"On a long enough timeline, the survival rate for everyone drops to zero.”
Tyler Durden - 'Fight Club'
The future of America has come down to a single question, and it’s a question of politics not economics. The question itself is this:
“Do you believe that we can elect a body politic of such strong moral character and huge popularity that they will be able to go to the American people and renege on the government’s promise for Medicare and Social Security without being immediately voted out of office for it, and their decisions reversed?”
If you can’t imagine that happening; if you can't imagine the US government giving up on Medicare and Social Security, even in the face of the increasingly shrill demands of the baby boomers then we're done. If you can't imagine them standing up to all those entrenched special interests, the AARP, the unions, the wholly irresponsible state governors, and all the freshly retired civil servants who all want free everything forever, then you can't imagine the US surviving. There will be no way remaining for the US to resolve its National Debt to the benefit of the debt holders and that will mean a default, and the end of the west.
The debt will be resolved of course, but it will either be through monetization (the Fed buys the debt with newly printed cash and throws the bonds in the fireplace) or through the government default. Thanks to this Democrat congress, the burdens placed on the taxpaying portion of the US citizenry are already so great, that there is no longer any way for the US economy to demonstrate the amount of growth necessary for the government to be able to provide for all its future commitments.
The huge burden of the Obama Stimulus makes a necessity of higher taxes. High taxes depress growth, which increases the portion of government spending funded through debt issuance, which increases the supply of the bonds and with it the interest rates, which in turn depresses growth further. The government can keep the bond supply low through monetizing the debt, but that leads to inflation and lowers the standard of living for all Americans. This depresses spending, and if you believe the Keynesian's running around these days, that depresses growth even further.
Eventually, the process becomes unsustainable. And unless you can think of a way for the question above to be addressed by our politicians, then that time is upon us. The current Debt to GDP ratio is something like 25%. When the full burden of Medicare and Social Security comes to bear, the Debt to GDP ratio will be more like 250%. That is, the US government will owe $2.50 for every dollar of the entire country's gross domestic product. Even if the government responded to a crisis like that by making taxes 100%, it would still take 2.5 years of work by every man, woman and child in the country for us to pay off what we owe. This is not a reconcilable issue for any institution.
Just to be clear here, I’m not some crazy guy living up in the hills writing my manifesto. I’ve never been a ‘gold bug’ in fact the bulk of my experience in the commodity markets has been in energy not metals. You’d never know it if you read my stuff lately, but I’m not the kind of guy who’s been ranting about our inevitable doom for a decade. I’m a professional investor with two decades of experience working at some of the most respected and highly profitable firms in the world. For two decades it’s been my job to try to look around the next corner before anyone else does. And when I look around this corner, what I see is the question above.
I won’t answer the question for you; I’ll leave that to you. But if you can’t think of a way for the US to pay down its debt before the deluge of Baby boomer entitlements comes due, then there is no long term future for America.
4 comments:
I have an idea for how we can extricate ourselves from social security: schedule the age of benefit eligibility to rise gradually over time, faster than life expectancy rises. It's the most painless possible way to do it because the closer you are to retirement, the less your date is delayed.
As I picture it, a 60 year old might have their date of eligibility pushed back 6 months to a year. A 40 year old might have their eligibility pushed back 5-10 years, and a 20 year old would have their date pushed back 20-25 years. The function that relates current age to benefit eligibility age should be continuous and monotonically increasing, but not necessarily linear.
I wouldn't stop until no more than 5% of the population can be expected to outlive their date of eligibility. The goal is to eliminate, as nearly as possible, the old age portion of the program.
I would leave the disability portion of the program alone.
Politically, I think that this is a plan that the population at large could buy into, but entrenched interests like AARP would probably dig in their heels. Obviously, it would be much better to do something like this while we're still taking in more payroll taxes than Social Security pays out, but realistically, I think the only chance that even the most sensible plan has is to wait until there is a crisis that is impossible to ignore.
Matt, there are lots of pretty simple fixes for social security, but I don't think any of them are politically possible. Just push the retirement age back 7 years and it solved, but you just try to get that past the unions, the civil servants, and the AARP. It's not going to happen.
But even if you made social security a financial viable as a standalone program, our debt to GDP ratio will still top out at 230% of our GDP. And remember, all the states are in this game as well. They are all running large and rapidly increasing deficits and floating larger and larger debt loads top pay for even more rapidly increasing entitlement programs. Obama is bailing them out of this round with the (cough sputter) stimulus package, but that just means bigger and more toxic behavior next time.
But I don’t want to make your mind up for you… no one would be happier to hear he’s wrong about things than me. If there really is a way that we can end the coming collapse, I’m down for it, but I don’t see it myself.
Just to be clear here, I’m not some crazy guy living up in the hills writing my manifesto.
I have been writing about all of this for at least two years and talking about it for closer to five. I have, at times, seriously wondered if I had experienced some sort of psychic break with reality - how is it that I am the only one that seems to see this coming? I'm not a genius and I do not have foresight, but what we are doing is clearly unsustainable. Am I seeing something that isn't there?
Finally, about a year ago, I had an epiphany. What I realized was that, for all of their advanced degrees and positions of prestige, those people pulling the levers are, at best, incompetent, and, at worst, deliberately doing things for political reasons.
I don't like to see people hurt and I don't like to be hurt. I kept hoping it wouldn't come to this, that the people in power and the people, in general, would come to their senses before it was too late.
Clearly, they haven't. Even now, to tell the truth is to risk being labeled as some kind of nut or, as one moron so eloquently put it, a "selfish f--k." We have some hard lessons to learn and I'm convinced we will not be the same country once all the dust has settled. At this point I have given up all hope that catastrophe can be avoided, I'm just trying to position myself to survive the fallout. Although, if history gives us any indication, I may not want to live long enough to see what we become. The kind of cataclysmic upheaval I see coming generally leads to some form of totalitarianism.
It is my hope and my dream that, once we get kicked in the face a few times, once we have realized that freedom and prosperity are not a birthright, we will dig deep, find the spirit that led to our Declaration of Independence and push away the hand of government and stand on our own; that we will rise from the ashes with a better understanding of ourselves and the limits of what a government can and cannot provide in a free society.
I'm in a similar place I think Steve, but since this is my job, I'm quite certain I'm seeing things as they are and I'm not deluding myself.
I agree we have a hard lesson to learn and I've said so repeatedly. Personally I think you're right on. But don't imagine a future like Mad Max. It was a good movie, but not at all realistic. Imagine a future with America starring in the role of Venezuela, where the rich are still rich, but there are fewer of them, the middle class is poor, and the poor are utterly destitute. I think that's a more realistic view of the future.
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