February 27th, 2009 1:08 PM by Lehel Szucs
The Looming Crisis Beyond Today's Financial Disasterby Alexander Green, Chairman, Investment UInvestment Director, The Oxford Club
Dear Investment U Reader,
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."
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."
It 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. To learn more, go here.
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.