Over the next couple of months, you will hear numerous folks weigh in on how to fix the next financial crisis that some say is bound to happen. They will suggest, as Bruce Barlett of Forbes recently did, that the looming event is easy to spot, once you figure what is sustainable and what is not, once you realize that it is the agencies who rate the debt of the US who have what seems to be supreme power over the future of our economy and that the deficit is unmanageable. Perhaps it isn’t as complicated as it seems to be. At least in the short-term.
Mr. Barlett’s assessment of the next decade is based on the inability of the unsustainable accumulation of debt to continue. He believes what keeps us from becoming Greece is more complicated than simply currency issues. Suggesting that rather than looking at the deficit itself, we should look at the deficit through the eyes of the agencies who project the creditworthiness of the borrower.
This belief hinges on the fact that when it comes to the interest rate cap, “the Treasury has no such constraint”, paying whatever the market believes is fair, the ability of the Federal Reserve to use the secondary marketplace as a means of purchasing these costly products and lastly, because the “good faith and credit” of the US is regarded so highly, there is little likelihood any agency downgrade will be based on those three items alone.
Instead, he suggests it will be the share of that debt service in relation to revenue. Citing a projection by the Congressional Budget Office, he writes that “interest as a share of projected revenues will rise from 8.9% last year to 9.9% this year, 14.8% by 2015, 19.8% in 2019 and 20.8% in 2020.” Once that 20% threshold hits, all hell will break loose. But as any economist might do, he does it one better.
Once the Fed begins to tighten its monetary policy, and event that begins too late in many cases and goes on for too long in almost all instances, the threshold will arrive much sooner. Looking to this as the catalyst ignores the moves the current administration is putting in place, from healthcare reform to allowing the devastating Bush tax cuts to expire. These two moves woud add trillions to the coffers without raising a single taxpayers obligation.
Moves to cut the defense spending, also accelerated during the Bush administration would have the net effect of a tax cut. It could be that Mr. Barlett is simply taking advantage of the political unrest, hardly comparable to that of the Euro zone and suggesting that it boils done to the stickiness of his idea as it plays to the short-term interest (of the average citizen) rather than long-term goals (both fiscally and economically).
The threshold for new ideas, any ideas for that matter is raised each time a particular group identifies the problem and seeks to defend its position, even if it is incorrect. Why do I bring this up when most of the focus of this site is on the repercussions of retirement?
In large part because we influenced by these short-term suggestions. We recoil when we see markets contract as they have in the past week or so. We wonder whether what we are doing for our retirement is worth pursuing. We tend to watch for opportunities even if we don’t really know what we are looking for or even what is if and when we find it.
Retirement planning is not to be taken lightly. But like any plan, it is based on you ability to survive worst-case scenario. Crises of confidence will happen on a regular basis and may even increase in frequency. Yet the only confidence that matters is your continued efforts at bringing your best efforts to the future by acting responsibly now.
Yes, your retirement future has a vested interest in the progress of the economy, the ability for it to produce jobs, collect revenue and spend where it need to spend. Your own fiscal approach will help you in the long-term. Just don’t get swept up in the short-term problems that are based on predictions that may not matter.
To read the full article in Forbes, click here.
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