Unfunded Promises

BY JOHN MAULDIN

 

JUNE 29, 2018

A debt occurs when you receive something now in exchange for a promise to give something back later. It doesn’t have to be cash. If you borrow your neighbor’s lawn mower and promise to return it next Tuesday, that’s a kind of debt. You receive something (use of the lawn mower) and agree to repayment terms – in this case, your promise to return it on time and in working order. 

One reason you try to get that lawnmower back on time and in the proper condition is that you might want to borrow it again in the future. In the same way that not paying your bank debt will make it difficult to get a bank loan in the future, not returning that lawnmower may make your neighbor a tad bit reluctant to lend it again. 

Debt can be less specific, too. Maybe, while taking your family on a beach vacation, you notice a wedding taking place. Your 12-year-old daughter goes crazy about how romantic it is. In a moment of whimsy, you tell her you will pay for her tropical island beach wedding when she finds the right guy. That “debt,” made as a loving father to delight your daughter, gets seared into her brain. A decade later, she does find Mr. Right, and reminds you of your offer. Is it a legally enforceable debt? Probably not, but it’s at least a (now) moral obligation. You’ll either pay up or face unpleasant consequences. What is that, if not a debt? 

These are small examples of “unfunded liabilities.” They’re non-specific and the other party may never demand payment… but they might. And if you haven’t prepared for that possibility, you may be in the same kind of trouble the US government will face in a few years. 

Uncle Sam has made too many promises to too many people, with little regard for its future ability to fulfill them. These are debt. Worse, some of them are additional debt on top of the obligations we already see on the national balance sheet. 

Even worse, entire generations have planned their retirement lives around the government fulfilling those promises. If those promises aren’t met, their lifestyles will indeed become a potential train wreck.

There Are Now Barely Two Workers per Senior in Most Developed Economies

For every American 65 years of age or older, there are now barely three people working and paying into the country’s safety-net, Social Security, and Medicare programs. In France there are barely two workers per senior. In Japan there are slightly less than two. In Italy and Greece there are barely more than 1.5 workers per senior, less than half the ratio in the 1960s. In each case, the definition of a ‘worker’ includes anyone working as little as one hour a week. 

At the same time, government entitlement spending is surging in virtually every developed economy. In the US, a full 73% of government revenues are already being spent on entitlement programs and over 60% of those entitlements go to senior citizens via Social Security and Medicare. With the bulk of the baby-boomer generation reaching retirement age right now, the problem is only going to get worse. 

With fewer and fewer workers per retiree, with entitlement spending already consuming the vast majority of tax revenues across the developed world, with governments already running large perennial deficits, with most developed world governments already weighted down with over 100% debt-to-GDP, and with interest rates set to rise, there is a funding crisis coming to governments across the developed world. 

With fewer and fewer workers per retiree, with entitlement spending already consuming the vast majority of tax revenues across the developed world, with governments already running large perennial deficits, with most developed world governments already weighted down with over 100% debt-to-GDP, and with interest rates set to rise, there is a funding crisis coming to governments across the developed world.

DYI:  The 800 pound gorilla in the room is the Medical Industrial Complex.  These companies are in criminal violation of the Clayton, Robinson-Patman, and Sherman Anti-Trust Acts.  Simply put they collude in order to price fix which is violation of Clayton and Robinson-Patman and now have moved from local to regional monopolies in violation of the Sherman Anti-Trust Act.  Due to vast campaign donations to the House, Senate and including the President have failed to enforce these laws.  The chart at the top of this blog just says it all.  If not stopped in their never ending cost spiral [zero competition; forming monopolies] our country will end up being called the Stagnation Nation.  

Surprisingly Social Security is easily fixable by slowly increasing retirement by one month every year for the next 20 years plus increasing the caps twice the inflation rate for the same amount of time.  

Unfortunately due to the lopsidedness of politics [both political parties] something along those lines that I just mentioned are in store for Social Security then they will increase the take from that program to fund Medicare's ever increasing costs.  The classic case of robbing Peter to pay Paul.

Is reform on the horizon? So far the answer is a resounding NO!  I've found that very people even realize that there is collusion and monopolies.  Since they deal money wise with their respective insurance company they immediately think these runaway costs are their fault.  Don't get me wrong I'm not lionizing these insurance companies they have pulled their share of shenanigans as well.  Be as that may be in the end pure economics comes into play as our premium payments reflect the underlining costs from the Medical Industrial Complex.

Until free market based competition reform is levied expect year after year of creeping economic stagnation for our beloved country.  Add on an out of control Military Spending, outrageous Student Loans, growing interest cost on our ever increasing debt, from young to old making a living will endure greater and greater hardships.

 DYI