Fiatch

You probably thought that payments such as unemployment benefits were provided via some sort of trust fund, right?  After all, the government commands under the muzzle of a gun that you contribute to this program, and government officials are so bright, capable, and selfless, correct?

Think again.

Florida has borrowed $45 million to pay the unemployed and officials estimate that it will borrow $1.2 billion by the end of the year for such payments.

Florida is the 19th state to borrow money to keep unemployment benefits flowing after the trust fund ran dry.

There is no trust.  There is no fund.  It’s just more theft present (taxes) and theft future (debt and/or inflation).

It’s often hard for the victim to admit to being conned.  Think again.

HT Robert Wenzel

[photo source]

Reuters reports:

U.S. Treasury Secretary Timothy Geithner formally requested that Congress raise the $12.1 trillion statutory debt limit on Friday, saying that it could be breached as early as mid-October.

“It is critically important that Congress act before the limit is reached so that citizens and investors here and around the world can remain confident that the United States will always meet its obligations,” Geithner said in a letter to Senate Majority Leader Harry Reid that was obtained by Reuters.

Robert Murphy posted a decent question in response:

When somebody owes you money, do you feel reassured when they say, “It’s fine, I’ll pay you back. I just got a new credit card?”

What builds trust?  What destroys it?  What store of value is safe?

Why do we still pretend?

HT Robert Wenzel

Robert Murphy linked to this nugget:

Small businesses that received $682 million in IOUs from the state say California expects them to pay taxes on the worthless scraps of paper, but refuses to accept its own IOUs to pay debts or taxes. The vendors’ federal class action claims the state is trying to balance its budget on their backs.

Lead plaintiff Nancy Baird filled her contract with California to provide embroidered polo shirts to a youth camp run by the National Guard, but never was paid the $27,000 she was owed. She says California “paid” her with an IOU that two banks refused to accept - yet she had to pay California sales tax on the so-called “sale” of the uniforms.

California, well past flat broke, squeezes its productive citizens even more.  As the walls come tumbling down, why do we still pretend?

When the walls come tumbling…

Cities and counties are tumbling to states for funds.  States are tumbling to the federal government.  Seemingly without reservation, The Feds are running the presses as fast as they can.

For now, “It’s good to be the [reserve currency].”

See Mish’s”Pension Crisis Hits Critical Mass in West Virginia.”

Via The Oil Drum:

The value of fiat currencies erodes over time, while remaining high quality energy increases in strategic value, even if not recognized in monetary terms.  We have a monumental problem - a system whose claims on the future are higher than its real assets.

[image source]

“Dollar Caught in Catch-22: Default or Debase?” via Minyanville

This whole “We will cut the deficit in half” talk is another affront.  Most of the press and economic commentators are soft, weak, stupid.

What is half of unconscionable?

Keynes is dead, but his ideas keep doing immense damage.

(Hat tip to DR and FA.)

The National Debt Clock is shown near Times Square in New York, Wednesday, Oct. 8, 2008. The clock has run out of digits to record the growing figure. As a temporary fix, the dollar sign has been switched to a figure—the ‘1’ in $10 trillion. The clock is marking the current national debt at about $10.2 trillion.

(AP Photo/Kathy Willens)

States are reeling from an over-reliance on both excessive leverage and also the excessively leveraged:

The crisis in the financial system will almost surely blow gaping holes in the already tattered budgets of New York, Connecticut, New Jersey and other states that rely heavily on tax revenue from investment banks and the big salaries and million-dollar bonuses doled out to Wall Street professionals.

Even before the crisis, many state governments had been forced to cut spending because of the shaky economy, soaring gasoline prices and the rising tide of foreclosures earlier in the year. How much damage the latest trouble will cause is not yet clear.

New York and other states could be forced to make even deeper spending cuts and take money from such things as schools, road repairs and health and welfare programs.

In New York, New Jersey, Connecticut and Massachusetts alone, the securities sector last year employed 338,000 people and generated $104 billion in payroll, according to the U.S. Bureau of Labor Statistics.

About a fifth of New York state’s revenue comes from Wall Street.

In a forecast that came out even before the turmoil of the past few weeks, New York state projected a deficit for 2009-10 of $5 billion and growing. On Sept. 16, the day after the Dow Jones average fell more than 500 points, the steepest plunge since the 2001 terrorist attacks, state officials estimated New York could lose up to 40,000 private-sector jobs and $3 billion in tax revenue over the next two years.

New Jersey faces the fallout on two fronts: as the location of many Wall Street spinoff firms, and as home to thousands of financial sector employees. An estimated $8.4 billion a year in payroll in New Jersey is derived from Wall Street.

Ouch.

via the AP’s “Financial Crisis blows holes in state budgets.“  The photo is not directly related to this item.

I have not yet included Marc Faber here at fiatch.com.  I now correct that issue.  Mr. Faber ranks right up there with Jim Rogers.  Pay attention.  :)

Please note how Mr. Faber fights upstream to the source.  It is vital that the citizens of this country understand the cause of this problem.  Otherwise, we will continue to let each political party play us off the other while these fundamental flaws are not corrected.

As Mr. Faber explains our predicament, note that he does not settle for a discussion of accounting rules, and he also deflects the false-front junk about short sellers.  Rather, he strikes right for the heart of the issue.

Well, basically, a financial crisis is a correction mechanism of excesses that occurred before the crisis.  And the more excesses you had before the crisis, the heavier the crisis is, the more severe the crisis is.

And I think the best is to let the crisis burn itself out and clean the system.  Even if it means some pain for some people, and the pain for Wall Street obviously would be very heavy.

But we have to see very clearly that the cause of the problem is excessive leverage.

And we talked before about hedge funds.  The biggest hedge funds were Fannie Mae and Freddie Mac.  They had a leverage of 1 to over 150 and under the eyes of Congress; under the eyes of the SEC; under everybody.  And nobody did anything about it.  Then people go and bitch about the short sellers.

And the second point is the Wall Street firms they all had leverage of 1 to 25 or 30.

I mean, if I have a house, and the house drops by 30% in value, and it’s fully paid, it doesn’t affect my lifestyle.

But if I borrowed 100% or 120% as they did in America, if it drops 5% you have a problem already.  You have negative equity.  And now, as it happens, about 15% of US households have negative equity.

Mr. Faber is on a major roll, and he is still only getting started.

Another CNBC guest adds, “I completely agree.  It all comes back to leverage.  I mean…”  Before she can continue her point, Mr. Faber continues:

But who supplied the leverage into the system?  It’s called The Federal Reserve Board.

The CNBC guest offers, “At one stage, but also investment banks facilitated leverage. It’s ironic that some of the investment banks that are on the list of stocks you can’t short are the very banks that fed the hedge funds that are now victims of the short-selling ban.”  Mr. Faber continues:

I agree with you.  If I am the drug dealer, I am not responsible that everybody takes drugs, but I facilitate it, especially if I give it out free of charge so I can enlarge market share.  That’s what the Fed has done.

He nailed it, folks.

Nailed.

It.

Everything else — and there is a mind-blowing ton of “everything else” — all of this stuff — it’s all tributary to excessive leverage injected by the Fed.

Now, ask yourself, what makes this excessive leverage possible?

The US is about to end this fiscal year with a $407 billion budget deficit that is more than double what it was in 2007 – and the red ink is projected to flow on.

Even before the full cost of the government takeover of Fannie Mae and Freddie Mac is calculated, the Congressional Budget Office (CBO) projects that the nation will add more than $2.3 trillion to the national debt over the next 10 years.

…What’s driving deficits is “an unusual amount of turbulence” in the US economy this year, including depressed housing markets, fragile financial markets, and soaring prices for energy and food, along with the cost of war, according to the CBO. But the biggest long-term threat is rising health care costs and the retirement of the “baby boom” generation.

“As we have said over and over in the past, the nation is on an unsustainable long-term fiscal course driven primarily by rising health care costs,” said CBO director Peter Orszag at a briefing on Tuesday. “And that does need to be addressed before a crisis hits.”

…Although Washington’s capacity to ignore fiscal warnings is well established, budget analysts say that the news is now sufficiently alarming, especially the fallout from the housing crisis, that it could set off a national wake-up call.

“Next President Faces Swelling US Debt” via the CSM