Four Words Obama Will Never Say
Will the new Obama administration offer a solution to our country's short and long term fiscal imbalances? I'm willing to bet four words you will never hear him say during his tenure are "The budget is balanced!" First, take a look at a couple of estimates regarding how great our long term debt will accrue due to the demographic challenges we face.
According to estimates from a 2007 study done by USA Today, the projected debt for our country could reach $59 trillion dollars because of the unfunded mandates from entitlement programs. And if you think that's scary, Richard Fisher, President and CEO of none other than the Federal Reserve Bank of Dallas, puts the figure in a speech given May 28th 2008 at $99.2 trillion! Medicare parts A & B account for 69% of the debt, Part D for prescription drugs (thanks George W. Bush) accounts for 17%, while Social Security accounts for just 14%. As foreboding as those estimates are for our future, it appears that recent events will preclude any substantive efforts at tackling this looming catastrophe.
The election of Barack Obama coupled with the current economic crisis virtually guarantees that our collision course with the entitlement iceberg will remain unaltered. After all, Democrats have historically railed against privatizing any aspect of our entitlement programs. Not that privatization would provide a panacea for all our long term fiscal imbalances, but clearly something must be done during his new administration. But lest you think Republicans have the high road, I hasten to add the Bush administration was nothing short of a fiscal disaster.
Given the recent performance (or lack thereof) of stocks and real estate, it would seem highly unlikely that an Obama administration would propose investing funds into the market. What needs to be done is a massive reduction in entitlement benefits; a phased-in reduction of expenditures until outlays equal receipts is the only viable long term solution to the problem. The problem with such harsh medicine is that it would take trillions of dollars in promises to retirees out of the economy. That would inevitably bring about a severe recession, one that would dramatically lower the standard of living for all Americans and impact quality of life for millions of our elderly population.
The bottom line is that we've made promises to future generations that we can never keep unless we print the money to redeem our obligations. But that would only be accomplished by depreciating the currency until it has lost much of its purchasing power. It isn't any benefit for retirees to send them money that has lost most of its value. That "solution" becomes even less viable when you take into account that entitlement benefits are pegged to inflation.
The problems associated with our long term imbalances have been exacerbated by the reduced wealth experienced as a result of the credit crisis. The S&P 500 has lost about 35% of its value in 2008 and home prices have dropped 16% year over year. Making matters worse is the fact that bank lending has fallen sharply, and home equity extractions have plummeted as American's percent of equity in the home as fallen to just 46% -- the lowest level since the end of WW ll. That situation will force the consumer to rely on those entitlement programs as a means of survival more than ever before.
According to a report from the Center on Budget and Policy Priorities, Social Security benefits account for 90% of income for 34% of our elderly, and for half of all retirees it accounts for 66% of their income. There can be no doubt how essential our nation's entitlement programs have become for the health of the country. Do you see the rub? We either have to print, tax or cut our way out of the problem but all those solutions carry an undeniable amount of dire consequences to our economy and standard of living. However, some combination of all three will most likely occur and the longer we wait, the worse the situation grows.
Quoting from Mr. Fisher, "No combination of tax hikes and spending cuts, though, will change the total burden borne by current and future generations. For the existing unfunded liabilities to be covered in the end, someone must pay $99.2 trillion or receive $99.2 trillion less than they have been promised... the decision we must make is whether to shoulder a substantial portion of that burden today or compel future generations to bear its full weight."
If there is one thing investors should have learned from this credit crisis is that the United States will do whatever it can to avoid a recession. Whether it is printing money or socializing a significant portion of the economy, our government will go to extreme limits to avoid dealing with its sins, be they in the past or in the future. The unfortunate consequence of that stance is that it's unlikely the new democratic administration will do anything in a proactive measure to solve the problem. In fact, the President-elect's proposals will make our problems much worse.
George W. Bush was about as fiscally conservative as Lyndon Banes Johnson but Barack Obama shows no signs of being any more conservative than his predecessor. His promises of "free" education and health care, for starters, should only guarantee that the U.S. Treasury Department's announcement that it will borrow $550 billion in the fourth quarter is just the prelude to future deficits to come. As long as foreign central banks continue to purchase our debt and keep interest rates low the problem doesn't seem acute. But net foreign purchase of U.S. debt was about $550 billion in each of the last two years. According to estimates from Goldman Sachs and moneymorning.com, the Treasury must raise $1.4 trillion in new money in fiscal 2009, which would leave about $850 billion to be financed domestically.
Because we don't have the adequate savings, our annual deficits should lead to much higher interest rates and inflation. We Americans must hope that the Obama administration is honest with the people and makes some difficult choices early in his tenure to deal with our growing annual deficits and long term debt. But as history reveals, we have a habit of only dealing with a problem when we have no other choice.
Michael Pento is a Senior Market Strategist with Delta Global Advisors and a contributor to greenfaucet.com
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4 words you might hear him say with the way things are going "Damn are we F'd!"
The Four Words Obama Will NEVER Say:
"It Can't Be Fixed"
Republicans, clearly, can no longer claim to be the party of fiscal responsibility. In addition I believe anyone who is able to grasp the concept of 2+2=4 has seen Reagonomics for what it is - boosting the economy for a few short years by massive deficit spending, making you very popular and leaving a huge mess for the next guy and letting the country suffer for years afterwards.
George W. Bush just took it too far and will be leaving in shame unlike Reagan who skipped off just in the nick of time.
As fast as things move TODAY!
Never SAY Never!
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We are in the AGE of Lightening FAST CHANGES!
IT WE CAN DO THE FOLLOWING THINGS:
1. Put a couple wars behind us - Costing over $3 Trillion
2. Cut Wasteful and Useless Government Programs - $1 or $2 Trillion
3. Get Over this HOUSING CRISIS which continues to feed the FINANCIAL CRISIS
4. Build New Industries and Infrastructure!
5. Rebuild Trust in our "FAIR Markets!"
Then we could see a FAST RECOVERY, and then it may be possible to say, "The Budget is Balanced!"
I hear the word "entitlement" and I can hear my soul growl.
You best watch yourself sir, we need to spend right now
Privatization is absolutely NOT the answer. I don't follow the logic of paying the private sector (out of tax payers pockets btw) to do something they've repeatedly proven they're incapable of doing as well or as cost effectively as the govt.
We spend more on our military than the rest of the world combined. While I believe it very important to retain a strong military, some cuts here could go a long way. Right now, about $0.35 of every $1 our government collects in taxes goes for all domestic programs, our basic military budget, and the two wars. $0.65 goes to pay interest on the national debt and to entitlement programs. The Congresional Budget Office has predicted this will spike at $0.67 in 2009, then recede back to $0.65 in 2010 and beyond. But this was before the current crisis.
Sorry, Mr. Pento, but we aren't on a collision course with the entitlement iceberg because the Democrats are now in power - it is your party that put us on the collision course with this present crisis through its penchant for deregulation, dismantling the new deal, and profligate military spending. It won't be impossible for the Democrats to fix this mess, but the fact that you who have made the mess aren't even wringing your hands about your own culpability on this is reprehensible.
Here's four I hope he NEVER says:
"Sarah - got any ideas?"
And also:
"Can I help, Hillary?"
Sarah: "You betcha Mr. President"
Michael,
I'm in complete disagreement with you and these Republican talking points about "our collision course with the entitlement iceberg." Nonsense.
Only if you subscribe to a particular worldview/ideology would anyone really believe what you've written. I reject the premise of your arguments. I call these scare tactics.
Let's take just one example. Just one: If we do absolutely nothing to Social Security there will be enough money in the current system to fully fund it at present levels until about 2044. Many economists believe it can go even longer. I cite this as just one piece of data that refutes your way of thinking.
Getting our fiscal house in order isn't impossible. It will require a combination of intelligently selected tax increases, a reduction in the Pentagon budget and a different way of thinking.
Every single industrialized country in the world provides far, far more in public goods and services than the United States of America: All of them. They're not "richer" than we are. They just make better choices.
When the top 1% of the United States population has more wealth than the bottom 90%, it provides the objective observer with some idea of how we got where we are and how we might reverse things to move in a better direction.
Some people who are very "liberal" about everything other than basic economic bread-and-butter issues want to convince us that only "entitlement reform" can save us. Sorry, Michael. I don't believe it.
See Michael Pento's Profile
2044 is when you say the trust fund runs out of money. But since there is nothing in the trust fund of either of our entitlement programs, the money runs out in less than 10 years for both. That is also the time that we will no longer be able to borrow from the over funding of these programs. Deficits will soar during that time.
But Obama could say that the national public debt is fully paid up. All he has to do is get Congress to authorize the Treasury, as permitted by Article I Section 8 of the Constitution, to buy back its outstanding bonds on the open market by issuing interest-free Treasury notes that may only be loaned at full reserve.
As the debt is retired, the Fed dollars that represent the debt retire as well, so this one-to-one replacement of the money supply at full reserve causes zero inflation. The bondholders are made whole with the Treasury dollars, which would also stimulate the credit markets to the tune of several trillion dollars in new loans to rehabilitate the economy.
This is essentially rebooting the economy with a clean slate of zero public debt. As this approach proves successful, the program can be extended to any Fed dollar-denominated debts in the private sector. The only "downside" is that people will finally understand that money is just a facilitator with no real value of its own, and they may become enraged that they had been suffering real hardships under an imaginary burden.
I don't think the foreign holders of our debt would appreciate it if we just declared ourselves debt free. I imagine that China especially would have a problem with all the money they gave the Bush Administration to being a figment of their imagination.
FDR had inherited the same economic problems from another Republican , President Hoover that BHO is inheriting from Republican President Bush.
And Øbama can and will solve the economic problem the same way FDR did with a WPA; creating millions of jobs by rebuilding the American infrastructure.
Borrowing money to create domestic jobs in America is a cycle that increases Treasury revenues building consumer spending and encouraging banks to finance new industries,
Incidentally, Adolf Hitler had his own WPA before FDR, building the autobahn with borrowed foreign money.
Deficit spending rejuvenates an economy as long as the money is invested in domestic projects hiring American workers.
Obama's plan for the Greening of America (GOA) through national renewable energy projects, is the equivalent of FDR's WPA.
We Can do it
No, he won't say the budget is balanced, the mess he is inheriting precludes any option for a balanced budget proposal in a single term. The next 4 years is taking on the debt and work of this fixer-upper of a nation. A second term will start paying dividens on the investments that must be made. Some current spending will be reduced but there must be new spending directed towards long term consistent benefit and profit that must be made. A 500 Billion, 5 year, 50 state energy/infrastructure initiative is such a program. 5 years to develop, build and bring online, 3 years to pay for itself, 30+ years of profit, cost reduction and exportation of developed and refined technology.
I agree that the Republicans from Reagan through both Bushes have dug us a big deep hole it will take a lot of time and sacrifice to get out of. But I'm not sure it's all quite so dire. I think Social Security can be easily fixed just by eliminating the cap on contributions above certain income levels. Medicare is a little harder and will be very unpopular. But some huge percent of all our medical $$'s go to people in their first and last two months of life, mostly very tiny premature babies being kept alive by heroic measures and elderly people in intensive care in the last months. We should quit doing this, go back to letting nature take its course and provide supportive/palliative care only in those cases. That plus an increased focus on prevention, dealing with our obesity epidemic, etc, would go a long way to making Medicare more manageable.
BANKING COLLASPE ?
MUST BE A BUSH IN THE WHITEHOUSE !
Im so glad that you mentioned Obama ending the war would be a good start. Although, like someone else said, you said have wrote this piece four years ago.
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