Over the years, I have subscribed to several financial newsletters. Also, I read the financial press closely and I watch CNBC and Bloomberg news daily or see the highlights on You Tube. The New York Times and Wall Street Journal are consumed daily in my household. Increasingly, some pundits and many newsletter writers are offering up a “gloom and doom” scenario.
I understand the nervousness of many people. Our national debt is $40 trillion, and the president just sent up a trial balloon on the mid-term campaign trail. If his party holds both the US House and Senate, he wants to reward American adults by giving each $5,000 in cash. This is projected to cost $1.2 trillion in addition to our $40 trillion long term debt and $1+ trillion-dollar debt for the current fiscal year. Fortunately, most Republican lawmakers seem to be blinking, and the idea will likely be a non-starter.
Still out there, as I mentioned before in MR, is how Social Security, received by approximately 73 million Americans each month will go into deficit by 2034. If the present plan still exists at that time, payments will need to be cut by about 24%. Many of us could adjust to this easily but some 15% of recipients only income is social security. They would be in real trouble.
When I discuss these issues with people, I get some bizarre answers including:
1) “We will likely both be dead by 2034.” It is not our problem. I responded to one person, “how about our children and grandchildren.” The chilling response was “that is their problem to deal with.”
2) “You worry way too much. We will grow our way out of the deficit. This year alone Trump’s tariffs will balance this year’s budget.” Someone, not I, is drinking the Kool-Aid. If the annual deficit were under 3%, I could see growth as a way out, but it would have to be sustained over many years. A recession or two would be big setbacks. This year are tracking at about 7%.
3) “The whole world is printing too much money. We are not an exception.” This is totally true, but our current yearly deficits currently are the size of developing nations. They are simply not sustainable.
4) “The US dollar is the world’s reserve currency. We have nothing to worry about.” Yes, the dollar may lose some of its luster but some 45% of global contracts of size are written in US dollars. It will not lose reserve currency status overnight, but it could be a slow, steady slog downward. Question is where does the world turn to?
5) There are many trial balloons out there to save Social Security as we know it. Removing the cap (currently Social Security tax is only taken on the first $184,500 of income and the cap is adjusted each year by the inflation rate), to tax 7% of all income is a simple and direct way to slash the Gordian Knot of issues surrounding reform. It sounds great when hedge fund manager earning a billion a year must cough up $70 million in Social Security taxes. The problem is that there are only a handful of such people and they do not earn a billion every year. If the cap is removed, there is some question as to how politically viable it would be. Imagine an affluent household earning $400,000 per year. They have a large mortgage and two kids in toney colleges. Their tax bill would climb by $15,085 for the ending of the Social Security cap, and they would scream bloody murder. These people vote and give to candidates. This could never pass at present.
Other suggestions include doubling the inflation rate to increase the cap and also having a stiff surcharge for those making over $1million per year. This is more palatable, but it does not strike me as politically realistic.
The last approach is draconian and may be inevitable at some point in the future unless something is done—raise taxes overall and cut spending. The late political humorist P.J. O’Rourke once wrote--“Giving Congress the right to spend money is much like giving whiskey and car keys to teenage boys.” This could never fly now but it may be forced on the US unless we act decisively in the next few years.
Many of you reading this and I can arrange our affairs to dodge this coming bullet. Sadly, many of our citizens cannot.
To end on a positive note, may I quote my hero, the late Charlie Munger of Berkshire Hathaway? The great man wrote “I have seen many crises. I have seen many people who were convinced that the end of the world was near. It never was.”
If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com or leave a message on the blog.
