That a politician would think short-term and try to stabilize only current economic problems is to be expected, though pathetic. However, I fail to understand why U.S. citizens are not making more noise about the country’s long-term financial problems. Well, I guess that it is easier to understand when we can observe that a large percentage of Americans are infinitely more knowledgeable about TV reality shows than even basic economics. When nearly half of the U.S. population receives some form of government support and see normalcy in the media and around their neighborhood, the country’s debt problems seem far away.
The U.S. has a national debt of nearly $1.5 trillion – about the size of our annual GDP – and has run deficits of over $1 trillion for the past three years. We continue to have enormous entitlement programs that politicians are afraid to touch, are fighting two overseas wars, and in general have a population that is unwilling to suffer short-term pain to better the country’s long-term prospects. Lots of people want the debt problem solved, but think that other parts of the population should pay for it. The politicians and Fed continue to spew out programs destined to fail just to show that they are doing something. The media latches on to any nibble of good news (retail sales up slightly, a few more people getting hired than the previous month, the stock market going up for the last two weeks, etc.) as signs that the recession is over.
Meanwhile, on the other side of the Atlantic, the Europeans are facing a mess, with many questioning how and if the Euro can survive. Greece is one of several basket cases there. In the fall of 2009, analysts at Standard and Poor’s figured out that Greece’s debt would increase to 125% of GDP in 2010. A few weeks later, PIMCO, the world’s largest investor in government bonds (it lends money to governments by buying their bonds) sold all of its Greek bonds. The following April, Greek debt was downgraded to junk status and it became clear that the debt of Greece would have to be restructured (a fancy way of saying that the country was bankrupt and that holders of their debt would suffer a nasty haircut). In June 2010, the European Central Bank bought 25 billion euros in Greek bonds – the first installment is what would balloon to 150 billion euros in purchases of bonds from not only Greece, but from other troubled countries like Italy, Spain, and Portugal – in an effort to calm markets and stabilize bond prices.
The Euro countries have nearly doubled their combined national debts since 1997, in defiance of all of the original rules. The 17 Euro nations now total 8 trillion euros in debt, while banks hold European government bonds with a face value of one trillion euros. The future of the Euro is in jeopardy, and nobody knows for sure how it will all play out. One certainly is that it is going to get ugly.
Both the U.S. and European debt problems have been known about for years, and were only exasperated by the recent recession. Most of the key political leaders were aware of the problems long ago but chose to ignore them. They acted in ways that seemed to help in the short term but wrecked the future.
Short-term responses to long-term solutions continue to this day. From Fed bond buying practices to the administration’s constant giveaways, the debts get worse while the present shows little improvement. I recently saw that a couple of politicians are proposing a “Home Act” that allows Americans to make penalty-free withdrawals from their retirement accounts to make mortgage payments. The homeowner can tap his or her retirement account for up to $50,000 or half of the account value, whichever is less. While this could perhaps help a small percentage of people, for most folks it would just gut their savings and only delay an inevitable foreclosure.
For the future, the current economic situation means more pain to the population. Real estate prices will probably go down another 5% between now and the end of 2012, as people without jobs can’t buy houses and interest rates can’t get any lower. Unemployment will most likely go up slightly while average household income (which decreased from 2000 to 2010) will decline further. The stock market is the hardest one to predict as it is so irrational, but I expect a small boost to stock prices over the next few weeks and possibly months (mostly due to the European bailout), followed by a gradual decrease over several years. Europe’s near-term problems are deeper than those of the U.S., so I would expect more pain there for the next few months and years as it tries to sort things out. The U.S., which controls its own currency and will feel less pressure to act, will have problems that go out much further.
As I’ve said before, I advise people to invest conservatively, keep a rainy day fund, and stay current with the news. “Dancing with the Stars” can survive without you for a couple of weeks.
Alan Noblitt is a mortgage note investor and note broker. As a mortgage note investor, his company will buy mortgage notes on nearly any type of property and in most of the 50 states.