“Dear President Obama, Per Your Request ... “

http://www.fool.com/investing/general/2010/02/24/dear-president-obama-per-your-request.aspx

An interesting health insurance reform proposal:

“Dear President Obama, Per Your Request ... “
By Brad Hessel and Madge Cohen
Published in The Motley Fool
February 24, 2010

"Build a Health Care Bill: We Can Do It Better Than Congress"

Build a Health Care Bill Content Index

Two Good Heath Care Articles

Below are links to two good articles that actually advance the health care debate.

"The Power of Small Ideas"
by Tevi Troy & Jeffrey H. Anderson
in National Review On-Line

"Cut Costs and Improve Care? That's True Reform"
by Regina Herzlinger and Eric Silfen
in National Review On-Line



"Build a Health Care Bill: We Can Do It Better Than Congress"

Link to the "Build a Health Care Bill" Idea Log

Does the Debt Matter? – Alternate Projections

In my earlier post "Does the Debt Matter? - Government Projections" I described how federal interest payments might be affected by an historical range of interest rates (from 2.0% to 14.0%) applied to the federal debt as currently projected by the Obama administration.

The Obama administration projections assume substantial growth in tax revenues averaging 12.5% each year for 2011 through 2014 and reductions in the growth of federal spending such that spending growth averages 2.9% over the same period. For the years 2001 through 2007, year over year actual increases in tax revenues averaged 3.7%. Average annual increases in federal spending were 6.2%.


The years 2001 through 2007 start during the “dot com” recession and end with the peak year just before the start of the current recession. They were not our country’s best years and they were not our worst. They were in fact typical; enough so that using their average figures as a guide seems reasonable.

If the 2001-2007 average spending increases and average revenue increases are projected into 2011 through 2014 you get the results shown below – a 2014 end of year federal debt of $21,276,966,800,464 ($21.3 trillion)


Using these projections of revenue and spending and therefore of 2014 debt; then applying the same range of historical interest rates we see the potential problem.


Under these conditions the interest payments consume the entire federal revenue at an interest rate of about 11.8%. Ten-Year Treasury Bonds exceeded this rate in 1981, 1982 and in 1984. We also approached it in 1980 and in 1983; and, we were over 10% in 1985.

Could it happen again? You bet your bootees it could

Quote of the Day
“Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”
Ronald Reagan (1911 – 2004)

Link to Other Topics in the Special Report: Does the Debt Matter?

Does the Debt Matter? – Government Projections

At the end of the 2009 fiscal year (September 30th) the federal government debt stood at $11,875,900,000,000 ($11.9 trillion). It's bigger already. Just last week the legal debt ceiling was raised by another $1.9 trillion.

Official federal projections of spending, revenue, and end of fiscal year debt for 2010 through 2014 are shown below.

Assuming the federal government projections of spending & revenue for 2010 through 2014 are accurate (a very poor assumption in my opinion) the debt at the end of fiscal year 2014 will be $16,959,800,000,000 ($17 trillion). Using that figure and the federal projection of 2014 revenue (also a very poor assumption) the range of interest payments due on the debt based on the range of possible interest rates are:

One could say, “We’ll be fine" because the recent 10 year Treasury Bond rate was 3.26% and at that rate of interest the debt will be only 15.5% of projected 2014 revenue. Or, one could ask the question, “What will happen when (not if – when) interest rates go up?”

At the very least, one could expect an increase in the annual deficit equal to the excess interest payment. For example, if interest rates revert to the 48 year average of 6.89% then there would be excess interest due (above that due at 3.26%) in the amount of $597,045,398,958 ($0.6 trillion). The debt after paying the extra interest would be $600 billion higher than projected for that year.

This feels a bit like the credit card trap. You know, getting a low introductory rate on a credit card and maxing it out. Then, the bank raises the interest rate and you start making minimum payments. Then the bank raises your credit limit and you charge more. After a while you’re minimum payments on the card grow so high you have to stop going to the movies. Then, you have to stop eating out. Then you have to sell your car. Then… well, you get the picture.

Quote of the Day
“… I have to point out that government does not tax to get the money it needs; government always needs the money it gets.”
Ronald Reagan (1911 – 2004)

Link to Other Topics in the Special Report: Does the Debt Matter?

Does the Debt Matter?

Links to Topics in the Special Report: Does the Debt Matter?

Does the Debt Matter? - We Owe it to Ourselves
Does the Debt Matter? - Paying the Interest
Does the Debt Matter? - Government Projections
Does the Debt Matter? - Alternate Projections
Does the Debt Matter? - Questioning Assumptions

Does the Debt Matter? – Paying the Interest

As of September 30th, the end of fiscal year 2009, the official debt of the United States federal government was $11,875,900,000,000 ($11.9 trillion). The yield of the 10 year Treasury bond at that time was 3.26%; Using 3.26% as an estimate of the average interest rate results in an annual interest estimate of $387,154,340,000 ($0.4 trillion). That was 18.4% of total federal revenues from all sources in 2009.

This is a huge amount of money no matter how you cut it. But, it could be much worse. The 10 year Treasury bond yield since 1962 has averaged $6.89%. Below is the end of year yields for each year from 1962 through 2009.

Year - Yield of 10 Year Treasury Bond (%)
1962 - 3.95%
1963 - 4.00%
1964 - 4.19%
1965 - 4.28%
1966 - 4.93%
1967 - 5.07%
1968 - 5.64%
1969 - 6.67%
1970 - 7.35%
1971 - 6.16%
1972 - 6.21%
1973 - 6.85%
1974 - 7.56%
1975 - 7.99%
1976 - 7.61%
1977 - 7.42%
1978 - 8.41%
1979 - 9.43%
1980 - 11.43%
1981 - 13.92%
1982 - 13.01%
1983 - 11.10%
1984 - 12.46%
1985 - 10.62%
1986 - 7.67%
1987 - 8.39%
1988 - 8.85%
1989 - 8.49%
1990 - 8.55%
1991 - 7.86%
1992 - 7.01%
1993 - 5.87%
1994 - 7.09%
1995 - 6.57%
1996 - 6.44%
1997 - 6.35%
1998 - 5.26%
1999 - 5.65%
2000 - 6.03%
2001 - 5.02%
2002 - 4.61%
2003 - 4.01%
2004 - 4.27%
2005 - 4.29%
2006 - 4.80%
2007 - 4.63%
2008 - 3.66%
2009 - 3.26%

If interest rates return to the 6.89% average, annual interest payments on the federal debt would total $818,670,114,792 ($0.8 trillion) – 38.9% of total 2009 federal revenues.

Annual interest payments on the federal debt at a 10% rate would be $1,187,590,000,000 ($1.2 trillion) – 56.4% of 2009 revenue.

And, annual interest payments on the federal debt at a 14% rate would be $1,662,626,000,000 ($1.7 trillion) – 79.0% of 2009 revenue.

What would happen to the economy under these conditions? What would happen to federal government services?

Quote of the Day
“I can calculate the movement of the stars, but not the madness of men.”
Sir Isaac Newton

Link to Other Topics in the Special Report: Does the Debt Matter?

Does the Debt Matter? – We Owe It to Ourselves

President Franklin Roosevelt is supposed to have said that the size of the Federal debt didn’t matter because “we owe it to ourselves”.

Of course, he was right in a certain sense because at the time, individual Americans were buying and holding a wide variety of United States Treasury debt. Common citizens bought “War Bonds” and “Liberty Bonds” out of patriotism and a shared need to win World War II.

The debt, however, was owed by the corporate Federal government to each and every individual holder of US bonds. So, it wasn’t really “owed to ourselves”. The government was obligated to pay others and those others expected and depended on the government to honor the obligation.

Once, some years ago, I really did owe a debt to myself. I borrowed a sum from my 401k account so, in true FDR fashion, the size of the debt didn’t matter since I truly owed it to myself. Or did it?

My 401k loan didn’t have to be paid back. But, an unpaid 401k loan is treated by the IRS as a distribution. And, if you’re not yet 59 ½ years old, an early 401k distribution is levied a 10% surcharge on top of your normal income tax. So, if I failed to pay back my loan I would owe income tax on the unpaid balance with a 10% surcharge.

Beyond these costs, failure to repay the loan would mean the value of the loan would not be available to compound and grow my 401k account.

In the event, I partially repaid the loan. When I changed jobs the unpaid balance was due immediately but I didn’t have the money to pay it off. So, I allowed the balance of the loan - about $3,500 – to become an early distribution. I paid the income tax and the 10% penalty - a combined total of about $1,000.

The debt I owed myself turned out to matter quite a lot. It cost me $1,000 out of pocket and my retirement account will be lighter by about $61,000 ($3,500 compounded annually for 30 years at 10%). Worse, I don’t even remember why I took the loan in the first place.

Our current Federal government debt can’t be described as one that we “owe to ourselves”. A great deal of it is owed to foreign governments. And, unlike during World War II, few individual Americans hold government debt except thru pension funds and mutual funds.

Winning World War II was an overarching and clear justification for Federal borrowing. But, “We owe it to ourselves” was never a very good rationalization for increasing Federal debt. Today it makes no sense at all.

Quote of the Day
“We can evade reality, but we cannot evade the consequences of evading reality.”
Ayn Rand (1905-1982)

Link to Other Topics in the Special Report: Does the Debt Matter?

Monetizing Foreclosures

Fannie Mae reports that their delinquent mortgages are up 163% compared to last year. The delinquency rate was 4.9% in October 2009 and only 1.8% in October 2008. What does this mean for the economy?

We all know that the US Treasury has poured money into all sorts of financial institutions including Fannie Mae, Freddie Mac, AIG, and a multitude of banks. Less well known are the Federal Reserve Bank purchases of Fannie & Freddie’s debt and the mortgage backed securities (MBS) they guarantee.

What happens to mortgages that are on the Fed’s balance sheet? The Fed can buy MBS’s with money they create out of nothing. MBS’s are simply bundled mortgages. So the result is that the Federal Reserve Bank owns a growing number of mortgages and they paid nothing for them.

The fact that the Fed paid nothing doesn’t mean the seller received nothing. On the contrary, the money created by the Fed is just as spendable as the money the Treasury borrows from China. But this situation intrigues me.

If the mortgages the Fed brought with nothing become worth nothing when the borrowers default what happens? Is the money the Fed created to buy the bad loans inflationary? Or, does it merely inflate to the same degree that the bad load deflates?

If a house and its mortgage were worth $1,000,000 last year but this year they are worth only $500,000 is it inflationary if the Fed buys the mortgage for $1,000,000 or is it anti-deflationary by $500,000?

What if on average the Fed pays $750,000 for a bundle of identical suspect mortgages and in the end only 10% of them default? Then the Fed has assets worth $900,000 per original mortgage contract. Is this then deflationary? How about if the Fed sells the mortgages for that $900,000 average price?

It seems like everything depends on how much the Fed pays and what real default rate results. No matter what they do they'll be wrong. The only way they can not distort the money supply (and therefore eventual inflation) is to sell the mortgages for the same total dollar amount they originally paid. But, if they do that either the buyer gets an instant windfall profit (if the mortgage value at the sale is more than the Fed paid) or the Fed fails to sell the mortgages (if the mortgage value at the sale is less than the Fed paid).

My head hurts. If the Fed must play with the money supply I think they should stick to buying and selling Treasury bonds. Then, at least, they would be giving nothing for nothing - the valuation being purely made up and in the eye of the beholder.

Quote of the Day
“The essence of Government is power; and power as it must be in human hands, will ever be liable to abuse.”
James Madison

Lead, Follow, or Get Out of the Way!

"If you will not fight for the right when you can easily win without bloodshed, if you will not fight when your victory will be sure and not too costly, you may come to the moment when you will have to fight with all the odds against you and only a small chance of survival. There may even be a worse case: you may have to fight when there is no hope of victory, because it is better to perish than to live as slaves."
Winston Churchill

What must be done?
You must vote in November, naturally; but will that be enough?

What can be done?
Contributing money to Political Action Committees and conservative candidates will be helpful; but will it be enough?

What should be done?
Volunteering some of your time to help the campaign of a conservative candidate this Fall would be a very good thing; but what if your candidates aren’t conservatives?

Why are RINOs & Socialists in office?
Because conservative people are busy living private lives while those who are motivated to use politics for personal gain populate the county and city committees of the major political parties.

How can you ensure conservative candidates are on the ballot in future elections?
By joining and participating in your local political party committee yourself and by encouraging your conservative friends to do the same.

As was said in other times for other reasons, “If not now, when? If not us, who?”

Use this link to the "American Thinker" for additional ideas.

Quote of the Day
"Freedom is never more than one generation away from extinction."
Ronald Reagan.

At War With al-Qaeda

Are we at war with al-Qaeda? Did the “panty-bomber” commit a felony, attemped murder? Or, did he attack the United States as part of the larger war waged by al-Qaeda on the United States?

Below are some interesting thoughts on the subject.
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“This is all quite mad even in Obama terms. He sends 30,000 troops to fight terror overseas, yet if any terrorists come to attack us here, they are magically transformed from enemy into defendant.

“The logic is perverse. If we find Abdulmutallab in an al-Qaeda training camp in Yeman, where he is merely preparing for a terror attack, we snuff him out with a Predator – no judge, no jury, no qualms. But if we catch him in the United States in the very act of mass murder, he instantly acquires protection not just from execution by drone but even from interrogation.”
From Charles Krauthammer’s article in Human Events
"War? What War?"
12/25/2009
-------------------------

“… more than one-third of all terrorist plots since 9/11 transpired in 2009 – despite loud chest-thumping about rejecting the idea of a war on terror, reaching out to the Muslim world, and apologizing for purported American sins.”
From Victor Davis Hanson’s article in National Review On-Line
"Who Is the Enemy"
1/4/2010
-------------------------

“Abdulmutallab's a rich kid. He didn't come from a deprived background, bearing the grievances of the slum. He's a graduate of a top English university. And Osama bin Laden's from a super-rich family. How does building a footbridge in Afghanistan deter them?

Most of our home-grown Islamist terrorists hail from middle-class families -- such monsters as Maj. Hasan or the Virginia virgin-chasers under arrest in Pakistan (where jail conditions are a lot worse than at Guantanamo -- can't we just leave 'em there?).
This isn't a revolt of the wretched of the earth. These terrorists are the Muslim-fanatic versions of Bill Ayers and the Weathermen, pampered kids unhappy with the world. Al Qaeda's big guns are rebelling against privilege. There's a lot of Freud in this fundamentalism.

Spoiled brats remade their god in their own vengeful image. And we have to kill them. This one really is a zero-sum game.”

Ralph Peters from the article entitled
"Lying To Ourselves"
New York Post12/29/2009