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Sunday, January 3, 2010

Beyond Our Means Revisited

Alfred Malabre, Jr. was economics editor for the Wall Street Journal. He wrote a book called Beyond Our Means which was subtitled “How America’s Long Years of Debt, Deficits, and reckless borrowing now threaten to overwhelm us”. Sound familiar? Well, here is the surprise. Malabre wrote it in 1987. It received a lot of play as it was published just prior to the October, 1987 stock market crash. His position was that a credit crisis would engulf us before Ronald Reagan left office in January, 1989.

I stumbled across the book as I was cleaning out some things with the start of the New Year. Beautifully written, it made a cogent argument for how things were going to be bad given the huge deficits built up in the Reagan years. Well, he was wrong. But, what stopped me in my tracks was looking at the federal debt numbers that Malabre said would do us in during the late 1980’s. Compared to today, they were miniscule and consumers were in far better shape in those days than now.

So even a born optimist such as me now is alarmed. We seem to be heading for some icebergs over the next few years that dwarf even the credit crisis of last year. If you really want to get scared read former Commerce Secretary Pete Peterson’s Running on Empty which details the coming shortfalls in Social Security and Medicare. These are not guesses; demographic trends make them a certainty. Another problem that I rarely see or hear discussed is the artificially low interest rates we now have. They mask a huge issue to me. As interest rates go back to a more normal level such as 5-6%, the interest on our newfound federal debt will be staggering. How do you pay for it? Well, the politicians will need to do some combination of aggressive cuts in spending and a simultaneous big increase in taxes. Looking at the current crop of political hacks in both major parties I do not see many with the moral will to do both or perhaps even either. Also, at some point in our new decade they will have to cut Medicare and Social Security benefits or really ramp taxes up. Will they do so? It will be necessary long term but does Washington regardless of who is in power have the guts and integrity to do it?

The pundits are lauding the return to saving in the economy (now at 4-5% of income) vs. the zero rate of 2007. Long term that is excellent as savings turn in to investment and that builds capital. But, the American Enterprise Institute recently released data saying that for every percentage point gain in the national saving rate in a 70% consumer driven economy such as ours, the GDP drops about .4%. So, if the American people were sufficiently frightened by the Great Recession and continue to save, it will be hard for us to have a robust recovery for several years as the shift to savings from consumer spending will keep a short term damper on things. So don’t be surprised if we have years with measly 2% growth for a while as long as the consumer is continuing to save.

The last piece of the mosaic is the US dollar. Financial columnist Peter Goodman put it this way in his new book, Past Due: “As US households sank deeper into debt and the trade balance widened; trading partners might have grown reluctant to keep accepting green pieces of paper in exchange for demonstrably useful things such as oil, sneakers, and electronics. But the reverse happened. Not only did foreigners, particularly China, keep on sending goods to American ports and taking dollars as payment, they went one better: they took the dollars they received for their goods and used them to finance the American debt, ensuring that Americans could keep spending. And, at the same time the U.S. lowered interest rates”.

Why do they do it? Well, we are their largest trading partner and the dollar, shaky as it is, remains the world’s reserve currency. What is scary to me is that the economic fortunes of many Americans are somewhat dependent on the continued willingness of China, Japan, and several other countries to invest in the US. Do we understand China, this immense and complicated country? They have big issues, too. I suspect most of us are clueless and the State department sadly superficial.

Finally, have you ever wrapped your head around what a trillion is? Our budget deficit including the bailout topped $1.2 trillion this past year. To me, the best way to visualize a trillion is to realize that a trillion seconds ago, no one on this planet was literate. Ancient dynasties such as those in China or the Roman Empire had not been formed. Religious founders of Islam, Christianity, and Judaism had not been born. We are talking about a total government debt of over $11 trillion plus off the books liabilities such as Social Security, Medicare, and soon some form of governmental healthcare. The debt load is beyond description and servicing it will put a damper on growth as far as the eye can see.

Okay, what does this have to do with media? More than you might think. After the nadir hit in March, 2009, we should see an up tick in local media spending this year but a real recovery cannot come until 2011. At some point, the government injections will have to stop and then we will get a clear picture of where things stand. (If they keep flooding the market with greenbacks we risk a huge inflation problem. They may do it anyway!)

Going forward, the caution we see now will continue. Forget about three year deals for sports sponsorships; timidity will reign and can you blame people? Investment spending via advertising will shrink and people will try to maintain Share of Voice (SOV) but only the intrepid will attempt to grow it in the hopes of building market share long term.

Technology will march on and the pin-point targeting of the new media will strike a responsive chord with those who are truly being held accountable for every dollar spent. New measurement techniques such as the set top box will supply advertisers with commercial viewing data and attentiveness measures never seen with the current Nielsen information. There will be positives and negatives that will come out of that for both broadcasters and cable players. Social media will blossom and there will be winners and losers there for brands as well.

Government largesse will hurt all of us in the communications field. If people do not have the money to spend, advertising will go down. Our debt service will hamper any hope of a boom unless the government decides to inflate its way out of paying off debts to sovereign nations. Double digit inflation would give us the short term illusion of increased billings and newfound prosperity but it would kill the lifestyle of our aging population. The government is clearly between a rock and a hard place. Some tough choices will have to be made that will affect our business profoundly.

Malabre was right but just way ahead of his time. We are living beyond our means and the financial diet we will have to go on in a few years will be very uncomfortable.

A historian once said “Bad ages to live through are good ages to learn from.” Will we learn? Stay tuned.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

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