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This is a very good article from Big Government (of course most of them are so if you don’t subscribe to Big Government you certainly should). I am posting this one in it’s entirety (with my comments natch!) because it is a good reminder of where we are now, how we got here and our possible future. That future is very very close to happening. All it will take is China and the other lenders, or I should say “supporters of America’s outrageous spending, to stop buying our Treasury Notes. China is the biggest and all they have to say is “No more!”. I haven’t read anywhere that they have done so as yet, but I have read hints and rumors that the China is very upset with our out of control government spending.
I am sure most of you have seen the latest Americans for Prosperity ad showing a Chinese teacher telling his students that Americans now work for them. This is so true! I believe it is impossible to buy anything that isn’t made in China. I have always bought American when I could get what I wanted and the quality I wanted. I was willing to pay more for the product, but it has become next to impossible to find the Made in America label. So the ad certainly is correct because we are working for them now.
The following article reminds us again why we are a House of Cards, or soon will be. BB
House of Cards: – “a speculative scheme that depends on unstable factors that the planner cannot control,” (WordNet – Princeton University). While we don’t believe America has, by any stretch of the imagination, yet become a house of cards, we do strongly believe the federal government and state and local governments have been, for a long time, pursuing policies that fit that definition to a tee. And, according to last week’s Rasmussen Poll, two thirds of Americans described as likely voters sense that something is very wrong and, what is worse, could, if triggered by any surprise world event, spin out of control.
They are very worried about the course we are on, and, we believe, with good reason. Notwithstanding President Obama’s lament last week that the public has become disenchanted with the Administration and the Democratic Congress because “we’re hard-wired not to always think clearly when we’re scared,” we believe the people are thinking quite clearly because they know there is really something about which to be scared. ( Americans are too stupid to understand all that The One has done for them! That’s why they voted for all those Republicans and not because Americans actually do understand very well what Obama and the Democrats have done to our nation. He still doesn’t get it. He isn’t faking and neither is he in denial because to be in denial a person really does see the truth but is trying not to. Obama actually believes what he is saying and that he has given Americans so much good and they just don’t understand and appreciate his efforts . BB)
We don’t want to dismiss all that is positive about our economy. As Fed Chairman Bernanke testified before the U.S. House Committee on the Budget on June 9. “Our economy is large, diversified, and flexible; our financial markets are deep and liquid;” and, as Bernanke correctly points out, in the midst of financial turmoil, global investors have continued to view Treasury securities as a safe haven…at least, so far. But we wouldn’t break out the champagne just yet. And we’re willing to bet Chairman Bernanke doesn’t see much about which to celebrate either.
He ended his testimony with the warning (certain to be ignored, at least by the current Congress) “that history makes clear that failure to achieve fiscal responsibility will, over time, sap the nation’s economic vitality, reduce our living standards, and greatly increase the risk of economic and financial instability.” (IN his latest reports to the Congress he has tried again to make this fact understood. But with the Senate in Dems control and Obama’s veto there is much the House can do but refuse to pass spending bills for Obama’s programs. there is only one problem with that strategy: These programs have been scattered thru out the government in many agencies so they will get funding no matter what the Congress tries to do. The only thing that will stop these programs is complete repeal of the bills creating them. BB)
As we noted in last week’s essay, “unsustainable” seems to be the new buzzword in Washington. What the government is, and has been, doing is clearly unsustainable. Chairman Bernanke knows it, and we believe the Congressional Budget Office and the vast majority of the American public knows it as well. (I am so tired of hearing Congressmen and Obama use the word “unsustainable” and then go out and pass a bill spending more money that must be borrowed from other nations. BB)
The White House projections for economic growth upon which estimates of future deficits and public debt are predicated are optimistic to the point of wishful thinking. The Administration assumes five consecutive years of annual GDP growth in excess of 3.5 percent beginning this fiscal year (which began one month ago). That is beyond a very bullish near term expectation of economic growth, and its authors, who have access to statistics of past economic results, must know the premises to be false. Projections of that kind from any public corporation in the private sector would trigger SEC scrutiny (assuming the SEC was doing its job) to make sure the private company warned the public as soon as it had knowledge that its projections could not be achieved. Very stiff penalties would await the private firm that made irresponsible projections that it could not achieve.
Consider the consequences. Each 1.0 percent shortfall in GDP growth compared to these assumptions results in a substantial further deterioration in the national deficit and, therefore, the national debt as well. With the government currently borrowing approximately 40 cents of every dollar it is currently spending, any further escalation of our deficit and, hence, our public debt portends a very rocky future, one that all but guarantees that our children and grandchildren will not fare as well as their parents – a first in American history.
The American public cannot take much comfort from the Administration’s projections for inflation either. The government’s projections of future deficits and public debt are, of course, dependent on the actual rate of economic growth as well as the actual rate of inflation The concern looking forward is compounded when considering the White House projections for inflation together with their projections for GDP growth. Not only does the nation have to achieve GDP growth in excess of 3.5 percent for the next five years, but also, if the Administration’s forecast is to be achieved, we have to hold inflation below 2.1 percent every year for the next decade. That is a very tall order, not achieved in any recent 10-year period, and especially so with an Administration and a Democratic controlled Congress that shows virtually no restraint in spending.
If these projections are achieved America will be able to breathe a sigh of relief. If, however, they prove to be as fanciful as on their face they appear, then the economy the country is building for posterity may well prove to be a house of cards.
Government, at all levels, but unfortunately not the American economy, has been on an incredible growth spurt. In recent years, it is government that has been growing at an unprecedented and an unsustainable pace. The public sector has been, at all levels, growing impressively (well, maybe not so impressively, but certainly rather spectacularly). Public payrolls have grown, as have public health-care and retirement benefits all of which, in the final analysis, are paid for with the taxes paid by private sector wage earners whose jobs have been dwindling, as have their benefits. (This is due to the unionization of public employees. The teachers unions, the transportation workers unions, the garbage collectors unions and all the others have We the people over a barrel. they get what they want or else they shut the services the government privates down. The average public employees salary is $70,000 a year as compared to us Joe’s working our buns off in privately owned businesses who average $45,000 a year. And that doesn’t include the generous benefits like premier healthcare, vacations and days off with pay and a whole range of goodies. BB)
Public sector health benefits frequently require little or no deductible and little or no co-pay and public sector retirement benefits are often predicated on the highest salary earned (usually the salary earned during the last working year or two prior to retirement). To justify these lavish tax-funded benefits, the public sector pension programs are invariably based on economic assumptions or investment returns that are just as unrealistically optimistic as the Administration’s budget and inflation assumptions. The liabilities incurred by the cities and states whose employees are the beneficiaries of this largesse are generally cast in concrete. The growth assumptions for investment earnings, of course, are not. They are, to borrow from the house-of-cards definition, truly a speculative scheme that depends entirely on factors the planners cannot control. For example, these pension funds typically are predicated on long-term investment growth of 8 percent. Typical bond yields are, today, around 2 percent and, according to Bill Gross of PIMCO, one of the largest and most successful fixed income fund managers, public sector pension programs are typically weighted 60 percent toward equities and 40 percent toward bonds or fixed-income investments. These bond yields require a long-term return on equities of around 12 percent for these pension plans to meet their projections. Unfortunately, the current yield of the S&P 500 (the broadest equity index) is barely 2 percent. Dividends would have to grow, according to Gross, by 9-10% a year to hit that target. And, to make matters worse, the further the government succeeds in pushing down bond yields, even more unrealistic return assumptions from equities are required. These kinds of returns bear no basis to reality, and yet public officials use them in order to justify the benefit packages they give to their friends in the public sector unions. That is why public sector benefit and pension plans are the major contributors to the red ink in which state and municipal governments are drowning…red ink estimated to now be running about $3 trillion. These plans are, in fact, built on a house of cards.
We have another structural problem that raises the specter of a future built on a house of cards. As we blithely continue with our statist European-model entitlement policies we will require a strong ratio of new tax-paying workers entering the work force to balance out the aging workers who are exiting the work force and retiring. We are now entering a cycle where, for the next decade or so, nearly 80 million baby boomers will begin retiring and collecting their social security checks and calling on the health-care establishment to care for them under Medicare, a program already facing future insolvency and under further strain as a result of Obamacare. While America enjoys, relative to our European trading partners, a larger 18-to-38 year old population, the positive infusion of young workers into our system is largely driven by prior immigration into the United States.
Our indigenous (non-immigrant) birth rate is about the same as the weak birth rates found in virtually all industrialized European countries today and America, in reaction to the huge illegal immigration problem we have and which successive. Administrations have refused to address, is in danger of becoming an anti-immigration country. Nothing could be more self-defeating. Without the population growth provided by legal immigration, the imbalance of aging, retired Americans compared to young workers who are required to support them will produce a crisis from which there may be no escape.
The current American birth rate without the larger families produced by new arrivals in the United States will not support the entitlements we owe to senior America. And without a steady stream of new, taxpaying workers offsetting the ever-growing steady stream of retiring workers, our economy could sag, if not collapse, of its own weight.
We began by stating that we do not believe that the American economy is built on a house of cards…not yet anyway. But our economy (in fact any country’s economy) is always a work in progress; it is being built every day. The decisions we make today will, indeed, determine whether what we are building is a future with a strong foundation, or, is instead, a future built on a house of cards.
by Hal Gershowitz and Stephen Porter