The state of our Nation

www.VermontersForEconomicHealth.org 1

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The state of our Nation

“Arguably the biggest threat [even terrorism] facing the U.S. today is our own Fiscal Irresponsibility, and very few people are willing to State the Facts and Speak the Truth.”

“Continuing on this Unsustainable Path will gradually erode, if not suddenly damage, our Economy, our Standard of Living, and ultimately our Domestic Tranquility and National Security.”

-David Walker, Comptroller General of the U.S, 2006, President of the Peter G. Peterson Foundation

- “Fiscal Wake-up Tour”: http://www.youtube.com/watch?v=OS2fI2p9iVs


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KEY FEDERALECONOMIC DATA


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The state of Indebtedness

• U.S. Public & Private Debt to GDP reached 358% in 2008.

• The all-time high of 300% was reached in 1933, during the Great Depression.


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The U.S. Federal Debt(% of GDP)

020

40

6080

100

120140

Civil War

1900WW I

Great Depression

WW II1965 19751985 1995 20092025

% GDP

World War II 122%

G.D. 44%

2009 80%


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The state of Indebtedness

0

10

20

30

40

50

60

70

80

90

100

Unfundedliabilities

U.S. Debt U.S. Guar. 10 yeardeficits

In $Trillions

Unfunded liab. primarily

Medicare, Medicaid, SS,

State & Municipal

Pensions/Health

benefits.

10 year projected

deficits of about 6%

of GDP vs. economic

growth of about 2.5%

of GDP spell disaster.

Over $100 trillion in

unfunded liabilities


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Life cycle of a Superpower Share of world GDP

33%

China65%

Other

1820

2014

23%

U.S.65%

Other

1950

27%

U.S.68%

Other

2009

24%

U.S.68%

Other

U.S. = 2% China = 5%

China = 8%8%

5%

12% China = 12%

*China is expected to

surpass U.S. GDP in

about 15 years.


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The state of our Monetary System

• "The President will continue to be clear that one of the lessons of the economic crisis is that growth driven by U.S. consumers is not sustainable in the 21st century," said Ben Rhodes, a senior official in the White House National Security Council and Mr. Obama's lead foreign policy speech writer. 11/13/09.

• The Reserve Bank of India joined central banks of China, Russia, Mexico and the Philippines in choosing to boost its reserves of gold (some $150B) in preference to dollar-denominated securities; declaring that the reserve currency role of the dollar is unsustainable.


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Changes in the Price of Oil,in Dollars, Euros & Gold

0

0.5

1

1.5

2

2.5

3

3.5

4

2000 2001 2002 2003 2004 2005 2006 2007

Dollars

Euros

Gold

$100/Barrel Oil

$57/Barrel Oil

$30/Barrel Oil

The value of the dollar is the market’s measure of its confidence that our governmentwill preserve the purchasing power of its debt, almost half of which is held Overseas.Bloomberg/WSJ 1/4/08

Had the dollar remained “as good as gold” since2001, Oil today would be selling at $30 a Barrel,not $100.

Had the dollar remained as strong as the Euro since2001, Oil today would be selling at $57 a Barrel,not $100.


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The state of our Monetary System-Part 1 of 4

• “Triffin’s dilemma,” by Yale economist Robert Triffin, in 1960, “argued that a global monetary system based on the dollar had a flaw; the increased liquidity the world sought would require current account deficits in the U.S.

• But, sooner or later, the overhang of monetary liabilities would undermine confidence in the key currency.”

• This loss of confidence in the U.S. dollar is what we’re witnessing today, as the value of our dollar has been in a free-fall.


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• Triffin’s dilemma is led by China’s exports & America’s over consumption.

• Through China’s recycling of its dollars into U.S. Gov’t Treasuries, our “time preferences” for saving vs. consumption are distorted.

• From 2000-2008, the U.S. outspent its national income. We’ve lived beyond our means.

• In 2000, China’s reserves were $165 billion; today, they are $2.3 trillion, of which nearly $2 trillion are dollar-denominated.


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• Triffin’s dilemma caused a distortion in the cost of capital and its misallocation.

• Significantly reducing long-term interest rates and helping to inflate the real estate bubble in the U.S.

• Americans were able to save nothing while consume much on the backs of inflated real estate asset prices.

• The era of cheap money & easy credit are gone.


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China’s & U.S.’s Mutually Assured Destruction-4 of 4

• 2009’s U.S. trade deficit with China is expected to roughly equal last years’, just over $200 billion

• With projected $1 trillion U.S. deficits for each of the next 10 years, foreign capital is essential

• If China & others do not purchase U.S. debt, their dollar holdings will lose significant value

• A weaker U.S. currency aids U.S exports but can lead to higher interest rates & a flight of capital. 40% of China’s GDP are exports.

• A Monetary System rebalancing is required


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Foreign Holdings of U.S. Debt to the Public

Foreign

DomesticForeign

Domestic49%

20091990

19%

81%

51%

China, Japan, South Korea & Singapore account for 47% of foreign holdings


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Composition of Federal Spending (% of Total Spending)

Medicare&Medicaid

SocialSecurity

NetInterest

Defense

All Else

Defense 46%

All Else

31%

13%

6%

4%

1968 2008

All Else

30%

Defense

21%

Med.

20%

SS

21%

8%


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Mandatory vs. Discretionary Spending (% of Total Spending)

66%

34%

1965- 5.1 Workers per SS

2008- 3.3 Workers per SS

62%

38%

1975

53%47%

1985

56%44%

Mandatory = Lt. BlueDiscretionary= Dk Blue

50% = Portion of budget spent on S.S., Medicare, Medicaid & net interest in 2008; all mandatory.


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The state of our States & Municipalities

• Net of stimulus funds, the Center on Budget & Policy Priorities estimates total state deficits of $255 billion through fiscal 2011. An average of $5 billion per state.

• Without more federal aid, state budget cuts will shave nearly 1% point off U.S. GDP; eliminating almost 1 million jobs through 2011.

• Of the $787 billion stimulus package, states were allotted about $250 billion of this total.

• Municipalities & state’s tax-capacities & debt levels have hit or nearly hit saturation while safety net, infrastructure, and unfunded pension costs rise.


Grow The Pie!The state of Housing

• In 2010, conservative estimates show another 2.4 million U.S. homes lost to foreclosures, while prices drop another 10% (NYT).

• The Census Dept. reports 14.5% of housing units were vacant in 3Q 2009 & average household formation of about 1.2 million per year is overwhelmed by the average housing starts of 1.7 million between 1996-2006

• 3Q 2009 delinquent & foreclosed homes hit an all time record of 14.4%. Foreclosures are expected to surge as those not eligible for the President’s anti-foreclosure plan come off lender’s books.


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The state of Fannie Mae, Freddie, FHA & the FDIC

0

200

400

600

800

1000

1200

1400 $1.25 trillion in monetized Fan/Fred debt

by the Federal Reserve Bank

(the printing of money to purchase debt)

Congress has appropriated $400 billion

in Fan/Fred total projected losses

$112 billion in realized

Fan/Fred losses

$100 billion thru 2013 FDIC

total projected bank losses18% of FHA loans are 30 days

or more past due


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The state of Commercial Real Estate

• $534 billion of the $800 billion in commercial real-estate loans held by banks maturing between now and 2014 are “underwater,” meaning loans exceed property value.

• Roughly $800 billion in real estate refinancing is needed between now and 2014. There is not enough U.S. capital for this. Foreign countries & sovereign wealth funds will be required.

• Lefrak Associates estimates we’re only in the “2nd inning” of this Commercial Real Estate “storm,” & it faces “hundreds of billions of dollars in losses.”

• $1.4 trillion in (weaker) corporate companies bonds & loans come due between now and 2015, putting further pressure on capital markets & interest rates.


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The state of the Consumer (70% of our GDP)

• U.S. household debt service as a % of disposable income reached 130% in 2008, compared to 83% in 1995

• $13 trillion lost in household wealth since 2007

• Credit card companies have slashed credit lines and have tightened restrictions

• A University of Connecticut study showed a 40% pay cut by those returning to work after a layoff & taking up to 6 years before earning 80% of their prior paychecks


Grow The Pie!The state of Jobs

• America has added no private sector jobs for past 10 yrs

• There are 6 applicants for every 1 job available

• The reported 10.2% unemployment rate jumps to 17.5% when including “discouraged workers” and those working part-time in lieu of full-time

• Between 2001-2007, 40% of jobs created were tied to the housing sector (WSJ)

• Approx. 125,000 monthly new jobs are required just to meet new entrants into the workforce

• Manufacturing capacity utilization is at a low of 67%


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The state of our Demographics

• The first of 80 million baby boomers began retirement on January 1, 2008.

• 10,000 of these baby boomers turn 50 years old every day; and you think medical costs are high today?

• In 1960, there were 5.1 workers for every Social Security beneficiary, today it is 3.3. 30 years from now, it’s estimated to be 2.1


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The state of Energy Demand

• The U.S. Energy Information Agency (EIA) estimates U.S. energy demand to grow 21% over the next 20 years.

• The EIA estimates 80% of that demand will be derived from fossil fuels, even with subsidization of renewables.

• World energy demand is estimated to grow some 50% over the coming 25 years.

• Of the worlds 439 nuclear reactors, more than half are expected to be retired in 20 years.


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The state of World Economies

• Harvard Bus. Review reported “in 1980, the total value of global financial assets was equal to world GDP.

• In 2007, these same financial assets increased to 356% of world GDP; most of the increase from private & public debt.

• Competitive currency devaluation, the devaluation of a currency to make a country's exports more competitive, is occurring through monetization, or the printing of money.


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KEY VERMONT

ECONOMIC DATA


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The state of Vermont Indebtedness-2009 data

Unfunded medicalliabilities 6/30/08

Unfunded pensionliabilities 6/30/08

General fund shortfall2011-2014

Unemployment fundshortfall by 2013

Unemployment fundreserve shortfall

Education fundshortfall FY2011

$1.6 billion

(Teacher &

state employees)

$466

million

$470

million

$400

million

$300

mill.

$70 million ($40M to stimulus)

(Net of

Stimulus)

(Champlain Bridge & VT State Hosp. costs not included)

*General Fund revenues at 2004 levels


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VT Taxpayer’s Looming *$3.5 Liabilities-2007 data

Road/Bridge Repair

Water Systems

Bonded Debt

Est. Medicaid

Other Expenses

Chit. County Landfill

New Highway Const.

School Construction

New Mental Hospital

State Parks Repair

Repairs to Dams

Collidge Connector

Catamount Health

$451M

$1.3B

$451M

$300M

$90M $75M $43M $18M

$161M

$200M

$45M

New Highway Const. Projects include the Circ, Bennington & Morrisville Bypass. See Web Site for details on all projects.

$300M

$1.3B

$438M

$451M

$438M

$300M$300M$200M$161M$90M

$75M$45M$43M

$18M

$38M

$38M

$3.5B*Excludes $1.6B pension liab.


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Unsustainable spending: Vermont Fiscal Year

2005-2009 Growth Rates

0%

5%

10%

15%

20%

25%

30%

35%

Edu PropTaxes

K-12Spding

IncomeGrowth

Inflation

23%

13%

10%

(Approx. 300% increase over income growth)

(Over 200% increase over inflation)

(VT gov’t payroll & employee benefit costs grew 70% between

2000-2007 vs. inflation of approx. 20%)


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Student Enrollment Down - Employment and Costs Up

Source: Summary of the Annual Statistical Report of Schools (SASR) FY 1997 - 2006

Student Growth = -9.1%; Teacher and Staff Growth = +20.8%

106,341

96,63615,783

19,069

94,000

96,000

98,000

100,000

102,000

104,000

106,000

108,000

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

15,000

16,000

17,000

18,000

19,000

20,000

Students

Teachers and Staff

1997: Act 60 Implementation


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Where Vermont Generates Its Tax Revenues

Federal Revenues-30%

Education Tax-20%

Income Tax-15%

Service Charges-12%

Other/Misc Taxes-12%

Sales & Use Tax-8%

Meals & Rooms Tax-3%

30%

20%15%

Source: Vermont Comprehensive Annual Financial Report. Fiscal year ending 6/30/06.Total Revenues were approximately $3.8 billion

12%

12%

8%

3%


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Cumulative % of Income Taxes Paid: By Income

Level & Number of Filers

$300K & higher

$150K - $300K

$100K - $150K

$75K - $100K

$50K - $75K

$25K - $50K

$10 - $25K

$10K & lower

26% of Taxes Paid,2,113 Tax Filers;0.69% of Filers

38% Paid,6,970 Filers; 2.29%

49%15,200; 4.99%

98%185,534; 61%

60%27,632;9.08%

75% Paid58,415;19.20%

91% Paid121,827;40.04%

100%304,254;100%

Source: Vt. Comprehensive Annual Financial Report, 2007

$75,000 & up pay 60% of Taxes

Start here,move clockwise…

Top 5% pays about 50%


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How Does Vermont Spend its Revenues?

Education

Human Services

Transportation

People & Prop Protection

Business Type

General Government

Natural Resources

Commerce & Community

Employ. & Training

Debt Interest

39%

36%

75%

7.5%

6%

5%

Source: Vermont Comprehensive Annual Financial Report. Fiscal year ending 6/30/06.

75% of Revenues Go Towards Education and Human Services


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150

170

190

210

230

250

270

1990 1992 1994 1996 1998 2000 2002 2004 2006

Total VTPrivateSectorJobs

Source: Public Assets Institute

Since 2001’s recession, private sector job growth inVermont has essentially been 0%.

(In thousands)

VT’s Private Sector Job Growth From 2000-2007:

0% (Pre-Recession)


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What Kinds Of Jobs Are Being Created?


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VT Retirees Double In 25 Years While The Work

Force Shrinks

0

50

100

150

200

250

2000'02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22 '24 '26 '28 '30

Over 65,(Retirees)

Age 6-18,(school age)

Total Population

Age 20-65,(working age)

Source: Center for Research on Vermont, Art Woolf. (Indexed to 2000 = 100)


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Vermont Summary

• We Have Lived Beyond Our Means For Far Too Long

• Among the highest taxed & regulated in the nation

• Spending at roughly 3X the rate of inflation

• 0% Private-Sector Job growth – 2000-2007

• Vermont faces billions in unfunded liabilities

• Losing our young people at 4X the national average

• With the Medicare and Social Security crisis, VT cannot expect continued Federal assistance to bail us out


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VERMONT SOLUTIONS

“A society cannot consume and not produce.”


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No more “Tinkering”

• “Fiscal policy is on an unsustainable path to an extent that cannot be solved by minor tinkering.”

- Douglas Elmendorf President Obama’s Director of the Congressional Budget Office, November, 2009


Grow The Pie!Wanted: A Plan

• The Pew Center on the States released its 2008 Report Card on state management.

• “Pew strongly agrees that the state [Vermont] needs to do a better job of looking at the big picture when it comes to managing, not just people, but everything.”

• “Poor strategic planning is the theme running through Pew’s report card for [Vermont].”

- Rutland Herald 4/7/08


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• If you would like a copy of this Presentation or,

• If you would like this Presentation presented to your Town…

• E-mail Tom Licata at:

[email protected]

Documents

The state of our Nation