An Ill Wind Blows Through the Holiday Season
Conventional marketing wisdom dictates that during the holidays people like to hear cheerful news and positive predictions. I’ll keep this focused on finance, but cannot help but express my deep grief at the horrific tragedy that has befallen so many families in Newtown, Connecticut. It is difficult to maintain the holiday spirit when others are suffering so.
Financial winds are not promising. The chasm that exists between people holding radically different financial and political philosophies seems to have widened, demanding that the financial markets send a signal to all concerned that compromise and shared sacrifice are no longer desirable but well overdue. When under stress, people cling in a most uncompromising way to their beliefs, losing flexibility of thought and any sense that their beliefs may be subject to question. Usually it is only after reality shakes people loose from their cherished beliefs that compromise comes. So I fear a sharp tumble in financial markets may be required to focus the attention of decision makers in government.
As summarized in a recent live presentation I gave to clients, the crux of the current efforts to gain control of America’s runaway deficits is a willingness to acknowledge that the demographic time bomb, long predicted, is exploding. Over the coming 17 years, it is estimated that the number of persons enrolled in the Medicare insurance program will rise from approximately 48,000,000 to approximately 80,000,000. (Wikipedia.org) Soon, only about two employed people will be supporting every one retiree with their Social Security and Medicare taxes, an unfair, untenable prospect. (when Social Security began the ratio was about 7 workers for each retiree) According to a July, 2011 study appearing in National Affairs “… calculations published earlier this year
Liberal Democrats, in league with AARP, continue to play emotional politics with this issue and to politically destroy responsible politicians who call for reasonable reforms. They did it when Robert Dole ran for President in the mid ’90’s, they did it again when George W. Bush suggested a private investment option for Social Security and they are offering nothing but a “Tax-the Rich” mantra while refusing to recognize that today, people are living twice as long after retirement than at the time Medicare was enacted. This “entitlement” onslaught seeks to moderate voices of both political parties seeking a way to gain some measure of control over the endless explosion in the cost of the Federal government, such as raising the eligibility ages for Medicare and Social Security.
As I illustrated in my talk on December 12, social welfare expenses now account for about 2/5 of the budget. When military spending is added in, virtually all the revenue collected at the Federal level, about $2,000,000,000,000(trillion) is consumed. All other government functions: National Highway Safety Administration, Departments of Agriculture, Education, Homeland Security, Alcohol Tobacco and Firearms, F.B.I., C.I.A., Centers for Disease Control, Food and Drug Administration, Federal Aviation Administration etc. etc. are paid for with borrowed money, about $1.5 trillion.
While there is room to trim inefficiencies in many areas of government, these will offer meager savings given the enormous bite taken from our budget by Social Security, Medicare, Disability and Medicaid. The time to trim social welfare costs is past due. Yet, convinced that he was given a mandate in November, President Obama has dug in his heels, defending the indefensible and doing it in such a way that leaves little room for face saving by Speaker of the House John Boehner. Boehner has gained my respect because he has compromised on the notion of tax increases, a courageous act in the face of Tea Party inspired intransigence and delusion around this issue.
By now, I’ve likely offended all of my clients of one political stripe or the other. My purpose is not to denigrate an entire party, as both have useful ideas. I do believe that extremists on the fringes of both parties are pushing us over a cliff. In the end, economics will trump politics. If both sides don’t give, investors here and abroad will hold an election of their own, and I am deeply concerned about the potential outcome for investor wealth. Yes, a market meltdown is highly possible.
This is unfortunate, as the equities markets feel as if they want to go higher. The malls are packed this holiday season, blue-collar trades are busy once again, and homes are selling with prices firming. A massive tax increase combined with a sharp drop in discretionary government spending will likely prove a shock from which our economy will join Europe’s in a new recession. And yet both tax increases and a reduction in government outlays are absolutely needed to prevent the destruction of the dollar and eventually, our way of life. It’s just that this needs to be accomplished in a more gradual way that attacks the root causes of our national debt disgrace. The path for reform needs to be crafted over a period of decades, not in the chaotic stop-and-go manner under which businesses and individuals become too frightened to make financial commitments. It’s a time of year when we envision miracles. Our country needs one, right now.
On that note, I remain grateful for the safety of children in 99% of our schools and for the common decency of our nation, that, I pray will allow us to find a solution to our problems.
