Fleecing Taxpayers Won't Fix The Pension Crisis

Authored by Nick Giambruno via InternationalMan.com,

Public pensions are a financial time bomb... and I see two ways to profit from the explosion.

In the US, unfunded public pension liabilities have surpassed $5 trillion. And that’s during an epic stock and bond market bubble.

Predictably, the government’s go-to “solution” is already making matters worse.

At first, distressed states simply increase taxes.

The state comptroller of Illinois—the most financially troubled state thanks to its pension crisis—summed it up well. He said: “We can’t go bankrupt and we can’t print money. Taxpayers are going to have to pay this bill.”

State governments always squeeze property owners the hardest.

Last year, Americans paid over $300 billion in property taxes. In Illinois and other states, property tax bills exceeding $10,000 per year are not uncommon.

Most governments continually raise property tax rates, especially governments in bad financial health. It’s easy to simply ratchet up property taxes to bring in more revenue.

Case in point: Greece, where the country’s bankrupt government has made owning property a burden.

The following excerpt from The Guardian shows just how far Greece’s government has gone (emphasis mine):

The joke now doing the rounds is: if you want to punish your child, you threaten to pass on property to them… Greeks traditionally have always regarded property as a secure investment. But now it has become a huge millstone, given that the tax burden has increased sevenfold in the past two years alone.

It’s happened in Greece. It’s happened in Illinois, which has some of the highest property taxes in the US (and rising). And it will happen elsewhere, especially in states struggling to meet pension obligations.

Here’s an excerpt from a local Chicago news outlet. The telling headline reads “Cook County property tax bills cause outrage”:

“Our taxes increased fivefold,” said William Phillips of Rogers Park. “I was expecting it to go up maybe twice as much but not four to five times as much.”

“My tax bill increased almost $1,200 dollars,” said Cornes King of Chatham.

“More than tripled. The city’s piece more than tripled,” said Logan Square resident Janelle Squire.

Fleecing Taxpayers Won’t Fix This Crisis

Politicians don’t seem to realize (or care) that it’s mathematically impossible—and counterproductive—to try to solve the pension crisis by raising taxes.

Even if tax rates double in places like Illinois, it still won’t solve the problem. And that’s assuming the overall tax collected stays the same—which it wouldn’t.

Higher taxes would make more people leave the state and actually decrease the amount collected.

This trend is already underway. More than half a million people have left Illinois over the past decade. That includes over 3,000 millionaires who’ve fled Chicago in recent months.

Many left for a simple reason: rising taxes.

Nonetheless, raising taxes is exactly what politicians are doing. And they’ll continue to do it, even though they’re long past the point of diminishing returns.

The Other Easy “Solution”

Ultimately, the Federal Reserve will paper over the pension crisis by printing more currency.

Politically, it seems impossible that the government would default outright on its promises to millions of its own employees when the Fed can simply print more currency.

Ultimately, this will turn a local debt crisis into a national currency crisis. And many states will effectively default on their pension obligations anyway, since those payouts will be made with depreciated currency.

The pension crisis has clear investment implications for gold.

When the government tries to “solve” the pension crisis with the printing press, I expect investors to rush into gold.

Gold has been a reliable safe-haven asset for thousands of years. Unlike paper money, it has intrinsic value. That value does not depend on a politician’s promise.

I think gold will reach not just multiyear highs, but all-time highs.

That’s why you should position yourself now.

I think everyone should own some physical gold. Gold is the ultimate form of wealth insurance. It’s preserved wealth through every kind of crisis imaginable. It will preserve wealth during the next crisis, too.

Gold Isn’t the Only Way to Profit

The pension crisis is making states desperate for every penny they can get.

That desperation is making them open to new ideas. Necessity has a way of quickly changing people’s minds.

Because of that, I expect many states to further soften their marijuana laws as they look for more sources of revenue.

In many of the states that have or will legalize cannabis, the tax revenue will exceed that of alcohol and tobacco. That’s not something a cash-strapped state can turn away from.

Just look at what’s happened in Colorado, which legalized recreational use in 2012. Last year, its marijuana industry generated $1.3 billion in sales and $200 million in tax revenue.

A decade ago, Colorado was receiving zero in marijuana taxes.

The industry has also generated over $250 million in taxes for Washington state already.

In California, a recent study estimated that cannabis taxes would bring in at least $1.4 billion dollars each year.

Soon, cannabis tax revenue will become a permanent part of many state budgets. This will encourage other states to follow suit.

Cannabis taxes will generate a lot of money. Still, legalizing and taxing marijuana won’t solve the multitrillion-dollar pension crisis. However, for our purposes as investors, it doesn’t have to.

We’re betting that the pension crisis will boost the US marijuana industry.

It’s already forcing states to look for new sources of revenue. Inevitably (and probably soon), they’ll find the economic benefits of legalized marijuana too good to pass up.

Legalized medical marijuana has already been approved in 29 states, plus Washington, DC. And eight states (plus DC) have approved recreational use.

It’s only a matter of time before other states start cashing in on this trend, too.

And the best way for investors to cash in on the coming US legal marijuana boom is through select publicly traded cannabis companies.

Those who get into these companies stand to make a fortune in the months ahead.

That’s why we recently released a new exclusive video. It has all the details on how you can get in ahead of the herd. Click here to watch it now.

Euro Slides After Greece Hints At Default

EURUSD is sliding in early Asian trading after Greece"s government is reportedly planning to forego its next bailout payment (of around EUR7bn) if no debt relief is offered by creditors (thus leaving it likely to default on its next round of repayments).

Bloomberg reports, Greece’s government preparing to possibly go without next bailout payment if creditors don’t agree on debt relief for the country according to German newspaper Bild (without saying where it obtained the information).

While probably just another negotiating step, it is weighing on EURUSD.

Another Greek WTF Showdown Moment Explained

Submitted by Michael Shedlock via MishTalk.com,

The IMF has once again threatened to pull out of the Troika following a warning that Eurogroup Loan Measures Not Enough for Greek Debt.

Greek debt yields had already been rising and spiked on the news.

Let’s take a look at what’s happening, culminating with an explanation of seemingly preposterous positions from all involved.

In the IMF’s baseline scenario, Greece’s government debt will reach 275 percent of its gross domestic product by 2060, when its financing needs will represent 62 percent of GDP, the report obtained by Bloomberg says. The government estimates public debt around 180 percent of GDP at present.

Europe Responds

The IMF board is set to discuss Greece’s ability to service its debt on Feb. 6. The fund has resisted pressure from countries including Germany and the Netherlands to contribute to the bailout program, seeing it as doomed unless Greece takes further steps to rein in spending or euro-area governments ease the terms of the loans.

Europe’s aid program for Greece is credible and backed by contingency measures to handle unforeseen events, a spokesman for the European Stability Mechanism, an EU agency that provides bailout loans to Greece, said in e-mailed statement Sunday.

IMF Proposals

As in the past, the IMF is proposing that Europe extend grace periods and maturity dates on the loans. The document also calls for further deferral of interest payments and to lock in interest rates.

Greek debt is “highly unsustainable” and “even with the full implementation of policies agreed under the European Stability Mechanism program, public debt and financing needs will become explosive in the long run,” the document says. A “substantial restructuring” of European loans to Greece is required to restore debt sustainability, it says.

The IMF agrees with Greece’s euro-area creditors on one point. Both want Greece to introduce a law triggering austerity measures if the country fails to maintain a budget surplus before interest payments of 3.5 percent of GDP. Greek Finance Minister Euclid Tsakalotos last week rejected that demand as “unacceptable.”

Greek Bond Yields Soar

Reuters reports Greek Bond Yields Soar on Worries about IMF role in Bailout.

Yields on short-dated bonds spiked 300 basis points, on track for their biggest one-day jump since July 2015, while 10-year bond yields rose to their highest in almost three months.

Germany said on Monday it believed the IMF would participate and that it was too early to start thinking about other possible scenarios.

But concerns were heightened after a leaked report that the Fund expects Greek debt to explode to 275 percent of GDP by 2060, analysts said.

“There’s a bit of disquiet regarding the IMF’s role…,” said Orlando Green, European fixed income strategist at Credit Agricole.

“The bottom line is that the IMF wants debt relief for Greece and the EU has taken baby steps towards this, but it is not what the IMF is looking for long-term. When there are divisions between the EU and IMF, that arouses concerns about Greece.”

He was answering a question about a report in the Bild newspaper that said Finance Minister Wolfgang Schaeuble would argue for a Greek exit from the euro zone should the IMF withdraw from the third bailout programme.

Short-dated government bond yields in Greece rose as far as 9.98 percent, their highest level in about seven months.

Five and 10-year Greek bond yields also rose sharply, with 10-year yields climbing 50 bps to around 7.76 percent – their highest since early November.

Perpetual Nonsense

The IMF argues correctly that Greek debt is unsustainable. Previously the IMF correctly argued Greece could not maintain a primary account surplus of 3.5 percent.

Yet the IMF now demands Greece automatically implement rules forcing it to have a primary account surplus of 3.5 percent of GDP as far as the eye can see.

Last week Eurointelligence reported that Greek officials were elated the much-despised IMF might exit the program. Although Greece hates the IMF, the IMF has at least been partially on Greece’s side, arguing for debt reductions.

Were the IMF to actually pull out to happen, Schaeuble wants Greece out of the Eurozone.

Meanwhile, Eurozone officials pretend the program is working when they know full well its not.

WTF Moments

This is one of those WTF moments where statements from Greece, from the IMF, and also the Eurozone make no apparent sense.

Yet, despite the obviously apparent nonsense, it’s possible to piece together what’s happening.

1. Neither Germany nor the Netherlands is willing to throw Greece the smallest of bones for fear of election consequences. It’s far easier for Eurozone nannycrats to pretend things are running smoothly.


2. Schaeuble has long wanted Greece out of the Eurozone. But Germany does not want to take the blame. Instead, Schaeuble wants the IMF or Greece to take the blame.


3. The IMF does not want the blame either, so it takes a preposterous stance that the debt is not sustainable but a 3.5% primary account surplus for as far as the eye can see is sustainable. The IMF takes this view despite having argued many times that 3.5% is not sustainable.


4. By pretending to now be in favor of 3.5% perpetually, the IMF can argue it is not one-sided to Greece.


5. Despite the fact the IMF is more on Greece’s side than Germany or the Eurozone nannycrats, Greece hates the IMF so much that its position of not wanting the IMF involved overrides common sense.


6. As an alternative to point 5, consider the possibility that Greece wants outs of the Eurozone, but none of the politicians want to take the blame. Instead, the politicians want to blame the IMF or Germany and are just itching for the IMF to get the hell out so they could do what they wanted to years ago (exit the eurozone). In this possibility, Greece looks to place the blame elsewhere and is waiting for the right moment.

Troika Blame Game Theory

Points 1-4 are certain. Points 5-6 are pick one. Despite the apparent absurdity of conflicting views and the IMF’s changing stance, blame game theory explains all you need to know. Here is a shorter synopsis.

1. Greece wants to blame the IMF and Germany


2. Germany wants to blame Greece and the IMF


3. The IMF wants to blame Greece and Germany