Ratio of debt to output has come down but still high.
  • Ratio of debt to output has come down but still high.
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Ten years ago, the world narrowly averted a financial disaster. It began with an explosion of low-quality mortgages bundled into putrid-quality financial paper that was awarded the highest-quality rating (AAA). Financial institutions began to collapse. The stock market plunged and the Great Recession ensued. The United States government fleeced the little folks by bailing out the big banks with taxpayer money. Then we wee folk got screwed again when the Federal Reserve dropped interest rates to near zero, meaning that savers got almost no interest. That’s not much better now.

Slowly, the world was saved, mainly by the flood of money and credit. That’s the good news. The bad news is that the federal government is acting as if we are still in recession and need a huge boost. As Ross Starr, professor emeritus and research professor at the University of California at San Diego, points out, the conventional cure for recession is a big federal deficit. But right now, we are at or near full employment. The economy is humming. Even though recessions generally come around every ten years, there is not one on the horizon.

Nonetheless, the Congress has passed a budget that will bring the annual deficit to a startling $1 trillion a year, and that deficit will continue to zoom throughout the 2020s. The Federal Reserve is raising interest rates, and bond buyers are demanding higher rates. The International Monetary Fund recently projected that the United States is the only advanced economy in the world that will see its debt burden worsen in the next five years.

New Jersey–based economist A. Gary Shilling looks at both public and private sector debt and says that total debt in the U.S. is now 3.5 times our total economic output. It takes $3.50 of debt for every dollar of economic output. That’s up from $1.50 in the 1960s and 1970s.

Some economists hope that foreigners will step up their plunking of savings into the American dollar, buying American debt, providing the money that otherwise would be sucked up by the deficit. That’s too big a gamble for Starr to count on. He takes the conventional view: “It is my personal view that with current federal policy we are in for a period of rising inflation and interest rates,” he says. “If inflation takes off [in this cycle], we will see a decline in stock and bond values. This will have a negative effect on the economy.”

Lynn Reaser, chief economist at Point Loma Nazarene University, says it boils down to this: “Our country does not save enough. Individuals and governments cannot continue to live beyond their means. Foreigners save too much and buy our debt.” But will they continue to do so? “If foreigners decide we are not the best place to invest, we have to entice them with higher interest rates or a drop in the value of the dollar, or a combination of the two. These [would be] negatives for the economy. Ultimately, the core of the problem lies with entitlement spending [Social Security, Medicare, Medicaid, etc.]”

State and local debt “is dominated by pension liabilities,” she says. “If investment returns begin to diminish, government services may have to be cut to pay those obligations, or taxes will have to be raised substantially.”

Mike Stolper, retired San Diego financial advisor, says, “A substantial part of debt will be repudiated,” and the first to be dealt with will be state and local debt for public employees. There is a crisis there. Last year, fully 858 retired San Diego County educators collected pensions of $100,000 or more — up 90 percent from 2012, according to TransparentCalifornia.com.

Knowing California as he does, Stolper thinks judges will be kind to educators; that means bondholders will carry the burden of straightening out the pension messes.

At the federal level, he thinks bond buyers (formerly known as bond vigilantes) will be the referees: they will refuse to buy certain bonds unless interest rates are high enough. Then governments will be forced to act. “This will stop the expansion of debt,” says Stolper. Ever since the Federal Reserve sharply lowered rates beginning in 2009, mortgages have been going for 4 percent, sometimes less. “I don’t have to tell you what happens when mortgage rates go to normal — say, to 6 percent. Overall, real estate is most vulnerable.” He thinks President Trump is bringing “a shift to a more [accommodative] business climate. That is what the market likes.” Stocks will be up and down, but he thinks in the long run they will do fine.

But Jim Welsh of San Marcos, who is a macrostrategist and portfolio consultant for Seattle’s Smart Portfolios, disagrees with Stolper. “Sooner or later, the piper has to be paid,” says Welsh. “As debt continues to rise, we get less and less economic bang for the buck, as the ratio of $3.50 of debt for $1 of output shows. A very, very difficult time is coming.” Recessions normally come every ten years and one is due, but the federal government in making forecasts doesn’t even take one into account.

“Since 1980, [corporations’] focus has been on increasing shareholder value. This has come at the expense of wages being paid to workers,” he says. “This is laying the seeds for a weak economy and potentially unrest.” One result is the spread of populism and protectionism. Middle-class incomes have been stymied for several decades. Within a few years, Welsh can see a steep recession and stock market “that could lose 50 to 80 percent of its value.”

But Gary Shilling, a major student in the relationship between debt and the economy, and also generally more pessimistic than most of his peers, is no longer fretting about too much debt. He writes, “The chances of another 2008 financial crisis are probably remote. If history is any guide, the next financial trauma will appear elsewhere, just as the savings-and-loan crisis of the late 1980s was not repeated but followed by the dot-com stock bubble collapse of the early 2000s. Then came the rise and fall of [low quality] mortgages.”

Shilling doubts that high interest rates and inflation are on the horizon. The Federal Reserve wants 2 percent inflation, but it stubbornly stays lower. Labor markets are not tight. Economists are looking only at the unemployment rate, which is statistically misleading. In 1981, when long-term interest rates were above 15 percent, he predicted, “We’re entering the bond rally of a lifetime.” He was right.

What’s next? Who knows?■

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Comments

AlexClarke May 10, 2018 @ 5:40 p.m.

I suspect that the 858 county educators you mention are not the average rank and file teachers that retire from the classroom but rather administrators and others that rake in large salaries and are far removed from actual teaching.

As for savings the government does not want people to save. Spending all of our paychecks is the goal which is why there is so much resistance to paying a living wage. Few workers are able to save and only the well to do are able to put a way any meaningful savings. Additionally, personal financial management is no taught in school.

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Visduh May 10, 2018 @ 7:34 p.m.

It's obvious that none of them were average or rank-and-file teachers. It might be possible that a handful of them were in highly-paid districts and served for forty-or-so years. The real abuse, and which is widely practiced, is a form of spiking the benefit. The pols have tried to convince voters that public employee spiking has been curbed; it hasn't for STRS. No matter how modestly a teacher has been paid for decades, if he/she can move into the admin ranks for a few years, his/her retirement benefit can be jacked up, way up. The benefit calculation uses a "base" year earnings to determine the retirement payout. Anyone in the system who has 25 or more years of credited service uses the single highest year as the base. For nearly all of the teachers and school administrators, that is the last year of employment. And so, superintendents and their retinue of paper-pushers, and principals, all arrange pay arrangements that put their final year of earnings up as high as they dare.

The poster boy for this abuse is Collins, recently-fired "supe" of the Poway district. Even though he has made a guilty plea for financial irregularities and had agreed to a substantial restitution, it is most unlikely his retirement benefits will take any hit. And his monthly payout will be based on his gigantic $400K+ final annual salary. Expect him to head the list of those who are pulling down over $200K a year, or maybe even $300K.

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Don Bauder May 12, 2018 @ 2:15 p.m.

AlexClarke: We have agreement: spiking benefits so people can retire with whopping benefits is simply wrong. I have seen it happen at the college level, too. Best, Don Bauder

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Don Bauder May 12, 2018 @ 2:13 p.m.

Visduh: It's a shame that very good teachers have to become administrators to get higher pay. The system should be set up so that good teachers can remain teaching. The same thing happens in Silicon Valley. A really good programmer is told he or she has to move into a managerial position to make the big bucks. So a great programmer becomes a poor administrator and may get fired. Best, Don Bauder

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Don Bauder May 12, 2018 @ 2:08 p.m.

AlexClarke: Yes, the 858 county educators would include administrators with higher pay. Yes, you are right: the government discourages savings. Lord John Maynard Keynes said, "Private virtue is public folly." Best, Don Bauder

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jnojr May 12, 2018 @ 4:16 p.m.

"I suspect that the 858 county educators you mention are not the average rank and file teachers"

Really? Why then, one must ask, are there hundreds of current retirees, which probably means thousands of current employees, raking in those pensions when they aren't teaching?

Public education is nothing but a giant money grab. We do NOT get well-educated children out of the public school system. California ranks near the bottom of the barrel in educational results. Something is wrong. And I say the first step to righting it is draining the vast swamp of money which attracts thousands and thousands of hangers-on and so-called "educators" who are not performing their essential job function. We need a clean sweep... we need to throw thousands, or tens of thousands, out of work, and bring in people who are looking to TEACH, not relax back into a lifetime sinecure followed by a lifetime of full-salary retirement on the taxpayers' backs.

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Don Bauder May 15, 2018 @ 11:31 a.m.

jnojr: In common with every profession, there are teachers and educational administrators who take advantage of the system. But generally speaking, I disagree with you. We get more bang for the buck out of public education than we do out of some professions such as medicine. The real thieves can be found in investment banking, corporate finance, real estate, politics, professional athletics, for-profit education, etc. Best, Don Bauder

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nativesd May 10, 2018 @ 10 p.m.

Most teachers in California do not receive Social Security because their unions have opted out of the system. And I believe Visduh is correct that the vast majority of classroom teachers are not receiving outrageous pensions.

The more fascinating part of this article is the evidence that no two economists apparently agree on anything. It’s a pretty dismal thought that they all look st the same data and they all come to different conclusions. You might as well poll 15 French literature professors; their answers spread along a bell curve might prove as accurate as those steeped in econometric data!

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AlexClarke May 11, 2018 @ 7:02 a.m.

The unions did not opt out it was a matter of negotiations. Negotiations that were participated in by the members and agreed to by the State. The unions do not decide anything the only thing they can do is represent the wishes of their members and make recommendations to their membership.

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Visduh May 12, 2018 @ 7:30 a.m.

Some states put all their employees, and those of their cities, counties and districts, into Social Security. California did not, and I'm not sure that a school district could decide to do that, even if it wanted to. For not much more than the current FICA tax rate, the teachers in public education get a real retirement benefit, far more than most would ever receive from Social Security. But now, the state system, STRS, is underfunded, and the new teachers have to put in a larger share of their pay, while the districts are required to boost the match they make for all active participants. One thing that hasn't been done, though, is to reduce the amount to be paid, or to eliminate that highest-year-as-base for over 25 year teachers.

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Don Bauder May 12, 2018 @ 2:25 p.m.

Visduh: CalSTRS appears to be in better shape than CalPERS. The underfunding of these pension plans is a worry. Best, Don Bauder

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Visduh May 12, 2018 @ 6:41 p.m.

CalPERS must be in dire straits. Politicians are all-too-eager to promise generous benefits to their public employee supporters, yet seldom actually require them to pay enough to fund the payouts. A worry? You understate the situation. It will be a crisis, and sooner than we think.

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Don Bauder May 15, 2018 @ 11:37 a.m.

Visduh: CalPERS is 68 percent funded. That's not good. It will be a horrible crisis if interest rates rise high and quickly, killing the bond and stock markets. Best, Don Bauder

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Don Bauder May 12, 2018 @ 2:22 p.m.

AlexClarke:What about when teachers go on strike -- as they are doing now? A school district wants good teachers. So it will pay for them. Best, Don Bauder

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dwbat May 13, 2018 @ 7:34 a.m.

The Ft. Worth, TX school district is now actively recruiting teachers from OK, offering a big raise over what OK pays its teachers.

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Don Bauder May 15, 2018 @ 11:34 a.m.

dwbat: Oklahoma starves its teachers, hence the strikes. We should encourage this kind of geographic competition for teachers. Best, Don Bauder

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Don Bauder May 12, 2018 @ 2:20 p.m.

nativesd: Tell me about it. I have been interviewing and writing about economists and investment advisors for more than 50 years. It's difficult to come up with a column that doesn't seem disjointed for the reason you cite. Best, Don Bauder

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jnojr May 12, 2018 @ 4:17 p.m.

"Most teachers in California do not receive Social Security because their unions have opted out of the system."

Who wouldn't opt-out of that Ponzi scheme in return for a plan that guarantees them a lifetime of full salary in retirement with the taxpayer backing up any losses? Gee, poor teachers, what a sacrifice...

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Don Bauder May 15, 2018 @ 11:40 a.m.

jnojr: This is one instance in which I can agree with you. Social Security is a Ponzi scheme. Ditto Medicare and Medicaid, and demographics make the situation worse all the time. I have no solution. Best, Don Bauder

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SportsFan0000 May 13, 2018 @ 3:44 a.m.

“Our country does not save enough. Individuals and governments cannot continue to live beyond their means.". They don't save enough because for decades wages have been depressed in both the private and public sector in many industries while prices for everything have skyrocketed..

\Ultimately, the core of the problem lies with entitlement spending [Social Security, Medicare, Medicaid, etc.]” Disagree totally with this premise...First...Those programs are "not entitlements"...millions of people payed into those public insurance programs...That elected officials and administrators mismanaged those programs and borrowed trillions from those programs without any plan to repay it is not the fault of those who paid into those insurance programs every working year for their entire lives..They paid for those programs, they earned those programs...stop with the far right BS that it is welfare...It is not..

State and local debt “is dominated by pension liabilities,” she says. “If investment returns begin to diminish, government services may have to be cut to pay those obligations, or taxes will have to be raised substantially.” Again, the programs were badly mismanaged by government officials...reneging on those programs will cause chaos in the country and the marketplace..

These deficits were created by reckless and unsustainable Republican economic policies...Constant tax cuts for large corporations and the top 10% when these deficits could have been payed down or eliminated with a little higher taxes on profitable corporations and the top 10%...

The chances of a 2008 crisis are remote?! Complete BS... Trillions in derivatives are embedded in major corporations that could tank the market at any time and could be triggered by any number of things according to Warren Buffett.. Just one of those "too big to fail" companies gets a major derivatives "call" or loss and order to pay, and it could be 2008 all over again...

Out of control Defense spending and excessive tax cuts have created these huge deficits and handcuffed our ability to repay that debt..

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Don Bauder May 15, 2018 @ noon

SportsFan0000: You are arguing with two distinguished economists quoted in this column. That is good. Lynn Reaser says entitlement spending is out of control. I agree with that. But I also agree with you. I believe we should slash defense spending. In this way, we may help get out of the Medicare Ponzi scheme addressed above.

Also, I believe we have to adjust taxes. The rich are taxed entirely too little. Even after that became obvious after Reagan, George W. Bush and now Trump went on to exacerbate this imbalance with more tax cuts for the rich and corporations. This has to be reversed. Of course, the rich will just then evade taxes through offshore havens. Thus, we should have a system of heavy criminal penalties for individuals caught stashing money in offshore havens. Then we should start working on a way to keep corporations from doing so.

Trickle down economics has never worked in any society.

Pension liabilities are a problem in the public and private sectors. Corporations are trying to handle the problem. Public sectors are not. This is greatly because private sector unions have little power. But public sector unions do. This is a big problem.

Perhaps I misrepresented Shilling's point. He knows there are trillions of dollars in derivatives that are dangerous. He thinks the next crisis may not be in mortgages. There could still be a derivatives crisis. Best, Don Bauder

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SportsFan0000 May 17, 2018 @ 11:23 a.m.

As FDR stated, 4 Years of Classical Economics at Harvard did not prepare him for the economic challenges of the Great Depression...FDR stated that he had to throw conventional wisdom and conventional thinking in economics out the window to deal with the crisis...

Spending is out of control?! Conservative Republican economics is out of control, illogical and does not work(Republican trickle down has never worked...put the money in the hands of the middle class, they spend it into the economy and that is what creates booms)... In their attempts to shrink and starve government of revenues, conservative Republican economists and elected public officials have created the fiscal crisis and done little or nothing to solve the problems of fiscal stability and long-term debt.

Take the same revenues, hike taxes on the top 10% and corporations and the long term debt program could be solved. Same strategy worked in Minnesota and California on the State levels and created booming economies... Reform Health Care with a Single payer system or a hybrid system with a public option of Medicare for All that would reduce costs by 2/3rds in the health care system and save trillions... We pay 3X-4X more per person in yearly health care costs than the same individual pays in Canada, Great Britain, Germany, Denmark etc... And, arguably, they get better healthcare and health care outcomes,(lower infant mortality rates, higher life expectancy because of comprehensive health care services from cradle to grave) Then, cut Defense spending(we spend more than the next 10 countries combined per year about 700-800B per year)... Then, lift the caps on income for tax withholdings for yearly Social Security payments..

Problems could be solved but the present WH and Congress does not have the political will to do so...

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SportsFan0000 May 17, 2018 @ 12:45 p.m.

AND News Flash

Defense Dept is under major audit with dozens of auditors. Just a minor matter in government and military industrial complex circles.

Only 21 TRILLION DOLLARS FOUND MISSING AND UNACCOUNTED FOR?!?!

Where is the money?! Who has it?! Did some of it get skimmed out of the black hole of huge yearly US Defense Dept appropriations?!

Where is the wall to wall network and cable news media coverage of this crisis affecting every man, woman, child, grandchild, future grand and great grandchildren in this country|?!

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Don Bauder May 17, 2018 @ 12:53 p.m.

SportsFan000: I basically agree with your suggestions. We should cut defense spending, raise taxes in the rich, put very heavy taxes on goods such as yachts, go to single payer in health care, etc.

Politicians won't buy into our suggestions because they live off bribes handed to them by various industries. Most are smart enough to realize trickle-down has ever worked, but they are motivated wholly by greed. Best, Don Bauder

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Don Bauder May 17, 2018 @ 4:11 p.m.

SportsFan0000: The US annual GDP is running about 20 trillion. That's a lot of waste. Best, Don Bauder

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