It all boils down to COLA — the government’s cost-of-living adjustment. Since consumer prices are — in theory, at least — deflating, the Social Security administration announced this weekend that they do not plan on a COLA for the next two years. Should that forecast come true, it’ll be the first time that’s happened since at least 1975, when automatic increases were first implemented.

That will probably equate to a net monthly loss for millions of beneficiaries. Medicare prescription drug premiums are on track to bump up a few bucks next year — a major cost for most retirees. And until the Obama administration jams through their health care reform, medical expenses will continue to rise, as well. Who knows… they might go even higher after Obamacare. Either way, tens of millions of seniors are about to face stagnant income and rising monthly costs… could get politically interesting.

Source: Seniors Beware: Deflation Hits Social Security

Your family’s share of the government debt is now over half a million dollars. A record $546,668, to be exact.

That cheery Monday stat comes courtesy of a USA Today study, which claims that each American family’s share rose 12% in 2008. That’s $55,000 in new government debt last year for every U.S. household — thousands more than the median household annual income. Here’s how it breaks down:

Last year’s spike is the biggest since the Medicare prescription drug benefit was added in 2003. According to the rag, the government garnered $6.8 trillion in “new obligations” in 2008, bringing the total U.S. tab to $63.8 trillion. Given our spending record so far in 2009, it’s safe to say your family’s burden is already much, much larger.

And you ain’t seen nothin’ yet… the Social Security program will grow by 1-2 million beneficiaries every year until 2032 as baby boomers retire. Medicare will add just as many each year starting in 2011, when that same demographic starts turning 65.
Unless the U.S. becomes a net saver, “another global financial crisis triggered by a dollar crisis could be inevitable,” forecast former Chinese central banker Yu Yongding over the weekend. (Oy… Beijing is 7,000 miles from Washington, and even they can see this coming.)

Yu’s comments were purposefully timed — U.S. Treasury Secretary Geithner embarked on a sudden PR tour of China this weekend. His mission? Keep the cash flowing from America’s No. 1 creditor.

“No one is going to be more concerned about future deficits than we are,” said Geithner, whose government’s budget deficit will exceed $1.75 trillion this year. “As we recover from this unprecedented crisis, we will cut our fiscal deficit [and] we will eliminate the extraordinary government support that we have put in place to overcome the crisis.”

In the meantime, Geithner assured students at Peking University that China’s investments in U.S. paper are “very safe.”
“I doubt the Chinese believed him,” says the man, the myth, the legend Chuck Butler. “Of course, I’m not a Chinese official, so I don’t really know what they are thinking. But I’ve watched them smile and tell former U.S. Treasury Secretary Paulson that they were going to allow greater currency flexibility, and after he would board his plane, it would business as usual… Same thing for Graham and Schumer, who thought their prestigious status as lawmakers would get them someplace with the Chinese.

”It all comes down to the fact that the U.S. needs China more than the other way around.”
General Motors, once the backbone of U.S. manufacturing, is officially bankrupt. As you’ve no doubt heard, the company declared bankruptcy this morning. But since it’s 2009, lord knows it can’t be a run-of-the-mill insolvency. The Obama administration has its hands deep in this thing… here’s the fine print of the biggest industrial bankruptcy in U.S. history:

• Uncle Sam gets a 60% stake. The government will pump an additional $30 billion into GM (on top of the $20 billion already squandered). In exchange, the government will be the largest shareholder… leverage it will use to usher GM through bankruptcy and convert it to this “leaner, stronger company” we’ve been promised
• Half of the UAW’s $20 billion health care fund will be converted to GM stock, which will give it a 17.5% stake in the company. 12-20 factories will be closed, at the cost of approximately 21,000 union workers. 40% of the 6,000 GM dealers will have to close, too
• The Canadian government gets a 12% stake, given all GM’s design/manufacturing activity up north.
• Bondholders were bought (bullied?) out. They’ll swap their $27.1 billion in unsecured debt for 10% of GM, with warrants to own 15% more. Surely, they learned from Chrysler’s bondholders, who were publicly vilified by President Obama for demanding what was lawfully theirs… so much for that hallmark of American capitalism
• Current shareholders get nada. At least that rule of bankruptcy is still intact. If you were long GM, please consider letting someone else manage your money. Anyone.

“GM Bankruptcy to Bring Taxpayer Ownership,” headlined Bloomberg this morning. Shame on them and the U.S. government for perpetuating this “taxpayer ownership” BS.

We must have been asleep when the “taxpayer” got any say in this one. GM is owned by wealthy politicians in Washington who, under threat of imprisonment, forced their constituents to finance the deal. Insinuating the public has any control is “Orwellian in the extreme” Addison suggested when we discussed the matter late Friday. Amen.

And let’s be really honest… taxes haven’t gone up to cover the GM bailout (or any credit crisis expense), but government borrowing certainly has. If any “taxpayers” truly own GM, their tax returns get mailed to Beijing or Tokyo.
Sign of the times… GM and Citigroup are getting kicked off the Dow. Cisco and Travelers will replace them next Monday. Extra irony (and foreshadowing?) in this exchange, as Citi is the former owner of Travelers, which it spun off in 2002.
The market baked in GM’s insolvency a long time ago. In fact, the Dow’s off to the races this morning, even though one of its 30 components is rapidly approaching zero (the “beauty” of a weighted index). The big indexes rose 2% within the first 30 minutes of trading.
“We have reached a pivot point in financial markets,” forecasts Rob Parenteau, steward of the Richebacher Society.

“As we have documented in recent weeks, the list of U.S. macro series showing stable nominal levels over the past three-four months continues to increase. These include retail sales, new orders for durable goods and imports of materials and finished goods. That is not what usually happens in a debt-deflation dynamic, which cumulatively builds on itself. It appears the debt-deflation risk is being contained by extreme fiscal and monetary measures.

“Stability is better than free fall, but it is not the same as expansion, and we believe equity investors have shoved valuations high enough over the past three months that they now require signs of economic growth, not just stability, to carry equity indexes higher. We think the odds of them getting that could improve after we get past the auto production and dealer downshift later in the summer, but the rise in Treasury yields is becoming alarming.

“So from a strategic point of view, we believe equity investors want and need to see stronger economic and earnings results to drive indexes higher, while bond investors need just the opposite to calm Treasury yields down. In addition, through near-zero interest rate policy (ZIRP) and quantitative easing (QE) approaches, the Fed has been trying to push private investors into riskier asset classes while the Treasury’s debt issuance calendar implies they need private investors to prefer owning Treasury bonds, which are generally not the asset of choice in an economic recovery scenario.

“In other words, we have contradictory cross currents here. If the Fed doesn’t intervene to slow or halt the Treasury yield backup, there is a chance the stabilization in unit home sales will wither away. If the Fed does step up QE operations to halt the Treasury yield rise, professional investors taking the ‘green toilet paper’ view will continue to sell dollars and buy commodities. Down the line, that implies higher energy prices for consumers and higher input prices for manufacturers, neither of which we would consider growth-supportive developments.”

If you seek a better, richer life through macroeconomic awareness, you’ll be right at home in the Richebacher Society. Get in, here.
Like last week, materials and energy companies are leading the way today. The great global rebound argument is still hot, and this data point is keeping the commodity fire ablaze:
China’s manufacturing sector expanded for the third month in a row in May, its government reports today. China’s purchasing managers index registered a score of 53.1 during the month, down just a bit from April but still above the expansion/contraction score of 50.
Oil’s up to a fresh seven-month high of $67 a barrel today, largely due to China’s PMI number.
The dollar is still falling, giving commodities an even bigger boost. The dollar index fell right through support at 80 on Friday and has plunged another point and a half since. It’s at 78.8 as we write, just off its 2009 low.

Thus, the cost of your European vacation has popped 7% since the start of May. The euro is up 9 cents over the last 30 days, to just under $1.42 as we write. The pound has followed suit, up 11 cents over the last month, to $1.62.

And could parity be around the corner for our neighbor to the north? The Canadian dollar is up to 92 cents today, its highest level since October 2008.
Gold continues to flourish, but silver has been the real precious metal story of late. The yellow metal is up about 9% over the last month, to roughly $980 today. Silver, on the other hand, shot up 29% in May, to $15.50 an ounce.

“In general,” says Byron King, “the precious metals are up because the big-spending politicians in Washington have no respect for the U.S. dollar. Break out the black crepe and armbands of mourning for the U.S. dollar.

“Specifically, silver has always been the “poor man’s gold.” Silver tends to lurk in the shadows of the price of gold, sort of a stepchild to the yellow metal.

“But on occasion, silver undergoes a slingshot effect. Between the basic industrial demand for electronics, plus jewelry demand (’cuz gold’s getting pricey!), and now the monetary pull… silver is accelerating in a price rise that is — believe it or not — leaving gold in the dust.

“Silver could break $20 sooner than we’ll see gold at $1,200, and the silver miners (my readers own several) will soar to new heights. Do you have your ticket for this ride? All aboard!!!”

Heh, get your ticket here: Byron’s latest special report on precious metals investing.
Silver may continue to outperform gold. If you’re a believer in historic ratios, silver still has room to rise in order to meet its average gold price ratio over the last decade.

Either that, or gold’s price needs to fall. And in this environment, we’d sooner go long silver than short gold. Do you agree?
“I’m a raving fan, but sometimes you guys get misled a bit,” writes a reader in response to Robert Gordon’s call that the recession has bottomed.

“The so-called ‘ultimate indicator’ of recession ends of the four-week moving average of initial jobless claims is hardly as accurate as suggested. It is true that it does turn down typically, just as a recession ends from the retrospective declaration of that recession, but it is NOT true that every time the four-week moving average of initial jobless claims turns down during a recession, the recession ends.

“In the ’81-’82 recession, the indicator turned down from over 500k four times before a correct signal — in December ’81, February 82, May 82, June 82, and finally at the real ultimate peak in October 82. In the 1990 recession, it turned down in January of ’91, before its ultimate peak in April 1991.

“In the 2000 recession, it turned down in June 2001 from high levels, to give a false signal before peaking in October 2001, although many other recession indicators suggest that the recession went on for far longer than in the graphic you presented.

“Virtually every recession therefore has witnessed false signals of at least one and often many times before the ultimate peak in initial claims and before the later declared end of the recession. Why would this time be any different — particularly in view of the potential for auto mess to lead to accelerated claims?”

The 5: We agree… guess we didn’t lay the skepticism on thick enough when we introduced the idea. Glad to hear you’re a fan.

Source: Your Share of the Debt, GM Dies, Silver Still a Buy, A Pivot Point and More!

However dire you think U.S. government’s fiscal condition has become… today we learn it’s even worse. For starters, would you invest in this business?

2008 fiscal year net operating cost: $1 trillion. Triple that of 2007. And those aren’t funky alternative accounting methods… today’s charts and numbers come directly from the 2008 Financial Report of the U.S. Government, issued yesterday.

What is “net cost”? It is “computed by subtracting earned revenue from gross cost,” the GAO explains on Page 29 of the government’s 194-page release. A layman might even call it a deficit. A layman who reads The 5 might notice it’s more than double the “official” 2008 federal deficit of $454.8 billion.

And how about this balance sheet?

God bless America!

And here… we saved the best for last … this chart, exactly as it appears in the Treasury’s report:

Our balance sheet shows a $10.7 trillion mountain of debt. In the same report, the Treasury suggested unfunded liabilities like Social Security and Medicare now exceed $43 billion. Put the two together, as we did for I.O.U.S.A., and the U.S. is in the hole for at least $53 trillion.

Late yesterday, John Williams estimated it was closer to $66 trillion. Still want to buy those 10-year notes?

By the way, “The federal government did not maintain effective internal control,” noted the GAO in the same report, “over financial reporting (including safeguarding assets) and compliance with significant laws and regulations as of Sept. 30, 2008.”

Not to worry, just some “serious financial management problems at the Dept. of Defense” and other unlawful accounting happening in Washington. But we can still trust them, right?

Oy. We encourage you to read the report yourself, which you can find here.

Fear of deflation is what has brought the Fed balance sheet so low. Unfortunately, today, U.S. officials got more ammo for defense of their spending plan:

The Labor Dept.’s consumer price index (CPI) fell 1.7% in November, the government reported today. That’s the biggest seasonally adjusted monthly fall since the department started those adjustments in 1947. Filter out adjustments, and CPI dropped 1.9%, the greatest fall since 1932.

As you’d guess, energy and gasoline prices led the way, falling 17% and 29%, respectively. On an annual basis, the government says consumer prices are up just 1.1%.

New housing starts crashed 18% last month, the Commerce Dept. said today. Now at an annual rate of 625,000, starts have slumped to their slowest pace since at least 1959, when the government started keeping track.

And yesterday, the National Association of Home Builders’ gauge of builder sentiment stayed at its record low score of 9… as in 9 points above the worst sentiment possible.

What a mess.

At least the stock market is breathing a sigh of relief this morning. The intricacies of Goldman Sachs’ balance sheet interests it far more than the government’s.

Goldman lost $2.1 billion in their fiscal fourth quarter ending Nov. 28… a notable departure from the $3.2 billion profit they pulled off this time last year.

Despite being worse than expected, Wall Street seems relieved by the news. Goldman earnings per share came in $1.24 below the Street’s expected $3.73 a share loss… but traders are buying GS anyway.

The stock popped 4% on the news and helped push major indexes up this morning. The Dow opened 75 points higher than yesterday’s loss of nearly 1%.

“No banks could ever be high quality” investments, Jeremy Grantham recently told Forbes. Grantham, if you recall, predicted early last year a “global bubble” in essentially every asset class.

Grantham was an “alarmist perma-bear” then… but the “smartest money” today.

“The most difficult decision we’ve had to make in a long time was when we started our quality fund four years ago — the question was whether banks could ever be considered high quality. All the quants in the shop were saying, ‘What do you mean? They’ve got high, stable returns.’

“But all the historians were saying, ‘Yeah, but every 15 or 20 years, the market takes half of them out and shoots them. That doesn’t happen to the Coca-Colas.’”

Today, Grantham says the big blue chips are “the cheapest part of the market.” His fund’s top holdings are Coca-Cola, Procter & Gamble, Microsoft, Wal-Mart and Johnson & Johnson.

“When stocks have managed a small rally, it doesn’t amount to much,” notes our John Wayne Burritt. “In fact, any move higher is quickly zapped by tough resistance. That’s why the S&P 500 has had little success moving outside its 12-day moving average — the red line on the chart (below) — for months.

“The downward pressure on the U.S. equity markets is still intense. It’s so intense, so deep, that it’s tough to find any real reason to even think about buying call options on stocks.

“Frankly, I wish it weren’t so. I’d like nothing more than to tell you, ‘The bottom is in,’ and that the colossal downdraft we’ve had to suffer through is finally over. But the facts simply don’t bear that out.”

“Now, there’s a chance the markets will meander around until the holidays are over. That’s usually the case, since traders and investors alike are busy with other things. And while I think that bias will certainly be to the downside, don’t expect a huge downdraft until the beginning of the new year.”

Mr. Burritt’s Easy Money Options traders are well positioned to take advantage of the pressure piling up on the broader market — the retail sector in particular. To get his advice, learn about Easy Money Options here.

Don’t forget, as a Reserve member, you get his service for free.

The U.S. dollar got shelled yesterday in anticipation of today’s super-sized rate cut by the Fed. Traders rushed out of the dollar the moment U.S. markets opened, selling the dollar index down over a point and a half, to 82.

The euro is now at a two-month high of $1.37. The yen is still strong at 90, just off a 13-year high.

“We saw a massive move in both the sterling and euro yesterday,” writes our currency trader Bill Jenkins. “The sterling was carried higher on a sympathy move as the euro began its takeoff. Both were aided by stunning Treasury info (as if the above charts above weren’t bad enough, ugh), which was released at 9:00 a.m. EST.

“October showed a dismal drop in the foreign purchases of U.S. securities. October numbers came in at $1.5 billion purchased… down from $65.4 billion in September!
Foreign investors were not interested in buying our paper in October.

“At the same time, U.S. investors pulled back on their purchases of foreign paper as well. In times of crises, everyone wants their money close to their wallet.”

A barrel of oil is up a buck, to $45, this morning. But that’s not high enough, says our oilman Byron King:

“The recent drop in oil prices to the $40s is the worst of both worlds. Consumers lose that price incentive to save, economize, be efficient, drive smarter, reorder their energy priorities. And the political will to ‘do something’ about energy declines.

“Plus, the fact that at $40-or-so per barrel, the energy industry is faced with a bunch of uneconomic investments in next-generation energy projects. Canadian tar sands development, for example, is decelerating fast. E.g., Petro-Canada’s decision last month to defer $17 billion in new investment in just one tar upgrading project. And that’s just one example out of about $30 billion total of announced cancellations and deferrals.

“You see the deceleration in offshore projects as well. There are numerous deep-water projects — from the Gulf of Mexico to Nigeria — that are getting scaled back, slid to the right on the calendar, deferred, placed in abeyance, etc.

“In many respects, we are set back a decade. If projects were marginally economic at $40-or-so oil 10 years ago, they are marginally economic today at $40-or-so oil. It’s just that we’ve spent 10 years draining out the other, older reserves that were discovered in the 1950s and 1960s (North Sea, Alaska, western Siberia, Mexico, even the OPEC fields.) The projects that got built in the last decade are now operating at break-even, or even at a loss. That’s not how you capitalize the next phases of development, now, is it?”

Gold got a $20 kick from yesterday’s dollar sell-off, and sells for around $835 today … a critical point of resistance, according to Ed Bugos.

We were on a call-in radio program in Toronto this morning. The callers were all freaking out that the Canadian government is learning bad habits from the U.S. brand of federal finance… and that eventually the U.S. would go bankrupt and take the Western world down with it.

“If the entire world is going broke,” one guy wanted to know, “where is the U.S. getting all that money?”

One of the places the U.S. borrows its money is from the oil-exporting nations. From their behavior, one could argue, we could do worse than spend their money. For example, here’s one way petrodollars are being employed on the other side of the planet: Refrigerated beaches.

Despite the biggest global slowdown of our lifetimes, “smart money” in Dubai has chosen to invest their petrodollars in heat–absorbent pipes and wind blowers that will cool the beaches of the Palazzo Versace Hotel.

“We will suck the heat out of the sand to keep it cool enough to lie on,” explained Soheil Abedian, president of Palazzo Versace. This is the kind of luxury that top people want.”

“I was rather amused,” writes a reader, “by the reader yesterday who stated that they would place a stick of the good stuff in the cord wood.

“A neighbor in England had his firewood raided quite often. His remedy was to drill a hole in a particularly knotty log, which would not be chopped into kindling, put a friendly gesture in and patch over the hole and cover it with mud and then place it on the pile of logs so that it would be one of the first to be lifted.

“We waited, and sure enough, the culprit was identified when the chimney inside the house disintegrated. He knew where he got the wood, and we knew who had taken what wasn’t his!

“Really appreciate your writings and books.”

“Whatever happened,” writes another, “to all those yoiks that used to write in accusing you of being anti-American? I never knew ignorance and bile ever stopping anyone’s mouth (or e-mail) before. Where’d they go? Or have you simply (as I advised you years ago) stopped responding to them?”

The 5: Not at all, in fact: We’ve been noticing, too… your hate mail has been remarkably supportive. Except maybe this one:

“I am a loyal reader of The 5,” the reader wrote, “and enjoy your snarky commentary on macroeconomics. However, I was appalled at the sexism displayed in Friday’s 5 in reference to the White House press secretary. If she were a good-looking man, would you have called her a ‘resident hottie’? Readers of your newsletters are not only men, and even if they were, I would hope a forward-thinking company like Agora would refrain from perpetuating the inequality of professional women in our society.

”Thanks for listening.”

The 5: You’re right. Of course, it’s a total coincidence that Bush chose Ms. Perino — an attractive, articulate young woman — as his press secretary during the depths of his unpopularity. Shame on us.

All apologies,

Addison Wiggin
The 5 Min. Forecast

Source: Redefining Deficits, Inflation Plummets, Market and Oil Forecasts, The Dububble and More!

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.

I’m sure it just breaks your heart that the Gray Lady thinks so ill of you. But it is what it is: The newspaper that tried to convince you Saddam Hussein was on the verge of unleashing mushroom clouds is now trying to make the case that CPI actually overstates the cost of living.

Granted, David Leonhardt can’t really begin his column with such a flat assertion. So he adopts a sympathetic tone:

Next week, the Bureau of Labor Statistics will release its monthly report on inflation, and it sure is going to sound strange. Wall Street is expecting the bureau to announce that the Consumer Price Index rose just three-tenths of a percentage point in April. Over the last year, the index has risen only about 4 percent.

I’m guessing that doesn’t square with your sense of reality.

He invites the reader in so warmly. And he goes on to point out you’re not alone in your perceptions.

“Last month, when I did an online Q. and A. with Times readers, I got three separate, thoughtful questions about — of all things — how the inflation rate is calculated. The current cover story in Harper’s, called “Numbers Racket: Why the Economy Is Worse Than We Know,” deals with the same subject. Written by Kevin Phillips, the Nixon aide turned left-leaning commentator, it concludes that the real inflation rate “is as high as 7 or even 10 percent.”

But it’s all illusion, Leonhardt proceeds to explain. See, many prices rose moderately or even fell during the 1980s and 90s. Food was getting cheaper relative to everything else. We tend not to notice that. “Part of this comes from the notion of loss aversion,” Leonhardt avers: “Human beings dislike a loss more than they like a gain of equivalent size.” And when things actually fall in price, we tend not to notice that either — especially if the things falling in price are things we don’t buy very often. We buy food and gas more frequently than just about anything else.

All of which is true enough, and Leonhardt apparently thinks that’s all he needs to prove his case because it’s at this point he hits you with the conspiracy zinger:

The conspiracy theories about inflation play off these human instincts, but they also depend on two other oddities. The first is the amount of attention given to the so-called core inflation rate. This is a version of inflation that excludes food and energy, which makes it a little like a grade point average that excludes math and French.

The core inflation rate does have a purpose. Its movements help Federal Reserve officials base interest rates on underlying price trends, instead of being overly influenced by food or gas prices, both of which can be volatile. But when Ben S. Bernanke, the Fed chairman, talks publicly about core inflation, he can leave the impression that the government is cooking the books. In fact, all the
important economic indicators, including real wages, are based on overall inflation, as are Social Security checks and cost-of-living raises.

Leonhardt makes it sound as if Bernanke is a sort of absent-minded professor here, focusing needlessly on an obscure and useless metric whose repetition only feeds the tinfoil-hat crowd. But in fact, the ceaseless harping on “core inflation” is a critical part of the whole scam: Fedheads believe they can create as much money and credit as they damn well please and face relatively limited consequences as long as “inflation expectations” stay under control. If people actually start to think prices are rising at a significant clip, well, then the Fed has a problem.

So much for Leonhardt’s first “oddity.” Here’s the other.

The final piece of the puzzle — and the focus of the Harper’s article — is the way that the Bureau of Labor Statistics has changed the price index recently. Back in the mid-1990s, a committee of academic economists concluded that the Consumer Price Index overstated inflation. To take just one example, years would often pass before the index included new products — like cellphones — and therefore it missed the enormous price declines that occurred shortly after those products entered the mainstream.

In response, the bureau tweaked the index. But economists who have studied the changes say they have had only a modest effect on the inflation rate, lowering it by perhaps a half point a year. More to the point, the changes seem to have made the index more accurate than it used to be.

Having already dismissed the idea that CPI understates the cost of living, Leonhardt feels no obligation to actually, you know, address any of the issues raised by the Kevin Phillips piece in Harper’s — which draws in part on the work of the fearless John Williams of Shadow Government Statistics and deals in fact with decades of statistical shenanigans, not just the Boskin Commission flim-flams of the 90s. Nothing about hedonics, nothing about substitution, nothing about geometric weighting.

Consider Leonhardt’s column an early warning. It’s not just the voice of the power elite assuring the plebes that all is well and they can go back to watching American Idol. It is also the beginning of an establishment push-back against Phillips, Williams, the DR, and everyone else who dares to call BS on government economic figures. It is heartening that this initial foray is so categorically, irretrievably lame.

— Here’s a cheery way to start your week: More than two-thirds of American Gen Xers — those aged 27-42 — don’t think they will ever be able to stop working. And don’t think they’ll ever see a dime from Social Security or Medicare.

“The Gen X group is the most anxious about their finances,” Chris Moloney of Scottrade told Reuters last week.

Of the 1,000 people they talked to who were 18 and older, nearly 40% percent said they had saved less than $25,000 for retirement. Conventional wisdom suggests if you want to live for 20 years on about $50,000 per year — whatever that will be worth at that the time — you’ll need to have $1 million stashed away.

“Gen X is in the middle of a ‘retirement perfect storm’ of very high expectations, low retirement savings and massive concern about the future of Social Security,” Moloney says.

Thirty seven percent said they would like to have between $1-5 million saved for retirement — even if their ability to save this money leaves such sums in the realm of wishful thinking.

Not that we want to reignite the debate among readers about which generation is “to blame” for the state of things, but we also note that 64% of baby boomers say they’re ready to retire — and aren’t worried.

Take that.

Worth the paper it’s printed on…

— Retail sales were up in March…but mostly because gasoline keeps costing more.

The Commerce Department says retail sales rose 0.2% in March, a tad more than the flat reading analysts were expecting. But throw gasoline out of the equation, and they were ruler flat, indeed.

If the figures took inflation into account, which they don’t, the outlook for retailers would be even more discouraging. Still, a 0.2% increase in March looks better than, say, the revised 0.4% decline in February…

— U.S. stock markets began the week moving sideways, taking a breather after GE’s earnings disappointment Friday and before Citi and Merrill reveal whatever they’re going to reveal later this week.

But Goldman Sachs isn’t waiting to make its call: Earnings season has had an “awful” start and stocks will head downward this spring.

“Early signs are awful,” says a Goldman report out today. “We expect generally disappointing results and a swath of lowered profit guidance that will drive the Standard & Poor’s 500 Index lower in coming weeks,” perhaps as low as 1,160, before a rebound by year’s end to around 1,380 — which would put the S&P down 6% for the year.

That’s a remarkably gloomy call for David Kostin, Goldman’s new chief forecaster — at least compared to his predecessor, the ever-optimistic Abby Joseph Cohen.

— Wachovia needs cash, and quickly. Ho-hum. The bank plans to float $7 billion in new shares and slash its dividend by 41%. It’s the second time Wachovia’s had to scramble for capital just this year.

Wachovia jumped into the adjustable-rate mortgage pool with both feet at the most frothy stage of the bubble in 2006 by purchasing Golden West — whose business was focused on one of the most airheaded states, California.

— But that’s just the beginning of the financials’ pain this week, as many of the top firms reveal first-quarter earnings… and probably more write-downs, too. Citigroup will likely write down $10 billion in debt this week…which would add up to a first-quarter loss of $3 billion. Merrill Lynch will likely write down another $5 billion, for a loss of $2.7 billion.

That’s still a drop in the bucket given that write-downs industrywide total $250 billion to date…and that everyone from George Soros to the International Monetary Fund is forecasting $1 trillion, give or take, by the time all is said and done.

— Citi’s announcement last week that it will unload about $12 billion in debt onto private equity at 90 cents on the dollar highlights another problem — one that’s “entirely separate from subprime mortgage lending,” writes Strategic Short Report’s Dan Amoss. “It’s another symptom of the credit bubble disease.”

The $12 billion is money Citi hoped to raise in the credit markets to finance leveraged buyouts. But when the credit markets seized up last summer, Citi had to take the deals onto its own books.

“Investment banks are stuck with an estimated $250 billion worth of this buyout debt on their balance sheets,” says Dan, “or in off-balance sheet entities for which they’ve made guarantees. Until they get rid of it, credit will remain fairly tight.

“Financial stock bulls point to this $12 billion sale as evidence that the leveraged loan sector of the credit markets is thawing. But I remain a financial stock bear, because this sale is only a tiny part of the market and only one of the many other credit-related problems plaguing investment banks.” For ways to play Dan’s skepticism, see the Strategic Short Report.

— Asian stock markets tanked overnight, fearing the worst from U.S. financials this week. Shanghai was down 5.6%, Hong Kong 3.5%, the Nikkei 3%.