How to Protect Yourself From the Idiots in Washington

Alexander Green
by Alexander Green, Chief Investment Strategist, The Oxford Club
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In my last column, I discussed my recent lunch with Republican Senator Mike Lee of Utah - and our dispiriting discussion about the nation’s looming entitlement crisis.

A whopping two-thirds of total federal spending today is two things: entitlements and interest on the debt.

With healthcare costs rising - and the Fed intent on “normalizing” interest rates - this is not good.

I’ll leave the interest rate discussion for another day. For now, let’s take a sober look at entitlement spending, starting with a few undisputed facts...

  • Healthcare’s share of GDP hit 17.8% last year, according to a new report from actuaries at the Centers for Medicare & Medicaid Services.
  • That’s not just a historic high. It is rapidly approaching one-fifth of the national economy. The U.S. healthcare sector is now larger than all but four of the world’s national economies.
  • Virtually all Americans who survive to the minimum retirement ages - 62 for Social Security and 65 for Medicare - will become beneficiaries of the two programs.
  • There are 57 million Medicare beneficiaries and 61 million Social Security recipients today.
  • Both populations are growing rapidly. Healthcare costs are rising even faster.
  • Tax revenues don’t cover benefits, and the so-called “trust funds” for these programs are shrinking.
  • Indeed, trustees for the two programs project that Social Security will reach insolvency in 17 years and Medicare in just 12 years.
  • Under current law, Social Security and Medicare cannot borrow money to pay for benefits.
  • Automatic benefit cuts are current national policy. They need no act of Congress to be imposed.

Yes, there are potential solutions. Politicians could increase payroll taxes, lift the income cap on them, reduce benefits and/or raise the age of eligibility.

So why haven’t they already?

One reason - as I mentioned in my last column - is the frightening size of the unfunded liabilities: more than $107 trillion. Translation: Half-measures won’t work.

Another is that politicians are afraid. Very afraid.

If they fiddle with entitlements, some voting blocs could become unhappy. That means they might lose their precious incumbency in the next election or - worse - the next primary.

So they sit on their hands. Unfortunately, this is like realizing you don’t have nearly enough to retire and then spending years doing nothing anyway.

The longer the wait, the more dire the situation.

Rest assured, this stalemate isn’t because of Republicans or Democrats. It’s because of Republicans and Democrats.

Our lawmakers can’t agree on much. But they can agree not to take the political risk of repairing our rickety entitlement structure.

Extra demerits go to Democrats, however, for advocating new entitlement programs - like a single-payer healthcare system, “free” college tuition and universal basic income - in addition to expanding existing ones.

But Republicans couldn’t repeal or replace Obamacare. (Or even pass the skinny bill.) Nor have they taken other steps to reduce out-of-control healthcare spending.

A year and a half ago, for example, President Obama proposed $1.1 billion over two years to deal with the opioid crisis.

The Republican leadership’s latest proposal? Spend $45 billion over 10 years. (Welcome to the new conservatism.)

You may think I’m overstating the seriousness of our entitlement problem. Not so.

In a recent Washington Post column, Pulitzer Prize winner George Will said, “America is sleepwalking into the most predictable crisis in its history...”

In The Debt Bomb, former Senator Tom Coburn writes, “America today faces one of the greatest threats to its existence since our founding. The threat does not come from any foreign army or terrorist network, but from our own government and its unsustainable spending... History has shown time and time again that debt can bring nations to their knees.”

OK, we have a problem. As an investor, how do you deal with it?

The answer is by building a robust portfolio that can survive lots of different outcomes.

For instance, some economists believe Uncle Sam will crank up the printing press and inflate our way out of the crisis, at least temporarily. (Inflation is a godsend for debtors and a sucker punch to lenders.)

If so, inflation-related investments - from gold to stocks to Treasury inflation-protected securities - would ultimately benefit.

But it could be ice - not fire - that hits us. Japan - with debt equal to more than 250% of GDP - has experienced the opposite problem: deflation.

The only real winner in that scenario is bonds. (At least, the ones that don’t default.) History shows that the longest maturities perform best.

As you can see, the looming entitlement crisis brings us back to square one. As an investor, your most important decision is your asset allocation.

That means you diversify your portfolio among different asset classes, including large cap and small cap stocks, foreign and domestic equities, bonds with various maturities, real estate investment trusts, inflation-protected securities and gold shares.

(The Oxford Club has a specific asset allocation with targeted percentages.)

This is how you protect what you’ve earned, saved and invested over a lifetime.

Because if you’re waiting for the yahoos in Washington to step up, act responsibly and do the right thing... well... can you hold your breath longer than a pearl diver?

I’ll have more on this important topic - including choice words from one of the nation’s most successful investors and businessmen - in my next column.

Good investing,

Alex

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