Liberty Newswire 6/29/11

[The Liberty Insight Newswire is an aggregation of what we consider to be important financial and political news and commentary from across the web.]

The articles in this weeks newswire show that “it’s worse than we think.” Whether it’s the fiscal future of the country, the deficit projections, stagnant incomes, the dollar’s status as the reserve currency, or the balance sheets of the international banking system, things may not be as good as we’re led to believe.


Stop the Fiscal War Against Our Children Now: Laurence Kotlikoff
Bloomberg, June 28, 2011

Economist Laurence Kotlikoff argues that it is the nation’s fiscal gap, the difference between the present value of our future obligations and future tax revenues, is what matters most when evaluating our country’s fiscal health. From the article:

How big is the fiscal gap? By my own calculations using the CBO data, it now stands at $211 trillion — a huge sum equaling 14 times the country’s economic output.


The Deficit Is Worse Than We Think
The Wall Street Journal, June 28, 2011

The Republicans are demanding that any raise to the debt ceiling must be accompanied by spending cuts that are at least as big- an estimated $2 trillion over ten years. It seems like a lot, but as Lawrence Lindsey points out, that $2 trillion is savings could be quickly swallowed up by any of three likely events. First, if interest rates were to slowly climb to normal historical levels, the additional cost to borrowing would be $4.9 trillion over ten years. Second, if economic growth resembles reality instead of the rosy projections of the administration that’s another $4 trillion in the hole. Third, it’s becoming increasingly clear that the long run costs of Obamacare will be much greater than projected. (And all of that is assuming the economy doesn’t double dip.)


Spectre of stagnating incomes stalks globe
Financial Times, June 27, 2011

Real wages for average workers have been declining since the mid 1970s and it appears that trend will continue. Part of this is due to the divergence in salaries of the top earners and the average workers. As the article points out:

While there are competing theories about what is causing the trends in inequality and labour demand, a few trends emerge. At the top of the income distribution, the revolution in communications has allowed many star performers to expand sales and revenues from a local to a global audience. Others, particularly in the financial sector, found ways to make fortunes by gambling with other people’s money.

This last sentence is the most pernicious reason, and is greatly exacerbated by our Federal Reserve banking system and government induced moral hazard.


Dollar seen losing global reserve status.
Financial Times, June 27, 2011

A survey of 80 central bank reserve managers and sovereign wealth fund managers by UBS shows that over half of the managers believe the U.S. dollar will be replaced by a basket of currencies as world monetary reserves within 25 years. (A survey of me says these reserve managers are being polite.) A demotion from reserve status would greatly erode the purchasing power of the dollar. Incidentally, these managers also predict that gold will be “the best performing asset class over the next year”.


Global Banking is What’s Really in Crisis
Wall Street Journal, June 27, 2011

Greece is screwed. That much is clear. But it’s a tiny country that represents 2% of the Eurozone GDP. So why are EU officials so intent on pushing new bailouts and austerity on the Greek people? It’s because the real threat of a Greek default is to the fragile, interconnected banking system.

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