Texas, PIIGS, Debt, and Bailouts

Background

The governments of Portugal, Italy, Ireland, Greece, and Spain (PIIGS) have borrowed and spent far more money than they can ever pay back.

In the United States, Texas is known for its independent attitude. The governments of California, Illinois, and New York  have borrowed and spent more money than they can pay back.

From John Mauldin:

My grandfather was born in West Texas in 1859 (not a typo). His uncle (a Kelly and Irish) was a charter member of the Texas Rangers, which was formed around 1836. When the mayor of Waco telegraphed the Rangers in the 1870s that there was a riot in town and to please send the Rangers, he got a telegram back saying they would be there on the noon train. The mayor met the train and was dismayed to see that only one Ranger got off. When asked why he didn’t have more men with him, the Ranger supposedly replied, “There’s only one riot, isn’t there?” That became the motto of the Rangers: “One riot, one Ranger.” These were the toughest SOBs in a tough state. And the uncle was Irish to boot.

Texas started out as a republic and was independent for nine years. The treaty that made us a state allows us to either split into five states (wouldn’t that change the balance in the Senate?) or to leave the union, at our choice.

I was once in a hotel bar (a shock, I know) somewhere in Africa and was asked where I was from. “Texas,” I replied. “Interesting,” came back the response; “Whenever I meet someone from America they always say they are from the US or America. Except when they are from Texas. Then they are always from Texas.” Yep. Texas is a state of mind, and those who come here eventually adopt the state as their own. Just seems to happen.

Now, a thought game. What would happen if California and Illinois and New York came to Texas and said, “We think your taxes should double so that we can finance our debt, and please buy even more of our debt next year to pay for our unfunded pensions. Oh, and while you are doing that the Fed is going to print massive amounts of dollars (far, far more than they are now) and destroy the value of the dollar, so your Texas pensions will be worthless.

My guess is that my fellow Texans would look around and decide which Ranger to set on these guys, and make it clear that this was not the ride we had signed on for, and dust off that old treaty and work out an exit strategy.

Understand, in the runup to the recent election our sitting governor talked about secession. I was been in meetings with Very Serious Texas Politicians where secession was earnestly discussed 15 years ago – maybe over some whiskey, but with the conclusion that Texas might be better off without the crushing debt that was coming down the pike.

Do I think that could happen? No. The Fed will never choose hyperinflation, and I do not think you can find 60 Senators to decide that bailing out the states that let their own spending and taxes get out of control would be acceptable with their voters. Further, even though I am a very proud Texan, after 9/11 it was not the Texas flag that brought a tear to my eye, it was the Stars and Stripes. It would have to take a series of massively stupid decisions to bring Texas to the place where it would even remotely consider leaving the union.

Now consider, if I have some pride in being Texan, with less than 200 years of history, proud as it is, what is it like to be Greek or Irish or French or German or any of the European mix? What deep cultural roots must they have? Nearly every country at one point was on top of the heap, and all have rich heritages. There is history around every corner in Europe. Except a history of unity.

If you ask a European in that African bar where he is from, does he say Europe? No, he is from a country. (Unless he is Basque. Or Catalonian. Or Welsh.) One is not from Great Britain but from one of the divers components of the UK. And a large number of Scots want out. Could Belgium split apart? Possibly.

But essentially, what the eurozone is asking Germany (and the Dutch and the rest of “core” Europe) to do is bail out Greece and perhaps much of the rest of the periphery, and to assume massive deficits and rising taxes. Because for there to be enough money for the deficit nations to borrow cheaply, there must be an AAA rating and a 30% cash-to-loan deposit, as I understand it. Spain or Ireland may try and borrow their share of the bailout fund (such irony), but they do not get that AAA rating. For all intents and purposes, it is on the back of Germany and, to some extent, France.

Will German taxpayers go along with that? Will France?

Will the Germans still finance the Greeks in 2013 when they have not whittled down their deficit and the Greeks still want to retire at 50 on full pensions? Will the Irish decide that it is in their best interests to take on massive debt so that French and German and UK banks are paid back? Can the solution to a debt problem be more debt?

Will Texas singlehandedly bail out California so their prison guards can continue to make $100,000 a year? Tough questions.

 

Using Energy Policy to Reduce the Deficit and Fix the Infrastructure

John Mauldin at Thoughts from the Frontline describes a plan to reduce oil imports and the budget deficit while repairing our aging infrastructure.

The mood in the country, if not in Washington (at least before the elections last November), is that the deficit needs to be brought down. And consumers are clearly increasing savings and cutting back on debt. But those accounts must balance. If we want to reduce the deficits AND reduce our personal debt, we must then find a way to reduce the trade deficit, which is running about $500 billion a year as we write, or about $1 trillion less than the deficit.

If the US is going to really attempt to balance the budget over time, reduce our personal leverage, and save more, then we have to address the glaring fact that we import $300 billion in oil (give or take, depending on the price of oil).

This can only partially be done by offshore drilling. The real key is to reduce the need for oil. Nuclear power, renewables, and a shift to electric cars will be most helpful. Let us suggest something a little more radical. When the price of oil approached $4 a few years ago, Americans changed their driving and car-buying habits.

Perhaps we need to see the price of oil rise. What if we increased the price of oil with an increase in gas taxes by 2 cents a gallon each and every month until the demand for oil dropped to the point where we did not need foreign oil? If we had European gas-mileage standards, that would be the case now.

And take that 2 cents a month and dedicate it to fixing our infrastructure, which is badly in need of repair. In fact, the US Infrastructure Report Card (www.infrastructurereportcard.org), by the American Society of Civil Engineers, which grades the US on a variety of factors (the link has a very informative short video), gave our infrastructure the following grades in 2009: Aviation (D), Bridges (C), Dams (D), Drinking Water (D-), Energy (D+), Hazardous Waste (D), Inland Waterways (D-), Levees (D-), Public Parks and Recreation (C-), Rail (C-), Roads (D-), Schools (D), Solid Waste (C+), Transit (D), and Wastewater (D-).

Overall, America's Infrastructure GPA was graded a "D." To get to an "A" would requires a 5-year infrastructure investment of 2.2 trillion dollars.

That infrastructure has to be paid for. And we need to buy less oil. And we know price makes a difference. The majority of that 2 cents would need to stay in the states where it was taxed, and forbidden to be used on anything other than infrastructure.

(And while we are at it, why not build 50 thorium nuclear plants now? No fissionable material, no waste-storage problem, and an unlimited supply (at least for the next 1,000 years) of thorium in the US. The reason we chose uranium was to be able to produce nuclear bombs, among other reasons.) We'll get into this and more when we get to the chapter on the way back for the US.

Mauldin likes thorium nuclear plants. In my opinion, traditional nuclear energy has several problems that are often overlooked: expensive technology, radioactive wastes, scarce fuel imported from other countries, massive water requirements, obvious terrorist target, centralized control, etc.

How many of these shortcomings do thorium nuclear plants overcome?

 

Politicians and Temptations

Giving politicians the ability to print money has always eventually been a disaster for any nation that did so. The temptation is just too great. Down that road lies inflation (maybe hyperinflation) and currency destruction. Just as Congress had good intentions to make home ownership more attainable, the good intentions of printing money to help pay for programs that help the poor or education or whatever is just too much for politicians to resist.John Mauldin

Link: http://www.frontlinethoughts.com/article.asp?id=mwo040910

Walt Ratterman: A Hero Dies in Haiti – by John Mauldin

From John Mauldin at Thoughts from the Frontline

A few weeks ago I wrote about my friend Walt Ratterman, who was at the Hotel Montana in Haiti when the earthquake hit. Walt's wife Jeanne received an email only 10 minutes before the quake, which placed him in the courtyard, where he would have been OK. After the quake there was an eerie silence. We all assumed that Walt was helping those injured in the quake and that he and his friends would surface when they got a break. Those who knew Walt understand the passion he brought to many relief operations. Walt was known for sneaking into Myanmar in the bottom of a boat where, if discovered, he would have been summarily executed. Walt was the subject of the documentary Beyond the Call, which showed him braving Afghanistan a month after 9/11, Myanmar, and the most dangerous region of the Philippines.

Walt's love of helping people who, for no fault of their own, couldn't help themselves caused him to relocate his family to the West Coast, to be better able to continue his work. Walt traveled the world to help the needy, visiting Asia, Africa, South America, and Central America. Each time he brought food, medical relief, and solar power, and had a sustaining impact on all the lives he touched. Walt was part of a team brought into Haiti by USAID (United States Agency for International Development) to bring solar power to Haiti. Walt was working there on several projects, including a few hospitals where electricity brought them out of the dark ages, allowing them to perform surgeries and other treatments that were unavailable in Haiti previously. Many of the projects were completed prior to the quake and provided much-needed support for the injured, saving countless lives.

The great irony is that Walt almost never stayed in nice hotels. He stayed with those he helped.

The men and women who loved Walt mobilized to raise money and travel to Haiti. My own readers have been very generous. Six teams made their way at various times throughout the search and rescue phase of the operation. Each of those teams brought much-needed food, water, or medical relief. Dr. Sir James Laws hired a bus in the Dominican Republic and loaded it with bottled water that was given to many who were thirsty in Haiti. Sir Edward Artis loaded a 20-foot truck with food and braved the road from the Dominican Republic as well, in spite of reports of looting and hijacking of other vehicles on the road. The first team was given the emotional task of handling the morgue at the Hotel Montana. Without complaining, each member of that team stepped up and did what was asked of them. Each night this team cried themselves to sleep from the emotional toll of dealing with the dead that day. Each of the Knights and friends of Walt reached out to their entire networks and brought awareness to the search for Walt and the hundreds of others trapped in the rubble at the Hotel Montana.

As time wore on it became obvious that a miracle wasn't meant to be. Hope gave way to preparation for the inevitable. Walt's backpack and laptop were found a few days before his body was discovered. And then there was a wait for positive identification, before dental records confirmed that Walt was a casualty of the devastating earthquake. He was one of more than two hundred thousand souls separated from their bodies in that quake. No doubt Walt was busy in the spirit world, calming and organizing this mass of men, women, and children for their trek to meet their maker.

Each of us who has been involved in the life of Walt, and now with his untimely death, knows that he lived a life of honor and that he died doing the work that he loved. His death was certain to be a death of honor because of the way he chose to live his life. Each of us has the opportunity to rededicate ourselves to living our lives in a manner more aligned with the values that Walt applied every day he was here. Walt stared death in the face so many times and lived, that we all expected him to be immortal. Each of us has limited time on this planet, and we can use Walt's example to make that time count.

John Mauldin

If you want to send a donation: send a check made out to "Steps for Recovery" but clearly marked "FOR KNIGHTSBRIDGE / HAITI" to:

Steps For Recovery
P.O. Box 67522
Century City, CA 90067

(A California 501(c) 3 Tax Exempt Corporation
Federal ID # 95.4472343)

Flaws in the Financial Reforms (it’s the same old song)

John Mauldin, who understands the financial markets, is outraged at the proposed financial reforms. Here are the flaws, in his view.

How can we allow banks to be too big to fail?

Where is the reinstatement of Glass-Steagall? If we are going to allow large banks to exist, then their leverage must be reduced to the point where their failure would not risk the system and require taxpayer dollars. I don't care if that makes them less profitable. They are making those large profits because they have taxpayers implicitly behind them, and I get no dividend payments from them, the last time I checked.

Where is Fannie and Freddie reform (and their breakup)?

No mention of an exchange for credit default swaps?

This bill reads as if bank lobbyists wrote it. Where is the populist outrage? We have let the fox set up the rules for running the hen house. Shame on us all if we allow this to happen.

Perhaps the bank lobbyists did write it, and our "leaders" will just sign off on it and continue to over promise and over spend. That's what they do and they're good at it. This cannot end well.