Dark Times Digest #6

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by Karl Loren

China Has Trillions of US Dollar Claims On US Assets

The above links are to the LARGE stories. Here is a link to a small story -- one person is harmed by a very small part of an evil goverment program.

Source: WSJ

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"Universal" government-run health care proved too ambitious even for FDR, who stripped it out of the Social Security Act of 1935. Lyndon Johnson settled for Medicare and Medicaid. Now liberals think the political moment has finally arrived to achieve what has eluded every other Democratic President from Harry Truman to Bill Clinton.

One signal is yesterday's news that Barack Obama has selected Tom Daschle, the very liberal former Senate warhorse, to head the Health and Human Services Department. But a even clearer sign was last week's release by Montana Senator Max Baucus of a policy blueprint that closely resembles the one Mr. Obama campaigned on for 17 months. The plan is significant not only because its author is Chairman of the powerful Finance Committee, which oversees taxes and about half of all government spending. Mr. Baucus is also one of the more moderate, and cautious, senior Democrats.

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If the Obama White House decides that reorganizing the 17.1% of the economy that the U.S. is likely to spend on health care in 2010 is a first-year priority, then Mr. Baucus's bill will be the place they start. Americans need to learn what they'd be paying for.

[Karl Note: Americans CANNOT learn, generally, they certainly cannot learn what their much-wanted entitlement to universal health care will cost them. because they have been dumbed down in our schools, drugged down with "medical" care and "street substances," and only then brain-washed with charisma.

We have finally arrived at a hypnotized electorate voting for what they think is "free" and, thus destroying the US economy. It will take years and be painful. Only a few can see this coming -- they are apt to be subscribers to these Dark Times Digests.

The "majority is always right?" If you believe that you believe in fairy tales.]

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First, Democrats want the government to create a national insurance exchange, or marketplace, in which all comers could buy into a range of heavily regulated private policies at group rates. These private plans would then "compete" with a new public insurance option, i.e., a program managed by the government and modeled after Medicare. Lower-income earners would get subsidies to make coverage "affordable." Businesses that didn't cover their employees would pay a tax on some portion of their payroll.

The last cog is the "individual mandate." This requirement that everyone buy coverage has grabbed most media scrutiny of the Baucus plan, because Mr. Obama opposed it during the campaign. But the many moving parts don't work together unless the young and healthy foot the bill for care of the older and sicker -- one reason Hillary Clinton kept nagging Mr. Obama about the individual mandate during the primaries.

The irony is that the public option -- not the mandate -- is far and away the most radical part of the plan. Green eyeshade objections are obviously out of favor in modern Washington, but the reality is that the Baucus-Obama plan would be extraordinarily expensive as it slowly but relentlessly grew the government's share of health spending. The draft doesn't include an exact cost, though casually notes the ballpark "investment" could run as high as $150 billion a year.

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Even those huge outlays are likely conservative, considering that subsidies would go to families earning up to 400% of the federal poverty level. According to the Census Bureau, that would apply to 61.5% of the American population, or about 184 million people -- less those already on Medicare and Medicaid.

Some financing will come from the "pay or play" tax on businesses, but because Mr. Baucus is no more omniscient than anyone else, the tax rate is left undefined. If it is too low, companies will have every incentive to "cash out" their employee liabilities and pay the tax instead. Then workers will flood the public option.

The Baucus plan expects to make up more of the money with nips like better health technology and tucks such as "a national focus on wellness." But those don't come close to adding up to $150 billion -- or the health system would have made them already. As for the claim that centralizing health spending will lead to more "efficiency" . . . well, that is the triumph of hope over evidence.

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Over the past 40 years, per capita health spending has grown an average of 2.1 percentage points faster than the economy. The dominant U.S. insurer -- Medicare -- has had no success in mitigating this climb, despite valiant attempts. Since the 1980s, Medicare has actually controlled the prices that physicians and hospitals are paid for thousands of billable services. In 2007, the program spent some $425 billion according to these arbitrary guesses. Because of its huge purchasing power, and because many private plans adopt its reimbursement rates, Medicare significantly shapes all health-care financing and delivery.

Now the Democrats want to double down with the public option, apparently on the theory that the bureaucracies fail only when they're too small. Even without the new program, Medicare and Medicaid costs are rising substantially both as a share of the economy and the federal budget. The nearby chart tracks the historical behavior of government health spending and the Congressional Budget Office's post-2007 fiscal scenario in the absence of reform. Today, health entitlements account for 4% of GDP but will rise to 7% in 2025 and about 15% in 2062.

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Not that the current level of benefits will ever be paid. According to the Medicare trustees, the program's excess costs over the next 75 years -- that is, the difference between expected outlays and revenues -- is more than $36 trillion, which even they acknowledge is several trillion too low given current trends. Even if Congress doubled all individual and corporate tax rates, it still wouldn't raise enough revenue to pay for Medicare and Medicaid.

The Obama-Baucus solution to this slow-motion catastrophe is to add tens of millions more people to the federal balance sheet. Because the public option will enjoy taxpayer sponsorship, it will offer generous packages to consumers that no private company could ever afford or justify. And because federal officials will run not only the new plan but also the "market" in which it "competes" with private programs -- like playing both umpire and one of the teams on the field -- they will crowd out private alternatives and gradually assume a health-care monopoly.

Many proponents of plans similar to Mr. Baucus's openly cite this as one of their goals. Eventually, the public option will import Medicare's price controls into the private sector as it tries to manage the inevitable cost overruns. When that doesn't work, Congress will deal with the problem by capping overall spending and rationing care through politics (instead of prices) -- like Canada does today.

Either Senator Baucus and President-elect Obama are making promises that can't possibly be kept. Or they're not being honest about their plans for U.S. health care.

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NOVEMBER 22, 2008
Source

China Will Be a Winner in the New Economy

Its cash will help fuel our recovery.

By ZACHARY KARABELL

The incoming Obama administration will face formidable challenges, but global economic collapse is no longer imminent. That may be small short-term comfort to the markets and Main Street. But having stared down the abyss, governments around the world appear determined to address root issues. The G-20 gathering of the world's major powers in Washington on Nov. 15 was only the beginning of a long and constructive process of revising the global system.

In the new system the United States will still be the largest economy but no longer the sole determinant of global economic health. The new winners will be cash and China.

Those without cash are in a precarious position. Tens of millions of homeowners and property owners in the U.S., Europe, the Gulf region and Asia have seen the value of their assets decrease sharply. They either have negative equity or insufficient income to make payments. Pension plans and 401(k) accounts have been devastated by a 50% plunge in global equities. Millions of workers have lost or are about to lose their jobs. The U.S. government balance sheet will become even more debt-laden.

But every crisis creates opportunities -- or at least so goes the old Chinese saying. This time is no exception, and China will emerge victorious. As its recently announced $600 billion stimulus package makes clear, those who have cash can spend their way through this global crisis, and China has lots.

The global economy for the past five years has been driven by credit, with cash as currency pushed to the sidelines. With cheap credit, deals got pricier and valuations higher, to the point where some transactions were about as carefully assessed as a Monopoly trade. Now credit is cheap but not readily available. New government regulations and internal risk-mandates will mean that credit won't flow as promiscuously.

There is more cash sloshing around the world than most people think. The problem for the U.S. and to some extent Europe is that this cash is now in unfamiliar places, some of which -- as John McCain reminded us on the campaign trail -- can be found in countries that "don't like us very much."

The McKinsey Global Institute assessment of global financial assets (which includes bank deposits, stocks, bonds and private equity) released earlier this year showed about $167 trillion world-wide at the end of 2006. That figure is now considerably less but still probably three times global GDP, and represents a massive supply of fuel for economic activity.

Tens of trillions in noninvested money (not in stocks or bonds) sit largely unused. Those who have it are hoarding it, unclear about the short term. As the dust settles, however, that cash will be king.

Some cash will be used for purely private gain, for example by vulture real-estate investors in southern Florida, buying up those unused, unwanted and unsold condos at fire-sale prices. Such cash will do little to enhance the public good. But other uses of cash will.

Corporations in the U.S. alone may have up to $1 trillion reserved, and they will begin to pick at deals amid the market wreckage. They are also likely to weigh future cash flow more cautiously. That doesn't mean that all deals will turn out well, but the reliance on cash will temper excessive greed and speculation.

Sovereign wealth funds have cash. After being burned in some of their deals at the end of last year, they have become more stringent. But they still have trillions, and they have every intention of investing that money with an eye on future returns, as demonstrated by Abu Dhabi's recent investment in Barclays, and Saudi Prince Alaweed's raising his percentage to 5% of deeply depressed Citigroup shares.

Private equity and hedge funds also have pools of cash. We hear about the blowups, but not as much about the ones weathering the storm.

In the next few years, these custodians of private capital are likely to assume the role of venture capitalists, merchant bankers and deal makers all in one. They will take on less leverage (by choice or necessity) and put more of their own skin in the game, which is always a good reason for thinking twice and checking your assumptions.

Then there is China. Yes, the balance of power at the G-20 summit shifted toward Russia, Brazil and its hundreds of billions in reserves, Saudi Arabia, and a rich though still economically stagnant Japan. But China remains in a league of its own.

With $2 trillion in central-bank reserves alone, China is cash-rich and almost debt-free. That is true not just for the government but for many individuals. Because there is no mature bond market and the currency remains unconvertible, individuals in China have a savings rate approaching 50%.

To be sure, there have been real-estate bubbles in many Chinese cities, and these have been popping. But China's overall cash position is extremely high, and its dependency on exports is less than most suppose.

The immense stimulus package just announced by China should erase fears of a major Chinese slowdown. Yes, some factories will close because labor is cheaper inland than in the more expensive coastal regions. But the shortfall created by sagging exports will be made up by state spending. Beijing has the money, and the willingness to spend it.

China's actions could also have direct -- and positive -- effects on the U.S. economy. An investment arm of the Chinese government is now deep in talks to buy up parts of AIG. China is already the primary source of growth for many U.S. companies, including ones like Caterpillar that make things in the U.S. and export them to China. As the developed world sags, China is becoming even more important to the global system.

China also needs a vibrant U.S. (and Europe). Beijing will likely take action to prevent a collapse by continuing to purchase U.S. Treasuries. We may not like the fact that China is our creditor, but having no creditor would be a good deal worse.

The U.S. government can spend for a time, provided the dollar remains the currency of last resort and buyers like China keep lending. But as the New Deal showed, and as Barack Obama understands, government alone cannot fuel the economy. Government must jump-start the system when it stalls, but after that, cash and China will drive the recovery.

Mr. Karabell is the president of River Twice Research. His book on China and the United States will be published by Simon & Schuster next year.

The "small" problem that is Huge for some people

Source: private eMail to Karl Loren