The resolutely non-partisan movie I.O.U.S.A begins: "I will argue that the most serious threat to the United States is not someone hiding in a cave in Afghanistan or Pakistan, but our own fiscal irresponsibility."
I will preface these remarks by saying I am neither a Republican nor Democrat, I am simply a Gen Xer. Further I hold the professions of government employees like teachers, police officers and fire fighters in high regard.
The Wisconsin showdown is infuriating from several angles, and as a Gen Xer I fully expect to see similar scenes play out again and again. I am not going to dwell on the shenanigans of the lawmakers who fled the state to block a vote (or what we used to call the democratic process). The union-funded left is of course playing the victim, but the reality is far simpler - at a time when budgets are cut in the tens of billions of dollars from every program from NASA to Planned Parenthood to the most sacred cow of all the Pentagon. At a time of ~10% unemployment, where every public company has had major layoffs.
This is the backdrop of the union refusing to negotiate.
Oh and by the way their actions, if successful, will cause 5,500 OTHER non-union people to be fired.
Talk about selfish.
But this is what yo get in an entitled society, its playing out like Tom Friedmans' grasshoppers (emphasis added):
A small news item from Tracy, Calif., caught my eye last week. Local station CBS 13 reported: “Tracy residents will now have to pay every time they call 911 for a medical emergency. But there are a couple of options. Residents can pay a $48 voluntary fee for the year, which allows them to call 911 as many times as necessary. Or there’s the option of not signing up for the annual fee. Instead they will be charged $300 if they make a call for help.”
Welcome to the lean years.Yes, sir, we’ve just had our 70 fat years in America, thanks to the Greatest Generation and the bounty of freedom and prosperity they built for us. And in these past 70 years, leadership — whether of the country, a university, a company, a state, a charity, or a township — has largely been about giving things away, building things from scratch, lowering taxes or making grants.
But now it feels as if we are entering a new era, “where the great task of government and of leadership is going to be about taking things away from people,” said the Johns Hopkins University foreign policy expert Michael Mandelbaum.Indeed, to lead now is to trim, to fire or to downsize services, programs or personnel. We’ve gone from the age of government handouts to the age of citizen givebacks, from the age of companions fly free to the age of paying for each bag.
Let’s just hope our lean years will only number seven. That will depend a lot on us and whether we rise to the economic challenges of this moment. Our parents truly were the Greatest Generation. We, alas, in too many ways, have been what the writer Kurt Andersen called “The Grasshopper Generation,” eating through the prosperity that was bequeathed us like hungry locusts. Now we and our kids together need to be “The Regeneration” — the generation that renews, refreshes, re-energizes and rebuilds America for the 21st century.
As the unions played the victim we were treated to a number of breathless Egyptian comparisons (talk about clueless, Egypt democracy demanded Mubarak leave, the Madison protestors are blocking a democratic vote). A much better comparison is Greece.
Greece (and Ireland, Portugal, Spain, ...) is a much better comparison, because what we saw in Greece and the other PIGS countries was that when the government is unwilling or scared to impose financial discipline, then the bond market will step and do the job for them. Delaying hard decisions is not the same as making hard decisions, its just kicking the can down the road.
Here is a chart of Greek bond prices over the last three years
The Greek 10 year bond trades 11.7%, let me repeat that for ELEVEN POINT SEVEN percent. Until recently it traded for half that. Do you think your economy can gorw, do you think you can support entitlements with payments in that neighborhood? In case you don't have a calculator handy, I will help you out - the answer is no you cannot.
As Herb Stein said: anything that can't go on forver, won't. Even if the governments paper over the Grand Canyon sized deficits on their budgets, as California has been doing, the massive checks the Baby Boomers have been writing for the last 50 years will be coming due and soon. Its not up to the government, its not up to the supposedly mean Republicans, its not up to the supposedly empathetic Democrats, and its not up to the union. If the rest can't or won't decide the bond market will do it for them.
Sticking with the bond market theme, Bill Gross is the manager of world's largest bond fund, and last year at this time (pre-Greece), he wrote about a handy concept called the Ring of Fire, specifically where "countries with the potential for public debt to exceed 90% of GDP within a few years’ time, which would slow GDP by 1% or more"
In the next letter from March 2010, Gross talked about various government responses
Just last week Bank of England Governor Mervyn King said that it would be difficult to cut government spending quickly, but that there needs to be a clear plan for doing so. Not good enough, Mr. King. Don’t care. Show investors the money, not vice-versa. An investor’s motto should be, “Don’t trust any government and verify before you invest.”
The bond people are not stupid, and they know how to do math. After awhile they will simply not lend money to governments where they do not think they are going to get paid back.
And just to give a little more texture to what is about to happen in America, the most read story in WSJ was on IRA shortages for baby boomers. The median household aged 60-62 has less than one quarter what they need to retire. I will encourage you to read that again. They have 75% less money than they need AND this is with all the assumed entitlements. Where do you think a 62 year old person is going to acquire the requisite funds at this time in their life?
Carol Dailey is continuing to work at age 71. Ms. Dailey spent 10 years as an executive assistant at America Online and had stock options she figures were once worth $1.7 million. The options' value collapsed with the company's stock.
Now she relies on her 401(k), which took a hit in the 2008 market plunge. She has cut back spending for entertainment and organic food, and continues to work three days a week as an office manager for an Internet security company."At AOL, we were buying $60 bottles of wine and not blinking. Now I drink box wine," she says.
Eventually, she wants to retire completely. Then, to make ends meet, she plans to take bigger investment risks. Her financial adviser then will shift some of her savings out of an annuity and into high-yielding bonds and real-estate investment trusts, aiming to double the return on that money to 10% a year.
As a baby boomer its assumed that someone else is paying for you, but if you are a Gen Xer and you run a retirement calculator (you know the kind where it figures out how much you need by when you retire based on a bunch of assumptions) - hear me now and believe me later - do not include Social Security and other benefits when you run the calculations.
The reality of States being downgraded is immediately in front of us, here and now, they have way too much debt, and no one is going to want to loan them money.
The states certainly cannot borrow from Uncle Sam, consulting the debt clock we see thepopulation of the United States is 310,070,398 so with our +$14 trillion debt each citizen's share of this debt is $45,593.17.
A different study by the McKinsey Group analyses current leverage in the total economy (household, corporate and government debt) and looks to history, finding 32 examples of sustained deleveraging in the aftermath of a financial crisis. It concludes:
- Typically deleveraging begins two years after the beginning of the crisis (2008 in this case) and lasts for six to seven years.
- In about 50% of the cases the deleveraging results in a prolonged period of belt-tightening exerting a significant drag on GDP growth. In the remainder, deleveraging results in a base case of outright corporate and sovereign defaults or accelerating inflation, all of which are anathema to an investor.
- Initial conditions are important. Currently the gross level of public and private debt is shown in Chart 2.
Initial conditions are important because the ability of a country to respond to a financial crisis is related to the size of its existing debt burden and because it points to future financing potential. Is it any wonder that in this New Normal, China, India, Brazil and other developing economies have fared far better than G-7 stalwarts?
Its called deleveraging folks, there is way too much debt, everything is on the table, and there are not protected classes. The worst thing we could do is to wait, let the meter run and watch the interest rates rise. If you are a baby boomer and you are particularly selfish then I can understand why you might fight for the status quo, otherwise you should do the math on the unfunded olbigations.
Warren Buffett:
We’re like an incredibly rich family. We sit on the porch of our huge farm – so big that we can’t even see the end of it – and each year, we consume 6% more than the farm produces. To pay for this, each year we sell or mortgage a little bit of the farm that we can’t see, so we don’t even notice. We’re very, very rich and the rest of the world is happy to buy from us or lend to us, so each year they take a piece of our valuable assets – and they work very hard. But we will have to service this. If it goes on for a long time, our children will pay.
As I said at the beginning I am Gen Xer not a right winger or left winger, but I can do math. I can sum up the amount of checks the Baby Boomers have written to themselves and how much they have in the bank to cover them (1/4th what they need), and I can tell grown up behavior, responding to a crisis instead of pretending one does not exist, when I see it. Charlie Munger (who is a Republican) was asked after Jerry Brown's victory, whether he was disappointed. His answer was quite illimunating - "If bad news is to be delivered it's better that a Democrat do the deed in California. It adds more credibility that way and is easier for the liberal CA public to swallow."
Basically, its over and the sooner everyone realizes that and we get back to making things, instead of being consuming grasshoppers, the better.
Update: Ben Tomhave pointed out the similarity of this post with Bill Clinton's keynote at RSA last week, I did not see it but I did catch this tweet "I don't understand why the Tea Party doesn't like me.There have been four balanced budgets since 1980. My last 4."
Why? Well here is a clue, James Carville famously said that when he died he wanted to come back as the bond market because then everyone would be afraid of him.
As I said, fiscal responsibility is not a right-left thing, both sides owe it to us to be fiscally responsible. That is not the case right now, we have one party that believes in spending more than it takes in and another that believes in taking in less than it spends. Neither is remotely sustainable and no one is willing to make temporarily unpopular choices.
A realistic plan rather than deficit spending would be Eisenhower's model as implemented by Clinton- "I hope everyone realizes we're Eisenhower Republicans here," Bill Clinton reflected, shortly after being elected president. "We stand for low deficits, free trade, and the bond market." How hard is that? Seemed to work pretty well.
