This is the first in a series of columns that may question, challenge or disagree with much of what you might believe to be true. If that is the case, please keep in mind that this by no means makes you wrong, or this column right. I would only hope that it would make for a healthy exchange of ideas through constructive comments. Sorry that this first one is definitely not a feel-good column, but thanks for stopping by.
Economically, could things be any better than they are today? The unemployment rate is low, productivity is up, and salaries are finally rising faster than the rate of inflation, which is, itself, being successfully held in check.
Furthermore, the stock market is ringing up new all-time highs while threatening more. And to top it off, many corporations are so flush with cash they’re having no trouble handing out tens of millions of dollars - or even more - to their CEO’s. Pfizer Inc. reported that it had $38.7 billion in current assets as of 10/1/06, one day after Exxon Mobil Corp. reported that it had $81.8 billion. Current assets, of course, are basically cash or its equivalent.
The conventional wisdom related to business conditions is obviously running on a full tank of optimism.
Thus, the economy is poised – perfectly poised – for the shock of its life. The stock market doesn’t like surprises. It is well known that the safest time to invest is when pessimism reigns and the riskiest time is when everything on the surface looks rosy as, for instance, today.
The possible shock may not come tomorrow, or even this decade, but there are some fairly large elephants in the room that are so far being overlooked by investors and the media. Like Glenn Close’s very scary character in the movie “Fatal Attraction,” these mammals don’t like to be ignored, and if they continue to be, they could well ignite a financial stampede that would make the angst experienced by Michael Douglas’ character seem like a walk in the park.
We had a glimpse of one of the elephants the other day when Federal Reserve Chairman Ben S. Bernanke warned Congress to address the national debt, saying that the spiraling government spending could lead to a “vicious cycle” of even greater federal budget deficits.
If you’ve made out a personal balance sheet lately, you probably didn’t include in your liabilities your share of the national debt. You might be surprised to know that, by one measure, this would amount to a little over $230,000. Thus, if you are a family of five or more, your collective share would be over $1 million. Maybe this is a little over-dramatized, but it is a fact that the reputable Brookings Institute has said that our national debt, which is generally claimed to be about $8.7 trillion, is – in fact - $70 trillion, if unfunded liabilities for Social Security, Medicare and other programs are taken into account – and that’s why you owe $230,000.
In any event, the debt is large, which takes us back to the rate of inflation. For it is there that the situation could get particularly dangerous, and that is what gives Ben Bernanke grave concern.
So far, the efforts of the Federal Reserve to tighten the money supply, as well as the policy of the federal government to enter into “free trade” agreements, and the eagerness of corporations to take advantage of those agreements to ship jobs overseas, have all conspired to keep inflation at its lowest sustained level on record.
How long this can continue to be the case is not known but, at some point, history suggests that the forces that tend to cause inflation, such as deficit spending, will have their day, and interest rates will rise.
If the rate at which the government borrows money should increase to - say - 10%, a level that rates have actually been at or above about one fifth of the time since 1980, the interest on the national debt – which might well be about $10 trillion by then – would, by simple arithmetic, soar to $1 trillion. This would be more than twice our current military budget and would essentially be unsustainable without major disruptions. This may be a little oversimplified, but it would take much less than what is shown in the foregoing example, actually, to create the “vicious cycle” described in Bernanke’s warning.
Corporate earnings, of course, would also be adversely affected by the higher interest rates.
Another elephant in the room is represented by the downgrading of American jobs. Fellow Gather member Felix R. may have best described the implications of this recently when he said: “…people in the lower rungs of the economic ladder tend to spend more when they earn more which in Keynesian Economics is good for the whole economy. So in the long run it helps business. The key to a healthy economy is the cash flow…not the hoarding of it.”
The reality of life in the business world today is perhaps best illustrated by Pfizer’s announcement one week ago that it will cut 10,000 jobs and close five facilities. This is the company that, by Felix’s definition, has “hoarded” $38.7 billion. It also reported a net income of $9.45 billion in the fourth quarter, up from $2.73 billion a year earlier?
Indeed, much of the improvement in net earnings that companies have recorded in recent years has come from the whittling away of expenses, particularly labor costs, and Pfizer is just one of the many companies that have been cutting jobs for some time now.
This route can only be described as a dead end alley, however. At some point, the potential for savings dries up and perhaps it is at that time that corporate America discovers what Felix suggested - that its customer base has also been seriously downsized. Of course, in that event, it will likely be able to find replacement customers in other countries. As long as big business finances our politicians, big business will always win.
Moving on, we are all aware that the “good times” enjoyed by Americans over the past few years were largely fueled by the surge in real estate values that enabled an orgy of borrowing. Now, however, the current slowdown in the real estate sector has the potential to become the elephant in the room that could start the stampede.
At this point there is a great deal of quiet desperation being experienced by the many borrowers who were enticed into variable rate mortgages, many of whom simply didn’t realize that their mortgage payments could skyrocket.. In California, default notices jumped 145% in the last three months of 2006 and, at the same time, foreclosures rose 700% from a year earlier. The numbers are still below historic levels, but the trends are troubling. As foreclosures are added to an increasing supply of unsold homes the result could trigger another “vicious cycle,” spinning towards a serious collapse in the real estate market, with repercussions throughout the economy.
Real estate companies are already feeling the pinch, reporting reduced earnings and desperately trying to shed assets. Some 10% of the nation’s jobs were tied to real estate as of last year.
The Fed’s ability to maintain an even keel is also critical for this sector of the economy. The high rates associated with inflation or, on the other hand, the economic turmoil associated with a recession, could – either one - be disastrous for real estate.
There are many smaller elephants in the room also getting scant attention these days, and many would rush to join any stampede that might develop. Here we have the risks associated with the instability of the energy markets, the high amount of our debt being held by foreign countries, particularly China, our fluctuating currency, and the continuing trade deficit. Also there are the economic consequences of a possible act of domestic terrorism, or another weather related catastrophe similar to Katrina.
And finally, there’s the seemingly bottomless financial pit represented by our involvement in the Middle East, which strains our resources and consequently makes all the other elephants loom a little larger.
So, let’s see now. Our government desperately needs to raise money and our corporations are flush with mountains of cash that they’ve hoarded away. What could that suggest?........hmmmmmm…..
Dave McGill, News Correspondent
Dave’s column, “The Contrarian,” published every Wednesday to Gather Essentials: News presents a contrary view to various aspects of the news, or an alternate point of view to the conventional wisdom of the day. Dave has been a senior officer of a large eastern insurance company, involved in economic projections and investment strategy, president of a Midwestern mortgage banking company, and a financial consultant in Southern California serving clients in the field of commercial real estate development.
You can find all of Dave’s “The Contrarian” columns at: http://gather.com/thecontrarian
Keep up with Dave’s other postings and Gather activity by joining his Gather network – just click here: http://atadaskew.gather.com and select the orange”Connect” button on the left-hand side of the page. You’ll find Dave and other News Correspondents, plus celebrity content and plenty of other News experts at News.gather.com.
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Comments: 37
We should instead be looking at our debt-to-asset/income ratio to see if we are in trouble. We are the wealthiest nation in the history of civilization. Moreover, our assets and income are continuing to grow each year in part because of the investments that our government has made. Out national wealth has been estimated to be as high as $100 trillion. Now doesnt that make $5 trillion a little more palatable?
The current "deficit" figure comes nowhere near reflecting the actual level of deficit spending occurring in this country currently. There are far too many items that are either "off budget" or which are not included because the government is taking money from such programs as Social Security to hide these expenditures. At some point, and sooner than later, this will all come crashing down as the bills become due and there is no money to pay them.
There are people here in Gather who regard a call for fiscal responsibility and a desire to address critical domestic issues as simple minded rhetoric rather than as severe and growing problems. At present the economy is moderately doing well, but that can change in an instant, and it is doing as well as it is despite, not because of current administration policies or lack thereof.
Thanks for pointing out all of the elephants in the room. It's a shame that far too many people prefer to put their heads in the sand and their fingers in their ears and scream "mouse" "mouse" "mouse" rather than recognize the size and complexity of the problems until something as horrific as a stock market or economic collapse forces them to act.
Yes, I would agree with you that we do not live in the best of times. I agree with you that the long term debt of our nation gives rise to real concerns. I am not mollified by the what-me-worry attitude of Bush about money. 300 or 400 billion for Iraq, no biggie. 500 billion for a trip to Mars, payable when GWB is golfing, hey it's an important trip. His answer to the social security shortfall was to spend MORE money short term to create nest eggs for young people so they would not need ss.
I think our finances are sort of a shell game. This idea that the lower classes need to keep circulating cash to prime the pump of hte economy is dumb. They are like little hamsters on an exercise wheel goin round and round. Keep the credit card companies solvent. Keep the balloon mortgage lenders solvent. Keep the payroll lenders who charge an annual interest rate of 300% (I'm not kidding) solvent. In the meantime they are flirting with bankruptcy and their kids are saddled with college loans that will take a decade to pay off.
We are all so short sighted. Eating our seed corn seems to standard operating procedure these days. There is no future in it.
The solution however is scary too. Cutting into the benefits of our aging baby boomers and reining in our borrowing tendencies, both in terms of our national finances and in terms of the bloodsuckers in the credit industry, is a mountain to climb. But pretending the mountain does not exist just makes it steeper.
I fear if we wait too long, they'll take themselves out, and us with them.
Now THERE'S a risky prediction... And which investors are those, David, that YOU think are overlooking your oh-so-deftly exposed "elephants"?
"...How long this can continue to be the case is not known but, at some point, history suggests that the forces that tend to cause inflation, such as deficit spending, will have their day, and interest rates will rise..."
How brilliantly you summarize the blatantly obvious.
"...f you've made out a personal balance sheet lately, you probably didn't include in your liabilities your share of the national debt. You might be surprised to know that, by one measure, this would amount to a little over $230,000. Thus, if you are a family of five or more, your collective share would be over $1 million. Maybe this is a little over-dramatized, but it is a fact that the reputable Brookings Institute has said that our national debt, which is generally claimed to be about $8.7 trillion, is – in fact - $70 trillion, if unfunded liabilities for Social Security, Medicare and other programs are taken into account – and that's why you owe $230,000..."
Claptrap at it's very finest, David. Scare me some more please.
"...Indeed, much of the improvement in net earnings that companies have recorded in recent years has come from the whittling away of expenses, particularly labor costs..."
And that's a BAD thing?
"...At this point there is a great deal of quiet desperation being experienced by the many borrowers who were enticed into variable rate mortgages, many of whom simply didn't realize that their mortgage payments could skyrocket..."
Kinda like those who joined the National Guard, but "didn't realize" they might be called up to fight? Folks THAT stupid are probably getting exactly what they deserve... Wonder how many are Democrats? Lemme see, biggest crises are in California and New York. Yup. Democrats.
What is it you think you've accomplished here, David, other than to poke yet another stick in the eye of Big Business? What a waste of time.
Steve, I'll try to address your comments that don't seem to be simply pathetic attempts at being cheap shots...
YOU: "And which investors are those, David, that YOU think are overlooking your oh-so-deftly exposed 'elephants'?"
Answer: Equity investors
YOU: "...Indeed, much of the improvement in net earnings that companies have recorded in recent years has come from the whittling away of expenses, particularly labor costs...".........And that's a BAD thing?"
Answer: Not if you think that a hungry man eating his own flesh is a good thing.
YOU: "Kinda like those who joined the National Guard, but "didn't realize" they might be called up to fight? Folks THAT stupid are probably getting exactly what they deserve... Wonder how many are Democrats? Lemme see, biggest crises are in California and New York. Yup. Democrats."
Answer: I can't speak for New York, but the counties with the most foreclosures around here, in California, are Republic (whoops, I left off the "an"....sorry....purely a mistake..... the "an" was in my notes...can't imagine how that happened...)
YOU: "What is it you think you've accomplished here, David, other than to poke yet another stick in the eye of Big Business? What a waste of time. "
Answer: Well, that's a nice thought, and I truly appreciate it, but actually no one can really hurt big business since they've bought the government, lock, stock and barrel and have proceeded to methodically enrich themselves at the expense of the middle class, much of which evidently has its head too deep in the sand to realize it.....
Please remember that the unemployment rate is an extremely unrealistic number, increasingly so! When I left Portland, OR a couple years ago, the unemployment rate hovered between 7.5 and 8% -- usually the highest in the nation -- but as a person involved in politics and nonprofit issues in PDX, I knew that the real unemployment rate was closer to 12-15%, because the government numbers don't count people in the underground economy, they don't count people whose unemployment has run out, and they don't count illegals who can't find work as legal workers lower their standards.
Until you learn the nuts and bolts and *history* behind the econometrics, you really shouldn't trust any of them. Their definitions either change, or become obsolete (consider the change in importance of durable goods to our economy between the 1940's and today, or the cost of living index assumption that people eat at home as much as they did fifty years ago).
Lies, damn lies, and statistics, I say!
Thanks for the reminder!! Good job. Seriously.
The Emperor-Commander-in-Chief--Decision-Maker wears no clothes and has no brains. When the going gets tough, he goes shopping and heartily recommends that we do the same. It "grows" the economy.
David, anyone,
As soon as we get a "guest worker" program, no one will ever have to say the "tax" word again -- they'll grow the tax base and help out our Chinese owners by buying from walmart [that's what Walmart is for -- goods and goodies for the poor people -- even some jobs]. Star Wars or the Missile Shield and all those other mysterious things that we're not supposed to know about help grow the economy too. And, when push comes to shove, there are all those military jobs -- how are they factored into the "employment" count. How are the missile shields shown on the ledger? Methinks it's a big black hole -- star wars.
The Chinese own us and are eating us for breakfast, lunch and dinner. Good thing we're nice and fat, eh?
Steve H. Enjoy your ivory tower while you can; hopefully you'll never have to get a job should you miscalculate -- or that mythical beast "the market" develops a significant glitch. Paulson and Bernanke are not nearly as sanguine as you, but perhaps they're not as rich as you.
Not to worry. Every hear of Pay Go and the congressional Blue Dogs? Republicans 'used' to be the fiscal conservatives but they've fallen under the influence of special interests who like to make it up as they go along. Buy now; pay later, print more and hope for the best is not exactly "handling" things.
Answer: Not if you think that a hungry man eating his own flesh is a good thing.
David,
What a graphic picture of what is happening, but "what me worry," if it's not my arm? Not unlike, "don't have bread? -- then eat cake!" Furthermore, it's your own stupid fault if you only have cake to eat. Ooooo, what happens if the ignorant wretches rise up? Drugs, gangs and things? Or, just more elephants.
Martin D. Weiss, Phd, author of the best seller, Investing Without Fear, points out that every president since John F Kennedy has tweaked the way the unemployment rate is calculated to make it look a little better, and the cumulative effect of these changes over the past 40 + years has been significant.
He calculates that today's unemployment rate of - say 4.5% to 5% - would actually be 12% if tabulated in the manner it was back then.
Most other government numbers are also phony. The Government Accounting office says that if the government followed the same generally accepted accounting principles it demands of corporations, the 2005 deficit would have been $760 billion - more than double the official number. And even beyond that the deficit totals are grossly innacurate because they don't reflect the amounts purloined from Social Security.
So here we are - living in a world of phony numbers, fighting a war for phony reasons. Can we truly believe anything?
If I remember my history well, many a great civilization was destroyed from the inside....too many extremes, greed and violence ruled the land...,there are similarities here that are too close for comfort....Some how we have to get a handle on the direction we are headed....I feel like I am in the middle of a bad dream and can't wake up.
And we're not supposed to worry?
It's a good thing I've already picked out the bridge I'll be living under when I retire because there sure as h**l won't be any kind of Social Security left for me!
With the rate the cost of surviving, oops living, is going up, and the continued Extortion by the health insurers, if my Health issues haven't killed me by then, living under a bridge might well be my only option in 20 year's time!:) Good thing I live in south Texas... it only freezes for a couple of days a year down here!
the following comment:
"Economically, could things be any better than they are today? The unemployment rate is low, productivity is up, and salaries are finally rising faster than the rate of inflation, which is, itself, being successfully held in check."...dose not compute!
We are spending more than we are making and that NEVER works...we will indeed have a shock one of these days, if something dose not change...this is not showing a "glass half full - but more like HALF EMPTY"
Bush Celebrates Fourth Largest Deficit In History
Today, the Office of Management Budget projected a $296 billion federal deficit for fiscal year 2006. Bush held a press conference arguing that this is a vindication of his economic policies.
Actually, it would be the fourth largest deficit of all time. Here's the top five:
1. 2004 (George W. Bush) $413 billion
2. 2003 (George W. Bush) $378 billion
3. 2005 (George W. Bush) $318 billion
4. 2006 (George W. Bush) $296 billion (projected)
5. 1992 (George H. W. Bush) $290 billion
When President Bush came into office, he inherited a surplus of $284 Billion. At that time, the Bush administration predicted a $516 billion surplus for 2006.
The fact that Bush now considers a $296 billion deficit an occasion to celebrate shows how far we've fallen
Looks like the glass started out as half full and is now half empty!
Bush: Cheney Is A 'Half-Glass-Full' Kinda Guy »
Last week, Vice President Cheney said that the United States has "had enormous successes and we will continue to have enormous successes" in Iraq. This claim contradicted President Bush's speech two weeks ago, where he said the "situation in Iraq is unacceptable to the American people — and it is unacceptable to me."
"Today on NPR, senior correspondent Juan Williams asked Bush whether there's a "conflicting message" between Bush and Cheney. . . . Bush brushed him off, saying that Cheney is a "person reflecting a half-glass-full mentality." (We're assuming he meant "glass half full.")
Here are some recent examples of Cheney's "half-glass-full" views of Iraq:
"I think we have made significant progress." [1/27/07]
"If you look at what's transpired in Iraq, Chris, we've made enormous progress." [1/14/07]
Before the war, this mentality also led the Vice President to predict that the United States would be "greeted as liberators" in Iraq.
All kinds of people have been warning of the demise of the U.S. since I was a kid. After 40+ years of it, I just quit listening.
This country has withstood bad economics, bad presidents, social strife, wars, and all kinds of crisis. I don't think the U.S. is impervious to danger, but so far, the resilience and creative destruction has gotten us through. The ride may be rough, but it's not over.
The answer lies not in legal proceedings such as impeachment actions, etc; it lies in evening-up the female-male balance of elected and judicial power.
With 48 - 55% female legislators & judges, we will stop the economic drains caused by a solo patriarchy, immature as it is, which has gone "rogue." (thinking Elephant here)
With enough women taking full responsibility for the growth of this group of states we call a nation [including moral and ethical economic growth as well as social and wellness growth], we can bring the raging greed back to center and begin to transform it into its proper energetic expression: planetary stewardship.
Looking at the single white male on our monetary bills, I yearn for the day when, instead, we have a picture of a Doe and a Buck - a couple - representing an empowered, enlightened, mature Matriarchy partnering with an empowered, enlightened, mature Patriarchy, for the highest GOOD of ALL.
I like your ideas.
What do you say you and I get an exploratory party together, and go out and find a large island somewhere, and start a new nation!
If there's already native tribes there, that's okay. We'll just give them all kinds of worldly goods in exchange for land, until we need more and more territory to accomodate our growing society, and then we'll just give them some "gifts" (you know, quilts laden with Smallpox, that sort of thing).
Ah, it's useless.. No matter how much of a free and just new society we create, it's only a matter of time until greedy jackals get a stranglehold on the government, and the whole damn thing transforms into something that we (the Founders) wouldn't even recognize if we were able to see what became of it.
Nevermind.
Nice try, but I know you're not a cynic, just one of the dedicated, hardworking men who have literally created this country and have been given a kick in the shin for it. "We" are the island and we can change it. Just keep building those bridges.
Ok, just a tad cynical -- and I should know because it takes one to know one -- but cynicism is kin to healthy scepticism and we have learned what happens when we smile and swallow it whole -- hook, line and sinker. Keep building bridges and writing and, yes, when all else fails I admit I have an urge to kick a few shins.
Carolion,
I'm working on this. Thanks for your inspiration. Hummmm!
My shins are bruised are bleeding, as are those of the majority of Americans'. *I saw a report on the news the other day: 65% of American families now live from paycheck to paycheck.*
But you're right; I'm not a cynic by nature. But I'm increasingly being driven to cynicism as the weeks go by. If this Democratic Congress doesn't show me that they're willing to stick their necks out and stand up to the artificial aristocracy for the good of the American people, then I'm seriously considering a move to Germany, or maybe Sweden. (I was originally thinking Canada, but I'll have to see how this NAU thing pans out before I move there.)
Don't get me wrong, I love this country. I just don't like what I see happening to it. And I'm literally sickened by the Bill O'Reilly/Rush Limbaugh-led persuasion that claims "the Left" is responsible for all that ails America. Surely they are smart enough that they don't honestly believe their own poisonous, obnoxious rightist propaganda -- but unfortunately, alot of other people do.
These are the people who scare me; not only for what they are capable of, but for what they are willing to advocate in our name.
The world as we've known it is fading - because the paradigm is closing. New paradigm opening. YES for the Age of Peace. YES for the Sacred Twins [matriarchy & patriarchy].
Thanks Donna for your thoughts - I often think of the world we're passing on to our grandchildren, and - frankly - it's a little depressing...You also mention that important fact that Americans are spending more than they are making and here you are of course alluding to the fact that the Commerce Department announced on Thursday that the saving rate for 2006 was a minus 1% (following a minus .4% in 2005), the lowest level since 1933. Of course the reason in 1933 was that it was at the depth of the depression. The reason in 2005 and 2006 was that the orgy of mortgage borrowing and credit card debt was sustaining the economy.
Kathleen, perhaps I wasn't clear, the first figure you mention appears to be the annual deficit, while the second is the debt outstanding, I believe...but I like your point.
It appears that the ride will be rough, Pat, as you said and the country will probably survive and possibly change for the better, I believe, but there's still Donna's concern for what our future generations will have to live (or die) through...
And Steve, I think you were very appropriately cynical, and I agree with your point Carolian about having more women in politics....The Good Old Boy network sure isn't working.....