Market Watch - October 28, 2004
Ask yourself this question: given all the real economic
problems known to exist, what has really been discussed by Senator
Kerry and President Bush? The answer is nothing! All we got on Social
Security, Medicare, or anything else that has a meaningful effect
upon our financial future, has been the same old request for government
solutions to social problems, which problems have all been a result
of previous government solutions to social problems. Government
is never the solution to problems-it’s usually the cause.
President Bush states he believes in smaller and limited government,
but government has increased in size by 30% on his watch. Senator
Kerry advances proposals to “fix our problems” in which
every solution involves more government. Both major political parties
are doing nothing to reduce the size of government.
Let’s take a look at what should have been a real national
election issue, the whopping current increases in federal debt.
In April 2003, congress voted the largest increase in the federal
debt in history of $984 billion, up to a debt limit of $7.4 trillion.
In early October of 2004, only 18 months later, the $7.4 trillion
limit had been exceeded. It has now been surpassed without an increased
Congressional authorization of debt and with no discussion by major
political parties concerning the need to immediately address the
situation. Why? Because both major political parties have put us
in this position. Neither party wants to point the finger at the
other for something for which they are both responsible.
The federal government is currently being sneaky and borrowing money
to pay bills from trust funds like Social Security, Medicare, airport
and highway funds, and other programs. By law, the debt ceiling
should have been addressed before it was reached or exceeded, but
both Congress and the President wormed their way around the situation
and avoided bringing it to the attention of the public. Neither
party wanted excessive government spending and debt accumulation
to be an election issue. The media could have brought the issue
to our attention but chose to go along with the “party line”
and ignore it.
One of the first acts of the new administration and of congress
after the election will have to be an increase in the debt ceiling
beyond the $7.4 trillion now authorized. It’s irresponsible
that no high-ranking national politician has brought this forward.
Nobody has pointed out that in only 18 months we have had deficit
spending of $1 trillion. No politician, nor the media, has pointed
out that this means the federal government has spent an average
of $55 billion a month more than government revenues during this
period of time. These are staggering amounts of increased debt equaling
more than 6% of our annual GDP!
| Why does this debt seem to be so dangerous when, in 1946, federal debt was 105% of GDP, and it is now only 73% of GDP? The answer is twofold: | ||
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| 1) | |
In 1946 our debt had been built to finance World War II. The tremendous industrial capacity created during the early 1940’s was able to be converted to the production of manufactured goods that were sold domestically and around the world. World markets were easy to penetrate. No other country had the capacity to produce most heavy industrial goods, as their capacity had been destroyed by war. The US was collecting and accumulating money from the rest of the world. Currently we are exporting money and incurring massive foreign debts, simultaneously. |
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| 2) | |
Having experienced an exodus of manufacturing since the WTO (World Trade Organization) agreements were signed in 1994, the US is not building value and accumulating money from a manufacturing base. Furthermore, government imposed social obligations for Medicare and Social Security are about to be stressed beyond our ability to meet obligations when baby boomers become eligible for Social Security in 3 years and eligible for Medicaid in 6 years. On January 1st, 2005, the ten-year delay in trade barriers erected over 217 years to protect us from unfair trade practices will all disappear. Foreign countries like China and India, whose manufacturing has dramatically increased, will witness further explosive increases in manufacturing. Not only are their wages much lower than ours, but they do not have to build into their pricing the cost of Social Security, Medicare, healthcare, unemployment compensation, workman’s compensation insurance, and huge costly government, to name just a few. |
In 1946 the future of US manufacturing
was bright enough to build value and allow our economy to grow beyond
government indebtedness. Now, however, we cannot count on a deteriorating
manufacturing base to sustain economic growth. And we have no way
to pay for huge future un-funded obligations incurred by the federal
government to meet Social Security and Medicare obligations.
Are We Without Hope?
NO, BUT IT CERTAINLY PUTS US IN A POSITION WHERE
THE LONG-TERM WORKOUT OF THESE ECONOMIC DISLOCATIONS WILL HAVE A
NEGATIVE EFFECT UPON THE GROWTH OF THE STOCK MARKET OVER THE NEXT
SEVERAL YEARS
Interestingly, in 1776, Alexander Frazier Tilter,
a University of Edinburgh history professor, wrote a paper entitled
The Decline and Fall of the Athenian Republic. He wrote: “A
democracy can not exist as a permanent form of government. It can
only exist until the voters discover they can vote themselves generous
gifts from the public treasury. From that moment on, the majority
always votes for the candidate promising them benefits from the
public treasury. The result is that the democracy always collapses
over a loss of fiscal responsibility.” Written in 1776, during
the Age of Reason, the same year the Second Continental Congress
published the Declaration of Independence and Adam Smith published
The Wealth of Nations, professor Tilter’s words may become
our reality in America over the next several years.
On average, stock market sell offs from their
highs during recessive times averages 43%. The Dow Jones Industrial
Average high a few years ago of 11,722 would drop to 6,700 if the
average were to be realized. Will it reach the average? Who knows?
What we do know is that the government has already pulled out all
stops. It does not seem feasible to increase deficit spending anymore
than we already have over the last few years. It is improbable that
a trade balance, which has now reached 6% of our GDP, can be sustained,
let alone increased. Any lower interest rates are unacceptable because
the dollar will become less attractive than it already has become,
and the huge loss in the value of the dollar relative to other currencies
could accelerate. The job situation is not improving, and we are
not creating enough new jobs annually to satisfy the demands of
high school and college graduates coming into the labor force. Tax
relief has already been used. Consumer confidence has decreased
for the third consecutive month.
So without further monetary and fiscal policy
available, and without further decreases in taxes practical, what
is left? Faith, and that’s about all! Because it’s apparent
our politicians are not going to address the situation until it
is an absolute crisis. It may then be too late to avoid an all out
dollar collapse coupled with a gold price increase to several thousand
dollars per ounce.
Conclusion
No real rock solid election issues have been
brought forward. No politician, and no political party, is attempting
to be truthful with us. There is no attempt to disclose our perilous
financial predicament and accept responsibility for helping to plan
for an economically secure future.
This is enough to make decent men and women
cringe, and it reminds us of H.L. Mencken’s saying that “every
decent man is ashamed of the government he lives under”.
Caveat Emptor!
George Rauch
October 28, 2004
