Thursday, January 10, 2013 - California As A Role Model

California As A Role Model

by Sinclair Noe

DOW + 80 = 13,471
SPX + 11 = 1472
NAS + 15 = 3121
10 YR YLD + .04 = 1.89%
OIL + .77 = 93.87
GOLD + 16.80 = 1675.80
SILV + .50 = 30.96

So, those are the closing numbers. At least, we think those are the closing numbers; give or take; kinda, sorta. It could be off a bit. The stock exchanges have a bit of a problem with something called the consolidated tape, which provides trade data. Seems it went out for about an hour at the New York Stock Exchange Tuesday, making it tough to see in anyone had traded in 165 securities. And the NYSE's screw up follows a similar snafu last week at the Nasdaq. The consolidated tape at Nasdaq went totally blank last week. The consolidated tape is the record of securities transactions across all US exchanges. If you're keeping track, the exchanges have recently had to admit they can't always run IPO's competently, there are some problems with faulty data and trade data. So, that's the closing numbers, more or less.

The World Economic Forum is underway in Davos, Switzerland. The annual gathering of the wealthy and influential includes the publication of a survey which outlines the concerns of about 1,000 experts. This year's report seemed to focus on the interplay between the environment and the economy, saying: “A sudden and massive collapse on one front is certain to doom the other’s chance of developing an effective, long-term solution.

That diagnosis underscores several points of contention in the United States, where there is a push for increased domestic energy production despite concerns from green groups about environmental impacts.The report said governments should invest in infrastructure upgrades to bolster resiliency to climate change and associated natural disasters.

Even if policymakers can recover to handle climate change, the report said experts wondered if we have "already passed a point of no return and that Earth’s atmosphere is tipping rapidly into an inhospitable state.”

While recognizing climate change is happening, the report said policymakers will need to become more comfortable making decisions without a conclusive set of data. At the same time, governments must boost research funding to gather more complete information.

The report also highlighted the income divide between rich and poor, ballooning government deficits, water shortages and aging populations as causes for concern.

For the past three years, the focus of Davos was the Euro-zone debt crisis. There seems to have been a shift away from worries about Euro-land and back to the political and budgetary process in the US, and whether the dysfunction will devolve into a political fistfight. Of course, it doesn't really matter what the rich folks think in Davos; the Forum isn't an official anything, just a lot of talk.

When it comes to most of the major political disputes in Washington, congressional Republicans insist Democrats focus on reducing the debt Republicans built up during the Bush/Cheney era. It underpins everything from the budget fight to the debt ceiling to efforts to expand public investments. What the debate tends to ignore is the debt reduction that's already happened; nearly $2.4 trillion in deficit reduction scheduled for the next ten years has already been signed into law. Roughly three-quarters of the deficit reduction has come is in the form of spending cuts.

As we enter the new year, the nation's most pressing economic problem remains the slow recovery, particularly the job market. Unemployment is still far too high and the rate at which we are creating new jobs is far too low. At the present rate of job growth, we are still several years away from full employment. The ability of monetary and fiscal policymakers to combat the slow recovery is constrained by three things: fear that aggressive monetary policy will drive up inflation to an unacceptable level; fear that tax cuts or increases in spending will worsen our long-run debt problem; and political disputes over taxes and the size and role of government.

There is debate that fiscal and monetary policymakers should do more to push an economic recovery, but the recent minutes from the last FOMC meeting indicate some reticence on the part of the Fed, and the question then becomes whether the Fed will try to increase rates and exit quantitative easing before the economy can enter a virtuous circle of growth. From the fiscal side, the best we can hope for is that the political standoffs over the deficit don't become disruptive.

Exactly how to avoid a political brawl remains to be seen. The debt ceiling will be breached some time in February. If nothing is done, the government will soon be unable to pay all of its bills in a timely manner. This unprecedented event would profoundly damage the government’s credit rating and send the financial system into a tailspin. So far, President Obama isn't giving in. Last week, he said he: “will not have another debate with this Congress over whether or not they should pay the bills that they've already racked up through the laws that they passed.”

So, what are the options? Well, one idea floated is the $1 trillion dollar platinum coin. And I'm sure we'll talk more about this plan in coming days and weeks; it's really a pretty good idea in some ways, and far too fantastic in others. The President could ignore the debt ceiling and direct the Treasury to issue more bonds to cover its obligations; a move that would likely result in even more political acrimony. And another plan has been used on multiple occasions in the nation's history, and as recently as 2009 – print IOU's.

The President could threaten to issue scrip — “registered warrants” — to existing claims holders (other than those who own actual government debt) in lieu of money. Recipients of these I.O.U.’s could include federal employees, defense contractors, Medicare service providers, Social Security recipients and others.

The scrip would not violate the debt ceiling because it wouldn't constitute a new borrowing of money backed by the credit of the United States. It would merely be a formal acknowledgment of a pre-existing monetary claim against the United States that the Treasury was not currently able to pay. The president could therefore establish a scrip program by executive order without piling a constitutional crisis on top of a fiscal one.

To avoid any confusion with actual Treasury debt, and to be consistent with the law governing claims against the United States more generally, the scrip would not pay interest in most cases. And unlike debt, it would have no fixed maturity date but rather would become redeemable in cash only when the secretary of the Treasury was able to certify that there’s enough money available in the Treasury’s general fund to cover it.

The idea may sound crazy, but remember that California did it in 2009; the state issued registered warrants, totaling $2.6 billion to individual and business claimants, including recipients of aid programs, recipients of tax refunds and government contractors. Those holders who needed immediate cash were usually able to sell their registered warrants to banks at face value, though some institutions limited such purchases. Eventually a budget was worked out and the scrip was redeemed for cash. California continued to pay its public debt service in cash and on schedule and never lost an investment-grade credit rating.

California is expected to post a budget surplus of $851 million for the fiscal year that begins July 1. The solution was a combination of deep budget cuts and billions in new taxes approved by voters last year. Schools will be the big winner in the governor's new spending plan, receiving $56.2 billion in state funds, an increase by $2.7 billion over the last year. That funding is set to jump to more than $66 billion by 2016. The budget also dedicated an additional $350 million to the state’s public insurance program, Medi-Cal, to help implement President Obama’s healthcare law. This is a tentative surplus, and there is plenty of debt, but this is another small positive step. The plan in California is to increase spending slightly, about 5%, in the upcoming year after several years of budget cuts. California as a role model; go figure. 

Nearly a third of the nation's homeowners have no mortgage at all, according to an estimate released by real estate website Zillow. The free-and-clear class includes, predictably, retirees who have chipped away at their debts for decades, but also a surprisingly high percentage of young people and those who live in relatively affordable regions. Zillow found that the nation's most elderly were the most likely to own their homes, with 77% of those older than 85 owning their homes outright, followed by those ages 74 to 84, at about 62%. One outlier was those homeowners ages 20 to 24. Out of that relatively young demographic, about 34% owned their homes outright.

As the economy picks up, regions with high percentages of free-and-clear owners probably will get a boost. That means there is a lot more disposable income, and that is positive for the local economies. Out of the nation's largest metro areas, Pittsburgh, Tampa, New York, Cleveland and Miami had the highest percentages of mortgage-free homeowners. Washington, Atlanta, Las Vegas, Denver and Charlotte, N.C., had the lowest.