March 7, 2002
I've asked myself several times in the last ten years or so, how did the Great Depression of the Thirties ever happen? Why did it happen? What caused it? Since it happened a long time ago, I'm like most people, and I'm not that motivated in doing research on why the Great Depression occurred. However, one thing I do know is that there were some people who did see signs that the stock market was becoming a gambling house more than a stock market, and that for the most part, those individuals were ignored and called pessimists or worrywarts.
Hoover commented about the over valuation, and Merrill of Merrill/Lynch supposedly went to a psychiatrist because he felt the market was severely over valued, but since everyone else didn't, he thought there was something wrong with him. I selected these two individuals not because I have confidence in politicians or Wall Street types, but because these types of individuals are the only ones who have any chance of being heard.
I mention this because I believe that America will have another depression within the next twenty years. I believe there are several facts that support my beliefs. I also believe that the vast majority of Americans actually believe that outside of an occasional recession, America will never again face a severe, hard economic time like it did in the Thirties.
In American History, there has been a depression every seventy years. The only reason why Americans feel there will not be another one is because they believe the government now has control of the economy and enough safety nets in place to prevent another one. I feel that in theory Americans are correct, but due to the severe irresponsibility of the U.S. Government, the theory doesn't hold water.
First, if anything goes wrong, the U.S. has nothing to back up the dollar. Before, U.S. dollars were backed by gold, now dollars are backed by nothing. And unlike gold, dollars can simply be printed.
As far as the government being responsible, they have amassed twenty trillion dollars of future Social Security and Medicare obligations and have not saved one cent towards the obligations. In fact, the government does not even have in place a way of "saving money." The so-called Social Security trust fund is money that the government owes itself. It's like me putting money in the bank in a savings account, and telling myself I have a retirement plan in place, and then going to another bank and borrowing money against the money I put into my retirement plan savings account. The money I borrowed was not for buying an investment or house, but was to simply blow.
The government is well aware of their problems because they have already raised Social Security taxes many times since Social Security was started; they have raised retirement ages, and reduced benefits. They have even started numerous tax advantage retirement programs to try and get Americans to save money on their own. You may ask, "Isn't that a good thing?" Yes, it would be if the government was not taking 15% of your pay for Social Security expecting you to pay all the other taxes you have to, and then expect you to have enough left over to invest in a 401k or IRA. This brings me to another big issue.
Since Americans are being taxed so much they don't have enough left over to save or invest so many Americans are taking what little they do have left over, and investing it in stock mutual funds. Why are they investing in stocks, because stocks are the only place they can get the returns necessary to turn the small amount of savings they have, after paying all their taxes, into any worth while retirement. Again, you may ask, "What's wrong with that?" What's wrong with that is the fact that the stock market is an auction market. As long as baby-boomers are buying stock via mutual funds and 401ks, stock markets are going to go up. However, when the baby-boomers start to retire, the stock market will turn down, and for an extended period of time. This will leave many boomers without the retirement next egg they thought they would have. And it will leave the Federal government with a weak stock market and economy that will keep it from meeting their obligations when it comes to Social Security (Don't forget that in 2015 Social Security taxes will no longer cover all those on Social Security, that is, all those Social Security surpluses that the government has had the luxury of having, will be gone, and it will be necessary for the Fed to raise Social Security taxes even more just to meet its obligations.).
Price to earnings ratios, price to book ratios, and price to revenue ratios, are all at all time historic highs...even with two years of market losses. Stocks are expensive because everyone is trying to turn a small amount of money into a decent nest egg, and they're using the stock market to try and do it.
Another tough issue: the government, corporations, and Americans in general, are severely in debt. The government has $6 trillion and corporations have around $4.5 billion in debt. According to publicagenda.org, consumers had $1.2 trillion of consumer debt as of 1997. For the government to pay the interest payments alone costs American taxpayers $366 billion every year. And this year the executive branch's budget projects more deficit spending through 2005. And remember their estimates are always very optimistic. Not to mention the fact that no one seems to even think there's a problem (just like in the Twenties).
To add to the problem of debt, the Federal government is constantly refinancing its debt and if interest rates go up, the cost to service the debt will go up as well, and it will go up even if the Federal government was to balance the budget, which it has not done for the past thirty years or so.
Other big problems outside of Social Security and debt are education and health care. Again, the government is doing nothing about these today, but is simply putting them off to deal with sometime in the future. Health care costs are rising exponentially compared to other services, and with an aging population and the fact the government is doing nothing, there is little hope. When it comes to education, the politicians have lots of words, but no action. And remember today's world is completely different than before. There is not a growing number of union jobs that pay well and don't required a higher education: those jobs are all being sent overseas. If you're part of the "X" or "Y" generation you will have two choices: have a higher education with good grades or be part of the service sector that pays close to minimum wage.
The next issue is globalization. Again, the world is a different world. Capitalism is growing like a wildfire, but the Federal Reserve lives in the past. Commodity inflation was a big problem years ago, but it's not anymore: many countries are producing numerous different commodities and this keeps prices down. Unfortunately, the Federal Reserve lives in the past and is constantly trying to keep GDP growth around 3-4%, which is not enough to pull U.S. out of our debt problem. Adding to the proplem is the U.S. government and U.S. consumer high debt, this will eventually cause liquidity problems that will cause the Fed to lose power with its monetary policy.
Today, the House passed an economic stimulus package of $51 billion. This is an economic stimulus package just passed today and CNBC, CNN, and FOX are already reporting that the Federal Reserve (Greenspan spoke today as well) may hike interest rates as early as May, and that there is a 100% chance that the Fed will raise at least a quarter point in June. The House just passed an economic stimulus package to try and get the economy moving, but there is also already talk about the Fed raising interest rates that would slow the economy. The U.S. economy is not the best in the world because of the politicians, the Federal Reserve, and Wall Street; it is, in spite of them.
I personally believe why the government is so irresponsible is because, they may be watching everyone else, but nobody is really watching them. Everyone says or believes that if the government doesn't do their job, elected officials won't be voted into office again. This is a joke. Government officials have not been doing their jobs for years, and there are as many incumbents in office today as there has ever been.
Here's a typical scenario when it comes to an "elected" official. Grey Davis is the governor of California. This month California voters elected a Republican candidate to run against Davis next November. For the past few months before the March election, Riordan was at the head of the polls, way a head. Riordan was a moderate Republican and it was thought that he had the best chance to beat Davis next November. So what did Davis do? He started a campaign against Riordan in the California primary. He wanted to knock Riordan out and go against someone who was more conservative because he thought that would give him the best chance to win next November. Davis pumped $10 million into the California Republican primary, and sure enough, voters were basically bought off with cheap TV commercials, and Riordan lost by a wide margin to Bill Simon who is much more conservative than Riordan.
What's my point? Elected officials are not elected on merit or track record, but are elected by money. So in reality, no one is really watching the politicians because politicians can simply buy off voters with cheap TV commercials.
Lastly, I believe that the news media does far more harm than good anymore. I believe the forefathers were very smart when it came to checks and balances, and I'm not only referring to the three branches of government: the executive, congress, and the judiciary, but I'm referring to the "press." The "freedom of the press," I believe, was for the press to be watching government and to do the job of informing Americans on exactly what the government was doing or not doing. But in the real world now, "freedom of the press," simply means, "who owns the press." And in America, that's the wealthy.
What's all this mean to me? Well, first I don't vote and I think that sends the best message: I don't think there's anybody worth voting for, so why vote. And I also think there will be another depression in America within the next twenty years. So I'm going to live each day to the fullest, never put off anything, never put buying anything off that I want. Moreover, I'm gearing my financial plan to a financially weaker government and weaker financial markets and institutions.
I do believe we are going to have another bull market, but when this one is over, all bets are off, and I believe the market will no longer produce the returns necessary to offset the risks associated with investing in the market.
To summarize:
The U.S. government is in debt: $6 trillion with $20 trillion in future obligations to Social Security and Medicare. U.S. corporations are in debt to the tune of about $4.5 billion. And consumer debt of $1.2 trillion in 1997, and it's only gone up since.
A stock market that when compared to historical averages have the highest levels of price to earnings, price to revenues, and price to books ratios ever recorded.
Health care costs are rising exponentially when compared to inflation. Only about 25% of the population have bachelor degrees, virtually no improvement in the last thirty years. More and more jobs that don't require a college education are being sent overseas leaving those without a good college education only minimum wage jobs.
Globalization and the fact the Federal Reserve is not adapting to it, they still live in the past. As the Federal Government and the American consumer continue to be more and more in debt, the Federal Reserve will lose power with regard to monetary policy. Not to mention the fact that with regards to globalization, America is not the only country getting deeper and deeper into debt with rising future obligations. Both Europe and Asia have an aging population just like America.
Elected officials are not elected based on merit or results, therefore, elected officials are not the best ones for the job, but are simply the ones who have the most cash available. What you have is all these government agencies: the SEC, NIS, IRS, EPA, congress, the executive branch, and the judiciary gaining more and more power, being put in charge and control of more and more, but with no one watching them at all, and making sure that when the government is backing something like bank depository insurance, that the government really does have the financial assets to back up its claims.
The press is simply a tool of the wealthy and not a watchdog of the government and business. I feel the forefathers wanted "freedom of the press" because they wanted the press keeping Americans informed of what the government and business was or was not doing, and to do it without bias.
ADDENDUM (April 4, 2002)
Two of my main points in the above article is that I have no confidence in politicians or the press. Here's are some results from a FOX News/Opinion Dynamics poll:
People were asked how much confidence they had in Congress, the news media, major business corporations, and the public school system. Only 19% had a great deal of confidence in congress. Only 14% had a great deal of confidence in the news media, only 12% felt they had a great deal of confidence when it came to major business corporations, and only 24% had a great deal of confidence when it came to the public school system.
It seems the average Joe Blow out there knows that Congress and the news media aren't worth a crap, but since Congress and the news media are the ones with the money and power, there's not much the little guy can do.