I.O.U.S.A. & The Coming Entitlement Meltdown

by Alexander Green, Chairman, Investment U
Investment Director, The Oxford Club
Monday, December 22, 2008: Issue #905

During the current economic crunch, top executives at Bear Stearns, Lehman Brothers and other financial giants received hundreds of millions of dollars in compensation… just before their firms keeled over.

This is galling to many. But the excessive and unwarranted compensation at Bear Stearns and Lehman doesn’t bother me, personally. Why? Because I never owned a share of either one of them.

However, we all have a stake in the future of the U.S. economy. No one can afford to ignore how Uncle Sam spends money. Fiscal policy will play a key role in determining the strength of the economy, the performance of our financial markets and the value of the dollar.

The incoming Obama administration is talking about spending up to a trillion dollars – a temporary shot in the arm – to get the economy moving again.

But looking beyond the current crisis, an even greater challenge looms. I call it “The Coming Entitlement Meltdown.”

Why We Face $53 Trillion in Unfunded Liabilities

According to the Treasury Department’s 2007 Financial Report, we currently face $7 trillion in unfunded liabilities for Social Security, $34 trillion in unfunded liabilities for Medicare and $12 trillion in unfunded liabilities for public debt and civilian and military benefits.

That’s $53 trillion… or $455,000 per U.S. household.

If serious steps aren’t taken (and soon), this crisis could make the subprime one look like just a rainy day.

Some argue that we can grow our way out of this problem. That is not realistic. To do so, our economy would have to grow by double digits in real terms for decades. That’s never happened before. (Even during the long stretch of prosperity in the 90s, the economy grew at an average rate of only 3.2% per year.)

Every investor needs to understand the scope of this problem and how it affects our long-term financial prospects.

That’s why I strongly suggest you read Addison Wiggin’s new book “I.O.U.S.A.”

I.O.U.S.A. – Washington’s Spending & The Upcoming Fiscal Crisis

I.O.U.S.A. takes a hard look at Washington’s out of control spending habits and the fiscal crisis that looms ahead of us.

(I used to say Congress spends our tax receipts like a drunken sailor with four hours of shore leave. That was before a reader wrote to say my comments were “an insult to besotted sailors everywhere. After all, the sailor is confessedly drunk and spending his own money. What’s your Congressman’s excuse?”)

Every American is now burdened with more than $175,000 in federal liabilities and unfunded government promises.

Looking ahead, the current $53 trillion will automatically grow by another $2 trillion to $3 trillion per year – or $6,600 to $10,000 per person – unless serious reforms are made.

Think about this for a moment: 53 trillion. It’s the kind of number astronomers should be throwing around, not legislators.

Yet these are the official numbers straight from the U.S. Government Accountability Office.

As you may know:

I.O.U.S.A. started out as a superb and entertaining documentary about the financial crisis created by the U.S. Government. Wiggin does a bang-up job of describing the scope of the problem. (Everyone from Alan Greenspan to Warren Buffett gets an opportunity to weigh in on the problem.)

I.O.U.S.A. was a smash in theaters and was nominated for the prestigious Critic’s Choice Award. It was short-listed for an Oscar for Best Documentary.

And while the film has not yet been officially released on DVD, Addison has put together a package that offers the book (which hit #1 on Amazon), the DVD and a two-year subscription to Capital & Crisis, an investment letter that shows investors how to protect and enhance their assets through the current crisis and beyond. Follow the link to learn more about I.O.U.S.A.

The non-profit Peter G. Peterson Foundation calculates that the sum of America’s debts and other financial commitments is about to exceed the collective net worth of its citizens.

That’s scary. Please don’t make the mistake of believing this won’t affect your financial security or that the problem is “way down the road.”

Markets are always forward-looking. For a sobering look at what lies ahead, I strongly suggest you read, watch – and share – Addison Wiggin’s I.O.U.S.A.

Good investing,

Alex

Today’s Investment U Crib Sheet

“Home for the holidays,” doesn’t always mean at home for the holidays.

It can be troubling to leave your home, as we enter the holiday season, and we find ourselves traveling more. But it can be just as concerning to leave your investments unmonitored. But unlike your home, it’s harder to have someone “keep an eye” on your portfolio. Unless, of course, you use trailing stops.

It’s a great way to protect your positions not just during a holiday absence, but all year long. It’s also one of our Four Pillars of Wealth. As we enter December, let’s take another look at this most relevant Pillar.

Pillar 2: Adhere to a Sell Discipline

Everyone knows you should cut your losses early, and let your profits run. Well, the only way to consistently do both is to use a trailing stop. That’s we why created The Oxford Safety Switch – a customary 25% trailing stop on all of our recommendations. It defines an exit strategy for all our positions right from the start… and makes sure we have the gumption to stick to it.

Follow this link to find out more about these and an easy way to put trailing stops into use.

Get all Four Pillars of Wealth.

What can you do to adhere to a sell discipline while ensuring your portfolio will be worth more in the future? Check out the White Cap Index for the answers.

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