Farr: Shut Down Government?
President Obama proposed a 3.7 trillion dollar budget for 2012. Revenues to support that amount of spending are estimated to be about 2.6 trillion dollars. That represents proposed deficit spending of 1.1 trillion dollars in 2012 which would be an amazing improvement from the 1.645 trillion dollar estimated deficit of 2011. The President promises 1 trillion dollars of cuts over then next ten years. Ten-year promises are curious from one with less than 24 months left in his elected term in office.
For the purpose of establishing a conceivable scale, counting dollar bills at $1 per second, twenty four hours per day will take about 12 days of non-stop counting to reach $1,000,000 and just over 32 years of non-stop counting to reach $1 billion dollars. It is stunning that government officials talk casually about trillions of dollars.
The numbers are as daunting as the political posturing. Of the $3.7 trillion in projected 2012 federal outlays, Medicare and Medicaid are $1.2 trillion, Social Security is $800 billion, Defense is $700 billion, and Treasury (interest on debt, IRS, etc) is $600 billion. These areas, which total $3.3 trillion, represent the political “untouchables.” Politicians on both sides of the aisle and in both branches are focused on the remaining 12% of the budget that they believe will cause the least political fallout come election time.
Everyone recognizes that Medicare, Medicaid, and Social Security (often referred to as entitlement programs) are the financial and political back-breakers, so they are best avoided. As it becomes more urgent to address entitlement spending, each branch and party is in a staring contest to see who blinks and what political currency can be gained in being a second responder.
The President said, “I'm glad to see Republicans leaders saying, 'How come he didn't talk about entitlements?'" He goes on to ask Republicans what they propose. "The president talks like someone who recognizes that spending is out of control, but so far it hasn't been matched with action," said U.S. Senate Republican leader Mitch McConnell. "Americans don't want a spending freeze at unsustainable levels. They want cuts, dramatic cuts. And I hope the president will work with us on achieving them soon." And so goes this “hokey pokey” dance without progress.
Two savvy and economically sophisticated government officials recently told me that the draconian conclusions of Malthusian deficit and debt projections (my high school English teacher would be so proud) will not come to pass. They posited that something else would happen: either responsible crisis-averting leadership will emerge, or a crisis will occur. Either outcome will bring about necessary, meaningful, structural change.
In the meantime, citizens, consumers, and investors wait and watch stock markets continue to rise as the wealth gap becomes more profound. CNBC’s John Melloy has a great article, “Is the Wealth Gap Widening Under Obama, Bernanke?”
While many wealthier investors have benefited from the market’s run, many retail investors who bailed-out of equity funds in favor of muni funds over the past few years are missing out and at risk for further pain. Given the increasingly well-publicized landmines out there, expert municipal bond management is almost compulsory in this environment. In stock land, a lot of companies are trading at favorable valuations but should be invested in carefully and with great due diligence.
The S&P is up 24% since August and is due for a pull-back which doesn’t seem to come. Investors who are feeling swayed by the Siren’s Profitable Song need to recognize that they were too worried to buy six months ago but now are drawn toward a flame that is 24% higher. Buffet says, “Americans are funny: they love stocks when they’re expensive and hate them when they’re cheap.” Cheap is over. Things are reasonable now. Proceed with caution.
Michael K. Farr is President and majority owner of investment management firm Farr, Miller & Washington, LLC in Washington, D.C. Mr. Farr is a Contributor for CNBC television, and he is quoted regularly in the Wall Street Journal, Businessweek, USA Today, and many other publications. He has been in the investment business for over twenty years.