Is economic disaster assured? Preparing for the perfect storm
By Ed Morrow
Intl. Assoc. of Registered Financial Consultants
When it comes to the weather, hindsight is far more accurate — the same goes for economics.
The bestselling book "The Perfect Storm" by Sebastian Junger and the popular movie starring George Clooney describe the devastating results when all the aspects of the sea — wind, rain, currents and storm — combine. The perfect storm would be predictable if a climatologist had all the history and complete information of where and when each new blow would strike, but such knowledge is not reliably available in advance. When it comes to the weather, hindsight is far more accurate — the same goes for economics.
Your clients (as well as you and your family) are living in a time preceding an economic perfect storm.
Even now, you can see the first of the elements, similar to an unusual tide, strong winds or dark clouds. The warning signs of which the public are aware include the stock market declines of 2008, the real estate crisis of 2010, the London Interbank Offered Rate (LIBOR ) fiasco and the widespread bank money laundering charges and bank losses from unsuccessful hedging activities.
Adding fury to our economic storm is the flagrant financial mismanagement of many national governments who have allowed their situation to deteriorate by encouraging overspending and undersaving. This includes Greece, Portugal, Ireland and Spain plus, sadly, the United States. As these waves race for the shore, they will add more pressure on other European countries. More sovereign debt will come into question and the impact will even be felt in France, England and Germany — the financial stalwarts of Europe.
Government regulators in the U.S. and elsewhere have been either wildly incompetent, hoping they can personally retire before all is revealed, or they have been privately enriched to countenance abuse of the public’s trust.
All over the world, there have been Ponzi schemers and those who wager other people’s money on derivatives and hedge funds. When they bet right, the “advisors” receive giant bonuses. When they place their institution’s chips on the wrong color, the collapse can be sudden and serious, as more elements are added to the growing confluence of effects.
Do you trust regulators?
Has FINRA protected investors from Madoff, Stanford and over a hundred other Ponzi practitioners? Has any action been taken against Jon Corzine for “misplacing” $2 billion — part of the $40 billion failure of MF Global? Note: Corzine must have been distracted while spending his $8.5 million salary.
The mortgage debacle is not over
Further decline will place more properties underwater. The HARM and HARP loans now offered by the U.S. government through their stalwart lending pals Fannie Mae and Freddie Mac are offered as a “turn-around for disaster” to distressed homeowners. It's like telling the casual swimmer to paddle out to the sand bar and ignore the growing riptide currents or the circling fins in the water.
There will be more loan defaults and the U.S. government will try to hide them so as not to upset the public. After all the damage caused by mortgages issued far in excess of property values, the U.S. government is still promoting this financial profligacy. A HARP loan, (funded by Fannie Mae or Freddie Mac) can be issued at 150 percent of the resident’s value — plus no appraisal is required. Obviously, there will be another housing crunch.
What does HARP stand for? The government would tell you the Home Affordable Refinance Program. Perhaps a better name would be the Housing Absurd Repeat Plan. Loans in excess of property value, not relating lending suitability to the resident’s income and failure to make an adequate property and neighborhood appraisal failed before and they will fail again. Why would a consumer keep paying on a loan that is 150 percent of the value of their property?
But these are only ripples. The serious waves are building and inevitable.
If we have a five day work week, do we need six day postal delivery? If we won World War II in 1945 and Korea in 1952, why do we still have military bases, equipment, civilian employees, combat military and their families that are now occupying over 700 offshore locations?
The media, governments led by legislators, presidents and regulators have encouraged the public to believe they are entitled to many aspects of daily living: food, shelter, medical treatment, education and receiving payment for not working.
Furthermore, Congress and the president believe these entitlements should be extended to illegal entrants and their families.
Large farmers are paid to not farm, less it reduce the price of food. Of course, this encourages unnecessary importing of food, which exacerbates the trade balances and drains federal financial reserves. Eco-passionates are encouraged to build windmills and solar panel farms that produce electricity at twice to 10 times the cost of traditional energy. Therefore, nuclear and coal-fired plants are not improved and their number is shrinking. We will learn the impact of that wisdom when electrical outages grow more common, as they have recently in India.
Until 100 years ago, there was no medical insurance. If you were sick or injured, you shopped for the best and cheapest treatment and you expected to pay for it. But group medical plans ballooned the purchase of medical services, stimulating physicians, researchers and a host of organizations to dramatically improve medical treatment. Want proof? Compare the life expectancy of various countries in 1900 to those of today. All of us have had family members survive medical incidents that would have previously been fatal; however, with that better care has come unintended consequences.
Medical costs have escalated
When I was born, the Illinois hospital charged a room rate of $10 for my mother and only $1 for me as a healthy infant. She was encouraged to stay several extra days since her blood pressure was unstable. Adjusted for inflation, that $10 room rate charge today would be $86 at 3 percent, $175 at 4 percent and $1,390 at 7 percent. What is the cost of a private hospital room in your community? Medical cost escalations exceeding general inflation are likely to continue, currently up at about 12 percent in the past two years. When will it end? However, persons all over the world have been told, “You are a person of value and our great economy should be able to save your life again and again, despite the costs.”
People are living longer
As the medical community develops treatments for disease, degeneration and accident, lives are extended. People are escaping death repeatedly. However, each time, the impact of complexity and inflation drives the costs higher. So the longer we live, the more expensive the treatment. Our lives and mobility are enhanced — and the costs keep escalating.
Longer lives mean longer retirements
Many years ago, the age of 65 was selected for late retirement. Persons were planning on a mid-range retirement of 62 and early retirement of 55. Some countries, like the Philippines and Greece, have been encouraging retirement at 55 in order to create more jobs for young people entering the work force.
In 1900, the life expectancy for a new male child was 48 years and 51 years for a female. Today, according to the U.S. Census Bureau, expectancies have grown to 76 and 81, respectively. However, by the time today’s infants reach their 70s, the expectation will be even greater.
Remember, a life expectancy is the point at which 50 percent of people in that range will have expired and 50 percent will continue to live much longer. Current life expectancy for a 65-year-old U.S. male is 17.3 (age 82) and 19.9 (age 85) for females.
Jobs have life expectancies
Today, no one manufactures buggy whips or horse-drawn carriages. Many people are engaged in occupations that did not even exist 30 years ago. Cellphones did not enter the consumer market until 1991 and now there are almost 6 billion units in circulation. Will the cellphone of 2030 be similar, or will it be implanted inside the body? You think that’s ridiculous? The first internal units were installed in 2007 and U.S. military research continues.
The point, however, is that as working lifetimes are extended from 40 years to 60 years, the rate of technology continues to speed up. Technical and even academic education will become outdated and inadequate. Many occupations will have a far shorter life expectancy than the workers.
Is economic disaster assured?
I’d like to be confident that the answer is no, but we are definitely headed in the wrong direction. There is currently an international failure of leadership. Governments and federal, state and local quasi–governmental institutions like the Federal Reserve and Fannie Mae are leading us into financial disaster. They are augmented by the giant, “too big to fail” investment and commercial banks.
Where are the solutions?
Governments and institutions must change direction — radically. We need to end the era of entitlement and adopt financial prudence at all levels. Can we do this? Yes. Will we do this? Maybe.
Individual responsibility must be exercised. This means not buying commodities or duplicates that are not needed. It also means saving your money, looking for bargains and paying cash. Individuals must be encouraged to do this — and so must governments.
Back to the "Perfect Storm." The boat encounters an enormous wave, flips over and sinks. The final scenes are a funeral service. But then, that was only a movie.