Heed This Warning!

In a speech given before the Commerce Club of California on May

28^th of this year, Richard W. Fisher, CEO and President of the Dallas Federal Reserve, made remarks that we best summarize like this:

·         (In reference to a speech given by Bill Martin, Fed Chairman under LBJ, to Columbia University 43 years ago) Here are some excerpts:

o   “Tonight, I want to talk about a different matter. In keeping with Bill Martin’s advice, I have been scanning the horizon for danger signals even as we continue working to recover from the recent turmoil. In the distance, I see a frightful storm brewing in the form of untethered government debt. I choose the words—“frightful storm”—deliberately to avoid hyperbole. Unless we take steps to deal with it, the long-term fiscal situation of the federal government will be unimaginably more devastating to our economic prosperity than the subprime debacle and the recent debauching of credit markets that we are now working so hard to correct.”

o   “Typically, critics ranging from the Concord Coalition to Ross Perot begin by wringing their collective hands over the unfunded liabilities of Social Security. A little history gives you a view as to why. Franklin Roosevelt originally conceived a social security system in which individuals would fund their own retirements through payroll-tax contributions. But Congress quickly realized that such a system could not put much money into the pockets of indigent elderly citizens ravaged by the Great Depression. Instead, a pay-as-you-go funding system was embraced, making each generation’s retirement the responsibility of its children.”

o   Now, fast forward 70 or so years and ask this question: What is the mathematical predicament of Social Security today? Answer: The amount of money the Social Security system would need today to cover all unfunded liabilities from now on—what fiscal economists call the “infinite horizon discounted value” of what has already been promised recipients but has no funding mechanism currently in place—is $13.6 trillion, an amount slightly less than the annual gross domestic product of the United States.

o   Please sit tight while I walk you through the math of Medicare. As you may know, the program comes in three parts: Medicare Part A, which covers hospital stays; Medicare B, which covers doctor visits; and Medicare D, the drug benefit that went into effect just 29 months ago. The infinite-horizon present discounted value of the unfunded liability for Medicare A is $34.4 trillion. The unfunded liability of Medicare B is an additional $34 trillion. The shortfall for Medicare D adds another $17.2 trillion. The total? If you wanted to cover the unfunded liability of all three programs today, you would be stuck with an $85.6 trillion bill. That is more than six times as large as the bill for Social Security. It is more than six times the annual output of the entire U.S. economy.

o   Why is the Medicare figure so large? There is a mix of reasons, actually. In part, it is due to the same birthrate and life-expectancy issues that affect Social Security. In part, it is due to ever-costlier advances in medical technology and the willingness of Medicare to pay for them. And in part, it is due to expanded benefits—the new drug benefit program’s unfunded liability is by itself one-third greater than all of Social Security’s.

o   Add together the unfunded liabilities from Medicare and Social Security, and it comes to $99.2 trillion over the infinite horizon. Traditional Medicare composes about 69 percent, the new drug benefit roughly 17 percent and Social Security the remaining 14 percent.  

o   Let’s say you and I ….. and every U.S. citizen who is alive today decided to fully address this unfunded liability through lump-sum payments from our own pocketbooks, so that all of us and all future generations could be secure in the knowledge that we and they would receive promised benefits in perpetuity. How much would we have to pay if we split the tab? Again, the math is painful. With a total population of 304 million, from infants to the elderly, the per-person payment to the federal treasury would come to $330,000. This comes to $1.3 million per family of four—over 25 times the average household’s income.

o   The way we resolve these liabilities—and resolve them we must—will affect our own well-being as well as the prospects of future generations and the global economy. Failing to face up to our responsibility will produce the mother of all financial storms. The warning signals have been flashing for years, but we find it easier to ignore them than to take action. Will we take the painful fiscal steps necessary to prevent the storm by reducing and eventually eliminating our fiscal imbalances? That depends on you.

o   I mean “you” literally. This situation is of your own creation. When you berate your representatives or senators or presidents for the mess we are in, you are really berating yourself. You have elected them. You are the ones who let them get away with burdening your children and grandchildren rather than yourselves with the bill for your entitlement programs.

Mr. Fisher’s comments are unnerving to those of us who remember 10% unemployment. In the 30’s it got over 30%. The impact of the current administration's spending is setting up the nails for our financial coffin. To fully grasp the importance of these comments you should read the entire article: http://www.dallasfed.org/news/speeches/fisher/2008/fs080528.cfm

Another article worth reading:

Bailout Pales Next to Budget Crisis, Mike Lillis of the Washington Independent 10/09/08

There are a lot of comments that I could make right now, but none of them would do justice to the injustice served upon us by our Congress. They take credit for serving up pork and earmarks to us without even the remotest idea of how to address this subject with their constituents, while they enjoy a separate retirement package that gives them full benefits regardless of length of service. That is ludicrous. Since they are so anxious to strip corporate CEO's of their big bonuses when they screw up, perhaps a quid pro quo is in order. However, then you would have to determine when they have screwed up, and if they can slip earmarks and pork into laws with impunity, good luck pinning them down on their mistakes. Line item vetoes sound good on paper, but they leave too much opportunity for abuse from the White House 

Neither Presidential Candidate has even mentioned this issue in terms of the disaster it will become if we don't get a hold of this problem and deal with it. McCain talks about the American worker like they are miracle workers and Obama wants to return to the Clinton tax schedule, like that will balance the books. Maybe he should have gone to Harvard B School. 

Send a letter to your Congressmen and Senators. Ask them when they are going to take this on. Work on removing them from office if they don't respond. Make no mistake about this. Inside of 20 years the military protection we currently enjoy will no longer be affordable. Expenses will creep up to rob us of our security like gremlins in the night, while we are sleeping in a fog of complacency. And once again, people will wonder if the Kondratiev Wave was really a myth. Sound a little over the top? Smell the coffee, so is the problem.