The End Game

It seems that with all of the news now days about Europe, and in particular Greece, the media seems to leave out the fundamental source of their problems. I think this paragraph from John Mauldin starts in on the root of the problem:

“This is the nature of the End Game I have been writing about. The decisions are now political. How do we unwind the debts and the leverage? How much pain do we postpone and how much do we take on today? It is the same question for much of Europe, Great Britain (serious problems there), Japan (which is a bug in search of a windshield), and the US. We now have a limited number of path-dependent options. By that I mean the political paths chosen by the various governments will dictate the economic path we go down.”

What it really comes down to is that governments have been put into place in order to represent and make decisions for the people they govern. Throughout the world and in the U.S. over the last 50 years or so, the people have demanded that their government do more. Whether they want them to help the suffering poor or better protect them we have seemed to look to government more and more to solve all of the problems. The people have seemed to demand this without giving a thought to the consequences. For example (and I am not giving this to pass judgment on whether it was a good or bad idea): After the 9/11 attack the people demanded to know why the government had not protected them from this terrible disaster. We wanted them to fix the problems and do what it takes to prevent a horrible thing like this from ever happening again. Well, we got what we asked for in the way of more acts which gave the government the power to watch for terrorists and terrorist actions more closely. That same power gave them the ability to invade privacy, which is not something people wanted.

While protection is one thing, the problem that is at the forefront has to do with money. Money, when it comes from the government, is pretty much labeled as an entitlement. Meaning, the people feel they should always get that kind of support and that the government is responsible for ensuring that support never ends. At the start these entitlements may seem like a good thing. Shouldn’t we all help those who have worked hard all their life and now can’t work due to age? Shouldn’t we provide medical care for those who can’t pay for the service and resources used in their care? Well, what happens if we decide that in order to help all those who are no longer able to work our government will choose to start paying them towards the end of their life and they decide on an age based on life expectancy at the time, but life expectancy increases? Or better yet, what if individuals encounter a set back in their working career and decide to not work anymore because the government will pay them? Or, what about the widow of the person who worked? Shouldn’t we provide for her and her children too?

My point is, once money starts to flow for free you will have millions of people lining up to claim it. They will flock to those who promise more free money, especially when it comes from someone else who has “too much” of it. When the politicians who, let’s face it, got into their position to perhaps help but now must keep their job regardless of their current motivation see that all they have to do is make some promises of money (in virtually any form) and they’ll get re-elected, they will offer up more entitlements or one-up the current ones.

Now, back to our current predicament. What we are seeing now, especially in the more socialist countries, is that this spending and money (which has always had to come from somewhere) is starting to dry out. They have either been getting money from leveraged borrowing or taxing their citizens. Those citizens have gotten smart and have figured how to better hide their money (and I say all the power to them). The problem, of course, is that governments are finding that they have increased these entitlements so much, that they can no longer fund them. In fact many of these governments (Spain, Greece, Ireland, etc.) see that if they don’t go back to the people and reclaim some of what was promised they will face a myriad of painful outcomes. Some of these governments have done it and already are seeing the reaction from the people.

The problem in the U.S., as I see it, is that our government sees this problem and they are facing it in pretty much the same way they have addressed these problems over the last several decades: A lot of blaming, a lot of spending, and further putting off of the tough decisions.

When John Mauldin, and many others who may title it differently, refers to the End Game, he is talking about the fact that these decisions were able to be put off for years, but now they must be addressed. The painful game that we are playing is what choice will be made? Will we rip off the band-aid and deal with the immediate pain that very well could temporarily shock the system? Or do we slowly pull it off dragging out the pain but perhaps avoiding the shock?

Many will argue against the idea of having to remove any of these entitlements. Just because we are in a fiscal crisis and the money has slowed doesn’t mean the tough questions will go away. How do we take care of the widow and the suffering? The answer to most reading this blog is simple. We take care of them and the government does not. Meaning, government needs to get out of the way and allow the people to choose to take care of those in need. Charitable donations are massive in this country and do a lot of good. While many would say this is hopeless faith, I believe that if more of the wealthy – and I include myself here since I am definitely above the poverty line – had greater and freer (meaning they wouldn’t have to go to excessive lengths to hide it from the government) ability to use their own money they would give even more. I have mentioned the fourth turning before in this blog. I believe the fourth turning, or major shift our country makes, will be to bring us back to power for the people. The tea parties are a small evidence of that. I believe the rising generations will take these problems head on and make the right decisions and by rising generations I mean those who are at the tail end of Generation X and all of Generation Y.

While it does seem that everyone in the media is pessimistic these days I, and I hope you do too, still have a lot of hope for our nation.

President's Budget

I thought this snippet from Greg Mankiw summed up my feelings on the budget fairly well. I usually try to read through anything before commenting on it but when I downloaded the budget and it was over 400 pages I decided there were plenty of other books I'd rather read. That, and after the first paragraph where it stated that the American dream was to become middle class. Not too sure if I agree with that. Anyway, on to Mankiw's comments:

"The troubling feature of Mr. Obama’s budget is that it fails to return the federal government to manageable budget deficits, even as the wars wind down and the economy recovers from the recession. According to the administration’s own numbers, the budget deficit under the president’s proposed policies will never fall below 3.6 percent of G.D.P. By 2020, the end of the planning horizon, it will be 4.2 percent and rising.As a result, the government’s debts will grow faster than the economy. The administration projects that the debt-to-G.D.P. ratio will rise in each of the next 10 years. By 2020, the government’s debts will equal 77.2 percent of G.D.P.

This level of indebtedness has not been seen since 1950, in the aftermath of the borrowing to finance World War II.Making matters worse, these bleak budget projections are based on relatively optimistic economic assumptions. The administration forecasts economic growth of 3.0 percent from the fourth quarter of 2009 to the fourth quarter of 2010, followed by 4.3 percent the next year. By contrast, the Congressional Budget Office predicts growth of 2.1 percent and 2.4 percent for these two years. Lower growth would mean less tax revenue, larger budget deficits and a more rapidly increasing debt-to-G.D.P. ratio.The president seems to understand that the fiscal plan presented in his budget is not sustainable and, as such, is not really a plan at all. That is why the budget prominently calls for a fiscal commission that will be charged with “identifying policies to improve the fiscal situation.” The goal, the budget says, is “to stabilize the debt-to-G.D.P. ratio at an acceptable level once the economy recovers.”

In other words, President Obama’s long-term fiscal strategy is to appoint a commission to figure out a long-term fiscal strategy.