The time to repair the roof is when the sun is shining.

John F Kennedy

I spend most of my time here suggesting how Washington can deal with issues, particularly the deficit.  No matter how this issue plays out, though, there will be implications for you and me at the household level.  So, it’s time to talk about how the deficit issue matters to us.  First, deficits are, by definition, stimulative.  So, any reduction in the deficit will represent a short term drag on the economy, no matter how its cut. Second, interest rates are at historic lows.  The Great Recession came to pass largely because too many people got comfortable with easy credit.  The same holds true now.  Don’t get too comfortable with low interest rates.  So, here are a few ideas for you to kick around as you figure out how to make ends meet and put a little something away to build a stronger future:

1. Interest rates: As I said, rates are at historic lows, and they will very likely be higher in the years ahead than they are today.  If Kongress does nothing with the deficit (remember my use of a K in honor of the Keystone Kops), rates will surely rise in the years (months?) to come, as government borrowing puts stress on credit markets.  What should you do?  Make sure you carry as little floating rate debt as possible.  Do what you can to transfer floating rate debt to fixed.  Try to lock in today’s low rates as best you can.
2. Inflation: Everyone’s forgotten about inflation, the most regressive tax of all.  Inflation’s been down for a long time, but it will almost certainly rise in the years ahead.  In case you’re too young to have known serious inflation, I’ll tell you this: In 1982, my wife and I lived in a condo that had a floating rate mortgage, and there was one 6-month period when we paid 18-1/2%.  That’s right. I might as well have had our mortgage on a Visa card.  What should you do?  See 1, above.  If you have the opportunity to fix some of your costs for a longer period of time, do it.  If you’re self-employed, don’t get involved in long term contracts that won’t allow you to pass along cost-of-living types of increases.
3. Recession: As I said, any reduction in the deficit will be a short-term drag on the economy.  Many think this will tip our economy into another recession.  What can you do?  Make sure you keep your skills honed and marketable, and I hope you’ve been able to build a cushion that can last you a few months if you lose your job.

Here’s a tip I received about predicting inflation from Jim Henderson, who writes a thoughtful investment newsletter each month.  Capacity utilization can be an indicator of future inflation.  Historically, when this reaches 84%, inflation begins to increase.  It’s 79.2% today, and it’s rising.  Keep an eye on it.

Be most interested in finding the best way, not in having your own way.

John Wooden

One of the unspoken truths that has emerged over the past few years is that mainstream Americans have promised more to themselves than society can deliver.  This isn’t about the extremes.  It’s easy to talk about getting the top earners to pay more.  The Left can rail about the 1% and the dirty bastards in America’s board rooms, but you could confiscate everything the 1% owns, and you’d hardly make a dent.  This isn’t about the needy, either. America will continue to find ways to do a better job of feeding the hungry, caring for the sick, and educating the disadvantaged.  No, this time, it’s different.

This time, it’s about us, you and me, the people who work every day, try to put a little something away, and live long enough to see our kids live better than we did.  It’s about how we educate OUR kids.  It’s about how we fund OUR retirements.  It’s about who pays when WE get sick.  And, it’s about the future that OUR kids will face.

The stark reality is that we have to lessen our expectations of society and pay a little more for what society can realistically provide us. More than anything, we need a leader to emerge who can communicate this reality to us in a compelling way, and it certainly needs to be somebody who doesn’t give a damn about his or her reelection.  President Obama missed his chance, and Mitt Romney clearly isn’t up to the challenge.   

I’m waiting.

Disarmament….is a continuing imperative…

President Eisenhower’s Farewell Address

The most serious thing a nation can do is go to war, to invade another country with ground troops and expose its young people to mortal danger.  Americans have become disconnected from the seriousness of the process that results in a decision to go to war.  The biggest reason for the disconnect?  There’s no draft anymore. 

We’ve become insulated from war.  Sure, it’s tough to watch the news report of a young person who’s been killed in Afghanistan, but, quietly, don’t we all sleep a little less concerned than we should be knowing that our sons and daughters aren’t exposed to the risk?

I wonder how much different recent history would be if conscripted soldiers were required to invade another country.  What if we had to call up neighborhood kids in order to invade Iraq?  How about if your child had to leave school or career today in order to replace your neighbor in Afghanistan?

There’s something scary to me about having a standing army of professional soldiers (mercenaries?) augmented by a phalanx of even scarier private contractors; too many itchy trigger fingers in one place for my liking.

I clearly remember the day that I got my draft lottery number in 1973, even though Viet Nam was winding down, and no one was being drafted anymore.  My son and daughter don’t know what that feels like.  Maybe they should.

There is a theory of human behavior that says we are motivated in two ways: towards pleasure and away from pain.  Of the two, avoiding pain is the higher priority.  I can offer a case study that supports this hypothesis.

I’ve been devoutly independent my whole life, and smugly so.  Independence fits my personality, too.  One of my strongest traits, according to the tests I’ve taken, is Deliberation.  I can see and understand both sides of just about anything.  I relish taking my partisan friends to task over their my-way-or-the-highway attitudes.  This role gives me great pleasure.

The thought of Rick Santorum as President causes me great pain.  I do not want to live in a theocracy.

So, I did it.  I gave into the pain.  I swallowed my independent pride, pulled a GOP ballot in the Illinois primary today, and voted for Mitt Romney.  I gotta tell ya, I feel a little unclean.  Never voted in a primary before.  You enter adulthood idealistically, and then, little by little, reality chips away at your ideals, and you do things like vote in a primary.

At least, I thought I’d make myself feel a little better by clinging to my independence and voting for a Ron Paul delegate.  Then I see that one of Ron’s prospective delegates is a 23-year-old kid I know from a wealthy family who dropped out of school and is fulfilling his potential by flipping pizzas at our favorite local carry-out.  What does THAT say?

“The grand thing is to be able to reason backwards.”
Arthur Conan Doyle (A Study in Scarlet)

What a sweet irony will occur on December 31 this year.  The so-called “Bush tax cuts,” which over the past 15 months could just as well be called the “Obama tax cuts,” expire on that date.  At the same time, the abject failure of last summer’s Super-Duper Committee will see the light of day, as automatic cuts will be made in defense and entitlement spending.  I predict that, as the year ends, our elected representatives in Washington will resemble most closely the Keystone Kops, those masters of mayhem from the Silent Era. Therefore, for the rest of this year, I will refer to our bicameral federal legislature as Kongress.

Here’s the great irony: If Kongress lives up to their reputation of “do nothing,” our deficit issue will be largely solved, and the country will be back on sound fiscal footing.  The tax cut expiration restores several hundred billion of revenue (a precise forecast depends on who’s holding the pencil), while the automatic cuts in spending reduce the annual deficit by another couple hundred billion or so.

Add to the mix that Washington will be in transition at year’s end, and you’ve got everything you need for comedy unmatched since the Kops were in their heyday.  But, just like in the movies, Kongress can bungle their way into a happy ending.

“I was no party man myself, and the first wish of my heart was, if parties did exist, to reconcile them.”
—George Washington

I’m a subscriber to No Labels, an organization whose motto is “Not Left, Not Right, Forward.” This week, I received this message:

Mitch Daniels is a Republican. I’m a Democrat. But both of us served as governor of Indiana. Both of us know how to make government work — a key No Labels message. That’s why I will be introducing Governor Mitch Daniels to you on the phone on Tuesday, March 13, at 11 a.m., eastern time.

 

Click here to RSVP for a national No Labels Town Hall Teleconference titled “The Most Predictable Crisis” with Governor Daniels.

 

Governor Daniels and I both understand the importance of passing a budget on time, and we both understand the recent financial crisis was not unpredictable. It’s been clear for years that our country’s finances are spiraling out of control. Now, gridlock is preventing the U.S. government from making the common sense decisions everyone knows must be made to put us back on the path to prosperity.

 

It’s time to talk solutions. Click here to sign up for a Town Hall Teleconference with Mitch Daniels on March 13, at 11 a.m., ET.

 

Together, we can start to move this country forward again.

 

Sincerely,

 

Senator Evan Bayh

Here in Illinois, where we’re on our way to bankruptcy, we tend to make fun of our neighbors to the east. Nonetheless, more and more “flatlanders” are moving to “hoosierville” to escape the corruption and blindness in the Land of Lincoln.  Maybe I should join them.

The left and right “are both incapable of doing the reforms,” says Pier Ferdinanco Casini, leader of the Union of the Center political pary, “We are afraid of losing votes.”

Time, 2/20/2012

Pier Ferdinando Casini is an Italian politician who leads a faction called “Union of the Centre,” and his comments came during as a result of the process that led to Mario Monti becoming Italy’s Prime Minister.

Mario Monti is not a politician, has never sought public office, and has never run in a popular election.  Yet, when Italy’s ability to borrow money waivered last year (10-year bond yields peaked at over 7% during Q4-2011, while ours hover around 2%), and Italians looked nervously at what was going on across the Ionian Sea in Greece, the dysfunctional Italian Parliament turned to Mr. Monti, a career economist and staunch supporter of the European Union, to lead an “austerity government” that hopes to restore fiscal sanity to the country.

Simply put, Italy’s reforms call for tax increases, pension reforms, and measures to fight tax evasion. 

Sound familiar?  Hmmm, let’s see.  Raise taxes, reform Medicare, and eliminate loopholes.  Yeah, I think that’s what every reasonable American knows we have to do here, including the brave souls who voted for Simpson-Bowles.  But, where are our politicians? (He asks knowingly.) They’re too busy running for reelection and feeding pablum to their core constituencies to spend any time in the real world.

I hope we don’t wait until we have an Italian-style crisis-or, worse yet, a Greek-style crisis-before addressing the need to restore sanity to our federal budget, but my hope is waning.

If I’d known I was going to live this long, I’d have taken better care of myself.

Hubie Blake

I’ve spent a fair amount of time in this column challenging the Washington gridlock over taxes and defense, generally the provinces of the right.  The left is no different.  There’s a new dirty four-letter word among champions of Medicare, primarily idealogues on the left: M-A-T-H.

Boomers like me are gonna bust Medicare in 10-20 years, and a lot of Democrats in Washington are in denial. (And, no, death is not an option.)  The data are stark and overwhelming.  This is from the Congressional Budget Office’s “Reducing The Deficit: Spending And Revenue Options” 

Altogether, CBO projects that spending for the Medicare program will roughly double between 2011 and 2021 in dollar terms and will increase from 3.6 percent of GDP to 4.3 percent of GDP….spending for Medicare and Medicaid combined will climb from 5.5 percent of GDP to 11 percent of GDP by 2035…

Hmm, my Dad died when he was 86, my Mom is basically healthy at 93, and I turn 80 in 2035.  Knock, knock: IS ANYBODY HOME?!?!

President Obama’s Deficit Commission-you know, the one he has completely ignored-offered a series of recommendations to put Medicare on a sustainable course.  Here is a list of the Democrats who voted for these recommendations:

• Erskine Bowles
• Alice Rivlin
• Sen. Kent Conrad
• Sen. Dick Durbin
• Rep. John Spratt

One of the Commission’s recommendations was to address the Sustainable Growth Rate (SGR), commonly known as “doc-fix.”  This is very convoluted, but hang in there with me.

In 1997, Congress passed doc-fix to control the rise of fees paid to physicians. The law required that payments to physicians be reduced if their fees exceeded certain targets.  Since 2002, such reductions were mandated by the law.  However, beginning in 2003, Congress has blocked the reductions each year.

That’s your government in action, taxpayers.  I’m going to do a little research and see who voted for doc-fix in ‘97 and who voted to block the payment reductions throughout the aughts.  Think I’ll find anyone on both lists?

All we want are the facts, ma’am.

Sgt. Joe Friday

This was must-see TV when I was a boy.  I thought I’d try to channel Joe Friday to talk a little bit about taxes.  Unfortunately, any discussion of taxes is about as dry as an episode of Dragnet, so please bear with me.

The Federal Government will have to raise taxes, plain and simple.  I know that’s bad news for Republicans, but it’s bad news for Democrats, as well, because you can’t there from here just by increasing taxes on the wealthy.  Joe Six-Pack and his family, the ones make $50-100,000 per year, will also have to pay more taxes in order for things to get squared away.

Here is the reality.  While politicians trip over themselves extending Bush-era tax cuts and payroll-tax holidays, Federal receipts as a percentage of GDP are at the historically low level of 14.9%. 

Some perspective.  Ronald Reagan was famous for tax cuts.  Yet, during his years in office, receipts ranged from 17.5%-19.6% of GDP.  During the Clinton years of 1998-2001, the Federal Government ran a surplus, and receipts ranged from 19.5%-20.6% of GDP.  Until last year, the lowest this has been over the last 60 years was 16.1% (1951 and 2004).

We can have a spirited debate about whether the right size of government is 17% or 21% of GDP.  But, for example, if you split the difference (which comes naturally to us here at The Golden Phi), you’re at 19%, or roughly 4% higher than we’re at today.  The United States’ economy is roughly $15-trillion, so receipts need to increase by $600-billion annually to return to the mid-range of historical norms.  You can’t get to that number merely by taxing the so-called “1%” and waiting for the economic cycle to return to normal growth.

This reality has serious implications for all of us, and I don’t see a leader in our midst that has the vision and guts to address the fundamental truth that taxes will have to be raised in the years to come.

Historical Source of Revenue

History of Deficits and Surpluses

We-you and I, and our government-must avoid…plundering, for our own ease and convenience, the precious resources of tomorrow.  We cannot mortgage the material assets of our grandchildren without risking the loss also of their political and spiritual heritage.  We want democracy to survive for all generations to come…

Dwight Eisenhower, Eisenhower, Soldier and President, by Stephen Ambrose

Yesterday, Senator John McCain was interviewed on CNBC about the Florida primary and the Presidential election. So, as I ask you to listen to the interview, I also advise you to cover your ears for most of it.  (The Senator and Joe Kernen have a political agenda that was the purpose of the interview.)  Uncover your ears when you see Bob Johnson appear to ask the Senator about Simpson-Bowles, then later, again, when Becky Quick follows up on this topic.

I’m paraphrasing, but McCain clearly said, and then repeated, that everyone knows that Simpson-Bowles is the blueprint that we will use to address the country’s suffocating debt/deficit trend, but that no one has the political courage to deal with the implications of the Simpson-Bowles recommendations.

How about you, Senator?  You made your name in Washington as a maverick, railing against the corruption inherent in the way political campaigns are financed.  Sadly, you abandoned this track and went mainstream on us in your attempt to become President.  You’re 75 years old.  You are still widely respected for the service you’ve given our country.  What better way to polish up your lasting reputation than to champion this critical cause?