In reality, finding a way to raise taxes may well be the central political problem facing the United States.

As countries become richer, their citizens tend to want more public services, be it a strong military or a decent safety net in retirement. This country is no exception. Yet our political culture is an exception. It has made most tax increases, even to pay for benefits people want, unthinkable.

This is where the Bush tax cuts come in. They have created a way for inertia to be fiscally responsible.

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The US lacks a “credible strategy” to stabilise its mounting public debt, posing a small but significant risk of a new global economic crisis, says the International Monetary Fund.

In an unusually stern rebuke to its largest shareholder, the IMF said the US was the only advanced economy to be increasing its underlying budget deficit in 2011, at a time when its economy was growing fast enough to reduce borrowing.

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The Republican budget released on Tuesday is a daring one in many ways. Above all, it would replace the current Medicare with a system of private health insurance plans subsidized by the government. Whether you like or loathe that idea, it would undeniably reduce Medicare’s long-term funding gap ”” which is by far the biggest source of looming federal deficits.

Yet there is at least one big way in which the plan isn’t daring at all. It asks for a whole lot of sacrifice from everyone under the age of 55 and little from everyone 55 and over. Representative Paul Ryan, the Wisconsin Republican who wrote the plan, calls the budget deficit an “existential threat” to the United States. Then he absolves more than one-third of all adults from responsibility in dealing with that threat.

This decision doesn’t make him unique in Washington. There is nearly a bipartisan consensus that any cuts to Medicare and Social Security should spare the baby boomers and the elderly. And, certainly, retirees or people on the verge of retirement shouldn’t have their benefits changed radically. But the consensus, like Mr. Ryan’s plan, goes too far.

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The above four multi-trillion-dollar liability balls are staggering in their implications. Remember first of all that the nearly $65 trillion of entitlement liabilities shown above are not some estimate of future spending. They are the discounted net present value of current spending should it continue at the projected demographic rate (importantly ­”“ it is much higher than the annual CPI + 1% used as a discounter because demand for healthcare rises much faster than inflation.) And while some Honorable Congressional Le Pews would counter that Medicaid is appropriated annually and therefore requires no discounted reserve, those words would surely count as “sweet nothings,” believable only to those whom they romance every several years at the polls. The incredible reality is that the $9.1 trillion federal debt that constitutes the next-to-tiniest ball in our chart is nothing compared to unfunded Medicaid and Medicare. It is like comparing Pluto to Saturn and Jupiter. The former (the $9.1 trillion current Treasury debt) does not even merit planetary status in our solar system of discounted future liabilities. It’s really just a large asteroid.

Look at it another way and our dire situation becomes equally revealing. Suppose that the $65 trillion of entitlement liabilities were fully funded in a “lockbox,” much like Social Security is falsely imagined to be. Just suppose. And say the cost of that funding (Treasury debt) was the same CPI + 1% that was used to produce the above discounted present value in the first place. Actually, that’s not a bad guesstimate for the average yield of all Treasury debt. If so, then the interest expense on the $75 trillion total debt would equal $2.6 trillion, quite close to the current level of entitlement spending for Social Security, Medicare and Medicaid. What do we pay now in interest? About $250 billion. Our annual “lockbox” tab would rise by $2.35 trillion and our deficit would be close to 15% of GDP! The simple conclusion would be this: Unless you want to drastically reduce entitlement spending or heaven forbid raise taxes, then Pepé, you’ve got a stinker of a problem.

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The President’s difficulties in positioning himself as the champion of a jobs renaissance were compounded by two new reports on the nation’s fiscal condition, one by the Congressional Budget Office (CBO), another by the General Accountability Office (GAO).

The CBO analysed the President’s proposed budget for the next fiscal year and estimates the federal deficit over the next decade will clock in at $9.5 trillion (£5.8tr), a mere $2.3 trillion (£1.4tr) higher than the White House estimate. And the GAO, re-assessing the nation’s long-term outlook, concluded that the fiscal situation has deteriorated. If the nation’s debt is to be stabilised at 62% of GDP, an immediate tax increase of 15%, or a spending cut of 13%, or some combination of the two is needed.

The Peter G Peterson Foundation, a sort of budget watchdog and nag, concludes that even under a set of optimistic assumptions, “large and persistent deficits still lead to an unsustainable growth in debt… and a steady growth in net interest payments to service this growing debt”. By 2030, unless the President and Congress come to grips with the fiscal situation, net interest payments and entitlements (pensions, healthcare costs) will consume almost the entire budget, leaving nothing for spending on defence, education and other programmes.

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Moody’s downgraded its credit rating on Spain Thursday, citing worries over the cost of the banking sector’s restructuring and the government’s ability to achieve its borrowing reduction targets.

The agency said it was reducing its rating by one notch to Aa2 and warned that a further downgrade could be in the offing if there are indications that Spain’s fiscal targets will be missed and if the public debt ratio increases more rapidly than currently expected, or if the funding requirements for the so-called savings banks””the cajas””are greater than anticipated.

Though noting the government’s resolve in dealing with its problems and that Spain’s debt sustainability is not under threat, Moody’s said that “Spain’s substantial funding requirements””not only those of the sovereign, but also those of the regional governments and the banks””make the country susceptible to further episodes of funding stress.”

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As expected, the U.S. Senate failed Wednesday to advance either the House Republicans’ spending bill or an alternative proposal offered by Democrats, leaving lawmakers just nine days to work on a compromise plan or face a government shutdown.

Neither plan achieved even a simple majority of support in the chamber. The vote in the Senate was 56-44 against the plan approved by the Republican-led House last month, which would cut current spending levels by $61 billion. A subsequent vote on the alternate proposal from Senate Democrats, which offers cuts of $6.5 billion, failed 58-42. Sixty votes were needed to advance the measures.

The vote comes as President Obama faces new pressure to exert greater influence over the congressional debate. As the Senate readied for votes on the competing measures Tuesday, freshman Democrat Sen. Joe Manchin (W.Va.) accused both parties of engaging in “political theater.”

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The greenback…is not just America’s currency. It’s the world’s.

But as astonishing as that is, what may be even more astonishing is this: The dollar’s reign is coming to an end.

I believe that over the next 10 years, we’re going to see a profound shift toward a world in which several currencies compete for dominance.

The impact of such a shift will be equally profound, with implications for, among other things, the stability of exchange rates, the stability of financial markets, the ease with which the U.S. will be able to finance budget and current-account deficits, and whether the Fed can follow a policy of benign neglect toward the dollar.

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…let’s try to put aside the hyperventilation. Everybody now seems to agree that Governor Walker was right to ask state workers to pay more for their benefits. Even if he gets everything he asks for, Wisconsin state workers would still be contributing less to their benefits than the average state worker nationwide and would be contributing far, far less than private sector workers.

The more difficult question is whether Walker was right to try to water down Wisconsin’s collective bargaining agreements. Even if you acknowledge the importance of unions in representing middle-class interests, there are strong arguments on Walker’s side. In Wisconsin and elsewhere, state-union relations are structurally out of whack.

That’s because public sector unions and private sector unions are very different creatures. Private sector unions push against the interests of shareholders and management; public sector unions push against the interests of taxpayers. Private sector union members know that their employers could go out of business, so they have an incentive to mitigate their demands; public sector union members work for state monopolies and have no such interest.

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President Obama’s budget director, Jacob Lew, said as much last week during his briefing on the president’s budget. Obama wants to find ways to “work together to find a solution to the long-term issues in Social Security,” Lew told reporters, but the program “does not contribute to the deficit in the short term.”

That would be nice if it were true. It’s not.

Social Security is a cash-in/cash-out program. It went into the red last year, when payroll tax revenue came up about $37 billion short of the benefits paid to retirees. Initially, that shortfall seemed a temporary consequence of the recession. But new projections from the Congressional Budget Office show that factors such as the payroll tax cut Obama and congressional Republicans agreed to last year mean that Social Security will instead come up short every year from now on ”” at least $45 billion this year, and a staggering half a trillion dollars over the next decade.

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I wonder if Mr. Obama is at all embarrassed by the 2012 budget. Like his previous two budgets, this one breaks all those “Morning in America” campaign promises of a “new” Washington.

The 2012 budget also is a repudiation of the findings of his very own bipartisan deficit commission.

The Bowles-Simpson commission had plenty of sensible recommendations, like cutting funds for the Corporation of Public Broadcasting, eliminating the Office of Safe and Drug-Free Schools and raising the qualifying age for Social Security.

But you’ll find precious little of this in the 2012 budget. At the White House, political sense apparently matters a lot more than common sense.

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Now that bipartisan commission has reported, but Mr. Obama didn’t fully endorse any of its recommendations. To the contrary, he promised more jobs for teachers and construction workers. He warned against “slashing” Social Security benefits. Corporate tax reform is fine, but if it’s revenue-neutral, it only postpones – and makes more politically difficult – the task of narrowing the nation’s deficit.

So what happens now? Maybe some members of Congress will display the courage the president has lacked. Maybe Mr. Obama, in the budget he proposes next month, will grapple more realistically with the hard choices than he did Tuesday night. But even if he does, how can he expect public support if he hasn’t made the case? From the man who promised to change Washington, it seemed all too drearily familiar.

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Chinese President Hu Jintao, who travels to Washington this week for a state visit after a year marked by disputes and tension with the United States, said the two countries could mutually benefit by finding “common ground” on issues from fighting terrorism and nuclear proliferation to cooperating on clean energy and infrastructure development.

“There is no denying that there are some differences and sensitive issues between us,” Hu said in written answers to questions from The Washington Post and The Wall Street Journal. He said “We both stand to gain from a sound China-U.S. relationship, and lose from confrontation.”

To enhance what he called “practical cooperation” on a wide range of issues, Hu urged an increase in dialogues and exchanges and more “mutual trust.” He said, “We should abandon the zero-sum Cold War mentality” and, in what seemed like an implicit rejection of U.S. criticisms of China’s internal affairs, said the two should “respect each other’s choice of development path.”

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Two leading credit rating agencies on Thursday cautioned the U.S. on its credit rating, expressing concern over a deteriorating fiscal situation that they say needs correction.

Moody’s Investors Service said in a report Thursday that the U.S. will need to reverse an upward trajectory in the debt ratios to support its triple-A rating.

“We have become increasingly clear about the fact that if there are not offsetting measures to reverse the deterioration in negative fundamentals in the U.S., the likelihood of a negative outlook over the next two years will increase,” said Sarah Carlson, senior analyst at Moody’s.

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The longer this dual crisis drags on, the more radical, and improbable, any solutions would have to be. In my view, the crisis is insoluble without a Europeanisation of the banking sector, common labour and product market rules that prevent inflation stickiness in southern Europe, and a minimal fiscal union with a single European bond. This is not a complete list.

Europe’s political establishment is of the opinion that such a radical response is unwarranted and politically infeasible. The first assessment is wrong. As the world comes out of its Christmas stupor, it discovers the second may well be right.

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Brussels has called for sweeping powers for regulators to seize failing EU banks, sack board members, and impose haircuts on senior bank debt, aiming to ensure that taxpayers are never again held hostage by high finance.

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Sadder, wiser, those of us gathered on the Washington Mall in the freezing morn of Mr Obama’s inauguration can see now that of all the brave, unsustainable hopes uttered by the new young president, the most unsustainable of all turned out to be his Biblical plea to “put away childish things”. He might as well have tried to legislate the word “dream” out of American public discourse. Dreams? Reality? It’s not even close, is it?

Whether fantasy will prevail over factuality, adolescent wishful thinking over maturity, will be the great political motif of the next few years. The omens are not auspicious….

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A better known real estate debacle is a sprawling development in Seseña, south of Madrid, one of Spain’s “ghost towns.” It sits in a desert surrounded by empty lots. Twelve whole blocks of brick apartment buildings, about 2,000 apartments, are empty; the rest, only partly occupied. Most of the ground floor commercial space is bricked up.

The boom and bust of Spain’s property sector is astonishing. Over a decade, land prices rose about 500 percent and developers built hundreds of thousands of units ”” about 800,000 in 2007 alone. Developments sprang up on the outskirts of cities ready to welcome many of the four million immigrants who had settled in Spain, many employed in construction.

At the same time, coastal villages were transformed into major residential areas for vacationing Spaniards and retired, sun-seeking northern Europeans. At its peak, the construction sector accounted for 12 percent of Spain’s gross domestic product, double the level in Britain or France.

But almost overnight, the market disappeared….

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State Street Corporation (NYSE: STT), one of the world’s leading providers of financial services to institutional investors, announced today that it has been appointed by the General Synod Pension Plan of the Anglican Church of Canada to provide custody, fund accounting, securities lending and foreign exchange services for CAD $600 million in assets.

The General Synod Pension Plan of the Anglican Church of Canada is a multi-employer Pension Plan registered with the province of Ontario and has been in existence since 1946. The General Synod Pension Plan of The Anglican Church of Canada provides pension benefits to clergy and lay employees of the Anglican Church of Canada and related organizations.

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Europe’s leaders endorsed plans for a new fund to rescue indebted euro-zone countries, and proposed treaty changes to make that possible, but failed to resolve deepening disagreements over whether more radical action is needed to quell a debt crisis that has raged on the region’s fringe for more than a year.

Meeting in Brussels for the final 2010 summit, European Union leaders agreed to replace the region’s emergency rescue fund, which ends in 2013, with a permanent crisis-finance program.

But the crisis gripping the weaker governments of the euro zone showed no signs of abating. On Thursday, Spain was forced to offer significantly higher interest rates at a debt auction Thursday than it paid just a month ago. Bond markets fell across Europe.

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….in the two years since the peak of the financial crisis, the government has not brought one criminal case against a big-time corporate official of any sort.

Instead, inexplicably, prosecutors are busy chasing small-timers: penny-stock frauds, a husband-and-wife team charged in an insider trading case and mini-Ponzi schemes.

“They will pick on minor misdemeanors by individual market participants,” said David Einhorn, the hedge fund manager who was among the Cassandras before the financial crisis. To Mr. Einhorn, the government is “not willing to take on significant misbehavior by sizable” firms. “But since there have been almost no big prosecutions, there’s very little evidence that it has stopped bad actors from behaving badly.”

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[Scott] Pelley: How would you rate the likelihood of dipping into recession again?

[Ben] Bernanke: It doesn’t seem likely that we’ll have a double dip recession. And that’s because, among other things, some of the most cyclical parts of the economy, like housing, for example, are already very weak. And they can’t get much weaker. And so another decline is relatively unlikely. Now, that being said, I think a very high unemployment rate for a protracted period of time, which makes consumers, households less confident, more worried about the future, I think that’s the primary source of risk that we might have another slowdown in the economy.

Pelley: You seem to be saying that the recovery that we’re experiencing now is not self-sustaining.

Bernanke: It may not be. It’s very close to the border. It takes about two and a half percent growth just to keep unemployment stable. And that’s about what we’re getting. We’re not very far from the level where the economy is not self-sustaining.

The debate on Capitol Hill this week is over whether to extend the Bush tax cuts, which would likely increase the budget deficit.

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A reckless ”boys’ club” inside the Anglican Church has been blamed for the Sydney diocese’s catastrophic losses during the global financial crisis, amid calls for greater involvement of women on the diocese’s boards.

The rector of the church’s Hunters Hill parish, Philip Bradford, said the presence of women on all-male Anglican boards would have brought a more cautious approach to investments that cost the church $160 million during the downturn.

But the diocese buried the motion for the equal representation of women on boards at the Sydney synod, he said, and did not debate the matter.

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European Union finance ministers agreed late Sunday on more than just an €85 billion bailout for Ireland. They also turned the currency union into a de-facto debt union by choosing to turn May’s €750 billion rescue fund into a permanent feature of the euro zone. What’s more, they promised that no sovereign creditor would face a haircut on their debt holdings until 2013, and that’s at the very earliest….

….here is what the EU has done: In the name of combating speculation against the debt of euro-zone members, the EU has now insured all those speculators against loss for three years at least. Meanwhile, in creating a permanent crisis-management mechanism, the EU has succeeded only in making permanent crisis more likely.

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Even as work continues to repair our financial infrastructure and get the economy moving again, we need urgent action to forestall the next financial crisis. I fear that one will start in Washington. Total federal debt has doubled in the past seven years, to almost $14 trillion. That’s more than $100,000 for every American household. This explosive growth in federal borrowing is a result of not just the financial crisis but also government unwillingness over many years to make the hard choices necessary to rein in our long-term structural deficit.

Retiring baby boomers, who will live longer on average than any previous generation, will have a major impact on government spending. This year, the combined expenditures on Social Security, Medicare and Medicaid are projected to account for 45 percent of primary federal spending, up from 27 percent in 1975. The Congressional Budget Office projects that annual entitlement spending could triple in real terms by 2035, to $4.5 trillion in today’s dollars. Defense spending is similarly unsustainable, and our tax code is riddled with special-interest provisions that have little to do with our broader economic prosperity. Overly generous tax subsidies for housing and health care have contributed to rising costs and misallocation of resources.

Unless something is done, federal debt held by the public could rise from a level equal to 62 percent of gross domestic product this year to 185 percent in 2035. Eventually, this relentless federal borrowing will directly threaten our financial stability by undermining the confidence that investors have in U.S. government obligations….

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Credit default swaps (CDS) measuring risk on German, French and Dutch bonds have surged over recent days, rising significantly above the levels of non-EMU states in Scandinavia.

“Germany cannot keep paying for bail-outs without going bankrupt itself,” said Professor Wilhelm Hankel, of Frankfurt University. “This is frightening people. You cannot find a bank safe deposit box in Germany because every single one has already been taken and stuffed with gold and silver. It is like an underground Switzerland within our borders. People have terrible memories of 1948 and 1923 when they lost their savings.”

The refrain was picked up this week by German finance minister Wolfgang Schäuble. “We’re not swimming in money, we’re drowning in debts,” he told the Bundestag.

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Check it out courtesy of Floyd Norris.

Surprisingly, the chairmen overlooked the easiest route to reducing the deficits over the next decade: scaling back the costly budget that President Obama presented earlier this year. Much of the projected doubling of the national debt between 2010 and 2020 reflects the spending and tax proposals in that budget.

The Congressional Budget Office estimates that those proposals would, if enacted, raise the 10-year budget deficit by $3.8 trillion, even after taking into account the president’s proposed $1.3 trillion of new taxes on businesses and higher-income individuals. The $5.1 trillion gross cost of the Obama proposals reflects the cost of making the Bush tax cuts permanent for individuals with incomes below $250,000, of providing additional tax cuts for low- and moderate-income individuals, and of increasing spending on domestic programs.

As President Obama considers the bipartisan commission’s proposals and plans his next budget, he should begin by removing some of the $3.8 trillion of increased deficits that he proposed earlier this year. Financial markets and policy makers around the world want to see if the administration is as serious about deficit reduction as the American public.

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America’s strapped states and cities took another hit Wednesday, with California seeing tepid demand for its latest bond sale and other governments pulling about $700 million worth of borrowing deals this week as investors continued stepping away from the municipal bond market.

The normally staid market has grown volatile the past week, posting its sharpest selloff in nearly two years, as investors demand higher interest rates to buy paper issued by states, cities and counties to finance their operations. Localities have been hammered by a drop in tax revenue amid the downturn””and unlike the federal government, most are barred constitutionally from running deficits.

“The tax-exempt municipal bond market is a cold, cold world right now for issuers and taxpayers,” Tom Dresslar, a spokesman for the California State Treasurer, said late Wednesday. He added that the state decided to cancel another $267.3 million bond sale it planned to price next week “in light of market conditions.”

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