Please Listen: The Problem is Too Much Debt

For the past two years or so, my prediction for the cumulative debt of the United States government over the next ten years has been in the $15 to $20 trillion range.  This would more than double the current amount of government debt outstanding.

Since the events of the past few days in Washington, D. C., my prediction for the cumulative debt of the United States government over the next ten years is still in the $15 to $20 trillion range.

The most descriptive characterization of the “debt deal” that I have heard is that Congress (and the President) has just “kicked the can down the road.”

In this, the United States government seems to be in the same league as their “kin” in the eurozone.  One has to look hard to see any evidence of leadership. (See my post http://seekingalpha.com/article/280658-in-europe-the-issue-is-leadership.)

As far as the Obama administration is concerned, in my mind, this “team” has observed the creation of three “camels” on its watch.  The first camel was the health care bill.  The second was the Dodd-Frank financial reform bill. (See my post http://seekingalpha.com/article/281090-the-future-of-banking-dodd-frank-at-one-year.)

The third camel is, of course, the just passed “debt deal”. 

The general comment about all three is that at the birth of all three, people were very unhappy with them. 

Never can I remember, except maybe under President Jimmy Carter, a President that exhibited less leadership in such important areas.  President Obama presented no “plan” to Congress in any of these efforts.  People say that the administration was responding to the “health care plan” rebuff experienced by the Clinton administration in the 1990s and wanted to involve Congress more from the start of any legislative attempt.  I believe that this was a gross mis-reading of the events surrounding the Clinton initiative. 

However, this strategy of holding back and letting Congress take the lead in proposing and disposing resulted in something more like chaos or anarchy than leadership.  And, this strategy has produced three camels that nobody really likes. 

And then people worry about jobs and the state of the economy.  How can you create smaller deficits through cuts in government spending without causing further danger to the health of the economy?

It seems like we are in some kind of situation in which everything that is proposed contradicts everything else.  President Obama, after the passage of the “debt deal” stated very clearly, that the issue now becomes one about jobs.  
In fact, the President plans a bus trip in the Midwest the week of August 15 as part of his new jobs push.  Whoopee!

To me, there is only one thing that ties all the different problems we are experiencing together.  It is the fact that there is just too much debt outstanding today…and, this debt load extends throughout the nation (and throughout Europe).  Consumers are still burdened with too much debt.  So are many businesses.  So are state and local governments.  And, so are sovereign nations. 

“Consumer Pullback Slows Recovery,” we read in the Wall Street Journal (http://professional.wsj.com/article/SB10001424053111903520204576483882838360382.html?mod=ITP_pageone_2&mg=reno-secaucus-wsj).  Why are consumers not spending?  They are saving…they are paying back debt…to get their balance sheets in line.  They are not buying homes because of the problems with bankruptcies and foreclosures (http://professional.wsj.com/article/SB10001424053111904292504576482560656266884.html?mod=ITP_pageone_1&mg=reno-secaucus-wsj).

Many businesses are not borrowing because of a decline in their economic value and the increased pressure this puts on the amount of liabilities they are carrying on their balance sheets.  (See my post http://seekingalpha.com/article/279506-debt-deflation-and-the-selling-of-small-businesses.)

And, the state and local governments are also getting headlines about their budget problems.  What about the city in Alabama that is declaring bankruptcy?  And the municipality in Rhode Island?  And, what about the problems in Harrisburg, Pennsylvania?  And, California?  And so on and so on?

This is the scenario called “Debt Deflation”.  Debt deflation occurs after a period of time in which credit inflation has dominated the scene.  Credit inflation eventually reaches a tipping point in which the continued inflation of credit can no longer be sustained.  Once this tipping point is reached, people, businesses, and governments see that they can no longer continue to operate with so much debt and so they begin to reduce the financial leverage on their balance sheets. (See my post http://seekingalpha.com/article/279283-credit-inflation-or-debt-deflation.)

This process is called “Debt Deflation” because it is cumulative.  As these economic units begin to reduce their financial leverage, it becomes obvious to them that they must reduce this leverage even further than first imagined.  Whereas “Credit Inflation” is cumulative and leads to people adding more and more debt to their balance sheets, the reverse process is also cumulative.

The only short-term way to avoid this debt deflation from taking place is to create the condition called “hyper-inflation.”  This is exactly what Mr. Bernanke and the Federal Reserve System has tried to do.  I say short-term because all hyper-inflations come to an end sometime.

We have had fifty years of government economic policy based on the Keynesian assumption that fiscal deficits and the consequent credit inflation that results from the deficits are good for employment and the economy.  This assumption has, to me, been disproved given that the compound rate of growth of the economy has averaged only slightly more than 3 percent over the last fifty years, about what was expected in the 1960s, and the amount of under-employment in the economy has gone from less than 10 percent of the workforce in the 1960s to more than 20 percent of the workforce, currently. 

Furthermore, the income/wealth distribution in the country has become more skewed than ever toward the wealthy during this time period.  This is because the wealthy can protect themselves against inflation and even position themselves to take advantage of it.  The less wealthy do not have similar opportunities.  And, in the current situation, some, the more wealthy, are doing fine because they are not as indebted as others and so can continue to prosper during these difficult times of excessive debt burdens.

Getting back to my projections for the cumulative federal deficit over the next ten years and the “debt deal”: I really don’t see a fundamental change in the underlying economic philosophy of the Obama administration (which includes Mr. Bernanke) and/or Congress.  They seem to see the current problems as a “temporary” aberration from the existing “Keynesian” credit inflation philosophy that underlies all that they do.  They seem to believe that once this “period of discomfort” is passed that business will continue on as usual. 

Until this attitude is changed, I see little reason to change my prediction for the cumulative federal deficit over the next ten years.

The U. S. Budget Deficit: It's Time to Get Serious!

The United States budget deficit will reach $1.48 billion in the 2011 fiscal year, according to the Congressional Budget Office.

The response: everyone seems to be pointing fingers at everyone else.

The President, on Wednesday evening in his State of the Union address, indicated that something needed to be done about the budget deficit.

Yesterday the CBO released its figures.

The evening news reported that the White House had some general things to say about the projection but would not come out with more specifics because they were waiting for the Republican response that they knew was coming.

There’s leadership for you.

No one in the top leadership positions in the country seem to be staking out a firm position on this. Like Health Care 1, the President is asking Congress to do something, but is not willing to step down from his intellectual tower to set out a path. As a consequence, like HC1, no one in the country really knows where he stands on containing and controlling the deficit.

As a consequence, no one really seems to be serious about the deficit.

The current estimate was constructed assuming that all current law will be used as the basis for the projection. If, for example, all the Bush tax cuts are allowed to expire, as is now the law, this will result in the budget deficit climbing to about 76% of GDP in 2020.

However, if Congress does not allow these tax cuts to expire and if Medicare programs are held constant, along with other spending and taxing programs, the budget deficit will rise to about 97% of GDP in 2020. This would place the cumulative total of deficits at around $12 trillion over the next ten years.

For the last 12-18 months, I have been arguing that the cumulative budget deficit for the next ten years will come in at least around $15 trillion, given the current attitudes about the budget deficit in Washington, D. C.. In my mind, Congress, given current attitudes, will not rescind the programs that are now in place, and, like always, will add more that will only cause the cumulative deficit to rise from current projections.

It seems as if the Congressional Budget Office is coming toward my forecast as time goes forward.

And the Gross Federal Debt continues to climb: the year-over-year rate of increase is now close to 20%. The compound rate of increase in the Gross Federal Debt between 1960 and 2007 was in slightly above 7% which some of us felt was excessive.

Since it took until fiscal year 2009 for the debt of the United States to approach $12 trillion, the idea that this figure would be doubled in the next ten years seems “unreal”. Yet, that is the way things look.

And, there are three major “holders” of this debt…Japan, China, and the Federal Reserve. Going forward it seems almost surreal the proportion of the new debt the Federal Reserve may have to acquire. There is, of course, the $900 billion that the Fed is intending to acquire as a part of QE2. But, what will the Fed have to do after that? With so much government debt coming on board it is frightening to speculate.

Why am I so pessimistic? Well, we really don’t know how much the health care program is going to cost us. We don’t know what military challenges we are going to be facing. The world is very unsettled now and I don’t see how commitments are really going to be lessened over the next ten years given all the turmoil taking place around the globe. We don’t know how the budget crisis affecting state and local governments is going to work out. Many are saying that the federal government will not play any role in state or municipal bailouts, yet, can you imagine the federal government not playing a role? And, what about the housing market and the government agencies called Fannie Mae and Freddie Mac? How much is this area going to impact the federal budget? One last unknown here is the cost of getting the commercial banking system back to full solvency. No one knows what these costs might be.

The problem with debt is that the more you have the fewer choices you have. Debt reduces your room to maneuver. And, as with Europe, it seems to me that the options are running out.

The other thing about creating more and more debt is that the options become less and less desirable.

That is why you don’t want to get yourselves “head-over-heels” in debt…you want to be able to make your own choices and you want the alternatives available to you to be desirable ones.

Right now, the choices are not good! And, we don’t seem to have any real leaders around in positions of authority that will step up to the table to take charge.

Funny, but the two Presidents that did take a leadership role in budget containment were George H. W. Bush (Bush 41) and Bill Clinton. Bush 41 made some decisions with respect to taxes that arguably cost him a second presidential term. But, Bush’s efforts set the stage for the Clinton era of strong economic growth and shrinking federal deficits.

There just is no leadership on this issue coming from the places that should be exercising leadership. To be more specific, in my experience, the top person, the CEO, the person where “the buck stops”, must take a leading role in getting something done or it just does not “get done” right. Secretary of the Treasury Robert Rubin was a major force behind the Clinton move on the budget, but the effort would have gone nowhere without Clinton getting on board and taking the lead.

As with the health care bill, people are not seeing Obama carrying the flag. Oh, he talks and talks, but where does he really stand? Tim Geithner has all but disappeared. The only real spokesperson for the administration on economics and finance seems to be Ben Bernanke and his “talk” has been getting lost in all the attention being given to other members of the Board of Governors of the Federal Reserve System.

The deficit problem is not going to be brought under control immediately. But, the lesson we can learn from the situation going on over in Europe is that someone eventually must take the lead. If no leader steps out in front of the crowd, the misery just drags on and drags on. The debtors just keep banging on the door. And, what happens during periods like this? Well, you lose focus.
I have seen this doing business “turnarounds”. When things start going downhill in a business and the debtors, or regulators, keep banging on the door, you stop doing what you should be doing in order to run a good business. You just have to “put out fires.” Thus, your organization continues to go downhill.

Likewise with a government: if the focus of the government is diverted from doing what it should be doing in order to resolve budget and debt issues, the government continues to experience problems in areas it should be focusing on.

It is past time to “get serious” on the federal government’s deficit problem. Are there any leaders in the room?

It's All About Leadership, Stupid!

I got on a Michael Douglas kick this weekend because his new flick “Wall Street: Money Never Sleeps” was coming out in the theaters. I, of course, took in Wall Street 1.0 again. Among the other Michael Douglas films I reprised, “The American President” caught my attention.

The particular line that got to me was one uttered by Michael J. Fox, who played a sort of George Stephanopoulos character to the President. The scene was set in the Oval Office of the President and the President and his chief advisors were discussing the direction that should be taken with respect to a crime bill. The conflict being addressed concerned whether or not the President should “play politics” and disappoint his friends, including his “girl friend” Annette Bening, or be true to his leanings and go for the environmental package.

He, at the time, chooses to “play politics”, and is taken to task for it by Michael Fox. The line that stuck with me was this:

“People want leadership and in the absence of leadership they’ll listen to anyone who comes to the microphone.”

This statement really resonated with me because I believe that is the situation we are in now in the United States. People want leadership, but they are not getting it.

Leadership starts with the CEO, the Chief Executive Officer.

There is no way others within or without the organization can exhibit leadership and set up the tone and the culture of the organization. But others try, especially opponents.

And, if the leader does not take charge, people will “listen to anyone who comes to the microphone.”

President Obama speaks. He is constantly speaking. Something small comes up and he goes out and makes a speech about it. Something large comes along and he goes out and makes a speech about it. The problem is that he is just speaking…not leading.

One of my firmest beliefs is that CEOs and their teams need to listen to the market and try and discern what the market is attempting to tell them. The “market” may be wrong, but, to me, the wisest action is to listen to the market and only claim that the market is wrong after a serious and thorough study attempting to support the fact that the market is correct.

What is the market saying right now?

Well, who is dominating the airways and printing presses these days? John Boehner. Christine O’Donnell. Stephen Colbert. Jon Stewart. Rush Limbaugh. Nancy Pelosi. Carl Rove. The Tea Party movement. The Party of “NO”. And, so on.

President Obama spoke at the United Nations this week…and it was just another of his many speeches. Who really listened to him?

President Obama is visiting homes trying to establish the “common touch.” Where is the leadership?

Obama is speaking a lot, but, people seem to be listening to other people who are grabbing the microphone. Conclusion: people do not feel that Obama is leading the nation.

A health care bill was passed on the watch of President Obama. But, the view of the voters is that Harry Reid and Nancy Pelosi and Congress did all of the work.

There is a new financial reform package the Chris Dodd and Barney Frank crafted. Where was Obama?

And, the earlier stimulus bill. The public perception was that the Obama administration turned this over to the Congress, fully supporting a bill that contained a lot of old programs that benefitted the interests of members in Congress. All Obama just praised the fact that a stimulus bill was passed.

The market perception seems to be that President Obama, himself, did not send up any bills to Congress in these areas; he turned the tasks over to Congress, urged them along, and accepted whatever Congress produced and sent to him.

The market does not see President Obama as “the” leader in any of these initiatives. His absence, then, has allowed the microphone to be dominated by others.

This lack of leadership has particularly been felt in the areas of economics and finance. No one seems to know where the administration is going or what the administration is going to do. What about another stimulus program? What about the Bush tax cuts? What about foreclosures? What about the big banks? What about the consumer protection agency? What about the insurance companies that are raising rates? What about the credit card companies that are raising fees? What about the Chinese currency? What about the government’s 61% ownership in General Motors? What about how GMAC pursued its foreclosure efforts? What about…you name it?

Talk about a free market!

If there is no leadership, then anarchy takes over.

There was the cry against big banks. But, the Obama administration (including the Fed) seems to be doing everything it can to help the big banks at the expense of the smaller ones. The administration talks about the United States being strong economically, yet its policies are just accelerating the re-positioning, economically, of China and Brazil, Russia and India, and other emerging nations. The administration talks about helping out the middle class and blue collar workers yet its policies promote the bifurcation of the work force, lessened capacity utilization in industry, and greater income inequality.

And, this is why people, other than the President, are dominating the microphone.

The Michael Douglas President finally did make a stand and began to tell the people where he really stood. The Michael Douglas President became a leader. Although this change came right at the end of the movie, it was the turning point of the movie. And, you knew what the President was going to do in the future, nothing more needed to be said in the movie. In taking this turn, the President began to dominate the discussion again.

Do you think this might happen in the real world? In the United States? Do you think it might happen in the near term?