I.O.U.S.A.: Documentary Worth a Peek 9 comments
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Pete Peterson, the former Treasure Secretary and co-founder of The Blackstone Group, has donated $1 Billion of his IPO receipts to a fund devoted to trying to save America from drowning itself in debt- a sort of super-Common-Cause (of which he was also a co-founder). One project of the fund is a traveling road show of “Town Meetings” on the subject of America’s apparent desire for financial self destruction. Another is the recently released feature documentary on the subject called I.O.U.S.A. which has a lot of Town Meeting footage and which I just saw today.
The film has slick production values. Even though it’s half hour’s worth of content is shoe-horned into a 1 hour and 25 minute film I’d still encourage anyone to see it, especially investors, because the problems it highlights truly are scary and we all should focus more on them as investors and just plain citizens. It specifically suggests that the U.S. is now on the brink of meeting the same fates as the Roman and British empires partly because of fiscal irresponsibility.
The hard content features an historical review of how our national debt became engorged going back to the Founding Fathers. It notes our generally consistent practice of promoting savings and repaying national debts that were required by military crises, once the crisis is resolved - until recent times. It pounds on the foolish idea of Ronald Reagan (abetted by the now discredited “Laffer Curve”) and particularly Bush 43 that lowering tax rates would actually raise government revenues. (Fact: it reduces government revenues as common sense tells us it would.) The film gives what seemed to me to be grudging credit to the fine work of the Clinton administration in balancing the budgets and creating surpluses. All of that information is presented is as non-partisan a fashion as the facts could possibly permit.
I found two aspects of the film particularly noteworthy. First, it highlights the role of unfunded off-balance-sheet liabilities as key to the U.S. debt problem. On a near-term basis, social security surpluses have been offsetting budget imbalances to a major degree during the past 25 years. But social security is starting to provide less cushion every year and will cross over to cash flow negative in 2015, just seven years from now. When the even larger looming problems of Medicare and Medicaid are added the projected national deficit and debt, the numbers begin to look truly horrific.
The second astounding part of the film - to me - is its lack of virtually any reference to oil as a problem, other than in general terms as contributing toward the trade deficit. But there is no mention of the impending Peak Oil problem. The fact that at the same time that Social Security turns cash flow negative in 2015 the country will also be fighting the gigantic problems caused by Peak Oil (which looks to be here sometime in the 2010 - 2012 time frame) is perhaps too much reality even for this film to contemplate. Or maybe Peterson does not understand Peak Oil. But for those of us who are focused on the impact of Peak Oil, the meaning of Peterson’s film is even more trenchant.
The film makes a stab at trying to impress the audience with the danger of massive debt owed to foreign countries, but it could have done a better job, I thought. The key to that concept is that a county’s currency value is a function of both trade and financial flows. That is, when a country begins to run a trade deficit, the consequent reduced value of its currency tends to correct trade imbalance by making its goods more affordable to foreigners and making foreign goods less affordable to be imported.
But when a country runs massive trade deficits for many years, as the U.S. has been doing, a large amount of currency in the hands of foreign governments can stop the trade deficit re-balancing from righting the currency value because foreign holders of the currency may lose confidence and begin to reject increased levels or even current levels of ownership of the currency. That creates more sellers of the currency among government and financial institutions that can more than offset a better trade balance among buyers and sellers of real goods.
In fact, this is exactly what seems to have been happening to the U.S. dollar recently. We are starting to see a reversal of the trade imbalance as more goods are starting to be made in the U.S. and fewer goods imported, due to the fallen value of the dollar (and the high price of oil which makes transporting goods more expensive). Nonetheless, there are so many dollars in the hands of the Chinese, Japanese and oil exporters that those countries may continue to sell dollars, driving down the currency, even as the actual supply and demand for products begins to favor U.S. domestic producers. Thus, financial flows can overwhelm trade flows to distort the value of a currency far in excess of what “purchasing power parity” would suggest is the “right” level.
The problem of too many dollars in foreign hands is exacerbated greatly by the high price of oil given America’s need to import about 14 million barrels of the stuff every single day. In fact, oil could cause a vicious cycle of selling the U.S. dollar to occur. That would happen if the price of oil goes higher and keeps growing. At some point there will be so many dollars held by oil exporting countries that some of them may try to lower their dollar exposure regardless of the value of the dollar. That would tend to drive the dollar lower, which would raise the price of oil (which is denominated in dollars), thus putting even more dollars in foreign hands and thus creating even more desire on the part of foreigners to sell their dollars…which would lower the value of the dollar further and increase the dollar value of oil further, etc., etc.
Bottom line for an oil investor: the perilous condition of U.S. fiscal imbalances is likely to push the value of oil in dollar terms higher over time, which tends to generate stagflation in the U.S. As it does so, the risks to owners of U.S. stocks as an asset class become greater. Eventually, with a high enough price of oil, a general stock market crash seems likely. We are already seeing a tendency for stocks to rise or fall in inverse relationship to the movement in the price of oil.
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This article has 9 comments:
Government spending, as a percent of GDP, is now TWICE what it was when JFK was president (according to numbers from the Fed St Louis). This means government spending has grown twice as fast as the economy as a whole.... Tax rates are not the problem.
I agree the Laffer curve was absurd, but the bigger question of whether lower taxes creates more/less revenue was never answered -- its just most Americans have too short an attention span. Lower tax rates are almost always associated with higher economic growth. Over a long period of time a low tax rate on a big economy (from higher growth) can very easily be larger than a high tax rate on a smaller economy. Low tax rates helped JFK, Reagan and Bush 43. High tax rates hurt LBJ, Carter, Bush 41. Low tax rates helped Ireland, while high tax rates hurt France and all the banana republics -- its not just a U.S. question. Reagan, like all the Presidents in recent times, spent like a drunken sailor -- so the lower tax rates were temporary (effectively unwound in his second term with lower deductions, and formally unwound by Bush 41). We never got to see the long term effects of lower tax rates. All the evidence you cite is what happens when spending is out of control.
I challenge you to prove that higher tax rates generate more revenue over the **long term**. Higher tax rates arguably generate more revenue **short term**, but the slower economic growth clearly negates any advantage over a longer term. And you would have to keep spending constant (at least as a percentage of GDP) in order to draw any meaningful conclusion.
Its absurd for you to ask people to think about Peak Oil (a long term issue) and then have such a short attention span on fiscal policy.
if an individual continued to borrow to pay for his escalating costly lifestyle, could not get endless loans, could not tax his family, could not print counterfeit currency, would such person end up bankrupt??? the things he bought with values[loans/taxes?] he possessed matter little. in the end, same result.
the nation[many similar individuals on a constant consumptive spending binge] is destined for the same bankrupt ending.
the end can be delayed due to unlimited taxing authority and unlimited printing of decreasing valued currency.
the questions are--
1-when do the "taxed" and the "acceptors[creditors] of the bogus currency say "no mas"-revolt?
2- does the potential bankruptee enter a ten step program with cuccess before item 1 occurs?
as ralph edwards [for those with enough years to remember] would say--
THIS IS YOUR LIFE!
yes it is mr/ms america
Finally, Milton Friedman pointed out that tax rates were not the correct measure of the burden of government - the total amount of government spending represents the burden, and it doesn't matter whether the spending is financed by taxes or debt. To keep the ship from sinking, the US has to reduce government spending as a percentage of GDP, period. That means that Social Security and Medicare/Medicaid cannot be taken as givens - we simply cannot afford these blank-check programs anymore.
Let's make a deal,you be right next 100 years I will cash my chips on Nat Gas with 10000-15000$ profit.
Good luck long term investors and thinkers,see you in heaven or hell.
My point was: whatever your view on tax rates, government spending has been growing way too fast... roughly twice as fast as the economy as a whole (measured by GDP). The effect of that absurd spending completely overwhelms a discussion of tax rates -- so I have to disagree with the author's "conclusion" that lower tax rates do not increase tax revenue. If lower tax rates promote faster economic growth, than over the **long term** they might very well result in higher over all tax receipts.
This is all somewhat of a moot discussion though-- unless spending is curtailed as a percent of GDP it won't make any difference.
I think its too late to save Social Security/Medicare. The amount of adjustment necessary is too great to absorb in the 7-8 years before they go cash flow negative. If we were going to save these programs, the adjustment needed to be spread over a longer period of time (and give people time to increase savings). Its too late now.
While I agree with you in principle that some spending should be reallocated -- the facts remain that government spending has grown twice as fast as the economy (and this doesnt count off balance sheet spending like Fannie Mae and all the turnpike authorities). Even if 100% of it was spent on infrastructure and helping the less fortunate -- it would still be terrible fiscal policy.
Comedians loved to poke fun at Enron's accounting-- but off balance sheet financing vehicles were invented by government accountants: The NY State Turnpike Authority was created to circumvent voter imposed debt limits. Government was committing accounting fraud long before Ken Lay or Bush 43 came on the scene
In the fifties and sixties some 2/3 of non-entitlement spending went for building and repairing the infrastructure and caring for americans who could not care for themselves. Today, however, 2/3 of non-entitlement spending goes down the drain fighting losing wars, propping up petty dictators, rescuing investment houses which made very stupid bets, and harassing and spying on american citizens in the name of "security". Meanwhile the infrastructure is crumbling. We have become obsessed with money for its own sake, completely losing track of the fact that money is only paper and has no value at all, and we are either ignoring or systematically destroying all the things that do have real value, such as doing quality work for other people, doing service for other people, manufacturing beautiful and useful products, and so forth ...
A few movies and diatribes notwithstanding, the personal and governmental debt situation in the USA has already passed the crisis stage and is now guaranteed to bring down the government, its only a matter of time, and not even a lot of that ... some real pain is coming down the tracks, and a few people are going to be spanked ...