America's Fiscal Day of Reckoning and Cassandra's Curse

Crossing administrations and decades, America’s bipartisan fiscal cluster-f**k has reached a kind of apogee (or nadir, depending on your point of view). Solving it requires a bipartisan solution, which means one almost certainly will not come. This, of course, makes the U.S.’s fiscal problem the world’s problem -- which the world will solve via the blunt force of steadily shunning the dollar.

Here is Merrill’s Rich Berner today on the subject’s frustrating history:

Warning about these challenges has long been a staple for economists. Five years ago, for example, I summarized my concerns about our coming fiscal problems, along with the interplay among them and unexpected longevity, inadequate thrift and saving infrastructure, mediocre education outcomes, and inadequate energy policy (see America's Long-Term Challenges, May 21 and May 24, 2004). I was merely the latest in a long line of alarmists; for example, Pete Peterson famously noted more than 20 years ago that "America has let its infrastructure crumble, its foreign markets decline, its productivity dwindle, its savings evaporate, and its budget and borrowing burgeon. And now the day of reckoning is at hand" (see "The Morning After," Atlantic Monthly, October 1987). The Congressional Budget Office (CBO) has since 1997 - under directors from both sides of the aisle - carefully laid out ever-more depressing fiscal scenarios in its annual Long Term Budget Outlook, the latest of which appeared last week.

If this has been coming for decades, why haven’t politicians listened? Back to Berner:

The problem, ironically, is that the day of reckoning hasn't come. This has seriously undermined doomsayers' credibility and, more importantly, it has made the electorate and elected officials complacent about the threat from unsustainable fiscal policies. Some even proclaimed that "deficits don't matter."

It’s Cassandra’s Curse: Predict the worst and have it not come true on schedule and in a democracy politicians ignore you, right up until they can’t and it’s (likely) too late.

More here.

Comments

[Larry House:]

I just read Berner's piece on the MS site before I saw your post. He is quite somber on our outlook right now. When problems are pushed off and "wished" away, they tend to snowball out of control. We are there.

Jul 06 12:04 PM

[MatrixSurfer:]

It is hard to believe that in California, Illinois and Washington DC our intrepid leaders do not seem to realize what they have done and continue to do. It seems certain we have put into office some of the most irresponsible, and most probably utterly economically ignorant rascals in the history of our country. And no, the worst has not arrived but it most assuredly will. On the bright side, when it does finally arrive, it will awaken the sleeping giant that the American spirit still is - I believe - we will eventually put ourselves back on the path to exercising and spreading the freedoms that have changed the world for the better. (Yes, I am an unapologetic believer that there IS a true and different American spirit and maybe the July 4th teaparty celebrations are still having a heady impact). I just hope I live long enough to experience it once again... :-)

Jul 06 12:23 PM

[Dave Wrixon:]

Well you voted them in and you get the leaders you richly deserve.

The bottom line is that if the American Democratic System is not equal to the task, it will be replaced with dictatorship. Frankly, I am not overly optimistic on this one.

Jul 06 12:41 PM

[conceptwizard:]

This is a typical response from a politician. Governments all the way from the top to the bottom rung are a REACTIVE, if a problem arises they react to it, the decision process entails things such as:

1. What are my chances of re-election if I do This/That. 2. How much have/will I get from these lobbists in political contributions. 3. How will I look the best to the general public and still satisfy 1&2 with minimal damage.

The proper way to Govern is to be Pro-Active, this is the best for the people. You put a plan in place, set goals to reach that plan and have plan 2&3&4 in the wings in case plan one fails.

The Government of the USA will fail. They lack the discipline, integrity, patriotism and foresight to lead. It is has and will be more obvious as the days continue. We are on a path that can only lead to the enivitable demise of a nation.

Jul 06 02:51 PM

[WS1835:]

On Jul 06 12:41 PM Dave Wrixon wrote:

> Well you voted them in and you get the leaders you richly deserve.
>
> The bottom line is that if the American Democratic System is not
> equal to the task, it will be replaced with dictatorship. Frankly,
> I am not overly optimistic on this one.

Without significant restriction, any political system with universal sufferage is shortsighted and vulnerable to demagogues. At this juncture, the USA has an evolving underclass paying little in the way of taxes while devouring a large chunk of government 'cheese' and a growing bureaucratic class that is determined to dole out as much cheese as possible. These two political classes combined constitute a ruling plurality that will stop any real efforts at reform. Without a large (and generous) nanny-state the bureaucrats are out of a job and the underclass have to go get one. Neither are going to do that voluntarily.

In a modern democracy, there simply is no mechanism by which a fiscally conservative majority can be created and maintained. The best result possible are intermittant tax revolts, which do not fundamentally change the system. They only postpone the day of reckoning. Hence, our democracy (like the ones before it) is unlikely to change course, and will totter on toward collapse.
Once the system collapses, the old rules and traditions fall away. To stave off chaos, the general public resorts to making a deal with the devil in the form of the strongest and most stable power bloc available.

Viola! One more cycle of democracy ending in dictatorship.

Jul 06 02:53 PM

[dhansen548:]

We are governed badly, but it is not the underclass that voted them in. It is predominantly the American middle class that votes, and it the American media that systematically mislead them. And it is the wealthier ones who control the media and give the campaign donations that control policies.

The end result of all this? The dollar, and the various state and national bonds, will lose most of their value; anyone that owns them will see their net worth crumble. As it was in the case of General Motors the solution is straightforward: stop paying for it, i.e. stop buying their bonds, diversify out of the dollar. And try to put a low cap on total government spending---including military spending.

Jul 06 03:01 PM

[Fighting Yoda:]

Politicians are only interested in re-election so they only opt for short term populist agendas – bailouts, dole outs – stimulus etc. You can always kick the can down the road- this has been easy for US as it owns the printing press and the rest of the world has huge $ reserves – so they simply can’t dump the dollar.

Cassandra’s can be right but they can not time because policy actions can delay the day of reckoning – Greenspan did it for 20 years, Bernanke is trying to follow the same path. I think it is different this time – as US is totally exposed as a house of cards- consumers, rating agencies, financial institutions – all have been proven as complete farce – Madoff like. BHO promised of $800B stimulus he will prevent unemployment going above 8% now that we reached 9.5% very quickly – talk is only about the next round of stimulus- start the printing presses.

But Cassandra was always proven right and it will – the king has no clothes.

Jul 06 03:01 PM

[losbronces:]

Really, what choice was there in the last election? As one writer pointed out (in MSN of all places), JFK would be considered too conservative to run underas the candidate of either party in the 2008 election. Obama raised a record amount of money to finance his campaign. Someone was paying, and it wasn't Joe Sixpack.

As to why the day of reckoning has stalled for so long: In my opinion it is simply due to the fact that most other countries are run even more poorly than the U.S.

Even now, what currency do you go to? The Euro (talk about a day of reckoning that is overdue), the yen (home of the disappearing economic base), the Canadian dollar (bloated social costs and greedy pols there as well), gold (that can be taken out by presidential edict--there is precident)... I don't really see any solid currency at this point.

I still like oil, but additional taxes, price controls and a continued decline in economic activity worldwide make that significantly less than a sure thing as well.

Jul 06 05:29 PM

[roywil:]

WOW! That is the most succinct, powerful, and persuasive (not to mention "terrifying") description of our national predicament I have heard yet. Bravo!

Would like to hear more from you.


On Jul 06 02:53 PM WS1835 wrote:

> On Jul 06 12:41 PM Dave Wrixon wrote:

Jul 06 06:05 PM

[User 353732:]

Nations rise to greatness each in their own special way, but they fall in the same sordid way: degenerate, self obsssed and self perpetuating elites; limiltless borrowing and spending; accelerating debasement of the currency; contempt or rejection for their legacy and traditional values; appeasement of enemies, internal and foreign.

Sadly, democracies freely vote for their own demise.

Jul 06 06:41 PM

[Graham and ...:]

Today's America reminds me of the fall of Rome.


On Jul 06 06:41 PM User 353732 wrote:

> Nations rise to greatness each in their own special way, but they
> fall in the same sordid way: degenerate, self obsssed and self perpetuating
> elites; limiltless borrowing and spending; accelerating debasement
> of the currency; contempt or rejection for their legacy and traditional
> values; appeasement of enemies, internal and foreign.
>
> Sadly, democracies freely vote for their own demise.

Jul 06 06:46 PM

[bricki:]

It isn't Cassandra, but rather the Boy Who Cried Wolf. I've seen these predictions of doom for the 40 years I've been an investor. After a while you tend to ignore them because they have a long term record of being wrong, but you know sooner or later circumstances will occur to make a prediction of doom come true.

You just hope that this won't be the time. But this is the worst I remember....

Jul 06 08:07 PM

[whidbey:]

Whatever, things will be different and someone caused it to happen and many will suffer and lots of the passive will have no idea what has happened.

Remember Lincoln "you can screw some of the people some of the people some of the time, and others most of the time, but not everybody all the time" (or words to that effect). I know what is going on, even if no one agrees with me.

Jul 06 10:02 PM

[ain't no fo...:]

they had the colosseum and gladiators, we have cage fighting...


On Jul 06 06:46 PM Graham and Dodd Investor wrote:

> Today's America reminds me of the fall of Rome.

Jul 07 12:25 AM

[JeffDB:]

On Jul 06 05:29 PM losbronces wrote:

> Really, what choice was there in the last election?

It seems to me that at its heart, our problem is a moral one. Our current leaders obviously can't hold a candle to our Founding Fathers with respect to their leadership and moral integrity, but I have to wonder whether we as a nation have the moral backbone that our forebears did. I tend to doubt it. I'm reminded of the wag who opined that "If Our Lord doesn't do something about our nation, He owes an apology to Sodom and Gomorrha."

> Even now, what currency do you go to? The Euro (talk about a day
> of reckoning that is overdue), the yen (home of the disappearing
> economic base), the Canadian dollar (bloated social costs and greedy
> pols there as well), gold (that can be taken out by presidential
> edict--there is precident)... I don't really see any solid currency
> at this point.

Much of the world appears to be between a rock and a hard place, but it appears that there has been an ongoing move for awhile by quite a few nations to reduce the percentage of their holdings of US dollars and a growing number of nations are using the Euro for their trading and some OPEC nations are pricing their oil in Euros:

www.youtube.com/watch?...

Jul 07 01:38 AM

[mr_subprime:]

Only when the masses are homeless and hungry will you see a "revolt" of any sort. The politicians are under the thumb of the bankers, drug companies, and oil companies. If the government was "governing", Wall Street wouldn't have been able to rob the country of it's equity; the oil companies would not be able to raise prices on a whim (summer driving season); and the insurance companies wouldn't be able to make you pay 3 times the amount for services/drugs as a self-payor that they themselves pay to providers. Yes, the American people have had their heads up their A$$e$ for too many years. No one pays attention until it's their house being foreclosed, or their child being indoctrinated in the public school (global warming and free condoms), or their 401k being destroyed. Even then, they feel powerless to make any change or difference in the status quo.


Democracies indeed follow the path to dictatorship (Obama) through laziness and self absorbtion.

I will personally vote AGAINST any incumbent politician on the ballot in 2010/2012. Politicians do not serve their constituents, but rather, their campaign contributors.

Morality has gone by the wayside in this country. We should all be ashamed. The founding fathers got it right. FEAR YOUR GOVERNMENT!

Jul 07 11:32 AM

[Socialism c...:]

I utterly disagree. The way to govern is to be REactive. Government should not be leading anything -- the private citizens and private companies should be. It is We The People who should be leading and pushing anything "new", with government confined to a VERY small role -- only those few critical things that we all need and are best done collectively. And I'm not talking individual needs that we all need (i.e. healthcare or retirement entitlements), but collective needs: national defense, roads, food & drug safety. When government gets in the role of "leading" most things, it botches it up -- either by incompetence in a niche area, or by the continuous growth of its role in that area...the never-relinquished power grab. Such is the state of things right now. We have a government that thinks it is its job to foster economic growth, rather than get out of the way and not impede what would naturally occur out of the aspirations, innovations and hard work of the private endeavors of the people of this country.

Once government gets involved, it never lets go:
If it moves, tax it.
If it stops moving, subsidize it.


On Jul 06 02:51 PM conceptwizard wrote:

> This is a typical response from a politician. Governments all the
> way from the top to the bottom rung are a REACTIVE, if a problem
> arises they react to it, the decision process entails things such
> as:
>
> 1. What are my chances of re-election if I do This/That. 2. How much
> have/will I get from these lobbists in political contributions. 3.
> How will I look the best to the general public and still satisfy
> 1&2 with minimal damage.
>
> The proper way to Govern is to be Pro-Active, this is the best for
> the people. You put a plan in place, set goals to reach that plan
> and have plan 2&3&4 in the wings in case plan one fails.
>
>
> The Government of the USA will fail. They lack the discipline, integrity,
> patriotism and foresight to lead. It is has and will be more obvious
> as the days continue. We are on a path that can only lead to the
> enivitable demise of a nation.

Jul 07 12:37 PM

[JeffDB:]

On Jul 06 08:07 PM bricki wrote:

> It isn't Cassandra, but rather the Boy Who Cried Wolf. I've seen
> these predictions of doom for the 40 years I've been an investor.
> After a while you tend to ignore them because they have a long term
> record of being wrong, but you know sooner or later circumstances
> will occur to make a prediction of doom come true.
>
> You just hope that this won't be the time. But this is the worst
> I remember....

I believe it was the editor of "The Economist" who noted in a round-table discussion on the crash that economists had been warning for several years about the housing bubble, but rhetorically asked, "How far ahead of the curve can one sound such warnings before they begin to lose their credibility?"

Jul 07 12:53 PM