We wanted to review with you some interesting information we heard at the conference that Bill just returned from sponsored by the Financial Planning Association in Anaheim, California. There was a prominent economist who was quite interesting whose name is Marci Rossell. She was the chief economist for CNBC and was an economist at the Federal Reserve Bank of Dallas, as well. She gave some very interesting comments regarding the economy that I thought would be worth sharing with all of our clients and friends.
She said in a financial crisis there are three phases. The first phase or pre‑phase was the credit crunch before the crisis actually happened. The second was the containment phase in which the government had the attitude that “big institutions were too big to fail.” The failure of Lehman Brothers really exacerbated the crisis. At that point, the rule book went out the window and really accelerated the crisis. The third phase is the resolution phase where the Fed pumped in the economy significant amounts of money to stimulate the economy.
Marci said there were three categories of spending. First was the financial stabilization of the economy, which had to be done. The second was what she called cash for everything which included “cash for clunkers” and the $8,000.00 homeowner's credit. [The cash for clunkers program was a net cost to taxpayers of $2000 per car] She feels both were a waste and unnecessary and really didn’t help the economy. We agree and feel it's only a short-term fix. The third is the economy of war, which contributes 2 trillion dollars of the deficit regarding Iraq and Afghanistan.
In her opinion, the economic recovery began in early September 2009. The unemployment rate always continues to rise after the end of a recession. She calls this a jobless recession. By extending unemployment benefits in a recession, it always extends the period of unemployment. She feels we are in a recovery because oil prices bottomed in March 2009 at approximately $30.00 a barrel and is now $73.00 a barrel. Oil prices are always a leading indicator of the economy improving or recovering. She said there has been a radical increase in savings rate to 6 percent from a negative savings rate in a very short period of time. That's a very good sign and far better than conspicuous spending of the past.
She thinks the real estate markets are starting to stabilize and close to fair value. The median house is finally affordable for median income buyers. It usually takes ten years to climb back in real estate prices from a market bottom and her opinion is the peak was 2006 so that she doesn't expect real estate prices to really increase until 2016. So, basically no growth until then. That's consistent with some of the comments that we have heard from others. At this point, she's not concerned about deflation. She said prices always fall in a recession in the short run and allows the economy to recover. She feels it is a self correcting mechanism. In her opinion, what drives growth is corporate profitability. She expects inflation to be 3 to 4 percent maybe in 2010 because when so much money goes into the economy it will stimulate at least some inflation. [That seems to be in conflict with what we heard an economist say last May who felt that there wasn’t going to be any inflationary pressure until probably 2015 because we wouldn’t reach full employment until then. Obviously, not every economist agrees on this.
She felt that the U.S. dollar has dropped drastically over the last six months, but the dollar is just going back to its normal level after the financial crisis. The decline in the U.S. dollar benefits our exports and helps drive the economic recovery. She thinks we will have an export driven recovery. She does expect the dollar to continue as the reserve currency.
She felt that income taxes will have to go up and there won't be any choice. Taxes will have to increase or our interest rates will go sky high. She feels the federal budget deficit needs to be dealt with. She feels the government should force people to obtain health insurance. Young people would go into a pool and make it far better for all of us. She doesn't expect much from healthcare reform. She feels they should eliminate the employer tax break for health insurance and feels that health insurance shouldn't be tied to the employer at all.
The second speaker was David Walker who is from the Peter G. Peterson Foundation. Their website which you might find interesting is pgpf.org. His talk was “America on the Brink of Financial Crisis”. He was the most recent comptroller general of the United States and he is the CEO of the Peter G. Peterson Foundation. He has traveled the country on a fiscal wakeup tour and his tour has been chronicled in the critically acclaimed documentary I .O.U.S.A. which was released in the summer of 2008. He combined a realistic analysis of the financial crisis facing America with an optimistic faith in our country's ability to overcome this enormous challenge if we, the people, wake up and do our part.
He said our current national debt of 11 trillion is cause enough for major concern, but that figure doesn't account for the gap between future promised and unfunded Social Security and Medicare benefits, as well as a range of other commitments and contingencies the federal government has pledged to support. With known demographic trends and skyrocketing health costs and with baby boomers, who represent one‑quarter of the U.S. population, that will put significant pressure on Social Security and especially Medicare, given rapidly rising healthcare costs. Unfortunately, younger workers, our children and grandchildren, will ultimately have to foot the bills. His opinion is we will need to mend our fiscally irresponsible ways, change current federal programs and tax policies, and create a climate that is more favorable to future economic growth and good government.
In his opinion, what needs to be done is that elected officials must start to close the gap between spending and revenues that results primarily from large and growing unfunded promises for Medicare and Social Security. Projections show that by 2028 revenues of about 18 percent of GDP, the level we are used to, will not even cover net interest, Social Security, Medicare and Medicaid. The federal government will have to borrow to pay for all those activities, including education, national defense and homeland security. Otherwise, in his opinion we would have to do without these programs. He feels we need to implement statutory budget controls that address discretionary and mandatory spending, as well as tax preferences both in the short-term and over time. He felt we need to pursue comprehensive tax reform that makes the system more streamlined, understandable, equitable and competitive while also generating adequate revenues. He feels the need to reprioritize and reengineer the base of the federal government to focus on the future and generate real results. He feels we will have to achieve Social Security reform that makes the program solvent, sustainable, secure and more savings oriented. He feels the need to reduce the rate of increase in healthcare costs and more effectively target related taxpayer subsidies and tax preferences. He also felt that we'll need to pursue comprehensive healthcare reform that addresses coverage, cost, quality and personal responsibility and ensure that we will have processes that will enable us to achieve the above objectives within a reasonable period of time.
As always, if you have any questions or comments please don’t hesitate to contact us.
Sincerely,
William T. Morrissey, CFP
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