Reuters Money
Margaret Atwood on debt and consequences
What might be most surprising about the myriad economic problems around the globe right now is how many major world economies seem to have been taken by surprise by the concept of debt. Maybe they should have been reading more Margaret Atwood.
Atwood isn’t only one of the world’s premier novelists, she’s also the author of the nonfiction “Payback: Debt and the Shadow Side of Wealth,” which hit the presses just as the financial crisis arrived in the fall of 2008 (timing that one review described as “freakishly prescient”).
Atwood is currently releasing her new essay collection about science fiction, “In Other Worlds,” and sat down with Reuters Money for coffee in Manhattan. We chatted about how debt has been dominating the headlines – and, perhaps, reshaping our sense of self.
Reuters Money: How did the issue of money and debt come to interest you?
Margaret Atwood: I came to this subject through studying literature. Money is everywhere. Charles Dickens, for instance, is completely obsessed with debt. His father went bankrupt, and was thrown into debtor’s prison. As a child, Dickens had to go off and work in the factory, and he never forgot it.
You’ve said that the current debt crisis was entirely predictable. How so?
MA: I’m always sorry when I’m right. It really is true that you can go back through history and trace the influence of money on crises. If you look at conditions right before the French Revolution, you’ll see that they were having a lot of money problems. They kept firing finance ministers and coming up with one new scheme after another, but those at the top wanted to keep everything for themselves. Conditions were top-heavy, with a lot of debt, the price of food going up, and many out of work — which all sounds very familiar right now.
Medicare will cut Social Security’s “raise” in 2012
After two years without an inflation adjustment, the Social Security Administration is expected to announce a 2012 cost-of-living adjustment (COLA) of more than 3 percent next week. That would be a sizable raise in this economy, and very welcome news to seniors hit hard by rising costs, slumping home equity and very low returns on fixed-income investments.
But the good COLA news will come with a nasty kicker. Many seniors will see a substantial part of the COLA consumed by a higher premium for Medicare Part B (doctor visits and outpatient services), which usually is deducted from Social Security payments. The situation sheds light on the complex interaction of Social Security COLAs and Medicare premiums — and it underscores the critical importance of the Super Committee deficit deliberations on possible cuts to future COLAs.
The annual Social Security COLA is determined by a formula that averages inflation for the third quarter, as reflected by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). No COLA was awarded in 2010 or 2011 due to a quirky spike in the third quarter of 2008, which resulted in a whopping 5.8 percent COLA for 2009. By law subsequent Social Security payments couldn’t rise until the CPI-W exceeded the 2008 level.
This year, the third quarter CPI-W has been running high as a result of higher energy costs. September inflation numbers will be released on October 19th, and most analysts forecast a resulting 2012 COLA greater than 3 percent. Indeed, some expect a number close to 3.5 percent or more.
That’s the good news. Unfortunately, most seniors would see that COLA reduced substantially, due to the way that Social Security benefits and Medicare Part B premiums interact.
The Part B premium usually rises at a rate greater than general inflation — a reflection of medical inflation. However, by law, the premiums cannot rise in any given year by a greater amount than the Social Security COLA – a “hold harmless” provision aimed at preventing Social Security payments from ever falling.
About 75 percent of beneficiaries were exempted in this way from Part B premium increases in 2010 and 2011. Rate hikes were paid only by two groups of seniors: low-income beneficiaries whose premiums are paid by Medicaid (so-called “dual eligibles”) and high-income seniors who pay income-related surcharges.
I forgot to mention. My disability check is now less than it was in 2009. I am not on Medicare. I have fought through my horror with as little tax payer assistance that I could get by on. I gave my children to their father so as to keep off of welfare and give them a better chance and a better life. I moved in with my ailing mother to help her. I sold everything I had to keep my mother from stressing out. I am not perfect. My bad decisions and mistakes caused my trauma. However, because of my journey I am that much better trained and equipped with the tools to help other people avoid my path and even more so to identify the people that I can hope to be able to encourage and offer emotional support to help them find their way back. If anyone feels a connection to my posts, please contact me. As Madonna sang, “I Have A Tale to Tell”. A tale worth being heard.
The rich respond to Obama’s “Buffett Rule”
Once the debt ceiling rancor faded, financial gurus and observers had little reason to think debate on taxing the wealthy would ignite again before Nov. 23. That’s when the 12-member congressional super committee issues its recommendations on finding at least $1.2 trillion in deficit reduction.
Then came President Obama’s announcement on Monday of the “Buffett Rule,” a plan to raise taxes on American households making more than $1 million annually. Suddenly, the millionaires who support such a plan — like Warren Buffett himself — had cause for hope after many months of anti-tax furor and tax hike inaction.
“It’s an excellent policy proposal,” says Wealth for the Common Good co-founder Chuck Collins. “The defenders of wealth and power are going to crazy over this proposal, but our job is to help balance the story. We’re already putting out calls; our members will call their legislators; they’ll organize their peers; they’ll write letters to editors.”
Yet it was also as though the Buffett Rule came with an unspoken corollary: Where proposals to tax the rich come, rhetoric and strong words on both sides of the issue will surely follow.
“The President’s speech today drew a clear line in the sand between patriotic Americans and people who just use the United States as a place to park their planes on the way to St. Bart’s,” says Agenda Project founder Erica Payne, who has worked closely with Wealth for the Common Good. “This issue is not complicated. It is not nuanced. If you care about your country, you pay taxes. If your country is in trouble, you pay more taxes.”
Under the President’s proposal — spelled out in a 67-page report issued by the Office of Management and Budget — the Buffett Rule (named for billionaire Warren Buffett) would mean that “No household making over $1 million annually should pay a smaller share of its income in taxes than middle-class families pay. As Warren Buffett has pointed out, his effective tax rate is lower than his secretary’s. No household making over $1 million annually should pay a smaller share of its income in taxes than middle-class families pay. This rule will be achieved as part of an overall reform that increases the progressivity of the tax code.”
Indeed, the 2,500 folks of high net worth who make up Patriotic Millionaires for Fiscal Strength would definitely agree — though not all of them find the President’s latest proposal exciting, let alone revolutionary, even though it’s sure to meet stiff opposition from anti-tax Republican lawmakers.
It’s time for the “Net Worth Tax”. Income and payroll taxes attack the production of wealth, stifling growth and restricting the accumulation of wealth (“the rich get richer”), while the wealthy, such as Mr. Buffet, accumulate more.
Why not tax all wealth, instead of wealth production? It seems a very simple task to require each citizen to report an annual Net Worth statement to the IRS, detailing assets & liabilities (real-estate, stocks, bonds, mutual funds, collectibles, savings, etc. . . . including offshore bank accounts) and a simple flat tax be paid monthly to the IRS, eliminating the withholding of income, social security, and medicare payroll taxes.
This Net Worth Tax, would answer both political sides by truly “taxing the rich,” and unfettering societies’ wealth producers, creating growth like never seen before. Nay sayers will say it would be impossible to enforce accurate reporting. However, I don’t see where enforcement would be more difficult than current complicated system of reporting income and deductions. Failure to report accurately would result with similar punishments
Fury brewing at ratings agencies as markets gyrate
Ratings agencies helped spark the financial meltdown of 2008-9, when they deemed that steaming piles of mortgage junk were brimming with triple-A goodness. They were wrong – and epically so.
Now S&P downgrades the debt of the entire country, further threatens to do so another notch, teams with fellow ratings agencies to bring Europe to its knees with each new appraisal and gets an assist for wiping trillions in wealth from investors’ portfolios in just a few days.
Anyone else think the ratings agencies need a time out?
“If you had asked me a couple of years ago if they could do anything more destructive than the mortgage debacle, I would have said never,” says Roger Kirby, Of Counsel for New York City law firm Kirby McInerney, who is involved in a class action against Moody’s on behalf of shareholders. “But it seems they’re managing to do it again, right now. In order to restore their damaged reputations, they’re interjecting themselves unsolicited into sovereign markets.
“It’s not productive, it’s probably inaccurate, and they’re just going out there on their own with no real purpose to what they’re doing. When future historians are writing about this period, they will probably single out ratings agencies as the single most destructive collection of entities.”
It’s not just an academic exercise. The musings of the ratings agencies are having very real effects on people’s portfolio. In the first day following S&P’s downgrade of U.S. debt from triple-A, another trillion was erased. As a result, some individual investors are starting to do a slow burn about how ratings agencies are stoking financial chaos.
So S & P dropped the U.S. rating below AAA. I wonder if they ever took the time to go back and change the rating on Enron and all the others they missed on?
Now they’re talking about a downgrade for Fannie and Freddie who EVERYONE knows is underwater. These guys have “0″ credibility.
Debt deal puts off tax decisions for another day
The legislation to lift the debt ceiling gives the country a framework for more than $2 trillion in budget cuts over 10 years and avoids default. But it also puts off discussion of taxes for another day — and it’s unlikely that we’ll see any movement on tax reform or significant tax changes until 2012.
“If I were at a roulette table in Vegas, I would put almost all my chips on a square marked ‘Lame Duck,’” says Clint Stretch, managing principal of tax policy in Deloitte Tax’s national office in Washington, D.C. “I see nothing that Congress will regard as a ‘must do’ in the tax area before a lame-duck session in 2012.”
In the second stage of the deficit reduction, a new Congressional super-committee will have a mandate to come up with some $1.5 trillion of savings by late-November. But while taxes could be part of that discussion, there are many obstacles: The two sides are very far apart, the timetable for the super-committee to do its work is very short (especially in tax terms), and the Republican victory on getting taxes off the table in the current deal makes it likely they’ll stay off a few months hence.
The tax reform efforts of 1986, 1993 and 2001 were all debated during their respective Presidential elections, and that’s likely to be the case today, too. While there have begun to be tax-reform proposals bandied about — from the Gang of Six, among others — these remain preliminary. “We have not begun a serious conversation about tax reform,” Stretch says. “It’s going to be the discussion of the next election. The President will eventually have a tax proposal, and the Republicans will have their competing proposal. Then we’ll have a bloody fight over it.”
At stake are key issues surrounding who should pay for the government to do its work, and at what level — issues of fairness and of complexity. What are the right tax rates, and should they be higher or lower than today? Should the wealthy pay higher rates? Should investment income be taxed like wages or at a lower level? Should homeowners continue to benefit from the mortgage interest deduction? Should taxpayers still be allowed to write off state and local taxes? And what about the Alternative Minimum Tax, the complicated alternate tax system? And those are just some of the questions for individual taxpayers.
In the meantime, of course, the Bush tax cuts are slated to expire at the end of next year, when the two-year extension they received last year runs out. Republicans favor continuing those cuts, while the Obama Administration had hoped to eliminate them for high-income taxpayers. Deloitte’s Stretch argues that as tax reform gets pushed off, the Bush tax cuts are likely to get another one-year extension and come up for discussion as part of broader tax-reform.
Also set to expire at the end of 2012 — though barely discussed during the recent deficit discussions — are the changes to the federal estate tax, which increased the exemption amount to $5 million and lowered the tax rate due.
The case for financial repression: Mild inflation, low interest rates
Rick Ashburn is a chartered financial analyst and the founding Principal Chief Investment Officer of Creekside Partners, based in Lafayette, California. The opinions expressed here are his own.
As the two – or is it three? – political parties in Washington lurch toward a budget agreement, what are the longer-term implications of the situation we find ourselves in? We have a lot of public debt combined with the rather serious economic headwinds that rapid deficit reduction always entail. And at the same time that we need to reduce our debt load relative to GDP, our real GDP growth is likely to be sub-par.
There has been a lot of commentary in recent months about the possibility of reducing the nation’s debt by means of inflation. Simply put, a dollar of today’s debt can be repaid with a dollar sometime off in the future. If in the future there are twice as many dollars floating around relative to the size of the economy, the repayment of the old debt is only half as burdensome. Debt that seemed high in 2011 is only half as high after some decades of even modest inflation.
If inflation averaged merely 3.5 percent per year for 20 years, debt incurred today can be repaid at an effective 50 cents on the dollar. The compounding of that 3.5 percent inflation over 20 years results in a doubling of the price index — and a halving of debt still denominated in “old” dollars.
Modest inflation of the genuine kind, where wages rise along with prices, has certain advantages to economic growth. Primarily, it encourages capital investment and risk-taking since companies have some confidence that prices for their products will go up over time, allowing them to recoup their investment. Banks like modest inflation since it means their loan collateral will not decline in value. Consumers tend to spend money more readily, helping stores turn over inventory and keep workers on staff.
For all the benefits of mild inflation, who does not benefit? Conservative savers and holders of long-term bonds, that’s who. A bond yield of 3.5 percent results in a zero rate of return after inflation. Savers with money tucked away in low-yielding deposit accounts fall inexorably behind.
Should inflation begin to accelerate, the bond market will drive up interest rates until bond yields are comfortably higher than inflation. Should this happen in the normal course of events, the cost of servicing the public debt will increase just as fast as inflation would normally drive it down. There is no net gain in debt reduction. What we really need in order to “inflate away” our debt is combination of high inflation and low interest rates.
An interesting piece Mr. Ashburn, and well-written. However, it is one of limited purpose (investment), and assumes stasis of a number of factors that seem destined to derail the trajectories you project.
I would be curious to hear your position on the interplay of just one of those factors: peak oil. It is widely acknowledged that in 2005, world oil production peaked. (U.S. oil production peaked in 1979.) Demand, however, has not peaked. In fact, all other things being the same, demand would be expected to grow substantially as the economies of the BRIC move forward and their infrastructure improves. Of course, all things will not be the same, and if we refuse to assume, without any basis other than optimism, that a replacement energy source will be developed, then we can expect demand to be conflated by increasingly oppressive prices.
Thus, declining production of fossil fuels alone, and particularly oil, will continue to drive inflation irrespective of the CBs’ money-printing policies. Energy depletion cuts across all sectors of the economy, and most sharply against those commodities that people (“consumers”) need the most: food, shelter and transportation. At some point, even communications can be expected to be impacted.
For these reasons, I believe your opinions are attractive, but only as a snapshot of where we are today. I frankly doubt they hold much predictive value over the long term. I’d be interested in how you would respond to that.
Debt ceiling: 10 reasons not to move your money now
Reuters Money reached out to members of the financial community to see how they’re calming the folks they advise. An overwhelming majority expressed faith that lawmakers would broker a deal by the deadline, and markets would adjust regardless.
Here are 10 reasons they give not to juggle your investments right now.
1. A short-term crisis demands long-term thinking.
While it’s true a debt ceiling crash might resemble the sky falling, no one knows if that’s going to happen. Markets reward investors who stick to sensible strategies over time. “Rather than obsessing about the debt debate, we are telling clients to get engaged in a long-term conversation about risk management,” said Michael Gault, senior portfolio strategist at Weiser Capital Management. Gault, who manages $200 million, stressed that the last few months on Wall Street have been good ones. “The concept of ‘risk’ has taken a back seat as the markets’ recovery has been in a relatively smooth upward trajectory. We think there’s tremendous value in rebalancing here.”
2. Smart investors adjust to market fluctuations, not political grandstanding.
“We’re telling clients that what is happening in D.C. is primarily political positioning,” said Mackey McNeill, CPA, PFS, and the principal of Mackey Advisors in Covington, Kentucky. McNeill manages $45 million, “mostly with Boomers,” and noted, “We continue to hold asset allocations based in the client’s plan. As asset classes respond to the market, we will take advantage and rebalance. We believe and have seen that trying to time the market in any environment puts clients money at undue risk.” The reckless ones, he thinks, are those gambling with political capital: “We also have encouraged via social media that this is a call for election reform.”
3. Cash reserves make for a strong defense.
A short term crisis does indeed require long term thinking, but I’m not at all convinced this is a short term crisis.
3 more gloomy bargains: How much the debt deal will cost you
No matter what plan Washington concocts to reduce the deficit, it’s going to cost you something. “Shared sacrifice” is in vogue, but your pain will be bigger if you’re unfortunate enough to earn wages or need social benefits.
Most conservative deficit-reduction plans shred the social safety net and cherished personal write-offs in unprecedented ways. The core elements of each proposal will pare middle-class tax breaks, Medicare and Social Security.
As Yogi Berra once said, “it’s déjà vu all over again.” The $3.7 trillion Senate “Gang of Six” plan and related iterations bear a striking resemblance to a “Moment of Truth” deficit commission report issued, and mostly ignored, late last year and pieces of a Heritage Foundation plan ironically entitled “Saving the American Dream.”
No plan will preserve or protect the American Dream as we’ve come to know it. And the powers that be don’t seem to be rattled by the potential chaos if an agreement on raising the federal debt ceiling by Aug. 2 doesn’t happen. Markets may collapse, benefits will be delayed and salaries won’t get paid if the U.S. can’t issue more debt, but the Beltway bickering goes on.
Instead, we have this power play in the form of Byzantine musical chairs. One sure loser is already ordained, though: Middle America. Let’s look at where the deficit commission, Senate and Heritage plans intersect:
“Broaden the tax base” This is one of the most Orwellian prevarications since the coining of the “death tax.” (Have you ever met a dead person who paid a tax?) When conservative policymakers say this, they don’t mean raising taxes, they mean lowering tax rates and eliminating “tax expenditures,” like deductions for individuals.
The Senate “Gang” plan proposes three tax brackets ranging from eight to 29 percent. Currently the highest personal tax rate is 35 percent. The Senate plan would also cut the hated $1.7 trillion alternative minimum tax. At first blush, both moves will reduce revenue flowing into the Treasury and balloon the deficit. How would the Senate make up the shortfall, considering that it also cuts corporate tax rates from 35 percent to as low as 23 percent? They say: “Reform, not eliminate, tax expenditures for health, charitable giving and homeownership.” Bottom line: Your after-tax cost for healthcare and mortgages may be higher. Although limiting the mortgage interest deduction to one home and capping it isn’t a bad idea, this is not a “broadening” of the tax base. Middle class workers will pay more — unless the cost of healthcare and homeownership mysteriously drop.
Simple sales tax (vs. income tax) can let money leave the country untaxed rather easily.
5 ways a big deficit deal will whack your retirement
If Washington strikes a big deal on deficit reduction to avoid debt default, it’s going to be bad news all around for older Americans.
The debt crisis negotiations may yield no more than a short-term Band-aid and sidestep long-term changes in spending policy. But it’s clear that the Obama Administration and some lawmakers are reaching for a big deal patterned on ideas developed by politicians positioning themselves as bipartisan budget peacemakers.
So, while average Americans worry about the ongoing jobs crisis and vanishing retirement security, lawmakers and the President make plans for deficit reduction that will whack vulnerable older Americans.
Many of the spending cut ideas come from the final non-report of the President’s own deficit commission. (I call this a non-report because co-chairmen Alan Simpson and Erskine Bowles couldn’t muster the votes needed from commission members under their own rules to report out a final document, yet Washington accepts what the co-chairs issued as an official document). Other key ideas are embodied in the bipartisan plan du jour presented by the on-again, off-again Gang of Six.
Watch out for these possible blows to retirement security as the debt default deadline approaches:
A higher Social Security retirement age. Simpson and Bowles call for raising Social Security’s full and early retirement ages. Their changes would effectively reset the full retirement age to 68 by 2050 and 69 by 2075; the early retirement age would rise to 63 and 64 in those same years. That comes on the heels of the increases already made in the 1983 reforms, which moved full retirement age to 67 in 2022.
Simpson-Bowles and others have argued that higher retirement ages are justified by the population’s rising longevity, but it’s really just a back-door benefit cut for everyone, no matter when you file for benefits. That’s because your monthly benefit is determined by the normal retirement age (NRA) at the time you file; if you file before your NRA you’ll be penalized, and if you file later you get an eight percent bump in monthly payments.
If they raise the retirement age, they must also have age discrimination legislation with teeth like a saber tooth tiger.
They must put he burden of proof on the employer, not the employee.
5 questions about Social Security and the debt ceiling
Social Security is a pawn in the negotiations to avoid a federal debt default, and that has stirred fear and confusion among current and future beneficiaries. President Obama has threatened not to make August benefit payments in the event of a default, and signaled that he is open to cutting Social Security if it helps him secure a big deficit-reduction deal with Republicans.
Let’s look at where Social Security stands on the D.C. chessboard:
Should I be worried that I won’t receive my Social Security benefit in August?
President Obama stated recently that he “cannot guarantee that those checks go out on Aug. 3 if we haven’t resolved this issue. Because there may simply not be the money in the coffers to do it.”
On its own, Social Security’s coffers are full enough to make the August payments. Social Security is cash flow positive – it generates more from current revenue than it spends on benefits and its own administrative costs. The main source of revenue is the payroll tax paid by employers and employees (the Federal Insurance Contributions Act, or FICA); other income sources include interest payments on bonds in the Social Security Trust Fund (SSTF) and taxes paid by higher-income beneficiaries.
Last year, revenue totaled $781 billion, while outgo was $713 billion. And even if funds aren’t on hand in a given week to pay benefits for timing reasons, the SSTF can redeem bonds to make up the shortfall.
Here’s the rub: the bonds are obligations of the U.S. Treasury back to the SSTF. A government debt default would put us in uncharted waters, and it’s entirely possible that the Administration could refuse to redeem bonds or divert payroll tax receipts to meet other pressing obligations.
( to JFTortorella ) on the one hand I would say, don’t shoot the messenger………but on the other hand, I would say, the reporting comes from the ’4th estate’……..they are not on your side.
Who is John Galt?
“So you think that money is the root of all evil?” said Francisco d’Anconia. “Have you ever asked what is the root of money? Money is a tool of exchange, which can’t exist unless there are goods produced and men able to produce them. Money is the material shape of the principle that men who wish to deal with one another must deal by trade and give value for value. Money is not the tool of the moochers, who claim your product by tears, or of the looters, who take it from you by force. Money is made possible only by the men who produce. Is this what you consider evil?…”