situation to achieve full understanding, think innovatively, and be the best stewards we can of the resources we have been given.

IRA and Legacy Planning

November 14th, 2014

Click the link below for the IRA and Legacy Planning Guide as well as a list of the Top 10 Mistakes made while planning!

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