BOSTON (Reuters) – A powerful virus targeting smart phones in China running Google Inc’s Android operating system may represent the most sophisticated bug to target mobile devices to date, security researchers said on Thursday.
You’ve heard it already — the government spends too much; we run up huge deficits; and finance it on the backs of future generations. We owe China the mother-load. We’re in deep and we don’t seem to be able to stimulate our way out of it. Yada. Yada. Yada.
Despite these scary facts, most of us don’t believe that the U.S. could “really” wind up on the skids, like Greece or Ireland. That would be like…really, really bad. Catastrophic. As opposed to just, say, lousy.
But ladies and gentlemen, the truth is that the cliff could be right in front of us.
Every month most of us gasp at the interest charge on our credit cards (still in the double digits –thieves!). Ever wonder how much the U.S. government pays for its debt?
In 1995, when we first began writing The Annual Report of the USA, the interest on the debt comprised nearly 15% of the federal budget. Today it comprises a measly 5%. That’s still a big number nominally — more than the federal government spends on education — but relative to the past, it’s pretty darn small. Why?
Back in 1995, the prime rate was over 9%. Today, it’s 3.25% — a 30-year low. The blended rate the federal government pays for its debt is just over 2%. That’s a lot better rate than you get on your credit card, right?
That low cost of debt means that we’ve been able to borrow a cool $3 trillion over the last two years with a net benefit to our federal budget. Wait, what? That’s right, our net interest costs dropped from $253 billion in 2008 to $197 billion in 2010 — even though we borrowed a whole lot more.
So you really can date Jennifer Aniston and Angelina Jolie at the same time? Not so fast. Interest rates don’t decrease forever. Our current interest rates are almost 2% below our 40-year historical average. And if that rate increases –just to historical averages — we are in deep trouble.
In the Congressional Budget Office’s most recent projections, “the cumulative deficit from 2011 through 2020 will exceeds $6.2 trillion. Borrowing to finance that deficit — in combination with an expected rise in interest rates — would lead to a fourfold increase in net interest payments over the next 10 years, from $197 billion in 2010 to $778 billion in 2020. As a percentage of GDP, net interest outlays would more than double during that period, rising from 1.4 percent to 3.4 percent.”
$778 billion, huh? That’s more than our entire military budget today. And that’s just with a moderate increase in interest rates.
What if the interest rate went even higher? What if inflation got away from us? What if China didn’t want to buy our debt anymore? What if there were a global capital squeeze, as many economists are predicting. In short, what if the global markets forced up interest rates – Fed be damned. Then what?
In one scenario, all our federal revenue would be required just to fund the interest on the debt alone– with nothing left to spend on the military, or build roads, or send out Social Security checks. Say dramatically: Catastrophic.
Could we look to increasing tax revenue to fill the gap? Not likely. Tax revenues have been stagnant over the last half-decade and those who could pay the most — the top 10% — could likely seek tax havens abroad.
The Congressional Budget office warns that a rise in interest rates — not government spending or tax cuts — will drive the deficits of the future. And that’s dangerous because we will have unleashed a monster we can neither control nor predict: Bernanke is not Oz and the Fed does not rule the interest rates of the world.
So what then? Here’s the scenario: Higher interest rates caused by an exogenous factor (like global capital demand) means that the U.S. would have to pay more for its debt, which means we’d have to raise more debt by increasing the interest rates to entice new investment. Or we could do some more Quantitative Easing — printing new money — and inflate our way out of the problem. You see where this goes.
Either way, the existence of our debt pushes domestic interest rates even higher. That means citizens have harder times finding mortgages; credit cards are more expensive; and there is less capital to start new ventures and fund businesses. All of this is bad for the economy, bad for employment and likely results in a weaker dollar and lower asset values — to say nothing of the risk of actually defaulting on our debt.
This scenario seems unavoidable unless we rapidly begin to cut government spending and increase tax revenue. Could we actually do it? We may not have a choice.
As we begin this New Year, we citizens need to demand — like there’s no tomorrow — immediate action from the incoming Congress. And as investors, we must begin storing up our nuts. It could be a very long winter.
Washington’s political punditry remains taken with the notion that President Obama is failing to “connect” with average Americans. Yet polling data and political science tell us that Obama’s problems have far more to do with public perception of how he is handling the economy, than with his ability to push the nation’s emotional buttons.
On Sunday, during a panel discussion on NBC’s “Meet the Press”, Washington Post‘s Bob Woodward used an anecdote about former President Bill Clinton to illustrate Obama’s supposed “connection” problem:
There’s something about Obama that is not connecting with the people. I was trying to think, what is that? And somebody was telling me about this wake and gathering that Richard Holbrooke’s widow, Kati, had in New York after he died — Holbrooke being the Afghan-Pakistan negotiator for Obama who died. And at this gathering, Bill Clinton walked in. And, of course, Clinton always takes over a room. And he put his arm around Kati, the widow, and started talking and saying that Richard Holbrooke had been somebody who always fought, who believed in peace. And somebody who was there told me, suddenly, everyone in the room was involved in Bill Clinton’s emotions.
And that’s what Obama has to do. He has to find a way to make these things personal, not abstract. He’s so cerebral. He’s so smart. He appears cool. And he’s got to get in there and make those connections with the people in the unemployment line, in the assembly line, in the mountains of Afghanistan.
If we want to know what “the people” think about our presidents, we can do better than a second-hand anecdote gleaned from a private gathering of well connected insiders. We might look instead to the findings of representative opinion polls and the lessons learned from more than 60 years of survey research on how Americans evaluate their presidents.
For example, the Gallup Organization reported this morning that President Obama’s current job approval rating (46% approve) is now “higher than approval of two of the last five presidents (Bill Clinton with 40% and Ronald Reagan with 43%) at the same point in their presidencies,” according to their daily tracking survey. So despite the reputation for emotional empathy that Clinton solidified during the 1992 campaign, his approval rating was lower at this point in his presidency than Obama’s is now.
Why might that be?
Part of the answer is that the personal or emotional “connection” that presidents make has far less of an effect on their job approval ratings than the condition of the economy. While political scientists may disagree about which statistic matters most, they collectively point to indicators such as the unemployment rate, job growth, personal income growth, and consumer confidence, as the most powerful drivers of the president’s approval rating. Presidential approval typically rises and falls with these statistics.
The point is not that voters monitor economic statistics — presumably very few do — but rather that these measures reflect the way Americans experience the economy and how those perceptions affect presidential approval. As Democratic pollster Mark Mellman wrote a few weeks ago, regarding changes in real disposable income, “it’s not a statistic people know, or even know about; rather, it’s one they feel every time they decide whether to buy or do without, save or invest.”
That said, the condition of the economy at this point in 1994 makes Obama’s relatively high job rating even more puzzling. As we all know too well, the last two years have witnessed the worst economic downturn since the Great Depression of the 1930s. Consider where things stand now: The Bureau of Labor Statistics estimates the unemployment rate was 9.8% in November, a month in which the economy created just 39,000 new jobs. The Reuters/University of Michigan Consumer Sentiment Index now stands at 74.5 — an improvement since the low of 55.3 set in November of 2008, but still far lower than any point since the recession of the early 1990s. Disposable personal income growth has been anemic. It grew by just 0.9% in the third quarter of this year (in real dollars), and by just 0.2% in both October and November.
Compare those statistics to what President Clinton faced at this point in 1994, two years into his first term, and a month after Democrats lost control of both houses of Congress, as Republicans gained 54 seats in the House and 9 in the Senate.
The unemployment rate in November 1994 stood at 5.6%, more than four percentage points lower than it is now. That month, the economy created 423,000 jobs, more than ten times the number created this past November. Michigan’s Consumer Sentiment Index stood at 95.1, and disposable personal income grew by a very robust 5.4% in the fourth quarter of 1994.
Thus, despite a far stronger economy in late 1994, Clinton’s much lauded communications skills produced a lower job rating than Obama receives now. What does this tell us? At very least, we should assume that there was more to Clinton’s relationship with voters 16 years ago than his ability to emote. And while Clinton’s approval ratings did rise (and fall) briefly in the immediate aftermath of the Oklahoma City bombing in April of 1995 — the most famous example of Clinton emotionally connecting with Americans — the more gradual, sustained increase in his ratings over the course of his remaining six years in office, occurred amidst significant ongoing job growth and economic improvement.
Chart generated with the USA Today Presidential Approval Tracker
Rather than endlessly speculating about Obama’s supposed inability to “connect,” we might do better to ask why Obama’s approval is as high as it is now, given the poor state of the economy.
Statistically, one big reason is Obama’s consistently stronger performance among African Americans. In December 1994, according to Gallup, Bill Clinton’s approval rating among white voters was 37% — exactly the same as Barack Obama’s average rating among white voters this past month. But Obama’s average rating among black voters this month (87%) is significantly higher than Clinton’s rating among the small number interviewed in December of 1994 (76%; n=167) or the larger number interviewed throughout 1994 (73%).
Another reason is that the white/non-Hispanic population is smaller now than it was in 1994. According to Gallup, the white subgroup has narrowed from 83% of their samples in December 1994, to 71% in December 2010.
Americans may well believe that Obama lacks the sort of emotional empathy that has always been Clinton’s trademark. But as the NBC News/Wall Street Journal poll found earlier this month, voters have little problem connecting with Obama on a personal level:
[W]hen it comes to the president’s personality, voters still like what they see. His personal ratings remain much stronger than his professional ratings.
For instance, he gets his highest marks for having a strong family and family values (74 percent give him a high rating here), being easygoing and likeable (68 percent), being inspirational and exciting (51 percent) and having strong leadership qualities (49 percent).
But his lowest marks come on being a good commander-in-chief (41 percent), sharing respondents’ positions on the issues (35 percent), achieving his goals (33 percent), uniting the country (30 percent) and changing business as usual in Washington (24 percent).
In other words, while Americans like Obama, performance matters. Americans will feel better about Obama when fewer of them are on the unemployment lines. We can argue about what the president has done, not done, or still needs to do to turn the economy around, but the notion that his salvation lies in a stronger emotional connection with voters is just silly.
Thanks to Gallup’s Lydia Saad for providing approval subgroup data from 1994.
Health care and real estate, two important areas of interest to me and to the US economy, are due for some changes in 2011. I have no better crystal ball than anyone else, but here are some of the things I expect:
Health care reform will have to be re-reformed. No, I don’t think the Republicans will actually repeal it all. If they do, they’re dumber than I thought, because they would then get caught in the same quicksand the Democrats have been in for the past two years. There will, however, be some necessary changes.
The first thing to go will be an unrelated part of the law that forces people to 1099 anyone to whom they pay more than $600. That’s a ridiculous burden on small business, and of course it doesn’t belong in health care reform in the first place. It will vanish quickly.
Next will come a revision in the way physicians get paid. In a recent survey by The Physicians Foundation, a majority of physicians (60%) said health reform will compel them to close or significantly restrict their practices to certain categories of patients. Of these, 93% said they will close or significantly restrict their practices to Medicaid patients, while 87% said they would close or significantly restrict their practices to Medicare patients.
Because Medicare guidelines are a guarantee of access to care, if physicians cease to see Medicare patients it will impact both their incomes and Medicare’s entire structure. Congress can’t let that happen, because seniors vote and starting next year Boomers turn 65 at a rate of 10,000 a day.
Instead, we will have — and welcome — death panels: caps on what can be spent on treatment of the elderly at the end of life unless it is life-extending with high quality of life as the outcome. No more chemo that extends life by three weeks during which the patient is suffering.
And the ability for seniors to have a free consultation with a physician about how to plan for end of life, prepare the necessary documents, and make their wishes known. This alone will prove a cost-cutter, since many seniors do not want extreme measures used to keep them alive, but haven’t properly documented their desires to the people who will make those decisions when they can no longer do so themselves.
We will also see further explosive growth in online health information sites and support groups as people realize they are going to have to pay higher deductibles and co-pays and finally undertake the responsibility for their own health. This will be slow, but has already begun. A few more years of 30% premium increases to cover costs for the underinsured (because the Republicans may well repeal the individual mandate or it may be found unconstitutional) and most of us will be nursing each other.
Now that we have life and death out of the way, here’s what may happen in real estate:
The loan modification programs that aren’t working will go away. HAMP and HAFA have helped about 300,000 people out of a possible fifteen million foreclosures by the end of 2011.
Instead, one of two things will happen, depending on what the banks, who hold all the cards, want. Either there will be another wave of foreclosures, or loans will finally be written down to the current market value of homes, allowing more people to stay in their homes. Probably there will be some of both.
FHA and VA mortgages, which have always been assumable by a borrower who could qualify, may become assumable for buyers who can’t, since there’s almost no one left in the country who can qualify for a mortgage under the current standards. This will stimulate the lower end of the market, which has gone away since the first-time home buyer credits expired.
The wraparound mortgage and the seller carry back, gone since the days of high interest rates in the early 80s, will be back. These are financial products that allow a seller who has to sell or wants to sell but doesn’t want to injure his/her credit with a short sale to sell to a non-qualifying buyer. Done correctly, the wrap and the carry back can be very advantageous to both buyer and seller, and were the way people built up real estate empires with no money down. If you wanted to, you could do that now. Sooner or later, people have to move for work or other reasons, and they become more willing to sell under unusual conditions. These may surface at the high end of the market, where in Arizona there is a 9-13 year supply of $1,000,000+ homes on the market. The lease purchase will also become more common.
I am an optimist, so I predict (think) these things will happen. Pessimists may comment below. Happy New Year.
Read more: Health Care Reform, Patient Protection and Affordable Care Act, Medicare, Republicans, Politics, Congress, Baby Boomers, Va, Underinsured, Fha, Economy, Mortgage Crisis, Political Reform, Hamp, Medicaid, Hafa, Real Estate, Politics News
Banks are finally beginning to lend, the big ones that is. Commercial and industrial lending is up this quarter 0.2% from the third quarter, according to Moody’s Analytics. That might not sound like much, but it’s the first quarterly increase in two years. This is great, right? After all, if banks are lending more to businesses, they can expand and begin to hire. That’s true, but this trend reveals something else: the financial crisis has created an environment where big banks are getting bigger, as the small ones struggle.
You know, the other day, when I remarked that Politico’s story “Obama and Wall St.: Still Venus and Mars” was “another piece in a continuing series” of “Wall Street people whining about all those times White House higher-ups have ever-so-mildly allowed certain language to slip from their larynxes that makes the financial industry out to be some kind of villain for that time its over-leveraged, incompetent speculation led to the near-collapse of the entire economy and required taxpayers to shovel untold billions of dollars at too-big-to-fail banks so that they could survive,” I wasn’t kidding. And yesterday, The New Republic‘s Jonathan Chait was having the same thought:
It seems to me as if the hurt feelings of this tiny (albeit very rich) segment of society has received enormous attention in the media. After all, there are a lot of groups in this country at least as numerous as CEOs and with no less cause for grievance, and yet we hear about their wounded egos far less often.
I asked intrepid Reporter-Researcher James Downie to tabulate how many times Politico alone has run some version of the “business upset at Obama” story.
Then [sic] answer turns out to be, a lot of times.
A whole lot of times, actually. Going back to February of 2009, Downie found 28 separate articles in this vein — 19 in 2010 alone. And because the TNR search was confined to reported pieces, this does not even include Roger Simon’s hysterical “leave Britney alone” column on how sad it made him to see people fighting class warfare, just because wages are stagnant and upward mobility has slowed to a halt and income inequity is at historic highs.
Please click on over to see Chait and Downie’s wonderful listicle. For my part, I’d like to take a moment to pay tribute to all of the people who complained about how sad the White House was making them over that time they nearly wrecked the economy in 2010, some of whom even saw fit to sign their names to their remarks.
(For best results, cue up this tune before continuing.)
Anonymous Bank Lobbyist
Anonymous Top Business Lobbyist
Anonymous corporate lobbyist
Anonymous Corporate Representative
Anonymous Executive At A Top Bank
Anonymous Financial Executive
Another Anonymous Financial Executive
Still Another Anonymous Financial Executive
Anonymous Financial Industry Lobbyist
Another Anonymous Financial Industry Lobbyist
Anonymous Lobbyist For A Giant Wall Street Bank
Anonymous Lobbyist For One Of The Top Five Wall Street Banks
Anonymous official At A Large Bank
Anonymous Senior Banker Who Is Deeply Plugged Into Washington
Anonymous Senior Executive At A Wall Street Bank
Another Anonymous Senior Executive At A Wall Street Bank
Or Maybe This Is Just The Same Anonymous Senior Executive At A Wall Street Bank, Who Knows?
Anonymous Senior Industry Official
Anonymous Senior Private Equity Executive
Anonymous Senior Wall Street Lobbyist
Anonymous Source Familiar With Discussions
Anonymous Sources At AHIP
Anonymous Sources At Goldman Sachs
Anonymous Wall Street Executive
Another Anonymous Wall Street Executive
Anonymous Wall Street Lobbyist
Robert Daleo, CEO, Thomson Reuters
Tom Donohue, President, U.S. Chamber of Commerce
Tita Freeman, spokesperson, U.S. Chamber of Commerce
Jeffrey Garten, Dean of the Yale School of Management, “Body Language” Analysis Hobbyist
Brad Hintz, former Lehman CFO, analyst at Sanford C. Bernstein
Jeffrey Immelt, chairman/CEO, General Electric
Insiders Familiar With Internal Discussions
Bruce Josten, lobbyist, U.S. Chamber of Commerce
Karen Klugh, spokeswoman, American Financial Services Administration
Nancy McLemon, president, Organization for International Investment
Bill Miller, senior vice president for Political Affairs & Federation Relations, U.S. Chamber of Commerce
Roger Nicholson, Senior Vice President, International Coal Group
Other Industry Officials
Other Major Corporate Titans
Martin Regalia, chief economist, U.S. Chamber of Commerce
Joanna Schneider, executive director for external affairs, Business Roundtable
Ivan Seidenberg, Chief Executive, Verizon Communications (ALSO)
Scott Shay, chairman, Signature Bank
Several Financial Industry Insiders
Some Corporate Leaders
Some On Wall Street
Some More On Wall Street
Some Other People On Wall Street
Wall Street Executives
More Wall Street Executives
Even Better Wall Street executives
The Rest Of The Wall Street Executives
Wall Street Officials
Wall Street’s Top Political Players
Christopher Whalen, investment banker, author and cofounder of Institutional Risk Analytics
Mort Zuckerman, billionaire complainer
They came, they saw, they whined — and in an amazingly profitable year, at that! God only knows how bad things will get if things actually start going badly for Wall Street.
The US, UK and Germany deplore the sentencing of former Russian oil tycoon Mikhail Khodorkovsky to six more years in jail for fraud.