Lately it seems like every day I hear analysts and economists on the news telling us that the economy “may be turning around” because things today are “less bad” than expected, or “less bad” than they were.
And every time I hear it I just about lose it. Less bad? Does that mean it suddenly became good? I know everyone wants to feel better and nobody likes negative news.
But at the same time, it’s important to be realistic. Sticking one's head in the sand and playing ostrich doesn’t make the problem go away.
Be careful not to get suckered into believing everything is OK now. Less bad is still not good.
Actress Mae West famously said, “I’ve been rich and I’ve been poor. Believe me, rich is better.” She also said, “too much of a good thing can be wonderful.”
That is part of the problem with our global credit meltdown – too much of a good thing wasn’t so wonderful after all.
We are witnessing an unsustainable trend in government debt growth. Recently, the federal government published two important reports on long-term budgetary trends.
Both showed that we are on an unsustainable path that will almost certainly result in massively higher taxes.
By 2016 we will have to fund Social Security out of general revenues, as the surplus we now have will be gone.
What about the social security trust fund? There is no trust fund. That is a myth. It is as if I wrote myself a check for $2 trillion and then declared I was worth $2 trillion. The money is just not there.
Someone once joked that Bernie Madoff got the idea for his ponzi scheme from the Social Security program.
Unfortunately, Medicare is in far worse shape. In a recent Forbes article by Bruce Bartlett, he estimated that taxes would have to go up by 81 percent if we are to pay the obligations as they now stand. Now that is really unsustainable!
Obviously, nobody is going to let that happen and something is going to have to change. But there is no getting around the fact that if something is unsustainable, at some point it stops.
Long before we get there, change you will not like will be forced on the United States.
President Obama recently said, “U.S. long term debt load is unsustainable.”
There’s that word “unsustainable” again. Yet they announced a $1.8 trillion deficit, which is really going to be at least $2 trillion, and are getting ready to pass health-care programs that will mean at least another trillion in deficits for as long as one can project.
How will they pay for it? Even getting rid of the Bush tax cuts will only produce a few hundred billion a year, which is nowhere near enough.
They project much lower medical costs in the future, because they assume they are going to figure out ways to cut costs and make medical care more “efficient.”
Uh, you’re kidding right? Do you really believe the government is going to figure out how to make medical care more efficient?
Of course, they say we will grow our way out of this and they project 4.5 percent annual GDP growth by 2011. That should be a pretty good trick considering that we never grew at a 4.5 percent rate when times were good, let alone while the entire world is deleveraging from gorging itself on excessive debt.
You cannot propose massive increases in spending without either creating crushing debt that the markets will simply not allow, or pushing interest rates much higher and really slowing growth and hurting the economy.
It is a simple fact that you cannot increase the debt-to-GDP ratio without limit. Ask Japan.
We found the limit on personal and corporate debt last year. We pushed the limits until the system crashed. And now the U.S. government wants to basically do the same thing.
Unless cooler and more rational heads prevail, this is going to be ugly. Sometime in the middle of the next decade we will hit the wall and it will make the current crisis pale in comparison.
The only way to solve the problem is to grow GDP more rapidly than debt, and for that to happen you have to have policies that are shaped for the growth of the economy or massive savings by consumers.
And right now we have neither. Cap and trade is hugely anti-growth. So are high corporate taxes.
Looming protectionism worldwide will be another anti-growth problem. As I have written for many years, one thing that really gets me worried is protectionism. Protectionism can turn a very significant recession into a depression quicker than you can imagine.
Bad ideas have bad consequences. Multi-trillion dollar deficits and massive new programs are not the right answer.
President Obama is right: the debt load is unsustainable. Let's hope he will do more than talk about it and show some budget restraint.
Just like you can’t drink yourself sober, you can’t borrow your way out of debt.
Nick Massey is a financial adviser in Edmond, Okla. CNHI News Service distributes his column. He is also a frequent guest analyst on CNBC and Bloomberg. Massey can be reached at www.nickmassey.com.
