By Edward Leone Jr. DMD MBA CFP RFC
Contact information: leonee@vzw.blackberry.net
Shawn Tully of CNN Money has done a respectable job of trying to describe where government spending is really going. Given the period in which we are witnessing political conventions, this information may be helpful. Most of the increased spending is not going into goods and services which government traditionally provides rising just 1% adjusted for inflation since 2008. It is the category of transfer payments which has exploded. Much of the funding is coming from new borrowing. Transfer payments during this period have increased by 34% to $800 billion per year. Medicare, Medicaid and Social Security are major culprits, but other transfer payments have increased by 38% in that same period. The spending on unemployment, food stamps, environmental issues etc make up this sector. This is not a sustainable situation as long as GDP growth is so meager.
I find it comical that the psychology of fear which is driving people to annuity products is becoming a failing strategy involving high fees and shrinking payouts. The Wall Street Journal Market Watch points out that the wise guys who operate these products can ‘t deliver originally implied benefit levels in this difficult economy. So where is the expected security of investment return with these products? For those concerned with fixed income returns, it may be that construction of appropriately timed bond ladders is a better strategy. While we are discussing the insurance industry, it should be know that pressure is building to force insurance companies to make their rate filings public. Granted that under writing must be considered in the establishment of rate structure, transparency in this industry with its antitrust exemption is fare too meager. I would not be at all surprised if we see more AIG type failures as the future unfolds.
It is clear that all which has been discussed above is related to the very low-interest rates we are experiencing. On the positive side, very low-interest rates make government borrowing cheap. However, those who depend on fixed income returns and other investors are being punished. Interest rates represent the cost of money. As interest rates go up, logically, bond and stock market values go down. The cost of doing business increases and spending on consumptive items declines. Clearly, a balance regarding interest rates, stability of the currency and growth within the business environment is essential to our future. Keep in mind that although GDP grew 20% between 2000 and 2010, the inflation factor was 27.6% during that period. Government has been a poor steward of the currency. China, Japan, India and Brazil are experiencing the same dynamics to an even greater extent. How about the “Fiscal Cliff”? What a disaster if it occurs. This potential is a failure of the US Congress. The idea of them settling for the actions of a committee to put us in this situation by default while they avoid their obligations to act on these issues is a very sad commentary. What will the Great Depression look like and how will it affect our lives and the lives of future generations if it happens??
For the Record:
DOWJIA 13090.84
NASDAQ 3066.96
S&P 500 1406.58
Suggested Reading: “Power Ambition Glory” by Steve Forbes
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