Toxicity Plus Toxicity Does Not Equal Purification

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by Dave Kranzler, Investment Research Dynamics:

Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims. Watch for the day when it bounces, marked, ‘Account overdrawn.’ – Francisco’s “Money” Speech – from “Atlas Shrugged”

You have to love it – the City of Houston issues $1.01 billion  “pension obligation” bonds to “ease” the underfunding of the underfunded public pension fund.  “Pension underfunding”  is the politically acceptable euphemism for “debt obligation.”  Underfunding occurs when a pension investment returns PLUS future beneficiary contributions are not enough to cover current beneficiary payments.

Some might say it’s the difference between the NPV of future payouts and the current value of the fund. But that’s horse-hooey. Houston had a cash flow deficit it had to address and it did that by issuing taxpayer obligation debt – $1.01 billion dollars of taxpayer debt.  Furthermore, let’s use a realistic NPV and ROR assumption on any pension fund plus throw-in a real mark to market of illiquid assets like PE fund investments.  Every pension fund in the U.S. is tragically underfunded.

The rational remedy would be to cut beneficiary payments or force larger contributions from current working stakeholder or both.  The problem is that implementing either or both of those remedies might cost elected officials their jobs in the next election.

Instead, the proverbial can is kicked further into the sewage ditch by issuing more debt and using the the proceeds to help the pension fund cover current cash outflows to beneficiaries.  Regardless of what you call it, an underfunded pension liability is simply “debt”.  This bond issue might ensure that Houston’s retired public employees will continue, for now, to receive their expected flow of monthly pension payment, but this bond deal in no way whatsoever “eases” the debt burden of the pension fund.  Rather, it shifts wealth from the taxpayers to the retired public employees.

Similarly, the Trump Tax Cut does nothing more than shift the distribution of wealth from 99.5%’ers to the 0.5%’ers plus big corporations.  In this case, it’s not wealth per se.  Rather, it’s shifting the burden of supporting the Government’s spending deficit from the tax cut beneficiaries (billionaires and big corporations) to the rest of the population.

I could care less what CBO projections show – CBO forecasts are always appallingly inaccurate – the Government’s spending deficit is going to accelerate next year.   Between the cut in tax revenues from Trump’s Tax Cut and the big jump in spending built into the budget for defense and re-paving the roads that were paved during the Obama era, total spending will soar.  The gap between inflows and outflows will be bridged with more Treasury bond issuance.

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