Dead Man Walking: The United States of America

The environment in Washington, D.C., and the 50 states has felt like walking into a place and having a sense that something is wrong, but not knowing exactly what will happen or when.

“QE infinity,” the Federal Reserve’s seemingly endless bond-buying program, has so distorted the “normal” prices and trends of stocks, bonds and commodities that no one can possibly determine what the investing landscape would look like, or what the condition of the economy and the financial system would be, in the absence of the $85 billion-a-month stimulus program.

The Fed is undoubtedly praying that economic growth will accelerate, giving it proper cover to tighten its ultra-loose monetary policy.

However, the economy is now in its fifth year of subpar growth, with little pickup in sight.

The global financial system is not much healthier.

In the past five years, laws and regulations have been passed, bankers have been pilloried, financiers have been vilified, “living wills” have been prepared and carefully and beautifully wrapped for presentation, regulatory entities have been formed and fresh-faced regulators, eager to save the world, have been hired and placed at new desks in front of new computers.

But through it all, one thing has not changed: The major banking and other financial institutions remain opaque and over-leveraged.

What has been happening with the U.S. federal government in its recent highly theatrical phase, as contentious and difficult as it has been, is merely a precursor to much bigger events.

We are talking about the underlying structural issues of the federal budget deficit, economic growth, the deeply contentious Affordable Care Act, and the long-term insolvency of the country due to the government having made (and continuing to make) massively unpayable promises for the future.

As I have thought out loud, the current annual federal deficit, so ballyhooed to be “coming down nicely,” is actually catastrophically out of control.

It is not a trillion dollars.

The true figure is more like $7 trillion (and growing!) after accounting for unfunded liabilities, which are mounting at a fantastic pace. It is not an exaggeration to say that America is deeply insolvent, and for that matter, so are most of continental Europe, the U.K. and Japan.

No combination of achievable growth rates and taxes can pay for the promises that have been made.

The numbers are clear and inexorable. None of the major governmental leaders in these regions is telling the truth about the present state of affairs and where it will lead, nor are they making the structural changes necessary to unlock the potential to grow their respective economies significantly faster than current rates.

As bad as the insolvency is, it would be infinitely worse if governments started to believe that just because they can print money, they can inflate their way out of these long-term obligations.

That will not work. It will lead the world down the road to total ruin. The situation is deeply unstable.

It is so sad that after the major developed countries recovered from World War II, they gradually morphed from soundly financed global engines of growth and prosperity into massively over-indebted countries whose currencies will likely collapse well before your grandchildren start looking for their Social Security checks.

Best wishes,

Douglas