made in u.s. dollars: paper promises, real consequences - bca february 2011 newsletter

Made in U.S. Dollars:Paper Promises,

Real ConsequencesReal Consequences

Ronald A. Tadross, CFABalance Capital Advisors, Inc.

February 2011

SurrealGovernment PromisesGovernment Promises

Everywhere

Cheap Money Has Helped Promote U.S. Federal Government Entitlement Spending

30%

40%

50%

60%

70%

As %

US

Fed

era

l E

xp

en

dit

ure

s

Entitlement Costs as % Total US Spend

Interest Costs as % Total US Spend

Ronald A. Tadross, CFA www.balancecap.com

3

0%

10%

20%

30%

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010EA

s %

US

Fed

era

l E

xp

en

dit

ure

s

Source: w w w .usgovernmentspending.com, Balance Capital Advisors Inc. estimates.

The States Have Made Enormous Pension Promises Also, Which Will Require Much More Taxpayer Money If Asset Returns Lag

100%

150%

200%

Pe

ns

ion

Lia

bili

tie

s a

s %

Re

ve

nu

e

Unfunded Pension Liability as % Revenues

Pension Assets as % Revenues


4

0%

50%

Co

nn

ect

icu

tIn

dia

na

Vir

gin

iaN

. Ca

rolin

aA

lask

aM

ich

iga

nA

lab

am

aO

reg

on

Oh

ioM

inn

eso

taN

ew

Je

rse

yK

en

tuck

yN

ew

Me

xico

Uta

hF

lori

da

Ma

ryla

nd

Ari

zon

aW

isco

nsi

nC

olo

rad

oM

issi

ssip

pi

Ma

ine

We

st V

irg

inia

Okl

ah

om

aH

aw

aii

Mo

nta

na

Ark

an

sas

Iow

aN

. Ha

mp

shir

eW

yom

yin

gN

ew

Yo

rkK

an

sas

Lo

uis

ian

aR

ho

de

Isla

nd

Wa

shin

gto

nIll

ino

isT

exa

sP

en

nsy

lva

nia

Ge

org

iaM

isso

uri

S. C

aro

lina

So

uth

Da

kota

De

law

are

Ida

ho

Ne

vad

aM

ass

acu

setts

Ca

lifo

rnia

Ne

bra

ska

No

rth

Da

kota

Ve

rmo

nt

Te

nn

ess

ee

Pe

ns

ion

Lia

bili

tie

s a

s %

Re

ve

nu

e

Sources: PEW Center on States, w w w .usgovernmentrevenue.com, Balance Capital Advisors

Even Municipalities Have Committed Property Taxpayers To Wage & Benefit Cost Trends That Are Clearly

Unsustainable

59%

91%

50%

60%

70%

80%

90%

100%

1995

-201

0 C

umul

ativ

e P

erce

nt C

hang

e

U.S. Inflation (Consumer Price Index, All Items)

Inc. Village of Garden City Property Taxes

Inc. Village of Garden City Total Labor Costs


5

43%

0%

10%

20%

30%

40%

50%

1995-2010 Cumulative Percent Change

1995

-201

0 C

umul

ativ

e P

erce

nt C

hang

e

Sources: Garden City Financial Filings, BLS, w w w .gardencityresidents.org calculations. Note: total labor costs include salaries & benefits.

Consequences of Printingand Borrowing U.S. Dollarsand Borrowing U.S. Dollars

Remain Muted

Taking on Debt to Finance Non-Productive Entitlements Ultimately Requires Money Printing

$1,000

$1,500

$2,000

$2,500

US

Mo

neta

ry B

ase (

$ in

millio

ns)

$8,000

$10,000

$12,000

$14,000

$16,000

US

Tre

asu

ry D

eb

t ($

in

millio

ns)

US Monetary Base

US Treasury Debt


7

$-

$500

$1,000

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

E

US

Mo

neta

ry B

ase (

$ in

millio

ns)

$-

$2,000

$4,000

$6,000

US

Tre

asu

ry D

eb

t ($

in

millio

ns)


Non-Productive Capital Use Does Not Generate Wealth

$2,000

$2,500

$3,000

$3,500

US

Fed

era

l T

ax R

eceip

ts (

$ m

illio

ns)

$80,000

$100,000

$120,000

$140,000

To

tal US

Deb

t (ex. corp

orate d

ebt, $ m

illion

s)

Federal Tax Receipts

Total US Debt (ex. Corporations)


8

$500

$1,000

$1,500

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

E

US

Fed

era

l T

ax R

eceip

ts (

$ m

illio

ns)

$20,000

$40,000

$60,000

To

tal US

Deb

t (ex. corp

orate d

ebt, $ m

illion

s)


The Mountain of U.S. Debt Has Yet to Have Borrowing Cost Consequences

8%

10%

12%

14%

16%

U.S

. 10-y

ear

Tre

asu

ry B

on

d Y

ield

$8,000

$10,000

$12,000

$14,000

$16,000

U.S

. Treasu

ry Deb

t ($ millio

ns)

10-year Treasury Bond Yield

US Treasury Debt


9

0%

2%

4%

6%

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

E

U.S

. 10-y

ear

Tre

asu

ry B

on

d Y

ield

$0

$2,000

$4,000

$6,000

U.S

. Treasu

ry Deb

t ($ millio

ns)

Source: U.S. Federal Reserve, w w w .usgovernmentspending.com, Balance Capital Advisors. Inc. estimates.

Total State Debts are at Unmanageable Levels and Continue to Grow

150%

200%

250%

300%

De

bts

as

% R

ev

en

ue

s

Unfunded Pension Liability as % Revenues

Unfunded Healthcare Liability as % Revenues

Bonded Debt as % Revenues


10

0%

50%

100%

Ne

w M

exi

coW

isco

nsi

nO

reg

on

Mis

siss

ipp

iO

hio

Okl

ah

om

aA

lab

am

aH

aw

aii

Ne

w J

ers

ey

Ma

ine

Ne

vad

aM

isso

uri

Co

nn

ect

icu

tM

on

tan

aS

ou

th D

ako

taM

inn

eso

taA

rka

nsa

sK

en

tuck

yC

alif

orn

iaIll

ino

isS

. Ca

rolin

aId

ah

oM

ich

iga

nL

ou

isia

na

Ma

ryla

nd

Co

lora

do

Vir

gin

iaG

eo

rgia

Uta

hIo

wa

N. C

aro

lina

Pe

nn

sylv

an

iaR

ho

de

Isla

nd

Ala

ska

Ari

zon

aF

lori

da

Wa

shin

gto

nK

an

sas

N. H

am

psh

ire

Ind

ian

aT

exa

sW

yom

yin

gV

erm

on

tM

ass

acu

setts

Te

nn

ess

ee

Ne

w Y

ork

No

rth

Da

kota

We

st V

irg

inia

Ne

bra

ska

De

law

are

De

bts

as

% R

ev

en

ue

s

Sources: PEW Center on States, w w w .usgovernmentrevenue.com, Balance Capital Advisors

Municipalities View Borrowing as a Solution Too, And In Most Cases Do Not Need a Public Referendum To Borrow

$15

$20

$25

$30

Vill

age

of G

arde

n C

ity T

otal

Bon

ded

Deb

t ($

in m

illio

ns)

Garden City Total Bonded Debt


11

$0

$5

$10

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011B

Vill

age

of G

arde

n C

ity T

otal

Bon

ded

Deb

t ($

in m

illio

ns)

Sources: Garden City f inancial f ilings, w w w .gardencityresidents.org calculations.

The $19,000 a day borrowing rate is based on a $6.8 million bond issued in May 2010 and another

similarly sized bond expected by May 2011.

Note: includes general government, w ater, pool & tennis.

Municipalities Are Behind States and Counties in Bonding Pension and Health Care Liabilities, But Not Far Behind

150%

200%

250%

300%

Bo

nde

d a

nd

Hea

lth

care

Deb

t as

% R

even

ues

Health Care Liabilities/Debt as % Revenues

Bonded Debt as % Revenues


12

0%

50%

100%

Garden City Rockville Centre Nassau County New York State

Bo

nde

d a

nd

Hea

lth

care

Deb

t as

% R

even

ues

Sources: PEW Center on States, NY state financial filings, w w w .gardencityresidents.org calculations.

Many Taxpayers are Agnostic to Government Borrowing Because They Do Not See It and Borrowing Limit's Tax

Increases

$2

$4

$6

$8

$10

Yr.

/Yr.

Cha

nge

Bon

ds &

Tax

es ($

mil.

)

5%

10%

15%

20%

Year/T

ear % C

han

ge in

Tru

e Taxes

Yr./Yr. Bonded Debt (Reduction)/Increase

Yr./Yr. Property Tax Increase/(Decrease)

True Tax Increase (Yr./Yr % Change)


13

($8)

($6)

($4)

($2)

$01996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011B

Yr.

/Yr.

Cha

nge

Bon

ds &

Tax

es ($

mil.

)

-10%

-5%

0%

5%

Year/T

ear % C

han

ge in

Tru

e Taxes

Sources: Garden City f inancial f ilings, w w w .gardencityresidents.org calculations.

Service Cuts IndicateBorrowing Is Reaching ItsBorrowing Is Reaching Its

Limit

Employee Pension and Health Care Costs Are Devouring More and More Taxpayer Funds, and are Compounding

$0.12

$0.14

$0.16

$0.18

$0.20

$0.22

$0.24

Po

rtio

n o

f E

ach

$1

in V

illag

e T

axes

th

at g

oes

to

Pen

sio

n &

Hea

lth

care


15

$0.00

$0.02

$0.04

$0.06

$0.08

$0.10

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011B 2012E 2013E

Po

rtio

n o

f E

ach

$1

in V

illag

e T

axes

th

at g

oes

to

Pen

sio

n &

Hea

lth

care

Sources: Garden City financial filings, NY State forecast, w w w .gardencityresidents.org calculations and estimates.

Garden City Village employees have been constant at approximately 300, but the portion of your tax dollars

going to employee pension and healthcare costs has nearly tripled.

Infrastructure Maintentance Has Taken a Backseat to Labor Costs, Including Pension and Health Care Costs

4%

5%

6%

7%

Str

eet M

iles

Res

urfa

ced

as %

Tot

al

60%

65%

70%

Labor C

ost a

s %

Revenues

Street Miles Resurfaced as % Total Street Miles

Labor Cost as % Revenues


16

0%

1%

2%

3%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011B

Str

eet M

iles

Res

urfa

ced

as %

Tot

al

45%

50%

55%

Labor C

ost a

s %

Revenues

Sources: Garden City f inancial filings, w w w .gardencityresidents.org Note: labor costs include w ages, benefits, and w orkers comp.

Municipal Governments Have Looked Under Every Rock (and Tree), Instead of Addressing The Entitlement

Problem

350

400

450

500

550

600

Gar

den

City

, NY

Tre

es P

lant

ed

60%

65%

70%

Labor C

ost a

s %

Revenues

Trees Planted Each Year

Labor Cost as % Revenues


17

100

150

200

250

300

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Gar

den

City

, NY

Tre

es P

lant

ed

45%

50%

55%

Labor C

ost a

s %

Revenues

Sources: Garden City financial f ilings, w w w .gardencityresidents.org Note: labor costs include w ages, benefits, and w orkers comp.

Despite Cuts in Infrastructure Maintenance, Municipalities Cannot Balance The Budget and Look Forward to Raising

Taxes

$45

$50

$55

$60

$ in

mill

ions

Garden City Village Tax Revenues

Garden City Village Expenses


18

$30

$35

$40

$45

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011B

$ in

mill

ions

Sources: Garden City financial f ilings, w w w .gardencityresidents.org calculations. Note: includes capital spending, excludes all w ater financials.

In Many Cases, Borrowing For Capital Expenditures Is Necessary To Maintain Social Order

$4

$6

$8

$10

Dol

lars

in M

illio

ns, G

arde

n C

ity, N

Y

Bonded Debt Year/Year $ Change (incl. Water)

Capital Spending (incl. Water)


19

-$4

-$2

$0

$2

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011BDol

lars

in M

illio

ns, G

arde

n C

ity, N

Y

Sources: Garden City financial f ilings, w w w .gardencityresidents.org calculations.

Printing Money isIncreasingly Driving PaperIncreasingly Driving Paper

Money to Real Assets

Global Paper Currency In Circulation Is Up 150% Since 2000, and Gold Has Gone Up Similarly

3.0

4.0

5.0

6.0

US$

Trill

ions

3.0

4.0

5.0

6.0


21

0.0

1.0

2.0

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

US$

Trill

ions

0.0

1.0

2.0

USD JPY EUR CNY Others (96) Value of All Mined GoldSource: w w w .dollardaze.org, Balance Capital Advisors, Inc.

US Money Printing Has Driven The Dollar Value Down For Decades, But Now The Money Is Leaving The U.S...

$0.40

$0.50

$0.60

$0.70

$0.80

$0.90

$1.00

US

$ V

alu

e in

Go

ld T

erm

s (

1971=1)

$8,000

$10,000

$12,000

$14,000

$16,000

Dollar Value in Gold Terms (1971=$1)

US Monetary Base


22

$0.00

$0.10

$0.20

$0.30

$0.40

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010E

US

$ V

alu

e in

Go

ld T

erm

s (

1971=1)

$-

$2,000

$4,000

$6,000

Source: U.S. Federal Reserve, World Gold Council, Balance Capital Advisors Inc. estimates.

…And Foreign Countries May Have An Uncomfortably High Amount of Paper Dollar Foreign Exchange Reserves

2,500

3,000

3,500

4,000

4,500

Fo

reig

n E

xch

an

ge R

eserv

es (

$ in

billio

ns)

India Foreign Exchange Reserves ($ bil.)

Taiwan Foreign Exchange Reserves ($ bil.)Japan Foreign Exchange Reserves ($ bil.)

China Foreign Exchange Reserves ($ bil.)


23

0

500

1,000

1,500

2,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E

Fo

reig

n E

xch

an

ge R

eserv

es (

$ in

billio

ns)

Source: World Gold Council, Balance Capital Advisors Inc. estimates.

China Is Already Starting To Move More of Its Paper Dollar Foreign Exchange Reserves To Gold and Other Real Assets

150%

200%

250%

300%

350%

Chin

a G

old

as %

Fore

ign E

xchange R

eserv

es

600

700

800

900

1,000

1,100

1,200

China G

old Holdings (T

onnes)

% China Foreign Exchange Reserves in Gold

China Gold Tonnes


24

0%

50%

100%

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

E

Chin

a G

old

as %

Fore

ign E

xchange R

eserv

es

200

300

400

500

600

China G

old Holdings (T

onnes)

Source: World Gold Council, People's Republic of China, Balance Capital Advisors. Inc.

If Gold Holdings Are Any Indication, Numerous Foreign Developing Nations Need To Buy Gold and Other Vital Real Assets

30%

40%

50%

60%

70%

80%

90%

Go

ld a

s %

Fo

reig

n E

xch

an

ge R

eserv

es


25

0%

10%

20%

30%

Port

ugal

Unite

d S

tate

s

Germ

any

Italy

Fra

nce

Neth

erlands

Austr

ia

Venezuela

Spain

Belg

ium

EC

B

Lebanon

Unite

d K

ingdom

Sw

itzerland

Philipin

es

India

Russia

Lib

ya

Alg

eria

Taiw

an

Japan

Saudi A

rabia

Sin

gapore

Chin

a

Go

ld a

s %

Fo

reig

n E

xch

an

ge R

eserv

es

Source: World Gold Council, Balance Capital Advisors. Inc. estimates.

Paper Promises To Real Assets

Entitlement spending and printing/borrowing money are unproductive uses of capital, which should sustain high U.S. national and local budget and trade deficits.

Data points continue to support that U.S. borrowing and taxing are reaching high limits.

At some point the U.S. Government will likely print a lot more money, in order to maintain U.S. social order.

Over the medium term, U.S. Dollar reserves of foreign countries will need to be invested to preserve wealth and develop local economies.

Real assets and foreign stocks should ultimately benefit the most from additional money printing.

The U.S. Dollar-related high quality of life and increasing global commodity prices are contributors to international tensions, like in Egypt. Such unintended consequences should intensify.

DISCLAIMER: THIS RESEARCH REPORT DOES NOT INTEND TO MAKE AN OFFER OR SOLICITATION FOR THE SALE OR PURCHASE OF ANY SECURITIES. INVESTMENTS INVOLVE RISK AND UNLESS OTHERWISE STATED, ARE NOT GUARANTEED. BE SURE TO FIRST


27

NOT GUARANTEED. BE SURE TO FIRST CONSULT WITH A QUALIFIED TAX AND/OR FINANCIAL ADVISER BEFORE IMPLEMENTING ANY STRATEGY DISCUSSED IN THIS RESEARCH REPORT.

made in u.s. dollars: paper promises, real consequences - bca february 2011 newsletter

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