Posted by: dstieglitz | October 30, 2011

UNCERTAIN TIMES

     My father told me how difficult it was living in the Great Depression, but he also told proud stories of how the Greatest Generation won World War Two and worked to build the world’s #1 economy. As a result of that generation’s efforts, I’ve lived through the country’s peak years – but the last few years have been the most difficult and uncertain times I’ve seen. The only period that comes close was the Carter years when we had double-digit inflation, interest rates over 15%, and didn’t know where to find a tank of gas. I’m usually optimistic, but lately I’m making ultra-conservative investment and spending decisions until the uncertainty goes away. How are you making it through these challenging times?

      Is the U.S. Going Bankrupt?  When you own stock, the company will mail you a glossy annual report that shows income and expenses, and describes future prospects, usually in glowing terms.  If the federal government were a Fortune-500 company, its annual report would say USA Inc. was on the brink of bankruptcy because:

  • Expenses exceeded income by $3 trillion in 2010 and 2011,
  • Debt increased from $10.0 trillion to $14.8 trillion in the last five years,
  • Standard & Poors downgraded its bond ratings for the first time in history, and
  • Customers are complaining, sometimes violently, that they want to get more and pay less.

The government isn’t a company, of course, so it can’t outsource or shutdown under-performing units like Medicare and Medicaid (the U.S. spent twice as much per-capita on health care as Sweden, but has a shorter life expectancy) or the Education Department (the U.S. spent more per-student than any other country, yet our teenagers rank 25th in math skills). If I was a shareholder in such a company, at a minimum I would expect the Board of Directors to take decisive action. But the Board of Directors of USA Inc. (i.e., Congress) is gridlocked on how to increase income, cut spending, or curtail entitlements – all of which are essential to resolve the crisis. Future government policies and taxes are uncertain.

    Congress Plays Russian Roulette.  The truth is Congress has been over-spending, under-investing, and promising unsustainable entitlements for decades. In the August agreement that avoided default on the national debt, neither Republicans nor Democrats sacrificed their sacred cows – Republicans avoided tax increases and Democrats avoided Medicaid, Medicare or Social Security cuts. President Obama hit the nail on the head when he said: “Our economy didn’t need Washington to manufacture a crisis and make things worse.” The willingness of some Congressmen to threaten default on federal bonds, pensions and paychecks to push their agenda is a frightening new low in partisanship. Both parties claim they want to create jobs, but neither blinked when the Federal Aviation Authority’s spending authority was allowed to expire, causing thousands of workers to be laid off and airport construction projects to be halted. Everyone focuses on the November deadline for the Congressional Super-Committee, but that committee is struggling – the members prefer rhetorical fairy tales to hard-nosed budget decisions. Because of cutbacks, government employment is down everywhere, particularly in the Washington area (my home) which people thought was recession-proof. The future economy across the country is uncertain – even more so in my hometown.

      Political Extremism.  Extreme partisanship isn’t surprising given the mixed messages citizens are sending. On one hand, the Tea Party bashes big government, fights for individual freedoms, and pushes the Republican Party to the right. On the other hand, the Occupy Wall Street movement bashes big business, fights for social justice, and pushes the Democratic Party to the left. The two extremes are incensed by myths about painless solutions like eliminating government waste and taxing millionaires – both are good ideas, but neither is a panacea. President Obama empathizes with the Occupy Wall Street folks, of course, but at the same time expects millions in donations from Wall Street for the 2012 Presidential campaign. The positive side of the protest movements is that they highlight the misery millions of Americans are feeling from the economic slump. But to effect real change in a real democracy, we need real politics – not political extremes that perpetuate Congressional gridlock. I don’t see an end to the uncertainty about what Congress will do – nothing looks like their most likely action.

     Volatile Financial Markets.  Talk about uncertainty: the stock market has gone up or down more than 1% in eight of the last ten working days. The civil war in Congress creates two problems for American business: paralysis and uncertainty. At the same time, U.S. companies have high profits and cash reserves, but nowhere to spend the money – Apple alone says it has $76 billion in the bank. They are making conservative decisions just like I am. Why? Business leaders blame the dysfunctional Congress for their reluctance to hire and invest. For example, in a Brookings Institution poll 33% of U.S. business leaders said political instability is a major constraint on hiring – by comparison the equivalent result in France was 15%. These leaders say they would tolerate higher taxes if the increases were linked to a broad plan that clarified the country’s policies for taxes, Social Security, health care, the environment, etc. Making matters worse, President Obama pushes his $474 billion “American Jobs Act” and begs companies to hire employees, but in his next breathe he vilifies the banks, insurance companies, oil industry, and other businesses he expects to do the hiring. He should heed former President Clinton who said: “I don’t understand how you can love jobs, but hate the people who create them.” The sooner Obama realizes how his rhetoric contributes to unemployment, the sooner the country will return to growth. The uncertainty is the mortal enemy of corporate investment and hiring.

      Uncertain Weather.  Uncertainties aren’t limited to politics – even weather is more unpredictable than ever. February’s snowmageddon in Washington, floods in Vermont, droughts and wildfires in Texas, more than 1,000 tornadoes across the U.S., a melting Arctic ice cap – our world is tearing itself apart and we’re doing nothing about global warming. The National Oceanic & Atmospheric Administration (NOAA) says warmer temperatures produce more severe and frequent weather extremes. NOAA reported 2010 as the hottest year in the 100+ years it has kept records – 2011 is likely to beat the 2010 record. Extreme weather is destructive and deadly: 2011 was first year in history with ten weather events that each caused over $1 billion in damage. Despite visible and expensive signs of global warming, the U.S. is unlikely to limit greenhouse gas emissions before 2013 – if then. Many Congressmen and some scientists deny that human activities contribute to global warming. As a PhD scientist, I don’t know what causes global warming, but it’s suicidal (and, quite frankly, stupid) to do nothing about it. Last month my wife and I had over $10,000 in flood damage in our house – the first damage in the 36 years we’ve lived here. Weather uncertainty is scary, expensive and unlikely to abate.

      Cyber Insecurity.  I don’t even feel safe in my own home these days – more because of cyber-attacks than home intrusions. Twice this year hackers penetrated my wife’s AOL account and blasted out an email asking friends to wire $1,000 because we’d been robbed in London (we haven’t even been to London). Since the Internet’s early days, hackers have tried to penetrate government, industry and personal computers. But hacking has changed from a game for geeks to a way for countries to attack each other and criminals to steal. The lack of federal standards and oversight leaves us open to cyber-attacks on the power grid or individual power plants. Unfortunately, there’s no way to know what systems have been penetrated. Even as I type these words, I wonder if dangerous sleeper code is in my computer that could destroy my records and the draft of my new book. On a cyber-warfare level, I wonder if the U.S. is as good at hacking as the Chinese. More uncertainty.

     Bottom Line. As a superpower, the U.S. isn’t so super anymore. Most people agree the 20th century was American’s century – just like Great Britain dominated the 100 years before World War One. It now looks like the 21st century will belong to China. With a president and Congress whose primary goal is to get re-elected, few people have confidence in their ability to fix trillion-dollar deficits, persistent unemployment, under-performing schools, energy policies that ignore global warming, crumbling infrastructure, or a moribund housing industry – and I probably left a few things out. The country is likely to crawl through the 2012 election hoping things will change thereafter. History will remember the 112th Congress as the “Nero Congress” that played foolish partisan games while the country’s economy went up in flames and millions suffered. This sure doesn’t feel like the country my father was so proud of. As Bill Gates said: “Where’s all that good stuff we used to make and other people copied?” On the other hand the 112th could be the “Hero Congress” that turned the country toward prosperity. I’d like to believe that, but I’m hedging my bets until I see hard evidence. I know I sound negative, but I’m really scared about my future. How about you?

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