Uncle Sam's Credit

"Romanian President Traian Basescu was inaugurated for a second term Wednesday and began working with political parties to form a government that can enforce the tough budget changes required by the International Monetary Fund. ... Romania had pledged to keep next year's budget deficit below 5.9% of [GDP]. The deficit is likely to be around 7.3% of GDP this year", Christopher Emsden & Joe Parkinson at the WSJ, 17 December 2009, link:

http://online.wsj.com/article/SB126097910690093879.html.

"We only hope Republicans aren't foolish enough to fall down this trap door, though some are already tempted. A budget deficit commission is nothing more than a time-tested ploy to get Republicans to raise taxes. In the 2009 version, Republicans are being teed up to hold hands with Democrats and agree to become the tax collectors for Obamanomics. The deficit reduction commission is a long-standing idea that is now pushed with renewed fervor by Republican Frank Wolf of Virginia and Democrat Jim Cooper of Tennesse in the House and Democrat Kent Conrad of North Dakota and Republican Judd Gregg of New Hampshire in the Senate. ... Mr. Wolf says the commission would be 'a 16-member panel that would look at everything--from what the government is required to spend on mandatory entitlements to spending on all other programs to tax policy.' ... They're correct that current federal commitments are unsustainable, starting with $37 trillion in unfunded Medicare liabilities. ... The real goal is to get GOP cover for tax increases so Democrats aren't run out of town in 2010 and 2012 for blowing up the national balance sheet. ... In 1983 Ronald Reagan and Congressional Republicans agreed to decades of job-destroying increases in payroll taxes to 'fix' Social Security, which you may have noticed still isn't fixed. ... Democrats would agree to means-tested entitlements, which means that middle and upper-class (i.e., GOP) voters would get less than they were promised in return for a lifetime of payroll taxes. ... New taxes will only reduce the pressure to cut future spending", my emphasis, WSJ Editorial, 29 December 2009: http://online.wsj.com/article/SB10001424052748703939404574566034074899214.html.

Is Romania a better credit than Uncle Sam? Moody's gives Romania a Baa-3 rating. Why?

The GOP should tell Obama and Pelosi, "No tax increases. No hell. No way. We remember Bush the Elder's promise and won't be fooled again". As for means-tested entitlements, consider if tax and social security policy are to be reviewed, what that implies for Roth IRAs.

Live Witnesses

"In a move that could add to the government's arsenal in the Galleon Group insider-trading case, prosecutors made a federal court filing Wednesday that suggested they are on the verge of accepting a guilty plea fronm former McKinsey & Co. partner Anil Kumar. ... The government 'wants live witnesses,' says John Coffee, a law professor at Columbia University. 'If you have someone saying, "This was the conspiracy and we talked about it and this was our goal," that is more effective' than documents such as emails he said. He added that prosecutors may be telling the other defendants that those who strike early deals may get better treatment than latecomers", my emphasis, Susan Pulliam & Kelly Nolan at the WSJ, 31 December 2009, link:

http://online.wsj.com/article/SB10001424052748704152804574628552933868662.html.

Disagreeing with Professor Coffee. It's more effective only if the AUSA does not know how to assemble a circumstantial evidence case, which seems endemic at the DOJ. I would not believe any federal witness whose testimony was not corroborated with documents. I would presume the AUSA was suborning perjury. It's that bad at the DOJ.

Citigroup's Aleynikov

"The [FBI] is probing a computer-security breach targeting Citigroup Inc. that resulted in a theft of tens of millions of dollars by computer hackers who appear linked to a Russian cyber gang, according to government officials. ... It couldn't be learned whether the thieves gained access to Citibank's systems directly or through third parties. ... The attack underscores the blurring of lines between criminal and national-security threats in cyber space. Hackers also assaulted two other entities, at least one of them a US government agency, said people familiar with the attack on Citibank. ... The FBI and the National Security Agency, along with the Department of Homeland Security and Citigroup, swapped information to counter the attack, according to a person familiar with the case. Press offices of the federal agencies declined to comment. Citigroup said, 'Allegations of a breach of Citi systems and associated losses are false.' ... Losses to online crime of all types exceeded $260 million in the US last year, the FBI estimates. Attacks on corporations are 'at an epidemic level,' former White House cyber-security director Melissa Hathaway said recently. US banks have generally been loath to disclose computer attacks for fear of scaring off customers", my emphasis, Siobhan Gorman & Evan Perez at the WSJ, 22 December 2009, link:

http://online.wsj.com/article/SB126145280820801177.html.

Absent national security implications, I would tell the FBI drop this case. $260 million in annual losses is peanuts. Vampire Squid (VS) got $13 billion from the AIG bailout, 50 times the annual cybercrime total. I note the FBI jumped on this. Well FBI, how many people have you investigating the AIG-VS fiasco? If Citigroup denied the breach and lied about it, will Preet Bharara indict anyone for securities fraud? Will KPMG find Citigroup committed an illegal act? Will Dudley Doo-Right save Nell Fenwick? Isn't it nice to see how concerned the Feds are about attacks on corporations? The DOJ's case selection is designed to further DOJ employees' careers. Never forget it. Where's the SEC? What's this "loath to disclose" nonsense?

California Death Watch-3

"California is deep in red ink again, according to a new report projecting that the cash-strapped state faces a $21 billion budget shortfall through June 2011. ... The state's Democratic controller, John Chiang, said on Wednesday that California could have trouble making payments as early as Spring 2010 if tax revenue remains below forecasts, among other reasons. Until at least June 2015, the report projected California will face annual budget shortfalls of about $20 billion. ... At one point, California was so close to insolvency it was forced to issue IOUs. ... Republicans, including Gov. Arnold Schwarzenegger [AS], opposing tax increases. ... 'The numbers cry loudly for California to focus on rebuilding our tax base,' said Democrat Darrell Steinberg, the Senate president. ... The new budget report said $6 billion of the projected shortfall in the current fiscal year is largely due to unrealistic budget assumptions about tax revenue and spending on schools and prisons", Stu Woo at the WSJ, 19 November 2009, link: http://online.wsj.com/article/SB125856632697953969.html.

"Facing a $21 billion shortfall through June 2011, California leaders want billions of dollars in budget relief from Washington that could head off deep cuts expected to state programs. Gov. [AS] will ask the White House to waive rules that require the state to spend its own money on certain programs to receive federal funds, according to California officials briefed on the Republican's coming budget proposal. ... His message: The national economy will depend on California's recovery. ... 'Under President Clinton, we got 94 cents back on every dollar we sent,' said gubernatorial spokesman Aaron McLear, citing data compiled by the nonpartisan Tax Foundation. 'Now it's 78 cents on the dollar. It makes no sense that California should be subsidizing programs in other states.' ... If the state doesn't receive federal aid, health and welfare programs could be eliminated, the officials said", my emphasis, Stu Woo at the WSJ, 31 December 2009, link: http://online.wsj.com/article/SB126222107949110937.html.

Absent a federal bailout, I don't see how California can avert defaulting its bonds.

Are you arguing against "progressive income tax rates"? That California gets back less than say Alabama results from California's higher average incomes. Look at The Guvernator's argument, it amounts to California is the Vampire Squid.

60 More Years of Flapdoodle

"In the 11/25/09 issue of the Wall Street Journal three eminences of public education--Harold Ford Jr., Louis Gerstner Jr., and Eli Broad--reflect on the ways to improve public education in 'Race to the Top in Education.' ... Now, however,' they note, 'President Obama has launched Race to the Top--a competition that is parcelling out $4.35 billion in new education funding to states that are committed to real reform.' This package, the author notes, should augur well for meaningful change. ... Despite the emphasis on so-called 'performance standards and competition,' clearly goals that are needed, my guess is this initiative will fail as all of its predecessors have. ... Like those in Lake Wobegone, everyone must be above average. It's good for politicians and a conclusion that satisfies parents. Unfortunately Johnny doesn't read, write, and compute as well as mom and dad think. ... As Al Shanker [AS] of the American Federation of Teachers once noted, 'When students start paying dues, I'll be as interested in them as my teachers.' ... As Thorstein Veblen noted, 'students are being trained in incapacity.' Until the real issues are addressed--if they can be addressed--don't count on any more success in education than we've encountered before", Herbert London (HL) at Newsmax, 15 December 2009, link:

http://newsmax.com/PrintTemplate?nodeid=61056.

I remember AS as a no nonsense union leader who would have said something like this. HL is a New York University professor. I read the article he refers to. For my money it's just 60 more years of Flapdoodle, my 17 September 2009 post:

http://skepticaltexascpa.blogspot.com/2009/09/flapdoodle-2009.html.

James Kroker, Shut Up

"[SEC] Chief Accountant James L. Kroker told leaders of the accounting profession that independent auditors will be expected to consider the interests of the 'investing public'--not just their audit clients--when performing their duties. The mission of his office will be to 'put investor protection at the forefront in all that we do,' he said in an address to the [AICPA's] National Conference on SEC Developments. Under his watch, 'you are likely to notice we will be more proactively seeking to understand and discuss the views of investors.' Accountants 'should not be surprised when we ask you whether you have considered the perspective of the investing public.' ... And while auditors can expect to be treated professionally by SEC regulators, Kroker told the AICPA members, 'You should not confuse professionalism with a notion of leniency. Those who fail to live up to their responsibilities and those who cause harm to investors or our capital markets can expect that we will take appropriate action,' he said. ... In this vein, the staff is unfortunately aware of potential structure designed and marketed to "address" assets where prices have and are expected to continue to show weakness by entering into creative off-balance-sheet structures with little apparent transfer of risk.' To guard against such schemes, Kroker called on auditors to be especially 'vigilant when evaluating the substance, or lack thereof, of elements of transactions included to achieve specific accounting results'," my emphasis, Ken Rankin at WebCPA, 8 December 2009, link:

http://www.webcpa.com/news/SEC-Chief-Accountant-Tells-CPAs-Consider-Investors-52682-1.html.

What crap Kroker, "former" D&T partner. See my 12 June 2009 post; http://skepticaltexascpa.blogspot.com/2009/06/ia-goes-to-meetin.html. CPAs don't need Kroker to remind them of US v Arthur Young, 465 US 805 (1984), or AICPA ethics section 53. Kroker, did you aim this speech at investors? Or did you remind your "former" partners of their "professional responsibilites"? My experience is the SEC staff treats only Big 87654 CPAs "professionally". What action will the SEC take with respect to PWC, AIG's and Vampire Squid's CPAs? Substance versus form considerations from the SEC staff, surely you jest Kroker. What will the SEC do about KPMG and E&Y and the ".001 standard", my 5 March 2008 post:

http://skepticaltexascpa.blogspot.com/2008/03/enron-accounting-redux.html.

Assignats for America!

"Corporations raise money by issuing both debt and equity, the latter giving investors an implicit share in future profits. Governments should do something like this, too, and not just rely on debt. Borrowing a concept from corporate finance, governments could sell a new type of security that commits them to paying shares in national 'profit,' as measured by gross domestic product. ... Although GDP numbers still aren't perfect--they are subject to periodic revisions, for example--the basic problem has been largely solved. So why not issue shares in GDP now? Such securities might help assuage doubts that governments can sustain the deficit spending required to keep sagging economics stimulated and protected from the threat of a truly serious recession. In a recent pair of papers, my Canadian colleague Mark Kamstra at York University and I have proposed a solution. We'd like our countries to issue securities we call 'trills,' short for trillionths. ... Each would pay in perpetuity, and in domestic currency, a quarterly dividend equal to a trillionth of the nation's quarterly nominal GDP. ... Trills would be issued with the full faith and credit of the respective governments. ... There are indications that officials in China are starting to worry about threats to their huge investment n [US] debt from a possible outbreak of high inflation. The trills, tied to nominal GDP, would protect them. Right now, TIPS, ... are offering disappointingly low yields, which may have to be raised to attract more investment. ... The [US] government is highly unlikely to default on its debt, but even this remote possibility would be virtually eliminated by trills, becasue the government's dividend burden would automatically decline in tough times, when GDP declined. ... These imbalances--exempliifed by the massive Chinese holdings of [US] government debt--might not be so worrisome if the investments were financed better. ... Proposals for securities like trills have been aired many times over the years", my emphasis, Robert Schiller (RS) at the NYT, 27 December 2009, link:

http://www.nytimes.com/2009/12/27/business/economy/27view.html.

RS is a Yale economics professor. I would normally say "big deal" to a proposal like this. A New York City CPA buddy of mine, suggested these type of securities 30 years ago! Trills appear to pay "interest", but pay nothing. As long as Uncle Sam (US) will not run a budget surplus, trills can't be "paid" in real terms. Anyone buying trills should remember, "interest is what the government promises to pay you to steal your principal". Trills look like an ideal security for Teresa Ghillarducci to stuff in people's IRAs without their consent. For their own good of course. I'm sure Argentina's Madame Kirchner will consider issuing trills. RS forgets "Miller-Modigliani" finance, i.e., investment and financing decisions are separable. No matter how US finances his debt, absent budget surpluses, it can't be paid. Will a trills owner get multiple votes? One vote per million trills? Will trill-owning foreigners vote? Will Saudi Arabia control our Congress more obviously than today? Trills facilitate deficit spending! RS said it! RS does not suggest US reduce spending. He is now another "house economist". Well RS, make it official and move to Princeton! "Full faith and credit"? Hahahahahaha. If TIPS yields are too low, tell Zimbabwe Ben (ZB). ZB could increase interest rates. Disagreeing RS, US will default on his debt. Explicitly, or through higher inflation. "Financed better"? Let's call Vampire Squid to sell trills and Moody's to rate them AAAA, quadruple A! Professor Fama, we need you. Try to kill trills. Trills remind me of France's assignats and mandats issued in the 1790s. They became worthless. Here's a link to an article about French inflation: http://www.usagold.com/gildedopinion/assignats.html.

California's Begging Bowl

"California Governor Arnold Schwarzenegger, anticipating a $21 billion state budget deficit, plans to ask President Barack Obama to ease mandates and minimums on social programs to save as much as $8 billion. ... 'The problem is that there are no easy solutions left,' said Jean Ross, executive director of the California Budget Project, a Sacramento-based research group concentrating on issues facing the poor. ... The arsenal of one-time accounting maneuvers he and lawmakers have previously used to temporarly paper over parts of the gap--such as accelerating income-tax collections--have been mostly depleted, making efforts to erase the latest $21 billion deficit more difficult. ... The state also has struggled to implement cost-cutting measures that were part of the $85 billion spending plan approved in July. Courts blocked part of the budget that cut funding for home care for the disabled and another part that borrowed $800 million from an account that sets aside money for local transportation agencies. ... The state was the biggest bond issuer this year, selling $36 billion of debt", Michael Marois and William Selway at Bloomberg, 24 December 2009, link: http://www.bloomberg.com/apps/news?pid=20670001&sid=aFdI2wUyyroI.

My answer: bring back quartering! Don't feed me any third amendment crap either.

Martin Feldstein-Maniac

"Many gold buyers want a hedge against the risk of inflation or possible declines in the value of the dollar or other currencies. Both are serious potential risks that are worthy of precautionary hedges. ... But is gold a good hedge against these two risks? Will gold maintain its purchasing power value if inflation erodes the purchasing power of the dollar or the euro? And will gold hold its value in euros or yen if the dollar continues to decline? The short answer is no on all counts. ... Consider first the potential of gold as an inflation hedge. The price of an ounce of gold in 1980 was $400. Ten years later, the US consumer price index (CPI) was up more than 60%, but the price of gold was still $400, having risen to $700 and then fallen back during the intervening years. ... So gold is a poor inflation hedge. Moreover, the US government provides a very good inflation hedge in the form of Treasury Inflation Protected Securities (TIPS). .... Gold is also a poor hedge against currency fluctuations. ... Unlike common stock, bonds, and real estate, the value of gold does not reflect underlying earnings. Gold is a purely speculative investment. Over the next few years, it may fall to $500 an ounce or rise to $2,000 an ounce. There is no way to know which it will be", my emphasis, Martin Feldstein (MF) at Project Syndicate, 26 December 2009, link: http://www.project-syndicate.org/commentary/feldstein18.

MF, did you lose your mind? Gold is the inflation hedge, see my 2 and 19 December 2009 posts:

http://skepticaltexascpa.blogspot.com/2009/12/dollar-drops-98.html; http://skepticaltexascpa.blogspot.com/2009/12/pound-drops-99.html. TIPS are a good investment? For who? Uncle Sam; not the TIPS holder. Buy TIPS? No bye TIPS, see my 5 October 2007 post: http://skepticaltexascpa.blogspot.com/2007/10/tip-on-tips.html. Gold has no underlying earnings, it's MONEY! What is a dollar's underlying earnings? MF, go back to school and study economic history. Try ECON 2239 at Harvard. I found the course number for you! Poor MF. He's so confused he should join Princeton's economics department and consult with luminaries like Paul Krugman and Alan (well-named) Blinder!

Zimbabwe Ben Fools Time

"The man who is now supposed to fix our problems did not see them cmong in the first place. One may perhaps think that the problems were so byzantine that they were undetectable until they at last erupted in the crisis. But this is not so. There were those who saw the problems clearly. A few predicted the crisis with uncanny accuracy. One of them was Peter Schiff, a financial commentator and president of Euro Pacific Capital. ... It is paradoxical that as Schiff was sounding the alarm, mainstream pundits--those of the Greenspan/Bernanke worldview--were laughing in his face. ... Of course, Peter Schiff and Ron Paul have no crystal ball that enables them to fortell future events with uncanny accuracy. Their grasp of financial and economic situation is rooted in the Austrian school of economics. An outgrowth of classical liberalism, its main proponents are Ludwig von Mises, Nobel Prize winner Frederich von Hayek and Murray N. Rothbard. One of the main focus areas of this school is the business cycle--the boom-and-bust recurrence--which defines the trajectory of western-style economies", Vasko Kohlmayer at Frontpage Magazine, 24 December 2009, link: http://frontpagemag.com/2009/12/24/ben-bernanke-bust-of-the-year-–-by-vasko-kohlmayer/

Not only was Zimbabwe Ben Time's "Man of the Year", he got a Financial Times accolade. Here's Junior's Junior Deputy Accountant post, 25 December 2009:

http://www.jrdeputyaccountant.com/2009/12/financial-times-names-lloyd-blankfein.html.