moneyFYI
Financial Freedom Is Merely Organized Common Sense
What Fiscal Crisis Will Be Next?
The Americans have survived the fiscal cliff. Sadly for them, cliffs usually are found on the side of mountains. What does the fiscal mountain look like?
There is a mountain of debt built on a foundation of undeliverable promises and reckless adventurism. The mountain may be permanent.
You cannot tax incomes to get out of a fiscal problem, because you make the ability to pay weaker with each dollar you take. Income tax to cure deficits and debt is self defeating. A capital tax would be worse. However, a sales tax that flows through businesses and only affects end-user consumption has a chance to work as long as the new revenues are not converted to new spending.
Government spending is insidious. Every dollar the government spends is more than a dollar that was removed from the economy. In some cases, it is money that would have been invested productively. In most cases, it finances regulation or other limits that restrict business productivity and growth. In all cases, there is overhead attached. The conventional wisdom, is that government needs to extract $1.67 to spend $1.00 in the real economy. All costs in, it likely worse than that.
Politicians historically have behaved like amateur salespeople. They over-promise and under-deliver. They promise in order to get votes and then hide the shortfalls.
Entitlement programs are generally unsustainable. Not just in the US, but everywhere. The problem will be how to explain to the folks that naively believed their representative, that the promised benefits can never be delivered. Politicians cannot hide forever, but perhaps hide until they retire is good enough.
I am fascinated by Social Security and the equivalent programs in other countries. The trust funds holds huge quantities of government debt instruments. Spending the cash and replacing it with IOU’s seems wrong.
Suppose I want a new set of golf clubs and decide that I cannot afford $3,000. However, my retirement plan can afford it. So I take the $3,000 from there and replace it with an IOU for $3,000. Would you say my retirement plan had the same value as it did before the transaction? If you think it does not, then you understand why some government retirement plans may not work out as they say.
I don’t pretend to understand Medicare but my general perception is there is a lot of overhead for each dollar of benefit delivered. The overhead cost just to bill the system is astounding.
Welfare is a problematic thing too. We provide incentives to stay in the welfare system and wonder why people do not move on out. People respond to incentives. You need to be careful which ones you provide. Especially careful to repair unintended ones.
It is difficult to imagine that the people who created the problem have a solution or would implement it if they had one. I doubt there will be a solution until there is no more money to garner favour with the voters.
That may be unpleasant. Problems grow slowly and collapse quickly, we may not know what the end looks like before it is to late to do something differently. Pay attention and be prepared to act in your own best interest.
While it is normally not good practice to panic, there are times when you must. Keep this in mind. If you must panic, panic first.
Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com
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