The Calm Before the Storm

     Until early 2008, things did not seem bad. The economy was doing pretty well. The stock market was up. Why the concern?

     If the demographics could remain constant, things would not be bad. However, with the baby-boomers headed into retirement and all their entitlements coming due, our nation stands heavily in debt with the ability to take on a relatively small additional amount of debt.

     Much of the prosperity of the late 1990s resulted from the internet boom. The recent prosperity has been created, in a large part, due to historically low interest rates. Those low rates have created an incredible real estate construction market. However, the rates are getting closer to historical levels and the supply of homes and office space (particularly homes) is getting so large that it will soon exceed demand (to the extent such has not already happened). A new economic driver is needed. Personally, I would like for it to be a conversion to hydrogen fueling, with the U.S. in the lead.

     Why are we now experiencing the calm before the storm? Because the baby-boomer entitlements begin in 2008. That is the first year in which the first baby boomers (born in 1946) can claim early retirement under Social Security (at age 62). Will things be bad beginning in 2008? No – at least not due to entitlements.

      In 2011, the first batch of baby boomers will be entitled to Medicare. Additional batches will be added each year thereafter until 2030.  Will things be bad beginning in 2011? No – at least not due to entitlements. So, under current fiscal policy, when will things really get bad? Answer: If the 2001 tax cuts are made permanent without spending cuts (and neither major party has or will cut spending) – around 2012. If the 2001 tax cuts are not extended – around 2030. By 2017, many baby boomers will be drawing both Medicare and Social Security. In 2017, the Social Security surpluses are expected to reverse and become deficits – with no money to repay Social Security from any source other than taxes and debt. Including Social Security, debt is now approximately $9 Trillion. Excluding Social Security and similar programs, it’s approximately $5 Trillion. There is only so much debt that can be incurred-at least at low rates. Note that these time lines assume no currently unanticipated spending for needs such as fighting terrorism or dealing with a natural catastrophe. How long will things be financially difficult? Indefinitely.

Social Security Finances:

     In testimony before the Senate Budget Committee on January 11, 2007, Government Accountability Office (GAO) Comptroller General David Walker said:

"We are on an imprudent and unsustainable long-term fiscal path, and while the short-term deficits have improved in recent years, the long term is getting worse every second of every minute of every day and the time for action is now."

     In testimony before the Senate Budget Committee on January 18, 2007, Federal Reserve Chairman Ben Bernanke said:

“. . . [O]ne might look at these projections and say, ‘Well, these are about 2030 and 2040 and . . . so we don’t really have to start worrying about it yet.’ But, in fact, the longer we wait, the more severe, the more draconian, the more difficult . . . the adjustments are going to be. I think the right time to start is about 10 years ago."

See:  Letter to AJC Editor.

The Storm, continued:

     So, when you hear about the values of “deficit spending,” realize that such a trick works only to a reasonable degree, and only when there is no storm on the horizon. Deficit spending to fund the government over the past few years (during a time of relative prosperity, in a large part due to the construction boom caused by historically low interest rates and tax cuts without spending cuts) is like raiding the water cooler and guzzling much of the supply just before the drought – that is certain to come – hits. Family values?

      It does not have to get bad. In order for things to not get bad, fiscal policy has to change. I believe that the changes that I have recommended in the Financial Problems Recommendations section of this website would prevent things from getting bad. The sooner we act, the better.