Saturday, July 04, 2009

The Rich are Different?

F. Scott Fitzgerald told us decades ago that the rich are different. Pimco’s Gross passes on those sentiments with a few comments in his latest INVESTMENT OUTLOOK for June. He observes that it will be much more difficult to get “filthy rich” using other people’s money now due to all the new burdens of regulation, deleveraging, taxation increases and limits on how much one can make. Interestingly, and worrisome, is the observation that the list of big money individuals on the FORBES 400 list includes less Americans. The money is moving globally. More rich people are foreigners. He sees that as troublesome since it indicates that US wealth producing capability is less. The US standard of living will decline. Lower salaries and continued high unemployment rates will go on. Our triple A credit rating may be at risk. We were warned recently by the evaluators. We may become a double A like Japan, or suffer the UK’s embarrassment. Our debt is huge. Our predicted rate of economic growth is only 1%, not the normal 2-3 %. We can’t earn our way out of this.

We are told by the administration though that they know such a debt level cannot continue long term. We will return to fiscal responsibility and conservative budgets as soon as this crisis is over. We can’t grow out of this at a 1% growth rate… We can’t increase tax levels to do it either. There aren’t enough rich people to tax and the middle class can’t help close the gap.

Let’s look at the multiple snags we yet have to get by. First, we have a health care reform being pushed by the administration and Democratic Congress. They want it enacted by year’s end. Its cost is a 13 figure number: try 1,000,000,000,000.That’s just 13 figures to show how big it is. Other bumps need to be avoided too. Medicare, Medicaid and Social Security are the land mines everyone still ignores. If we have 11.3 trillion now in dollar debt and we add the health care tab in, we still need to look at a 40 trillion dollar unfunded liability for these programs over the next twenty years. Ration care, raise the age limits and lessen the benefits are real possibilities for the next generations to accept.

Gross reports that we have a conservative debt ratio for the US of 45%. With these liabilities (the 1.5 trillion deficit per year), that will rise to 100% quickly. How do we pay for this? Will China buy our bonds? Does anyone want them any longer? No, they are looking elsewhere to diversify. China is buying gold, and buying goods from other nations. To accommodate this debt level, interest rates will climb in Treasury bonds. We see that now. The dollar will continue to weaken. It is at its lowest levels in months. The Federal Reserve will continue to buy up 400 billion in Treasuries and Agency bills each year. The balance sheet gets more unbalanced. What to do? Balance the budget as the economy gets going. We cannot sustain this level of debt.


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