Two Views on the Economy

Two interesting views on the economy and whether the recession is over:

1. Schwab's Liz Ann Sonders says it might be over.

2. Dennis Gartman says it's over.

Now read this and this:

For years, governments have been promising generous medical benefits to millions of schoolteachers, firefighters and other employees when they retire, yet experts say that virtually none of these governments have kept track of the mounting price tag...

Actuaries say that about 5.5 million retired public employees have health benefits of some kind - and accountants joke that there are not enough actuaries in the country to do all the calculations necessary to estimate how much all these retirees have been promised...Today, only one in 20 companies still offers retiree benefits, according to Don Rueckert Jr., an Aon actuary.

Rosy economic projections belie the public sector's debt bomb. At some point, taxes must be raised to cover public sector pensions and lifetime medical benefits. Once taxes increase, non-government workers will have less disposable income. The less disposable income, the less people can spend. The less spending, the lower our economic growth--as long as our economy is driven by consumer spending.

The only solution to the death/debt spiral is to cut spending, which includes cutting public sector benefits. Does this mean that teachers and other government workers must get paid less? No. What it means is that government benefits must be brought in line with a regular American's benefits. Instead of a pension, police officers, teachers, lawyers, judges, and other government workers should get a 401k or 403b plan. Instead of guaranteed lifetime medical benefits, government workers should get the same medical plan everyone else gets--employer-subsidized health care while employed, COBRA if terminated, and then Medicare when the time comes.

Economists who praise the so-called economy recovery are not taking into account long-term debt liabilities. We need to cut spending, and all we've done so far is use accounting tricks to hide the massive debt we're giving to our children and grandchildren. That's not just irresponsible--that's immoral.

Kudos to the NY Times' Milt Freudenheim and Mary Williams Walsh for being ahead of the curve. Their article on GASB 45 was published in December 2005.

Comments

[Mad Hedge F...:]

Here's a third one. Welcome to the square root shaped recovery. That is the likely shape of the recovery curve we can expect over the coming years. If you back out what I call the “2000’s fluff” of excess car production, liar loans, using the home ATM for serial, annual refinancings, excess consumption, unneeded home construction to account for the new frugality, US GDP growth drops by 1%. Chop off another 1% for deleveraging in all its forms, including lower leverage ratios, the end of the collaterized debt markets and credit default swaps, ultra high junk yields, bond ratings for sale, and the new conservatism of CFO’s and auditors. That leaves you with a 1% growth rate that Japan has seen for the last 20 years. That means falling standard of livings, an unemployment rate permanently stuck at German style double digits, endemic deflation, a collapsing dollar, a comatose real estate market and moribund stock markets. Where are the 37 million jobs going to come from that American needs over the next decade? If your kid is going to graduate from college soon, or cash out from the army, he better start learning Mandarin.

3% Average US GDP growth rate 2002-2007
-1% Bank deleveraging
-1% 2000’s fluff-liar loans, excess home construction, excess car production
-1% real GDP growth 2010-2020

Aug 10 02:57 PM

[Alan von Al...:]

Thank you, Matthew. Absolutely right, logically and morally.

Aug 10 04:18 PM

[drewriders:]

You are correct. One observation though. Politicians in the U.S. will never balance the budget again since individuals on BOTH sides need to make tough (unpopular) choices that would affect their re-election. Unfortunately, because of the new massive deficits (started under Reagan) we will need to raise taxes AND cut spending (including cutting military spending and raise the retirement age) if we want to really make a difference in bringing down the national debt. Politicians care more about their job than the debt they are leaving future generations.

The U.S. will default on these obligations WAY before we pay them off.

Forget Japan. We are Ancient Rome.

Aug 10 04:37 PM