I seem to have caused some confusion among readers with my two recent columns on “Obama’s New War on Investors.”
Several wrote to say they found my investment outlook positive and my new book inspiring, but they had a tough time squaring my optimism about the future with my profound pessimism about the state of today’s federal government. (And, as you’ll see, times have been better at the local and state level too.)
We truly live in a bipolar world today. As Charles Dickens put it in
A Tale of Two Cities, “It was the best of times, it was the worst of times…”
The Best of Times
These are the best of times because Americans have never been richer. The Federal Reserve reported in December that the nation’s household wealth hit $77.3 trillion in the third quarter, an all-time record, thanks to rising home prices and stock values.
These are the best of times because the human life span has doubled in the last hundred years. Standards of living have never been greater. Crime is in a long-term cycle of decline. The risk of death by violence has never been smaller.
Literacy and education levels are at all-time highs. Technology and medicine are revolutionizing our lives. We enjoy goods and services in almost limitless supply. Travel – to the next town or the other side of the world – has never been easier or more affordable. Human progress is in a decidedly upward arc.
The Debt Problem
Yet democracies from Tokyo to Washington, D.C., all face the same intractable problem: Elected representatives who simply cannot say “no” to runaway spending or the special interests who demand it.
Every discussion of this sort should
start
off not with a partisan rant – since there is plenty of blame to spread on both sides of the aisle – but with a dispassionate look at the numbers.
As you can easily see at
usdebtclock.org, the United States is currently carrying a $17.34 trillion national debt. (This is more than our annual GDP and equal to $150,544 per taxpayer.)
Yet this doesn’t even factor in our much larger entitlement crisis. Look at the bottom line and you’ll see that unfunded liabilities for Social Security, Medicare and the prescription drug benefit (Part D) amount to more than $127.6 trillion. This shortfall amounts to a further $1.1 million per taxpayer.
Where will we get the money? Borrowing a sum this titanic is out of the question. It is beyond the capacity of global financial
markets. And entitlement spending is projected to grow at more than $8 trillion per year.
Raise taxes? According to the IRS, the total corporate taxable
income generated by all U.S. corporations is approximately $1.6 trillion. The total adjusted gross income of all Americans making over $66,000 per year is approximately $6.7 trillion.
So even if the federal government confiscated the entire adjusted gross
income of all U.S. corporations and all these taxpayers every year, it still wouldn’t be enough to meet just the $8 trillion a year
growth in U.S. entitlement obligations.
Radically cut spending? Reform the
system? Now we’re getting warmer. Unfortunately, promising to cut benefits – especially for seniors – is seen as political suicide. That’s why Obama completely ignored the recommendations of his own bipartisan panel on entitlement reform.
Making matters still worse in the pubic sector, a report by the States Project – a joint venture between Harvard’s Institute of Politics and the University of Pennsylvania’s Fels Institute of Government – estimates that state and local government owe yet another $7.3 trillion. (Amazingly, taxpayers never approved the vast majority of this debt and most remain generally unaware of the extent of their obligations.)
Predictable Crisis
In short, we are hurtling toward the most predicable financial crisis in our nation’s history, one that is beyond solving with higher taxes, modest reforms or slightly stronger economic growth.
Most Americans understand that we have a federal budget deficit and that it is a negative. What they don’t understand is the true extent of the problem and the terrific threat it poses.
Investors who shrug this off as “old news” are in for a rude awakening. If you took
your credit cards to Las Vegas and maxed them out to the hilt, you might have the party of your life. But there would remain a great reckoning ahead. And we can only guess at the timing.
This is the negative aspect of our bipolar world. Look closely at these facts and it would seem logical that if you’re going to invest in the stock market at all, it ought to be on the short side.
Yet that is not what I recommend. I remain bullish on the mid- to long-term outlook for the economy and the
markets. How can this be? That’s the other side of our bipolar world that I’ll discuss here on Monday.