Thursday, January 18, 2007

This long term bull is turning bearish

Not because of the housing crash (won't happen). Not because of energy consumption (orderly marches). Not because of the current budget deficit nor trade deficit (higher tax revenues with growing economy, and capital surplus to balance trade).

Because of what Fed Chairman Bernanke said today to Congress (subscription required), in line with his predecessor:
"If early and meaningful action is not taken" in reforming programs like Social Security and Medicare, then "the U.S. economy could be seriously weakened, with future generations bearing much of the cost," Mr. Bernanke said in prepared testimony to the Senate Budget Committee. His prepared remarks didn't address the monetary policy outlook or current economic conditions.
When Social Security was borne during the New Deal, the life expectancy was 64 and for every 1 beneficiary there were 45 payees.

Now life expectancy is over 70 and there are only 3 payees for every beneficiary, and the baby boomers have not even started collecting yet. (Check this out paper)

Congress is able to raise spending (and taxes), but their track record shows they cannot cut spending. So by continuing to expand the retirement and medical liabilities for the whole country, the federal government is acting like the Big Three auto companies back in the seventies and eighties. In a few decades, the U.S. will not be able to compete with other nations because of our high labor costs and liabilities. Those of you with Lou Dobbs and disturbed by outsourcing and trade deficits--you ain't see nuthin' yet.

And I am supremely confident that, Congress will continue to ignore the advice of someone who is much more an expert, and that just as our auto industry is bleeding to death today, so our economy and the productivity our of workforce will, too.

Go bears! And Patriots!

UPDATE: Don Luskin had a great cartoon on this yesterday.

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