New Book - America The Broke

[Telly]

"America The Broke" by Gerald J. Swanson.

I'm not a financial genius. But I'm not an idiot either, having been able to EER! This book is disturbing, as it dovetails with my feeling of major trouble ahead if there aren't some major major changes.

I'm not a gloom and doom person, but it looks like arguing over SWR rates and the like is a fool's paradise to our debt/deficit/Medicaid(deficit)/Medicare(deficit)/Soc.Sec.(deficit) problem ahead. Federal Debt and the increasing amount of tax revenue to service it. Hiding under the present low low interest rates, that have nowhere to go but up. A future of increasing deficits, a lot dependent on entitlement programs. There is only so long that you can spend what you don't have... and what is that point? What associated factors will make the tipping point occur suddenly?

Nothing like mentioning debt or deficit to get people's eyes to glaze over, and for them to stammer something like "it's all numbers", "it'll be okay" (duh!) what makes you say that? "It's never happened before..." (well, not to US, but it has to OTHERS!).

To me, the premise of this book is a sound one. We may argue over politics, and who did what when, but that is water over the dam. And the water keeps on flowing...

Having had to lay off people over multiple recessions, I can say that the sacred cows that "can't be touched" will get gored when basic survival of the organization is at stake.

There is no way I can do this book justice in a few paragraphs. Go borrow it. Its more than a book, it's an idea, a vision of the future, and how we are getting there by keeping our collective heads in the sand.

Would be great if we could get President(s) & Congress & politicians in general & special interests & social "activists" to agree we have a big and fast growing problem, and to get to work on it. Yeah, it would be great. Believing in the Tooth Fairy seems more likely. :P

Yes, There are quite a few books out on this very topic. Pete Peterson has one also.

Does this author have any suggestions for the average Joe, besides sticking your head between your legs and kissing your A** goodbye?

[Jarhead*]

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Yes, There are quite a few books out on this very topic. Pete Peterson has one also. Does this author have any suggestions for the average Joe, besides sticking your head between your legs and kissing your A** goodbye?

Hey Cutthroat: I'm a busy beaver today. Was suppossed to play in a golf tournament, and was cancelled because of rain.

Stick to reading Sports Illustrated, or Outdoor life. Books like above, (Remember "Future Shock", and "Soylent Green", from the 70s), seem to only serve one purpose. Scare the hell out of the reader. I really have never seen anybody change their habits, and if that is the case why bother, unless we are looking for something else to worry about.
Hell, you've got enough problems. (Not easy deciding what pattern to use
Regards, Jarhead

[Telly]

His suggestion is to lobby our legislators. They are the only ones who can reel in deficit spending and tackle the growing entitlement program mess.

(I just realized that I used the words "reel in" and "tackle" in the sentence above. No pun was intended!)

He didn't mention it, but another possibility would be to die soon enough before interest rates go way up, and it will all become someone else's problem then.
I will probably still be around, and my children sure will be.

I don't have a government guaranteed pension, but one could say about that situation: Guaranteed by WHO, with WHAT? hahahahahaha

The whole concept of this book has become a real lead-in to the next book I am reading, by a well-known and respected financial journalist. This is not good!

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Hey Cutthroat: *I'm a busy beaver today. * *Was suppossed to play in a golf tournament, and was cancelled because of rain. Stick to reading Sports Illustrated, or Outdoor life. *Books like above, (Remember "Future Shock", and "Soylent Green", from the 70s), seem to only serve one purpose. *Scare the hell out of the reader. *I really have never seen anybody change their habits, and if that is the case why bother, unless we are looking for something else to worry about. Hell, you've got enough problems. *(Not easy deciding what pattern to use Regards, Jarhead

yup, you're probably right.

And as I remember it, we solved this problem on the forum last week. We all concluded that Baby Boomers will work at their desks until they die, mostly because they won't have enough money to fund their standard of living

[GTM]

Overspending is a problem but
What exactly does the author and others who see a financial crisis coming believe life will be like for those who live the United States.

Will the US default on their obligations and bonds?
or just print more money pay them off and create inflation.

Will the rich get richer and the poor poorer?

Or as previoulsly asked how will it effect the average person with savings, a home and a pension.

[Hyperborea]

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Overspending is a problem but What exactly does the author and others who see a financial crisis coming believe life will be like for those who live the United States. Will the US default on their obligations and bonds? or just print more money pay them off and create inflation.

Either one will devalue the US dollar and make all imports exorbitantly expensive including important things like oil.

I haven't read the book yet but I did put it on reserve at the local public library (along with "The Birth of Plenty" by William Bernstein). What would be possible hedges against this would be broad diversification as being discussed in another thread on William Sharpe's lecture series (I'm in the process of reading that - seems worthwhile). That diversification should have significant non-US equity exposure (perhaps market cap - i.e. ~50-60% non-US) and possibly commodities.

[Telly]

I should have posted this topic while I still had the book in hand. *Too late, it is in someone else's sweaty hand now.

But let me throw a few items out from memory:

For FY2003, something like 17% of incoming tax revenue went right back out again to service the outstanding debt. *That is 17% of revenue that can't be used for anything else. *And the number is growing with the big deficits. *And that is with very low interest rates.
He asks a question - What interest rate would it take such that ALL of 2003 tax revenue would be needed to service the debt (leaving 0 dollars for all the entitlement programs, and defense, etc.)? *He comes up with 18%. Which is a number we exceeded in the early 80's.

Entitlement programs (which is where the majority of the federal budget dollars are spent) are inflation indexed. *Which means in the yearly budgeting process, most of the money is spent without even doing anything. *Add to that the $ needed to service the ever-increasing debt.

A vicious positive feedback loop (my words) is created. *Inflation goes up a few points - requiring increases in all of the entitlement programs - which requires even more borrowing. *At increased rates, so the percentage of revenue needed to service the debt increases. *Feed this back into the top and run it through again. *And then again, and...

Meanwhile, the International Monetary Fund has already warned the US Gov. that the high deficits will be destabilizing both us and the world economy (I remember reading that IMF pronouncement in the newspaper, too).

As our financial situation gets worse, more borrowing is needed. *The big loaners are foreigners. *Most of the debt is held outside of the US. *They will get paid back in dollars. *Dollars of ever-decreasing value. *While they get to feeling uncomfortable about our situation (it's their money after all! They ain't doing it out of the kindness of their hearts!). *So they demand higher interest rates to reward their increasing risk of loaning us money. *And to make up for the devalued dollars they get paid back with.

As interest rates increase, the borrowing gets worse, the situation decays, they finally stop loaning money. *The Gov goes broke, the economy collapses. *Along the way, the Gov started to print more dollars, but that just loops around and makes it worse by deflating the dollar's real value even further.

There is a chapter where he creates a fictitious family, and how they are impacted as it all suddenly unravels. *And disbelief reigns to the end.

Right now, and for quite a few years, we have been borrowing incredible amounts of money from foreigners so that we don't have to save, and can spend more than we make. *Consume today, and pay tomorrow. *But slowly the tide is turning, more are starting to wonder about being paid tomorrow.

Now add into all of that the large amount of money that will have to be borrowed to finance Medicare & SS for the boomers. *And the Medicare drug plan...

My own analogy here is a person who buys more house then they can afford, and then runs up the charge cards, etc. *Finally, they are tapped out. *They declare personal bankruptcy. *And then they are born anew. *Their little financial disaster did not change the value of the US currency. *And they had a net to fall back into - the rest of the US economy which bears the cost of their foolishness.
But who will bear the cost of OUR foolishness? *And the US currency is devastated. *I don't think there is anyone big enough to dust us off and set us back on our feet again.

Separately, we all have been used to the US Dollar being the international standard. *What was the standard in say, 1890? *Did they think they would ever lose it? *OPEC standardized on the Dollar. *We have competition now. *I expect OPEC to switch to the Euro within the next 10 years if progress isn't made.

Other than biting the bullet and fixing the problem in time, which will require hard choices, the other alternative would seem to be to get far away from the US economy, and any other economies that would be significantly impacted by it. *Hmmm, suggestions? *Rwanda? North Korea? *not looking too good from my thinking

Hello Telly! Good post, if a bit gloomy. Actually, none
of what you posted is any surprise to me, since I am a firm believer that "Murphy was an optimist!" It made me
think about a debate I sometimes had with my ex.
She opined that I was a pessimist, whereas I saw myself
as a cynic. The subtle distinction excaped her. Anyway,
I expect the government (and others) to screw things up
but I also have complete confidence in my own ability to
deal with the fallout. I view this as cynical optimism,
which is certainly not an oxymoron as some might
have you believe. Viewed from another angle........
I see a bazillion problems (economic and otherwise)
which may befall me, but I also see a bazillion solutions.

John Galt

[Nords]

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I see a bazillion problems which may befall me, but I also see a *bazillion solutions.

In the Navy that's referred to as "being a nuke".

The colloquial version of that cynical optimism is "f$%ing nuke!"

[Michael]

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What exactly does the author and others who see a financial crisis coming believe life will be like for those who live the United States.

The author shows what happened in other countries in similar situations. The currency was destroyed, and a new one was issued in its place. Anyone who had savings lost it all, and pensions were made worthless. Life went on, but the savers and pensioners had to start over from scratch.

Having seen a number of these gloom and doom scenarios in the last 40 years, the one thing that they have in common is that they sell books.

Human nature is more likely to believe in a doomsday event and so these books are very believeable. And someday one of these predications will more or less come true.

Looking back over the other doomsday scenarios. In particular, one by Ravi Batra. He was even questioned about why his doomsday scenario did not come to pass. He answered that the U.S. took actions that averted the crisis. And that is what these scenarios often overlook. As soon as a Crisis is upon us, there are actions that are taken that changes the crisis and a new scenario develops that is unforseen today.

After all, it only takes 1 domino out of place in a line of 10,000 to completely stop the chain reaction.

[Telly]

The biggest action that needs to be taken is mathematically simple.

Raise taxes, cut spending. More of the latter than the former. But both are needed.
I would hit EVERYONE, from the richy-rich media darlings & sports figures, down to the downtrodden huddled masses. A National effort. Everyone feels some pain. The longer it is put off, the uglier it will be.

Mathematically simple, but the devil is in the details. And with approx. 285 million devils, see the problem?
The devil count may be low, maybe we should have a devil multiplier for each lobbyist/special interest/activist/etc. person.

[Telly]

In the book, Swanson also talks about Canada. How in 1995 an editorial by the New York Times said Canada was becoming a third-world country due to their ever increasing economic problems. The Canadians got upset, but took it to heart. They all got together and ushered in major economic reforms. I guess I was too busy then to have taken notice of it. Any Canadians here to comment on that?

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A National effort. Everyone feels some pain. The longer it is put off, the uglier it will be.

We will have to have the first crisis first.

This nation just voted for a lot more Tax Cuts and a Lot more spending. That's what they got the last 4 years and during the election the chant was "4 more years".

[Hyperborea]

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Any Canadians here to comment on that?

It was mainly due to public concern at the mounting debt that made it an issue. *The party that came to power in the 1993 elections (the Liberal party) brought in budget reforms and cut programs to bring the deficit in line and eventually the debt once there was a budget surplus. *The surplus is being used partially to increase some program spending again too but it is easier to do now that fewer budget dollars have to go to finance the debt. *The guy who was the Finance Minister at the time (Paul Martin) is the current Prime Minister.

These budget reforms were partially a reaction to the free-spending corporate welfare Conservative party. *They no longer exist now but they were similar to the US Republicans without the bible-thumping element. *Since then they have merged with a party known as the Reform party which added serious amounts of bible-thumping. *If they get into power I guess they will bring back the corporate welfare of the Conservative party side of them coupled with laws forcing their religious beliefs on others. Maybe this is part of the reason for America's ballooning deficit (and debt)?

[Jane]

Ditto what Hyper said. I just caught on the news today that our national budget surplus is now around $8 Billion (Cdn of course).

Feels good to me. There are lots of times when I moped around thinking of the tax rate we have to pay but then the almost-free health care (free for me as my employer pays the rest) and the budget surplus made the tax rate almost bearable.

That said, if I have to choose between lower tax rate resulting in budget deficit and higher tax rate resulting in budget surplus, I'll choose budget surplus and the associated tax rate any day. Other Canadians may not feel this way though, I don't know. To me, good government (like good company) *has* to keep a black bottom line.

Yes, I did vote for the Liberal.

Jane

[GTM]

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The author shows what happened in other countries in similar situations. *The currency was destroyed, and a new one was issued in its place. *Anyone who had savings lost it all, and pensions were made worthless. *Life went on, but the savers and pensioners had to start over from scratch.

If that happen in the US I would think it would have a major effect on all currencies.

Is there any currency that can survive a default of USD.
If so which ones?

[BigMoneyJim]

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The author shows what happened in other countries in similar situations. The currency was destroyed, and a new one was issued in its place. Anyone who had savings lost it all, and pensions were made worthless. Life went on, but the savers and pensioners had to start over from scratch.

What happened to those who were deeply in debt? Were all debts forgiven? If not, what about bond holders?

What happened to corporate stockholders? If the company survived surely it must have some value in the new currency. Same question for other equity investments.

[Hyperborea]

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What happened to those who were deeply in debt? Were all debts forgiven? If not, what about bond holders?

The currency becomes devalued. *If Bush decides in his 4th term to replace the US dollar with BushBucks(tm) and each new BushBuck(tm) is set at let's say $1000 (which have been devalued through incredible fiscal stupidity to be equivalent to say 0.001 Euro) then all debts outstanding become valued at 1/1000 of the new currency in use. *All old debts were priced in old US dollars and in new BushBucks(tm) are incredibly cheap.

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What happened to corporate stockholders? If the company survived surely it must have some value in the new currency. Same question for other equity investments.

Any hard assets or equities have whatever price the market is willing to pay for them in BushBucks(tm). *However, if history is any guide then you may need to go through a couple of generations of currency revaluing before the underlying problems are fixed.