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White House Proposes $3.8 Trillion Budget

President Barack Obama’s $3.8 trillion budget for fiscal 2011 raises $2 trillion in taxes, cuts spending on programs with considerable political support and still leaves the nation with $8.5 trillion in additional debt over the next decade.

The budget’s political pain and the difficult choices it poses for fiscal 2011 and beyond underscores the deep fiscal hole the nation finds itself in after a decade of deficits and a deep recession. It will add fuel to the election-year debate over the size and scope of government that Americans want and their willingness to pay for it.

“It tells you we’re in a lot worse shape than advertised,” said David Walker, a former U.S. comptroller, now president of the Peter G. Peterson Foundation.

Mathematically, budget analysts say, the spending and tax plan for the fiscal year that begins in October undermines Mr. Obama’s pledge to close the budget gap without raising taxes on the vast majority of Americans. And that’s assuming that the plan passes intact, which is highly unlikely in an election year marked by public distrust of big government.

Mr. Obama’s budget sets up a conflict Congress must address this year, when President George W. Bush’s 2001 and 2003 cuts to income taxes, capital gains and dividend taxes and estate taxes all expire Jan. 1, 2011. Mr. Obama would extend the cuts for middle- and lower-income Americans, but allow taxes to rise for wealthy families, although not all the way back to the levels under President Bill Clinton.

The president dared Republicans to oppose the spending cuts he proposed. Many Republicans say the budget could be balanced with spending cuts alone. But both sides have declared the bulk of the budget—entitlements and defense—off limits for significant cuts.

“What I will not welcome—what I reject—is the same old grandstanding when the cameras are on, and the same irresponsible budget policies when the cameras are off,” Mr. Obama said. “It’s time to save what we can, spend what we must, and live within our means once again.”

Mr. Obama called for killing the National Aeronautics and Space Administration’s manned mission to the moon, halting the additional production of C-17 military transport planes and Joint Strike Fighter components, and cutting the Army Corps of Engineers budget and agriculture programs.

Some Republicans were quick to cry foul.

“The president’s proposed NASA budget begins the death march for the future of U.S. human space flight,” lamented Sen. Richard Shelby (R., Ala.).

Sen. Saxby Chambliss (R., Ga.) welcomed the president’s decision to “rein in government spending,” but complained the proposed budget “unfairly targets farmers and ranchers to achieve savings and fund Washington-based programs.”

Even with tax increases and spending cuts, Mr. Obama’s budget foresees a record budget deficit of $1.6 trillion this fiscal year sliding down to $706 billion in red ink by 2014, only to begin rising again as the baby-boom generation drives up the costs of Medicare and Social Security. By 2020, the federal debt will have risen to $18.6 trillion, or 77% of GDP, from $7.5 trillion, or 53% of GDP, last year.

Mr. Obama again reiterated his plan to freeze spending on non-security, non-veterans programs, about 17% of the total budget, and he pledged to name a bipartisan fiscal commission entrusted to recommend ways to bring the deficit down in the short term while addressing Social Security, Medicare, Medicaid and tax issues over the long run.

But even with the commission, the White House was cautious, setting a goal of “primary balance” for the budget—equalizing revenues and spending but excluding interest payments on the debt—by 2015. The International Monetary Fund uses the “primary balance” standard for the world’s poorest countries trying to get their fiscal houses in order.

Savings the president once anticipated from winding down the wars of the Bush administration are pushed back to 2012. Mr. Obama’s troop increases in Afghanistan and withdrawal of forces from Iraq—known in the budget as “overseas contingency operations”—will cost $160 billion this year and next, $46 billion more than anticipated last year.

“You’ve got to think bigger,” said Sen. Judd Gregg of New Hampshire, ranking Republican on the Senate Budget Committee. “I do think the American people are ready for much tougher decisions than the Congress is ready for.”

The budget plan calls for nearly $1 trillion in tax increases on upper-income families—largely through allowing Bush tax cuts to expire. Banks, bankers and multinational corporations would face new fees and levies. And oil companies would lose $36 billion in tax breaks.

But extensions of the Bush tax cuts for the middle class, along with some new tax cuts in Mr. Obama’s jobs program, would cost the government $284 billion over the next decade.

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Feb

03

2010

Taxes, Real Estate and Loans

The other day I was listening to a young man extol the virtues of owning real estate.

Much of what he said was true. However, two things made me sit up and take notice and I couldn’t help but comment:

First, he said the interest on his home loan was tax deductible, so the government was underwriting his house payment.

I asked how much the government was giving him. He said they were not giving him anything but allowed the interest on his home loan to be deducted from his taxable income.

Assuring him I didn’t want to be nosey, I asked what that deduction meant to him. 28% of the interest paid he saved on taxes was the reply. “So, you get to keep 28 cents for every dollar in interest you pay?” Eagerly he responded, “YES.”

He didn’t see the problem with the math, so I decided to help him out.

I took some change from my pocket and placed 28 cents on the table. I asked him if he would give me a dollar for the coins. Before he could answer I sweetened the pot.

I doubled the amount and put a total of 56 cents on the table right in front of him.

I said, “I’ll give you double what the government is giving you. I’ll give you 56 cents for every dollar you have or can scrape together.”

He didn’t seem too excited about my idea as he understood the demonstration. “Pay off the mortgage.” I told him.

But he wasn’t through. He was looking to redeem himself. He mentioned that at least the property was going up in value.

I asked him his age, he told me 35. I asked him how well he remembered the early 1980’s. He didn’t.

I told him real estate doesn’t go up in a straight line, and on occasion it goes down. I told him I bought a home in the spring of 1980.

Almost immediately the real estate market went flat. Five years later my wife and I were certain if we wanted to sell our house we would OWE money to the bank at closing. It was 10 years before the market started to move up again.

Just recently it hit another bump in the road.

In my area prices have dipped 3% in the past year. With easy money and low down payments, many new buyers are finding themselves upside down in their mortgages.

Many people, who have taken a home equity loan up to or even exceeding the value of the property, find themselves in the same boat.

Did he understand the moral?

Yes, he did!

Borrow as little as possible, pay it off as quickly as you can and take care of it before it takes care of you!

The goal is living debt free …

Unless you are ready and willing to give me one dollar for my 56 cents!

Jan

28

2010

China says Google, foreign firms must respect laws

Foreign firms, including Google, must respect Chinese laws and customs, China’s foreign ministry spokesman said on Tuesday, a week after the world’s largest search engine said it might pull out of China due to hacking and censorship.

Ma Zhaoxu also said he did not know whether Chinese officials had held talks with Google executives. Google (GOOG.O) said it would seek meetings on how to offer a legal, unfiltered search service after losing intellectual property to a sophisticated cyber-attack that also affected more than 30 other firms.

“The Chinese government encourages the development of the Internet,” Ma said.

“Foreign firms in China should respect China’s laws and regulations, and respect China’s public customs and traditions, and assume the corresponding social responsibilities, and of course Google is no exception.”

Ma’s comments mostly repeated the foreign ministry’s statements on Thursday, but this was the first time the foreign ministry referred directly to Google.

Jan

19

2010

German Business Confidence May Rise to Highest Since July 2008

German business confidence probably increased to the highest since July 2008 in December, a sign the economic recovery is on track.

The Ifo institute in Munich will say its business climate index, based on a survey of 7,000 executives, rose to 94.5 from 93.9 in November, according to the median of 33 forecasts in a Bloomberg News survey. That would be the highest reading since July 2008. The index reached a 26-year low of 82.2 in March. Ifo releases the report at 10 a.m. today.

Recent reports have painted a mixed picture about Germany’s recovery. While the ZEW institute said four days ago economists are tempering optimism about the outlook, the Bundesbank this month raised its forecast for 2010 growth and Volkswagen AG on Dec. 11 posted the strongest sales gains this year.

“There’s probably further good news to come from Ifo, even if the improvement isn’t as rapid as before,” said Laurent Bilke, a former European Central Bank economist now at Nomura International Plc in London. “Exports are the place where you’ll see the recovery coming from in Germany, even if the very strong euro means they may not benefit as much as they would have done normally.”

Ifo’s gauge of the current situation probably increased to 90 from 89.1 while an index of executives’ expectations may have risen to 99 from 98.9, according to the survey of economists. The institute conducted the survey between Dec. 1 and Dec. 17.

Exporters are helping to fuel Germany’s recovery, overcoming a 14 percent appreciation in the euro since February. Sales at Volkswagen, Europe’s largest carmaker, rose 19 percent in November from a year earlier. Deutsche Bank AG, Germany’s biggest bank, says business in Asia will help push pretax profit to a record 10 billion euros ($14.3 billion) in 2011.

Recovery Doubts

While factory orders and industrial production fell in October, exports rose more than economists forecast.

The end of government stimulus measures and market turmoil stemming from concerns over Greece’s budget health are nevertheless casting doubt on the pace of recovery.

The Bundesbank says German economic growth will slow in the current quarter from the 0.7 percent rate recorded in the third, when expansion was boosted by stimulus spending.

The central bank then expects the economy to grow 1.6 percent in 2010 after a contraction of 4.9 percent in 2009. It previously forecast the economy would stagnate in 2010.

“Exports are still strong, last month’s factory orders and industrial production were disappointing, but it was a temporary blip,” said Aline Schuiling, an economist at Fortis Bank in Amsterdam. “The underlying trend remains well set for exports and the industrial sector.”

Dec

19

2009

Citi could face heavy U.S. influence for some time

Citigroup

Citigroup Inc’s (C.N) Vikram Pandit endured a brutal capital raising episode this week in an effort to win the bank’s freedom from close government oversight, but the bank’s CEO may have won less than he hoped.

In a blow to both the No. 3 U.S. bank and the Treasury, Citigroup sold $17 billion of shares at $3.15 apiece, below the $3.25 price at which the government bought its Citi stake.

The share sale, part of a $20 billion capital raise to help repay funds from the Troubled Asset Relief Program, was meant to reduce the government’s say over compensation and other matters at the bank.

But the sale went poorly enough that a key element of Citigroup’s plan to extract itself from the government’s clutches did not happen: the U.S. government did not sell the up to $5 billion of shares it hoped to shed at the same time as the bank’s offering. The government holds 7.7 billion Citigroup shares, now equal to about a quarter of the company.

The government does not want to sell at a loss, a point that Herbert Allison, Treasury assistant secretary for financial stability, emphasized in Congressional testimony on Thursday.

But selling at a profit in the near term could be difficult. If Citigroup’s shares rise above $3.25, the government is likely to think about selling off part of its stake in the bank and that pressure could push the shares back below $3.25, analysts said.

“If you have a big seller at $3.25, the chances of your getting there are much smaller,” said Malcolm Polley, chief investment officer at Stewart Capital Advisors in Indiana, Pennsylvania.

There are at least two possible scenarios that could lift Citigroup’s shares well above $3.25 apiece: a broad rally in the stock market, or the bank posting out-sized profits over the next few quarters.

Analysts are not expecting the second scenario — the mean estimate for Citigroup’s fourth quarter, for example, is a loss of 7 cents a share, and for the first quarter, it is a loss of a penny a share.

The direction of the broader market is more difficult to forecast, but a surge in the stock market in the coming months is hardly a sure thing.

In short, there is a chance the government will have little opportunity to sell Citigroup shares at a profit for some time. The bank said on Monday the U.S. Treasury plans to sell its shares in six to 12 months, but some investors fear that period could be closer to 12 months than six months.

“This may translate into the government holding onto its stake for some time,” Stewart’s Polley said.

STRINGS ATTACHED

With the government holding a large stake in Citigroup, it has a material say in how the bank runs itself, a person close to Citigroup said, which reduces some of the value of the bank’s efforts to exit TARP by the end of the year.

One key area where Citigroup was looking to shed government influence is executive compensation. The Obama administration’s pay czar, Kenneth Feinberg, has a say over compensation for the top 100 employees at Citigroup for 2009.

When Citigroup repays $20 billion to the government and ends the guarantee it gets from the United States on a pool of assets, it will be able to avoid that oversight, a step expected in 2010.

But if the government holds onto Citi shares for longer, that could translate into pay restrictions at the bank for longer, albeit in a less overt form, said Dan Alpert, managing director at investment bank Westwood Capital in New York.

“As long as the government is a major shareholder, Citi can’t go crazy on pay,” Alpert said.

This oversight does not necessarily mean Pandit is on his way out, analysts said, even if Federal Deposit Insurance Corp Chairman Sheila Bair has in the past pushed for Pandit to leave.

The bank’s board of directors seems to support Pandit and, if the bank is not generating big losses, regulators are unlikely to press for his ouster, analysts said.

It is unclear who could step in to do a better job and, although Pandit’s tenure has not been free of miscalculations — including, some investors believe, the rush to repay bailout funds — many of the bank’s problems predate Pandit’s arrival.

But longer term, if the bank is unable to generate real profitability, Pandit’s future is more uncertain, analysts said.

“There’s a lot of pressure on Pandit now to deliver,” said one analyst at a hedge fund.

Dec

18

2009

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