Just the Facts, Ma’am .
-Joe Friday, Dragnet
This blog post is long overdue, but with the hijinks in Washington during most of October, the quiet time after Halloween going into the end of year Holiday season seems to be a good time for a summary. Most of these letters are about the investment markets, but this deals with the short- and long-term U.S. economic climate. Short is considered 7 -8 years out; long is 25-30 years into our future. In late September, Barron’s published an article entitled Budget Disaster, profiling not what might have been the results on Congress’ scary October shenanigans, but outlining a report published by the non-partisan Congressional Budget Office. On October 25, BCA Research published a similar article entitled It’s Time for a Reality Check.
While both articles discuss the U.S. fiscal short- and long-term outlooks, BCA focuses on the short term. Other than high cost of healthcare in the United States, they are positive on our economic outlook, compared to U.S. historical averages and also compared to our developed country peer group. Their main points are these:
In contrast, the Barron’s article focused on the long-term, and had very little positive to say. Both articles focused on the negative of the extremely high cost of healthcare in the U.S as compared to our peer group, but Barron’s concentrated on the long term future of U.S. entitlement programs, including the new Affordable Care Act. Our federal debt is currently 73% of our annual economic output and the CBO projects by 2038 it will grow to between 100-190% – well above where Greece was during the recent financial crisis. Obviously, the demographic of the Baby Boomers retiring and using more healthcare as they age is the culprit. Bill Clinton, in his 1999 State of the Union address, with a rare budget surplus, urged Congress to seize “an unsurpassed opportunity to address a remarkable challenge, the aging of America.” Obviously, our Congress didn’t seize the opportunity, but simply ignored it. Barron’s goes on to state, fourteen years after that challenge, “…the next decade is the relative calm before the coming storm. Any short-term improvement in the budget during the recent upswing in the business cycle is negligible when measured against looming long-term shocks.”
Both articles concur that the main stumbling block to mitigating these long-term problems, to reforming the existing entitlement programs, is lack of political will in Washington. The fact that we Americans feel entitled to our entitlements makes it that much harder for Congress to make some very difficult choices. In May of this year, Clinton circled back to his comments made years ago. At an economic conference, he stated that deficit doves are “right in the short run” to continue our current easy money policies. But he then stated that deficit hawks are “right in the long run” to be calling for entitlement tweaks now “to avert a fiscal crisis resulting from soaring debt.”
The CBO’s latest report was published on September 17. At the coinciding news conference, CBO Director Elmendorf stated “We as a society have a fundamental choice of whether to cut back on those programs or raise taxes to pay for them. So far we’ve chosen to do very little of either.”
So does “just the facts, ma’am” lead into “just the conclusions, ma’am”? Both reports lead to the conclusion that over the next seven to eight years, our national debt burden will continue to ease, albeit from a currently high level. The research also draws one to conclude that the extraordinary debt we have added to the national balance sheet may not cause extraordinary inflation, although this conclusion seems to be more uncertain. But both reports warn that this “calm before the storm” will deter the sense of urgency politicians need in order to deal with program tweaks now, rather than waiting until the debt burden accelerates so rapidly that it gets out of control. (I have the benefit of seeing the graphs of the projected debt – imagine a line like a hockey stick, straight out for a short while, then almost straight up.)
As for the markets, it is very difficult to project out that far into the future with any certainty, but one just has to remember the painful inflation of the 1970’s and the painful markets during that period to understand that the projected extraordinary debt burdens would be a hindrance to good returns.
As always, thank you for your confidence in the team at Longview.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Longview Financial Advisors, Inc.), or any non-investment related content, made reference to directly or indirectly in this newsletter or post will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter or post serves as the receipt of, or as a substitute for, personalized investment advice from Longview Financial Advisors, Inc.. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Longview Financial Advisors, Inc. is neither a law firm nor a certified public accounting firm and no portion of the newsletter or post content should be construed as legal or accounting advice. A copy of the Longview Financial Advisors, Inc.’s current written disclosure statement discussing our advisory services and fees is available for review upon request.