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Five Things You Need to Know: U.S. Bankruptcy?, Why Do Gokhale & Smetters Hate America?, Good News?, AO-Not-So-Well?, MV Celebrity Ringtones?


What you need to know (and what it means)!


Minyanville's Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Is the U.S. Bankrupt?

A paper from the Federal Reserve Bank of St. Louis Review by Boston University Professor of Economics and National Bureau of Economic Research associate Laurence J. Kotlikoff crossed our desk this morning, courtesy of Minyanville Professor Scott Reamer. It asks, "Is the United States Bankrupt?"

  • Is the U.S. Bankrupt? "Many would scoff at this notion [of U.S. bankruptcy]," Professor Kotlikoff writes. "They'd point out that the country has never defaulted on its debt; that its debt-to-GDP (gross domestic product) ratio is substantially lower than that of Japan and other developed countries; that its long-term nominal interest rates are historically low; that the dollar is the world's reserve currency; and that China, Japan, and other countries have an insatiable demand for U.S. Treasuries."
  • Yes, that's the bullish argument in a nutshell, but wait, why do China, Japan and other countries have an insatiable demand for our debt in the first place? Before we get into the nuts and bolts of Professor Kotlikoff's counter-argument, let's imagine some weird sound effects and wavy line imagery suggesting we are going back in time and, in fact, go back in time to a speech delivered in March 2005 by then Federal Reserve Board Governor Ben Bernanke:
    "I will argue that over the past decade a combination of diverse forces has created a significant increase in the global supply of saving--a global saving glut--which helps to explain both the increase in the U.S. current account deficit and the relatively low level of long-term real interest rates in the world today."
  • Oh, ok, so it's due to a combination of diverse forces that have created a global savings glut.
  • Professor Kotlikoff's paper has a slightly different take, and it is far less sanguine. "The developed world is not saving enough and will not be saving enough to generate capital deepening on its own," he writes. "However, China is saving and growing at such extraordinarily high rates that it can potentially supply the United States, the European Union, and Japan with huge quantities of capital. This message is delivered in Fehr, Jokisch, and Kotlikoff (2005)... Their model suggests that China can serve as America's saver and, consequently, savior, provided the U.S. government lets growth outpace its spending and provided China is permitted to invest massive sums in our country. Unfortunately, recent experience suggests just the opposite."
  • The bottom line, according to the paper, is that a "partial-equilibrium analysis strongly suggests that the U.S. government is, indeed, bankrupt, insofar as it will be unable to pay its creditors, who, in this context, are current and future generations to whom it has explicitly or implicitly promised future net payments of various kinds."
  • Kotlikoff finds that one measure of the fiscal gap (the Gokhale and Smetters measure, See Number Two of Five Things) is a stunning $69.5 trillion. "One way to wrap one's head around $69.5 trillion is to ask what fiscal adjustments are needed to eliminate this red hole," he writes. "The answers are terrifying."
  • And what are those answers according to Kotlikoff?
  • One solution is an immediate and permanent doubling of personal and corporate income taxes. Hmm, that doesn't seem very appealing.
  • Another is an immediate and permanent two-thirds cut in Social Security and Medicare benefits. I can live without Social Security and Medicare, but what about Mom and Dad and the rest of the Baby Boomers?!
  • A third alternative would be to immediately and permanently cut all federal discretionary
    spending by 143 percent. Hahaha. Yeah, we'll check in with the "Prince of Pork," Rep. Alan Mollohan, D-WV, on that one.
  • The Final Solution? Storm the Bastille 2! Ironically, Bastille Day is this Friday. Weird.

2. Why Do Gokhale and Smetters Hate America?

Ok, so this so-called Gokhale and Smetters measure showing the U.S. is probably bankrupt was clearly devised by a couple of wacko economists who hate America, right?

  • Not so fast, Inspector KneeJerk.
  • The measure was developed back in 2002 by Jagadeesh Gokhale, an economist with the Cleveland Federal Reserve and the American Enterprise Institute (AEI), and Kent Smetters, an economist at the Wharton School of the University of Pennsylvania.
  • What the number measures is the present value difference between all future government expenditures, including servicing official debt, and all future receipts.
  • In calculating the fiscal gap, Gokhale and Smetters use the federal government's arbitrarily labeled receipts and payments.
  • Whatever, why do these guys hate America so much?
  • Well, the study was actually derived from an extensive US Treasury Department fiscal gap analysis commissioned in 2002 by then Treasury Secretary Paul O'Neill.
  • Smetters was at the time the Deputy Assistant Secretary of Economic Policy at the Treasury and he recruited Gokhale, then senior economic adviser to the Federal Reserve Bank of Cleveland, to assist in the study.
  • According to Kotlikoff, "Gokhale and Smetters's $65.9 trillion fiscal gap calculation relies on the same methodology employed in the original Treasury analysis. Hence, one can legitimately view this figure as our own government's best estimate of its present-value
    budgetary shortfall

3. Now for some Good News. Oh, wait.

According to Dow Jones newswire reporter Damian Paletta in a story on CBSMarketwatch, Senior Treasury officials scheduled separate meetings with Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks during the next week to discuss potential new reporting requirements.

  • The meetings indicate that the Treasury is closer to potentially limiting the debt issued by the GSE's.
  • Fannie Mae and Freddie Mac issue debt so that they can buy mortgages in the secondary market.
  • According to Paletta, Treasury officials have alleged that the size and weak internal controls at Fannie Mae and Freddie Mac posed systemic risks to the economy.
  • "The Treasury plans to meet Thursday with Fannie Mae, Friday with Freddie Mac, and Monday with the Federal Home Loan Banks, according to a person familiar with the meetings," the story says.
  • Paletta reported back in June that such meetings were potentially in the works.

4. Time Warner and AO-Not-So-Well?

Time Warner Chief Executive Officer Richard Parsons and 200 other media executives will gather at Allen & Co.'s annual retreat starting today in Sun Valley, Idaho. According to Bloomberg, Parsons may be under pressure to explain why Time Warner stock continues to trail other media stocks.

  • Bloomberg notes that Parsons has said that all media stocks are simply out of favor.
  • "Our company is clearly undervalued,'' he said at the annual shareholder meeting in May, according to Bloomberg. "All media stocks suffer from concerns our investors have regarding new technologies.''
  • But, it appears the numbers don't exactly bear that out.
  • Shares of Time Warner year-to-date are down 5%, compared to a 26% rise for Disney, a 25% rise for Comcast and a 21% rise for News Corp.
  • Earlier this year Carl Icahn sought to break up the company and spin off AOL, among other units. And according to Bloomberg some are concerned that it is indeed AOL's faltering cash flow that is hurting Time Warner's stock.
  • However, Minyanville President Kevin Wassong, in an article on Monday, insists that breaking up AOL away from Time Warner is NOT a good idea.
  • Rather, the integration of AOL into Time Warner is the issue going forward.
    "This integration will be a critical part of Time Warner's growth in the years ahead," Wassong wrote. "From a marketer's perspective, Time Warner knows three things:
    1) It knows how to create compelling content. (Think HBO.)
    2) It knows the power of the advertising dollar (and for AOL it seems like it has put process in place to capture those dollars), it had a 26% increase in Ad revenues for the quarter.
    3) It knows how to distribute content. So shifting to an ad supported model for AOL content is a smart, long term strategic move."
  • "If AOL can get consensus from management and the support of the Time Warner organization across the board, Yahoo!, Google and MSN should look in the side view mirror and heed the warning "objects may appear closer than they look."," he added.

5. Minyanville Celebrity Ringtones

Cell Phone ringtones are the latest pop culture phenomenon. (By "latest" we, of course, mean "dying fad which finally found its way into the news.") Still, according to the Denver Post, "Seems like everybody's matching up their dialing buddies with a song snippet." While the Denver Post asked you to match up the tune with the celeb who is calling, below we're asking you to see if you can pair the tune with five Minyanville celebrities. Send answers here.

No positions in stocks mentioned.

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