Why Your Life Will Be Harder Than Your Parents

Is America on the verge of a financial collapse? Are we entering the next Great Depression? Is the dollar going to fall even further? Oil $200 a barrel? Is China going to take over the world?

Broad doom-saying headlines and statements like these have been sprinkled throughout the news for so long now that we have naturally grown desensitized to them. An unfortunate by-product of a news cycle that’s primary interest is the comforting pleasure of entertainment and not the dedicated focus of education.

While the broad consensus among Americans is that we are in for harder times, we weren’t born with an understanding of the history of the financial system, exchange rates, government debt, and other nuanced economic issues our lives are shaped by. Without tangible dates, facts and figures that can answer the all important questions of how does this effect me and why is it worth my time to understand, people find little reason to alter their habits.

However, what keeps us reading the articles and watching the programs is this unscratchable itch in our mind that things just aren’t right. Why are all the goods I by made in a foreign country? How can a government run on a perpetual deficit? Why doesn’t the rest of the world live in better conditions? How is it that America is so clearly falling behind?

My attempt with the rest of this piece will be to provide a more comprehensible common sense explanation of the changes we can expect in our personal financial/economic situations sprinkled with simple statistics and enough historical context to explain why these things are certain to occur. Things that you should be prepared for:

First. The government won’t help you, you are more likely to be helping it the rest of your life.

The deficit this year grew to over 9.5 trillion dollars. With annual interest payments of over 320 billion this is no small sum, but if the government were to use GAAP accounting as they mandate business to do, which recognizes accrued obligations on such things as health care and social security they would have to show a deficit of over $60 trillion dollars, growing exponentially larger as the population gets larger and entitlements only expand. The Federal government is effectively bankrupt, plain and simple. You will never see that social security being deducted from your check and further you will pay even more in taxes throughout your life and receive less medical assistance, less housing assistance, education spending, less unemployment, welfare, farming subsidies, across the board less of just about everything. The baby boom generation just turned 62 and has begun drawing their social security payments. Over the next generation the entitled elderly population will double to 72 million. You’ve probably heard throughout your life that the government has been putting spending off on future generations? Well guess what, that’s us.

Second. Your interest rates and all prices will rise except for the cost of your labor.

Whether it is the 3% on your student loans, 5% on your mortgage or 20% on your credit cards, they will all go up and faster than the wage increases you can expect. Just imagine if your credit card was at 35% interest, or more likely that you didn’t have access to one, because companies knowing people won’t be able to pay the high interest rates demanded, just won’t issue them to as many people. Same goes for business loans. That 10% profit you planned on earning won’t cut it, it will need to be more along the lines of 20%, that is again if you’re lucky enough to find it. Right in line with these prices will rise. The $1 dollar paper towel roll will be $3, the $15 dollar salmon filet will be $35, and energy costs will triple to quadruple, perhaps worse. This credit crisis and run up in energy prices, food and raw materials prices are just a warm up. To keep the wheels of the economy turning the Federal Reserve pumps money into the system at an ever-increasing rate. During the “run” on Bear Sterns and the subsequent liquidity grabbing, the Fed increased the money supply as measured by M3 by over 11%. That was enough to calm people’s initial fears about whether they’d be able to get their hands on dollars, and in most opinions the right move, but it totally avoids the question of whether these banks are legitimately solvent, just as the government has avoided being asked this fundamental question by coaxing the Fed into providing endless cash on hand. So why won’t the US continue to get away with this trickery if we have in our living memory you ask? Because our memories are short. Following WW2 America was in a preeminent position as the only fully functioning modernized economy run by a hungry experienced generation who had experienced economic depression and war. Such a good position that the elite nations agreed to make the dollar the world currency, on which all other currencies would be based (backed by gold at 35 dollars per ounce until 1971). Britain, Germany, France, Canada, even the USSR and most every major nation learned to trust the dollar and base their currency off it in some part. If you were in Germany and wanted to convert your Italian Lira to Deutsche Marks, you converted them to dollars and then into Marks. Everyone trusted the dollar, but after we took it off the gold standard to help us pay for the Vietnam War and rising deficits without having to worry about our gold disappearing, people naturally began to lose faith. When an OPEC boycott and other factors caused inflation to skyrocket in the mid-late 70’s, the Fed actually decided to try and protect the integrity of the dollar from inflation by raising interest rates higher than 15%, (an idea of what might be to come) which caused many other problems and a political regime quickly succeeded by a New World Order, whose priority was not the fundamental integrity of the dollar, but the appearance of the integrity of the economy as demonstrated in the unprecedented massive deficit spending they initiated and exploited for maximum personal gain. In response to this monetary instability governments around the world have slowly but surely been breaking away from dependence on the dollar. The creation of the Euro was a direct response to what these more monetarily experienced nations recognized as the loss of the former stable world currency. While nations with less experience and development across the world continue to use the dollar directly and indirectly as a peg (China, Brazil, Saudi Arabia and on and on) to our direct benefit (think $1 paper towels and $15 dollar salmon filets) it is becoming a more widely held view in all nations that the dollar is less and less suitable for this purpose resulting in actions like China’s who has taken to increase it’s reserves of Euros decrease it’s reserves of dollars and began to adjust its peg to the dollar. And this is happening around the world, as anyone who travels abroad will tell you just how the purchasing power of their dollar has disintegrated at an increasing rate. The reason it is a guarantee that our interest rates and prices will rise is because while we have long been beneficiaries of the credit people place in our currency, the self-evident truth these days is that we do not deserve this credit. Our government, our economy and our consumers are completely overextended as most recently demonstrated by the growing deficit, the credit crunch and the fact that last quarter the personal savings rate fell to the lowest level since they began recording it in 1947. We have transitioned from a manufacturing society to one that provides less tangible, more subjectively valued services and afforded our luxurious lifestyles and low rates by an international workforce hungry enough not to ask questions in their efforts at economic success. While the exact time line of these effects is as difficult to predict as peoples emotions, for the same reasons, the inevitability of this decline is not.

Third. Your investment potential will be limited.

People aren’t completely irrational for not saving. Why put your hard earned money into a money market fund at 2% that has no chance of keeping pace with inflation at the rate dollars are printed? So people try and get more action for their dollar by putting it into stocks and bonds, and of course the banks and brokerages aren’t going to turn them down. Instead they find ways to promise more and more return by taking on increasing risk and try and justify the dangers away with talk of the complexity of their mathematical models and the “science” that modern investments has become. However there is nothing modern about it asides from the shiny new devices they’re using, the Blackberries and Bloombergs that make the same old Ponzi schemes look like magic. If you haven’t had the chance to study the trickery in the modern financial system here’s a quick lesson. You have $1 million dollars to invest, you want a 10% return with as little risk as possible so your friendly financial advisor suggests that you put it into something historically safe like a mortgage or corporate bonds, but you can’t get 10% when mortgages and bonds are only selling to return 5% that is unless your financial advisor goes out and borrows another $9 million at an interest rate below 5% (likely indirectly from Chinese or Arab lenders) and uses all $10 million to make loans at 5%. Now your $1 million is earning 10% and because it’s in mortgages or some other historically safe sector your advisor will tell you you’re not taking much risk, but all it takes is a change in one of the faulty assumptions made, whether it is the interest rates, falling housing prices or one of the lenders just feeling unsettled for this house of cards to collapse. That’s what’s happened to Bear Sterns, and is what’s occurring to all these big financial services companies that so many people put their trust in, which allowed them to leverage their equity between 15-30 times. Truth is they’ve been awash in money for decades and they just need to find places to put it to justify keeping their jobs. You can only buy so much GE, Coca-Cola and Google stock, because 90% of listed companies are overpriced. Warren Buffett just announced to shareholders in his company that they should expect returns on their investments to shrink in the near future. That people should be happy if they make 10%. This from a man whose company has returned an average of 24% for over 30 years and it’s not just him. Leading investors and industrialists around the world are sounding the alarm on the American economy. Even in Europe countries like Britain and Germany that have taken more fiscally and monetarily balanced approaches have been watching their middle classes shrink under the burden of rising prices and increased foreign competition. The American dream of the middle-income worker who puts away 10% of his paycheck to watch it grow into a healthy nest egg allowing them to put their kids through college and retire at 65 is increasingly an illusion.

Now I have no crystal ball. Admittedly my estimates, particularly in terms of the amounts of inflation, interest and investment rates are all speculations. I do not discuss the intricacies of competitive advantage, the revolutions of technology or that American manufacturers have for years been handicapped by a currency that other countries manipulate to the advantage of their productive capabilities, which our currencies devaluation is likely to have some positive affects on. I also have no delusions that Europeans have the answer. With some of the most heavily unionized workforces, and excessive government systems of regulations and benefits they too will experience great tribulations. To varying degrees rising powers also have their issues with corruption, a lack of transparency, excessive bureaucracies, authoritarianism, demographic problems, monetary and fiscal reforms and on and on. However, no comfort can be taken in the faults of others, because their failings will not change the fact that the problems enumerated will increasingly become a part of your life.

The dilemma we face is not new. These are problems of the excess of affluence and coming off the apex of empire that are as old as civilization, all that is new is that it is our generation that will have to deal with them. At the root of these problems is the very real fact that America is no longer competitive. We see the decadence every day in our peers more concerned with titles and impressions than actually making an impact. We are a nation of lawyers, financial advisors, consultants, actors, artists and politicians, aspiring to titles and accreditations, better houses and cars on borrowed money, to status and impressions more than to actually being productive and affecting positive change. In children that tune in and drop out.

We live on the shoulders of those that came before us, in the buildings they constructed, in the institutions they created with the technology they invented and the work they put into it. Over the past 50 years we have increasingly farmed this work out to foreign countries in return for IOU’s. Japan, the largest holder of American debt rose from the ashes of World War 2 to become a leading power in the world in 30 years on savings rates right around 20% of income. For over a decade now China, with 10 times the population of Japan, has been saving at over 25%, with this years estimate at 40-50%. In an age when capital flows freely across borders, anyone who claims belief in capitalism should understand that it is the people that save who own the world. The future is theirs.

People look to Barack Obama with hope that he will change things. A representative of the new age, more culturally aware and open-minded then the apathetic poster boy for entitlement he replaces. They see in him the hope of our generation, that by our intellect we will rise above our problems and I sincerely hope this is the case, but counting on a politician is like wishing on a star. I don’t mean to give the impression that issues like the Iraq War and government reform aren’t important, they are crucial, but sedating your life with CNN and political talk that’s so much the fashion these days changes very little. The failure of America is that of waiting for others to do what needs to be done and more than ever what we need is revolution, and not a revolution of arms or words, but one of actions, because it will be only by our collective hunger, our sweat, our pain and sacrifice that things will really change. The only question is are you ready for this reality?