It is normal for politicians to think in the short-term and attempt to stabilize current economic problems. But I don’t understand why Americans aren’t making more noise about America’s long-term financial woes. It is easy to see that Americans are far more educated about reality TV shows than basic economics. The country’s problems with debt seem distant when nearly half the population of the United States receives some type of government support. They also see normalcy in their local media and neighborhood.
The U.S. has nearly $1.5 trillion in national debt, which is roughly the same size as our annual GDP. In addition, the country has experienced deficits of more than $1 trillion over the past three years. There are still huge entitlement programs that politicians are afraid of touching, we are currently fighting two wars overseas, and have a large population unwilling to take short-term pain in order to improve the country’s long term prospects. Many people want to solve the debt problem, but believe that the burden should be shared by other segments of the population. To show they are doing something, the politicians and Fed keep promoting programs that will fail. Any bit of good news is picked up by the media (retail sales increasing slightly, more people being hired than the previous month; the stock market rising for the past two weeks, etc.). These are signs that the recession has ended.
While the Europeans face a crisis on the other side, many are wondering if and how the Euro will survive. One of many basket cases is Greece. Standard and Poor’s analysts calculated that Greece’s debt would rise to 125% of its GDP in 2010, during the fall 2009. PIMCO, which lends money to governments through the purchase of their bonds, sold all its Greek bonds a few weeks later. In April 2010, the Greek government’s debt was downgraded from junk status to junk and it was clear that Greece’s debt needed to be restructured. This is a fancy way to say that Greece was bankrupt and that debt holders would get a bad haircut. The European Central Bank purchased 25 billion euros of Greek bonds in June 2010. This was the beginning of what would become 150 billion euros worth of bonds not just from Greece but also from other troubled nations like Spain, Portugal, and Italy. It did this in an attempt to stabilize bond prices and calm markets.
In defiance of all the original rules, nearly doubled their combined debts between 1997 and now the Euro countries. There are now 8 trillion euros of debt in the 17 Euro countries, and banks have European government bonds worth one trillion euros. The Euro’s future is at risk and no one knows how it will all turn out. It is certain that things will get ugly.
The U.S. and European debt problems were well-known for many years and have only been made worse by the current recession. The majority of key political leaders knew about the problems but chose not to address them. They chose to act in ways that appeared to be beneficial in the short-term but were detrimental in the long-term.
Long-term solutions are still being sought after despite short-term fixes. The present is worsening due to Fed bond buying and the administration’s incessant giveaways. A couple of politicians recently proposed a “Home Act”, which would allow Americans to withdraw their retirement funds without penalty to make mortgage payments. A homeowner can tap into his or her retirement account up to $50,000, or half the account value, depending on which is lower. This could be a good option for a few people but it will not help most homeowners. It will only gut their savings and delay foreclosure.
The current economic environment will continue to cause more pain for the population in the future. Between now and 2012, real estate prices will likely fall another 5% as people without jobs are unable to buy homes and interest rates cannot go any lower. The unemployment rate will likely rise slightly, while the average household income will decrease (which has fallen from 2000 to 2010). Because the stock market is so unpredictable, it can be difficult to predict. However, I expect a slight increase in stock prices over the next few months and possibly months. This is mainly due to the European bailout. Then there will be a gradual decline over many years. The European crisis is more immediate than the U.S.’s. I expect that Europe will experience greater pain in the coming months and years. The U.S. will experience more problems because it controls its currency and will be under less pressure to act.
As I have said before, I recommend people invest conservatively and keep a reserve fund for the unexpected. Also, stay up to date with current news. You can make it through “Dancing with the Stars”, even if you are not there for the first few weeks.
Adam Mcbrian, a note broker and mortgage note investor, is the name of his company. His company buys mortgage notes from almost any property, in all 50 states.