“It’s Not Sustainable” – Sacramento Lashes Out At Calpers After Raising Pension Payments

In the latest sign that America’s looming pension crisis is inching closer to an all-our collapse that will inevitably end in a series of bailouts – or worse, the failure to pay out retiree’s coveted benefits – a handful of California cities are lashing out at CALPers after being forced to hike pension contributions to offset expectations for long-term returns that have been revised lower by the state pension system.

Ten of the largest local governments in the capital region can expect to pay a total of $216 million to CalPERS in fiscal 2018-19, an increase of $27 million over this year, according to the Sacramento Bee. And nearly half of that increase will be borne by one local government – the city of Sacramento.

The Sacramento region’s largest local governments will see pension costs go up by an estimated 14 percent next fiscal year, starting a series of annual increases that many city officials say are “unsustainable” and will force service cuts or tax hikes.

 

The increases come after CalPERS in December reduced the expected rate of return from investments, forcing local governments and other participants in the state’s retirement plan to pay more to cover the cost of pensions.

As one might expect, city officials are less than pleased. According to Leyne Milstein, the city of Sacramento’s finance director, said the city’s pension costs will double in seven years, and while city revenues have also increased in recent years, thanks in part to a strong real-estate market, the rise won’t be nearly enough to offset the increased cost.

“It’s not sustainable,” Milstein said. “These costs are going to make things incredibly challenging.”

In a report this month, Joe Nation, a researcher at the Stanford Institute for Economic Policy Research, wrote that “employer pension contributions are projected to roughly double between 2017 and 2030, resulting in the further crowd out of traditional government services.”

Nation said he supports tax increases to pay for pension obligations, although he adds that it would be extremely difficult to muster political support for such a tax.

In a futile exercise that resembles banging one’s head against a wall, local government officials from across the state, including West Sacramento, complained to CALPers board members, warning that they would need to cut services and raise taxes to put more money toward pensions.

“We don’t know how we’re going to operate,” said Oroville’s finance director, Ruth Wright, who suggested that a doubling of pension costs in five years could force the city into the nuclear option. “We’ve been saying the bankruptcy word.”

Of course, there’s little CALPers can do. If it doesn’t mandate the increases, it knows that will increase its culpability when the music stops and every asset has been liquidated.

To wit, Steve Maviglio of the labor-backed Californians for Retirement Security said officials have the means to address the increased costs. “If city officials are truly interested in meeting their obligations, they always have that opportunity at the bargaining table or providing more revenue thru measures on the ballot,” he said.

Of course, this exercise in cya isn’t nearly enough to stave off the inevitable collapse. Nation questions whether the new CalPERS return rate is too optimistic. In his report, he provides estimates for how much local governments can expect to pay if the fund’s investments don’t meet projections. In 12 years, the city of Sacramento would see pension costs go up $94 million a year under his alternative projection.

To afford these higher costs absent higher revenues, Sacramento would have to cut 25% of police and fire services after cutting other less essential services.

Milstein said she won’t estimate when or if the city will have to start cutting employees if the current financial forecast proves correct. In the city’s current budget, officials said, “Given the current revenue forecast, the city alone cannot absorb the increased costs of providing retirement benefits.”

Some groups, including the League of California Cities are lobbying CalPERS to consider funding options besides raising employer rates, including possibly suspending cost-of-living adjustments for pensioners and looking at working current workers into less generous plans.

As we’ve noted many times, defined benefit pension plans are, in many cases, a Ponzi scheme…

Current assets are used to pay current claims in full despite insufficient funding to pay future liabilities…but unlike Wall Street Ponzi schemers like Bernie Madoff, nobody goes to jail because everybody is complicit.

While California’s problem is certainly dire, pension costs directly triggered budget battles in state capitols across the US this year. Connecticut is still struggling to pass a budget that meaningfully reduces an expected $3.5 billion two-year deficit.

Indeed, as the chart below illustrates, underfunded pensions are an endemic problem.

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London Stock Exchange Exec: Fiat Cash Impeding Blockchain Trials

Fiat currencies are hampering blockchain innovation – at least according to David Harris, head of commercial innovation at the London Stock Exchange Group (LSEG). In a keynote address at the third annual London Blockchain Summit today, Harris told a crowd of about 150 global bankers, insurers and technology providers that he looks forward to a day […]

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London Stock Exchange Exec: Fiat Cash Impeding Blockchain Trials

Fiat currencies are hampering blockchain innovation – at least according to David Harris, head of commercial innovation at the London Stock Exchange Group (LSEG). In a keynote address at the third annual London Blockchain Summit today, Harris told a crowd of about 150 global bankers, insurers and technology providers that he looks forward to a day […]

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QE’s Untold Story: A Chart That Fed Correspondents Need To Investigate

Authord by Daniel Nevins via FFWiley.com,

We’ve produced some research over the years that we’d love to see the powers-that-be react to, but none more so than our look at financial flows during the QE programs.

By netting all lending by banks and brokers-dealers and then comparing it to the Fed’s lending, we stumbled upon a chart that seemed to show exactly what QE does or doesn’t do. But “doesn’t,” not “does,” was the story, and it couldn’t have been clearer. Or shown a more stimulating pattern. To geeks like us, our Excel click on “Insert, Line” was like stepping from a shady trail to a sunny vista.

Here’s the updated chart, which we dubbed the “argyle effect” and looks even sharper than it did when we first produced it in 2014:

We like the chart because we’re just as confirmation-biased as the average human – anything that confirms our QE skepticism is cognitively satisfying. And the chart appears to show that QE was largely irrelevant. It merely replaced growth in privately financed credit with growth financed by the Fed. The Fed grabbed the credit-growth baton for QE laps and returned it to the private sector for QE pauses, and whoever didn’t have the baton more or less stood still.

As we concluded in 2014, QE is a substitution story, not an addition story.

Many pundits told the addition story as QE was underway. They expected banks to “multiply up” reserves by aggressively expanding their loan books. But reserves never significantly multiplied.

We think there are five reasons why the “money multiplier theory” failed:

  1. High-quality borrowers don’t emerge mysteriously from cracks in the Eccles Building and parade zombie-like to bank loan desks. In other words, credit demand was probably about the same with or without QE.
  2. QE’s effects on bank balance sheets aren’t quite as distorting as they’re often depicted. Consider that new reserves are typically matched by new deposits, because dealers offering bonds to the Fed get paid for those bonds through their accounts at commercial banks. In other words, QE adds a similar item to both sides of bank balance sheets, which you might not appreciate if your information comes from those who call for banks to “lend out” reserves. That’s impossible—reserves can’t be “lent out”—and it often leads to exaggerated statements about the implications of excess reserves.
  3. To a significant degree, banks can neutralize excess reserves (and the corresponding “excess” deposits) with financial derivatives and other balance sheet adjustments. They can rearrange exposures to mimic a balance sheet of equal risk that’s not stuffed with reserves.
  4. Just as importantly, excess reserves flow naturally from banks that don’t want them to banks that don’t mind them nearly as much. Consider that Fed data shows a disproportionate amount of QE’s extra reserves landing at U.S. branches of foreign banks. Those foreign banks might have sound reasons for holding excess reserves.
  5. The money multiplier theory is inconsistent with real-world reserve management practices. The Bank of England has called it “reverse” to how bank lending and reserve management work in the real world. And the gap between theory and reality is so large that you don’t even need the four reasons above to reject the money multiplier—you just need a healthy skepticism about mainstream theory.

According to our chart, even QE’s wealth effects appear to be poorly understood. If credit growth is the same with or without QE, any effects on bond and stock prices might be more psychological than commonly believed.

Or, those effects might transmit mainly through financial derivatives (see #3 above). Or, I hear at least a few readers asking, “What wealth effects?” We’ll never know for certain if QE boosted asset prices at all. Maybe the bull market only needed low interest rates, a slowly growing economy, the knowledge that our policy honchos wanted asset prices higher, and a soothing narrative that they have the tools to make that happen?

Think of it this way: New borrowers know approximately how many calories they can consume, and after the Fed starts delivering three meals a day, private banks find that their contributions are no longer needed. By necessity, private banks shut down their kitchens, and almost nothing changes economically. We get substitution, not addition.

Getting to the Bottom of the Burberry Backlash

To be sure, the argyle effect might not be surprising to the Fed’s policy makers. They might have already looked at the data in the same way we did. They might also believe that QE increased the overall lending trend (referring to the entire period’s lending growth), irrespective of the pattern from one QE to the next. All that said, we’d like to know their reaction.

We’d like to know: Would the Fed’s heads explain the chart pattern differently to our interpretation above? If our interpretation is on the central-bank-printed money, how do they justify their policies? How do they expect the pattern to change as QE unwinds? Or, do they not know what to expect—are they as confused as anyone else about what QE really does? The last possibility matches public statements by both current and former FOMC members. (See, for example, Bill Dudley here, Kevin Warsh here, or just about anything from Richard Fisher.)

So, we’re asking Fed correspondents to lend a hand. Nearly nine years after QE began, you’re tired of having the same discussions, right? Here’s a chance to make the discussions more interesting—a chance to drop a Burberry bombshell on your most insightful Fed contact. Inquiring minds would like to see the bomb’s impact, or at least to know how policy makers would go about defusing it. More bluntly, inquiring minds deserve to know. It’s our economy, too, and public officials should be held accountable for the results of their actions.

And if the public interest isn’t enough to persuade Fed correspondents to investigate the argyle effect, we’ll offer other incentives. In return for a report that includes the insights of any FOMC member or senior Fed researcher, we’ll send a complimentary copy of Economics for Independent Thinkers, which is filled with similar research. Or, if our book isn’t mainstream enough for you, we’ll send a thank you with a big smiley face on it. Either way, we look forward to your report on our simple—yet oddly revealing—chart.

Author’s Note: We separated QE and non-QE periods according to the credit the Fed added to the financial system through all of its activities, not just open market operations. Because we included loans, repos, and various emergency facilities enacted during the financial crisis, our time periods are slightly different than the announced start and end dates for QE alone. (For more details, see this note from 2014, although replicators should be aware that the Fed recently replaced its “credit market instruments” category with a few subcategories.) In other words, the line showing the Fed’s net lending is jagged by design. By separating periods of high versus low Fed-sourced credit, we could test whether the private sector’s net lending would show a reverse correlation to the Fed’s activities. As you can see, it did.

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Economics Professor Barry Eichengreen Favours Central Bank Issued Digital Currency Over Decentralised Cryptos

Renowned Professor of Economics and Political Science, Barry Eichengreen, has declared that he believes decentralised cryptocurrency will “not really” play a part in the future of finance. For the University of California lecturer, it is far more likely that central bank-issued digital currency will be favoured, thanks to the ability virtual currency has to streamline existing … Continue reading Economics Professor Barry Eichengreen Favours Central Bank Issued Digital Currency Over Decentralised Cryptos

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US <b>Crude Oil</b> Stocks Down 5.087 Million Barrels, API Says

Investing.com – Crude oil stocks fell by 5.087 million barrels last week, the American Petroleum Institute (API) said on Tuesday, while gasoline …

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Daily Market Report for October 31 2017

October 31 2017 
KRAKEN DIGITAL ASSET EXCHANGE
 $101M traded across all markets today
 Crypto, EUR, USD, JPY, CAD, GBP 
ATH! 
BTC 
$6,375 
↑4.57% 
$63.1M
ETH 
$306.6 
↑0.52% 
$16.1M
BCH 
$445.64 
↓0.90% 
$10.1M
XRP 
$0.2003 
↓0.99% 
$2.7M
LTC 
$55.93 
↓0.76% 
$2.38M
USDT 
$1.00 
→0.00% 
$1.35M
ZEC 
$232.9 
↓2.89% 
$1.14M
DASH 
$284.2 
↓0.11% 
$1.03M
XMR 
$88.11 
↓1.26% 
$826,752
EOS 
$.72 
↑2.86% 
$803,543
XLM 
$0.0290 
↓9.16% 
$703,241
ICN 
$0.996 
↓8.18% 
$512,210
ETC 
$10.54 
↓2.23% 
$434,182
REP 
$17.34 
↑1.11% 
$136,230
MLN 
$60.57 
↑2.64% 
$54,169
GNO 
$72.0 
↓2.57% 
$47,250

Visit the About section on our blog for more information about the Kraken Daily Market Report here.

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Bitcoin Price Boom Sees Students Flocking to Take Cryptocurrency Courses

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