Friday, November 14, 2008


"First" of the Day: Record budget deficit for October

The federal government began the new budget year with a record deficit of $237.2 billion, reflecting the billions of dollars the government has started to pay out to rescue the financial system.

The Treasury Department said Thursday that the deficit for the first month in the new budget year was the highest monthly imbalance on record. It was far bigger than analysts expected, over four times larger than the October 2007 deficit of $56.8 billion, and more than half the total for all of last year.

—Martin Crutsinger reporting in "October budget deficit hits record of $237.2B"

John Brinkley gives another perspective on the size of the October deficit—

The U.S. budget deficit last month exceeded the shortfall for President George W. Bush's first full year in office, spurred by purchases of stakes of some of the nation's largest banks.1

The deficit is the difference between what the U.S. government takes in and what it spends.

What you should notice is a number so astounding that I'm thinking it must be a misprint—

Corporate income tax receipts fell to $81 million in October, from $6 billion a year earlier, according to the Treasury. Individual income-tax collections declined to $86.2 billion last month, down 10 percent from $95.6 billion a year earlier, the report showed.

I'm inclined to believe that number should read "$810 million," which would put it more in line with the AP report that states "Corporate income tax receipts fell by $5 billion." Still, even at $810 million that's a drop of 87%! If there is no clever accounting explanation for this number, we are doomed!

And it's not just the feds in the red. This story is being writ small in the budgets of most state and local governments.

Take little California. According to an editorial in the Sacramento Bee,

The collapse of Wall Street and rising unemployment have driven down tax receipts to levels no one could have foreseen. Income tax receipts are expected to be $7.2 billion lower than projected two months ago. Revenues from sales and corporation taxes are expected to fall by $3.2 billion.

What this means, practically speaking, is that the federal government will be bailing out state governments while state governments will be called upon to bail out local governments.

Of course the Chinese and the Arabs will in turn have to bail out the federal government by buying Treasury bonds—at least if they ever hope to see a dime of value in all those dollars we so cheerfully sent them in our quest for more oil and cheaper flag pins. Since they are more or less obliged to lend us back our money, surely they won't be so crass as to expect anything in return, do you think?

Oh, and the dollar

As the financial meltdown has gotten underway the dollar paradoxically has strengthened. This is not as strange as it seems. As investors looked for a safe haven for their money after they had pulled what was left of it from stocks, bonds, real estate, hedge funds and money markets, the only thing remaining with the slightest glitter was U.S. Treasury bonds.2 In other words, the demand for dollars shot up as the demand for U.S. exports took a dive.

The good news is that the U.S. is able to borrow dollars at a low rate of interest relative to other countries, since most believe that the U.S. is still the safest debtor around.

The bad news is that the U.S. is borrowing amounts that may well shoot into the trillions. This will encumber the U.S. budget for generations.

Since neither you nor I nor our descendants can work that hard, even if we wanted to, ultimately the U.S. will have to print more dollars to pay down the debt. And that means that sooner rather than later the value of the dollar will continue its decline.

You don't have to take it from me. A month ago America's favorite billionaire wrote an op-ed for the New York Times entitled "Buy American. I am." Acting as cheerleader for the American economy, Warren Buffett did his best to lift the spirits of the investing class—not to mention the value of the U.S. stocks he said he'd just purchased. His advice—that now is the time to buy into the depressed stock market—was trumpeted throughout the media.

But they didn't read Buffett's column to the end. There, in the next-to-last paragraph, was this

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

Most will read this as a testament of faith in the future value of the stock market. The Simply Appalling view is that Buffett knows where the dollar is heading—and it's a place he doesn't want to be.

Related posts
Something you should know about your dollars (4/24/04)
More comment on the dollar (10/11/04)
Yet more news about the dollar (and the global economy) (10/21/04)
Buying a used Mercedes (2/8/05)
Bubble of the Day (4/26/07)
Currency of the Day (7/23/07)
The Depression Chronicles – 1: Bankruptcies (4/19/08)
The Depression Chronicles – 5: Consumer spending (5/13/08)
Understatement of the Day: A failing economy and an ignorant public (5/26/08)
The Depression Chronicles – 6: Fall of the GDP (10/30/08)



1Most accounts of the deficit for October make no mention of the military's contribution. Only John Brinkley notes that "Department of Defense spending rose 16 percent to $66.1 billion from $57 billion." [back]

2I am ignoring, of course, the "gold bugs" who would have you think there is safety in streams and caves. If everyone took their advice and bought gold there would be a "gold bubble" the likes of which the world has not seen. Before the bubble burst your financial advisor would have gotten out and become very rich—in the fiat currency of his choice. [back]

Wednesday, November 12, 2008


History Lesson of the Day: Piracy and venture capitalism

In the 17th and 18th century privateers were backed by financiers, much like modern multi-national PLCs. The way that privateering was operating back in the golden age of buccaneering, is that a group of individuals come together, and agree to kit out a ship to sail the seven seas to see if they can pull in some gold. It was a global gamble for enormous rewards. These predatory voyages are the roots of modern venture capitalism, with these modern multi-national corporations out to get all they can get. That’s the sort [of] privateering that led to the Credit Crunch. —Dr Peter Hayes, Senior Lecturer in politics at the University of Sunderland, as quoted in "Did Pirates Create The Credit Crunch?"

Dr. Hayes is on to something, but not the source of the "credit crunch." What led to the "credit crunch" was an overleveraged asset bubble. But so far as I know the value of booty never deflated—which is to say, crashed—even if it may have been overleveraged through the sale of treasure maps, which bear a startling resemblance to financial derivatives.

On the other hand, if the investing class of the buccaneer era thought of the pirates themselves as the asset in which they were investing, and then used the presumed future value of this investment as a 1% down payment on a new château to be paid in full when their ship came in, and then used the château to borrow more money to equip more pirates... No! Surely no one of the 18th century could have been that dumb!

Related post
"First" of the Day: The death of IPOs (10/23/08)


Tuesday, November 11, 2008


In memoriam: Miriam Makeba

Peter Popham said it well—

Miriam Makeba died gloriously on Sunday night: the World Music star and anti-apartheid icon finished her set at the concert for Roberto Saviano with her most famous song, "Pata Pata", acknowledged the ovation with a bow and a smile, walked off stage – then collapsed and died. Italian papers called it a tragedy, which in a way it was, but in another way it was a triumph.

Though she lived in exile from South Africa, which banned her recordings, she embodied such joy and hopefulness that even a lugubrious teenager of the Sixties could hear it and share it—

Love Tastes Like Strawberries - Miriam Makeba

As for her death, Makeba expressed herself in this recording from 1966, which she was still singing 30 years later—

When Ive Passed On - Miriam Makeba



Notes on the 2008 elections – 1: Massachusetts state income tax

Massachusetts liberals really did put their money where their mouths are.

Question 1 on the state ballot would have repealed the state income tax, eliminating 40% of the state's tax revenues. Conservative columnist George Will characterized it as "the most radical measure at issue" in last week's elections.

Supporters claimed that the "average worker" would save about $3,700 per year. It turns out there are no average workers in Massachusetts. Although a similar measure was narrowly defeated in 2002, this time it was rejected by a whopping 70% to 30%.

Rare Massachusetts Republicans supported the repeal and claimed afterward that "money played the biggest role in the results."

I am shocked, shocked to learn that money played a role in an election! Just as shocked as Republicans must be.

There was also some smug backbiting in the winner's circle. Craig the Carpenter reportedly remarked to supporters of the tax repeal, "If you don’t want to pay income taxes, move to New Hampshire." Which begs the question whether New Hampshire would grant them asylum.


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