Monday, September 20, 2010

We Are All Speculators Now

The Federal government refuses to face the fact that its accrued liabilities, including explicit and nearly-explicit promises to current future retirees and users of governmentally-sponsored medical programs. This refusal leads everyone throughout the financial spectrum to be unable to make realistic plans.

If one is poor, and is aware of the situation, one wonders how government can continue to provide whatever aid is being provided, and one is concerned about one's future income and that of one's family.

If one is in the broad middle financially, and retired, one is being hit with no increase in Social Security payment but with large percentage increases in medical costs; and one may own one's home and have suffered loss of equity (the only real "deflation" in the economy the last few years except for typical tech pricing declines).

If one is a retiree who would have expected to be comfortable at current wealth levels as recently as 3 years ago, one now has no idea how to plan for the future. How much damage inflation will do to one's assets? What will public policy be regarding Social Security and Medicare?

If one is a young-to-middle aged employed adult, one is probably confused about what to do with income. Should it be saved? Why bother saving if government is going to tax heavily the income that the savings throw off, and in any case may inflate much of it away?

If one is truly rich (whatever that threshold is), one may be worried about the peasant-pitchfork scenario, and may be moving (more, perhaps, than one has already done) assets out of the country.

The certainty that the Federal government and many important state governments have their heads in the sand about their abilities to meet their obligations is causing sufficient uncertainty amongst the populace to be providing a negative feedback into the economy.

The blogger Calculated Risk had a (now-deceased) co-blogger who focused on the about-to-pop housing bubble known as Tanta who used to joke (not such a joke): "We are all sub-prime now!"

In 1992, tired of what then seemed like large Federal deficits and what appeared to be a once-every-50-year financial disaster (the S&L fiasco), taxpayers supported a balanced budget hawk as a 3rd party candidate for President. This Perot movement ended up being reflected in an apparently virtuous financial gridlock between the parties. The Republicans wouldn't allow President Clinton his spending priorities and he in turn would not let them cut taxes.

The public "got it" in 1992 and later in the '90s when it supported and took pride in balanced Federal budgets.

People know there is no free lunch, except perhaps in the Garden of Eden where there may have been low-hanging fruit to pick. What they need is for the President, as the official elected by all the people, to level with the American people and propose a realistic plan for government to meet all its obligations. He could propose a plan that takes Federal spending to 70% of GDP, as in Norway. Or, unlikely for this President, he could propose a plan that takes said spending to 10% of GDP, such as in Hong Kong.

The public would vigorously support the goal of a plan toward financial stability based on unaggressive projections. The political process would be charged by the President with working things out, subject of course to his veto. Then the horse-trading would begin. There is a reason why Congress has an 18% approval rating, and it comes from the public's knowledge that Washington has failed for several years to rise to Job 1:
chart a course for the future of the United States. Other countries have done so. Why can't we?

The current policy is no policy at all. It involves fighting unfunded wars; promising greater unfunded medical programs even as doctors retire young due to declining reimbursements and higher costs; "stimulating" the economy with giveaways to retirees, small and large businesses, and asphalt companies; and keeping a nominally Republican Fed chairman in place with the understanding that he will accommodate all the government's funding needs that the marketplace cannot provide at a price that the government will accept.

It is literally impossible to make logical choices one can believe in when political decisions or lack of decisions are such critical factors. Even more basic decisions such as whether to buy or sell a house are now made almost regardless of fundamental supply-demand considerations. Consider that even as unemployment came in worse than predicted in last year's "stress tests" on banks, house prices came in much higher. Who could have predicted the vast array of Fed and Federal programs to keep prices higher than expected given the relatively sluggish pace of economic growth? And will such prices and governmental support continue? Gentle Ben and governmental leaders may or may not even know. Maybe some other fiscal or military crisis will supervene.

The advent of stagflation in the 1970s threw a lot of people off balance, but the economic and financial imbalances did not become bubble-like until the energy crisis of the late 1970s sent oil prices skyrocketing for the second time in the decade. This was superimposed upon the chaos of the loss of the Viet Nam War. So the public sent Mr. Nixon packing; his plan to end the war was no plan, it turned out. Mr. Carter similarly got the boot after the "misery index" he used against Gerald Ford turned out to be much worse in 1979-80 than during Ford's tenure.

Matters turned when Messrs. Volcker (a Democrat) and Reagan laid out a coherent plan. It just may be that the fact that there was a plan that each man stuck with as long as he could was as important as the specifics of the plans. The political process put each man in place with his plans, thus the public explicitly and/or implicitly bought in, and individuals and businesses could make plans under this new set of policies.

Sorry, but health insurance reform to start after the next Presidential election, and another deficit commission due to report after the midterm elections is not a plan.

Mr. Obama started his term with a reservoir of very good will and fervent hopes, just as Jimmy Carter did. Neither one delivered what the public hoped when they elected them. Mr. Obama has time. He's wasted a year and a half from an economic perspective. Until he and Congress agree on a realistic plan that shows that Leviathan has developed strong self-assessment skills, we all all be fumbling around in the dark in America.

Exploration of new frontiers has its benefits. But nothing beats travel plans based on a good map. The country needs a good map. Blaming the prior guy does not provide that map.

Meanwhile the financial markets continue with two trends intact: falling Treasury yields and rising precious metals (and other commodity) prices. As with NASDAQ 1990s and housing 2000s, financial bodies in motion can stay in motion longer than reality-based bears can stay solvent. The third and most recent trend is truly easy money. Forget 1%- that is so last decade. Money should be free in the land of the free, right?

Well, sort of. If you're a member of Big Finance, yes, not only should it be free, but you should get to make money on the very money you put in reserve against losses. Huh?

The leaders of the United States of America are deliberately turning the country into a land where everybody has to guess as to what plan, or non-plan, they will come up with next. Thus we cannot plan our own futures.

We are all speculators now.

For the perma-bulls amongst us: precisely why will this end well before it gets worse?

Copyright (C) Long Lake LLC 2010


  1. "Head in the sand" is the result of failing to make and instead deferring tough and potentially politically unpopular decisions.

    The real cost of health care was hidden in the federal deficit back in the 60's when the Medicare bill was passed, effectively putting off tough decisions about health care rationing for 50 years.

    Now we're twenty years away from being insolvent as a nation and unable to pay the tens of trillions of dollars of unfunded federal entitlements, and I believe the American people deserve an explanation, as you've well stated in your article. Another good question is, what have you done with the money we've already given you? The answer is, it's gone to pay the salaries of a lot of baby boomers. Are we now expected to fund their retirement? If the answer is yes, see item number 1, unfunded federal entitlements. Your government has promised more than it can deliver. How do we reconcile the two? More to come after the mid-term elections, the most recent period of deferred tough and potentially politically damaging decisions.

    The dems have to be asking themselves, why not let the repubs have Congress, then they can be blamed for the fallout over the next two years. Gridlock may be the lesser of two evils. The larger question of how to address fiscal insolvency may well be deferred until the 2012 presidential campaign coming to a whistle stop near you.

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