Made in U.S.

Dollars:
Paper Promises,
Real Consequences

Ronald A. Tadross, CFA

Balance Capital Advisors, Inc.
February 2011
 Surreal
Government Promises
Everywhere
 Cheap Money Has Helped Promote U.S. Federal Government
Entitlement Spending
70%
Entitlement Costs as % Total US Spend

Interest Costs as % Total US Spend

60%
As % US Federal Expenditures

50%

40%

30%

20%

10%

0%
1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010E
Source: w w w .usgovernmentspending.com, Balance Capital Advisors Inc. estimates.

Ronald A. Tadross, CFA 3

www.balancecap.com
 Pension Liabilities as % Revenue

0%
50%
100%
150%
200%
Connecticut
Indiana
Virginia
N. Carolina
Alaska
Michigan
Alabama
Oregon
Ohio
Minnesota
New Jersey
Kentucky
New Mexico
Utah
Florida
Maryland
Arizona
Wisconsin
Colorado
Mississippi
Maine
West Virginia
Oklahoma
Hawaii
Montana
Arkansas

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

Iowa
N. Hampshire
Wyomying
New York

www.balancecap.com
Kansas

Ronald A. Tadross, CFA

Louisiana
Rhode Island
Washington
Illinois
Texas
Pennsylvania
Georgia
Missouri
S. Carolina
South Dakota
Delaware
Pension Assets as % Revenues

Idaho
Nevada
Massacusetts
California
Will Require Much More Taxpayer Money If Asset Returns Lag

Nebraska
The States Have Made Enormous Pension Promises Also, Which

North Dakota
Unfunded Pension Liability as % Revenues

Vermont
Tennessee
4
 Even Municipalities Have Committed Property Taxpayers
To Wage & Benefit Cost Trends That Are Clearly
Unsustainable
100%
U.S. Inflation (Consumer Price Index, All Items) 91%
90% Inc. Village of Garden City Property Taxes
Inc. Village of Garden City Total Labor Costs
80%
1995-2010 Cumulative Percent Change

70%

59%
60%

50%
43%
40%

30%

20%

10%

0%
1995-2010 Cumulative Percent Change
Sources: Garden City Financial Filings, BLS, w w w .gardencityresidents.org calculations. Note: total labor costs include salaries & benefits.

Ronald A. Tadross, CFA 5

www.balancecap.com
Consequences of Printing
and Borrowing U.S. Dollars
Remain Muted
 Taking on Debt to Finance Non-Productive Entitlements Ultimately
$2,500 Requires Money Printing $16,000
US Monetary Base

US Treasury Debt
$14,000

$2,000
$12,000
US Monetary Base ($ in millions)

US Treasury Debt ($ in millions)

$10,000
$1,500

$8,000

$1,000
$6,000

$4,000
$500

$2,000

$- $-

E
70

72

74

76

78

80

82

84

86

88

90

92

94

96

98

00

02

04

06

08

10
19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

20

20

20

20

20

20
Source: w w w .usgovernmentspending.com, Balance Capital Advisors Inc. estimates.

Ronald A. Tadross, CFA 7

www.balancecap.com
 Non-Productive Capital Use Does Not Generate Wealth
$3,500 $140,000
Federal Tax Receipts

Total US Debt (ex. Corporations)

$3,000 $120,000

Total US Debt (ex. corporate debt, $ millions)

US Federal Tax Receipts ($ millions)

$2,500 $100,000

$2,000 $80,000

$1,500 $60,000

$1,000 $40,000

$500 $20,000

E
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08

20 9
0
10
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
20
20
20
20
20
Source: w w w .usgovernmentspending.com, Balance Capital Advisors Inc. estimates.

Ronald A. Tadross, CFA 8

www.balancecap.com
 The Mountain of U.S. Debt Has Yet to Have Borrowing Cost
16%
Consequences $16,000
10-year Treasury Bond Yield

US Treasury Debt
14% $14,000

12% $12,000
U.S. 10-year Treasury Bond Yield

U.S. Treasury Debt ($ m illions)

10% $10,000

8% $8,000

6% $6,000

4% $4,000

2% $2,000

0% $0

E
62

64

66

68

70

72

74

76

78

80

82

84

86

88

90

92

94

96

98

00

02

04

06

08

10
19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

20

20

20

20

20

20
Source: U.S. Federal Reserve, w w w .usgovernmentspending.com, Balance Capital Advisors. Inc. estimates.

Ronald A. Tadross, CFA 9

www.balancecap.com
 Debts as % Revenues

0%
50%
100%
150%
200%
250%
300%
New Mexico
Wisconsin
Oregon
Mississippi
Ohio
Oklahoma
Alabama
Hawaii
New Jersey
Maine
Nevada
Missouri
Connecticut
Montana
South Dakota
Minnesota
Arkansas
Kentucky
California
Illinois
S. Carolina
Idaho
Michigan
Louisiana
Maryland
Colorado

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

Virginia
Georgia
Utah
Iowa

www.balancecap.com
N. Carolina

Ronald A. Tadross, CFA

Pennsylvania
Rhode Island
Alaska
Arizona
Florida
Washington
Kansas
N. Hampshire
Indiana
Bonded Debt as % Revenues

Texas
Wyomying
Vermont
Massacusetts
Tennessee
New York
North Dakota
Unfunded Pension Liability as % Revenues

West Virginia
Unfunded Healthcare Liability as % Revenues

Nebraska
Total State Debts are at Unmanageable Levels and Continue to Grow

Delaware
10
 Municipalities View Borrowing as a Solution Too, And In
Most Cases Do Not Need a Public Referendum To Borrow
$30
Village of Garden City Total Bonded Debt ($ in millions)

$25 Garden City Total Bonded Debt

$20

$15

$10

$5 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.

$0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011B
Sources: Garden City financial filings, w w w .gardencityresidents.org calculations. Note: includes general government, w ater, pool & tennis.

Ronald A. Tadross, CFA 11

www.balancecap.com
 Municipalities Are Behind States and Counties in Bonding
Pension and Health Care Liabilities, But Not Far Behind
300%

Health Care Liabilities/Debt as % Revenues

Bonded Debt as % Revenues
250%
Bonded and Healthcare Debt as % Revenues

200%

150%

100%

50%

0%
Garden City Rockville Centre Nassau County New York State
Sources: PEW Center on States, NY state financial filings, w w w .gardencityresidents.org calculations.

Ronald A. Tadross, CFA 12

www.balancecap.com
 Many Taxpayers are Agnostic to Government Borrowing
Because They Do Not See It and Borrowing Limit's Tax
Increases
$10 20%

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

$8 Yr./Yr. Property Tax Increase/(Decrease)
True Tax Increase (Yr./Yr % Change) 15%
$6
Yr./Yr. Change Bonds & Taxes ($ mil.)

Year/Tear % Change in True Taxes

$4 10%

$2
5%
$0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011B

($2) 0%

($4)
-5%
($6)

($8) -10%
Sources: Garden City financial filings, w w w .gardencityresidents.org calculations.

Ronald A. Tadross, CFA 13

www.balancecap.com
 Service Cuts Indicate
Borrowing Is Reaching Its
Limit
 Employee Pension and Health Care Costs Are Devouring
More and More Taxpayer Funds, and are Compounding
$0.24
Portion of Each $1 in Village Taxes that goes to Pension & Healthcare

$0.22

$0.20

$0.18

$0.16

$0.14

$0.12

$0.10

$0.08
Garden City Village employees have
$0.06 been constant at approximately 300,
but the portion of your tax dollars
$0.04
going to employee pension and
$0.02 healthcare costs has nearly tripled.

$0.00
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011B 2012E 2013E
Sources: Garden City financial filings, NY State forecast, w w w .gardencityresidents.org calculations and estimates.

Ronald A. Tadross, CFA 15

www.balancecap.com
 Infrastructure Maintentance Has Taken a Backseat to
Labor Costs, Including Pension and Health Care Costs
7% 70%
Street Miles Resurfaced as % Total Street Miles
Labor Cost as % Revenues

6%
65%
Street Miles Resurfaced as % Total

5%

Labor Cost as % Revenues

60%
4%

3%
55%

2%

50%
1%

0% 45%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011B
Sources: Garden City financial filings, w w w .gardencityresidents.org Note: labor costs include w ages, benefits, and w orkers comp.

Ronald A. Tadross, CFA 16

www.balancecap.com
 Municipal Governments Have Looked Under Every Rock
(and Tree), Instead of Addressing The Entitlement
Problem
600 Trees Planted Each Year 70%
Labor Cost as % Revenues
550

500 65%
Garden City, NY Trees Planted

450

Labor Cost as % Revenues

400 60%

350

300 55%

250

200 50%

150

100 45%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Sources: Garden City financial filings, w w w .gardencityresidents.org Note: labor costs include w ages, benefits, and w orkers comp.

Ronald A. Tadross, CFA 17

www.balancecap.com
 Despite Cuts in Infrastructure Maintenance, Municipalities
Cannot Balance The Budget and Look Forward to Raising
Taxes
$60
Garden City Village Tax Revenues
Garden City Village Expenses

$55

$50
$ in millions

$45

$40

$35

$30
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011B
Sources: Garden City financial filings, w w w .gardencityresidents.org calculations. Note: includes capital spending, excludes all w ater financials.

Ronald A. Tadross, CFA 18

www.balancecap.com
 In Many Cases, Borrowing For Capital Expenditures Is
Necessary To Maintain Social Order
$10

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

Capital Spending (incl. Water)
$8
Dollars in Millions, Garden City, NY

$6

$4

$2

$0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011B

-$2

-$4
Sources: Garden City financial filings, w w w .gardencityresidents.org calculations.

Ronald A. Tadross, CFA 19

www.balancecap.com
 Printing Money is
Increasingly Driving Paper
Money to Real Assets
 Global Paper Currency In Circulation Is Up 150% Since
2000, and Gold Has Gone Up Similarly

6.0 6.0

5.0 5.0
US$ Trillions

4.0 4.0

3.0 3.0

2.0 2.0

1.0 1.0

0.0 0.0
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
USD JPY EUR CNY Others (96) Value of All Mined Gold
Source: w w w .dollardaze.org, Balance Capital Advisors, Inc.
Ronald A. Tadross, CFA 21
www.balancecap.com
 US Money Printing Has Driven The Dollar Value Down For Decades,
$1.00 But Now The Money Is Leaving The U.S... $16,000

Dollar Value in Gold Terms (1971=$1)

$0.90
US Monetary Base $14,000

$0.80
$12,000
US$ Value in Gold Terms (1971=1)

$0.70

$10,000
$0.60

$0.50 $8,000

$0.40
$6,000

$0.30
$4,000
$0.20

$2,000
$0.10

$0.00 $-
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
Source: U.S. Federal Reserve, World Gold Council, Balance Capital Advisors Inc. estimates.

Ronald A. Tadross, CFA 22

www.balancecap.com
 …And Foreign Countries May Have An Uncomfortably High Amount
of Paper Dollar Foreign Exchange Reserves

4,500

India Foreign Exchange Reserves ($ bil.)

4,000
Taiwan Foreign Exchange Reserves ($ bil.)
Japan Foreign Exchange Reserves ($ bil.)
3,500
Foreign Exchange Reserves ($ in billions)

China Foreign Exchange Reserves ($ bil.)

3,000

2,500

2,000

1,500

1,000

500

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E
Source: World Gold Council, Balance Capital Advisors Inc. estimates.

Ronald A. Tadross, CFA 23

www.balancecap.com
 China Is Already Starting To Move More of Its Paper Dollar Foreign
350%
Exchange Reserves To Gold and Other Real Assets 1,200
% China Foreign Exchange Reserves in Gold
China Gold Tonnes 1,100
300%
China Gold as % Foreign Exchange Reserves

1,000

250%

China Gold Holdings (Tonnes)

900

800
200%

700

150%
600

100% 500

400
50%
300

0% 200
19 7
19 8
19 9
19 0
19 1
19 2
19 3
19 4
19 5
19 6
19 7
19 8
19 9
19 0
19 1
19 2
19 3
19 4
19 5
19 6
19 7
19 8
20 9
20 0
20 1
20 2
20 3
20 4
20 5
20 6
20 7
20 8
20 09
E
7
7
7
8
8
8
8
8
8
8
8
8
8
9
9
9
9
9
9
9
9
9
9
0
0
0
0
0
0
0
0
0

10
19

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

Ronald A. Tadross, CFA 24

www.balancecap.com
 If Gold Holdings Are Any Indication, Numerous Foreign Developing
Nations Need To Buy Gold and Other Vital Real Assets
90%

80%
Gold as % Foreign Exchange Reserves

70%

60%

50%

40%

30%

20%

10%

0%
ECB

United Kingdom
Germany
Portugal

Belgium
France

India

Russia

Japan

China
United States

Italy

Netherlands

Philipines
Spain

Lebanon

Libya

Singapore
Austria

Venezuela

Algeria

Taiwan

Saudi Arabia
Switzerland

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

Ronald A. Tadross, CFA 25

www.balancecap.com
 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
CONSULT WITH A QUALIFIED TAX AND/OR
FINANCIAL ADVISER BEFORE IMPLEMENTING
ANY STRATEGY DISCUSSED IN THIS
RESEARCH REPORT.

Ronald A. Tadross, CFA 27

www.balancecap.com