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Jun 11, 2013

Social Security: The New Deal’s Fiscal #Ponzi


Via Zero Hedge

Guest Post: Social Security: The New Deal’s Fiscal Ponzi

Submitted by David Stockman via the Ludwig von Mises Institute,
The Social Security Act of 1935 had virtually nothing to do with ending the depression, and if anything it had a contractionary impact. Payroll taxes began in 1937 while regular benefit payments did not commence until 1940.
Yet its fiscal legacy threatens disaster in the present era because its core principle of “social insurance” inexorably gives rise to a fiscal doomsday machine. When in the context of modern political democracy the state offers universal transfer payments to its citizens without proof of need, it offers thereby to bankrupt itself—eventually.
By contrast, a minor portion of the 1935 legislation embodied the opposite principle—namely, the means-tested safety net offered through categorical aid for the low-income elderly, blind, disabled and dependent families. These programs were inherently self-contained because beneficiaries of means-tested transfers simply do not have the wherewithal—that is, PACs and organized lobbying machinery—to “capture” policy-making and thereby imperil the public purse.
To the extent that means-tested social welfare is strictly cash-based, as was cogently advocated by Milton Friedman in his negative income tax plan, it is even more fiscally stable. Such purely cash based transfers do not enlist and mobilize the lobbying power of providers and vendors of in-kind assistance, such as housing and medical services.
Social insurance, on the other hand, suffers the twin disability of being regressive as a distributional matter and explosively expansionary as a fiscal matter. The source of both ills is the principle of “income replacement” provided through mandatory socialization of huge population pools.
On the financing side, the heavy taxation needed to fund the scheme has been made politically feasible by the mythology that participants are paying a “premium” for an “earned” annuity, not a tax. Consequently, payroll tax financing is deeply regressive because all participants pay a uniform rate regardless of income.
At the same time, benefits are also regressive because those with the highest life-time wages get the greatest replacement. This regressive outcome is only partially ameliorated by the so-called “bend points” which provide higher replacement on the first dollar of covered wages than on the last.
The New Deal social insurance philosophers thus struck a Faustian bargain. To get government funded pensions and unemployment benefits for the most needy, they eschewed a means test and, instead, agreed to generous wage replacement on a universal basis. To fund the massive cost of these universal benefits they agreed to a regressive payroll tax by disguising it as an insurance premium. Yet the long run results could not have been more perverse.
The payroll tax has become an anti-jobs monster, but under the banner of a universal entitlement organized labor tenaciously defends what should be its nemesis. At the same time, the prosperous classes have gotten a big slice of these transfer payments, and now claim they have earned them—when affluent citizens should have no proper claim on the public purse at all.
Accordingly, social insurance co-opts all potential sources of political opposition, making it inherently a fiscal doomsday machine. It was only a matter of time, for example, before its giant recipient populations would capture control of benefit policy in both parties, and most especially co-opt the conservative fiscal opposition.
Within a few decades, in fact, Republican fiscal scruples had vanished entirely. This was more than evident when Richard Nixon did not veto but, instead, signed a 20 percent Social Security benefit increase on the eve of the 1972 election. Worse still, the bill also contained the infamous “double-indexing” provision which since then has generated massive hidden benefit increases by over-indexing every worker’s payroll history. The fiscal cost of relentless universal benefit expansion has driven an epic increase in the payroll tax. The initial 1937 payroll tax rate was about 2 percent of wages, but after numerous legislated benefit increases, the addition of Medicare in 1965, the Nixon benefit explosion and the Carter and Reagan era payroll tax increases, the combined employer/employee rate is now pushing 16 percent (including the unemployment tax).
Accordingly, Federal and state payroll taxes for social insurance generate $1.2 trillion per year in revenue—four times more than the corporate income tax. So with the highest labor costs in the world, the U.S now imposes punishing levies on payrolls. It thus remains hostage to a political happen-stance—that is, the destructive bargain struck eight decades ago when high tariff walls, not containerships loaded with cheap goods made from cheap foreign labor, surrounded it harbors.
Yet there is more and it is worse. The current punishing payroll tax is actually way too low—that is, it drastically underfunds future benefits owing to positively fictional rates of economic growth assumed in the 75-year actuarial projections. As a result, the benefit structure grinds forward on automatic pilot facing no political opposition whatsoever. In the meanwhile, the fast approaching day or reckoning is thinly disguised by trust fund accounting fictions.
In truth the trust funds are both meaningless and broke. Annual benefit payouts already exceed tax receipts by upward of $50 billion annually, while the so-called trust funds reserves—$3 trillion of fictional treasury bonds accumulated in earlier decades—are mere promises to use the general taxing powers of the US government to make good on the rising tide of benefits.
The New Deal social insurance mythology of “earned” annuities on “paid-in” premiums that have been accumulated as trust fund “reserves” is thus an unadulterated fiscal scam. In reality, Social Security is really just an intergenerational transfer payment system.
Moreover, the latter is predicated on the erroneous belief that new workers and wages can be forever drafted into the system faster than the growth of benefits. During the heady days of 1967, for example, Paul Samuelson and his Keynesian acolytes in the Johnson administration still believed that the American economy was capable of sustained growth at a 5 percent annual rate. The Nobel Prize winner thus assured his Newsweek column readers that paying unearned windfalls to current social security beneficiaries was no sweat: “The beauty of social insurance is that it is actuarially unsound. Everyone ... is given benefit privileges that far exceed anything he has paid in ...”
Samuelson rhetorically inquired as to how was this possible and succinctly answered his own question: “National product is growing at a compound interest rate and can be expected to do so as far as the eye can see. ... Social security is squarely based on compound interest ... the greatest Ponzi game ever invented.”
When 5 percent real growth turned out to be a Keynesian illusion and output growth decayed to 1–2 percent annual rate after the turn of the century, the actuarial foundation of Samuelson’s Ponzi game came crashing down. It is now evident that Washington cannot shrink, or even brake, the fiscal doomsday machine that lies underneath.
The fiscal catastrophe embedded in the New Deal social insurance scheme was not inevitable. A means-tested retirement program funded with general revenues was explicitly recommended by the analytically proficient experts commissioned by the Roosevelt White House in 1935. But FDR’s cabal of social work reformers led by Labor Secretary Frances Perkins thought a means-test was demeaning, having no clue that a means-test is the only real defense available to the public purse in a welfare state democracy.
When the American economy was riding high in 1960, Paul Samuelson’s Ponzi was extracting payroll tax revenue amounting to about 2.8 percent of GDP. A half century later, after a devastating flight of jobs to East Asia and other emerging economies, the payroll tax extracts two-and-one half times more, taking in nearly 6.5 percent of GDP. So the remarkable thing is not that wooly-eyed idealists who drafted the 1935 act succumbed to social insurance’s Faustian bargain at the time. The puzzling thing is that 75 years later—with all the terrible facts fully known—the doctrinaire conviction abides on the Left that social insurance is the New Deal’s crowning achievement. In fact, it is its costliest mistake.


Guest Post: Social Security: The New Deal’s Fiscal Ponzi | Zero Hedge


Jun 10, 2013

#Uruguay's Exposure to #Argentina's Economic Malaise

some people are taking advantage of arbitrage opportunities by bringing dollars from Uruguay into Argentina, selling them on the black market for pesos, and either spending the pesos in Argentina or converting the pesos back into dollars in Uruguay at the official rate and pocketing the difference

Summary

As Argentina's economic situation deteriorated over the past several years, Argentines flocked across the border to Uruguay to bank and invest. This has presented Uruguay with economic opportunities but also has exposed the small nation to considerable collateral risk and economic distortions that have compelled Buenos Aires and Montevideo to take corrective action. To prevent Argentines from pouring dollars into Uruguay and then pulling dollars out of the country en masse, potentially triggering a repeat of Uruguay's last crisis, the Uruguayan government has implemented capital controls and is considering adding more.
 

Jun 7, 2013

#Paulson: All That Glitters Isn’t #Gold


Paulson: All That Glitters Isn’t Gold



Gregory Zuckerman, Juliet Chung

John Paulson has a message for investors: Stop paying so much attention to my gold bets.
Mr. Paulson, the billionaire hedge-fund manager who has been one of the most bullish investors in the precious metal and suffered deep losses as a result, is eager to focus attention on his better-performing investments, which also dwarf his firm’s gold fund in size.
Now, his $18 billion firm, Paulson & Co. will stop including the performance of the gold fund when it shares monthly updates with investors in its healthier funds, according to a letter sent to his investors Thursday. From now on, investors in the gold fund, which manages about $360 million, will receive separate word of the fund’s returns, the letter says.
Mr. Paulson, the firm’s founder, has grown frustrated that his firm’s gold troubles have obscured much-better returns from his other funds. Paulson Gold was down 47% for the year through April, including a 26.5% decline in April. The firm hasn’t told investors about May’s returns for the gold fund yet.
“At the request of clients and consultants, we will be reporting the performance of our Gold Funds separately to investors in those funds and interested parties,” the letter says, noting that those funds represent only 2% of assets under management. The funds “have received a disproportionate amount of attention over recent months and have detracted attention from the performance and positive developments of our other funds.”
The firm will begin conducting separate conference calls for the gold fund. It also plans to stop broadly reporting the performance of the gold share class of its various funds in its regular investor updates, though it will share those figures with clients who are invested in the gold-share class or with people who specifically ask for it. The gold share classes were introduced by Mr. Paulson to give all of his investors access to the metal.
One of Mr. Paulson’s other funds has been on a tear, while others have held up better than gold, spurring the move. The Paulson Recovery fund, for example, which manages about $2 billion and invests in companies that benefit from a broad economic upturn, jumped 4.9% in May and is up 27% on the year, according to the letter to investors. The fund has made money on “insurance, banking, and defaulted securities,” it said.
Paulson & Co.’s two credit funds, his biggest, rose 3.6% in May and are up 16.2% for the year through May. They have profited from bets on defaulted and convertible securities, the investor letter says.
Meanwhile, his merger funds are up between 8.2% and 17.4% through May, profiting from bets on various deals.
Still, Paulson Advantage and Paulson Advantage Plus funds, which bet on anticipated corporate events and manage about $3.6 billion, also have been hit by the decline in gold because of positions in gold stocks. Those funds are up 2.4% and 3.3%, respectively, in May. The Paulson Advantage fund is up 4.4% for the year, while Paulson Advantage Plus is up 6.1% in 2013.
“Lots of people are beating up on him because he’s been wrong on gold for some time, but he has many different strategies, and those have been performing pretty well,” said Vidak Radonjic of Beryl Consulting Group LLC, who advises on hedge-fund investing. Mr. Radonjic, who recommends his clients invest with smaller managers because he believes they are more nimble, nonetheless said he found the gains of Mr. Paulson’s larger funds impressive.
Mr. Paulson made his name scoring $20 billion of profits over 2007 and 2008 by betting against subprime mortgages and financial companies ahead of the financial collapse.
Gold prices have fallen 15.5% in 2013, despite a rise of 1.2% on Thursday. As stocks have climbed and inflation has remained tame, investors have dumped gold-tied investments.
The shift in reporting doesn’t mean Mr. Paulson has reduced his commitment to gold. He isn’t selling gold investments, according to people close to the matter, citing what he considers to be an attractive valuation for many gold-mining companies, which have slumped for several years.
Heavy losses from gold and other investments in Mr. Paulson’s Advantage funds made them much smaller, putting more of a focus on the Recovery fund and other better performers.
He also remains bullish on real estate, believing the current turnaround will continue for as many as four or five years, people familiar with the matter said. He has noted that new home building remains well under peak levels and also under the level needed to satisfy the nation’s population growth.
Write to Gregory Zuckerman at gregory.zuckerman@wsj.com and Juliet Chung at juliet.chung@wsj.com


Jun 6, 2013

More on #Japonica Partners: The Mysterious Bidder for #Greek #Bonds - MoneyBeat - WSJ


Meet Japonica Partners: The Mysterious Bidder for Greek Bonds


3:43 pm
Jun 3, 2013
Credit

By Charles ForelleEuropean bond markets were perplexed Monday by an unusual tender offer: An investment firm in Rhode Island is offering to buy up to €2.9 billion in Greek government bonds.
Just as unusual: The putative buyer, Japonica Partners.
Japonica was founded in 1988. Its chief, Paul B. Kazarian, fought rough-and-tumble takeover battles at Allegheny International Inc., which made toasters and blenders, and Borden Inc., maker of milk and Elmer’s glue. (It won Allegheny but lost Borden to KKR KKR -2.50%.) In 1999, Kazarian agitated as an activist shareholder of pen maker A.T. Cross.
Then, he got much quieter, only to emerge Monday as a bidder for Greek bonds — a volatile and risky corner of the European market.
A spokesman for Japonica, Xander Heijnen, said Kazarian wouldn’t be available for an interview. The phone at Japonica’s Providence, R.I. offices rang directly to voicemail. No one returned a message. Japonica’s Web site offers scant information about the firm or Kazarian, other than to detail his philanthropic interests and list venues where Kazarian has delivered speeches.
But a perusal through The Wall Street Journal’s archive paints a picture of a corporate raider of an old-school mold, and a whiz-kid investor whose smarts came coupled with a temper.
In a 1989 article about Japonica’s hostile bid for CNW Corp., a railroad holding company, Japonica is described as a “mystery New York investment group.” Kazarian, then 33, was dubbed part of a “brassy new generation of corporate raiders, called ‘kid raiders’ or ‘brat packs.’” On its Web site, Japonica said CNW was “suffering from a loss of passion for innovation and performance.” Blackstone eventually took CNW private, but Kazarian “made a bundle” for him and his partners, according to a later article.
The next year, Japonica ended up on top in a bruising fight for Allegheny International, whose major brands included Sunbeam toasters and Oster blenders. Kazarian became chairman. The company became Sunbeam-Oster Co. It turned into a lucrative deal. But things got rocky. In 1993, Kazarian was ousted from Sunbeam in an internal revolt. A Page One story detailed the turmoil.
Top executives and board members of the Providence, R.I., company tell a story of a man whose mastery as a crisis manager turned vicious as Sunbeam’s success diminished the need for his furious management style. Mr. Kazarian’s main management tactic, executives claim, was to create crisis. Top managers, speaking not for attribution, say they were pitted against one another, publicly hazed, humiliated and even physically intimidated.
In the article, Kazarian said he received no complaints about his management style before his ouster. His style appeared to be colorful:
Thus, there was tension with Mr. Kazarian, whose 1991 compensation was $1.84 million (10 times that of either of his Japonica partners) and who had become frustrated at his loss of control. In one incident, he took a BB gun — a sample the company was examining as a possible product — and shot it at the vacant chairs of executives, shouting “Die! Die!” according to a witness. Mr. Kazarian says he shot the BBs at targets in the office to test the gun, but doesn’t recall where he put the targets. He adds that no one was in the office at the time, and denies saying, “Die! Die!”
Kazarian’s firing spawned a furious legal fight with Sunbeam investors and some of Kazarian’s former colleagues. He won a $160 million settlement. He took a run at Borden the next year, but KKR ultimately won out. A 1994 Journal article said it wasn’t clear where Kazarian would get the $1.27 billion needed for the Borden bid.
A major weakness in his approach at this stage is that he hasn’t given details of how he could finance such a purchase. Mr. Kazarian’s Providence, R.I., Japonica Partners has about $180 million in gains from Sunbeam and other investments.
But he should be able to gain the ear of some major Borden shareholders, who have complained openly about the terms of the KKR offer. Mr. Kazarian noted in his letter that he has assembled financing for past takeover bids, including Sunbeam.
It also isn’t clear today precisely how Kazarian would finance the purchase of Greek bonds. Japonica has offered to buy as much as €2.9 billion of bonds for a minimum price of 45 cents on the euro. That means Japonica would need at least €1.31 billion to acquire all it wants. The procedure outlined in Japonica’s Monday press release doesn’t oblige Japonica to buy all €2.9 billion, and existing bondholders are free to offer to sell at prices higher than 45 cents. Japonica can choose whether to accept them.
A Japonica spokesman said in written response to questions that Japonica had made “several billion-dollar-plus investments” and that they’ve “performed extraordinarily well.” The response said Japonica’s “profits are the source of its capital.”
Greek government bonds have been a stellar investment over the past year. In March 2012, Greece defaulted on its huge debt load and exchanged nearly all of its outstanding bonds for new ones. They performed poorly in the months after the default, but a year ago most Greek bonds stood at below 15 cents on the euro. Today, depending on maturity, they trade at between about 45 and 60 cents.
The benchmark 10-year bond closed Monday at just over 60 cents, equivalent to a yield of 9.25%. That was unchanged from Friday. Longer-dated bonds, which have lower prices that are closer to Japonica’s 45-cent minimum bid, were better performers, but there were no jarring moves.
– Katie Martin contributed to this post.


Meet Japonica Partners: The Mysterious Bidder for Greek Bonds - MoneyBeat - WSJ


Jun 4, 2013

Wall Street Is Transfixed by #SAC Capital Deadline

Yesterday's Bloomberg article has got a lot of brokerage firms nervous about their trading volumes if #SAC downsizes. 


  CNBC.com Article: Wall Street Is Transfixed by SAC Capital Deadline

A quarterly deadline for investors to withdraw money from the troubled hedge fund SAC Capital Advisors was the talk of Wall Street. The New York Times reports.

Full Story:
http://www.cnbc.com/id/100787330

#Whale of a Trade Revealed at JP Morgan Chase $JPM

"We are dead I tell you," Bruno Iksil, a London-based trader at JPMorgan Chase & Co. (JPM), messaged an associate on March 23, 2012. "It is hopeless now."

To read the entire article On Bloomberg, go to http://bloom.bg/18OeVTZ

Jun 3, 2013

#Japonica Partners Bid For #Greek #Debt


Why does this sound like a #scam?

Rhode Island-Based Firm Announces Bid For Massive Amount Of Outstanding Greek Debt

A firm called Japonica Partners has announced a tender offer for 10% of all Greek government bonds.
FT Alphaville reports that the firm, which is based in Rhode Island, was founded in the late '80s by former Goldman banker Paul Kazarian.
Here's the full statement:


FRANKFURT, Germany, June 3, 2013 /CNW/ -
  • First-ever tender offer by private investor for European government bonds
  • First-ever unmodified Dutch auction for sovereign bonds
  • Significant premium to price in December 2012 government buy-back
  • Japonica to align its long-term investment interests with Greece
Japonica Partners & Co. announces an invitation by its indirect wholly-owned subsidiary Yerusalem Hesed, Ltd. (the "Acquirer") for eligible holders of certain series of bonds issued by Greece in 2012 to sell the bonds for cash. The amount to be purchased will be up to €2.9 billion in face value which represents less than 9.9% of the total outstanding €29.6 billion of Greece government bonds. The purchase of the bonds by the acquirer would permit existing holders to monetize their Greece government bonds.
This offer marks the first time ever that a private investor tenders for European government bonds. Also for the first time ever, purchase prices for a sovereign bond tender will be determined by an unmodified Dutch auction. The rationale for this highly innovative tender procedure is to apply an effective method to purchase institutional blocks of these bonds in an orderly and price-efficient manner.
The invitation provides maximum flexibility by enabling the acquirer to make immediate purchases and by giving investors a right to withdraw prior to acceptance or the tender deadline. The expected tender deadline is 5:00pm Central European Time on 1 July 2013, unless otherwise revised in accordance with the Tender Offer Memorandum.
The minimum purchase price for each of the series of bonds is 45.0% of their principal amount, a 26.5% premium to their average price in the December 2012 Greece government bond buyback, and a 15.2% premium to the average closing price on 27 March 2013.
Japonica believes that the market for Greece government bonds is volatile, highly illiquid, and at any time not necessarily reflective of their intrinsic value. During a 42 trading day period in the first quarter of 2013, historical price volatility included a 27.8% decline in average price. The minimum purchase price is a discount to the most recent average price.
A Japonica spokesperson said: "This tender offer reflects Japonica's long-term perspective on Greece and the progress that the country has made to date. It is Japonica's goal to align its investment interests with those of Greece."
Japonica Partners is an entrepreneurial investment firm that makes concentrated investments in underperforming global special situations. Founded in 1988, Japonica Partners has developed and builds "perfectly aligned" relationships that both cultivate entrepreneurial returns and are the foundation of low risk. With its high value creation core competencies, Japonica invests to significantly raise the bar for the best investments globally. Japonica Partners is not a fund, nor does it provide investment advice.
The invitation is restricted to certain eligible institutional investors and bonds may only be tendered for purchase in a minimum principal amount of €1,000,000 and multiple integrals of €1 in excess thereof. The invitation is being made on the terms described in the Tender Offer Memorandum to be issued on or about 5 June 2013. Further details, including the relevant series of bonds, will also be contained in an announcement to be promulgated together with or shortly before the Tender Offer Memorandum.


Japonica Partners Bid For Greek Debt - Business Insider


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