Nigel Farage

The Awful Ryan Budget

While I have already blogged about this, the cacophony of voices against the Ryan budget as harsh, I felt that talking about it again is needed. 

Here is an example:

Mr. Ryan’s proposals would substantially phase out the federal government’s role in providing basic social insurance for older people by sharply reducing Medicare and by eliminating almost all nonmilitary discretionary spending.

No, that was the Rand Paul proposal. The Ryan budget grows government spending by 4% a year while the Obama budget, voted against in rare unanimity by the House and the Senate, grows the budget at 5% a year. Neither is sustainable. Here is the Veronique de Rugy Chart I used before. 

The Ryan budget does NOT cut spending, it reduces the increase in spending. 

The problem in the long term is health care. The cost of health care grows each year by about 7%. 

The projected growth rate of 7.5 percent for overall healthcare costs contrasts with expectations for growth of 2.4 percent in gross domestic product and a 2.0 percent rise in consumer prices during 2013, according to the latest Reuters economic survey.

Look at this chart and think about what that means for a minute. 

Most developed countries spend 8 to 12% of GDP on healthcare. The US spends 15%. If health care costs continue to grow at 7.5% then in ten years the cost will double. Since the economy is also growing at 2% this will not result in a doubling of the percentage spent on health care. This will take longer, 15 years or so. Does anyone think that 15 years from now the United States will spend 30% of GDP on health care? As Herb Klein, advisor to Nixon, once said, if it can't continue it won't continue. 

Here is how the NY Times blogger I quoted earlier put the Ryan proposal:

On Medicare, Mr. Ryan’s proposal is very simple. He wants to cap increases in spending on Medicare below the rate at which health care costs increase. By his own estimates, the share of Medicare spending relative to the size of the economy would shrink sharply over the coming decades.

What the blogger fails to realize is that we have no choice. Yes this means Dad may not get that second double bypass operation; Mom may not get her new knee. The reason is simple. We do not have the money. In fact Obama's proposal for health spending and Ryan's proposal are almost identical in terms of total growth. 

Here is the conclusion to the blog post:

Under such a Ryan-Romney approach, big risks – such as severe ill health and the danger of other calamities – would be shifted from society to individuals. Large corporations in health care and finance and perhaps in other sectors would benefit. So, too, would the people who control those favored legal entities.

This is the exact opposite of the truth. The Ryan proposal would keep the health care for large expenditures but reduce everyday health care expense. In fact the Ryan proposal is woefully inadequate. We do not have the money even for his proposal. Using false optimistic economic assumptions the Ryan proposal balances the budget in 26 years—in other words, not at all. 

Large cuts in spending now are better than draconian cuts later. I am not sure why so few can see this. Each party has their own ideological blinders. As much as I dislike tax increases, the choice we face is large tax increases, even larger budget cuts, or societal chaos when investors quit buying government bonds. Yes those cuts must include defense. 

Remember, what can't continue won't continue. Act now or suffer later.

The Pain in Spain Falls Mainly on the Sane

My favorite movie is My Fair Lady. The scene where Eliza Doolittle has learned to talk without her cockney accent is one of my favorite scenes. The sheer exuberance of the scene is a lot of fun to watch. I have a feeling that the current situation in Spain is not going to be fun to watch. 

Already the smart money has left Greek banks, and many Greek citizens have taken their savings out of the bank for the proverbial mattress. 

The Financial Times reports:

Greece’s four largest banks received a €18bn transfer on Monday as the first instalment of a recapitalisation plan agreed as part of the country’s second bailout by the EU and the International Monetary Fund.

(If you do want to see the article without registration google "financial times" "Greek Banks to receive" Note that this is from Mish Shedlock.) 

Of course when the Greek banks fail this money will never be repaid. Maybe not even in drachmas, the traditional name of the pre-Euro Greek currency. How much will a Greek exit cost? This is Bloomberg's guess:

The cost of Greece exiting the euro would be unmanageable and probably exceed the 1 trillion euros ($1.25 trillion) previously estimated by the Institute of International Finance, the group’s managing director said.

Of course this money does not exist so it will have to be printed. 

Although the "powers that be" in Spain deny it, Spain is on the edge of just such a bank run—the next domino to fall. 

ABC News tells us: 

Bankia is considered key to the country's financial system, and a failure would contaminate the entire banking sector.

The plight of Bankia - which holds some 10 per cent of the nation's bank deposits - has added to the concerns over the massive debt crisis gripping Spain and the rest of the eurozone.

Bankia president Jose Ignacio Goirigolzarri has sought to reassure investors and the public about the future of the struggling bank at a press conference called the day after it announced huge losses, and asked for a government rescue.

How much will it cost if Spain leaves the Euro? This is so frightening there is no official estimate that I am aware of. 

In addition to Spain's banks, Spain's provinces are in trouble too. 

Here is Mish Shedlock's view:

The crisis in Spain is rapidly coming to a head. This crisis has nothing to do with Greek "contagion" as is widely believed. Spain dug this hole by itself. Spain's immediate unsolvable problems are a bankrupt banking system coupled with bankrupt regions that have no way to pay bills. Spain's regional governments need to roll €35.7 billion and there is current deficit of €15 billion.

The president of Spain's Catalonia Region said it faces refinancing needs of €13 billion and is "running out of options refinance its debt".

Catalonia accounts for about one fifth of the Spanish economy.

Moreover, Spain's Valencia region set off alarm bells on a six-month €19 billion bond issue because it may be forced to pay a 7% return, more than two points above what Greece is paying for their junk bonds.

As I mentioned last week, in the short term, this is good for the dollar. 

But in the long term, 

What can't go on, won't go on.

Update on Sunday, June 10, 2012 at 7:10PM by [Positive Dennis]

There is a downside to posting articles in advance. This weekend a bailout of Spanish banks was announced. It was 50 75 125 billion. The amount kept growing as the weekend progressed. Maybe the "powers that be" are right and kicking the can down the road will work one last time. 

Bizarro World

In the Superman Universe an evil mad scientist made a mistake that created Bizarro Superman. Yes, Lex Luthor was very evil. For more than you ever want to know about Bizarro Superman click here. 

Today we live in a modern Bizarro World. While our home planet is not square and all the inhabitants are not clones of Lois Lane and Superman, we do live in a very strange world where German taxpayers bailout Spanish banks. 

Officials in Brussels said the contingency strategy to support Spain could be "austerity-lite", rather than tied with conditions like the Greek and Portuguese bail-outs, to restore confidence more quickly. The bail out could be as much as €80bn(£65bn) rather than €40bn Madrid reckons its banks need.

While I understand the fear that is driving these bailouts, it should be obvious that if it can't continue, it won't continue. It is better to "take your medicine" now rather than later. 

But instead the powers that be hope to kick the can down the road one more time, they have more money they want to steal. But we have reached the point where we have to cut, we have no choice. 

Here is how one Senator puts it. (This is through Karl Denninger.) 

Paraphrased, Jim DeMint said:

If you stop the deficit spending the economy craters (~10% of GDP) and if you continue doing it the economy will crater (since you will eventually hit the wall and be forced to stop, and it will be even worse.)

We live in a Bizarro World where living within one's means is "austerity." 

Eurozone Crisis Continues

Rather than try to reinvent the wheel, I thought I would just post this interview with Mish Shedlock.