The Top 5 Looming Financial Issues 58 comments
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With all the turmoil in investment markets, I have found it useful to try to estimate major financial issues that will influence the American economy over the next few years and several decades. This will summarize my current findings ranked in order of total dollar value. All of these problems need to be resolved for the future viability of our way of life. I think it is obvious that if the biggest problem is not solved, what we do with the other four will be of little consequence.
Issue #5: The estimated asset write-downs resulting from the 2007-2008 credit crisis. The International Monetary Fund has estimated this to be $1.1 trillion. Less than half of this has been realized to date. The time frame for this to be totally realized is one to three years. The potential for this estimate to be too high is limited to a couple hundred billion at the most. The potential for this estimate to be too low depends on whether or not we see an extended downward spiral in home prices and the associated worsening of credit markets. Worst case scenario is probably another $1 to $1.5 trillion, corresponding to defaults on 20% to 30% of home mortgages.
Issue #4: U.S. national debt of $4.4 Trillion. This figure is obtained from the “Long-tern Financial Outlook”, U.S. Government Accountability Office, Jan. 2008. Government estimates envision a balanced budget by 2013. If you believe this, I would like to sell you a well known bridge over the East River. However, I will use that to project the national debt to grow to $5.9 Trillion in the next five years. The probability that this is too high an estimate is extremely low. The probability that the national debt will be larger than $5.9 Trillion in 2013 is very high. Furthermore, I am skeptical that a balanced budget will be achieved, not only in five years, but even in 10 years. The risk is high that the national debt will continue to grow through deficit spending for many years to come. I do not have a rational way to estimate an upper limit for the national debt in five years or beyond.
Issue #3: The unfunded liabilty of the Social Security System is estimated to be $6.7 Trillion (Government Accountability Office, Jan. 2008). This number could be higher with inflation above the report estimate - approximately 3%. The time frame for this figure is several decades.
Issue #2: The unfunded liability of Medicare is estimated by the Government Accountability Office to be $34.1 Trillion. Again, higher inflation could raise this estimate. The time frame is several decades.
Issue #1: The cost of imported oil. Many sources have estimated the 2008 cost for imported oil to be approximately $800 Billion at an average price of $120 to $130 per barrel. The estimate for the hidden cost of oil - added military expense, environmental expense, health care expense, infrastructure degradation, etc - was approximately $825 Billion per year in 2006. See here for details on the hidden cost (.pdf).
If we assume the 2006 hidden costs and the estimated 2008 purchase cost to be applicable for the next 30 years, the cost of importing oil over that time frame is approximately $48.7 Trillion. The likelihood that this too high an estimate is extremely small. To lower the cost not only does the price of oil have to stay at or below current levels, the amount of oil we import must stay at or below current levels and there must be no inflation for 30 years. With that scenario, the present value of a cash flow of $1.6 Trillion per year is $45 Trillion at a discount rate of 5%.
It is much more likely that the annual cost for imported oil will rise from the $1.6 Trillion per year. If the cost rises by 10% per year (probably too small a figure), the present value of the cash flows over 30 years is approximately $58 Trillion. The cost of continuing current energy policy is somewhere between $45 Trillion (an unrealistic lower bound) and something larger than $58 Trillion. Half of this money is paid to entities outside of our economy and can only return to us by purchase of our assets. A lot of the hidden cost remains within our economy, but none contributes to higher productivity. The hidden costs are basically maintenance expenses.
I have been trying to find some economist who would assess how the investment in getting the energy problem addressed would positively effect the federal debt, Social Security and Medicare problems. If we were to develop domestic energy sources that would remove the need for imported oil within ten years (Al Gore has called for such an effort), $40 Trillion (or more) of Issue #1 would not go overseas and to maintenance of the oil import system, but would be spent domestically on new production and distribution systems. If I (arbitrarily) assign 60% to labor and 20% to domestic corporate profit, potential federal income tax revenue increases by $7 Trillion or so, Social Security revenues are increased by about $4 Trillion, and Medicare revenues are increased by about $1 Trillion. This is all back of the envelope, and does not incorporate the time value of money considerations.
The problem is that there must be political will to deal with a level of economic austerity usually found only in times of major war, such as WW II. Can America face the music or has our country become prisoner to living in the moment?
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This article has 58 comments:
An apt comparison. Conscription. Food and fuel rationing. Retooling GM and F to make tanks, jeeps, and bombs. Confiscatory taxation. Censorship. Internment of resident aliens.
And who do you propose to attack? ... Mexico?
Sorry
The decisions made should make sure we do not sacrifice our future for current convenience. That is the austerity that may have to be faced. Otherwise, I will "get mine" and "my grandchildren will be so brilliant they can figure it out" will be the modus operandi.
The government can only do a small part of what needs to be done to get to a sustainable future. Private, even individual, enterprise will carry the load. The government did not invent the automobile, the airplane and our modern transportation vehicles. The government did, however provide most of the infrastructure that enabled them to become engines of our economy. A different model is the railroad system, where both vehicles and infrastructure have been predominantly private. Without an effective form of government cooperation, the rail system has not been able to prosper against the competition from other transportation means. This is an example of the law of unintended consequences. Overly supporting one area of transportation (public highways and airports) without equivalent support for railroads has not necessarily put us in the best competitive position.
So what I hope to see develop are government policies that enable all future energy sources to be developed and implemented by the ingenuity and entreprenurial resources of the U.S.A., while making sure that the full diversity of energy production needed for economic vitality is not thwarted. Our policy will be effective if it can get us to an energy condition that is sustainable for the next 150 years, as the fossil fuel age has been for the past 150 years.
This may be too idealistic, because we have to overcome the predispositions of polititians pandering for their next re-election. We have to overcome the influence of the lobbies, current and future, that will try to maximize their own interests to the detriment of all the others. This country cannot have a good future if it is dominated by the oil lobby, the wind lobby, the solar lobby, the nuclear lobby, the coal lobby, the environmental lobby, etc individually or in any sub-set. All lobbies should have the right to make input, open and publicly, but none should dominate the others.
Somehow we need to find a way allow the path to the sustainable future. I feel the path will be torturous if it is driven by the next quarter income statement, the next year's profits and the next five years' profits. Giving up smaller near-term profits for sustainable future longevity is the austerity I refer to. If our current and future titans of the energy business focus on 10, 20 and 30 year business plans the outcome for our economy may be much rosier. Government policy can influence the time scale of private enterprise business plans.
As far as auserity for the average citizen, that's coming whether we face the energy crisis or not. If we face the crisis and solve it, the austerity ends in 10 years or so. If we never face it, austerity could go on forever.
The same dolts who think we can drill our way out of the energy shortage will tell you we can print our way out of the mortgage mess. We are doomed! Buy guns and ammo, and be prepared to defend yourselves. Why do you think the gun grab is on? Our "leaders" know the end is near.
A similar disparity exists in income.
Any analysis of the American economy and its profligacy has to be examined within the perspective of plutocracy.
The plutocracy has little to fear from a coming economic meltdown. It is the bottom 90% who will suffer and who are now suffering from the economic and social policies of the plutocracy.
Trickle down indeed.
America resembles 18th century England more every day. One wonders when titles will become fashionable.
Is there an Earl of Redmington and Prince of Omaha in our future?
1. The price and ability to feed yourself and your family-(food).
2. The price of available housing, with appurtenant expenses, taxes etc
3. Cost of raising a family, clothes, education, marginal living expenses.
4. Cost and ability to provide for old age and health expenses.
5. Ability to find a job with an adequate wage to accomplish the above.
Don't need 4 pages to answer that question.
SK
your 5 are due primarily to the author's 5.
the FED has been creating digital debt dollars for too many years.
but i have been reading lately...and i think some of the thinking about social security, national debt, energy payment flowing out of usa, medicare liability etc are flawed..
1. medicare and SS are not liability written in stone or paper......they will be reduced drastically if they cannot be financed, which means US govt ability to fund them is least of my worries, i am more worried about the ensuing socialism that will overpower america.
2. national debt....its not a debt if nobody forces you to pay it, china/japan/middle east are the financers of our debt....and what do they get in return? more fiat currency.....so we are not giving them of any value.....but my only worry will be if china/japan/middle east will stop supplying goods for the fiat currency/USD that we offer to them in future....i dont see it happening.
of course they can come to usa and try to buy real assets in form of companies/properties..... BUD)...so whats the big deal if ownership changes....as long as they play by our rules.
4. same thing applies to cost of oil, we are paying paper money in return for real energy/OIL.....and i wont worry about the fact that we are transferring wealth.
but i will be more worries about the fact the big oil companies and vested interests have taken over the USA congress/politics....a... they make sure we keep a huge military to protect their business in OIL. but this is to do more with stupid people electing corrupt politicians due to some misguided issues (religion/environmenta... etc..)
I can name one (elected congressman) who told them the truth and Not-what they wanted to hear--as a Presidential candidate.
Recognized for his insight loved for his "Truth" none the less raised 0-$$-and faded into the twilight, unremembered for his proclamations, which are now coming to pass.
His name??--Ron Paul
I am also a technology wonk (Ph.D in Chemistry and 34 years in corporate America, mostly as an engineering manager). So I keep appealing to those formally trained in economics to enter discussion for my edification. None the less, the last 16 years of practice in personal financial planning and investment management have opened my eyes (and Mind( to isues I never really considered as a techy.
I appreciate the detail of your discussion and questions. Let's have a look at what you said as best I am equipped to discuss.
1. I agree. Social Security & Medicare can be changed over time. It is possible that the "unfunded liablity" may be reduced. Two problems: (a) Many people now in retirement are at the margins of poverty (and many yet to retire will be); reduction of payments from these sources might put an unmanageable strain on our economy. And (b) a responsible solution to these programs' deficiencies may not be achievable with our form of government where elected officials are pandering to win the next election. I am not presumptuous enough to propose a solution. But the problem is there and America needs to find a way to get it out on the table instead of living from one election to the next.
2. The problem will come home to roost in the form of hyperinflation in dollar terms. When Asia, with potentially 3 billion consumers, produces ten times as much product for their own consumption as they do for U.S. consumption, the upward movement of Asian living standards will drastically raise the prices we pay for their goods. I believe the only way we can combat this potential outcome is to raise our own productivity to be competitive. This will never happen with imported energy, which in an of itself, without competition from Asia, is producing inflation and stealing dollars that would otherwise be invested in our means of prodution.
3. The problem with foreign ownership of U.S. assets is that the profit from those do not stay in the U.S. If there is some reasonable parity between U.S. ownership of foreign assets and foreign ownership of U.S. assets, this can be a healthy situation. If it is very one-sided, it is good primarily for the U.S. (much more U.S. ownership of foreign assets) or it is good only for foreign interests (much more foreign ownership of U.S. assets). It is true that our corpor
Politicians do not get reelected by making the current population suffer for the benefit of future unborn and unknown generations. Corporate executives do not get to keep their grossly overpaid positions and their outrageous perks by sacrificing near term profits dividends and stock prices in favor of the long term advantage, which will only occur after they are deceased. Such is selfish, egocentric human nature. Learn to live with it.
It is true that our corporate income taxes are paid by all owners, domestic and foreign, but I think most of us agree that it is not the most productive use of resources to have the only benefit of corporate activity be taxes paid to the government. If we are to have a future, our own people must have the opportunity to build wealth. Does anyone want to argue that taxes paid to the government build wealth?
4. I think you are arguing that we are paying for oil with a fiat currency which has no value (or little value). I think that is not a broad enough view. Currency has a value based on what it can be exchanged for. In the discussion of 2., above, I mentioned the spectre of hyperinflation. What good will it do us if we have devalued our currency to provide fuel for heating and transportation? What have we produced of lasting value? I call it "burning money".
5. I have no issue with your summary. What I am hoping for is a start on some progress to change the situation. Can either McCain or Obama make a difference? Maybe, but texasgolfer and captbob correctly point out that no president can impact significantly all by himself.
Please explain. My understanding is that it is currently around $9.5T. Congress just raised the debt limit from $9.8 to $10.6 trillion.
Bottom line, we are a debt-addicted soon to be bankrupt nation.
Having been born poor in 1931 USA, I was old enough soon after the end of WW2 to realize that without winning WW2, there is no way the USA of today could have reached it's apex of wealth and scattered that wealth about the incrementally growing populace with such ease (compared to any other nation in the world....civilized or 3rd and 4th world nations).
Btm line is that only a war of signficant length and decimation of peoples in the top five (pick a number) most prosperous nations in today or tomorrow's world of the next fifty years...give or take (purely guess on my part) will straighten out many of today's imbalances. A fresh start is needed, although it is highly questionable that the human race, cloned or not will ever learn the ultimate lesson needed to be learned...which is that there has never, ever been any free lunches since the world began with Eve providing an apple to Adam. Not for the earliest cave man, Greek or Roman empires nor the Byzentine. Belief in God or not, there is a price to be paid for everything except death, it comes for everyone sooner or later and if B.O. has his way it will be sooner and more than likely... taxed to the hilt.
2."government builds wealth" How much is government spending on infrastructure and necessary services and at what cost? How much is government spending on dubious redistribution schemes and at what cost? Paying people to not work, work very little, or be overpaid for working is more expensive than people realize. Their labor is devalued directly by taxes and then devalued indirectly when they have to compete against their own money in the marketplace.
3. Hidden Costs. I don't have time to debunk the hidden cost reductio absurdum. But what are the hidden costs of eating or sex(which leads to children,which leads to ohmygod-should sex be 1-10 on the misery index?). Of course most of the hidden cost of energy can be defeated with a hoe, some seeds, and a plot of ground. That will have to do until we develop low energy suspended animation.
Remember the bully who would push you around? At some point, he could no longer bully because a newer, tougher bully took over.
The USA (not calling us a bully), has reached its critical "mass" and is now slowly but, surely, losing its ability to perform. Aside from our massive military capability, (which we should consider using now) to protect our interests, we are no longer the "bully".
China is the new "bully". They will have greater economic strength and shortly, greater military strength eventually.
Could this disaster of the downfall of the USA been avoided? NO!
However, it could have been delayed dramatically. Remember when Nikita Kruschev while banging his shoe in the U.N.? He said, our demise would all come from within. He was correct....to the most part.
Ever since the great years of prosperity after WW Two, during the 1950's, we have been on a downward slope, starting in the early 60's. Do you remember what began? The morals and standards that made us the greatest country on this planet were beginning to be undermined and destroyed right before our very eyes.
In the 1950's, education in the USA was superior. The NYC schooling system was the best in the world. Education, discipline, family values existed. Relative to today's cost of living, the teachers were paid less than today. Becoming a teacher in NYC today will make you a millionaire. Yet, the standard of education is inferior to the rest of the world, (with few exceptions). Why?
Once civil rights, women's rights, gay rights became the cry of the minority ultra-liberal population, the majority caved in and a guilt ridden response took over. Standards were considered unfair and either reduced or dropped. Morals turned topsey turvy.
Jump ahead to today's news. Illegal immigrant kills husband and son.
It turns out he was previously arrested for other crimes in the USA.
San Francisco (the land of the sick), mayor, declared in a bill which was ratified by legislation, makes it illegal to make law enforcement agencies become aware of the Illegal Immigrant status of any captured felon. In other words, if you are an illegal immigrant in San Francisco; commit a crime; get caught....your illegal status will be protected in San Francisco.
Think about that for a moment.
Illegal immigrant/commits crime/released/illegal status ignored in San Francisco because the mayor decided to made SF a safe haven for illegals, regardless of their criminal activity.
If you are outraged by this, good. You should be.
If you defend the SF mayor, you are the problem.
This example I have provided summarizes in a few moments, the state of affairs of what was once the greatest country on this planet.
Another example. I use to teach in the largest high school in NYC.
During a meeting of teachers and principal to discuss problems and solutions for new teachers, one of the teacher's said that he had a student who wouldnt stop cursing in class. He explained how he tried everything to stop this behavior which affected his control of the class room and his ability to teach. It was obvious, to me, and to most of the other teachers in that room, that the administration needed to take over and take some strong steps to get this situation resolved. The Principal, listening to the teacher's complaint, said the following: "I have a good idea. Why don't you go to the student who curses and say to him....that if you stop cursing today, I will add one point to your grade!!!"
This is from the mouth of the principal of the largest high school in NYC!!!
If you are outraged by this, good. You should be.
If you defend the student and the principal, you are the problem.
The dumbing down of America. The loss of values, standards, morals.
This is what is responsible for the quick descent of the USA.
The USA saved Europe three times. Both world wars and causing the break up of the USSR. Western Europe hates us. Eastern Europe, no longer a slave to communism LOVES us.
It makes no difference any more. Let me tell you why.
1) National debt will destroy this country. What does the rest of the world need the USA for? If the dollar has no value, what will we provide of value? Strong military is all we have.
2)Personal debt will destroy this country. People who live their lives without ever considering how much money they will need to survive in the future, spend today as if they can print the money endlessly.
Case in point. People buying homes/taking loans they can not afford. Bad decisions which the American tax payer will be hit with.
3)Overload on Social Security/Medicare. You can forget about benefits being available down the road. The money is NOT there.
4)The cost of living will increase exponentially. The price of oil will skyrocket. Why? Peak oil is upon us. Demand is greater than supply and growing at a rate that is about to reach critical mass.
Alternative energy? This is the only possible answer.
A Manhattan Project, (name of project creating atomic bomb) to develop a hydrogen fuel, (which will be unlimited, infinite) created by the greatest scientific minds in the USA will change everything.
Oil imports will cease. We will become the richest nation on this planet by being the "owner" of the technology that will power the world's energy needs. Our debt will end. This will be the only possible solution to a crisis, that at this moment will explode over the course of the next 20 years.
Be prepared for the following:
Half the wealth of this nation will evaporate:
Costs will increase exponentially and at the same time supplies will dwindle.
The very small minority of super rich will be able to survive.
The middle class will become the greatest to suffer as the initial efforts to stem the tide of our economic collapse will be to raise taxes.
The poor will initially fair better as the democratic led government will provide for them, (out of the pockets of the middle class primarily/the ultra rich wont be affected).
The monetary system of this country will break down and total martial law/anarchy will be the law of the land.
Finally, we will use the only tool we have to create wealth. The military. Wars for natural resources will occur with China/Russia/Middle East. We will eventually capitulate and become slave labor/third world status or use the nuclear option which will be the final solution.
NOTE: Another solution would be some world wide pandemic which will wipe out 50% of the world's population.
It's really a simple mathematical observation.
If the demand on supplies by all nations (all commodities) are growing at a rate of 35% a year, the need for these supplies will double every 2 years. The formula is simple. Divide the rate of increase into 70. (35 into 70 is 2 times.) Imagine you had savings of one dollar. This year, you need 1 penny to survive. In two years, you double that and need 2 pennies. You will have 98 pennies left and feel safe. Then the two pennies becomes 4...and the 4 becomes 8. But, you still have 92 pennies left and still feel safe.
Then, the 8 becomes 16 and the 16 becomes 32 and then the 32 becomes 64. Now you only have 36 pennies left. Remember, as demand increase by 35% a year, the need doubles every two years.
So, when do you realize that you are in deep trouble? Answer? The next to last year of doubling the need. Because, the very next year you will need 128 pennies and it is not there.
Why am I showing this simple mathematical observation. Simple.
This is how oil is being used.
This is how foods are being used.
This is how water is being used.
This is how all elements/minerals we take from the earth are being used.
Unless the demand stops growing.( it wont) Unless the population stops growing. (it wont). Unless the supplies increase as fast as the demand, (and it wont). The conclusion is that there will come a time when there is not enough "stuff" for everyone. This is why China is currently buying all the oil/nickel/iron/copper... etc... mines all over the world right now.
Remember when the need for pennies reaches 50?
Then, the next time the need doubles, (35% increase of demand a year), the need will exceed the supply.
Math does not lie.
What can you do about it?
Nothing.
Even the rich will not survive. The starving will kill the rich and then kill themselves.
Not a pretty future.
There is only one way to prevent this.
Create an infinite supply of energy. (Hydrogen is the answer).
Create an infinite supply of food. (technology to create food (molecularly) in the laboratory is the answer.
Reduce population growth....or better yet, a world wide loss of half the population.
What will I do in the coming years?
Simple.
Leave the USA and move to a third world country and have the ability to grow my own foods and capture rain water.
Learn to accept the future.
Give to others as much as I can.
Die with dignity.
Hasta la vista baby!!
I own a truck load of puts, a wide of array of canned food and weapons.
I meant to say.....They will have greater economic strength and eventually, greater military strength. (I despise poor grammar).
I wrote: He was correct....to the most part. It should have read: for the most part.
Please excuse my sloppy writing. I saw Obama on tv and became upset and lost my focus. Who is this guy? Where did he come from? How did he manage to gain so much influence/political power out of no where? Who is supporting this person behind the curtains?
What has he done in his political career that is worth mentioning?
Why do people like him so much?
He is a good orator; has charisma; good looking/sharp dresser; bit of a huckster; would make a great salesman......HOWEVER&...
who is he?
He spoke to Europe and almost apologized about the USA!!
His wife clearly stated: " for the first time in my life, I am proud of my country"! So this means prior to "this time" she wasn't proud of her country?
Why when I see him on tv is he always surrounded with a greater percentage of black folk. Black folk make up 12% of this country's population and yet, he appears to always have a make up of closer to 40-50% black constituents around him. It appears that way.
Who is he?
What does he stand for?
In this day and age with the war with radical Muslim, why would the voters even consider anyone with the slightest ties to Muslim?
Borak Hussein Obama. From a broken family. Street organizer.
Educated in Indonesia, hotbed of Muslim radicals.
Who is he?
Where did he come from?
What does he really want for America?
I'm not saying that McCain is any great shakes. Seems like a good guy. Like that he stayed behind in the prison to be with his comrades. Seems to truly be a patriot and lover of this country. (this alone makes him the better choice).
However, I wish that one of his advisors would have him whiten his teeth.
I wish they would instruct the Mrs. on how to dress appropriately and to show some human qualities.
Who is Obama? What does he really want?
No one knows. Yet, he is loved by Western Europe. Why?
Will it make a big difference in the end?
I doubt it.
We are doomed.
By the way, there is a way of turning urine into commercial grade fuel. You would never have to worry about a fill up or where to find a bathroom when you are on the road and need to pee.
There is NOT enough petroleum in the ground to maintain the energy demand of this planet. With countries like China/India and other developing nations, all seeking their piece of the pie economics, the demand will increase exponentially. Understand some basic stuff. The USA with 4% of the world's population requiring 25% of the world's energy resources, what do you think will occur when Chinindia combined will require and or use 3X that amount of energy to develop themselves. Basic common sense suggests...no...DEMAND... there is NOT enough energy to go around. So, what will occur is simple. Prices of oil will rise. Economic wars will be fought. Life on this planet will deteriorate because there simply is NOT enough of the stuff we need to survive. Mainly, water, food, oil.
Population growth coupled with newly developing manufacturing centers will create a demand which mathematically will double every two years.
If there is not enough food in the food market where you shop, can't you see what will happen?
Stop worrying. You can not find places to invest your money. You can not protect yourself from the future.
This is the final countdown. Accept it.
There are only several possible alternatives that exist which will save mankind.
1) War or disease which will kill off half the world's population.
2) Creating hydrogen fuel which is unlimited and infinite.
3) Developing molecular science to be able to create food from "nothing".
There is not enough land to produce enough food to feed this planet if this planet continues to grow in population. There is not enough water to provide for the inhabitants of this planet if it continues to grow in population.
Accept reality.
Once starvation, thirst and energy needs are met, mankind will be able to direct its energies towards other goals.
This is the ONLY solution. There is NO other solution.
The caveat is that this solution is met BEFORE the mass extinction of the human race. When the stockpile of necessary requirements for life are non-sustainable, (food,water,energy), famine, pestilence, war and ultimately man's demise.
Electing Obama just hastens the process a little bit.
In fact this "lifestyle" has only been in existence for about 60 years; for an equal time before that, the nation was more evenly divided between rapidly growing, highly dense urban settlement and rural agrarianism. The notion of choosing to live 5 or 25 miles away from one's job would have seemed insane. You either lived on your farm or ranch and worked there or lived in a rowhouse or apartment in a city and walked (or, perhaps for a few, took a streetcar) to work no more than a few miles away. If you needed to travel - and you had to need to, for it was not cheap - you took a train.
Even if we suppose that plough animals were diesel tractors and local horse drayage trucks, the oil-intensity of that pattern of living is insignificant. And that time happened to coincide with a dramatic expansion in American wealth and power. Clearly it would be no great loss to redirect some of our resources away from "our way of life" today toward more productive purposes and alter our living patterns to more closely approximate those prevalent from 1840-1910.
The real threat is not expensive oil. America has the proven ability to survive, grow, and prosper without any oil at all. Intelligent use of small amounts of oil could add great marginal improvements to our quality of life, but the wasteful usage patterns in place today actually degrade society and distort land use while raising the cost of living for all. It would not hurt America en toto to abandon this foolishness. Those who are mentally incapable of coping with the destruction of suburbia as a way of life will be pushed to the margins of society by their own poverty if forced to bear its true cost and in time the value system behind it will be mercifully extinguished from the national character.
If instead we suppose that "our way of life" means freedom from tyranny, individual opportunity for achievement, economic strength, and belief in the free market system, the greatest danger is debt. Public debt, private debt. And not only the debt itself, crushing though it is - the greater danger still is the ethos behind the accumulation of that debt. Debt comes in two main flavours: that which is taken on with a sound plan for investing the proceeds in a productive enterprise, and that which is taken on so that one might enjoy today what he hopes he might afford tomorrow. The key distinction is whether the proceeds of the debt will be used toward some productive goal. Not every such borrower will succeed, of course, but their reasoning is sound: if I borrow now, I can repay with the productive capacity I build /with what I borrowed/ and have profits left over. This type of borrowing is healthy; it is a force for growth and expansion. The other kind is destructive, and it is this second kind that occupies most of the Treasury's, banks', and individuals' balance sheets. It is debt borne of greed and profligacy. One who borrows to buy nonproductive assets or to squeeze just a little more out of some paper investment is not investing the money he borrows; he is speculating and hoping. The public debt was not, by and large, incurred to build infrastructure or protect the nation from invaders. It is primarily the product of giveaways and handouts, promises and pandering. We did not buy dams or bridges or railroads or oil wells with that money. We did not do scientific research or provide education with it. Instead, we bought our own votes for the politicians who borrowed abroad on our behalf and offered to give some of it to a few of us or to use it to espouse some bit of ideology a vocal few of us found attractive.
It is hard to imagine a more harmful kind of debt than the one just described, but it does get worse. Individuals in America have taken on crushing levels of debt as well, and for no better purposes. The evils of consumerism have been well-covered by others and I do not feel the need to discuss them in detail here. Suffice it to say that "owning" a nonproductive asset worth many times one's prospective income while borrowing heavily at punitive interest rates to finance the purchase of inessential and nonproductive baubles and status symbols such as cars, televisions, furniture, knickknacks, and kitchen remodels is the height of stupidity.
In the end, debtors have three main choices: they can increase their productivity and decrease consumption to pay down the debt, they can repudiate it, or they can hope that their income will rise more quickly than the rate of interest they are paying. There is no reason to believe Americans are considering the first of these; public and private debt levels continue to rise despite the so-called credit crunch, so we will not consider this further. Repudiation is in vogue with individuals and will surely remain so for some time as bankruptcy filings continue to rise. We've even coined a clever phrase for repudiating housing debt: jingle mail. But repudiation of public debt has broad geopolitical and even military consequences, especially when your debt forms most of the world's reserves. We will have to assume that the Treasury does not intend outright default or repudiation of its debt, especially while most of America's depleted armed forces are occupied with foreign quagmires. That leaves the last option - one that would appear to consist of little more than crossing one's fingers and hoping for better conditions tomorrow. Indeed, there is plenty of evidence of this behaviour among American politicians. But when you control the currency in which you have borrowed, you can do better than just crossing your fingers. You can devalue and debase that currency, raising your nominal tax take while your debt load - absent new borrowing, of course - remains constant. Consider the tax consequences of holding TIPS, the instruments the government would prefer you use to hedge against the rising prices caused by currency debasement. Even though the real value of TIPS is intended to remain constant and the only real profit you are offered is the coupon, you are obligated to pay income tax on the increase in the bond's value due to price rises! Imagine that - the government created tax revenue out of nothing! But TIPS at least cost the government something; what of other assets? We see the same everywhere; if the cost of a gallon of milk or gasoline rises 10%, so do sales tax revenues. If workers receive 5% cost of living increases, income tax revenues rise - probably by more than 5% - even though the workers are receiving no more real income than they were before. Many writers have discussed the virtues of inflation to destroy debt at the cost of savers, but in fact inflation is even more insidious; by controlling the level of inflation the government can effectively raise or lower its own tax revenues as a percentage of real GDP without changing one line of the tax code. The losers, as always, are workers and savers - as well as bondholders. The winners? The politicians - remember, they've already received the benefit of the money you borrowed: your vote. You in all likelihood got nothing; at best you got a handout worth a few percent of the money you'll pay over your lifetime in interest and lost purchasing power. But what do you care? You're busy looking the wrong way, whining about the price of oil instead of adapting to it. And demanding, of course, that the government "do something" about it. You'll get your wish.
The national debt figure of $9.5Trillion includes the treasury notes held in the so-called Social Security Trust Fund. I have included these in the unfunded liability figure since they represent Social Security taxes spent for other purposes.
Computerad - - -
I have strong opinions on U.S. domestic energy production being the solution. I deliberately chose not to develop those ideas in the article to see what dialogue could be developed in the comments. I have achieved that objective and then some.
I am investing significantly in new energy technologies. Right now these are specifically battery technolgy, wind turbine producers and solar. As in the dot com bubble, I believe there will be a large number of new companies that do not make it. However, there will be some that become as successful as Microsoft, Oracle, Intel, etc. If I find one or two of them along the way, it will more than make up for the misses.
I also agree with some of the comments about the misappropriation of our taxes. It is well and good for the social welfare of the people to be attended, but not at the expense of education, infrastructure and incentivization of entreprenurial effort. Unfortunately, we have developed a system which provides welfare for the poor and welfare for the rich and powerful, but does not sufficiently encourage dramatic new direction. Some commenters have mentioned things like the need for an effort like the Manhattan Project (developed the atomic bomb) and the man on the moon decade. I have mentioned an all out effort such as in WW II. My opinion - something like these efforts is what it will take to turn this situation around.
Several comments have been made about one or the other nominee as the next president. I do have a preference but I am not pinning my hopes for proper direction only on my choice. I hope that whoever is elected in November will step up and face this problem. The economic crisis that the energy problem presents must be clearly laid before the American people. Only when the public understands the true magnitude of this problem can the political will of America be focused on enabling solutions.
Economy..a ticking time bomb....tick.!...tick!
"Derivatives massively leverage the debt in an economy, making it ever more difficult for the underlying real economy to service its debt obligations and curtailing real economic activity, which can cause a recession or even depression". Is the view of Marriner S. Eccles, U.S. Federal Reserve Chairman from November, 1934 to February, 1948, too high a level of debt was one of the primary causes of the 1920s-30s Great Depression
My concern is about about all the talk on derivatives, and watch the destruction of the dollar, the sub-prime loans etc, etc....The main types of derivatives are futures, forwards, options, and swaps. (OTC) derivatives are contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. Products such as swaps, forward rate agreements, and exotic options are almost always traded in this way. The OTC derivatives market is huge. According to the BIS (Bank for International Settlements), the total outstanding notional amount is USD 516 trillion (as of June 2007)
According to the BIS the total derivative market in 2002 was $100 trillion dollars. Warren Buffet thought then that. that could be a problem because he had just acquired Gen Re Insurance company that had some derivatives and he wanted to sell them...Well, he couldn't find takers....He termed derivate as “financial weapons of mass destruction”. I think he was thinking that if the LTCH (Long Term Capital Management hedge fund )which had just gone " belly-up" with losses of $5 billion and nearly brought down the US financial system. So, he had to be thinking "what would happen if the $100 billion derivatives had such a problem". Fast forward to 2007 and the derivatives had changed to (according to BIS)...These amounts are hard (for me)to imagine...'cause we're talking “big bucks here” We not talking money in terms of main street every day shopping, but more in terms of petrol-dollars IOU's, etc., which fluctuates in value by the second. Never the less, to put it into context, so that a small time “investor” like me can "try" to get a handle on it, here are a few comparative monetary numbers to use "as economic land marks"....Take a peek!:
USA, GDP (annual gross domestic product)....$15 trillion
USA money supply................... trillion
USA Federal Budget (2007)................... trillion
USA Maximum "legal" debt..................... trillion
World GDP (all nations 2007)................$... trillion
Unfunded SSI (socials security) and Medicare.$60 trillion ****Uh...Oh, what's that?!
Total world real estate value...............$7... trillion
Total value of stocks and bonds..............$10... trillion
Total value of world's derivatives(BIS 07)...$516 trillion
Total war exp. Afghanistan $200 + Iraq $850...$1.05 trillion
Getting the picture?...not pretty!
Note:The BIS notes that the $516 trillion is “notional value” which really means the melt- down-value, or a complete wipe-out of the world derivate market, they also state that "only" $11 trillion was the nominal financial risk in 2007....Oh...geees!..n... I feel better!
Some of us, think that the FED. (U. S. Fed. Reserve) is a US Government organization who's function is to protect the nations economy. The term "Federal Reserve"
(I think) prefixed with U.S. leads us astray. In reality the Federal Reserve is a private, not public institution, representing the interests of the US banks through its 12 regional branches. Therefore, the nature of the Fed is that it is a banking system insider. The Fed's first and foremost defends the banking system and "only" secondarily represents broad economic interests as mandated by the US Congress. These two objectives are not necessarily always in harmony with each other, because the bankers can bring "heavy" pressure by lobbying and with reelection donations. For example, the most profitable cycle for the banks started during the 2001 recession as a result of the Fed’s super loose monetary policy eventually leading to today’s disaster in the housing market.
Today, we are in the midst of "a worldwide financial system crisis". That is why, even more so than before, the greatest priority for the Fed is an immediate rescue of the banking sector. The most pressing need for the Fed now is to "buy more time," which is desperately needed by the banks in order to continue their de-levereging process. To date, this de-levereging process has been happening way too slowly and with huge losses for the banks. In April/May, many banks recapitalized their balance sheets by writing off bad loans and issuing long term noncumulative preferred stock (at 7.75% – 8.50%..but not available to "average" stockholders..(actuall... doing them a favor)..Hmmmm?) to bolster their cash positions and support their diminishing lending ability.
My concern is that this entire unregulated market "only needs a small jolt" to set off a unstoppable global domino type collapse, similar to Bear Sterns fiasco, which almost sent us into the abyss. Bill Gross (US. bond guru) has said “what we are witnessing is essentially the breakdown of our modern day banking systematically, these (derivatives)are not just risk management tools, they are a new way to make money...outside, the normal Central Bank's liquidity rules. It's “a shadow banking system”...How?...becau... they are private contracts (promises to pay) between two (or more) institutions”.....AND,... this!.... A complex of leveraged lending, so hard to understand that the Fed. Reserve Chairman Ben Bernanke required a "refresher course" from a hedge fund manager in mid August (2007) trying to understand them. In short, Warren Buffet, Bill Gross and Treasury Sec. Henry Paulson and Ben Bernanke couldn't figure out what's going on in the derivative market or world markets.
My take on this ('an, I'm not an economist...Thank heavens!) is: that the world economic system is out of control and the World Central Banks are looking at each other wondering "who's going to blink first". We, ....as in "us"...you and me...are on our own, we can't relay and wait for things to get better we have “self-protect” as best we know how, for our families. Ben Bernacke (who is the designated fall guy)has been handed "a hot potatoe" and now, plain a simple, doesn't know what to do. So, he's doing the only thing he can do, keep his fingers crossed, jaw-bone the public into thinking that he's in charge. But, there's no-way we can clear away $615 trillion of derivatives without a complete rearrangement of the world's finances. Even the $11 trillion is too big of a nut to crack. "If"....or I should say "when" the general public lose faith in "fiat" currencies (such as the US dollar, Euro, etc... which is happening) they...(and we) will panic and push gold, silver, and "hard" assets into the stratosphere. And, economic order will only be reestablished after we learn that those hard assets are "not" the answer. Can you imagine having a lot of gold/silver when no one else has any and trying to buy bread, milk etc. ....??.
Solutions? The economic philosophy has to change, "paper pushers" who do not produce anything should not get special tax breaks like hedge fund managers who only pay 15% on trading income this includes investors like me. On shore "producers would have to be encouraged and off shore co. who now pay zipp in taxes such as GE would have to pay a minimum amount. Savings have to be encouraged instead of discouraged, real estate "house flipping" discouraged. Houses are places for people to live in not trading not speculating. Gas conservation by increasing the minimum mileage and "flex" vehicles,done NOW..not 20 years from now and be able to run on gas or ethanol. Finally the currency will have to be tied to something of value...silver/oil /etc as a means to try and keep the governmental kleptomaniacs from causing more inflation. Keep the faith!
gato.
attackers.
US Energy independence is an election rhetoric. Do you really think you can rid the US of $10 million barrels of oil a day? It would take many decades for that to happen. You would need about 1000 nuclear plants built and every car to switch to electric or some other renewable type of fuel. Completely improbable.
Yes, we must all pay off the debts, some. Start with Iraq, use that money to fund peaceful initiatives. Ask the super rich to pay a little more tax for a little while.
We may, unfortunately, find we need a "dictator" to provide solutions. The system we have known for all these years is now in decline. There will be short periods when the US appears to become stronger, but the wheel of civilizaton has turned...and the US is no longer on top.
youtube.com/watch?v=9Z...
seekingalpha.com/artic...
Worst case scenario is probably another $1 to $1.5 trillion, corresponding to defaults on 20% to 30% of home mortgages.
Any ideas about the US & global banking sector reserves to absorb the US mortgage failure? Tier I perhaps?
I agree that we are facing a crisis. Many people have commented on family values, and how things started getting bad in the 1960s. Few have tied this to one of the most pervasive and corrupting influence in our culture, mass media! Al Gore and Ex president Jimmy Carter were right in claiming that mass media now controls all our political energy and directs our votes. I claim that the single-most corrupting influence in our society is the “Mass Media Corporate Kleptocracy”. Media has produced an image of american life that we have blindly followed, and that tells us we deserve to use most of the world’s resources for our own gratification. These are not the morals that our country was built on!
Solutions? I have a few broad ones.
1.) We are not number 1! We must humble ourselves and our culture to work with the rest of the world on solutions. Our first effort must be conservation! A cultural revolution is needed for us to learn to live lightly on the earth, and this must be done in direct opposition to the corporate kleptocracies. Corporations and governments are ultimately powered by the people, and if the populace is unified they can rein in these excesses. THAT is what many northern European socialist populations are doing now! That is why Sweden has one of the best “standards of living”. We can do this in a controlled and deliberately american manner, or a painful and bloody manner like France and ancient Rome.
2.) We have to wean ourselves from non-renewable energy sources first. This will include intermediate steps of nuclear fission and possibly fusion. (Hydrogen is not the panacea for energy, because we use coal/natural gas/petro-chemicals to create hydrogen now. The only long-term hydrogen solution would start with solar voltaic production of hydrogen to use as “portable energy”.) Ultimately all renewable energies depend on the sun, so we need to focus research on solar power generation and the efficient storage and transport of such power.
3.) We have to take control of the population increase. All projections show an increase of population driving increased “whatever-it-is”. We don’t need a pandemic to do this. China has shown one way to slow the population. Most developed nations have a much lower population growth than developing nations. Education and social safety nets reduce the cultural need for a growing population, and these need to be spread to all cultures.
4.) Don’t isolate yourself or hide, but get involved in making things better! Burying money, stockpiling food, massing weapons and other forms of individual survival are not a solution because we no longer have a “wild west frontier”. Any post-apocalypse future will be survived by small communities who work together and not by isolated individual fortresses. So, change your lifestyle to cozy community living on low energy dependence. Invest in solar power for your home (starting with solar water and heat, which is presently more cost effective than solar-voltaic). Buy a bicycle for your commute (manual or electric assist). Take charge of your 401k plans and investments, and help shareholder propositions that push for greener business practices and that limit CEO power and excess! Invest time and money in a local community garden. Learn to cook using local ingredients. Start a social group with your friends for food, entertainment, and discussion instead of spending evenings lobotomized by the TV! Be an active part of your own family; instilling family values by working with kids, their teachers, and limiting the corruption of children by “the media”. Most importantly, connect with youth through your career or by volunteering. As the next generation takes control of our society; they need our humility in admitting that mistakes were made, our experience in how not to repeat those mistakes, and our support in working with their solutions.
Heyswyndon,
Daddy, High-school teacher, and electrical engineer.
"We may, unfortunately, find we need a 'dictator' to provide solutions."
Heyswyndon concurs:
"We must humble ourselves... buy a bicycle..."
There is no way to answer these inanities or Lounsbury's maximum sacrifice of WWII, except by parody, although Sinclair Lewis was dead serious when he wrote It Can't Happen Here. And so, I'll say it straight. You have all been bullied into a folly. The one and only problem we face is strangulation by government, and here you all are begging for more of the same.
There is no energy crisis. I'm better informed than most about the oil and gas business. Peak oil is real. And 3/4 of current production is in the hands of fascist, tribal dictatorships (governments). But it's only a commodity. The one best thing you can do as an American and citizen of the world is make money, compete aggressively with your neighbor, and roll back the power of government. At minimum, that means ending the war, ending foreign aid, ending subsidies and loan guarantees. To make real progress for the sake of our children, we need to phase out Social Security and Medicare altogether.
Too tough? Too scary? Well, too bad. If you lack the courage to advocate American liberty, then American Fascism you will get, all red white and blue with brass buttons and ration cards.
I know! It must be time to start buying equities.
Based upon the current inflation rate, even if I am able to get a reliable 8% return on my money, the principal will NOT survive me.
Investing in the stock market via individual stocks or mutual funds (70-100%), will create the best mathematical probability of my money surviving me. (approximately 40-70% probability based upon today's rate of inflation).
Since I require a steady flow of income, I am forced to invest in fixed income products which will provide $50,000/year, which will raise annually based upon a 5% inflation rate. So, in year two I will require $52,500 and so on.
Assuming I invest $550,000 at 7% which will yield $38,500, (fixed), that would leave me $450,000 to invest in (?) which I need to produce minimum 10% return a year.
If total inflation, (including oil/food) goes below 5%, I will be guaranteed to survive. If I can not receive 8% total return a year, my money will run out before 30 years or sooner.
I want to invest 25% of the $450,00 in oil so that when the price of oil goes up, so will the investment. I want to invest 25% in alternative energy sources, (wind/solar/electric/n...
I want to invest 25% in emerging economies (China, India, Southeast Asia, Brazil).
Of the remaining money, I want to invest half in pharmaceutical companies/nursing homes/health related companies.
The final 25% to be divided equally in commodities and mutual funds.
Do you find fault with this plan?
If so, what is your suggestion to improve it?
Thanks.
(1) Committing 55% of investments to fixed vehicles for 30-40 years is taking a bigger risk with future inflation exposure and dollar devaluation than may be appropriate.
(2) Finding fixed investments that pay 7% return in today's market is very difficult. Averaging over the past 20, 30 and 40 years it has not been possible to get an average return of 7% with fixed vehicles. Investments that have 7% (and higher) payouts do not have fixed principal or have a significant risk of default, the extreme case of principal not being fixed.
(3) Your allocations appear to be very much focussed on today's economy. You do not mention sectors such as financials, homebuilders, REITs etc. Just fine for 2008. Maybe not fine in 2009 or 2010 or sometime later. You should not put an asset allocation plan on autopilot. The economy is cyclical and your investment plan should recognize that. At least annually the entire plan and asset classes included should be reviewed.
(4) I agree with Alan van Altendorf. Commodities can have a high volatility and the allocation to commodities should be reviewed frequently. One possible strategy is to have a lower level committed for longer terms and "trade" an additional amount quarterly, semiannually or annually based on trends. I feel 12% of your entire portfolio invested in a single commodity (oil in your case) is too high. I would recommend current conditions would warrant total for all commodities under 10%. We've had a several year run in commodities and I believe that the risk of relatively poorer performance in the next 1-2 years has increased. Longer term, commodities should resume (or continue) an uptrend. If that does not happen it will be because of serious economic slowdown and deflationary pressures around the world. In that case your inflation estimate will be way too high. Summary: in the near term (1-2 years) be cautious with commodities but do not abandon them.
(5) The emerging economies you mention should be included in your plan. I would recommend a dollar cost averaging process for making the investments over the next 12-24 months. You could include some individual stocks, but definitely should use ETFs. If the deflationary cycle that some are predicting comes to pass, extend the time over which investments are made. Depending on how the next 1-2 years go, you might go above a 12% allocation to emerging markets, going possibly as high as 20% within 2-3 years.
(6) I am gradually increasing my own investment in alternative energy technology. I believe that the economic salvation of the U.S. requires rapid growth in this area. I keep trying to find individual companies with good management and prospects, but I'm also using several ETFs as well. I agree you should have an allocation to this area, but 12% of your entire portfolio is higher than I would recommend. Perhaps 6-8% now, possibly increasing to 12% when energy policy is more clear (1-2 years) and higher to 15-20% in 2-5 years.
(7) My father, who had a Ph.D. in economics, told me that he knew the secret to financial security. "Never have a year in which you spend more money than you make." However clever your investment plan, there is an increase in the probabilty of outliving your money the higher your fixed expenses are. The probability of long term financial success for your plan will improve if your fixed living expenses are low. That way, when there is a bad year (or string of years) for investments you simply adjust your discretionary expenses accordingly.
(7) To be successful, you should systematically devote significant time to managing your investments and regularly reviewing your plan and plan assumptions. For those that can not (or do not wish to) do this, find a competent fee based (or fee only) financial planner/investment manager.