Oil didn’t move yesterday. Neither did gold.

The Wall Street Journal reported that markets were reacting to “mixed data”.

That is to say, some reports were encouraging. Others were not. It was as if one weather forecaster called for a blizzard. The other for sunny skies and warm temperatures. Investors didn’t know how to dress.

Among the dark clouds was an item on the falloff in tax revenues. States are having a hard time balancing their books, because their tax receipts are declining. The WSJ reports that they are running 17% below last year.

Since states cannot print money, they’re forced to make cutbacks – typically reducing hours worked per employee as well as the total number of employees. This is a bad thing, says the report, because it increases unemployment and lowers the wage base. This leads to less consumer spending.

Another little cloud appeared yesterday (in addition to the consumer confidence numbers): the vacation timeshare market is collapsing at a record pace.

Well, don’t worry about it. We met a guy who explained the timeshare business to us.

“What you’re selling is a dream. You bring them to the property. You make sure they have a good time. And then you do to the numbers with them. You show them how much they save by coming to your property rather than on a typical vacation. And then you show them the other properties that they can exchange for. They think they can buy a cheap property and then exchange with an expensive timeshare. But it doesn’t work that way. They get stuck in the cheap unit and the dream gets a little faded… And then, they stop coming… and then they try to sell the timeshare. Timeshares are rarely a good investment.”

Besides, timeshares are a small, quirky part of the housing picture anyway. The real story is in the regular housing market. There, if you believe the forecasters, it’s sunny skies.

House prices seem to be stabilising. In some areas, they are going up. Of course, in some places you can get a house at half the price it sold for two years ago. That lures buyers back into the market. If we wanted a house to live in, we might be tempted too. That’s why we like falling housing prices: we get more for our money. But most people want a rising housing market. They think it makes them richer.

They’re likely to be disappointed. They show up at the beach with their umbrellas and sun-tan lotion… just as a winter storm hits the coast.

Forbes lists eight reasons to “remain worried about housing”.

• The federal tax credit, worth $8,000, is set to expire at the end of November. That will make housing $8,000 more expensive for first-time buyers.

• The Fed is also ending its $1.45 trillion shopping spree. It has been supporting housing by buying mortgage-backed derivatives. What will happen when it stops?

• Mortgage lending standards are tightening up generally.

• Houses are still not cheap. Forbes cites Shiller’s numbers, putting the average house price 41% higher than it was in 2000. Incomes did not increase during that period; ergo, houses are still too expensive.

• Damaged psychology. It will take time for potential homeowners to get over the shock of a bear market.

• The end of summer has arrived. Housing sales always go up in the summer. People relocate in summer, during the school break. Then, sales fall with the autumn leaves.

• There are still huge numbers of houses that will be repossessed. Forbes says only 12% of option ARMs have been reset. More repossessions will increase the supply of desperate sellers and decrease prices.

• There’s a ‘shadow inventory’ hanging over the housing market. It could be vast. Everyone knew it would be hard to sell a house in 2009. Many potential sellers held back, waiting for the market to stabilise. As they put their houses up for sale, that too will hold prices down.

Some wiseacre economist has probably already come up with eight reasons why housing prices will go up. But the key thing to recall is that this is a depression. It’s a major restructuring of the economy, not a standard post-war recession. After 64 years, the consumer has finally rung a bell. He has reached his limit. He cannot borrow more. He cannot spend more. He is finally cutting back. That fact will echo through the entire world economy – and through the US housing market – for many years.

Houses, like stocks and corpses, may bounce. But they will not begin a real bull market again for a long, long time.

***Our old friend Marc Faber is “highly confident” that things will turn out badly.

“The future will be a total disaster, with a collapse of our capitalistic system as we know it today, wars, massive government debt defaults and the impoverishment of large segments of Western society,” he writes.

“We have a money-printer at the Fed,” he continues, which guarantees runaway inflation, wholesale debasement of the dollar, and a major lowering of living standards for most Americans and many Europeans as well.

Meanwhile, Paul Volcker says that China’s rise merely “highlights the relative decline of the US.”

So there you have it: China on the way up, America on the way down .

That’s the drama that we’re watching every day here at the Daily Reckoning. In our view, the peak of US wealth and power probably came during the period between the fall of the Berlin Wall and the fall of Lehman Brothers. But there are probably a lot more shoes to drop before people are fully aware of what is going on.

The way we see it, almost the entire 20th century was a mistake, a dead end. Europeans were clearly on top of the world when the century began. Then, after WWI the Europeans in America took the lead role. But WWI shook their faith in their evolving political order.

Not long after, German hyperinflation and the Great Depression shook their faith in their economic and financial order. This left a huge vacuum, which was soon filled by ruthless adventurers and ideological schemers. Much of the rest of the century – from 1939 to 1989 – was spent in hot wars and cold wars against these Bolsheviks, Fascists, Stalinists and Maoists.

In the end, the more reasonable and consensual societies of the West won the battle. But they, too, were transformed by 50 years of war and nearly a century of bad ideas .

“Whoever fights monsters should see to it that in the process he does not become a monster. When you look into the abyss, the abyss also looks into you,” Nietzsche warned.

Looking into the abyss created by Mussolini, Hitler, Tojo, Pol Pot and the rest, Western societies decided both to fight them and to join them. Tax rates soared. Regulations multiplied. University professors taught socialism, Freudianism, modernism, cubism, feminism, racism… and every other ‘ism’ they could think of. Parents spent good money to send their children to universities that turned them into mush-heads.

And – perhaps most ominous – in the United States of America, the military grew into a greedy, grasping goliath… the very thing Eisenhower had warned against.

Then, there were counter-trends in the 1980s… led by Margaret Thatcher in England and Ronald Reagan in the US. But these were mostly frauds . Top marginal tax rates were rolled back. And there were some cuts in regulatory procedures. But government spending tended to go up anyway. Worse, Ronald Reagan mistook the Soviet Union for a genuine threat and increased military spending even further to combat it.

And now, the US staggers under the weight of its eternal wars… its imperial illusions … and its everlasting efforts to provide bread and circuses. If it kept its books like a private enterprise, it would be broke. If it were a public corporation, it would be de-listed.

Still, it spends and spends… and there is no stopping the spending. Trillions are spent on wars in Iraq and Afghanistan, for no apparent reason. But who complains? Too much money is at stake. There are too many lobbyists for too many industries and too many special interests involved. Military spending – even in a time when America faces no substantial challengers – cannot be rolled back. Neither can social spending.

Marc Faber is right. There too, there are too many people with too many dogs in this fight. Both military and social spending will continue to expand until the empire is ruined.

Until tomorrow,

Bill Bonner

Source: A Century of Bad Ideas

Now, I need to offer you a warning here – it’s really for those among you who think I am some sort of liberal weenie, sent to IDE to spread a pro-commie, anti-conservative gospel.

I am going to use Ronald Reagan’s name within this text. Don’t flinch the way you do when I use the name of a current US Republican Party leader and simply stop reading so you can spew some hate my way… though I do secretly enjoy them… and pass them on to party headquarters.

Saint Ron

I am going to say something nice about the aged (now late) president with the trickle-down problem.

You see, Reagan did know a thing or two. He knew that unless the federal government took action there’d be no Social Security for baby boomers… the first wave of which are now beginning to draw Social Security benefits.

There’s a unique irony in this, too. For I doubt there has ever been a generation of retirees that could attend a family gathering and share a common bitch about Social Security payments with their parents.

But, of course, I digress.

Though Reagan did the right thing, others have not.

So, Social Security’s solvency problem has been a political kickball going on three decades now. The utter depth of the problem can be measured by how little talk there is about it by US presidential candidates.

But, fixing Social Security is relatively easy.

It involves something that is, as you’ll see, anathema to US Republicans.

It’s something Bill Clinton couldn’t do because he was basically a moderate Republican at heart – though in his personal life he was a true Democrat, since unlike Republicans in Washington his sex scandals involved women.

His hetero-proclivities aside, Clinton was pretty much pro-business, pro-global trade, anti-welfare, pro-smaller government and anti-deficit spending.

Cindy’s Cute… and Rich Too

Gosh, that sure makes him sound like John McCain… and I am sure that if given the opportunity, the 42nd president would change places with McCain for a day or two… if you know what I mean.

Of course, the current president tried to fix Social Security with a complicated plan for personal retirement accounts… his GOP brethren did us all a favor and nixed that idea… after all, how well are 401ks really working out?

And, that was really a wasted effort, because as I said, there is a simple solution to the Social Security woes… but, it’s one that would take some political courage.

So, let’s examine this solution by looking at it through the lens of recent history.

Not GAAP Accounting

First, during the past 25 years or so Social Security has piled up a huge surplus… as it was supposed to do.

But, everyone who sat in the White House during those years have proposed federal budgets that stole from the surplus in order to hide the real size of the current federal budget deficit. These slick moves allowed those presidents – and their pals in Congress that approve the budgets – to spend more and justify tax cuts for the wealthy.

The US Office of Management and Budget says that between 2002 and 2006 while the US government’s reported deficit averaged about $300 billion a year – about $4,000 per household – the real deficit was actually more than 50% larger.

The government shrunk that deficit with some chicanery by reaching under the table to borrow about $165 billion a year from the Social Security Trust Fund.

In 2007, the real deficit was $449 billion, according to the OMB. However, the “official” widely reported deficit was only $257 billion.

That’s because it’s government policy to add the borrowed Social Security Trust Fund surplus ($192 billion in 2007) to revenues before calculating the “official” deficit that has to be borrowed publicly.

And here’s a bee-ute. US leaders in Washington claim that the recently passed $160-billion economic stimulus package will only raise the 2008 official deficit to about $400 billion. Add in the annual theft from the Social Security Trust Fund and the real deficit in 2008 will be about $600 billion.

So, how did it become so easy for US elected leaders to become thieves? Other than the obvious answer, that is.

Saint Alan?

Well, as most of you know, Social Security was initially a pay-as-you-go system – annual payroll taxes of workers covered that year’s payments to retired people.

But, by the early 1980s, it was clear that the program wasn’t sustainable. More was going out than was coming in, and baby boomers were only going to exacerbate the problem.

But, Ronald Reagan, or someone who worked for him, saw the problem clearly. In 1981, Reagan appointed Alan Greenspan to design a massive overhaul of the system.

By 1983, the Greenspan/Reagan plan turned Social Security into a national pension plan. The plan increased Social Security payroll taxes, which in turn created a huge surplus that would fully cover the future costs of baby-boomer retirements.

As it did then, that payroll tax now takes 12.4% of a worker’s salary and pays it directly into the trust fund. Half is paid by employers, unless you are self-employed like me, then you pay the full 12.4%… and don’t even get me going about my $1,750 a month health insurance bill, either.

The Five Percent Problem

But, the Social Security tax is capped. It only applies to the first $102,000 of annual income. About 85% of all US workers make that amount or below.

The top 15%, people with income beyond $102,000, are not taxed (for Social Security) after that level or earnings.
Of course, Greenspan and Reagan set that $102,000 cap back in the 1983. That’s because it was their plan to tax 90% of all income earned in the US.

But, people make much higher salaries today than they did 25 years ago, so the income distribution plan’s maximum top – the $102,000 cap – now includes only the bottom 85% of US earners.

Now, let’s not lose sight of this vital point.

The Next BOOM You Hear

Because, baby boomers, and all others who have worked since 1983, paid in way, way, more than is needed for their Social Security retirement payments. They saved and created the trust fund surplus, which now, on paper anyway, amounts to more than $2,000 billion… and all that is supposed to be invested in US Treasury bonds.

And, that number is projected to reach nearly $3,000 billion in 10 years. Then Social Security will stop generating a surplus – and stop subsidizing the rest of the budget – and will begin redeeming its bonds to help make payments.

Current projections show that the trust fund bonds will be exhausted by about 2041.

So, if you’re a baby boomer, you have to admit that this not only bites for you but it totally bites for your kids, too.

Because, not only did we have to bail out our parents, but now it looks as if we’ll need to bail out our kids, too.

Because, many of us are today’s top earners.

It’s This Simple

And, we can restore the trust fund’s full sustainability though the year 2085 with a minor adjustment to the Social Security tax scheme. We need to demand that the federal government restore the income cap to the Greenspan/Reagan level of 90% of all US wages.

Yikes, raise taxes… Yep! Sorta… on huge salaries… like congressmen, presidents, governors and senators, other professional actors, pro athletes and top lawyers.

To let things go the way they are now is criminal, because politicians won’t admit that they raped Social Security.

That means their solution will be to cut pension benefits and raise the eligibility (retirement) age.

And I am serious, this stinks for baby boomers.

Crappy Choices Come Back To Haunt Us

We’re the good guys. Most of our lives, on federal Election Days, we ended up with the choice between crap or double crap… but we voted faithfully.

Then, our crappy, two-bit politicians made the national argument about moronically trivial stuff in order to hide their thievery and avoid any real discussions about their obligation to your federal pension plan.

And, now, it’s up to us to show our kids – and future generation – that we are not self-centered and self-absorbed, unlike the beg-for-votes crowd.

That somehow, we can make right what Washington has made so wrong. Because, thanks to the father of the conservative movement, Ronald Reagan, Social Security is not a federal entitlement – it’s a federal pension obligation.

Have a great weekend… keep the faith and…

Lock and load.

Andy

P.S. To let me know what you thought of today’s article, send an e-mail to: feedback@investorsdailyedge.com.