Tuesday, December 25, 2007

The Social Security Medicare Headache

Current financial news suggests the economy is deteriorating. Many institutions are in damage control mode. If an entity is facing an impending bankruptcy, why announce it early? Collect a few more paychecks. People tend to hide problems. Sweep this under the rug and maybe it will go away. The real picture of our predicament is probably still well hidden. Nothing is a clear as it seems. No set of facts describes the whole story. And when you mix and match news reports, there is room for the error of interpretation

People talk about helicopter Ben throwing money out everywhere. It makes a great newspaper story, but it’s way out in left field. All he can do is make the money easier to borrow. The damn problem is you can’t force people to borrow money. If you want to blame Ben for what Congress has spent, be my guest. He is being groomed to take the fall.

Congress is the main player in this game as it unfolds. To get elected they promised the moon and pretty much delivered. This group repealed laws written in the 1930’s that could have kept a lot of this from happening a second time. The country is headed into a deflationary recession but our elected “Cesspool of Irresponsibility” could change all of that. Congress assumed (with good reason) that the tax receipts would increase each year. Even with inflation, they will probably drop next year. Fixed Costs are the real headache. The amount spent on social programs is pretty much set in stone (it isn’t going to get smaller) 56% (See diagram). As tax revenues decrease, the pie gets smaller; the share devoted to social programs increases. A 20 percent decrease in revenues would make the fixed cost rise to 70 percent of the budget.

Congress will have some very unpleasant decisions to face\avoid (choose one) in the near future. Don’t expect them to cut Social Security or Medicare; they want to get re elected. Congress is held accountable for fixing present problems, but responsibility for the future problems doesn’t even enter the equation. From there it is quite simple; the Treasury writes the checks to cover the fixed costs. This is where the money is printed. It’s kind of like a Visa card with no limit on it.

Where will Congress cut when things get worse? There is no answer to that question yet. When FDR was elected, there were no social programs, and by 1948, these programs consumed 10% of the budget. Now where are we? Entitlements are where the cuts will have to be made. To a Congressman, that’s an incredibly stupid suggestion especially come election time.

We are looking at several things in decline; credit, housing, banking and a shrinking tax base. Just think, you got all this, in time for Christmas!

Merry Christmas everyone.



Spot on, Jim. Merry Christmas, and keep campaigning.

Anonymous said...

Jim, What 1930's laws were recently repealed? Thanks for all your work putting this info out there!

Jim in San Marcos said...

Hi Anon 3:23

A lot of it had to do with banking regulations. They were not allowed to compete against insurance companies, mutual funds and foreign entities.

A lot of the stuff repealed had kept banking from competing the business world with non banks. In the past they couldn't sell stock, money market funds Ira's. A lot of this stuff is not FDIC insured.

Most of what was repealed allowed the banks to become super banks, which are technically too big to fail and that is not a good thing.

Tom said...

Anon 3:23:00,

Jim may be aware of others, but this is what I found...

"In 1999 Congress eliminated all the fail-safe mechanisms put in place after the Great Depression of 1929. It was the Gramm-Leach-Bliley Act and the cause of our next Great Depression. This act enabled mortgage banks for the first time since the Great Depression to get back in bed with the securities industry. Banks could now just originate home loans - regardless of their soundness- and pass off the risk to people who bundled the mortgage into a securities to sell to pension funds and foreign investors. Hence easy mortgage credit to all, and the cause of the current housing price bubble."



Jim in San Marcos said...

Hi Tom

Thanks for your info. Chalk up my vagueness to a bad memory. What I was alluding to has happened over a long span of time from about 1970 on up. It was quite gradual and little noticed, a slow chipping away of the bonds of restraint on banking.

Congress is like a dumb set of parents. "If everyone else is doing it, it's alright for my Johnny (the banks)to do it too." I never won that argument as a kid--go figure.

Anonymous said...

It's more than just banking. In 1935, FDR forced the electric utilities under regulation; back then they used their customers as a cash machine. The result? Stable, reliable electricity for seven decades. It made utilities a rock-solid investment. Not a boom/bust industry.

Back in the 1990's those PUHCA laws were gutted by the lobbying of essentially Ken Lay/Enron. Congress offically repealed them in 2005. Kennyboy's best buddy was Governor of my state back in the 1990's and signed us all up for "competition" in the electrical industry. The result? Prices tripled with no discernable so-called competition. As an engineer, it boggles my mind that my neighbors actually think they pick which powerplant makes their electricity.

It is predicted that Texas (my state) will run out of reserve power in late 2008 or 2009. In electricity, profit comes from shortages.

That should really help the home values of all my fellow Texans!

Jim in San Marcos said...

Hi Annon 7:02

Thank you for sharing your information on this. You and Tom have put some meat on this turkey.

Congress did the same thing to my telephone and cable bills. Split them up so I could pay less. It didn't quite work out that way.

I wonder if it's is against the law to tar and feather a Congressman? It's the least we could do to show our appreciation of what they have done for us.

JimAtLaw said...

Either our political system will collapse utterly in the next 50 years, or we will end up completely socialist.

The selfish generation (the Boomers) will not give up a dime of Social Security or Medicare benefits, and will happily impose 90% marginal tax rates to try and maintain their benefits, at the expense of Generations X and Y. Productivity will fall like a rock, and China and the third world will mop the floor with us economically. The U.S. will become the next Europe, but without most of its charms.

I saw a funny and apropos bumper sticker this week - "Today's empires, tomorrow's ashes."

LtRand said...

Anon 7:02,

It's interesting how much fear and misconceptions are public belief.

Electricity, and roads for that matter, are areas of natural monopolies. While some would contend that natural monopolies are better than government monopolies, I really don't believe that. It's a case of lesser of two evils at that point, and a private monopoly will always underproduce and over price from market equilibrium, and government monopoly will always overproduce and overprice, but I would rather have more than less if I'm getting overcharged at either rate. Because it is true that in a competitive market, if electricity could be such a thing, it would be cheaper than state run monopoly.

As far as banks are concerned, I don't think we need to reregulate the industry, we just need to refuse them bailouts so they learn that they're on their own. Most of these bad habits they practiced was just like a kid leaving his overbearing parents for the first time. They try every bad habit and then learn why they're bad, and moves on usually without repeat. Let the industry learn from their mistakes, and we'll be fine. Just like a kid, if we bail them out, they'll never stop.

Jim in San Marcos said...

Hi Itrand

I agree, long term monopolies tend to stagnate. When they broke up Ma Bell my bill tripled, but in the long term rates have gotten a lot lower, you just need a PHD to understand the billing charges.

What you suggest for the banking industry will probably happen, the contracts were written way before Congress could do much about it.

The issue that we need to address is the potential failure of some retirement plans due to this speculation. Here, I am afraid that the government is already committed as payee of last resort.

Thank you for your insight

Jim in San Marcos said...

Hi Jimatlaw

I don't think we have 50 years, maybe 5 at most.

I share your opinion that Congress will not address the issues. They hope this mess will disappear. I think that they have realized that they can keep their jobs as long as they don't try to fix it.

The situation will fix itself, and it's called inflation. Add a COLA or two and you could have HYPER tacked onto it.

Thank you for your comments. Catch you next year

Anonymous said...

so what should i do with my ira if its not fdic insured and thats where all my eggs are? not necessarily pertaining to this article but how i feel in general with whats going on today. jim please reply.

Jim in San Marcos said...

Hi Anon 1:42

The only tip I can give you is to shop around for a bank that offers FDIC insurance on an IRA. Union Bank of California offers such a program, but you are stuck in their Treasury's and money market funds. This might not be a bad choice if you are over 65 and are concerned about principle. If you are young, inflation might eat you alive.

Another thing to consider, my IRA requires the money to be left in the account for 5 years before I can switch to another carrier like a bank. Its about a 5% fee which is not cheap. So I have started dumping my new money into the bank IRA fund and waiting for the other one to mature.

The funny thing about you mentioning this is that I am meeting with my Union Bank rep tomorrow just to discuss my options in transferring from one plan to another. Bank IRA fees seem a lot more reasonable than some of the private ones.

There is no way I could offer you investment advice, there are too many variables. I have always stressed that the most important part of any savings program you pursue is to have an investment plan and stick with it.

One thing not understood very well, is that banks can offer both types of investments, FDIC insured and privately insured. That is what ruined a lot of elderly people in the 1990 Saving & Loan fiasco.

I've got a little time off this week maybe I write a bit on investment advice from what I learn tomorrow. Most blogs have a warning about this stuff not intended as investment advice, which I think is rather humorous.

So stay tuned, I may have a tip or two on investment advice without the boilerplate warning coming up.