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Great Depression 2 Right Around The Corner?

Scary stuff from MarketWatch columnist Paul Farrell the other day. On Monday, Farrell wrote:

Now it’s time for my 2008 update, a look into the future where things will get far worse during the next presidential term. And given human behavior, especially in the deep recesses of Wall Street’s “greed is good” DNA, it seems inevitable that no matter how well-intentioned the new president may be Wall Street and Washington’s 41,000 special-interest lobbyists will drive America into the Great Depression 2.

Farrell then goes and rattles off 30 ‘leading edge’ indicators of the next Great Depression. From the piece:

Every day there is more breaking news, proof Wall Street’s greed is already back to “business as usual” and in denial, grabbing more and more from the new “Bailouts-R-Us” bonanza of free taxpayer cash and credits, like two-year-olds in a toy store at Christmas — anything to boost earnings, profits and stock prices, and keep those bonuses and salaries flowing, anything to blow a new bubble.

Scan these 30 “leading indicators.” Each problem has one or more possible solutions, but lacks unified political support. Time’s running out. We’re already at the edge. Add up the trillions in debt: Any collective solution will only compound our problems, because the cumulative debt will overwhelm us, make matters worse:

1. America’s credit rating may soon be downgraded below AAA
2. Fed refusal to disclose $2 trillion loans, now the new “shadow banking system”
3. Congress has no oversight of $700 billion, and Paulson’s Wall Street Trojan Horse
4. King Henry Paulson flip-flops on plan to buy toxic bank assets, confusing markets
5. Goldman, Morgan lost tens of billions, but planning over $13 billion in bonuses this year
6. AIG bails big banks out of $150 billion in credit swaps, protects shareholders before taxpayers
7. American Express joins Goldman, Morgan as bank holding firms, looking for Fed money
8. Treasury sneaks corporate tax credits into bailout giveaway, shifts costs to states
9. State revenues down, taxes and debt up; hiring, spending, borrowing add even more debt
10. State, municipal, corporate pensions lost hundreds of billions on derivative swaps
11. Hedge funds: 610 in 1990, almost 10,000 now. Returns down 15%, liquidations up
12. Consumer debt way up, now at $2.5 trillion; next area for credit meltdowns
13. Fed also plans to provide billions to $3.6 trillion money-market fund industry
14. Freddie Mac and Fannie Mae are bleeding cash, want to tap taxpayer dollars
15. Washington manipulating data: War not $600 billion but estimates actually $3 trillion
16. Hidden costs of $700 billion bailout are likely $5 trillion; plus $1 trillion Street write-offs
17. Commodities down, resource exporters and currencies dropping, triggering a global meltdown
18. Big three automakers near bankruptcy; unions, workers, retirees will suffer
19. Corporate bond market, both junk and top-rated, slumps more than 25%
20. Retailers bankrupt: Circuit City, Sharper Image, Mervyns; mall sales in free fall
21. Unemployment heading toward 8% plus; more 1930’s photos of soup lines
22. Government policy is dictated by 42,000 myopic, highly paid, greedy lobbyists
23. China’s sees GDP growth drop, crates $586 billion stimulus; deflation is now global, hitting even Dubai
24. Despite global recession, U.S. trade deficit continues, now at $650 billion
25. The 800-pound gorillas: Social Security, Medicare with $60 trillion in unfunded liabilities
26. Now 46 million uninsured as medical, drug costs explode
27. New-New Deal: U.S. planning billions for infrastructure, adding to unsustainable debt
28. Outgoing leaders handicapping new administration with huge liabilities
29. The “antitaxes” message is a new bubble, a new version of the American dream offering a free lunch, no sacrifices, exposing us to more false promises

And “leading indicator” number 30? Farrell wrote:

At a recent Reuters Global Finance Summit former Goldman Sachs chairman John Whitehead was interviewed. He was also Ronald Reagan’s Deputy Secretary of State and a former chairman of the N.Y. Fed. He says America’s problems will take years and will burn trillions.

He sees “nothing but large increases in the deficit … I think it would be worse than the depression. … Before I go to sleep at night, I wonder if tomorrow is the day Moody’s and S&P will announce a downgrade of U.S. government bonds.” It’ll get worse because “the public is not prepared to increase taxes. Both parties were for reducing taxes, reducing income to government, and both parties favored a number of new programs, all very costly and all done by the government.”

Reuters concludes: “Whitehead said he is speaking out on this topic because he is concerned no lawmakers are against these new spending programs and none will stand up and call for higher taxes. ‘I just want to get people thinking about this, and to realize this is a road to disaster,’ said Whitehead. ‘I’ve always been a positive person and optimistic, but I don’t see a solution here.’”

Farrell’s conclusion?:

We see the Great Depression 2. Why? Wall Street’s self-interested greed. They are their own worst enemy … and America’s too.

Geez. Looks like I picked the wrong week to quit smoking…

Scenes from Airplane! (1980)
YouTube Video Link

Source:

“30 reasons for Great Depression 2 by 2011”
Paul B. Farrell
MarketWatch, November 17, 2008

Social Security Recipients Being Short-Changed?

The Wall Street Journal’s Sarah N. Lynch reported this morning:

More than 55 million Americans will see a 5.8% boost in their monthly and supplemental Social Security benefits next year, the Social Security Administration announced Thursday.

That figure represents the largest increase in Social Security benefits since 1982.

The 5.8% cost-of-living adjustment will take effect for 50 million Social Security beneficiaries in January of next year. Another roughly 7 million people who receive supplementary Social Security income will start to see payment increases on Dec. 31.

Social Security benefits increase each year based on the rise in the Consumer Price Index. The increase comes at a time when many Americans are struggling economically in the wake of the financial crisis.

If you’re a recipient of Social Security benefits, this would appear to be good news. And in a way, it is. However, there’s a possibility you may be getting short-changed. How so? The key is the Consumer Price Index. According to the Bureau of Labor Statistics, U.S. Department of Labor:

The Consumer Price Index (CPI) is a measure of the average change in prices over time of goods and services purchased by households. The Bureau of Labor Statistics publishes CPIs for two population groups: (1) the CPI for Urban Wage Earners and Clerical Workers (CPI-W), which covers households of wage earners and clerical workers that comprise approximately 32 percent of the total population and (2) the CPI for All Urban Consumers (CPI-U) and the Chained CPI for All Urban Consumers (C-CPI- U), which cover approximately 87 percent of the total population and include in addition to wage earners and clerical worker households, groups such as professional, managerial, and technical workers, the self-employed, short-term workers, the unemployed, and retirees and others not in the labor force.

In addition, the CPI is the most widely watched and used measure of (or proxy for) the inflation rate in the United States.

The Wall Street Journal’s Jeff Bater and Brian Blackstone wrote this afternoon:

The consumer price index was unchanged in September compared to August, the Labor Department said Thursday. Excluding food and energy, the CPI advanced just 0.1% last month…

Still, consumer prices rose 4.9% on a year-over-year basis, though that’s well off the 17-year high of 5.6% reached in July.

Okay, so prices are up 4.9% from a year ago. With a 5.8% cost-of-living adjustment, Social Security recipients are still keeping ahead of inflation, right? Maybe not. In fact, they may even be far behind, even with the COLA from Uncle Sam.

Oakland economist John Williams has spent 25 years as a consulting economist and is the creator of Shadowstats.com, a Web site that tracks government statistics using alternative calculation methods. And according to his website:

Inflation, as reported by the Consumer Price Index (CPI) is understated by roughly 7% per year. This is due to recent redefinitions of the series as well as to flawed methodologies, particularly adjustments to price measures for quality changes.

Redefinitions? Flawed methodologies? MSN Money columnist Bill Fleckenstein wrote back in 2006:

Williams differentiates between two data-manipulation practices. One is “systemic manipulations, where methodologies are changed.” That’s done in order to align the government’s view of the world with the world, i.e., make things look better than they are. The second practice is out-and-out fudging of the data to produce whatever result is desired. Williams describes instances where various administrations have literally reverse-engineered the data to achieve that result (though politics is not the main purpose of the article).

For those not familiar with “substitution,” he explains the practice’s evolution in the CPI calculations. The concept of substitution was a concoction of Alan Greenspan and Michael Boskin, who basically argued that if one item were too expensive, consumers would substitute that with a cheaper one. Williams’ response: “The problem is that if you allow substitutions, you aren’t measuring a constant standard of living. You’re measuring the cost of survival. You can keep substituting down and have people buy dog food instead of hamburger. It happens. But that’s not the original concept behind the CPI.”

Williams says that the government’s motive in all of this, if there is a motive (of the government collectively; don’t picture a group of men cooking up something in a back room), is its desire to put a favorable spin on all the data.

Another motive? Transfer payments like Social Security are indexed to the CPI, and they would be far higher if the CPI were accurate. In fact, says Williams, if the “same CPI were used today as was used when Jimmy Carter was president, Social Security checks would be 70% higher.” That’s seven-zero.

In contrast to government data showing prices are up only 4.9% year-over-year, Williams says the real figure is closer to 13% through September 2008, when calculations are made using the methodologies in place in 1980.

So, is Williams on the level or what? Maybe so. The San Francisco Chronicle’s Sam Zuckerman wrote on May 25:

“If anything, the CPI understates inflation for the average household,” said Irwin Kellner, chief economist for the online investment news service MarketWatch. “Car prices might be down 5 or 10 percent in the CPI, but in reality, when you go to the dealer, you’re paying more.”

And while there’s not much patience for Williams’ claim of outright falsification, the idea that politics influences government statistics is not entirely far-fetched.

In the 1990s, for example, Republicans wanted to make changes in calculating inflation along the lines recommended by a special commission, including more use of quality adjustments. By lowering the official inflation rate, such changes promised to reduce the annual cost-of-living adjustments for Social Security and other federal programs.

[Katherine] Abraham, the Clinton bureau [of Labor Statistics] commissioner, remembers sitting in Republican House Speaker Newt Gingrich’s office:

“He said to me, ‘If you could see your way clear to doing these things, we might have more money for BLS programs.’ “

If summary, if you receive Social Security benefits (or are close to doing so), I’m sure you’re pretty excited about the news today. However, if Mr. Williams is correct in his calculations, you could be a heck of a lot more happier.

Sources:

“Social Security Benefits to Rise 5.8%”
Sarah N. Lynch
Wall Street Journal, October 16, 2008

“Inflation Pressures Eased in September”
Jeff Bater, Brian Blackstone
Wall Street Journal, October 16, 2008

“The numbers behind the lies”
Bill Fleckenstein
MSN Money, March 6, 2006

“Economist challenges government data”
Sam Zuckerman
San Francisco Chronicle, May 25, 2008

Tough Times For Those Nearing Retirement

More bad news on the retirement front. From William M. Bulkeley of the Wall Street Journal yesterday:

One in five middle-aged workers stopped contributing to their retirement plans in the last year, and one in three has considered delaying retirement, according to a new survey by AARP, an advocacy group for older Americans…

The survey, which covered 1,628 employed people over 45 years old, found that 20% had stopped participating in their retirement accounts in the past year, and 34% contemplated putting off retirement. Twenty-seven percent said they were having trouble making rent or mortgage payments.

Bulkeley pointed out the significance of these findings. He wrote:

About 60% of U.S. workers in the private sector have 401(k) accounts, holding about $3 trillion in assets. Earlier surveys have shown workers don’t put enough into 401(k)s to support their retirements, even as such plans have become the main source of retirement support, surpassing traditional fixed-benefit pensions. Labor Department statistics also show more Americans over 55 years old are staying in the work force, a sign that many can’t afford to stop working.

There is a silver lining to all this. Regarding all those middle-aged workers who stopped contributing to their 401k’s— at least their hard-earned money didn’t get swallowed up in the recent carnage on Wall Street.

Source:

“One in Five Baby Boomers Cuts Retirement Saving”
William M. Bulkeley
Wall Street Journal, October 7, 2008

Retirement Bliss Becomes Nightmare

I feel so bad when I hear of retirees who are experiencing financial distress. True, there are no guarantees in life, and that includes financial security. But it still saddens me that a person could work so hard, for so long, and not retire comfortably, if at all. And the data points to more of these heart-breaking stories ahead, according to the New York Times’ John Leland and Louis Uchitelle. Back on September 23, they wrote:

Today’s retirees have less money in savings, longer life expectancies and greater exposure to market risk than any retirees since World War II. Even before the last week of turmoil, 39 percent of retirees said they expected to outlive their savings, up from 29 percent in 2007, according to a survey by the Employee Benefit Research Institute, an industry-sponsored group in Washington…

Older people with few assets, including the one-third of retirees who rely on Social Security for 90 percent or more of their income, may not suffer directly from the decline in the stock market, but they feel the pain of higher gas and food prices and reductions in volunteer services like Meals on Wheels, which have been curtailed because of fuel costs.

The collapse of the housing market has hit older homeowners. According to the Center for Retirement Research, Americans over age 63 pulled $300 billion out of their home equity through refinancing from 2001 to 2006, lowering their net worth.

Surveys by AARP, the Transamerica Center for Retirement Studies and the Employee Benefit Research Institute have found that more workers nearing retirement age are putting off their plans to retire, curtailing contributions to their 401(k) accounts and borrowing from the accounts to pay for living expenses, including credit card and mortgage debt.

After three decades of decline, a higher percentage of Americans older than 55 are now working than at any time since 1970, the Bureau of Labor Statistics reports. Some are working because they want to, but many because they need to.

The McKinsey Global Institute reported in June that the typical worker would have to work to age 70 to maintain his or her standard of living in retirement.

Source:

“More to Fear in World of Retirees”
John Leland, Louis Uchitelle
New York Times, September 23, 2008

Poll: One-Third Of Adults Surveyed Think U.S. In Depression

It’s a recession when your neighbor loses his job; it’s a depression when you lose yours.

-Harry S. Truman, 33rd President of the United States

The “D” word is making a comeback. USA Today’s Mindy Fetterman wrote today:

In a sign that anxiety is growing, 33% of 1,011 adults surveyed over the weekend by USA TODAY and Gallup said the economy already is in a depression (though by economists’ measures it is not). Just 12% said that 10 months ago…

Seventy-three percent said U.S. financial troubles will get worse before they get better. They expect their taxes to go up, and many worry about affording retirement or maintaining their standard of living. Nearly half worry about their homes losing value; 20% are seriously looking at taking money out of the stock market…

Trust is shifting from stocks and real estate to federally insured bank CDs. And nearly 30% have postponed, or are thinking about postponing, a big purchase. Almost half of those with jobs are more worried than before that the Wall Street crisis will mean their pay or benefits will be cut.

Displaced Great Depresssion kids
Bakersfield, California (1935)

Source:

“Poll on the economy: Americans gloomier, for now”
Mindy Fetterman
USA Today, September 29, 2008

Home Values And Declining Net Worth

You’ve heard the expression. “A picture is worth a thousand words.” Earlier today, Money Magazine senior editor Walter Updegrave wrote on the CNN Money website:

You already know that the housing crisis has wreaked havoc with the economy and financial markets, not to mention the lives of millions who’ve lost or could lose their homes. But there may be a less obvious casualty too: your retirement prosperity.

According to a recent report from the Center for Economic and Policy Research, a Washington, D.C. think tank, the collapse of house prices that started in 2006 has wiped out more than $4 trillion in home equity, putting a sizable dent in the net worth of millions of baby boomers.

Among its more ominous findings: By next year, the average net worth of households headed by homeowners age 45 to 54 will be almost 25% less than it was in 2004.

Now, that last number depends on U.S. home prices stabilizing next year. But what if prices continue to fall?

Any questions?

Source:

“How the housing crash hurts your retirement”
Walter Updegrave
CNN Money, September 2, 2008

America’s Debt? $455,000 Per Household

Yup. You heard right. The U.S. government is $53 trillion in debt, factoring in long-term liabilities. This translates to $455,000 per U.S. household. The San Francisco Chronicle’s Carolyn Lochhead wrote last Thursday:

As the Bush administration proposes backstopping mortgage giants Fannie Mae and Freddie Mac with a $300 billion line of credit and Congress contemplates another economic stimulus, the question is who will bail out the government?

“People seem to think the government has money,” said former U.S. Comptroller General David Walker. “The government doesn’t have any money.”

A rare consensus has developed across the political spectrum that the government’s own fiscal affairs are precarious, with an astonishing $53 trillion in long-term liabilities, according to the Government Accountability Office.

To put that number in human terms, the debt has reached $455,000 per U.S. household. As that debt grows, the United States increasingly relies on foreigners, including China and Middle East oil producers, for financing.

“The factors that contributed to our mortgage-based subprime crisis exist with regard to our federal government’s finances,” said Walker, now head of the Peter G. Peterson Foundation, a group established to raise alarms about the nation’s budget. “The difference is that the magnitude of the federal government’s financial situation is at least 25 times greater.”

According to Lochhead, the federal government’s finances are in worse shape than annual budgets show. This is due to the U.S. government not being required to state its long-term obligations. And the situation is about to become a crisis. She wrote:

This year’s presidential election coincides with the first retirements of the 78 million people born between 1946 and 1964. The first of this Baby Boom generation may now collect Social Security. In three years, they will join Medicare, the giant health care program whose finances are commonly described as out of control. Medicare accounts for the bulk of the nation’s long-term liabilities.

According to the Chronicle, current liabilities total $6.7 million for Social Security and $34.1 trillion for Medicare.

When will the financial meltdown occur? According to Kent Smetters, an economist at the Wharton School of Business at the University of Pennsylvania and a former Bush Treasury official:

I believe we could have a financial crisis like we’ve seen in South America or Asia. It could easily happen, and under current policy will happen in the United States. People say, “Gee, give me a date.” Obviously, that’s impossible, but the longer we wait, the higher the probability. Could it happen in the next decade? Absolutely.

In 1802, President Thomas Jefferson said to Treasury Secretary Albert Gallatin:

We might hope to see the finances of the Union as clear and intelligible as a merchant’s books, so that every member of Congress and every man of any mind in the Union should be able to comprehend them, to investigate abuses, and consequently to control them.

Is it just me, or are we doing a lot of things these days the Founding Fathers warned against?

Source:

“Concern grows over a fiscal crisis for U.S.”
Carolyn Lochhead
San Francisco Chronicle, July 17, 2008

Baby Boomer Retirement: From Dream To Nightmare?

With 77 million Baby Boomers expected to retire in the next few years, a new study by Ernst & Young shows that the retirement bliss may be short-lived. According to Reuters today:

Almost three out of five new middle-class retirees will outlive their financial assets if they attempt to maintain their pre-retirement standard of living, according to a new study conducted by Ernst & Young LLP on behalf of Americans for Secure Retirement.

The study also finds that middle-income Americans entering retirement now will have to reduce their standard of living by an average of 24 percent to minimize the likelihood of outliving their financial assets. Those Americans seven years out from retirement are even less prepared and the study estimates that they will have to reduce their standard of living by even more, an average of 37 percent. These reductions will be necessary even when assuming that retirees can maintain the same standard of living with income equal to 59 to 71 percent of their pre-retirement wages.

Source: Gifts For Geezers

Tom Neubig of Ernst & Young told Reuters:

Many Americans envision a retirement where their lifestyle continues much as before. Our work shows that this is not a realistic expectation and that, with the current state of savings and potentially very long life expectancies, many retirees will have to cut back far more on expenditures than they had ever expected.

Ernst & Young staff concluded that retirees were much better prepared to have a financially-secure retirement if they had a guaranteed source of retirement income beyond Social Security. They predict that retirees with only Social Security as a source of retirement income have a 90% chance of outliving their financial assets during retirement.

According to Reuters, other key findings of the study include:

• Persons that are 5 to 10 years away from retirement have a higher risk of outliving their financial assets than those already at retirement age.
• Married couples, with their longer joint life spans, are more likely to outlive their financial assets than single households.
• Montana, Wyoming and South Dakota residents have the highest likelihood of outliving retirement savings.
• Washington D.C., Rhode Island, Utah, and New York citizens have the least likelihood of outliving retirement savings.

Source:

“Ernst & Young Study Finds Most Middle Class Retirees Will Outlive Retirement Savings”
Reuters, July 14, 2008

Playing The Markets? Caution Is The Name Of The Game

Caution is not cowardly. Carelessness is not courage.

-Unknown

Here’s one for the traders and investors out there. I came across the following list of reasons yesterday from Bennet Sedacca (with Professor Rob Roy) of the financial website Minyanville.com as to why caution is a must in the markets these days:

1. Stocks are firmly in a downtrend.
2. Corporate spreads are rapidly widening.
3. Everyone I know is saying “All is well, buy America.”
4. European equities are taking out the lows of the year.
5. The capital-raising window is closed.
6. Earnings estimates are too high.
7. While much of the move in financials is done, it should spread to other industries.
8. If the “best of breed” are missing their numbers, what happens to the real dogs?
9. We are entering the worst part of the Presidential cycle.
10. We are at war. On multiple fronts.
11. The consumer is tapped out.
12. Corporate buybacks are gone.
13. Net equity issuance is very high.
14. Oil above $100 is very bearish.
15. The savings rate is 0.
16. The U.S. is actually one of the best performing markets in the world this year.
18. Level III assets continue to grow.
19. “Credit rot” is spreading from sub-prime to prime.
20. The dollar is sinking to new lows.
21. The Federal Reserve’s balance sheet is impaired.
22. Mutual fund equity cash remains low.
23. Individual investors are now taking money from their retirement accounts to survive.
24. The market is technically on the verge of breaking down.
25. We’ve broken the 200-week moving average in the Dow Jones for the first time since 2003.

Sedacca and Roy explained each reason in detail, and offered this advice:

Risks remain high and, as always, being cautious will only lose you opportunity - not capital.

Source:

“25 Reasons To Remain Cautious”
Bennet Sedacca, Professor Rob Roy
Minyanville.com, July 1, 2008

Economic Woes Force Baby Boomers To Put Off Retirement

Some years ago I remember reading an article that said how the employment outlook was incredibly bright for Generations X and Y, as the Baby Boomers were fast approaching retirement age. Because economists and demographers were predicting a huge exodus of Boomers from the workplace, companies were trying to figure out ways to retain these highly-experienced workers.

That was then. But now, says Jennifer Levitz of the Wall Street Journal, the gray tsunami “has run into a breakwall.” Levitz wrote yesterday:

While many Americans are still sitting on large gains from homes and stocks bought years ago, today’s market turmoil is shaping up to be the most painful in decades. Nationally, house prices have fallen 10% or so in the past year. And the quarter ended Monday marked the worst period for stocks in 5½ years, with equities off 15.5% from their October highs…

With their homes worth less, fewer people feel confident enough to retire, even if they plan to continue living in them. And unlike younger workers, they don’t have years to make up for downturns in the stock market. As a result, they worry that their investments will diminish to the point that they won’t have enough money to get through retirement.

Because of the troubled housing and stock markets, increasing numbers of Baby Boomers are putting retirement on hold.

Someday soon?

Levitz wrote:

Millions of retirement-age Americans, stung by the recent economic pall, suddenly are having to reassess their plans — with many forced to quickly change course. In February, the proportion of people ages 55 to 64 in the work force rose to 64.8%, up 1.5 percentage points from last April. That translates to more than an additional million people in the job pool, according to the U.S. Labor Department. The ranks of those 65 and over in the work force rose to 16.2% from 16% in the same time span — meaning 212,000 more hands on deck. So far, the numbers for March continue to show a “sharp” increase, says Steve Hipple, a department economist.

According to the Journal reporter, a recent Schwab survey of 1,006 financial advisers showed nearly a quarter of their clients are looking at working longer because of the poor economy. Levitz also noted:

Seniors delaying retirement could create competition for jobs with younger workers and put more pressure on the unemployment rate, which at 4.8% remains low, but has been edging up in recent months.

Source:

“Americans Delay Retirement As Housing, Stocks Swoon”
Jennifer Levitz
Wall Street Journal, April 1, 2008

Why Americans Should Worry

Let me tell it to you straight. The. Math. Politicians. Sell. Does. Not. Work. And if we don’t start dealing with the truth soon, this country could face dire consequences.

-David L. Walker, Comptroller General of the United States, October 2007

On February 15, David M. Walker, Comptroller General of the United States, announced his resignation as head of the U.S. Government Accountability Office (GAO). Since November 9, 1998, Walker has served as the nation’s chief accountability officer, leading the GAO in its mission to help improve the performance and accountability of the federal government for the benefit of the American people. Back on February 15, Richard Cowan wrote in Reuters that:

Walker repeatedly urged Congress to waste no time in reforming massive government programs, such as health care for the elderly, which will grow significantly as the U.S. population ages.

“The picture I will lay out for you… is not a pretty one and it’s getting worse with the passage of time,” the blunt-talking Walker told Congress more than once.

Despite those warnings, Congress and the White House have yet to begin cooperating on how to tackle the huge growth in health care and retirement benefit costs.

Back on December 18, 2007, I wrote:

On Monday, the Bush administration released its Financial Report of the United States Government for the 2007 budget year. And guess what? The U.S. government is promising $45 trillion more than it can deliver on Social Security, Medicare, and other benefit programs, according to the Associated Press yesterday…

Even worse, when the gap in funding social insurance programs (Social Security, Medicare, Railroad Retirement, and Black Lung Program) is added to other government commitments, the total shortfall as of September 30 increases to $53 trillion, up more than $2 trillion in just a year, according to the report. Comptroller General David M. Walker, who serves as the head of the Government Accountability Office (GAO), said Monday that, “Our government has made a whole lot of promises in the long-term that it cannot possibly keep.”

Yesterday, Bill Donoghue from MarketWatch had this to say about Walker’s departure:

Facing indifference on the Hill and unrealistic spending promises, Walker is resigning with five years still remaining in his term to head the newly formed Peter G. Peterson Foundation. Peterson, senior chairman of The Blackstone Group and Commerce secretary in the Nixon administration, has pledged an astounding startup budget for the foundation of $1 billion.

That money will attack what the foundation considers “the most substantial economic, fiscal and other sustainability challenges of our current age” — including federal entitlement programs, health care, unprecedented trade and budget deficits, low savings rates, mounting foreign debt, soaring energy consumption, an uncompetitive educational system, and the proliferation of nuclear warfare materials. Maybe Congress will listen this time.

The departing Comptroller General told Reuters:

As Comptroller General of the United States and head of the GAO, there are real limitations on what I can do and say in connection with key public policy issues, especially issues that directly relate to GAO’s client — the Congress.

My new position will provide me with the ability and resources to more aggressively address a range of current and emerging challenges facing our country.

MarketWatch’s Donoghue lamented:

This sounds to me like the ultimate sell signal on America…

When the nation’s best-informed watchdog resigns and few are acting on his recommendations on his “Fiscal Wake-Up Tour,” it’s time to reconsider over-optimistic domestic stock investments and look elsewhere, or bet against the U.S. market.

Source: stock.xchng

The “Fiscal Wake-Up Tour” is a joint public engagement initiative by the Concord Coalition, the Budgeting for National Priorities Project at the Brookings Institution, and the Heritage Foundation, created for the purpose of explaining in plain terms why budget analysts of diverse perspectives are increasingly alarmed by the nation’s long-term fiscal outlook.

(Note: The author disclaims any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.)

New Poll: More Than Half Of Americans Expect Recession

Earlier today, a Reuters/Zogby poll showed that a majority of Americans expect a recession in the next year in light of the housing slump, growing inflation, and tightening credit conditions. The survey of 1,105 likely voters found that 54% of respondents thought a recession was looming. According to Emily Kaiser in “Majority of Americans expect a recession: poll,” it was the first time since the recession question was added to the monthly poll in September that more than half predicted such a downturn.

“Can you say hell in a handbasket?”

Economic worries have now replaced the war in Iraq as the top issue in this year’s U.S. presidential election as the housing bust takes a toll on Americans, said Kaiser. Three out of four Americans expected home prices will hold steady or fall in the next year. The poll, conducted between January 13 and 16, found that less than 40% of those surveyed thought the U.S. economy would be able to avoid a recession. The Reuters reporter noted:

Those nearing retirement age were particularly concerned about recession. Among those ages 50 to 64, 61.2 percent expected a recession, making them the most pessimistic group.

That group includes a large portion of the Baby Boomer generation born in the nearly two decades after the Second World War. Much of their savings is tied up in home equity and stock-based retirement plans, both of which have been under pressure in the past year.

Pollster John Zogby, himself a Boomer, said older boomers were increasingly delaying retirement or cutting back spending for fear of outliving their savings. Zogby said:

We began as an anxiety-ridden generation and that’s how we’re going to punch the time clock, too.

The poll had a margin of error of plus or minus 3 percentage points.

Most Americans Face A Lower Standard Of Living In Retirement

I can’t say I’m too surprised about the following, especially when 62% of Americans expect to receive pensions, even though only 41% have them. Yesterday, CNN Money’s David Goldman talked about a report that was released Tuesday by the Center for Retirement Research (CRR) which said a majority of American workers will not be able to maintain their current standard of living after they retire. The center estimated 61% of households are “at risk” of being unable to live the way they would like and pay for their health care when they get old. CRR said consumers were at risk if the combined total of their savings, Social Security, and pension benefits was at least 10% short of the income needed in retirement to support the same standard of living they enjoyed while working. While previous reports assumed that less would be spent on consumer goods to cover health care costs, this study takes into account the idea that Americans want to keep on spending on the same amount of goods into retirement, while still being able to afford health care. Andrew D. Eschtruth, associate director for external relations at CRR, told CNN Money that:

People take the notion of health care for granted. The basic assumption of this report is that retirees think they will eat the same kind of foods, travel the same - or more - and buy the same clothes.

Goldman wrote:

If that’s the case, then there is cause for concern. Health care costs continue to increase dramatically, far outpacing wage increases year over year.

Additionally, out-of-pocket health care costs for most consumers rise significantly upon retirement. The report assumes that people recognize the burden of health care costs once they retire; however, those retirees to whom the added expense comes as a surprise will have to reduce their spending on consumer goods and spend much more on health care.

The CNN Money staff writer also noted that many workers do not have a realistic estimate of how much they will need to spend on health care when they retire, citing a 2007 study by the Employee Benefit Research Institute (EBRI). The EBRI report showed that 84% of employees estimated they and their spouse will need to accumulate less than $250,000 for retiree health costs, with 32% from this group thinking they would need less than $100,000. However, EBRI estimated that couples will need to save about $300,000 in retirement to cover health expenses, assuming they live to average life expectancy and Medicare benefits remain at current levels. For those who make it to age 95, this amount jumps to $550,000.

The Tax Rebate: Spend Or Save?

It’s official. Earlier today President Bush signed a $168 billion “economic stimulus” package that will extend rebates to American taxpayers, give tax breaks to businesses, and make more-expensive mortgages available through government and government-sponsored mortgage finance companies. Approved by lawmakers last week, the package provides a tax rebate of up to $1,200 per working couple, plus $300 per child. Businesses get tax breaks to invest in capital equipment. In addition, there are provisions to make more-expensive mortgages available through the Federal Housing Administration and government-sponsored enterprises Fannie Mae and Freddie Mac. According to MarketWatch reporter Robert Schroeder this afternoon:

Surveys show most consumers say they’ll save the tax-rebate money, or use it to pay down debts. Only a minority of consumers say they’ll spend it. To be an effective short-term stimulus to the economy this year, the money would have to be spent.

However, a number of groups and individuals are arguing that the tax rebate should be used to improve one’s finances instead. Financial columnist Eileen Ambrose said in the Chicago Tribune on February 3 that:

Consumers for years have done more than their share of propping up the economy. And what do we have to show for it? Steep credit card debt. Rising bankruptcies. More late payments on car and home equity loans.

Yet now, with the economy in danger, politicians are calling on consumers to spend more. They’re even planning to give us the cash to do it.

Instead of spending the tax rebate the government wants to send us, use it to improve your finances. Pay off high-rate credit card debt. Invest in a 529 college savings plan. Start an emergency fund. Salt away money for retirement. Do something that will leave you in better financial shape — not just for a week or month, but longer term.

Thomas Ochsenschlager, vice president of taxation for the American Institute of Certified Public Accountants, the group which spearheads a savings campaign called “Feed the Pig,” said:

You listen to some people and it’s almost unpatriotic if you don’t take the money out and spend it right away. You can be patriotic and save the money.

Daniel Wishnatsky, an Arizona-based certified financial planner with Special Kids Financial, told Edward Gately of the East Valley Tribune (Arizona) on January 25 that:

It’s not patriotic to be in debt. You could argue that that’s why the markets are in the condition they are today. There’s really too much debt.

However, Ambrose said that using the rebate for other purposes is not what politicians want to hear. The rebate was meant to stimulate a slowing economy through consumption. Spend, spend, spend! David Wyss, chief economist for Standard & Poor’s, offered this advice to the country:

You need some to go out and spend money and eat more meals out and stop cooking for yourself.

However, according to Ambrose, Wyss admitted that if he were advising an individual, he would suggest using the money to pay off credit cards.

Joanna Smith-Ramani, director of the Baltimore CASH Campaign, which provides tax preparation and financial counseling for the type of workers the rebates are targeting, said:

What drives me most mad about this tax rebate is that it’s all about more consumerism. They are saying, “Buy, buy, buy.”

Maryland-based financial planner Peg Downey said the call to spend “infuriates her.” She warned, “It reinforces bad behavior. You’re training people to overspend.” Personally, I don’t believe additional training is needed when it comes to learning how to overspend. When it comes to buying things we can’t afford, Americans excel in that respect. In fact, it seems I’m not the only one who feels this way…

Source: Google Video
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