July 16, 2011

Hi friends,

The headlines are filled with chatter about deficit reduction and tax increases matched with spending cuts. The news is filled with dire prediction about what bills won’t get paid if we can’t borrow more money. Think about that. This country, allegedly the richest country in the world won’t be able to pay its bills if it can’t borrow. Maybe we should send Rep. Boehner, Sen. Reid and President Obama down to the docks to see if they can get a payday loan to tide us over. Maybe we could call one of the many pawn brokers and see if we can get some cash for stuff we may no longer need.

OK, so none of those ideas would fly, we need too much money, but it points out the seriousness of the problem. We can’t pay our bills without borrowing more money. This is crazy. The Congress, both houses and the executive branch as well are responsible for this situation. This has been going on for decades. It is the system that needs to be overhauled.

Enough of that rant. What does it mean to you?

We need to recognize that, scare tactics aside, we really do need to pay our bills so there is no option but to borrow more. However, we need to spend less so that borrowing to pay the bills month in and month out is not necessary. In truth wasteful spending can be cut, over reaching expenses trimmed and we can get control of our finances. But it is unlikely that we can do that without additional borrowing and additional tax income.  Republicans and Democrats both have had a hand in creating the problem and now must have a hand in fixing it.

The President, Mr. Boehner and Mr. Reid must come together and work out a solution that puts the USA back on a sustainable course. To be effective it will have to contain new tax revenue, reduced wasteful spending and long term entitlement program reform. Yes, I said that long term entitlements (which we just expanded in terms of Obama-Care) need to be reformed. Social Security eligibility will have to change. People born after 1955 or so will have to wait longer to retire (early retirement - today 62 - will need to move to 65 or 66 and full retirement will need to move to 70). This can be phased in over time, one year longer for each year past 1955 until we reach birth dates of 1959. Top income earners will also need to contribute more. Income is income, so capital gains and ordinary income rates need to be the same. Warren Buffett is the leader on this and his income is mostly capital gains. Those of us who are living on our capital gains can afford to pay more in taxes. We won’t like it and a few politicians may have their careers shortened but it is a necessary step to regaining our financial footing.

The key going forward will be our ability to not repeat the mistakes of the past. We can no longer be the policeman of the world. We can no longer promise more than we are willing to be taxed. We can no longer put off or, in the presidents words, kick the can down the road. Obama-Care costs will kick in down the road in 2013. We need to be on a pay as you go basis by then and that is not long from now. If we fail to do this our borrowing costs (yes we will still have the existing debt to pay interest on) will rise, inflation will rear its ugly head and we will be far worse off that we are today. I don’t even want to think about that, do you?

Take notes during the next weeks and figure out who you think is a leader and leading in the right direction and more importantly those who are not. When you have an opportunity to vote again in November of 2012 be sure to vote based on their performance not their appearance, propaganda or sound bites, either pro or con.

In the meantime, check your retirement savings plan and take charge because at the end of the day you are responsible for you, now and in the future. Yeah, I know being a grown up isn’t easy nor fun. Get over it.

Car sales are improving, slowly but surely. Retail sales are up year over year by about 3% and manufacturing is actually doing quite well. It is manufacturing that employs technology rather than people, unfortunately. The economy is creeping forward and will continue to grow very slowly. Job creation won’t likely speed up to where it needs to go for a longtime. We need to add 100,000 jobs each month just to absorb the natural growth of the work force, forget bring down unemployment. Unemployment at 9.2% is likely under reported but it is surely not equally felt in all demographic sectors. When young people are affected to a great degree, you have the fuel for civil unrest. Remember the Newark and Watts race riots. I do and I don’t want to see them again.

Housing prices and sales will not recover for probably a decade and maybe longer. Housing is a world class example of unintended consequences of a well meaning government policy trying to make home ownership easier to achieve. We made it easier and easier until it was too easy and the bubble burst. Now young people will have to do what their grandparents or great grandparents did - work hard, postpone marriage and live with parents until they have saved enough to put a down payment on a home, a down payment of 20%. Seems wild but that will be the future. It is sustainable and it will take a long time to absorb the houses on the market today.

Education will be of greater importance than ever because even small business people (plumbers, electricians etc.) will need to know how to run a business as well as just be experts in their trade. New home construction will not recover nationally for a very long time, if ever. However, as immigrants came to the USA for work in years past, we may be going to other places to find work. IBM, I’m told is hiring in India and other locations outside the USA. Maybe going to work for them or other major employer in India will result in a good job in the USA in 10 or 20 years. Young people are going to need to rethink their career plans and adjust. Sorry, kids but our life style is no longer available to all.  The smart, the talented and those willing to do what they have to, will do well. The rest will be stuck scraping along until they can’t work any longer. Doesn’t sound like the America we were taught about but it is the America of the next 35 years.  

If you are young, think long and hard about your future. If you’re in your 30’s, 40’s, and 50’s start saving every dollar you can. You are going to need every one of them. If you are already in your 60’s be thankful that you have the benefits you have and talk with your financial advisor about making it last for the next 30 years.

Sorry to be so negative but I think I’m right and you need to know.