China’s Economic Challenges

Previous posts this year, “The China Bubble,” and “National Debt and Rates of Return,” have already emphasized that China’s real estate market is grossly overvalued. Today on the respected economics blog, Mike Shedlock has offered new insights on the coming correction in China which he, too, has seen coming for a long time. In his post “China Hikes Rates, Ponders Capital Controls to Halt Currency Inflows,” Shedlock lists eight reasons China faces a hard landing:

Hot money inflows Huge property bubble Massive increases in money supply, much of it property speculation and building of unneeded capacity Currency manipulation charges from the US and potential trade wars Unsterilized trade imbalances fuel inflation Slowing Europe Dearth of Jobs for new graduates Potential social unrest

Shedlock also provides a link to a story posted December 18th, 2010 on the U.K. Daily Mail’s website entitled “The ghost towns of China” that shows amazing satellite images of deserted cities that are meant to be home to millions. And today in the Wall Street Journal, a column by Hugo Restall entitled “China’s Real-Estate Frenzy” has this to say about a property bubble in China, “Housing prices in the U.S. peaked at 6.4 times average annual earnings this decade. In Beijing, the figure is 22 times.”

You don’t have to be an […] Read More

National Debt and Rates of Return

Over the past few weeks it has been clear that another exploration of deflationary risk is in order. Having already published Inflation vs. Deflation (3-15-10) and Avoiding Global Deflation (7-18-10), as well as The China Bubble (6-8-10) there seemed no point in compiling additional alarming, but anecdotal information. Nothing has changed. Debt is too high almost everywhere, certainly in the U.S. and the Eurozone, and even if Chinese debt ratios appear low, the information available could be misleading because China’s banking system is opaque, and much of their collateral may be grossly overvalued.

Because for the past thirty years the global economy has relied on rising debt to fuel rapid economic growth, as debt levels become unsustainable, economic growth slows. When that occurs, asset values drop, meaning that outstanding loans are no longer backed by sufficient collateral. Even in a mildly deflationary environment – which for now, thankfully, is all we are dealing with – real rates of return on large investment funds cannot realistically be projected at levels that cause total interest payments to consume an inordinate percentage of GDP. The more debt exists as a percentage of GDP, the more a burden interest payments become, and the more imperative it becomes to keep interest rates low to maintain solvency – whether that is solvency of government, business, or household entities.

As an aside, when considering levels of debt, what level is deemed sustainable will affect the […] Read More

Voter Fraud in America

In a previous post “Widespread Voter Fraud” the point is made that voter fraud is something that has plagued democracies throughout history; it is certainly something that has challenged American democracy over the past 200+ years; it is not something that is practiced exclusively by either party. So it should come as no surprise that voter fraud was alive and well in the 2010 election cycle.

In addition to the compilation from, “How Unions or Their Allies Could be Stealing November’s Election Right Now,” referenced in the previous post, what follows are links to additional useful summaries of some of the problems we apparently are having with voter fraud. What is disturbing is that these reports are found on a handful of lightly trafficked websites that focus on this topic – and within those reports are links to mainstream media articles on the topic. But the mainstream media covers newsworthy anecdotes regarding possible election fraud, then moves on. This is too bad, because if you read these reports from the blogosphere, they seem credible.

On the Robomonkey blog, their “Archive for the ‘Voter Fraud’ Category” includes a thirteen part series of posts entitled “Grand Theft Democracy.” These are well worth reading. On the HillBuzz blog, their “Voter Fraud / Election Tampering Thread” adds several additional valuable reports and […] Read More

Calculating Public Employee Benefit Overhead

A post published last October, “Public Employee Compensation” estimated the average state and local employee in California makes about $100K per year. This post attracted a great deal of comments and discussion, including identifying some minor errors in the calculations. These errors were offsetting, however, and the findings generated in that report are now distilled in this post. Not only the data compiled, but the methodology, may hopefully be of value to interested citizens who wish to independently assess how much their local public servants are actually costing the taxpayers in total compensation when the true value of their benefits are included.

Determining a credible estimate for the average base pay of California’s state and local employees is fairly straightforward. Here is the basis of those calculations – using only full-time workers this time: As of March 2008 there were 1,245,734 full-time workers employed by local government agencies, mostly cities and counties, in California, and their payroll for the month of March 2008 was 7,070,297,612 (ref. ). This equates to 5,652 per month, or 67,818 per year. During the same period there were 338,725 full-time workers employed by the state of California, and their payroll for the month of March 2008 was 2,002,723,495 (ref. ). This equates to 5,913 per month, or 70,950 per year. Using the state of California’s own payroll data, data that is 2.5 years old and therefore assumes zero increases to compensation, in aggregate, the state […] Read More

Teacher Pension Solvency

A fairly typical pension plan for a public school teacher in California is as follows – if they retire at age 55, they receive 1.4% of the average of what they were paid during their three consecutive years of highest pay. If they retire at are 60, the multiplier increases to 2.0%, and if they retire at age 63, it will be 2.4%. Also fairly typical are the following rates of contribution into the pension fund – the employee contributes 8.0% in the form of payroll withholding, and the employer contributes an additional 8.25%. This post is to examine what rate of return on the pension fund is necessary in order to maintain solvency under these terms.

If you check the Actuarial Life Table courtesy of the U.S. Social Security Administration, you will see that the average 63 year old American male has a life expectancy of another 18 years, and the average American female at age 63 has a life expectancy of 21 years. To be conservative, assume the pension fund will need to retain a positive balance for 18 years after retirement – taking the average would require a higher rate of return, but in the interests of always using conservative assumptions, we’ll go with 18 years.

Following this text are three tables that show the results of a baseline case and two what-ifs. In the baseline case, the teacher commences work at age 26, works for 38 years, then enjoys 18 years of […] Read More

Why California is Bankrupt

Over the past year several attempts have been made here to evaluate just how much public sector employees make in total compensation. The most comprehensive of these was “Public Employee Compensation,” published on Oct. 24th, 2010. In that post, which as of this writing has attracted 44 comments from very informed readers, it appears fairly well-settled that the average total compensation for a state or local worker in California is about $100K per year, and the average total compensation for a private sector worker in California is slightly under $60K per year.

This data comes with a lot of caveats, two of which are worth highlighting, (1) total compensation is based on putting a value on current funding requirements for future retirement benefits, including pensions and health insurance, using a conservative inflation-adjusted 3.0% return to retirement benefit funds; currently, for example, CalPERS uses an after-inflation return projection of 4.75%, and (2) a true apples-to-apples comparison of public sector compensation to private sector compensation should normalize for the average skill sets that characterize the workforce in each sector. Advocates for retaining the higher rates of average compensation to the public sector argue, for example, that on average, public sector workers have higher average educational attainments. There is clearly a degree of truth to this argument. Another argument frequently heard is that public safety employment entails personal risk that doesn’t accrue to jobs in the private sector, and this too has validity. The real question is how much […] Read More