The Kowalski Constitution

As I'm rather over-caffeinated this morning and have an hour or so to blow, I've decided to let my mind wander a bit on what would solve the longer term ills of our nation, which are many: deep political and racial divisions within our nation, a broken financial system designed to rob the people on behalf of bankers, and the monstrous debt levels we find ourselves in. The current economic and political system is clearly not up to snuff, and nothing short of a new constitution is needed in order to solve these very serious problems. Therefore, I humbly present the Kowalski Constitution:

Federal Government


1. The Federal Government's spending would be limited to 3% of the nation's GDP.
2. The Federal Government would be able to borrow money only by a vote of 4/5ths of the people.
3. The Federal Government may raise income taxes only by a vote of 2/3rds of the people.
4. Income Taxes would be set at the following levels: the top 1% would have a 27% income tax; the next 19% would have a 22% income tax; the next 20% would have a 16% income tax, the next 20% a 10% tax, the next 20% a 5% tax and the bottom 20% would have no income tax at all. Excess revenues collected {after the Federal Government spends their 3%} shall be used firstly to pay off the national debt and after that remaining revenues will be given to the states on a per person basis (those states with larger populations will recieve more money).
5. The Federal Government may institute trade tariffs and service fees for the regulatory bodies that are needed such as SEC, the FDA, FDIC, Corps of Engineers, INS, Coast Guard etc.
6. As per the 10th Amendment, the Federal Government will not interfere in states rights or abilities in any manner save that of the currency, national defense and treaties with foreign nations.
7. There shall be only one legislative body, called the Senate. Each State shall elect one Senator for every 650,000 people for a total initially of 435 senators. From amongst themselves the Senate shall elect a President.
8. Immigration: There will be two types of visas: Family {spouse & child}, Technical {1,500 issued per annum, to be auctioned off}. Of those currently in the US illegally, women and children under 18 may stay and will be able to apply for citizenship. Males who are both currently employed full time, in college, or the military and have no felonies on their record may also apply for citizenship. Going forward, there shall be 1,000 family visas sold each month at auction to the highest bidders.

State Governments

1. There shall be 435 states, now called US Congressional Districts. Each state will have complete control of all matters not relating to national defense, treaties with foreign nations and the issuance of currency {as per the 10th Amendment}as well as the responsibility to funding of programs they see fit to employ, with the exception that states will not be able to borrow money without a 4/5th vote of the people.

2. Each state will have five wards, in which each ward shall elect a State Assemblyman {the state's legislative body}. The Assemblymen will elect a Governor from amongst themselves. The Governor will propose each year's budget to the State Assembly.

3. Every ten years there will be redistricting as follows: Given that each of these five wards needs to have roughly equal population, the ward map might need to be adjusted as population moves. When a state gets to 1,240,000 in population, it may then elect two senators to the federal level Senate and would then need to divide itself into two Senatorial districts for this purpose.

4. States are forbidden from enacting an income tax.

The idea here is to empower small states and limit the power and scope of the Federal Government. Each state will have the powers to enable {or ban} programs such as Medicare, Social Security, Welfare, Education, Criminal Justice, Affirmative Action, Abortion, Gay Rights, Taxation-- pretty much everything so long as it does not cross the Bill of Rights. Each state will essentially be a little country save the currency, treaties and war powers.

Federal Financial Regulations

1. Immediately ban all forms of leveraged trading in all markets, including equities and commodities.
2. Immediately re-enact Glass Steagel.
3. The Federal Reserve shall, each quarter, determine if there is a need to print more money. If money does need to be printed, it shall be distributed evenly to the people. Banks will need to then compete for capital from the citizenry. This will be the world's first bottom-up credit based monetary system.
4. No Institution in the US shall exceed 2% of GDP in size. If it does, it shall be broken up into at least five smaller companies, with each being no more then 20% the size of the parent company.
5. No loans shall be given to individuals without a 1/3 down payment.

So let it be written.. so let it be done !!


Now on to a couple of updates: Debtmageddon and Euromageddon.

In regards to the debacle in Wash DC's raising of the debt ceiling, as of this writing, the US House has passed a Republican plan to extend the borrowing for another six months or so {about $1 trillion} and it includes a provision that requires a Balanced Budget Amendment to be in passed in the US House and Senate and it be sent to the states for ratification. The US Senate, within hours of it's passage, defeated it. The Repubs have a stronger hand here, having passed not one but two bills to avert debtmageddon. Obama has proposed nothing and seems MIA; the Democratic Senate has passed nothing and has said no to everything. The ball is now in the Senate's court to come up with something that everyone can agree to pass. I still believe a deal gets done; it'll look something like this:

* There will be more in spending cuts than debt increases
* The Senate will allow a vote on a balanced budget amendment (which will not pass)
* The cuts will include some sort of capping on either Social Security or Medicare
* The extension will get us past the next election.

It will result in a downgrade of the US credit rating by one of the agencies, likely Moodys-- and rightfully so. Politically, any cuts to either Social Security or Medicare will be Barack Obama's Waterloo, who already lists high unemployment, a failed and unpopular health care bill, and out of control borrowing followed by a credit downgrade  amongst his "accomplishments". Any cuts in either of these entitlement programs will cost him the senior vote. My guess is that $4.50/gal gasoline will also be added to his legacy by election day.

Onto Euromageddon, where the rot and bad news continue unabated. Spain's PM Zapatera has called for early elections in September due to the unpopularity of further austerity measures required to safeguard their {deteriorating} credit rating and thus their ability to borrow more money. One of the ratings agencies downgraded Spain anyways.. and this was before Zapatera's announcement. Ominously, Italy's situation is also deteriorating as the rates on their debt also goes up. A week ago, there was an agreement which allowed the EFSF to proactively intervene in the secondary markets and thus stop the slide in Spanish and Italian bond rates. So far, the EFSF is missing in action and remains woefully underfunded. Expect the market to test their resolve, and soon. If the EFSF does step up and 1. Increases it's size, and 2. Intervenes to help Spain and Italy, then a crisis can be averted. But if either of these components are missing, expect Spain to slide into insolvency by Halloween.

Update 10pm 7/30: According to ABC news, the GOP and Obama have reached an agreement, pretty much like what I outlined above: http://www.zerohedge.com/news/abc-reports-tentative-debt-ceiling-deal-reached-between-gop-and-obama#comment-1508875 ..... if this is true {rumor so far} then there is a high probability that when the automatic cuts are triggered in December, Medicare will be cut. If this happens, expect the seniors to stay home. As for the bigger picture, since at the end of it no entitlement was cut, much of the cuts take place in later years {and so cannot be truly enforced}, this was-- after all the drama-- just a big smelly show. Expect at least one of the credit rating agencies to downgrade the US by fall. What a joke.

America's Three Choices

On July 19th, the Congressional Budget Office {CBO}, which is a non political budget organization, came out with a quite important report, which was largely ignored what with the Euro crisis and budget ceiling talks. In this report, which was unusually blunt, it came out and said what we all know is the truth-- which is that America cannot continue to borrow at the current rate it is doing and that in the long run we must do one (or a combination) of three things:

1. Raise revenues {taxes} significantly.
2. Make considerable cuts to the benefits provided to the elderly: Social Security and Medicare
3. Substantially reduce other parts of federal spending: Defense, Food Stamps & Unemployment

My first comment is that while it is true that at some point these choices will need to be made, we are still able to borrow obscene amounts of money-- and its my view that until the day arrives when we are forced to make these painful decisions, we'll just keep borrowing and avoiding.

But at some point, we will arrive at the Day of Reckoning. What happens at that point really depends on how the government looks-- if we have a strongly Democratic government, higher taxes and defense cuts will happen. If we have a strongly Republican government, the elderly programs will suffer. Social Security, MediCare and Medicaid expenses are set to explode.. this is by far the biggest part of the problem, along with the ever growing payments on our national debt.

But I want my readers to consider this: what we are seeing is one of the greatest inter-generational wealth transfers in all of history. Lets start with the current generation's borrowing-- and handing the bill to their children's generation. Combine this with the exploding cost of Social Security and Medicare-- a cost to be paid by our children. From where I sit, the current generation stands condemned of the worst of all crimes-- greed to the point of impoverishing your children, which will be a mathematic certainty given the promises made via Social Security, Medicare and the monstrous debt. Shamefully, I'm part of this Generation of Greed. If I were Emperor, I'd cap Social Security, Medicare and Medicaid combined at it's current level of 9% of GDP and I'd limit Defense spending to 2.5% of GDP from it's current 4% {I'm not a fan of foreign wars.. we can easily reach the 2.5% by withdrawing our forces based in other nations}. I'd also return tax rates to Clinton-era levels. If this means that the amount I get when I hit retirement age is slimmer and the government refuses to pay for a ridiculously expensive surgery to save my old arse, so be it, and would plead with my fellow grey tigers to join me in accepting a slimmer future so that our children might have a brighter one. I doubt any will. Shame. Here's another article on just how much Soc Sec was promised: http://www.zerohedge.com/contributed/inflation-%E2%80%9Cbend%E2%80%9D-points

The Euro Bailout v3.0

Well today was the big meeting in Brussels. Big things were expected-- and they delivered, especially when it came to expanding the EFSF {Europe's Bailout Fund}. Here's a quickie list of the major bulletpoints:


* Greece will partially default and be recieving another €110 billion rescue package
* EFSF loans to Greece will be extended to 15 years from it's current 7 years.
* EFSF loans to Greece will have the interest rates reduced on them.
* The EFSF will now be able to help recapitalize troubled EU banks (much like TARP)
* The EFSF will now be able to purchase EU government debt in the secondary markets (much like QE2)


In my humble opinion, there are two points that come up here. First is that the size of the EFSF will need to be dramatically expanded, perhaps to €2 Trillion. This is up from it's current €440 billion. Second is that there appears to be no real incentive for other nations to get their house in order when the EFSF will backstop their borrowing and guarantee low interest rates on that borrowing. That said, this does quite a bit for Greece and the last two bullet points looks like a winner to halt the bleeding of other nations' debts, including Spain and Italy this week. I'm surprised Germany and Finland went along with these last two points. Even Ambrose Pritchard, a noted Euro skeptic and gloom and doomer, was impressed:  

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8653579/Europe-steps-up-to-the-plate.html