According to the latest census, there are now just under 39.5 million persons age 65 and over in the United States, and another 10.7 million age 60-64. Yet according to an insurance data-gathering organization called LIMRA, only about seven million of those have long-term care insurance coverage.
As you probably know, long-term care--or LTC as it is known to professionals--is any insurance coverage that pays for the costs of a stay in a nursing home or for someone to provide care and assistance in your home if you (or a parent, or loved one) should ever become unable to care for yourself. It has been estimated that roughly two-thirds of all 65-year-olds will, at some point in their lives, need this kind of care. About half are expected to require more than 90 days of skilled nursing care. The odds are one in ten that a person will be in need of care for three years, and another ten percent will need care for five years or longer.
For the unlucky minority, the costs can be significant. One state-by-state database shows that the average nursing home cost across the nation is $71,000 a year, or $195 a day, but these costs vary dramatically depending on the actual facility you're looking at, from just under $50,000 up to (gulp) $200,000 annually.
The AARP estimates that some two-thirds of all of today's nursing home residents pay for their care with money from Medicaid, the national health insurance program for persons with low incomes. There is, in fact, a thriving cottage industry in the legal community offering tips on how to impoverish an elderly loved one in order to qualify for government assistance. The problem is that many facilities limit the number of beds they offer to Medicaid recipients, which means that the genuinely impoverished--and those who have maneuvered themselves into impoverishment--may not be able to get the best care.
Another government program is on the way, although some are already questioning its long-term solvency. The recently-passed health care law created something called the Community Living Assistance Services and Supports program, otherwise known as CLASS. CLASS will be available through employers. It will collect monthly premiums, and after five years, participating employees will be covered and receive benefits if they need care, whether they're in their 20s recovering from a snowboarding accident or in their 90s dealing with Parkinson's disease.
However, recent reports in the Washington Post and the New York Times suggest that the program, which is due to open either late next year or in 2013, may not actually be solvent unless younger people sign up for what has generally been regarded as middle-age (or later) insurance. The Center for Retirement Research at Boston College has estimated that if fewer than one percent of participants in the CLASS plan are under age 40, then the program would need to charge $312 a month to make the program actuarially sound. At that price, it might be hard to get people to sign up.
If the government is worried about funding long-term care expenses, than you probably should be too. But how would you know whether to self-insure or buy coverage?
As it happens, an article in a recent issue of Financial Planning magazine offers a rough way to weigh the costs against the potential benefits. The article assumed that there is a 20% chance of needing one year of care, and a 10% chance that you'll spend three years or more in a nursing home or in your own home under the care of a skilled nurse. You could either buy a policy at age 55 with premiums of $3,400 a year or roll the roulette wheel and take the risk of incurring long-term care costs of $57,000 a year in current dollars. The analysis assumes that you (or a loved one) will live to age 85, and the care costs will tend to occur late in life.
Bringing all the various costs back to present-day dollars, the analysis says that you have a 60% percent chance of never needing to make a claim and, therefore, losing all your premiums--a present value cost of $60,000. You have a 20% chance that you'll stay in a facility for just one year, which means that if you bought the insurance, you would still come out behind about $12,000, on a present value basis.
You have an additional 10% chance of staying in a nursing facility for three years, in which case your insurance purchase would result in an $85,000 savings--again in present value dollars. And if you are among the one in ten who requires five years of care, then your insurance purchase would result in a $183,000 gain.
There is one additional factor to this equation. If you self-insure long-term care costs, that money would typically be set aside in safe fixed income investments which currently (you may have already noticed this) offer little return. If you buy insurance, that money could be redeployed into a more broadly-diversified investment portfolio, where the returns (no guarantee, of course) are expected to be higher, based on historical numbers.
And, depending on your preferences, there may be one more factor to consider. LTC insurance is sometimes referred to as "nursing home avoidance" insurance, because unlike Medicaid, LTC policies will typically cover some or all of the costs for home care, allowing you to sleep in your own bed during your period of convalescence. CLASS is also projected to pay for home care, but the first benefits won't be given out until 2017 at the earliest.
Like all insurance, this is a premium you would pay and hope it never results in a claim. Many will achieve that happy result. But millions of others are someday going to wish they hadn't rolled the dice on one of the costliest potential consequences of getting older. More people should at least be talking about whether they want coverage--either for themselves, or for their parents, or both.
Sources:
LTC popularity and need analysis: http://www.financial-planning.com/fp_issues/2011_9/is-long-term-care-insurance-worth-it-2674824-1.html
Census figures: http://en.wikipedia.org/wiki/Demographics_of_the_United_States
http://www.censusscope.org/us/chart_age.html
AARP: http://assets.aarp.org/external_sites/caregiving/options/nursing_home_costs.html
Nursing home costs by state: http://www.prepsmart.com/long-term-care-costsbystate.html
Explanation of CLASS: http://newoldage.blogs.nytimes.com/2010/03/24/a-new-long-term-care-insurance-program/
http://www.nytimes.com/2011/04/30/your-money/health-insurance/30money.html?pagewanted=all
http://www.washingtonpost.com/politics/ap-exclusive-warnings-ignored-on-new-long-term-care-programs-bankruptcy-risks/2011/09/14/gIQA7yDPSK_story.html
Friday, September 30, 2011
Tuesday, September 13, 2011
ASSESSING THE AMERICAN JOBS ACT
Will Congress pass it? What difference could it potentially make?
On September 8, President Obama announced a new plan to improve the economy – the $447 billion American Jobs Act, a sequel of sorts to his past economic stimulus proposals. His announced goal: job creation without new taxation.
While the President took some sharp jabs at Republicans in his speech to Congress (“I know that some of you have sworn oaths to never raise any taxes on anyone for as long as you live”), early indications are that the bill will have noticeable bipartisan support.1
What’s in this bill? The AJA would try to boost the economy through seven different tactics – extensions and expansions of tax breaks, and infusions of federal dollars.
1. The current payroll tax holiday would be extended through the end of 2012.
2. The payroll tax would fall to 3.1% - not only for workers, but also for businesses with payrolls of $5 million or less.
3. Companies could get a tax credit as large as $4,000 for hiring the long-term unemployed (people who have been out of work for at least 6 months).
4. Long-term jobless benefits would again be extended.
5. $80 billion of federal money would be assigned to new infrastructure projects (highways, bridges and schools).
6. Businesses could expense 100% of their investments in 2012, just as they have been able to do in 2011.
7. Additional federal money would be given to struggling state and local governments to help them avoid layoffs of first responders and teachers.2,3
How could this all be funded without new taxes? President Obama claims the effort can be paid for as a byproduct of his plan to reduce the federal deficit (a plan he will discuss in greater detail in a September 19 speech).1,4
The bill isn’t set in stone yet. The AJA goes to the House for a vote this week, and though the House Republican leadership likes the essence of the plan, it may seek major alterations.
In a jointly authored statement issued on September 9, House Speaker John Boehner (R-OH), House Majority Leader Eric Cantor (R-VA), Majority Whip Kevin McCarthy (R-CA) and Conference Chairman Jeb Hensarling (R-TX) said the plan “merits consideration”, but they also hoped that the President’s ideas were not offered “as an all-or-nothing proposition, but rather in anticipation that the Congress may also have equally as effective proposals to offer for consideration.”4
Indeed, Republicans have had an alternative plan in the works for a while - the so-called Plan for America’s Job Creators - which centers on tax reduction, decreased non-defense discretionary spending and less costly industry regulations to stimulate private-sector job growth. There isn’t much support for it among Democrats.
What do economists think the AJA could accomplish? Some think the economy would get some short-term relief if it became law. Others see an upcoming object lesson in failed Keynesian economics.
• Moody’s Analytics chief economist Mark Zandi is big on the bill – he believes it could add 2% to GDP, cut 1% off the jobless rate, and create 1.9 million jobs in an economy “on the edge of recession”.
• University of Pennsylvania Wharton School of Business professor Susan Wachter thinks the payroll tax reductions alone could generate 1 million jobs and expand the economy by 1%.
• At Pimco, Mohamed El-Erian calls it a “credible program that is focused on the right structural areas.”
• Unicredit’s Harm Bandholz thinks the AJA could “add up to 2 percentage points to growth in the coming year.”
• “Bottom line: not a lot of bang for the buck here,” states Tom Porcelli of RBC Capital Markets, who feels that the economic impact of the infrastructure investments will likely be “fairly modest … the red tape and politics involved in allocating these funds makes the implementation a long and drawn-out process.”
• The Heritage Foundation’s J.D. Foster sees “a bunch of retread policy ideas that two years after they were first tried managed to create an arithmetic novelty – exactly zero job growth in August. In total, the President is calling for more new spending on proven policies that are proven failures.”5,6
As the economy is in such a low gear, you may see Democrats and Republicans support the bill with newfound unity or at least tolerance. While America can’t reach across the Atlantic and fix the Eurozone crisis hampering world stocks, this envisioned stimulus could help our economy make some small strides.
Citations.
1 - advisorone.com/2011/09/09/obama-chides-congress-as-he-urges-passage-of-jobs [9/9/11]
2 - montoyaregistry.com/Financial-Market.aspx?financial-market=maxxing-out-your-ira&category=1 [9/9/11]
3 - money.msn.com/business-news/article.aspx?feed=AP&date=20110909&id=14243169 [9/9/11]
4 - latimes.com/news/politics/la-pn-house-jobs-plan-20110909,0,2297315.story [9/9/11]
5 - usatoday.com/money/economy/story/2011-09-09/obama-jobs-plan-economists/50336434/1 [9/9/11]
6 - blogs.wsj.com/economics/2011/09/09/more-economists-react-gauging-impact-of-obama-jobs-proposal/ [9/9/11]
6 - blogs.wsj.com/economics/2011/09/09/more-economists-react-gauging-impact-of-obama-jobs-proposal/ [9/9/11]
On September 8, President Obama announced a new plan to improve the economy – the $447 billion American Jobs Act, a sequel of sorts to his past economic stimulus proposals. His announced goal: job creation without new taxation.
While the President took some sharp jabs at Republicans in his speech to Congress (“I know that some of you have sworn oaths to never raise any taxes on anyone for as long as you live”), early indications are that the bill will have noticeable bipartisan support.1
What’s in this bill? The AJA would try to boost the economy through seven different tactics – extensions and expansions of tax breaks, and infusions of federal dollars.
1. The current payroll tax holiday would be extended through the end of 2012.
2. The payroll tax would fall to 3.1% - not only for workers, but also for businesses with payrolls of $5 million or less.
3. Companies could get a tax credit as large as $4,000 for hiring the long-term unemployed (people who have been out of work for at least 6 months).
4. Long-term jobless benefits would again be extended.
5. $80 billion of federal money would be assigned to new infrastructure projects (highways, bridges and schools).
6. Businesses could expense 100% of their investments in 2012, just as they have been able to do in 2011.
7. Additional federal money would be given to struggling state and local governments to help them avoid layoffs of first responders and teachers.2,3
How could this all be funded without new taxes? President Obama claims the effort can be paid for as a byproduct of his plan to reduce the federal deficit (a plan he will discuss in greater detail in a September 19 speech).1,4
The bill isn’t set in stone yet. The AJA goes to the House for a vote this week, and though the House Republican leadership likes the essence of the plan, it may seek major alterations.
In a jointly authored statement issued on September 9, House Speaker John Boehner (R-OH), House Majority Leader Eric Cantor (R-VA), Majority Whip Kevin McCarthy (R-CA) and Conference Chairman Jeb Hensarling (R-TX) said the plan “merits consideration”, but they also hoped that the President’s ideas were not offered “as an all-or-nothing proposition, but rather in anticipation that the Congress may also have equally as effective proposals to offer for consideration.”4
Indeed, Republicans have had an alternative plan in the works for a while - the so-called Plan for America’s Job Creators - which centers on tax reduction, decreased non-defense discretionary spending and less costly industry regulations to stimulate private-sector job growth. There isn’t much support for it among Democrats.
What do economists think the AJA could accomplish? Some think the economy would get some short-term relief if it became law. Others see an upcoming object lesson in failed Keynesian economics.
• Moody’s Analytics chief economist Mark Zandi is big on the bill – he believes it could add 2% to GDP, cut 1% off the jobless rate, and create 1.9 million jobs in an economy “on the edge of recession”.
• University of Pennsylvania Wharton School of Business professor Susan Wachter thinks the payroll tax reductions alone could generate 1 million jobs and expand the economy by 1%.
• At Pimco, Mohamed El-Erian calls it a “credible program that is focused on the right structural areas.”
• Unicredit’s Harm Bandholz thinks the AJA could “add up to 2 percentage points to growth in the coming year.”
• “Bottom line: not a lot of bang for the buck here,” states Tom Porcelli of RBC Capital Markets, who feels that the economic impact of the infrastructure investments will likely be “fairly modest … the red tape and politics involved in allocating these funds makes the implementation a long and drawn-out process.”
• The Heritage Foundation’s J.D. Foster sees “a bunch of retread policy ideas that two years after they were first tried managed to create an arithmetic novelty – exactly zero job growth in August. In total, the President is calling for more new spending on proven policies that are proven failures.”5,6
As the economy is in such a low gear, you may see Democrats and Republicans support the bill with newfound unity or at least tolerance. While America can’t reach across the Atlantic and fix the Eurozone crisis hampering world stocks, this envisioned stimulus could help our economy make some small strides.
Citations.
1 - advisorone.com/2011/09/09/obama-chides-congress-as-he-urges-passage-of-jobs [9/9/11]
2 - montoyaregistry.com/Financial-Market.aspx?financial-market=maxxing-out-your-ira&category=1 [9/9/11]
3 - money.msn.com/business-news/article.aspx?feed=AP&date=20110909&id=14243169 [9/9/11]
4 - latimes.com/news/politics/la-pn-house-jobs-plan-20110909,0,2297315.story [9/9/11]
5 - usatoday.com/money/economy/story/2011-09-09/obama-jobs-plan-economists/50336434/1 [9/9/11]
6 - blogs.wsj.com/economics/2011/09/09/more-economists-react-gauging-impact-of-obama-jobs-proposal/ [9/9/11]
6 - blogs.wsj.com/economics/2011/09/09/more-economists-react-gauging-impact-of-obama-jobs-proposal/ [9/9/11]
Thursday, September 8, 2011
A Prime Time To Refinance
On August 18, rates on 15-year FRMs were averaging 3.36%. Freddie Mac reported the lowest interest rates in at least 50 years in its August 18 Primary Mortgage Market Survey. In fact, it noted record lows across the board. Rates on conventional 30-year home loans were averaging 4.15% on August 18. (The last time 30-year mortgage rates were this minimal was during a stretch in 1950-51 when FHA-backed 30-year FRMs averaged 4.08%.) Average interest rates for 5/1-year ARMs and 1-year ARMs were respectively at 3.08% and 2.86% in the August 18 survey.1,2
You can chalk these new lows up to skidding Treasury yields. In fact, the yield on the 10-year note actually dipped below 2% for a moment on August 18.3
Those able to refinance are seizing the moment. The Mortgage Bankers Association reported that refi applications rose by 30% in the week ending August 5 to the highest level seen so far in 2011.4
If you can do it, keep your long-term goals in mind. Years ago, a refi came down to one factor: if you could knock a couple of percentage points off your interest rate, you did it. Today, it’s a bit more complex. There are three aspects to consider: a) how much you can save per month, b) lender points and fees, and c) how long you intend to live in your home.
Let’s say a refi frees up $150 for you each month. Sounds great, right? It isn’t so great if the mortgage company tacks on a point up front (think $1,500-5,000, depending on the amount of your loan) and a few hundred dollars in fees. If you’re only going to stay in that home for a few more years, that refi is hardly worth it.
If you plan to live in your home for many years, then it’s a different story; you may be poised for substantial savings. This is a simple example, of course. If you are moving from a 30-year loan to a 15-year loan or vice versa, or if you are among those getting out of “ARMs way” and refinancing into a fixed-rate mortgage, you’ve got more variables to think about.
How long will rates stay this low? It is truly hard to say; recent history has illustrated that. On April 10, 2010, a New York Times headline blared: “Interest Rates Have Nowhere to Go but Up”. At that time, the average rate for a 30-year fixed mortgage was 5.31%. Look where it is now.5
Could rates go even lower? If 10-year Treasury yields were to fall even further, that could happen. While the Federal Reserve wants to refrain from QE3, it could again print money and buy Treasuries to cheapen the dollar and help the stock market.
However, the Consumer Price Index rose 0.5% in July – the biggest increase since March - with annualized inflation running at 3.6%. The Fed’s informal inflation target is 2%, so a gap like that would seem to preclude a QE3.
Of course, the Fed has pledged to keep near-zero interest rates in place into 2013 on the expectation that inflation will decline – half of the 0.5% jump in the July CPI could be traced to the rise in retail gasoline prices.6
Through the years, bond investors have often gauged interest rates on conventional home loans by adding about 1.7% to the current percentage yield of the 10-year note. On August 17, Dow Jones Newswires polled bond dealers to get a consensus forecast for the 10-year Treasury yield; they expect yields to end 2011 at 2.5%. Some fund managers and strategists feel that benchmark Treasury yields could end the year under 2.0%. These forecasts imply rates on 30-year FRMs of anywhere from 3.6-4.2% by around New Year’s Eve.7
Interest rates will move north at some point, so a window of opportunity beckons – and no one really knows how long it will stay open.
Think before you make a move. Before you get out that pen and sign anything, talk about your options for refinancing with a qualified mortgage specialist, and talk to your financial consultant to see how your choice to refinance relates to your overall financial situation.
Citations
1 - freddiemac.com/pmms/ [8/18/11]
2 - kentucky.com/2011/08/18/1850034/mortgage-rates-fall-to-lowest.html [8/18/11]
3 - bloomberg.com/news/2011-08-18/u-s-mortgage-rates-fall-to-lowest-in-at-least-50-years-freddie-mac-says.html [8/18/11]
4 - usatoday.com/money/economy/housing/2011-08-11-mortgage-rates-low_n.htm [8/11/11]
5 - nytimes.com/2010/04/11/business/economy/11rates.html [4/11/10]
6 - online.wsj.com/article/SB10001424053111903639404576516054025747710.html [8/18/11]
7 - online.wsj.com/article/BT-CO-20110818-715221.html [8/18/11]
You can chalk these new lows up to skidding Treasury yields. In fact, the yield on the 10-year note actually dipped below 2% for a moment on August 18.3
Those able to refinance are seizing the moment. The Mortgage Bankers Association reported that refi applications rose by 30% in the week ending August 5 to the highest level seen so far in 2011.4
If you can do it, keep your long-term goals in mind. Years ago, a refi came down to one factor: if you could knock a couple of percentage points off your interest rate, you did it. Today, it’s a bit more complex. There are three aspects to consider: a) how much you can save per month, b) lender points and fees, and c) how long you intend to live in your home.
Let’s say a refi frees up $150 for you each month. Sounds great, right? It isn’t so great if the mortgage company tacks on a point up front (think $1,500-5,000, depending on the amount of your loan) and a few hundred dollars in fees. If you’re only going to stay in that home for a few more years, that refi is hardly worth it.
If you plan to live in your home for many years, then it’s a different story; you may be poised for substantial savings. This is a simple example, of course. If you are moving from a 30-year loan to a 15-year loan or vice versa, or if you are among those getting out of “ARMs way” and refinancing into a fixed-rate mortgage, you’ve got more variables to think about.
How long will rates stay this low? It is truly hard to say; recent history has illustrated that. On April 10, 2010, a New York Times headline blared: “Interest Rates Have Nowhere to Go but Up”. At that time, the average rate for a 30-year fixed mortgage was 5.31%. Look where it is now.5
Could rates go even lower? If 10-year Treasury yields were to fall even further, that could happen. While the Federal Reserve wants to refrain from QE3, it could again print money and buy Treasuries to cheapen the dollar and help the stock market.
However, the Consumer Price Index rose 0.5% in July – the biggest increase since March - with annualized inflation running at 3.6%. The Fed’s informal inflation target is 2%, so a gap like that would seem to preclude a QE3.
Of course, the Fed has pledged to keep near-zero interest rates in place into 2013 on the expectation that inflation will decline – half of the 0.5% jump in the July CPI could be traced to the rise in retail gasoline prices.6
Through the years, bond investors have often gauged interest rates on conventional home loans by adding about 1.7% to the current percentage yield of the 10-year note. On August 17, Dow Jones Newswires polled bond dealers to get a consensus forecast for the 10-year Treasury yield; they expect yields to end 2011 at 2.5%. Some fund managers and strategists feel that benchmark Treasury yields could end the year under 2.0%. These forecasts imply rates on 30-year FRMs of anywhere from 3.6-4.2% by around New Year’s Eve.7
Interest rates will move north at some point, so a window of opportunity beckons – and no one really knows how long it will stay open.
Think before you make a move. Before you get out that pen and sign anything, talk about your options for refinancing with a qualified mortgage specialist, and talk to your financial consultant to see how your choice to refinance relates to your overall financial situation.
Citations
1 - freddiemac.com/pmms/ [8/18/11]
2 - kentucky.com/2011/08/18/1850034/mortgage-rates-fall-to-lowest.html [8/18/11]
3 - bloomberg.com/news/2011-08-18/u-s-mortgage-rates-fall-to-lowest-in-at-least-50-years-freddie-mac-says.html [8/18/11]
4 - usatoday.com/money/economy/housing/2011-08-11-mortgage-rates-low_n.htm [8/11/11]
5 - nytimes.com/2010/04/11/business/economy/11rates.html [4/11/10]
6 - online.wsj.com/article/SB10001424053111903639404576516054025747710.html [8/18/11]
7 - online.wsj.com/article/BT-CO-20110818-715221.html [8/18/11]
Tuesday, August 30, 2011
TWO NEW IDEAS, ONE INVOLVING A TWIST
The government still has some options to stimulate the economy.
What can Washington do now to help consumers, housing and stocks? Options remain. The Obama administration and the Federal Reserve are reportedly considering two interesting tactics: one first employed 50 years ago, and another that could bloom into a multi-faceted effort to aid homeowners under pressure.
Is a great mass refinancing coming? The August 24 edition of the New York Times mentioned that the White House was mulling over three different proposals to aid the housing market.
• One plan would let homeowners with government-backed home loans refinance those mortgages at today’s 4% interest rates. The potential economic stimulus could be profound: Columbia University professor Christopher Mayer, who first suggested the idea to the Obama administration, thinks it could save homeowners $75 billion in interest a year. While that would be great for Main Street (and personal spending), it might rile the regulator supervising Fannie Mae and Freddie Mac and mortgage bond investors. Banks could applaud this program, which could start without Congressional approval and without drawing down the $45.6 billion in Troubled Asset Relief funds earmarked for aiding homeowners. (Those billions could be redirected for deficit reduction.)
• A second proposal would change criteria for the federal refinancing programs already up and running so that more mortgageholders could become eligible for help.
• A third plan (actually the most developed of the three) would help troubled homeowners rent out their residences to avoid foreclosure. Houses owned by Fannie and Freddie could be converted to rentals or put to other uses. This plan may prove very attractive to investment firms, especially if the federal government lends them money to promote their involvement.1,2
Could the Fed try a new variation on Operation Twist? In early 1961, we were facing a recession. Soon after taking office, President Kennedy convinced the Federal Reserve to sell short-term Treasuries and invest the proceeds into longer-term bonds. This program – known as Operation Twist – was kind of like a small-scale ancestor of QE2. It lengthened the average maturity of the Fed’s holding of Treasuries and it was fairly successful; it had an impact roughly akin to a 1% cut in the federal funds rate.3,4
Operation Twist had two objectives:
• To bump up the yields on shorter-term Treasuries, thereby making them more attractive to overseas investors while aiding the dollar.
• To reduce long-term Treasury yields and stimulate longer-term investments.
Operation Twist was also a weapon against cross-currency arbitrage. The U.S. was on the gold standard then; billions in gold were leaving our shores. Foreign investors were converting dollars to gold and using the gold to purchase higher-yielding assets in Europe.
Today, the playing field has changed – yet a sequel to Operation Twist could potentially increase appetite for risk. If an effort like this manages to reduce yields on “safe” assets, insurance companies, pension funds and other institutional investors could be convinced to put their money elsewhere (i.e., equities).
Lower long-term interest rates could also reduce the cost of capital for companies and encourage borrowing on Main Street: mortgages, auto financing and other consumer loans would be less expensive. JPMorgan economists think that a new Operation Twist could possibly lower mortgage interest rates by .1%. (This projection assumes the Fed passively buys $20 billion in long-term Treasuries per month.)3
Of course, the stock market would prefer to see a full-blown QE3 rather than the comeback of Operation Twist. Yet with GDP so anemic and the stock market and housing sectors both needing boosts, any idea with merit is welcome – and these proposals may go from drawing board to reality this fall.
Citations.
1 - nytimes.com/2011/08/25/business/economy/us-may-back-mortgage-refinancing-for-millions.html [8/25/11]
2 - foxnews.com/politics/2011/08/25/obama-administration-weighs-mortgage-refinance-plan/ [8/25/11]
3 – money.msn.com/investing/can-the-fed-chief-calm-our-fears-mirhaydari.aspx?page=2 [8/24/11]
4 - foxbusiness.com/markets/2011/08/10/is-fed-reserve-operation-twist-20-around-corner/ [8/10/11]
5 - montoyaregistry.com/Financial-Market.aspx?financial-market=wealth-planning-using-the-stretch-ira-strategy&category=4 [8/28/11]
Monday, August 22, 2011
European Debt
Cruising Toward Resolution
Does it ever feel like this: (http://news.yahoo.com/comics/pat-oliphant-slideshow/#crsl=%252Fphotos%252Fpat-oliphant-slideshow%252F20110817-po110817-gif-photo-060208364.html ) to be a stock market investor these days?
Two weeks ago, the markets were rocked by the Standard & Poors ratings downgrade of longer-term U.S. Treasury securities. This past week, it was problems with European debt.
It's not immediately obvious, even for financial professionals, why U.S. stocks should suffer because Greece or Italy have trouble paying their debt obligations. But in a recent posting, Mohamed El-Erian, who serves as co-CEO of the world's largest bond management company, made an interesting analogy that helps to make the situation a bit clearer.
His analogy suggests that we think of the European Central Bank as a Coast Guard cutter in the Mediterranean, and it gets a warning that a relatively small cruise ship called Greece is in trouble. The ship passed through a significant storm called 2008, and now, through poor planning, has run out of food and fuel and is in danger of sinking. True to its mission, the Coast Guard cutter sets out to tow the battered ship back to shore.
But then the rescue shop receives another message. A somewhat larger cruise ship is also in trouble, as a result of the same storm. Another call comes in, another ship is foundering. And then one of the larger vessels, called Italy, announces that it is in trouble as well.
What to do? Nobody prepared for the possibility that more than one ship would be in danger at once, much less four or five. The Coast Guard vessel can think of only one thing to do; it radios the two largest cruise ships in the Mediterranean, called Germany and France, and asks them to participate in the rescue operation, by cutting short their trips, sharing the food and fuel that was set aside for their passengers, and basically rescue the cruise ship business before too many future passengers become disenchanted and cancel their tickets.
The captain and the cruise ship lines (the leaders of France and Germany) are willing to help out, but the passengers are extremely restless. Why should their trip be sacrificed? Why should the food they paid for be shared with the passengers of less stable or thrifty cruise lines? The captains of the France and Germany cruise ships are afraid their passengers will mutiny if they execute a rescue, and afraid of the consequences if there is no rescue and one of the smaller cruise ships goes down with passengers and crew.
The world, of course, is watching. The overwhelming hope is that the larger ships will come and save the day. The fear is that they may not. Meanwhile, El-Erian says, the crew of the struggling rescue vessel is struggling with a once-unthinkable decision: should throw somebody overboard to lighten the vessel and save the rest of the passengers?
This, El-Erian says, is the European Central Bank's situation today. And if we have learned anything since 2008, it is that in such a highly-connected global economy, if one major entity is allowed to go under the waves (think Lehman Brothers), the entire global system will be negatively affected. Hence, investors sell stocks in fear of another 4th quarter of 2008.
How likely is that? El-Erian points out that there are three possible endgames to the European Sovereign debt crisis. One is a disorderly breakup of the eurozone, which would mean temporary economic chaos. This could happen if the countries with the most debt problems--Greece, Ireland, Portugal, Iceland, Spain and Italy--fail to address their fiscal balance sheets due to pressure from their voters. To return to the cruise ship analogy, the people aboard the vessel named Greece believed that they paid for an appropriate ticket, and now the captain is telling them that they will have to sacrifice their vacation and pay back the Coast Guard and the other cruise ships. The response, for some, has been rioting.
A second possibility is a tighter fiscal union among the European countries, which basically means that Germany (and, to a lesser extent, France) reaches into its pocket and bails out the debtor nations to the south. In return, Germany gets more control over over the economic governance of the other members of the European Union. The slogan of this approach: never again will we float unsafe vessels.
And the third? Several economists, El-Erian says, have floated the idea that two or three "peripheral economies" (Greece and Italy) would take a sabbatical from the euro. They would go back to their own currencies, which would allow them to devalue immediately, making their exports more competitive and their debt less costly. Instead of imposing an unpopular new tax on the population, the countries would impose a stealth tax in the firm of higher inflation. Meanwhile, the euro becomes stronger. The motto: fix your own vessels, and then come back to see us when you're finished.
As one of these scenarios plays out, it might become obvious that many American and European stocks are currently being affected more by anxiety and uncertainty than by any direct connection with the Euro's woes. A report recently noted that Apple Computer was worth more than all 32 of Europe's largest banks. If chaos reigns across the Atlantic, there could be a flood of capital looking for a safe, liquid home in the U.S. stock market.
Source:
http://www.project-syndicate.org/commentary/elerian8/English
http://www.cultofmac.com/apple-was-worth-more-than-all-the-banks-in-europe-earlier-today/109642
Does it ever feel like this: (http://news.yahoo.com/comics/pat-oliphant-slideshow/#crsl=%252Fphotos%252Fpat-oliphant-slideshow%252F20110817-po110817-gif-photo-060208364.html ) to be a stock market investor these days?
Two weeks ago, the markets were rocked by the Standard & Poors ratings downgrade of longer-term U.S. Treasury securities. This past week, it was problems with European debt.
It's not immediately obvious, even for financial professionals, why U.S. stocks should suffer because Greece or Italy have trouble paying their debt obligations. But in a recent posting, Mohamed El-Erian, who serves as co-CEO of the world's largest bond management company, made an interesting analogy that helps to make the situation a bit clearer.
His analogy suggests that we think of the European Central Bank as a Coast Guard cutter in the Mediterranean, and it gets a warning that a relatively small cruise ship called Greece is in trouble. The ship passed through a significant storm called 2008, and now, through poor planning, has run out of food and fuel and is in danger of sinking. True to its mission, the Coast Guard cutter sets out to tow the battered ship back to shore.
But then the rescue shop receives another message. A somewhat larger cruise ship is also in trouble, as a result of the same storm. Another call comes in, another ship is foundering. And then one of the larger vessels, called Italy, announces that it is in trouble as well.
What to do? Nobody prepared for the possibility that more than one ship would be in danger at once, much less four or five. The Coast Guard vessel can think of only one thing to do; it radios the two largest cruise ships in the Mediterranean, called Germany and France, and asks them to participate in the rescue operation, by cutting short their trips, sharing the food and fuel that was set aside for their passengers, and basically rescue the cruise ship business before too many future passengers become disenchanted and cancel their tickets.
The captain and the cruise ship lines (the leaders of France and Germany) are willing to help out, but the passengers are extremely restless. Why should their trip be sacrificed? Why should the food they paid for be shared with the passengers of less stable or thrifty cruise lines? The captains of the France and Germany cruise ships are afraid their passengers will mutiny if they execute a rescue, and afraid of the consequences if there is no rescue and one of the smaller cruise ships goes down with passengers and crew.
The world, of course, is watching. The overwhelming hope is that the larger ships will come and save the day. The fear is that they may not. Meanwhile, El-Erian says, the crew of the struggling rescue vessel is struggling with a once-unthinkable decision: should throw somebody overboard to lighten the vessel and save the rest of the passengers?
This, El-Erian says, is the European Central Bank's situation today. And if we have learned anything since 2008, it is that in such a highly-connected global economy, if one major entity is allowed to go under the waves (think Lehman Brothers), the entire global system will be negatively affected. Hence, investors sell stocks in fear of another 4th quarter of 2008.
How likely is that? El-Erian points out that there are three possible endgames to the European Sovereign debt crisis. One is a disorderly breakup of the eurozone, which would mean temporary economic chaos. This could happen if the countries with the most debt problems--Greece, Ireland, Portugal, Iceland, Spain and Italy--fail to address their fiscal balance sheets due to pressure from their voters. To return to the cruise ship analogy, the people aboard the vessel named Greece believed that they paid for an appropriate ticket, and now the captain is telling them that they will have to sacrifice their vacation and pay back the Coast Guard and the other cruise ships. The response, for some, has been rioting.
A second possibility is a tighter fiscal union among the European countries, which basically means that Germany (and, to a lesser extent, France) reaches into its pocket and bails out the debtor nations to the south. In return, Germany gets more control over over the economic governance of the other members of the European Union. The slogan of this approach: never again will we float unsafe vessels.
And the third? Several economists, El-Erian says, have floated the idea that two or three "peripheral economies" (Greece and Italy) would take a sabbatical from the euro. They would go back to their own currencies, which would allow them to devalue immediately, making their exports more competitive and their debt less costly. Instead of imposing an unpopular new tax on the population, the countries would impose a stealth tax in the firm of higher inflation. Meanwhile, the euro becomes stronger. The motto: fix your own vessels, and then come back to see us when you're finished.
As one of these scenarios plays out, it might become obvious that many American and European stocks are currently being affected more by anxiety and uncertainty than by any direct connection with the Euro's woes. A report recently noted that Apple Computer was worth more than all 32 of Europe's largest banks. If chaos reigns across the Atlantic, there could be a flood of capital looking for a safe, liquid home in the U.S. stock market.
Source:
http://www.project-syndicate.org/commentary/elerian8/English
http://www.cultofmac.com/apple-was-worth-more-than-all-the-banks-in-europe-earlier-today/109642
Thursday, August 11, 2011
A Q&A About Our Market Confusion
Here's an amusing graphic that sums up, perhaps in exaggerated form, how some people view the mathematics behind the recent U.S. Treasury bond debt downgrade:
Normally, the very last thing we would want to do is call your attention to daily market movements, because all of the worst investment decisions are made with a short-term focus. But I want you to be aware that we are following, very closely, the market events and their impact on your investment portfolio and ability to fund future goals.
As you no doubt heard in the media echo chamber, the U.S. markets recovered in dramatic fashion on Tuesday after the Monday free-fall. By the end of the trading day, the S&P 500 index was up 4.74%, and the technology-heavy Nasdaq index was up 5.29%. This helps to offset the roughly 16% drop over the past 11 trading days.
What does this mean? Here are some good questions that you may be asking yourself, and the best answers we can provide at the moment.
What was different about Tuesday (when the market was dramatically up) from Monday (when the market was dramatically down)?
Very little from the standpoint of fundamentals. The economy is no stronger or weaker from one day to the next, corporate profits didn't make any radical adjustments, and the underlying worth of the business enterprises and debt obligations that you own have been pretty much the same throughout these Summer doldrums.
The main difference can be found in investor emotion, which is not predictable by any measure that we've been able to find. The Federal Reserve Board gave the optimists something to cheer about when it announced that it would maintain low rates--which tend to stimulate the economy by encouraging banks to lend and companies to borrow (and build factories, and hire workers)--through mid-2013. That means that even though the federal government's expenditures won't be stimulating the economy during this time of highly-partisan belt-tightening negotiations, at least higher interest rates won't slam the economy into recession.
What about the ratings downgrade? Won't that hurt the economy and the markets?
Over the last couple of days, economists and veteran market watchers have been mocking the Standard & Poors rating agency. The kindest things they are saying is that the other rating agencies--Moodys and Fitch--have continued to give U.S. Treasury debt their highest safety ratings. Warren Buffet recently came out with a statement that U.S. government debt is the safest on the planet, and should be given a AAAA rating (which doesn't exist), rather than a downgrade.
Those who are less kind are pointing out that the downgrade came from the same Standard & Poors that rated boatloads of subprime debt as 'AAA', fueling the fire that resulted in the 2008 financial crisis. During that same period, it raised the credit rating of Bear Stearns an astounding 5 notches to AA- in March of 2008--the same month that the brokerage firm declared bankruptcy. Lehman Brothers, as a company, held an S&P rating of 'A' the week they went under, and the rating agency reaffirmed its 'AAA' rating on some of the company's securities just three days before it filed for bankruptcy and basically defaulted on everything. It made similar mistakes with Merrill Lynch and Morgan Stanley (rated A and A+ respectively the week they had to be bailed out), and completely missed the problems with the Republic of Iceland.
Meanwhile, despite the downgrade, the prices of Treasury securities surged for the second straight day, sending the 10-year yield to an all-time low of 2.03% before it settled at 2.19%. Sophisticated investors around the world seem not to be worried that the U.S. will default on its debts.
Is this a good time to sell? Or to buy?
Some economists are saying that the market was oversold on Monday--which means that stocks, in general, were selling at a discount to their true value. But we aren't as confident that we know the true value of stocks in an uncertain economy, and it seems clear that emotions are ruling the recent market moves. It is possible that the emotions will take the markets further down, and it seems equally possible that the optimism we saw on Tuesday will continue.
It is worth remembering that in the first half of last year the market experienced a 17% decline (which was greater than the current downturn), and yet finished the year ahead by double-digits.
What should I do about these uncertain markets?
For now, we recommend that you not make any dramatic moves. Your account statements are reflecting the recent drop in market value, but this is a "paper loss" only. If you were to sell right now, you would be locking in a real loss. As we have discussed in the past, investing is a long-term process, and generally full of unpredictability and surprises. If you look back three years ago, the Dow had dropped to around 6,000. At the end of the day Monday, it was still around 11,000--almost double the low of a few years ago. Think back to all the scary headlines about double-dip recessions, sovereign debt crises in Europe, unemployment and all the rest, and you realize that the headlines were telling you to sell when it was much more profitable to hang on.
Is this time different?
Probably not. The world will come to its senses and hopefully we will be in a better place. However, we never know what is really going to happen, and I have found by planning for the things I can control - sharing time and love with friends and family, and living life fully from a place of love and joy, makes my world a better place while waiting for the rest of the world to get it together.
Sources:
Market rise and Treasury surge:
http://finance.yahoo.com/blogs/daily-ticker/dow-jumps-430-points-stealth-fed-ease-202736590.html
Here's an amusing graphic that sums up, perhaps in exaggerated form, how some people view the mathematics behind the recent U.S. Treasury bond debt downgrade:
Normally, the very last thing we would want to do is call your attention to daily market movements, because all of the worst investment decisions are made with a short-term focus. But I want you to be aware that we are following, very closely, the market events and their impact on your investment portfolio and ability to fund future goals.
As you no doubt heard in the media echo chamber, the U.S. markets recovered in dramatic fashion on Tuesday after the Monday free-fall. By the end of the trading day, the S&P 500 index was up 4.74%, and the technology-heavy Nasdaq index was up 5.29%. This helps to offset the roughly 16% drop over the past 11 trading days.
What does this mean? Here are some good questions that you may be asking yourself, and the best answers we can provide at the moment.
What was different about Tuesday (when the market was dramatically up) from Monday (when the market was dramatically down)?
Very little from the standpoint of fundamentals. The economy is no stronger or weaker from one day to the next, corporate profits didn't make any radical adjustments, and the underlying worth of the business enterprises and debt obligations that you own have been pretty much the same throughout these Summer doldrums.
The main difference can be found in investor emotion, which is not predictable by any measure that we've been able to find. The Federal Reserve Board gave the optimists something to cheer about when it announced that it would maintain low rates--which tend to stimulate the economy by encouraging banks to lend and companies to borrow (and build factories, and hire workers)--through mid-2013. That means that even though the federal government's expenditures won't be stimulating the economy during this time of highly-partisan belt-tightening negotiations, at least higher interest rates won't slam the economy into recession.
What about the ratings downgrade? Won't that hurt the economy and the markets?
Over the last couple of days, economists and veteran market watchers have been mocking the Standard & Poors rating agency. The kindest things they are saying is that the other rating agencies--Moodys and Fitch--have continued to give U.S. Treasury debt their highest safety ratings. Warren Buffet recently came out with a statement that U.S. government debt is the safest on the planet, and should be given a AAAA rating (which doesn't exist), rather than a downgrade.
Those who are less kind are pointing out that the downgrade came from the same Standard & Poors that rated boatloads of subprime debt as 'AAA', fueling the fire that resulted in the 2008 financial crisis. During that same period, it raised the credit rating of Bear Stearns an astounding 5 notches to AA- in March of 2008--the same month that the brokerage firm declared bankruptcy. Lehman Brothers, as a company, held an S&P rating of 'A' the week they went under, and the rating agency reaffirmed its 'AAA' rating on some of the company's securities just three days before it filed for bankruptcy and basically defaulted on everything. It made similar mistakes with Merrill Lynch and Morgan Stanley (rated A and A+ respectively the week they had to be bailed out), and completely missed the problems with the Republic of Iceland.
Meanwhile, despite the downgrade, the prices of Treasury securities surged for the second straight day, sending the 10-year yield to an all-time low of 2.03% before it settled at 2.19%. Sophisticated investors around the world seem not to be worried that the U.S. will default on its debts.
Is this a good time to sell? Or to buy?
Some economists are saying that the market was oversold on Monday--which means that stocks, in general, were selling at a discount to their true value. But we aren't as confident that we know the true value of stocks in an uncertain economy, and it seems clear that emotions are ruling the recent market moves. It is possible that the emotions will take the markets further down, and it seems equally possible that the optimism we saw on Tuesday will continue.
It is worth remembering that in the first half of last year the market experienced a 17% decline (which was greater than the current downturn), and yet finished the year ahead by double-digits.
What should I do about these uncertain markets?
For now, we recommend that you not make any dramatic moves. Your account statements are reflecting the recent drop in market value, but this is a "paper loss" only. If you were to sell right now, you would be locking in a real loss. As we have discussed in the past, investing is a long-term process, and generally full of unpredictability and surprises. If you look back three years ago, the Dow had dropped to around 6,000. At the end of the day Monday, it was still around 11,000--almost double the low of a few years ago. Think back to all the scary headlines about double-dip recessions, sovereign debt crises in Europe, unemployment and all the rest, and you realize that the headlines were telling you to sell when it was much more profitable to hang on.
Is this time different?
Probably not. The world will come to its senses and hopefully we will be in a better place. However, we never know what is really going to happen, and I have found by planning for the things I can control - sharing time and love with friends and family, and living life fully from a place of love and joy, makes my world a better place while waiting for the rest of the world to get it together.
Sources:
Market rise and Treasury surge:
http://finance.yahoo.com/blogs/daily-ticker/dow-jumps-430-points-stealth-fed-ease-202736590.html
Monday, May 16, 2011
The Debt Ceiling
THE DEBT CEILING
Many Americans don’t want it to be raised.
Could our economy hold up if it isn’t?
Congress must think (and act) fast. In the middle of May, the national debt limit of $14.3 trillion will be reached. This means the federal government must increase the debt ceiling sufficiently to cover U.S. obligations through the end of 2012. It will undoubtedly happen, but not before a loud round of partisan politics is finished.1
What does the public think? In April, a CBS News poll showed that 63% of Americans opposed raising the debt ceiling. Polls often ask simple yes-or-no questions, and the respondents may not have understood the consequences here. If the debt ceiling isn’t raised, America will end up defaulting.2
What would default mean? Picture something like the Wall Street downturn of 2008-2009 happening again … but in a broader context.
As Treasury Secretary Timothy Geithner explained succinctly in a letter to Senate Majority Leader Harry Reid (D-NV), a default would mean that “the Treasury would be prevented by law from borrowing in order to pay obligations the Nation is legally required to pay, an event that has no precedent in American history.” A default would limit, halt or impact Social Security and unemployment benefits, veterans’ benefits, federal worker salaries and payments to members of the armed forces.3
These aren’t the only calamities that would happen. America sells Treasuries to finance its federal government operations, and other nations and investors have bought them with absolute confidence – we haven’t defaulted since 1933. A default would elevate borrowing costs across the board. It would act like a tax. You would see higher interest rates, with implicit damage to equity prices and home values. The ripple from this could hurt retirement savings, consumer spending and investment.4
Moreover, a default would shatter the conviction other nations have in our political framework. It might be decades before we could count on cheap debt again.
GOP’s memo to Obama: no higher debt limit unless we cut trillions. The President is adamant about raising the debt ceiling. On May 9, Speaker of the House John Boehner (R-OH) said it could only happen if “significant” cuts to the federal budget could be made: “We’re not talking about billions here. We should be talking about cuts in trillions if we’re serious about addressing America’s fiscal problems.”1
The GOP leadership does not want to see emergency tax increases. Addressing the Economic Club of New York, Boehner said that “raising taxes is off the table” because “it will have a devastating impact on our economy.” On May 7, Senate Minority Leader John Kyl (R-AZ) requested that revisions to the tax code to address the deficit be kept “totally off the table” as such moves would only amount to backhanded tax hikes.5
“We do not have a revenue problem; we have a spending problem,” Boehner noted. “Let’s address the spending problem.”5
How would privatizing Medicare help? House Budget Committee Chairman Paul D. Ryan (R-WI) claims that his controversial plan to privatize Medicare by 2022 would save the federal government $5.8 trillion over the next ten years. Ryan’s proposed voucher system would assign $8,000 annually to a typical 65-year-old for purposes of buying a private health plan. (The voucher amount would vary per person, with richer and/or healthier seniors getting less.)6
The non-partisan Congressional Budget Office disagrees and says out-of-pocket medical costs would double for seniors through Ryan’s plan. The CBO estimates that with this voucher system, the typical 65-year-old would pay about $12,510 out-of-pocket each year for medical care above the $8,000 of “premium support” provided. In contrast, it says that under the current Medicare structure, the same 65-year-old would pay $6,150 out-of-pocket in 2022 (providing Medicare payments to doctors are not greatly reduced).6
How long before this impasse gives way to agreement? It could take days, it could take weeks. “I am guarded in my optimism,” House Majority Leader Eric Cantor (R-VA) remarked on Bloomberg Television this week. Secretary Geithner claims that the federal government could use “extraordinary measures” to keep borrowing money into the beginning of August. Noting that there was “no hard date” to hike the debt limit, Boehner said that “allowing America to default would be irresponsible. But it would be more irresponsible to raise the debt ceiling without simultaneously taking dramatic steps to reduce spending and reform the budget process.”
This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty.
Citations.
1 - advisorone.com/article/boehner-demands-obama-cut-spending-get-debt-limit-deal [5/10/11]
2 - mercurynews.com/breaking-news/ci_18041062 [5/11/11]
3 - economix.blogs.nytimes.com/2011/01/04/fearing-another-u-s-debt-default/ [4/1/11]
4 - treasury.gov/connect/blog/Pages/letter.aspx [1/6/11]
5 - businessweek.com/news/2011-05-10/republicans-rule-out-tax-increases-in-debate-over-debt-cap.html [5/10/11]
5 - businessweek.com/news/2011-05-10/republicans-rule-out-tax-increases-in-debate-over-debt-cap.html [5/10/11]
6 - articles.latimes.com/print/2011/apr/07/nation/la-na-gop-budget-20110408 [4/7/11]
7 - montoyaregistry.com/Financial-Market.aspx?financial-market=common-financial-mistakes-and-how-to-avoid-them&category=29 [5/12/11]
Many Americans don’t want it to be raised.
Could our economy hold up if it isn’t?
Congress must think (and act) fast. In the middle of May, the national debt limit of $14.3 trillion will be reached. This means the federal government must increase the debt ceiling sufficiently to cover U.S. obligations through the end of 2012. It will undoubtedly happen, but not before a loud round of partisan politics is finished.1
What does the public think? In April, a CBS News poll showed that 63% of Americans opposed raising the debt ceiling. Polls often ask simple yes-or-no questions, and the respondents may not have understood the consequences here. If the debt ceiling isn’t raised, America will end up defaulting.2
What would default mean? Picture something like the Wall Street downturn of 2008-2009 happening again … but in a broader context.
As Treasury Secretary Timothy Geithner explained succinctly in a letter to Senate Majority Leader Harry Reid (D-NV), a default would mean that “the Treasury would be prevented by law from borrowing in order to pay obligations the Nation is legally required to pay, an event that has no precedent in American history.” A default would limit, halt or impact Social Security and unemployment benefits, veterans’ benefits, federal worker salaries and payments to members of the armed forces.3
These aren’t the only calamities that would happen. America sells Treasuries to finance its federal government operations, and other nations and investors have bought them with absolute confidence – we haven’t defaulted since 1933. A default would elevate borrowing costs across the board. It would act like a tax. You would see higher interest rates, with implicit damage to equity prices and home values. The ripple from this could hurt retirement savings, consumer spending and investment.4
Moreover, a default would shatter the conviction other nations have in our political framework. It might be decades before we could count on cheap debt again.
GOP’s memo to Obama: no higher debt limit unless we cut trillions. The President is adamant about raising the debt ceiling. On May 9, Speaker of the House John Boehner (R-OH) said it could only happen if “significant” cuts to the federal budget could be made: “We’re not talking about billions here. We should be talking about cuts in trillions if we’re serious about addressing America’s fiscal problems.”1
The GOP leadership does not want to see emergency tax increases. Addressing the Economic Club of New York, Boehner said that “raising taxes is off the table” because “it will have a devastating impact on our economy.” On May 7, Senate Minority Leader John Kyl (R-AZ) requested that revisions to the tax code to address the deficit be kept “totally off the table” as such moves would only amount to backhanded tax hikes.5
“We do not have a revenue problem; we have a spending problem,” Boehner noted. “Let’s address the spending problem.”5
How would privatizing Medicare help? House Budget Committee Chairman Paul D. Ryan (R-WI) claims that his controversial plan to privatize Medicare by 2022 would save the federal government $5.8 trillion over the next ten years. Ryan’s proposed voucher system would assign $8,000 annually to a typical 65-year-old for purposes of buying a private health plan. (The voucher amount would vary per person, with richer and/or healthier seniors getting less.)6
The non-partisan Congressional Budget Office disagrees and says out-of-pocket medical costs would double for seniors through Ryan’s plan. The CBO estimates that with this voucher system, the typical 65-year-old would pay about $12,510 out-of-pocket each year for medical care above the $8,000 of “premium support” provided. In contrast, it says that under the current Medicare structure, the same 65-year-old would pay $6,150 out-of-pocket in 2022 (providing Medicare payments to doctors are not greatly reduced).6
How long before this impasse gives way to agreement? It could take days, it could take weeks. “I am guarded in my optimism,” House Majority Leader Eric Cantor (R-VA) remarked on Bloomberg Television this week. Secretary Geithner claims that the federal government could use “extraordinary measures” to keep borrowing money into the beginning of August. Noting that there was “no hard date” to hike the debt limit, Boehner said that “allowing America to default would be irresponsible. But it would be more irresponsible to raise the debt ceiling without simultaneously taking dramatic steps to reduce spending and reform the budget process.”
This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty.
Citations.
1 - advisorone.com/article/boehner-demands-obama-cut-spending-get-debt-limit-deal [5/10/11]
2 - mercurynews.com/breaking-news/ci_18041062 [5/11/11]
3 - economix.blogs.nytimes.com/2011/01/04/fearing-another-u-s-debt-default/ [4/1/11]
4 - treasury.gov/connect/blog/Pages/letter.aspx [1/6/11]
5 - businessweek.com/news/2011-05-10/republicans-rule-out-tax-increases-in-debate-over-debt-cap.html [5/10/11]
5 - businessweek.com/news/2011-05-10/republicans-rule-out-tax-increases-in-debate-over-debt-cap.html [5/10/11]
6 - articles.latimes.com/print/2011/apr/07/nation/la-na-gop-budget-20110408 [4/7/11]
7 - montoyaregistry.com/Financial-Market.aspx?financial-market=common-financial-mistakes-and-how-to-avoid-them&category=29 [5/12/11]
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