Federal Debt and the Bank of Timmy

There has been much breathless discussion lately surrounding the national debt ceiling as total government debt approaches the legal limit. Treasury Secretary Timothy Geithner said there was "no alternative" and threatened Congress with unspecified "catastrophic" consequences if the limit was not increased. Of course, he is merely following in the tradition of terroristic threats by corrupt Treasury officials.

But just as the implied threats of martial law were used by Henry Paulson as cover for one of the biggest thefts in history, we must now ask what lurks behind the current spate of threats out of Treasury? Paulson lied about what the TARP was to be used for - which is why he demanded immunity in advance. Geithner is lying about the need for an immediate increase in the debt limit. What is being hidden is many activities that aid speculators and bureaucrats that will have to end if the limit stays in place.

In the real world there is a problem that a lot of money is being spent that has nothing to do with the operations of the federal government. This can be seen clearly in the recent announcement that the Treasury will be selling off some of its $142 billion of MBS (mortgage backed securities). There really is no legitimate function of government that relates to manipulating the price of bonds. It's good that they are looking to get rid of them but there is no reason to have them in the first place other than to overpay to help sellers and also to make continuing holders look more solvent by deliberately distorting the "market" price.

Then there are the loans which Treasury has extended to the states to cover their own spending. The state unemployment funds are in hock to Washington for $46.3 billion as of March 23. This is problematic in that it undermines the constitutional requirements that many states must balance their budget every year. It also undermines the ability of the states to function as sovereign entities when they are financially so beholden to the central government. Thus it is a direct attack on the our Federal system of government.

Secretary Tim Geithner is not running a Treasury Department. He is in fact running a bank under the aegis of the federal government and Congress needs to keep that in mind as he goes begging them for more money. Treasury should not be in the business of lending money to the states or of buying private market debt. Those are functions for commercial banks and bond markets. Worse still, those banking functions have been performed using the credit of the American People. If Geithner was not playing these games, the Treasury would have another $190 billion in borrowing authority remaining.

Any increase in the debt limit should be conditional on the Treasury ceasing all interference in state finances and public financial markets.

(F)Rebasing

Obviously there is a pretty bad discrepancy between those numbers in this morning's edition of blowing sunshine up your skirt from the Ministry of Truth.

current employment report

Given the size of the country, it SHOULD take 600k jobs to move the rate that much so obviously there's a problem here. How did this happen? Dig a bit deeper and you'll see that they simply defined 504k out of the labor force from December to January and rounding did the rest. Wave a wand and define those people out of existence. If they don't exist, they can't be unemployed now can they?

If you look at the chart, you'll see that they did the same thing in December from November. In that case only 260k unemployed people disappeared from the statistics. There is a clear and systemic effort to deceive the public about the state of the economy and it's getting worse.

latest household data

But there's is an even bigger deception in the numbers that helps to reveal the systemic fraud of the numbers. Last month the B(L)S claimed that their establishment survey measured 130,712k employed:

December 2010 employment report

But THIS month they show 130,265k employed and claim that it is an increase of 36k, rather than the massive drop of 447k that it actually is. They did this by altering history. Now, the record shows that 130,229k were working in December and the rest of those people have disappeared down the memory hole. It wouldn't be a concern if the revisions were random but the pattern is very consistent - almost perfectly so. Report good news now and back away later. This is the same game played with corporate earnings to deceive investors. Loudly trumpet "good" current results. Then quietly go back later and revise them down. Then use the revised numbers to show "growth" with the next fraudulent set of numbers.

The B(L)S calls this rebasing. Corporations call it a "one time charge" but it's the same scam. The objective in both cases is to mislead the public. It's nothing more than fraud with the goal of getting the public to buy the hopium of the confidence game. That's why I think that freebasing is a more appropriate name.

Pension Seizure Precedents

One of the problems with out of control government spending is the way it affects the behavior of government itself. Like any other junkie, the government convinces itself it needs "just one more" fix and will do anything to get it. Again like a junkie, the government will prostitute itself and steal from friends and family to keep the drug supply coming.

We see a glaring example of the later when governments simply grab private property in order to pay off their own debts. We have already seen the precedent for pensions being seized by government. Just last week in Hungary the government grabbed $14 billion in private assets. Over the weekend, the Irish government decided to take 15 billion Euros from the future pensions of its citizens to give to the banks. Now France is taking 36 billion Euros from the pension fund to keep its bloated and unsustainable welfare state afloat for just a little while longer.

People need to understand that the United States is not immune to the same financial pressures that caused Hungary, Ireland and France to take these desperate measures. If you are counting on a future pension from the state, you might wish to start making alternate plans. In most states, there is effectively zero chance that you will get everything promised - the state government pension funds are already over $1 trillion in the hole. The gap will only grow as additional obligations are incurred but little new money is available to meet them from the state budget side. It would be completely unsurprising if the more desperate and foolish states attempted to raid these pension funds to "invest" in more unemployment payouts or other attempts to fund general budget spending.

Of course we won't have that problem with Social Security since it is funded entirely by current taxes. Since no such pension fund exists, we don't have to worry about the government grabbing it. Of course that raises the question of which assets the will try to take since the same financial imperatives and the same junkie behavior are at work in Washington as in Budapest, Dublin and Paris. That said, we need to be vigilant for any sign that similar asset seizures are imminent here in the United States since the precedent has already been set. We have been warned by events across the pond.

Fraud and Failure

Recent news on the housing front confirms what we have been saying about that market since the inception of Financial Jenga. In sum, there is no real stabilization much less recovery, the costs of attempting to maintain the illusion continue to rise rapidly and any cessation of government interference and manipulation results in rapid breakdown of the fake "market" which was created by those policies.

In the first instance, we now see the failure of HAMP as redefault rates among those "helped" by the program soar. An absolute majority of the government-sponsored loan modifications have now re-defaulted but they did give utterly baseless hope to debtors, thus trapping them into making continuing payments on a hopeless mortgage.

The ongoing cost to prop up Fannie Mae and Freddie Mac continues to rise. Last week the NY Times reported that the cost of those bailouts has now reached $148 billion and will likely total $389 billion. Bloomberg cites a "reasonable worst case scenario" for the ultimate tab which could be $1 trillion or more.

The creation of the tax credit for housing purchases induced a temporary uptick in the number of sales. But like many other government actions, this merely succeeded in pulling forward future demand into the present - which is now the past. We have now entered the void created by that pulling forward. The existing home sales number yesterday and the new home sales number today both demonstrate that in clear terms. Today's existing sales number was nothing short of a disaster. The headline on Marketwatch says:

New-home sales plunge 33% to record low in May

But that fails to reflect the full scale of the drop. In addition to May being down, April was also revised lower. This is a game we should all be familiar with by now. Actual may sales were 300k annualized. But the April report had 504k units sold but it has now been revised to 446k. That allowed the comparison to be reported as merely 33% down rather than over 40%. Either way it's not good and May set a new record low. Apparently, new houses just don't sell unless a big tax credit is piled on top of the subsidized mortgage loans.

Yesterday's existing home sales number was less dramatic but still indicated a housing market in trouble. The decline of 2.2% contrasted with an expected gain of 4%. The tax credit doesn't seem to have accomplished anything of value but at least it fraudulently paid out $9 million to 1,300 prison inmates.

The Visible Fist

The Visible Fist of government that is. The Visible Fist is about to crush the property market in China, exploding one of the most egregious bubbles on the face of the planet. The specific blow will take the form of imposing a property tax nationwide - in guidelines recently approved by the State Council. It was reported earlier this week in China Daily.

Although the measures have been considered for some time, the recent push has been given urgency by the dangerous levels that China's property bubble has reached. One of the key contributing factors has been the number of speculators buying property and then holding it off the market to profit from the price run up. Morgan Stanley's Andy Xie estimates that such properties number in the 10-20 million unit range.

Some of his other comments portray a China going through the same stages of economic madness that the US has over the last 20 years. But China is passing through each stage much faster as the (well-deserved) lack of trust in their financial system causes people to only chase really big potential profits. Look at this paragraph and tell me you don't see the parallels:

China's policies have travelled the path of least immediate resistance - monetary expansion and asset inflation. The main purpose behind asset inflation is that the government can tax it. It provides a place for people to chase their get-rich-quick dreams and is popular as long as the market goes up. It also offers insiders who have disproportionate influence to play the game at the expense of little people. It is no coincidence that China's policies have been so pro-asset-inflation in the past few years.

His comments seem to suggest that the lack of a property tax was a deliberate strategy to encourage land speculation and bid up prices in a frenzy. This would make sense as the state was by far the biggest landowner and wanted to extract the maximum price for it. With a large amount of land now in private hands, it can be taxed as the taxable base can now replace diminished land sales as a source of government revenue.

Increasing the carrying cost of speculative assets is one of the surest ways to burst a bubble. That is why rising interest rates nearly always do the trick. Rising ownership taxes have the same impact. China is doing both. The government is both instituting a property tax and requiring higher interest rates on properties other than a primary residence. The impact has been dramatic and nearly immediate and so far, it's just the new financial rules and property restrictions. The tax will aggravate the impact. Here is a report from two weeks ago in China Daily:

The Shanghai market has already felt the chill of the tightening housing policies with new apartment sales falling in April. Over 13,185 units of newly built apartments were traded in April, down 43.7 percent from the same period in 2009, according to data from China Real Estate Index System Shanghai.

Trading in the secondary market in Shanghai also saw a dramatic slump since April 16.

A total of 13,865 housing units changed hands between April 1 to 16, but only 7,974 units were traded from April 17 to 30, said Ma Ji, consulting manager at property consultancy Shanghai Centaline China.

Local media also reported that a property tax might be imposed in the next few months. Houses that fall into the definition for charging property tax will be levied an annual fee of as much as 8 percent of the apartment's total value, the Shanghai Securities News reported on Wednesday.

While I applaud the Chinese government's belated return to sanity, they are now being forced to take action to rein in the monster they created. Recall that we criticized the massive push to force credit through the system last year in Command and Control and The Price of Ponzi. The Sinophiles bragged about how smart the Chinese government was and how the money was going into useful projects. They completely forgot (or never learned) that money is fungible and much of it was bound to end up wasted in financial speculation in stocks and real estate.


Implications
China is trapped in a massive inflationary spiral of its own making. Wages are rising rapidly - undermining their major competitive advantage. But the average worker is still falling behind in terms of housing and other necessities. Just as in the US during the 1970s, inflation's initial effect is seen a purely positive - a feeling of rising prosperity that seems costless. China went through that over the last 18 months and it's time to pay the piper. It is going to be impossible to tame short of crashing their economy to subdue the fundamental labor supply picture, crash the RE market to increase purchasing power in terms of land or crash the stock market through contraction of the overall money supply. I expect more than one will be needed and likely all three will happen when they try to trigger any one readjustment.

One final comment. The divergence between Chinese consumer inflation and US CPI dis-inflation is strong supporting evidence for the Austrian and Monetarist schools view of the matter. Both consider inflation to be a matter of increasing amounts of money (really credit). Private credit is tanking in the US and has been for some time while China forced their banks to lend massively more.

Lies, Damn Lies and Statistics

This morning, the Bureau of Labor Statistics release triggered news report to put up a huge headline:

431,000 Jobs Added in May

That sound impressive on the surface but the reality is much less than it seems. When you dig down into the numbers you can see just just how little really is there. First, the Census Bureau hired 411,000 temporary workers who were counted as part of the 431,000. The BLS claims 41,000 private-sector jobs were created, with the discrepancy likely coming from net layoffs at state and local levels of government.

Let's drill down a bit farther and take a look at the Birth-Death model that we have written about before. When we look there, note that the "model" has added 215,000 private-sector jobs for May. By backing out this estimate, we can conclude that the actual survey measured a net loss of 174,000 jobs in the real economy.

We can also dissect the Unemployment Rate in the same fashion. This statistic is based on the Household Survey, where the jobs created number is based on the Establishment Survey of employers. The Household Survey again shows that the number of people with jobs shrank in May - in this case the measured loss was 35,000 jobs. That is not as bad as the Establishment survey but still pointing in the wrong direction. The only way the BLS was able to report a lower unemployment rate was because they reduced the Labor Force by 322,000 workers, even while the pool of employable citizens rose by 170,000 people. Basically. BLS arbitrarily said 600,000 people ceased to exist for purposes of their calculations this month - so they could report a lower unemployment rate.

This is clearly a piece of propaganda designed to keep the ignorant public "confident" and spending despite reality. Like much else that comes from government, BLS reports have become riddled with accounting tricks that amount to fraud in order to paint a rosy picture. Don't be taken in.

The Non-Comparison

It seems quite popular in these days of crisis for certain commentators to compare struggling individual states within the USA to the troubled Eurozone PIIGS (Portugal, Ireland, Italy, Greece and Spain). ECB President and Apologist in Chief for the Euro Jean-Claude Trichet (and boy isn't that a bunch of Capitalized Words strung together) is a prime example. A couple of weeks ago in a speech about the Greek Financial Crisis his remarks were summarized by Business Week:

He [Trichet] also played down the importance of Greece's economy on the euro region, which he said represents less than 3 percent of the bloc's GDP, especially when compared with the size of a U.S. state such as California.

A number of news outlets and blogger have echoed these sentiments so it behooves us to examine the validity of the comparison. On the pure surface level, Trichet is correct: California had a GSP of $1,850 billion in 2008, whereas Greece's GDP was less than one fifth as large at $343 billion. So we can conclude that he in not lying outright but what of the implied statement that California's financial problems are more important to the US than Greece's are to the Eurozone and EU? For this analysis we will leave aside the issue of the rest of the PIIGS.

For perspective, let's start with raw numbers. The debt of the Greek government hit 300 billion Euros two months ago making headlines around the financial world. At current exchange rates, this is over $400 billion and is surely higher today. The total general fund debt of California is LESS THAN $85 billion as of January 1, 2010. So in absolute terms, the Greek Problem is nearly FIVE TIMES LARGER than California's. In terms proportional to the size of the respective economies, the disparity becomes even more striking.


Implications of Federalism
With a little thought, the reason for this disparity should be obvious. California's state government brings in tax revenue of just under 5.0% of GSP and plans to spend 5.5% of GSP in the FY 2010 budget. Greece taxed 32.2% of GDP and spent 43.0% of GDP in 2009 as estimated by the CIA World Factbook. The state government of California is not the top-level sovereign even within its own borders. Federal taxation and spending within California far exceeds the comparable activities driven by Sacramento. In terms of government impact on the economy, the key is at the Federal level, not the state. So in addition to California's government problems being a much smaller deal overall, the consequences of failure would also be less for the population than would be the case in Greece. We can safely conclude that Trichet's statement, while true at first blush was highly misleading in its implications. There is simply no comparison between the gravity of the current crisis in Greece and the looming one in California.

Having dealt with that nonsense, let's talk about the rest of the PIIGS. These are all similar, top-level sovereign situations. It would appear that Portual is next, with Spain not far behind from the trading activity in CDS and the rising risk premiums being demanded. Italy is not nearly as badly off and it may be unfair to lump them in with the rest of this group; the market appears to be taking note of that as well. And then, there is Ireland.


Celtic Hedge Fund
Ireland is in for a tough time. Their total external debt was 1,637 billion Euros (roughly $2.23 trillion) as of September 30, 2009 with an economy of $177 billion per the CIA. Irish banks alone account for 41% of the debt. Another way to express this is that their banks owe foreigners over 500% of the nation's annual GDP. Many financial institutions are counted in the "Other" category which is nearly as large in terms of foreign obligations. The largest components would be insurance companies and pension funds. In all, Ireland's financial sector probably owes nearly 1,000% of GDP to overseas entities. This is a time bomb comparable in design to Iceland but with many times the explosive power. This is another nation being run like a hedge fund but Ireland currently owes more than 30x as much as Iceland going into their meltdown.

None of this is to suggest that the US doesn't have truly huge problems. But let's not be distracted by specious comparisons involving the states. In the US, the fate of sovereign credit will be determined almost entirely by the actions of the Federal government and the market's reaction to them. In the Eurozone, that same process will be resolved in the national capitals and possibly also in Berlin. Barring a decision by Germany to bail out other members, individual European nations can and will choose austerity or default themselves.

An Elegant Solution

The heads of the global banking cartel are currently gathered for their annual meeting in Davos, Switzerland. They have received enormous subsidies and bailouts at the expense of taxpayers in many nations all around the world. Those nations that possess representative governments are now beginning to respond to the outrage of their citizens at this gross injustice. In Britain, this has taken the form of a proposal to tax financial transactions. In the US, President Obama recently proposed regulations to limit the risk-taking activities of banks and to force the "too big to fail" institutions to shrink. The bankers' response is a proposal to take regulatory power away from national governments according to a British Press outlet.

This of course would be precisely the WRONG action. National governments in representative systems are forced to respond to the concerns of their citizens. The bankers' proposal would push the power even further away from the people and vest it in unaccountable supra-national bureaucracies. Our response should be precisely the opposite - devolve regulatory power over the banks back from the Federal government back to the state level. This should be particularly true for commercial banking. First, power should be as close to the citizens as reasonably practical so that the exercise of government power will be as responsive as possible to the average citizen. Second, power should be decentralized so as to reduce the incentive to abuse it and to minimize the damage when such abuse does occur.

One very positive effect would be to create a framework that automatically penalizes large organizations. Giant banks constantly lobbied to reduce the role of the states in banking regulation in the name of "efficiency" starting in the 1970s. One of the chief claims advanced during that period was that US banks would be unable to compete with foreign (especially Japanese) banks without consolidation. That turned out to be correct as the US banks produced a bubble very comparable to the one that has led to a 20 year depression in Japan.

The collapse of the states' role led directly to the creation of corrupt TBTF mega-banks by reducing the cost of geographic consolidation, just as the weakening and then repeal of Glass-Steagall enabled the growth of financial conglomerates via acquisition across business lines. President Obama has called for limiting the ability of banks to take risk and also breaking up the TBTF banks. We agree and call upon the president to immediately re-implement Glass-Steagall in order to confirm the seriousness of his words via corresponding action. In addition, we call upon him to remove all federal roadblocks to state banking regulation.

The mega-banks object to state regulations because it would increase their cost of compliance. We agree that it would increase such costs and further state that such an outcome would be a GOOD thing. It would create an automatic systemic incentive not to expand. It would be far better for the banks to decide to break themselves up rather than to mandate such an outcome. The legal and regulatory environment can provide the proper incentives and then leave the implementation to the individual players when they find such actions to be in their self-interest. The explicit repudiation of the "too big to fail" doctrine should be sufficient as the only reason to create such behemoths was to become large enough to hold the US economy and financial system hostage. But it never hurts to create the right incentives - all that Washington DC needs to do is stop interfering with the states' ability to regulate.

This seems to be an elegant solution.

Trembling Pillars of Fraud

Over the last two weeks we have seen a series of indications that some of the key elements supporting manipulation of market pricing mechanisms are beginning to tremble. We have seen equity prices rise despite the lack of any significant increase in profits. We have seen commodity prices spike without much increase in real demand. In our opinion the key institutions behind this mess are the major Wall Street (TARP) banks, government agencies and the Fed. They have all played a major role in creating credit inflation, with subsequent asset bubbles and debasement of our currency. But understand this: if you 'look through' each of those institutions you will find the US government backstopping each and every one of them. Each of those has come under increasing attack and as the supports have begun to shake, the fraudulent pricing they have promoted has also begun to unwind. As politics has supported bubble dynamics, so it can destroy them - live by the sword, die by the sword.


Fear and Loathing
First, Yahoo Finance reports that Wall Street's bonuses being paid out now will total $145 billion. That is greater than 1% of US annual GDP. In a normal year that number would be insane. After the disaster those same players inflicted on the US and global economy, that number is downright obscene. Bailouts were indefensible to start with and now you can add infuriating arrogance to the list of offenses. Public anger may be getting through to Congress and without siphoning off taxpayer money via the legislature, the rest of the Wall Street con game doesn't work. It has now gotten so bad that according to Dow Jones Newswire the TARP still exists only courtesy of a Senate filibuster by its supporters.

Fear of angry constituents has taken on a new urgency for our elected officials in the wake of a shocking Republican victory in the Massachusetts election for Senate. With citizens realizing that the Fed's actions have been a pure handout to Wall Street, the reconfirmation of Ben Bernanke as chairman is now very much in danger. Today, the NY Times reports that two additional senators abandoned him. With Geithner at Treasury already under serious scrutiny by Congress for his role in the bailout of Goldman via AIG and the subsequent attempt to hide the details, the two most prominent faces of bailout nation are both in danger of being forced out.


Friendly Fire
The biggest blow psychologically may be the rhetorical broadside from President Obama against the big banks that are a key leg of the credit inflation machine. His speech yesterday called for them to be cut down to size and shackled. This was a frontal attack on the concept of Too Big To Fail, with its implicit taxpayer guarantee for the stupid risks taken by big banks. The Obama Administration has given Wall Street nearly everything it wanted so the Street must now feel shocked that their tame politician has turned on them viciously. We have long felt that once the anger of the populace rose to sufficient levels, the political class would throw the financial elites under the bus in the interest of self-preservation.

Our government has betrayed our nation's citizens in many ways - from the TARP to the uncapping of taxpayer losses on Fannie and Freddie on Christmas Eve. The failure of those policies to make things better or even to stop them from getting worse is now obvious. The failure has become political kryptonite - so much so that Rep. Barney Frank is calling for Fannie Mae and Freddie Mack to be abolished. Frank has been one of their main defenders and cheerleaders for years if not decades. For him to even contemplate such a call tell us that taxpayer bailouts have become the political equivalent of Ebola.

Political support lies at the very foundation of attempts to revive the bubble by inflating credit and eroding the dollar. It is clear that this political support is evaporating before our very eyes and the state of the markets is beginning to reflect that. Suddenly the political foundation of Bailout Nation isn't looking too stable and the pillars resting on it are beginning to tremble violently.

Great Pyramid of Geezer

An update by Karl Denninger at Market Ticker today got the old synapses firing. Denninger points out that pension plans are in trouble and cites a Wall Street Journal article strongly suggesting accounting fraud in public pension plans. The WSJ says:

Based on their preferred accounting methods -- which discount future liabilities based on high but uncertain returns projected for investments -- these plans are underfunded nationally by around $310 billion.

The numbers are worse using market valuation methods (the methods private-sector plans must use), which discount benefit liabilities at lower interest rates to reflect the chance that the expected returns won't be realized.

Last year we warned about the same phenomenon in private sector pensions in Some Key Questions and The Limits of Optimism. In every case the culprit was the same - overly optimistic assumptions about investment returns allowed a financially deficient structure to be sold to key constituencies as safe and sound. The wild optimism that causes managers to overreach like this and causes others to believe their literally incredible assumptions are part and parcel of the Universal Debt Bubble (UDB). Only in such a manic environment can such outlandish claims be regarded as anything other than the fantasies they are in reality. Even worse, a bubble atmosphere makes those assumptions even more dangerous than normal by burdening assets with inflated starting values, making the required price appreciation even less likely than usual. But as long as such tales are believed, a small sliver of capital can be made to support grand promises in the future.

Unfortunately, the credulous public has been misled in any number of similar ways. Robert Prechter of Elliott Wave International recently described the process by which banks also shrank the capital supporting their balance sheets to a tiny fraction of what had previously been required and considered prudent:

In the early 1990s, the Federal Reserve Board under Chairman Alan Greenspan took a controversial step and removed banks’ reserve requirements almost entirely.

To do so, it first lowered to zero the reserve requirement on all accounts other than checking accounts. Then it let banks pretend that they have almost no checking account balances by allowing them to
“sweep” those deposits into various savings accounts and money market funds at the end of each business day... The net result is that banks today conveniently meet their nominally required reserves (currently about $45b.) with the cash in their vaults that they need to hold for everyday transactions anyway.

Sure or Insure
Yet the problems of inadequate capital hardly end there. Like pensions and banks, insurance is another area that succumbed to the ubiquitous optimism of the UDB. Insurance companies became so accustomed to capital appreciation well above the historic norm that they began to take them for granted. Many annuity policies and guaranteed investment contracts were written promising high fixed rates of return based on that experience. This has proven devastating for many insurers, who are now rushing to rewrite such contracts. This is a microcosm for the weak capital position of much of the industry as key asset classes for most life and casualty companies are stocks, bonds and real estate. Like every other leveraged institution out there, the insurers have taken a beating on those assets and their promises to deliver future benefits are increasingly in doubt. Which brings us to a similar structure with the biggest capital shortfall of all.


GovernMENTAL Institutions
For the most part, capital is literally a foreign concept in this sector. Few governments have significant reserves, much less any real capitalization. Except in regions where government-owned enterprises dominate the economy, the primary source of revenue for most institutions is taxes - on the private sector naturally. So instead of actual capital, governments have something even more volatile - a projected future revenue stream. As with every other sector we have examined so far, those projections about the future are subject to the psychological distortions that accompany large-scale financial manias. In an environment of historic extremes like the UDB, those distorted perceptions can easily become fatal. We see that today in the sad case of California - where the state is issuing IOUs because they are out of money. Having accustomed themselves to double-digit annual rises in tax revenue, Sacramento (and other state capitals) simply spent it all. Those projections and plans aren't working out so well anymore.

The US Federal Government is arguably in even worse shape. Borrowing this year is likely to approximately equal tax income. No entity can spend twice its income for long and hope to survive. The remnant optimism of the UDB has settled in one of its last-ditch redoubts: faith in government. In addition to the spending spree, Washington has also embarked on a series of empty promises that would make a serial polygamist blush. Not content to merely guarantee deposits through the FDIC, the Feds now do the same for bank bonds through TLGP. Fannie and Freddie debt is backed thorough a de facto nationalization and money market mutual funds are guaranteed by the Federal Reserve. Many trillions of government "guarantees" are piled atop the roughly $1 trillion of deficit spending for this fiscal year. These promises are lighter than a feather but certainly worth their weight in gold. In other words there is no way Washington can deliver but they are hoping nobody notices and that the empty promises will inspire "confidence" in the economy. Like many other sectors, various levels of government are attempting to cover huge obligations with inadequate resources.

Frankly, it's sad that so many people fail to see the little man behind the curtain putting up the front that is the Great Oz. These large and varied institutions have stretched themselves far too thin and are praying for another bubble to bail them out again. The title of this missive refers to those who will bear the brunt of the damage from our return to reality - those who bought into the promises of these institutional pyramid schemes and don't have the time to recover financially. The frenzy of financial pyramid construction certainly put the Egyptians' little excursion in stonework to shame. In reality, the old truths would have served us well, but like every bubble generation in history, ours has convinced themselves that "this time it's different" when it never really is. Like those who have gone before, we will learn the hard way when two things we all learned as children would have prevented much of this mess:

• Never count your chickens before they hatch.
• Save for a rainy day.

It seems so simple and most of us will never forget. With the optimistic assumptions that undergirded the psychology of the UDB evaporating, any program sporting the words insurance or guarantee must be treated with great skepticism.