Great Depression Online Archive Issue:

The Little Guy Gets Snookered

Great Depression Online
Long Beach, CA
April 02, 2010

Inside This Issue You Will Discover…

*** State Pensions and Hidden Debt
*** This Won’t End Well
*** The Little Guy Gets Snookered
*** And More

State Pensions and Hidden Debt 

Many states are going broke.  They borrowed too much money and overextended themselves during the boom years.  Now they can’t balance their books.

What’s more, people no longer die…they just keep on living.  Consequently, retired public workers are multiplying like mushrooms on a rainy cow pasture.  And public pension programs are falling short.

Here at the GDO, we don’t blame anyone for demanding what they’re rightly entitled to.  Deals were made, contracts were signed, and promises must be kept.  But the deals made during the fat years no longer pencil out during the lean years.

~~~~~~The Wave Principle~~~~~~

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Where The Rubber Hits The Road

~~~~~~~~~~~~~~~~~~~~~~~~~

States have always kept their pension obligations off the books.  Yet now that states are going broke, these unstated liabilities are being questioned.

“Pensions are debts, too, after all, paid over time just like bonds,” explained The New York Times on Tuesday.  “But states do not disclose how much they owe retirees when they disclose their bonded debt, and state officials steadfastly oppose valuing their pensions at market rates.”

Here’s an example of why…

This Won’t End Well

“California’s stated debt -- the value of all its bonds outstanding -- looks manageable, at just 8 percent of its total economy.  But California has big unstated debts, too.  If the fair value of the shortfall in California's big pension fund is counted, for instance, the state’s debt burden more than quadruples, to 37 percent of its economic output.”

But that’s nothing.  Rhode Island pension funds are on the hook for much, much more…

“If Rhode Island were a country, the fair value of its pension debt would push it outside the maximum permitted by the euro zone, which tries to limit government debt to 60 percent of gross domestic product.”

You know this won’t end well.  In the meantime, the federal governments doing everything they can to lighten the debt load…

The Little Guy Gets Snookered

“The next wave of inflation is on the way,” says a Fortune magazine headline.  For state government’s overloaded with debt, inflation can’t come soon enough.

“Inflation,” said Milton Friedman, “is always and everywhere a monetary phenomenon.”

What Friedman was pointing out is that inflation is not rising prices of goods and services.  Rather, inflation is the expansion of the money supply at a greater rate than an economy’s growth.  Rising prices of goods and services are merely a reflection of the excess money that’s been forced into the economy.

Of course, the expansion of the money supply starts with the Federal Reserve.  And the inflation it creates decreases the real value of debt.  The problem, though, is that the little guy gets snookered.

Here’s what we mean…

“In the United States, the government generally tracks inflation using the Consumer Price Index, or CPI,” says Fortune.

“Besides measuring inflation, CPI is also used to set income rates for more than 80 million people on entitlement programs. 48 million people on social security, 22 million food stamp recipients, and 4 million civil service retirees, have benefits tied to the CPI.

“When inflation increases, so do their benefits.”

But here’s the catch…

“Not surprisingly, then, the government tends to understate inflation and has changed the way the CPI is calculated nine times since 1996.”

Pretty sneaky.  Particularly, when the dollars and cents of it all will still show up in a pensioner’s paycheck.  Regrettably, the paycheck will run out long before the month’s end.

Sincerely,

M.N. Gordon
Great Depression Online

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