Big Deficits, Big Problems: Considering the State of the U.S. Economy

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Includes: AGG, DIA, SPY
by: Roger Nusbaum

"And if I claim to be a wise man, it surely means that I don't know."

That is a lyric from the 1976 Kansas hit "Carry On Wayward Son" (the word "My" is not in the title, which I did not know until I looked on Wikipedia). I have this song on my iPod, it is a great workout song (who knew?) and seems to often come on at the most difficult point of my workout; the last 5:30 on the StairMaster.

Anywhoo, that one line strikes me as being especially poignant. While I am not sure that I claim much wisdom, there is plenty I don't know but one thing I've started to think about more lately is the serious pickle the country is facing.

The chart at right (click to enlarge) comes via John Mauldin and tells an important part of the story. While the spread will probably narrow in the next couple of years, it is not realistic with what we know today to expect it to revert to any sort of mean.

I am thinking more about the magnitude of the deficits, how much debt needs to be purchased in the future, the percent of revenue that could need to go to interest payments and the $53 trillion (or whatever number you care to insert) entitlement problem and I do not know what the answer is.

To repeat... think about the magnitude of the numbers.

One thing that will happen is that some amount of growth at some point will make the problematic numbers a little smaller. This always happens, but whatever the magnitude of the effect is it cannot solve the problem, not even close.

As a country we lack political will, and as citizens collectively we lack the will to make truly difficult and painful decisions. We lack political will because politicians who vote for truly difficult things will lose their next elections. As far as citizens go, try telling someone who relies on Social Security that their check needs to be cut by 2/3.

This week, Mauldin wrote a lot about the book "This Time Is Different" by Reinhart and Rogoff. In studying just about every crisis in history it is amazing the extent to which past crises had so many things in common with each other and how similar this one has been. The other ones tended to end very badly.

My focus in this regard is not to be the one to come up with a solution to the problem, and as noted above I really don't know the answer, but instead to focus on what is in our control. We can control our own savings rates, our own balance sheets, how long we work (not universally true) and what we do with our savings.