Thursday, November 3, 2011

Kicking the Can

For many individuals, procrastination is a challenge they often have to face.  For various reasons, one doesn’t always want to address problems and challenges head on as soon as they present themselves.  While we know the problem will not just disappear on its own, the pain or work needed to address the problem is such that we decide that we will just postpone addressing it until another day.  Often, the unaddressed problem festers and becomes worse – where the corrective measure is even more painful or hard to do than when it was first presented.  Despite knowing this, many of us still procrastinate addressing things that are hard or painful.

This happens in politics as well.  It shouldn’t be a surprise as politics is as much about human nature as it is about policy and governorship.  While we can call it procrastination, it’s more commonly described as ‘kicking the can down the road’ – passing the buck on the decision or remedial action to some other poor dumb group of politicians in the future so they can make the unpopular decision and face the wrath of the electorate.

In order to make this happen, the current crop of politicians will use any tool, any form of sleight of hand, legislative or fiscal shenanigans, and outright misrepresentation (What problem?  That’s not a problem?  It’s only being presented by our political enemies as a problem for partisan gain…) in order to both shift the problem to some date in the future and get oneself out of being accountable and responsible for either the creation of the problem or its immediate solution.  What happens, good or bad, after one is out of office or dead, is ultimately immaterial.  One is out of office or dead.  Who really cares about partisan finger pointing then?

This mindset is becoming far too commonplace in politics and governance.  The concept of kicking the can down the road is also raising new problems – we are rapidly, and on many issues, nearing that point where the road ends and we can’t continue to kick that can any further.  This means that the problem or issue has come to such a head that it has to be addressed or the problem will manifest itself in its worst case scenario regardless of any action or inaction taken.

Let’s look at a couple of examples of this.  Ideally we should be learning some lessons from these examples, lessons that will prompt us to take remedial action sooner rather than continuing to kick the can down the road. But with human nature and politics being what they are, far too many are still spending large amounts of time and effort to develop new ways to kick the problems down the road as opposed to solving the problems.  The likely irony is that the effort to develop new ways to kick the can down the road is perhaps greater than the effort to fix the problem.  The rub is, to fix the problem; one may have to admit that their ideology or political values ultimately lead to only one result – failure.  People hate to admit they were incredibly wrong about something….and they hate doing this more than procrastinating.

First example is Greece.  This example also has applications across other nations in Europe which have embraced and enacted a socialistic / progressive viewpoint towards government and society.  Yes, this also has similarities with the US Federal Government and a number of US States which also embrace the same ideological viewpoint towards government and society.  But Greece is very close to the point where they can no longer kick the can down the road and the problem they face is going to impact them regardless of the action they are taking.

Today, Greece has a national debt of roughly $480 billion US.  This is about 150% of their current Gross Domestic Product.  Their 2010 national budget contained about $150B US in expenditures with nearly 40% going to entitlement programs.  The government’s revenue was about $118B US.  Therefore the Greek government had to borrow about $32B US from banks in order to cover their shortage.  The deficit is about 20% of the budgeted expenditures.  In 2010, the GDP of Greece fell by 4.5%.  Because of the high deficits, the risk of the high national debt, and a declining economy, it’s becoming harder and more costly for the Greeks to borrow the funds that they need to cover their deficit spending.  In order to borrow more, the Greek bonds have to have higher interest rates – which increase the costs to the Government to service the debt obligations, increases the deficit, and so on and so on. 

This cycle will continue until the point is reached where there is little confidence that Greece will be able to service their debt obligations, repay the bonds, and the lenders decide to stop throwing good money into this cycle.  If this was a family or a business as opposed to a nation, the family or business would declare bankruptcy.  If they continued on, it would be on a cash basis – where their expenditures would have to be equal to or less than their revenues until such time where they had proven they could be responsible with credit once again.

The challenge here is that this is a nation and the exposure that EU and other banks have to Greece, at $480 billion US, is quite substantial.  These entities can’t afford to write off $480 billion US.  Rather than face the pain associated with having to write off $480 billion US as uncollectable and force Greece into bankruptcy, it’s far easier, most of the time to keep lending Greece more money so they can use the new money to pay for their entitlement system and service the old debt.  When the new debt becomes due, it’s now the old debt that is serviced by lending Greece more money.  Yes, at some point this cycle becomes unsustainable – but that’s decades off, right?  Not anymore.  It’s pretty obvious that once a nation achieves a debt of 150% of their GDP, that nation is not going to be able to repay that debt.

This is the tipping point that Greece is at today.  Unfortunately for the EU, other nations like Spain, Italy, and Portugal are also very close to this tipping point.  That means the bulk of the risk and pain associated with addressing this problem is going to reside on the wealthier nations of the EU – France and Germany. 

This opens a series of challenges.  If one or more nations are fiscally irresponsible with their government policies why should other nations that are more fiscally responsible bail them out? Why reward mismanagement and self-destructive policies?  If they do bail out Greece, aren’t they also then obligated to bail out the other nations like Spain, Portugal, and Italy?  And if they do bail out these nations, what is the incentive to be fiscally responsible?  Then there is the question if the bailout will weaken the fiscally stronger nations to the point that they are in trouble?  Perhaps the issue is that those ‘fiscally stronger nations’ are that way because they aren’t quite as far down the road as Greece is?  That their government policies and demographics reflect a strong likelihood of a similar fiscal problem at a later date – and holding onto their wealth now will be it easier to keep kicking the can down the road?

Unfortunately for the EU, there are few options left for it to avoid a major financial crisis among the major banks of the EU.  Under the latest agreement to continue to lend Greece funds, 50% of the current debt holdings would be written off as uncollectable.  50 cents on the dollar lost.  This alone will send a number of banks into insolvency.  As the cycle continues, not only will the other 50 cents on the dollar be uncollectable, but the current funds loaned to Greece will be uncollectable unless Greece adopts a level of fiscal responsibility that they have never been willing or able to achieve.  So a banking crisis will be inevitable even if the latest bailout happens…it will just be postponed from 2011 to 2014-2020.

This bailout is also contingent on Greece eliminating its budget deficit.  This means nearly 20% has to be cut from their budget.  Beyond serving their debt load, which cannot be cut, the next largest series of expenditures is related to the extremely (overly?) generous entitlement programs and bloated government.   People will no longer be able to retire on substantial pensions at the age of 50.  Government assistance and subsidies will be cut resulting in businesses closing and far less being available to cover the rising costs of food and shelter.  This is very painful to the person who is either collecting or about to collect. After all it was promised to them.  They ‘earned it’ – even if it is unsustainable.  Politicians who made those promises are long gone and they basically kicked the can down the road – gaining tactical benefits when they made those promises knowing that it was a strategic loser that someone else would have to clean up.

With an angry populace, many turn to violence to complain about the ‘lack of fairness’ with the solution.  They are effectively begging the current political leadership to do anything to kick the can down the road so that their children or grandchildren have to clean up the mess – just as long as they don’t have to do it now.

This brings us to the second example.  It’s an example of a nation (or a state – CA -) that is not quite as far down the road.  They have some time to make a course correction.  Making this course correction now, as painful as it might seem, is going to be a lot less painful and drastic as waiting to make the course correction a number of years from now.  (It’s simple geometry...)

The United States is accelerating at 1,000 mph down this road of fiscal irresponsibility.  We were moving down this road at about 300 mph during the early years of the 21st century, but since the Obama Administration took over, we’ve increased our pace down the road of fiscal irresponsibility to the point where the end of the road (where Greece is today) is less than a decade away.

The Bush Administration was rightfully castigated for increasing the national debt by about $5 trillion dollars in its 8 years in office.  This is the cumulative effect of the budget deficits resulting from spending more than the government took in.  It basically doubled the national debt that was created between 1789 and 2000.  Bad.  But the current Administration has exceeded even that record.  It has equaled that level of addition to the national debt in about 3 ½ years.  For the first time in history, this country is now running regular (FY2009, FY2010, FY2011, and projected for FY2012) annual budget deficits of over $1 trillion dollars – averaging closer to $1.3 trillion dollars across those 4 years.

Today, our total national debt is between 100% and 102% of our GDP.

In terms of spending, we are now spending about $900 million to $1 billion more than we did just 4 years ago.  Federal Government spending is still on a significant upward trend for both discretionary and mandated spending.  The latter, primarily represented by the entitlements of Social Security, Medicare, and Medicaid, are growing far faster than inflation or the population growth.  Over the next decade, we are looking at spending a total of between $42 and $48 trillion – yet our economy is projected to not grow at a pace anywhere close to being able to support that level of spending.  We are looking at $10 trillion in increased debt obligations to cover this shortfall between revenues and outlays.  That would place us at least near or above the 150% mark of debt to GDP – which is right where Greece is today.

These are just projections – decisions we make today can either accelerate that path, slow down ‘judgment day’, or return us to a path of fiscal responsibility that we departed from at least 4 decades ago (the start of the Great Society programs).  Unlike Greece, which is tied to the EU and the Euro as its currency, we also have some options that we can use via the Federal Reserve and Congress to try to kick the can down the road so that someone in 2020 or 2025 or 2035 has to face the end of the road.

The policies of the current Administration seem fixated on the decision to not only continue down the road at 1,000 mph, but in the name of ‘social justice’, accelerate to even faster speeds.  Simultaneously, they want to use every possible tool they have to kick the can down the road as far as possible.  The short term goals around their ideological viewpoint are far more important than the crash at the end of the road.  When that crash happens, fundamental change will be a done deal and it’s someone else’s problem.

Unfortunately, for many in leadership roles in the opposition party, they look at the expedience and pain avoidance of correcting the course now, and also appear to be supportive of not only kicking the can down the road, but slowing us back down to maybe 350 mph or 500 mph – which only buys more time between their departure from accountability and responsibility and the end of the road.

As geometry teaches us, the ultimately less painful time to do the course correction is now – never later.  That is a lot of what the election of 2012 has to be about.  Making 2013-14 the time where we not only stop our journey down the road of fiscal irresponsibility, but also the time where we get on the path of fiscal responsibility and embrace traditional American values which stimulate economic growth.  This is where we return to equality being delivered in opportunity and not guaranteed results.  Where our compassion and generosity help those who are in need while encouraging all to become accountable and responsible to them – and eliminate the cycle of dependencies that we’ve created.

We can learn from the lessons being played out in front of us or we can continue to make the same mistakes – all in the name of avoiding doing what is hard and procrastinating on needed decisions.

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