The Fuse of an Economic Renaissance Has Been Ignited

by: David Roskoph

More than a simple case of indigestionClick to enlarge

Having just lived through a Modern Depression, most assume the present rally off the bottom has been fueled by narcotics or, worse yet, plain hope. Nope. This time the economic tide went so far out that the stark reality of our republic was revealed; surprise, we can't afford our present standard of living. We are now at an historic crossroads, one road leads back to the status quo and the other leads to a brighter future. I believe we are on the latter and experiencing an American Renaissance, for reasons I'll divide into two articles.

We listen with little sympathy to southern Europeans who have convinced (only) themselves that La Dolce Vita was a timeless novelty. We are only the tallest munchkin in the room and, like them, have major changes to make to get back within our means. Specifically our social net, which just like every other, is woven with the best of intentions but not the sharpest of pencils. The seeds of our delusion were planted during the heady years of prosperity following WWII and the relatively high economic tide since then has kept them nourished. The game-changing assumption was that Baby Boom birth rates would fund the expanded programs. It was destined to bleed red ink from the start and now the US birth rates are just above replacement rate with 2 adults producing only 2.1 children.

Medicare began in 1965, when life expectancy was still only 70. The first wave of Baby Boomers didn't even have a chance to show their more conservative replacement rates. We were a nation bloated from the dividends of the WWII peace, atop a ever-more democratic world itching to buy our goodies. Johnson's vision of a Great Society infused a substantial percentage of the nation's wealth into healthcare, spawning a horizon of health related industries.

As a result, medicine was substantially "altered". Medical professionals were greatly elevated because the largest percentage of patients were now getting federal subsidy. That inadvertently caused steady and exceptional inflation in medical costs. Medicare dollars promoted fantastic strides in prolonging life and preventing morbidity. We are all staying younger, longer but still spend the majority of our benefit in the last few months of our extended lives.

Social Security was incepted as a supplemental retirement plan in 1934. Back then it was hard enough to reach the (then) life expectancy of 58, let alone live another seven years to collect a SSI check. The Social Security retirement age has remained virtually unchanged despite our greatly protracted lives. FICA taxes have risen steadily but only enough to keep the actuarial fantasy alive. Fast forward to today where, with a life expectancy of 78, our population has been trained to expect 10 - 15 years of golden retirement. Simply, it's not going to happen.

Americans now consider Social Security and Medicare as birthrights even as the birth rate needed to support them declined, even as we drew more and more benefits from longer retirement years and, even as medicine produced new and expensive procedures. Instead of facing the social net deficit when the projections clearly demonstrated expenses eclipsing revenue, we made sure beneficiaries were paid. Keeping that promise, despite the income assumptions' fallacy and the ever-escalating expenses meant going deeper and deeper in debt.

We have created a relatively common social mirage and we will now experience the same human responses as Greece: from denial through acceptance. Our social net has been misaligned for decades by dangling too-golden a carrot to our seniors. Our Unfunded Mandates, now estimated at five years' GDP, rest on the back of generations who can either accept them, and complete the road to societal self destruction, or modify them until they reconnect with economic reality - the road to authentic prosperity. There is no realistic ability to increase FICA taxes to meet the mandates and the benefit will not be monetized al la Argentina.

21st Century Capitalism and the mathematical impossibility of our unfunded mandates demand the resolution that we shrink our idle years to meet our collective means and, like it or not, ration healthcare.

We are awakening from 40 years of economic excess and realizing that we can no longer support the massive social net expansions dating back to LBJ.

This conclusion is anything but rocket science. The confluence of the Modern Depression we just survived, Greece's public implosion and an administration with the temerity to finally address our "unmentionables". I am suggesting that the fuse of an economic renaissance has been ignited and the absurd projections of our social net will be reduced by this administration. Remembering the necessary stages of loss - it will not be done quickly.

Decade after decade we've nervously watched Congress rearrange the social-net deck chairs. Hoping that the system would stay together long enough to see us through to room temperature, after 13 years of economically and medically secure (non productive) retirement. It won't, it can't and continuing this charade only suppresses our potential. The time of reckoning is long overdue. Realigning our social net to our actual means will be a liberating event because we all know we've been living a lie. This is more than a recovery, it's the start of an American Renaissance, born of necessity. Next I'll discuss why financial reform, a strengthening dollar and a restored manufacturing sector are fortifying us as the best living example of capitalism.

Disclosure: I am very long US equities, long the US dollar and short commodities and commodity companies.