Vigilant Investor

“The Federal Reserve as other central banks is obviously taking onto its balance sheet a lot of mortgages these days.” “Well, the creators of the Federal Reserve system would be rolling over in their graves if they knew the Federal Reserve is buying mortgages.”
– Former Federal Reserve Chariman Paul Volcker

Whether or not the creators of the Fed would be rolling over in their graves is debatable in our opinion. Like Andrew Jackson — we believe central bankers have always been dangerous, incompetent meddlers. We feel the Fed should never have been created — and and that it continues to prove itself as bungling as any other central planning committee. But we digress…. That said, the former chairman’s grave concern over the central bank taking on billions of not so hot private debt is quite valid.

Volcker went on to warn that recent intervention by the Fed in securities markets might compromise it’s independence. He went on to say that the Fed’s inability to contain inflation will create a 1970’s like scenario. Again, he’s right there. We’ll also add, it’s too late Paul — the nationalization of the US private debt has begun. When politicians, who’s outlook is only as far as the next election — get involved, the trend will only accelerate. So to will corresponding inflation and Dollar degradation.

Beyond the blatant example of the Fed’s $30 Billion bailout of Bear Stearns — we now see Senator Christopher Dodd proposing the creation of an FHA program to insure refinanced mortgages following partial forgiveness of the loans by lenders. OK, let’s think about this. In an environment where U.S. foreclosures have risen 65% over the past year — and private banks/lenders are preferring to seize homes rather than renegotiate with already defaulting borrowers — the Federal Government is going to step in with money it does not have (but will be all to happy to print) — to back already bad debt.

Also, earlier this month, the Fed agreed to accept securities backed by student loans pledged as collateral for Treasuries the central bank would in turn lend to Wall Street Investment Banks. Let’s analyze that deal. Investors had become far less willing to finance student loan debt at pre-existing prices — due to liquidity issues, the economy, and the fact that consumers (including students) are hurting — and are therefore higher credit risks. The cost to finance such loans would have to naturally go up. Wall Street investment banks (you know, the ones who paid themselves billions in record bonuses over the past year) were less willing to hold onto securities they owned backed by this type of debt. However, if they tried to sell it — they would sell it for a loss. No worry, the Fed would lend/swap them Treasuries for the riskier (and worth far less) student loan backed securities.

Effectively, you have the government, or quasi government institutions backing substandard debt with money it will have to print. That spells one thing — accelerating inflation — and the always accompanying confiscation of private savings. And we’re not talking the low single digit inflation figure the government “calculates” (and bases Social Security payment increases on). We’re talking about the inflation you see in the supermarket ($4 for a handful of blueberries anybody?) — and at the gas pump.

When we hear the Treasury Secretary, or the Chairman of the Fed talk tough on inflation and defending the Dollar — we just smile. When we hear political candidates blaming oil companies and “speculators” for rising prices — we smile again.

We think the next 3-5 years will be quite interesting.

“I think we were really on the verge of a financial collapse of unbelievable proportions that we haven’t seen since the 1930’s.”
– Former U.S. Treasury Secretary Paul O’Neill describing the Bear Stearns bailout in an April 16, 2008 interview on Bloomberg

Read that quote again by Paul O’Neill – because, yep folks, that’s really where things stand. Our financial system effectively patched together by an inflationary, money printing band-aid. And, as the real estate markets in England, along with those in Spain, Ireland, et al. continue to melt down, we maintain our belief that the whole fiasco is far from over. (Our regular readers know we said the same when conventional pundits said the worst was over in 2007).

The interesting thing about economics is that people have been conditioned to believe in the charade that it is a mysterious, complex, science – and to be successful at understanding it, explaining it to the great unwashed, and at running large portfolios – one must be a superior mathematician educated at the most prestigious of universities. As we watch the same geniuses educated at said universities – some of whom had supposedly developed mathematical models which had eradicated risk – continue to drive hedge funds (and at least one major Wall Street brokerage firm) valued in the $ billions straight over the cliff – we say – “oh really?”

We instead choose to take Harry Truman’s quote — “There is nothing new in the world but the history you do not know” – to heart when we look at economics. History is in fact the study of human behavior – of what has worked, and what has failed. To ignore historical facts one must be either arrogant, a fool – or an arrogant fool. So, as Sir Alan Greenspan and his knights at the Fed Round Table repeatedly cut rates earlier this decade – we warned that the unfolding scenario looked a whole lot like Japan in the 1980’s and 90’s! A Stock market bubble, followed by a stock market crash – and subsequent economic pain. Then came massive interest rate cuts to supposedly “stimulate” – which instead caused a real estate bubble – followed by a real estate collapse, and a severe, prolonged recession.

Sound familiar?

What next? We see the bailouts continuing — simply because the alternative is the severe and necessary corrective pain to clean out the mess and get prices of all things back in line. And what politician, Wall Street banker, investor, or voter wants to deal with that reality? And bailouts spell inflation. Not the fudged low-ball inflation that’s used to calculate Social Security payment increases or “official” economic growth. We’re talking about real inflation. The rapidly rising kind you are seeing at the supermarket and the gas pump on a daily basis. As these inflationary bailouts continue – look for prices of all things tangible to increase dramatically.

Commodities bubble? We think not – because bubbles require excessive stockpiles/inventory/supply – and we don’t see that at all – in anything. And we see inflationary (money printing/bailout) policies accelerating.

Oil at $125 in the near future anyone? $5 Dollar gas at the end of the year? Food prices continuing through the roof? It would not surprise us at all.

Regulators “are playing with fire,” said Allan Meltzer, a Fed historian and economics professor at Carnegie Mellon University in Pittsburgh. “With good luck, none of these liabilities will come due. We can’t expect that good luck, and we haven’t had it.”
– Bloomberg (March 26, 2008)

The reason you want solid collateral to secure a loan is obvious. You want to protect adequately against the borrower’s potential inability to pay you the loan back. How interesting that the Fed is taking 30 $ Billion of illiquid mortgage securities as collateral from otherwise insolvent Bear Stearns to bail the Wall Street firm out. As intriguing (alarming) — is the Treasury’s encouragement of Fannie Mae and Freddie Mac to buy more mortgage-backed bonds.

We ask — who in their right mind would lend out their own money backed by such risky collateral? Who today would buy mortgage backed bonds with their own money?

Ah, there lies the rub! It’s not their money which backs these shenanigans – it yours!

With today’s 75 basis point rate cut – we see continued evidence as to whom the Fed really serves. As we have long said, it’s not you and I – it’s the Big Wall Street Banks. The “Big Rip-Off” of your savings continues. Jon Markman gets right down to it…

The U.S. Post Office just jacked up rates again, just one year post its previous increase. Why the increase so soon? Well, go figure: Congress passed a law requiring that it start funding the promises it’s made to the powerful employee union members who are employed by the agency. In other words, the cost of stamps must include the cost for benefits that are dramatically more generous than the private sector.

As for the monopoly privilege granted the agency that prohibits the private sector from competing in the first class mail category, enough is enough. Let the private sector handle it. It does quite well with all other mailing services, let the free market do its job. What about those choosing to live in the middle of nowhere? Enough with the subsidy. This is 2007, not the era of the Pony Express.

Income Disparity: The Trough and Spigot Ignored

In a tradition that is as regular as Tax Day (only more frequent), the New York Times is again updating us on the vast discrepancy in income between the top wage earners and most U.S. taxpayers. The slant of most such articles is one to suggest remedy is required, with the implication that the redistributionistas ought to help level the playing field in order to make things more “fair” — whatever that’s supposed to mean.

Many regular readers might expect our publication to defend the free market and the rights of individuals to keep what they’ve duly earn. After all, most wage earners do not find themselves among the top 1% earning more than $348,000 by collecting welfare checks or blaming society for their problems. Most are providing something of value in exchange for what they earn. The demand for what it is they offer — a unique talent, service or product, is what gets them their wage, after all. Right?

Well, that’s the idea — at least with free market capitalism.

However, assertions that the U.S. is a system of free market capitalism is a MYTH. Today it more closely resembles what should be called a neo-fascist state.

Gasp! Did you just read the word “Fascist” being used to describe the U.S.? Indeed you did, but not in the context often used by radicals mislabeled as “anarchists” (who are really Marxists) who protest world trade meetings.

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• Sub-prime implosion update: why it will not be contained
• Municipalities are facing headwinds on assessments and accounting requirements
• The NYT, income gaps and REAL solutions to the problem (vs. social redistribution)
• Why Bill Gates and Warrent Buffet are Wrong on Taxes!

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“Those who do not know history are doomed to repeat it.” Yes, that phrase is a cliche and overused. I’ve always liked Mark Twaine’s read on it: “History doesn’t repeat, but it sure does rhyme a lot.”

Whichever you prefer, we talk day in and day out here at Vigilant Investor and on our Podcast about the serious problems of the economy and, especially, the dollar. To understand what is in store for the dollar and how it has been made possible, you need to understand the context of the dollar in history. Most importantly, you must understand the present nature of banking and the private central banking cartel that manages the system, called the Federal Reserve.

The video above tells the story. I cannot stress how important the subject matter is for all to understand in the context of the vigilant investing of all things: your money, time, votes, family, business, etc, etc. Take 41 minutes out of your day and learn why.

Don’t have time to watch it now? Dowload it here, and upload it to your iPod for your next commute, run, plane ride, etc. There really is no excuse!

Stay Vigilant!

Think price controls are a good thing? More than a few folks do, here in the U.S., the old “Land of the Free.” That’s because memories are short and most believers are either historic and economic illiterates, or simply believe in collectivism come hell or high water.

Well, hopefully our little Marxist friend down in the southern hemisphere in Venezuela will remind everyone why capping prices and too much inflation by government edict is stupid.

Consider this update from the hardly pro-free market NYT: Chávez Threatens to Jail Price Control Violators

“Shortages of basic foods have been sporadic since the government strengthened price controls in 2003 after a debilitating strike by oil workers. But in recent weeks, the scarcity of items like meat and chicken has led to a panicked reaction by federal authorities as they try to understand how such shortages could develop in a seemingly flourishing economy.

Entering a supermarket here is a bizarre experience. Shelves are fully stocked with Scotch whiskey, Argentine wines and imported cheeses like brie and Camembert, but basic staples like black beans and desirable cuts of beef like sirloin are often absent. Customers, even those in the government’s own Mercal chain of subsidized grocery stores, are left with choices like pork neck bones, rabbit and unusual cuts of lamb.”

Any honest economist knows that the mechanism of price is to allocate scarce resources where they are most in demand. That is what socialists never seem to grasp in their plans for centrally planned nirvana. The article continues:

José Vielma Mora, the chief of Seniat, the government’s tax agency, oversaw a raid this month on a warehouse here where officials seized about 165 tons of sugar. Mr. Vielma said the raid exposed hoarding by vendors who were unwilling to sell the sugar at official prices. He and other officials in Mr. Chávez’s government have repeatedly blamed the shortages on producers, intermediaries and grocers.

The problem is made worse by the fact that Chávez is also confiscating wealth by inflating the Venezuelan Bolivar, nothing new for the country, but also something that is made even more disasterous when prices are forbidden to adjust. Venezuela’s inflation rate clocked in at 18.4% last month, yet producers are supposed to abide by capped prices.

Meanwhile, Chávez has hatched a plan to lop a few zeros off the Bolivar while cracking down on the black market exchange rate.

Venezuela’s currency, set by the government at an official exchange rate of 2,150 bolivars per U.S. dollar, was little changed today at around 4,025 per dollar in unofficial parallel markets at 11:45 a.m. New York time. It weakened to a record low 4,700 last month after Chávez announced his plans to nationalize several companies in the phone and energy industries.

As if the zeros matter when a percentage of inflation is a percentage inflation. Meanwhile, super genius Chávez has even hinted that newspapers that print the black market exchange rate would find themselves in trouble.

At this point I’m sure many readers say, OK… This Chávez fella… Yes, he’s a cook. He’s and extreme fool. But otherwise this has nothing to do with the United States.

Perhaps not so directly, but you’d need only check your history books to see that iconic President, Franklin D. Roosevelt — in an attempt to strengthen a Fed debilitated dollar, passed assorted price control laws and made it illegal for people to protect their rapidly deflating wealth through gold ownership. Meanwhile, today plenty of politicians in Congress and throughout the U.S. local governments are pushing for more and more government intervention on things like price caps. Perhaps Chávez’s socialist policies are 100% foolish, but we should crow about 50% stupidity, or even 25% in the U.S.?

Its at points like this when we remind readers that democracy is a false god of freedom. Politicians in the U.S., including President Bush, talk of democracy as if it is there is no higher aim in civilization. Yet students of history know full well that democracy does not equal freedom, and in fact, pure democracy denigrates into free-for-all populism, which usually includes the have-nots voting to confiscate the wealth of the haves, while the politically connected classes manipulate the masses to pass laws that benefit the power elite. In the case of Chavez — beneficiary of reckless democracy –, freedom and liberty are pretty low on the list, far below collectivism and political cronyism. The old adage that democracy is the theory that people deserve to get what they want, and good and hard, is playing out perfectly for Venezuelans and U.S. citizens alike.

• Chavez: New currency to be introduced

When it comes to members of Congress, more than a few appear to be more interested in popular appeasement — with heavy doses of grandstanding so the votes flow forth — rather than economic policy grounded in reality. Recent comments from Hillary “The Hopeful” Clinton, clouded in “save the environment!” rhetoric, prove the point:

The other day the oil companies reported the highest profits in the history of the world. I want to take those profits, and I want to put them into a strategic energy fund that will begin to fund alternative smart energy … technologies that will begin to actually move us toward the direction of independence.

Never mind that those record profits are in dollar terms, not in percentage terms. Don’t bother to engage brain to consider that McDonald’s and Microsoft have higher percentage returns on their investment when compared to big oil, or consider that the oil industry had terrible years during the 1990s when oil profits were virtually nil, driving the smallest producers out. Definitely ignore that during those lean years, very little investment was made into infrastructure which is now as old as it ever has been and in need of a serious (and very expensive) overhaul, lest it remain exceptionally vulnerable to supply-cutting breakdowns as it has been lately.

Disregard all of that. Because the elected geniuses in Congress, pros at getting elected, like Hillary, know what “smart energy” is. You, the consumer, and those in the business of providing energy, don’t. After all, you should trust socialist central planners like Hillary and her pro collective cohorts ahead of the market when allocating scarce resources for developing the most efficient technologies - energy included given the stellar history socialism has managing all things globally. Like, for example, the meddling worked so well in the 1970s under Nixon and Carter (creating the energy shortage and skyrocketing prices, gas lines, etc.). Let’s allow for it again!

Of course, Hillary is not alone. There’s talk of punitive windfall profits’ taxes when oil prices go up — without really addressing WHY those prices are rising. And with each shortage, like the ones in the wake of Hurricanes Katrina and Ivan, there’s always talks of prices controls, which are in denial the very purpose of the pricing mechanism.

To get a look at just how smart socialist allocation of resources is, especially when the citizens of a nation abdicate their freedoms to a centralized body that the Hillary’s of the world dream about at night, just look south of the boarder to our friendly oil rich neighbors in Venezuela, run by just such a super-genius: Hugo Chavez.

While we may scoff at the vast stupidity of Mr. Chavez as he ruins the economy and living standards of his nation, please consider that doing 50% or 25% of that is still that percentage of stupidity.

We are alternative media. You may as well understand the revolution that is taking place — change is why we’re here, so here’s an excellent piece that explains Web 2.0 (the revolution) in under 5 minutes. If you are an entrepreneur like many of our readers, you’d do well to understand it yourself.

Kudos to the effective ad guys over at IdeaMill for keying us in.

Also, don’t forget to be leery of those who think the internet media is too unrestrained to be allowed for opinion, political or otherwise. Watch out for restrictions to political speech. As Plato asks in the Republic, “Quis custodiet ipsos custodes?”: “Who shall watch the watchers/ protect us against the protectors? Web 2.0 is the answer and the future of freedom and liberty. Don’t let the regulators ruin it.

Politicians are never ones to let a little reality get in the way of vote pandering populism. We are getting a heavy dose of this in the case of the minimum-wage-hike “or you’ll go to jail” laws that are all the rage in the U.S. Congress and in state legislatures. While many readers might believe the minimum wage to be a worthwhile, good hearted trade-off, it is actually more harmful than helpful. Long term, it is contributing to many other economic problems in the United States.

Minimum wage laws have been pushed by the democrats since time immortal given their collectivist predilections. Today, the war-weakened republicans, with their smaller government façade already revealed to be vote-pandering lip service, decided it was easier to simply give the people what they wanted (well, some of the people, at least) instead of bothering to lead and educate the population on why feel-goodism is not a sound basis for economic policy.

From the Arizona Republic on February 10, 2007:

Oh, for the days when Arizona’s high school students could roll pizza dough, sweep up sticky floors in theaters or scoop ice cream without worrying about ballot initiatives affecting their earning power. That’s certainly not the case under the state’s new minimum-wage law that went into effect last month. Some Valley employers, especially those in the food industry, say payroll budgets have risen so much that they’re cutting hours, instituting hiring freezes and laying-off employees. And teens are among the first workers to go.

Well, there you have it.

But, teens (which the article above, unbelievably, goes on to hint as somewhat expendable labor) are merely the tip of the iceberg when it comes to forcing employers’ hands on dealing with artificial base-wages for entry-level and unskilled labor. It’s important to remind all readers that entrepreneurs are not in the business of seeking profits so much as they are in the business of satisfying consumer demand, for which profits might be earned if a quality value-exchange is offered. Hence, ever subservient to the consumers’ demand for the highest possible quality at the most appropriate price (the price/quality trade-off), employers have some of the following choices to consider when adjusting to a minimum wage hike, none of which are exclusive:

• Cut jobs and consolidate with fewer employees.
• Push ahead plans to invest in new, lower cost labor-replacing technology. The break-even point for such an investment is pushed ahead by mandated wage increases. The least skilled tasks are those most easily replaced by such technology.
• Push ahead investment into the offshore job market where work can be done more inexpensively with ever increasing quality. While larger corporations do this with their own employees by setting up divisions in foreign lands, smaller companies do the same less-directly - even inadvertently. It is the natural byproduct of their own demand for quality at the best price possible: their vendors who supply them with their input goods and services are constantly looking for efficiencies, which includes off-shoring jobs away from the countless U.S. market inefficiencies. Moreover, this is made worse by the reality that the minimum wage is often (not coincidentally) tied to upper-level wage contracts in some lines of work (most often, union contracts), hence a raised minimum works means more pay for big labor.
• After all other efficiencies are exhausted - there are limits –, employers must raise prices, thus passing the cost increase onto the very minimum wage employee such laws are purported to benefit, as well as onto the population as a whole. In the case of the latter, what benefits the low wage tied earner comes out of the pockets of everyone else in the form of less purchasing power out of the old paycheck, again, compounded by the reality that low skill wage hikes reverberate up the wage ladder.
• The cycle has one more loop to go since, as prices are increased, all workers then demand additional income AND lower prices in order to make ends meet. This drives employers to seek more efficiency by the methods noted above.

Quite the policy: fewer jobs and higher prices. Around and around the cycle goes, thank you busy-body Congressperson - collectivist meddlers and wimpy slaves to the vote are both to blame. Meanwhile, the average family in the United States wonders why their old, high paying jobs are being replaced with “opportunities to advance” at, say, Wal-Mart.

“After a wage hike, employers seek to take fewer chances on individuals with little education or experience,” one institute researcher told lawmakers in 2004.

Tom Kelly, owner of Mary Coyle Ol’ Fashion Ice Cream Parlor in Phoenix, voted for the minimum-wage increase. But he said, “The new law has impacted us quite a bit.” It added about $2,000 per month in expenses. The store, which employs mostly teen workers, has cut back on hours and has not replaced a couple of workers who quit. Kelly raised the wages of workers who already made above minimum wage to ensure pay scales stayed even. As a result, “we have to be a lot more efficient” and must increase menu prices, he said.

Gee.

Certainly there are those minimum wage earners (and upstream wage earners) who will keep their jobs and benefit a touch with the higher wage. But their gains will come out of the hides of others who will lose their jobs as in the adjustment. Of course, those in the media with collectivist inclinations will first point to the hike as a success story. But it won’t be long before the new equilibrium settles in and they’re rallying for yet another round of wage increases.

Meanwhile, consider that the minimum wage exacerbates the flow of illegal immigration across the U.S. boarder. Many will rail on this “problem” without considering how artificially mandated wages for unskilled labor in the U.S. serves as a perfect magnet. It is one of the primary reasons why an arbitrary line called the Mexican boarder creates such a dramatic wage difference for the otherwise identically unskilled. But the issue is tailor-made for political grandstanding and vote pandering: Congress contemplates spending hundreds of millions (adding to the deficit) to prevent such immigration while the issue is used to divide and distract the nation. But the reality is that such black-market in labor is helping consumers on the other side of the transaction.

This sort of economic dislocation-creating lunacy is what we rail on here at Vigilant Investor, day in and day out. The U.S. economy may be super-duper resilient as we are always told, but it eventually will succumb to the realities that are the laws of economic gravity. Rule number one: there is no free lunch. Rule number two: give away too many free lunches, and you’ll pay soon enough by having no more lunches for anyone. The minimum wage issue goes to show how distant politicians at all levels are from understanding the precarious economic situation here in the U.S. It also demonstrates the gigantic levels of economic naivety among the average citizen, many who think this is harmless at worst, and many others who believe it is a good idea to help economic growth. As such, vigilance demands that you plan around such foolishness.

It is ironic is it that the many minimum wage proponents lament the loss of higher wage jobs to foreign competition, and then propose more draconian protectionist measures to fix the problems they’ve created and compounded. Surely, protectionism has its winners: those able to garner the favor with our modern day, D.C.-based court aristocrats. On the surface it may appear decent, civilized, democratic, and fair. But by scratching the veneer we see that inefficiencies are sheltered from competition, forcing average folks to pay more, leaving them with less disposable income afterward. It is in all ways another form of tax and subsidy for benefit of the privileged few, it happens time and time again. Things will have to collapse under the weight of such inefficiencies before it ever changes.

If the minimum wages issue was the only wrongheaded economic policy we encountered, we’d be delighted. However, Vigilant Investor documents countless others that compound the problems, many of them foisted on the public by the Fed and Congress. The losers, of course, are the riff-raff like you and me who resist retrofitting our mouths with a proboscis for clandestinely lunching on others’ effort, blood, sweat and tears. Such is the devolution of freedom and liberty at the great nanny-trough worshipped by so many.

But, at least you know this is how things work, so plan where you can accordingly.

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Note: Most images in this piece can be clicked to enlarge.

There are yet more indicators in the news that we’re seeing only the tip of the iceberg with the break in the housing bubble:

NYT: D.C. Buyers Scarce, Many Condos Are for Rent

After six weeks of failing to lure more than a couple of dozen buyers, Mr. Franco and his partner, Jeff Blum, joined the builders of nearly 6,000 condominium units in the Washington metropolitan area who have decided in the last three months to recast their projects as rental apartment buildings.

Gee. We can’t wait to see what that will do to rent in the nation’s capital:

Industry analysts also point out that rents may start sagging if too many condos are converted into apartments too quickly. While rents were rising at a robust 6.1 percent annual pace in the Washington area late last year, according to the Bureau of Labor Statistics, some buildings in the suburbs have recently started promoting move-in specials and other incentives to lure renters.

Lest we forget that this is also the era of CondoFlip.com, now home of the patented level-1, level-2, and level-3 “panic sale” buttons, many condo buyers were not future residents, but rather aspiring real estate moguls seizing their rightful slice of the American pie. Developers and speculator alike will be deep underwater on these projects. Primary homeowners who squeezed into properties will also face difficulty should they need to sell. I can only imagine how many of these unfortunates are now realizing, with sudden clarity, that they have just lost at what was investment game of musical chairs.

Take the owner trying to sell a spacious two-bedroom condo for $879,000 in the former Columbia Hospital for Women, which closed in 2002, in the Foggy Bottom neighborhood of Washington. In 2004, the investor was so confident that he would make a handsome resale profit that he told his agent, Thomas P. Murphy, he wanted to buy five condos. Mr. Murphy said he flatly told his client he would only assist him in purchasing one unit in any one building.

“He needs $890,000 to break even, but the offers are at $800,000 to $840,000,” Mr. Murphy said. “He does remember that I told him he was not getting five of them.”

Could he rent the condo? Yes, but that option is not appealing, either. Mr. Murphy estimates that the unit could rent for $4,000 a month, far short of the $6,800 a month the condo costs in mortgage interest, maintenance fees, insurance and taxes.

Bubbleland, USA

Pity, if they only folks like this understood that they were buying into what was nothing more than an artificially expanding, money-supply / credit induced boom.
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The Pension Benefit Guaranty Corporation’s (PBGC) obligations, should just a few of the unfunded liabilities it covers hit the fan, are insurmountable. For taxpayers who will hold the bag, it is yet another reason why the $4.6 trillion real U.S. Federal Deficit may, unbelievably, be understated. (If you are under the impression that the 2006 deficit was in the $260 billion range, click the noted link to be shaken from your comparative bliss.)

Today it was announced that Delta’s 13,000 active and retired pilots are now formally beneficiaries of the PBGC with Delta having formally defaulted on its pension. The agreement of assets and liabilities exchanged between Delta and the PBGC is complicated (it appears that at the moment the PBGC assumes $920 million of the $3 billion shortfall), but let it suffice to say that old-model U.S. Corporations that promised the sun, moon and stars to their retirees are facing the music of stiff competition. Don’t be surprised to see the trend of PBGC take-overs to continue given the sorry state of many off balance pensions.

In the meantime, we await revelations of government pension and benefit shortfalls in the wake of the new accounting rule that requires local governments to disclose Net Present Values of future benefit (health, retirement, etc.) obligations. The looming deficiencies ought to awaken more than a few previously slumbering taxpayers from their comma’s of indifference once they realize what new taxes must be raised to fund those massive shortfalls.