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Soft Landing, or Just a Short-term Perspective? |
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February 18th: The broader indices all closed higher during the last week, up between 1 and 1.5%, helped by two big moves to the upside on Tuesday and Wednesday as Federal Reserve Chairman Ben Bernanke testified before Congress that the economy appeared to be in good condition. With all due respect to the man setting our monetary policy, I believe the economy is in significantly worse condition than the data indicates. Part of this has to do with a reference time frame perspective: Bernanke was saying that immediate inflation pressures seem to be easing, and the economy looks good for the next few months. As a long-term investor, I want to know about how things are going to be 5-10 years from now, so such an opinion (if it is accurate; insert economist joke here) is really no help to me. My primary reasons for concern about the long-run health of the American economy include:
-A massive federal deficit. The US government owes close to $9 trillion dollars, and that amount isn’t getting smaller anytime soon. Every deficit dollar we spend needs to be repaid with interest in the future… so the question becomes: who will pay the piper? Interest payments on the debt amounted to over $400 billion last year, and if spending is not checked those interest payments could triple to become a double-digit portion of GDP in the next 25 years. Further, the national debt will lower the value of the dollar, making foreign goods more expensive (effectively causing inflation).
-A negative personal savings rate. Americans and their government are very similar in that they both spend more than they make. Unlike with the government, the average person doesn’t have a $9 trillion credit limit from Visa. The simple rationale for this being a cause of worry is that the economy’s expansion on unsustainable spending isn’t really an expansion at all. Taking this a step further, the economy cannot have a true “soft landing” if it is engineered with borrowed money on borrowed time. Borrowed money and time, you may notice, is a prominent recurring theme here.
-A lack of understanding by economists. Bernanke’s predecessor Alan Greenspan often admitted that he didn’t understand the absence of a serious fiscal crisis given the spending habits of our nation. This is comforting. Greenspan’s rationale was that if no seriously adverse events have yet to occur, something must be different this time. He frequently pointed to globalization as a potential source of America’s financial stability despite its reckless fiscal policy, while not really considering that there may be a storm looming large on the horizon. I believe that time reveals all flaws (that sounds wise, I should trademark it) and, barring some significant shift in American’s government and personal lives, their will be a day of reckoning. How bad that day is depends on how long we put off confronting the problem.
-An understanding by financial professionals… at least, the good ones. Perhaps the most noted critic of American’s spending policies is Warren Buffett, who has made several references in shareholder letters about the ominous path our nation is taking. Buffett also has a sizable stake in financial instruments that will profit from his expected decline in the dollar. Additionally, more focus is being given on diversifying portfolios to overseas countries and domestic corporations with sizable foreign operations, with the intention of hedging risk from a falling dollar and seizing on the greater growth potential present in foreign and emerging markets. |