The state of our Nation

1
The state of our Nation

• Arguably the biggest threat even terrorism
  facing the U.S. today is our own Fiscal
  Irresponsibility, and very few people are willing
  to State the Facts and Speak the Truth.
• Continuing on this Unsustainable Path will
  gradually erode, if not suddenly damage, our
  Economy, our Standard of Living, and ultimately
  our Domestic Tranquility and National Security.
• David Walker, Comptroller General of the U.S,
  2006, President of the Peter G. Peterson
  Foundation
• Fiscal Wake-up Tour http//www.youtube.com/wa
  tch?vOS2fI2p9iVs

2

• KEY FEDERAL
• ECONOMIC DATA

3
The state of Indebtedness

• U.S. Public Private Debt to GDP reached 358 in
  2008.
• The all-time high of 300 was reached in 1933,
  during the Great Depression.

4
The U.S. Federal Debt( of GDP)
World War II 122
2009 80
G.D. 44
5
The state of Indebtedness
Unfunded liab. primarily Medicare, Medicaid,
SS, State Municipal Pensions/Health benefits.
Over 100 trillion in unfunded liabilities
10 year projected deficits of about 6 of GDP
vs. economic growth of about 2.5 of GDP spell
disaster.
6
Life cycle of a Superpower Share of world GDP
1820
1950
5
27 U.S.
U.S. 2
China 5
33 China
65 Other
68 Other
2014
2009
24 U.S.
8
23 U.S.
12
China 8
China 12
68 Other
65 Other
China is expected to surpass U.S. GDP in about
15 years.
7
The state of our Monetary System

• "The President will continue to be clear that one
  of the lessons of the economic crisis is that
  growth driven by U.S. consumers is not
  sustainable in the 21st century," said Ben
  Rhodes, a senior official in the White House
  National Security Council and Mr. Obama's lead
  foreign policy speech writer. 11/13/09.
• The Reserve Bank of India joined central banks of
  China, Russia, Mexico and the Philippines in
  choosing to boost its reserves of gold (some
  150B) in preference to dollar-denominated
  securities declaring that the reserve currency
  role of the dollar is unsustainable.

8
Changes in the Price of Oil,in Dollars, Euros
Gold
100/Barrel Oil
Had the dollar remained as good as gold
since 2001, Oil today would be selling at 30 a
Barrel, not 100.
Had the dollar remained as strong as the Euro
since 2001, Oil today would be selling at 57 a
Barrel, not 100.
57/Barrel Oil
30/Barrel Oil
The value of the dollar is the markets measure
of its confidence that our government will
preserve the purchasing power of its debt,
almost half of which is held Overseas. Bloomberg/W
SJ 1/4/08
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The state of our Monetary System-Part 1 of 4

• Triffins dilemma, by Yale economist Robert
  Triffin, in 1960, argued that a global monetary
  system based on the dollar had a flaw the
  increased liquidity the world sought would
  require current account deficits in the U.S.
• But, sooner or later, the overhang of monetary
  liabilities would undermine confidence in the key
  currency.
• This loss of confidence in the U.S. dollar is
  what were witnessing today, as the value of our
  dollar has been in a free-fall.

10
The state of our Monetary System-Part 2 of 4

• Triffins dilemma is led by Chinas exports
  Americas over consumption.
• Through Chinas recycling of its dollars into
  U.S. Govt Treasuries, our time preferences for
  saving vs. consumption are distorted.
• From 2000-2008, the U.S. outspent its national
  income. Weve lived beyond our means.
• In 2000, Chinas reserves were 165 billion
  today, they are 2.3 trillion, of which nearly 2
  trillion are dollar-denominated.

11
The state of our Monetary System-Part 3 of 4

• Triffins dilemma caused a distortion in the cost
  of capital and its misallocation.
• Significantly reducing long-term interest rates
  and helping to inflate the real estate bubble in
  the U.S.
• Americans were able to save nothing while consume
  much on the backs of inflated real estate asset
  prices.
• The era of cheap money easy credit are gone.

12
Chinas U.S.s Mutually Assured Destruction-4
of 4

• 2009s U.S. trade deficit with China is expected
  to roughly equal last years, just over 200
  billion
• With projected 1 trillion U.S. deficits for each
  of the next 10 years, foreign capital is
  essential
• If China others do not purchase U.S. debt,
  their dollar holdings will lose significant value
• A weaker U.S. currency aids U.S exports but can
  lead to higher interest rates a flight of
  capital. 40 of Chinas GDP are exports.
• A Monetary System rebalancing is required

13
Foreign Holdings of U.S. Debt to the Public
2009
1990
19
49
51
81
China, Japan, South Korea Singapore
account for 47 of foreign holdings
14
Composition of Federal Spending ( of Total
Spending)
2008
1968
4
Med. 20
13
All Else 30
All Else 31
6
SS 21
Defense 21
Defense 46
8
15
Mandatory vs. Discretionary Spending ( of Total
Spending)
1965- 5.1 Workers per SS
1975
Mandatory Lt. Blue
Discretionary Dk Blue
34
47
53
66
2008- 3.3 Workers per SS
1985
50 Portion of budget spent on S.S., Medicare,
Medicaid net interest in 2008 all mandatory.
38
44
56
62
16
The state of our States Municipalities

• Net of stimulus funds, the Center on Budget
  Policy Priorities estimates total state deficits
  of 255 billion through fiscal 2011. An average
  of 5 billion per state.
• Without more federal aid, state budget cuts will
  shave nearly 1 point off U.S. GDP eliminating
  almost 1 million jobs through 2011.
• Of the 787 billion stimulus package, states were
  allotted about 250 billion of this total.
• Municipalities states tax-capacities debt
  levels have hit or nearly hit saturation while
  safety net, infrastructure, and unfunded pension
  costs rise.

17
The state of Housing

• In 2010, conservative estimates show another 2.4
  million U.S. homes lost to foreclosures, while
  prices drop another 10 (NYT).
• The Census Dept. reports 14.5 of housing units
  were vacant in 3Q 2009 average household
  formation of about 1.2 million per year is
  overwhelmed by the average housing starts of 1.7
  million between 1996-2006
• 3Q 2009 delinquent foreclosed homes hit an all
  time record of 14.4. Foreclosures are expected
  to surge as those not eligible for the
  Presidents anti-foreclosure plan come off
  lenders books.

18
The state of Fannie Mae, Freddie, FHA the FDIC
1.25 trillion in monetized Fan/Fred debt by the
Federal Reserve Bank (the printing of money to
purchase debt)
Congress has appropriated 400 billion in
Fan/Fred total projected losses
112 billion in realized Fan/Fred losses
100 billion thru 2013 FDIC total projected bank
losses
18 of FHA loans are 30 days or more past due
19
The state of Commercial Real Estate

• 534 billion of the 800 billion in commercial
  real-estate loans held by banks maturing between
  now and 2014 are underwater, meaning loans
  exceed property value.
• Roughly 800 billion in real estate refinancing
  is needed between now and 2014. There is not
  enough U.S. capital for this. Foreign countries
  sovereign wealth funds will be required.
• Lefrak Associates estimates were only in the
  2nd inning of this Commercial Real Estate
  storm, it faces hundreds of billions of
  dollars in losses.
• 1.4 trillion in (weaker) corporate companies
  bonds loans come due between now and 2015,
  putting further pressure on capital markets
  interest rates.

20
The state of the Consumer (70 of our GDP)

• U.S. household debt service as a of disposable
  income reached 130 in 2008, compared to 83 in
  1995
• 13 trillion lost in household wealth since 2007
• Credit card companies have slashed credit lines
  and have tightened restrictions
• A University of Connecticut study showed a 40
  pay cut by those returning to work after a layoff
  taking up to 6 years before earning 80 of
  their prior paychecks

21
The state of Jobs

• America has added no private sector jobs for past
  10 yrs
• There are 6 applicants for every 1 job available
• The reported 10.2 unemployment rate jumps to
  17.5 when including discouraged workers and
  those working part-time in lieu of full-time
• Between 2001-2007, 40 of jobs created were tied
  to the housing sector (WSJ)
• Approx. 125,000 monthly new jobs are required
  just to meet new entrants into the workforce
• Manufacturing capacity utilization is at a low of
  67

22
The state of our Demographics

• The first of 80 million baby boomers began
  retirement on January 1, 2008.
• 10,000 of these baby boomers turn 50 years old
  every day and you think medical costs are high
  today?
• In 1960, there were 5.1 workers for every Social
  Security beneficiary, today it is 3.3. 30 years
  from now, its estimated to be 2.1

23
The state of Energy Demand

• The U.S. Energy Information Agency (EIA)
  estimates U.S. energy demand to grow 21 over the
  next 20 years.
• The EIA estimates 80 of that demand will be
  derived from fossil fuels, even with
  subsidization of renewables.
• World energy demand is estimated to grow some 50
  over the coming 25 years.
• Of the worlds 439 nuclear reactors, more than
  half are expected to be retired in 20 years.

24
The state of World Economies

• Harvard Bus. Review reported in 1980, the total
  value of global financial assets was equal to
  world GDP.
• In 2007, these same financial assets increased to
  356 of world GDP most of the increase from
  private public debt.
• Competitive currency devaluation, the devaluation
  of a currency to make a country's exports more
  competitive, is occurring through monetization,
  or the printing of money.

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• KEY VERMONT
• ECONOMIC DATA

26
The state of Vermont Indebtedness-2009 data
70 million (40M to stimulus)
300 mill.
400 million
1.6 billion (Teacher state employees)
(Net of Stimulus)
470 million
466 million
(Champlain Bridge VT State Hosp. costs not
included) General Fund revenues at 2004 levels
27
VT Taxpayers Looming 3.5 Liabilities-2007 data
90M
75M
43M
18M
45M
38M
1.3B
451M
161M
438M
300M
200M
300M
1.3B
200M
300M
161M
90M
300M
75M
45M
451M
438M
43M
451M
38M
18M
New Highway Const. Projects include the Circ,
Bennington Morrisville Bypass. See Web Site for
details on all projects.
Excludes 1.6B pension liab.
3.5B
28
Unsustainable spending Vermont Fiscal Year
2005-2009 Growth Rates
(Approx. 300 increase over income growth)
23
(Over 200 increase over inflation)
13
10
(VT govt payroll employee benefit costs grew
70 between 2000-2007 vs. inflation of approx.
20)
29
Student Enrollment Down - Employment and Costs Up
1997 Act 60 Implementation
Source Summary of the Annual Statistical Report
of Schools (SASR) FY 1997 - 2006
30
Where Vermont Generates Its Tax Revenues
3
8
30
12
12
20
15
Source Vermont Comprehensive Annual Financial
Report. Fiscal year ending 6/30/06. Total
Revenues were approximately 3.8 billion
31
Cumulative of Income Taxes Paid By Income
Level Number of Filers
75,000 up pay 60 of Taxes
100 304,254 100
98 185,534 61
Start here, move clockwise
26 of Taxes Paid, 2,113 Tax Filers 0.69 of
Filers
91 Paid 121,827 40.04
38 Paid, 6,970 Filers 2.29
75 Paid 58,415 19.20
49 15,200 4.99
60 27,632 9.08
Top 5 pays about 50
Source Vt. Comprehensive Annual Financial
Report, 2007
32
How Does Vermont Spend its Revenues?
75 of Revenues Go Towards Education and Human
Services
5
6
39
7.5
36
75
Source Vermont Comprehensive Annual Financial
Report. Fiscal year ending 6/30/06.
33
VTs Private Sector Job Growth From 2000-2007 0
(Pre-Recession)
(In thousands)
Since 2001s recession, private sector job
growth in Vermont has essentially been 0.
Source Public Assets Institute
34
What Kinds Of Jobs Are Being Created?
35
VT Retirees Double In 25 Years While The Work
Force Shrinks
Over 65, (Retirees)
Age 20-65, (working age)
Total Population
Age 6-18, (school age)
Source Center for Research on Vermont, Art
Woolf. (Indexed to 2000 100)
36
Vermont Summary

• We Have Lived Beyond Our Means For Far Too Long
• Among the highest taxed regulated in the
  nation
• Spending at roughly 3X the rate of inflation
• 0 Private-Sector Job growth 2000-2007
• Vermont faces billions in unfunded liabilities
• Losing our young people at 4X the national
  average
• With the Medicare and Social Security crisis, VT
  cannot expect continued Federal assistance to
  bail us out

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• VERMONT SOLUTIONS
• A society cannot consume and not produce.

38
No more Tinkering

• Fiscal policy is on an unsustainable path to an
  extent that cannot be solved by minor tinkering.
• - Douglas
  Elmendorf President Obamas Director of the
  Congressional Budget Office,
  November, 2009

39
Wanted A Plan

• The Pew Center on the States released its 2008
  Report Card on state management.
• Pew strongly agrees that the state Vermont
  needs to do a better job of looking at the big
  picture when it comes to managing, not just
  people, but everything.
• Poor strategic planning is the theme running
  through Pews report card for Vermont.
• - Rutland
  Herald 4/7/08

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• E-mail Tom Licata at tomlicata2_at_comcast.net