Tuesday, June 23, 2015

When Will Illinois Learn How to Budget?

 Illinois has until June 30 to pass a new budget.  At present the General Assembly has proposed a budget with a $4 billion revenue shortfall, because they want to continue funding educational and social programs, as a reaction to public concerns over proposed deep cuts, the Governor wants to cut even more and they want the Governor to publicly advocate the revenue solutions.  It is what has become the usual game of tug and pull rather than debate and compromise.  Illinois has played financial games with its budget since the second administration of Governor Jim Edgar in the 90's.

The Volcker Alliance has published Truth and Integrity in State Budgeting, which details how a State budget should be constructed and the information in State budgeting and financial operations accessible by the public.  Its checklist is:
1) Complete budgetary information, including how balance was achieved and whether one-
time revenue sources were tapped, should be easier to find and interpret,
2) Short-term revenue forecasts should be transparent and supportable by historic growth
trends. Past projections should be assessed for accuracy to help improve forecasting methods,
3)  Recurring costs should be paid with recurring revenue,
4)  The proceeds of borrowings should not be used to cover operating expenses,
5) States should move away from strictly cash budgeting and toward the type of accounting, used in their audited comprehensive annual financial reports, that shows the true present value of future spending obligations, and
6) States must build rainy day funds to safeguard essential services during economic down-turns. The size of the funds should be adjusted for revenue volatility, and they should be replenished consistently after they are tapped.

Illinois has the worst funded State pension systems in the United States, because it does not understand these basic budgeting rules.  Illinois has a revenue problem. It has put off required pension funding to future periods.  It has been sweeping (raiding) special funds for money with no intention of paying them back.  The Executive and both parties of the General Assembly have not been able debate, communicate, and compromise in the best interests of the people of Illinois for the last five Governors.  No one wants to take the revenue problem and own it by solving it and accept the political consequences.

With respect to information, you would have to read and analyze the General Assembly's budgeting bill (Good Luck) or you could get the Governor's position here.  You can go to COGFA and get forecasts and projections.  You can go to the Illinois Auditor General to find agency and department budget results (I particularly like reading the audit report for the Teacher's Retirement System as I find it far more informational than the TRS website).  Try finding the current balance of the Budget Stabilization Fund (rainy day fund); at least you can get FY2015 and FY2016 projections as of March 2015 here.  As of FY2013, the Budget Stabilization Fund had $276 million, which was less than 1% of General Fund revenues.

 Illinois needs to get its act together.  Unfortunately, this requires politicians to work together and compromise rather than continuously posture in the public circus.

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U. S. Economy in a Snapshot

 The Federal reserve Bank of New York has just started a monthly report on the U.S. economy.

Here3 is the first 18 page report for the month of June.

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Chicago Public Schools Bond Fire

We have recently brought the problems of the City of Chicago and the Chicago Board of Education budgeting, financing, and outstanding bonds to readers attention through three articles by Kristi Culpepper.

Since then the Illinois General Assembly fortunately failed to pass a property tax freeze, passed a delay program for Chicago pension funding payments (which has not yet been signed into law), and the City of Chicago has authorized the issuance of $1.1 billion in GO fixed rate bonds to be used to restructure short term outstanding debt  and pay other current obligations, including $75 million in back police pay.  The City of Chicago had earlier issued an over subscribed fixed rate bond issuance that allowed it to convert $918 million in variable rate bonds to fixed rate bonds.

The Chicago Board of Education is, with the help of a former banker as Board President, in far worse financial condition with variable rate debt which lacks the backing a credit facility, a need to terminate its swap payments by probably depleting its $174 million debt service stabilization fund, the CBOE is looking at a $350 million budgeting shortfall and the school system could be out of cash as early as this summer, and  the CBOE looking for a $200 million line of credit and $935 million to address its next year deficit.

Kristi Culpepper covers the CBOE bond risks is far more detail in this new article which you should read.  She does an outstanding analysis.

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Friday, June 5, 2015

Biofuels Subsidies Raise Global Food Prices

On my radio show, I repeatedly discussed the subject of biofuels subsidies which divert corn grain products from the food supply to motor vehicle fuels.  Tim Taylor has a new article which nails the resulting global food price increases and how biofuels are economically inefficient and counter productive as a policy.

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Getting Bank Lending, Capital Flight, and Target2 Payments Right Part 2

 Frances Coppola has published an excellent article on Hans Werner Sinn's economic mistakes which compliments my recent article on the same subject, although my article referenced a recent Bank of England working paper on how bank lending works which is not getting sufficient attention.

Sinn has been consistently confused and wrong.

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Tuesday, June 2, 2015

Dysfunctional Politics & the Beginning Depression

Here is a draft post from 2009/early 2010 on dysfuntional politics and economic policy and potential social upheaval and protests in countries.  How prescient was it?

We have noted in past radio shows and prior posts how the FED appears to be using unemployment to hold down inflation.  We have noted that the "Recovery" appears to be focused solely on the return of the status quo prior to the Financial Crisis of the financial system and the resumption of risky but profitable business trading.  Volcker has commented on the fact that no economy, which has 30% of its GDP from synthetic financial services, can continue without risking another financial crisis.  In fact, we have noted the "Recovery" appears to be setting the stage for the very same financial crisis.

In a long post Edward Harrison  has written on his belief that the Recession is over but the Depression has just begun.  His argument is essentially that the political process, of which Congressional actions are only one example, has created a dysfunctional economic debate, economic recovery policies, and a divisive political debate which serves the special interests but not the Nation.  He goes into some detail on what it means globally as well as nationally and what needs to be addressed.  While I do not entirely agree with him, his arguments are very worthy of consideration for anyone who is desirous of dealing with the economic conditions as they exist.

It is well known that I believe Geithner and Summers need to go, because they serve Wall Street more than the Nation.  Washington'sblog has been very good at delineating Summer's insistence on his way or no way to the point where Volcker is now in Europe speaking for financial reform because Summers has muzzled and isolated him in the United States.  Still, there is opposition loyal to President Obama which are attempting to debate and contradict him, however, dangerous that may be.  Despite what Summer's says, unemployment will continue to rise and it cannot be ignored.  Read the post "Larry Summer's is like the guy who yells the Sun really does revolve around the Earth ..." and sharpen your critical skills.

In past radio shows we have talked about food shortages and riots, economic protests, and even a Joint Special Operations University faculty member's speech at a former intelligence officers conference about the possibilities that prolonged economic crisis could cause social upheaval in countries.  My first career was intended to be military and I still do extensive readings on military subjects including papers and publications at the War College and the JSOU.  It again appears that there will be food and commodity shortages with increasing prices in 2010.  There are two scenarios which could evolve with one being demonstrations, riots, and perhaps revolution in some parts of the world and the other being that the population will become so demoralized by their treatment from the elite who run their governments that they will be passive and do what they are told.  Here is one recent article that lists a variety of sources from the establishment and from the fringe for your critical review.  For the argument that people have been broken and demoralized, although there are more scholarly books which have been published over that last 60 years.

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Economy & Market week ended 12/25/2010

Here is a draft post from 2010 early 2011 which did not get published in which the dysfunctionality of  the eurozone was so obvious and yet so ignored today.

For a Holiday week, a tremendous amount of information flowed and we are going to cover the eurozone, Ireland, Germany, bonds, the euro, other countries like the UK, China, the new tax bill in the U.S., the mortgage mess, austerity in U.S. municipalities and States, unemployment, sectoral balances, the effect of home prices on small business, and the market and investing.  You should find this material pertinent and thought provoking.

Michael Hudson in discussing how financial interests determine sovereign policy argues that bankers are getting politicians to siphon off public money bail bankers out of their mistakes at the expense of capital formation and living standards.  Latvia is an example of how the economy has been subjected for the purposes of bankers just as if it has been militarily defeated and occupied.  Germany is serving its bankers and not the people; Germany needs to adopt more progressive tax and financial policies.  Hudson sees the current crisis as a sovereign crisis --- who is in charge and responsible for taking care of the citizens --- not a true debt crisis.  Banks should be forced to realistically value assets and debts on their books.  There is no need to wreak economies with financial asset stripping.  Debt needs to be restructured with the help of a progressive tax and a true central bank which can help finance governments.  He wants to see taxes shifted back on to land and resource rent as well as financial and capital gains.  He wants to de-privatize basic utilities and natural monopolies to take control from rentiers and prevent Europe from being turned into a tollbooth economy.

Edward Harrison acknowledges that eurozone internal devaluation and austerity is not a politically sustainable solution and there are only three possible outcomes in his opinion: monetization, default. or breakup.  Charles Wyplosz sees the problem as a lack of alternative options planning allowing decisive action, because the ECB has been consistently late to help.  Wyplosz remains concerned about debt and possible default.  He sees six questions which need to be addressed: can eurozone member nations face down the markets, is there a strategy for avoiding defaults, is there a plan to organize defaults if they occur, can a first defaulter be ringed to avoid contagion, if sovereign default is a possibility should banks also need to fail, and is ECB independence threatened by its need for more capital?  Daniel Gros finds the debate in the eurozone over the structure and financing of a stability mechanism self-defeating and likely to promote a festering situation which does not solve the lack of growth in the countries affected and the increasing costs to refinance with rising interest rates.  Geoffrey Underhill sees the problem as fully understood from the beginning of the euro as a lack of federalism.  The eurozone needs to act as a federal union consistent with the primacy of Germany as established by the structural formation of the euro and the ECB needs to proved guarantees to the "provinces" "... and adequate internal resource transfers to compensate for the fully predictable adjustment asymmetries in the absence of intra-Eurozone devaluations."

Is Germany, in demanding at the European Summit that "... there would be no fiscal transfers to troubled economies, and that the best way forward is further fiscal consolidation, along with plans for the private sector to share in any losses after a sovereign default", acting in its best interests?  Gavyn Davies believes Germany is not acting in its best interests.  There is a "damaging effect of a permanent increase in the interest rate spread of 1 per cent over Germany fully offsets the beneficial effects of reducing the budget deficit by 1 per cent of GDP for the troubled EU economies."  He believes the strategy emerging from the Summit will not work and the stronger EU economies could make a big difference by providing the weaker economies with liquidity in the form of lower interest rates.  Davies uses a recent paper by Lupton and Mackie to demonstrated the arithmetic to show Germany cannot continue to assert its creditor nation policies which will not reward these weaker nations and demands they suffer the sanctions befitting their debt and not place German banks on the precipice of shared suffering in sovereign default by any one of these weaker nations.

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