The list of things we never thought we’d see continues to grow, like a tumor.
Our republic has finally reached a midlife crisis, having lost the pejorative AAA credit rating from an agency that considers yesterday’s sub-prime CDO a safer bet than today’s Uncle Sam.
The American economy is stuck in a classic catch-22, that as we solve one problem, it is quickly replaced by a greater concern.
High unemployment poses such a tremendous risk to our solvency because 82 percent of all government receipts come in the form of personal income and FICA taxes. Moreover, every lost job not only reduces tax revenue, but adds a burden to the safety net programs. Please note that the increasing need for unemployment benefits, food stamps and Medicaid expenses have been a significant burden on our finances, costing $519 billion in fiscal year 2010.
While private sector jobs are being created, it’s the state and local governments, recently deprived of stimulus money, who are now adding to the jobless numbers. Government workers may not be held in high regard by private sector gladiators, but they’re 15 percent of the country’s workforce.
Cut one expense and another magically appears.
Despite the acute fear of socialism, government spending is estimated to represent almost25 percent of the nation’s GDP.
The stock market has benefited from two rounds of qantitative easing that inflated the price of equities and diluted the value of the dollar. Unfortunately, 31 states will have completely exhausted their pension funds in less than 15 years, and that’s assuming they experience decent returns in a market deprived of simulated demand once provided by Quantitative Easing. It’ll be interesting to see how the government bails out public pensions and reduces the federal debt in the face of unprecedented political gridlock.
The number one objective of any business is to grow shareholder value, and since labor is the largest expense of any business, recent streamlining goes a long way in explaining record profitability. Some believe that multinational corporations would repatriate $780 billion from overseas and begin adding to payroll if their tax rates were lowered. It makes complete sense, but only in theory. Corporations increased their profit margins because of mass layoffs; what makes us believe they would deplete their bounty and hire the same workers back again?
America has a math problem. Congress agreed to cut spending by $2.4 trillion over ten years, although they needed to cut spending or increase revenue by $15 trillion just to maintain the current debt to GDP ratio for the foreseeable future due to the $60 trillion in unfunded liabilities. Should interest rates that have been kept artificially low by the Federal Reserve rise by 60 basis points, the treasury would face an additional $100 billion of annual interest expense, consuming the alleged savings from the debt ceiling compromise.
So how do you cut benefits and grow the economy without diluting the currency to keep interest rates low so consumers who are worried about their jobs (and pensions) can continue to spend money that represents 70 percent of the economy? It feels like we’ve already tried everything — stimulus, deregulation, re-regulation, TARP, TALF, tax cuts and Quantitative Easing (twice).
The U.S. economy is a lot like the human body, addicted to so many prescription drugs that none of them seem to work anymore. Instead of a free market, we’re left with one big coffee table covered by medications and no plans to change our diet. And while most Americans believe they’re drug free, few admit that everything from group health insurance premiums to residential home purchases, all private sector activities, are heavily subsidized by the government’s pharmacy of make-believe.
The middle class and filthy rich alike voted for low taxes, generous benefits and expensive military endeavors, electing politicians who promised things they had no reasonable chance to deliver. As a result, our national debt has outpaced GDP growth for a decade, manufacturing fake wealth, authentic reelection campaigns and no signs of sacrifice. As it turns out, the math doesn’t work and Standard & Poor’s finally learned how to add. Rumor has it our foreign creditors have calculators too.
Ivory Johnson is the director of financial planning at Scarborough Capital Management, Inc. He is a Certified Financial Planner, a Chartered Financial Consultant and a frequent guest on CNBC. Mr. Johnson attended Penn State University, where he received a Bachelor of Science degree in finance.