The Biggest Risk – And Greatest Reward – For Your Portfolio (Part II)
by Alexander Green, Investment U Chief Investment Strategist
Monday, January 28, 2013: Issue #1957
In my last column, I promised to outline the biggest risk and the greatest reward investors face today.
I began with the greatest risk: public sector debt that – when you include current unfunded liabilities for entitlements – comes to $1.3 million per U.S. taxpayer.
The situation is also bad (and often worse) in many of the other leading democracies. Greece – the world’s best-known deadbeat – has debt to GDP of 165%. But following close on its heels are Italy (165%), Spain (147% – not the official 91%), Portugal (120%), and Ireland (112%). The United States will soon hit 90% – and that is also the average debt to GDP for the 17 countries in the euro zone. (Great Britain is not far behind at 87%). Of course, Japan stands alone at 220%.
Around the world, politicians have created enormous public-sector benefits without requiring citizens to pay for them. Why? Because this is a winning strategy at the polls. Forget voter rhetoric about limited government and lower taxes. When they vote – which is all that matters – citizens want a generous welfare state (and in the United States a robust military) – and “someone else” to pick up the tab.
This applies to both Democrats and Republicans. Yes, the Democrats have been on an impressive spending spree over the last four years. But conservatives who elected George W. Bush and a republican House and Senate and expected to see limited government, sharp cuts in discretionary spending, a balanced budget, term limits, tax reform, tort reform, immigration reform, and social security reform, got none of these things. What they got instead was the biggest growth in government spending since LBJ. And it wasn’t just because of 9/11. We also saw No Child Left Behind, the new Prescription Drug Benefit, record earmarks, and gargantuan new deficits. I’ll remind you that the Tea Party originated in protest of George W. Bush and a republican House and Senate that acted just like Democrats, not in reaction to Barack Obama.
I’m not trying to rub salt in the wound, just reminding investors that – despite the sniping on both sides – fiscal irresponsibility is a bipartisan problem.
Americans often complain that Washington needs to stop bickering and get to work solving our problems. The conventional wisdom is that they can’t because the two parties are polarized. They want to go in different directions. That’s only partially true. The real reason they can’t work together is voters won’t let them. Politicians know that seriously cutting benefits or raising taxes (on anyone other than the top couple of percent) is suicide at the polls.
In short, Western democracies are fiscally irresponsible because the voters demand it. This was actually the rap against democracy from the beginning, in Athens 2,500 years ago. Critics said it wouldn’t work because once the voters realized they could use their elected representatives to loot the treasury, all would be lost.
The concern may have been premature but it’s looking prescient today. Politicians don’t make tough choices because – despite all the high-flown rhetoric – politics is really about gaining, holding and wielding power. Upset the masses and you can forget about all three. And I’ll remind you that despite their chronically low opinion of Congress, voters once again returned 91% of House incumbents to power in the last election.
So instead of solving problems, politicians kick the can down the road, past the next election. Meanwhile, the risk is not just that the public debt is growing. It’s that this growth actually hampers and slows the economy. (Ask Spain, whose economy keeps contracting as its debt keeps snowballing.) Furthermore, even those who favor a robust social welfare state should recognize that it can only be funded by a healthy and growing private sector.
In short, out-of-control public sector debt is the greatest threat to our economic future and to your financial well-being. And – while voters prefer to blame their elected officials rather than themselves – the nature of democracy is such that nothing serious is likely to be done about it anytime soon.
What will happen? I’m reminded of the story of a man who went broke who was asked how it occurred. “Very slowly for a long time,” he answered. “And then all at once.” That’s the threat many Western democracies face today.
Yet, despite these facts, there is reason for optimism. Despite the dysfunctional public sector, there are amazingly positive things happening in the private sector – in engineering, electronics, medicine and technology. These pluses actually outweigh the public-sector negatives – for now.
In my next column, I’ll explain why this is and how investors – though most don’t recognize it – actually face the biggest investment opportunities of their lives today.
Good Investing,
Alex
Any investment contains risk. Please see our disclaimer.
10 Responses to “The Biggest Risk – And Greatest Reward – For Your Portfolio (Part II)”
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Mr. Green,
Your comment “Critics said it wouldn’t work because once the voters realized they could use their elected representatives to loot the treasury, all would be lost.
Is a bit upside down. The politicos have the key to the treasury & have themselvs decided to loot it. Seems Elitists can always find a way to blame the common folk!
Greg
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Mr. Green,
Your comment “Critics said it wouldn’t work because once the voters realized they could use their elected representatives to loot the treasury, all would be lost.
Is a bit upside down. The politicos have the key to the treasury & have themselvs decided to loot it. Seems Elitests can always find a way to blame the common folk!
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I actually really like alex’ approach to all of life except the fact that he is clearly a republican and buys mythology about republicans. The Obama administration is not a high spending administration and Republicans have been highspending on borrowed money for little service except wealthy defence contractors and dead foreigners since the days of Dwight Eisenhower who actually identified the military industrial complex. The democratic party to my way of thinking is actually sort of a progressive conservative party, the republican party is insanely (doing the same thing over and over again expecting different results) ignorant and there is no real keynesian liberal party left in the United States (a role the republican party could fill)
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I would really like you to explain how, when most of us contribute to social security and medicare, this is considered to be an unfunded liability and an “entitlement”. I keep hearing this from various sources. Is this another one of those things that we are supposed to just accept without question? Sorry, I’m not buying it until someone can satisfactorily explain to me exactly what is meant. There are a lot of places where useless bureaucracies could be cut back or eliminated. Instead there are may, like you, who seem to think that the money I and a huge number of others who contributed to this don’t deserve to reap the benefits that they have accrued.
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Yes, Sir, there are many of us who paid into SS, just like you say, but there are apparently hundreds of thousands who are living off us and our contributions, you know like SSID and people who have never paid in but the politicians have decided to give them a “safety net”. You surely jest about the “unfunded liability” comment, right? Else how do you explain the fact that if we don’t raise the debt ceiling that the next months’ batch of SS checks cannot go out? You people who don’t accept this need to take a reality course!
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Alex, you are a breath of fresh air! Thank you for correctly naming the source of much of our
current deficit problem. So many writers love to
dump everything on Obama, which shows their extreme ignorance of the past, including the cost
of two wars.
Thank you for your knowledge and honesty, and
lets all pray that we will learn to paddle in
synch before the boat sinks!
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I am new to investing and therefore I have a real desire to jump right in. Unfortunately I get the jitters everytime I think of it. Does anyone have any encouraging words (and a hot tip)?
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Democracy has been defined has been defined few as the substitution of the corrupt few for the incompetent many….i believe this is truly evident today.. most pension funds presume a 8.5% return on investments to be solvent.with banks and companies paying way less….the difference between the 2 amounts is called unfunded liability.so what they the government will do is print money, raise taxes , cut services or all 3.. a government big enough to give you every you want is big enough to take every thing you have..Thomas JEFFERSON
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Gary, many governments have borrowed for decades and promised even more. We have to pay in the end, just like in Greece and Spain. They will of course lie to us about why we have to pay for the mistakes of others.
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Please keep party politics out of articles and comments. Mr Skousen, his name seems to be from peaceful Denmark, is a rabid Republican and gun fanatic.
However we all need to make sure that politicians do their job.
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