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Planning for an Economic Tipping Point

If you engage in any form of meaningful strategic planning you cannot plan effectively without carefully examining the economic conditions that are likely to affect your firm’s prosperity over the next few years. And whether you practice in Canada or the United States, the U.S. economy has a profound effect on our combined prosperity.

For those who are regular readers of my material, you know that every so often I engage in flights of fancy believing that I may actually understand something about real-world economics. In August 2008, I authored a tract entitled Managing Through A Prolonged Downturn. In that article I had the audacity to contradict those who claimed that “the recession will be intense, but short” and publicaly declare,

that for the next five years, every time you think it’s safe to get up and dust yourself off from this downturn, every time you feel like you’ve endured the worst of it, another piece of news is going to come along to freshly bludgeon you. This time the economic slowdown is going to be a lot different and, in many ways, a hell of a lot tougher.

Well, we are now into the early part of my year five and examining the landscape I guess I was wrong . . . because it is going to take much longer than five years!

While many of the twelve danger signs I outlined in my initial paper continue to be of concern, my number 11: “Massive increases in government debt at all levels” continues to be a predominant issue (both in the U.S. and in every Canadian province) and one that you need to be fully aware of as you plan for your firm’s future trajectory.

The mammoth U.S. debt monster is not going away. It continues to grow. Here are the hard facts:

  • The U.S. government and its agencies still owe $18.8 trillion in interest-bearing debts;
  • The U.S. government has obligations of at least another $150 trillion to present and future recipients of Social Security, Medicare and other benefits;
  • American families still owe $13.1 trillion on their mortgages with a huge chunk of those under water;
  • Other borrowers in the U.S. – including local governments and individuals owe an additional $23.3 trillion; and
  • U.S. banks are clinging to a giant mountain of $222 trillion in derivatives, also a form of debt.

The grand total of all of this is simply too large to fathom.

You may remember a popular book written by reporter Malcolm Gladwell called the “The Tipping Point.” It was all about how trends pick up speed when most of us least expect it. Well right now, we’ve reached a deadly “tipping point” for U.S. debt.

Specifically, there are three issues that have come to the forefront this year that could make things very difficult:

1. Running Out Of Cash

I am told by a reliable source that a group of ex-senators and D.C. insiders meet regularly behind closed doors. This think tank has been holding meetings privately for some years. Shortly after one of their meetings, they released an urgent report warning Americans about a dangerous financial deadline . . . but it wasn’t the deadline that came with the so-called “Fiscal Cliff.” This financial deadline occurs in 2013 when supposedly, the government literally runs out of cash – and it is now starting to take over much of our daily news coverage.

How’s that possible, when the Fed runs its own printing machine?

The key is what’s called the Federal “Debt Limit.” I’m sure you remember the last time we had a D.C. debt limit battle in August 2011. When Congress and Obama couldn’t resolve it, the Federal Government nearly shut down. America lost its top-tier credit rating and in just six hours, nearly $2.3 trillion fled the stock market. We have already raised this “limit” on our spending 74 times just since 1962. Just since 2001, we’ve raised it 13 times. That last decade alone counts for an extra $10.4 trillion in new government spending. We may now blow through that debt limit again.

Why not just raise the debt limit again? You can, but unfortunately, it’s not without consequences. The biggest part of the debt tipping point (and the one that not that many in the media are focusing on) is how we’re starting to look to our international creditors and the other investment markets. In today’s fragile market, that could be a disaster.

2. Recession Ahead

The day before Obama was re-elected, some Federal Reserve economists released a report. Perhaps you didn’t see it. Few news organizations reported on it, because of course, nearly every news camera in America was focused in on the presidential campaigns. But what that report said might be an important piece of financial news for your planning purposes.

For decades the Federal Reserve has had access to a surprisingly powerful indicator. It’s called the “U.S. Recession Probabilities Index.” What it evidences is a boring-sounding mix of everything from non-farm payroll jobs, industrial production numbers, real personal income numbers, and manufacturing and trade numbers. And what it has done is successfully predict every recession since 1967. Every single time. And in nearly 46 years, this has happened six times.

So what’s it saying right now? It says that the odds of our experiencing a 2013 recession are now . . . 100% – with or without a fix to the Fiscal Cliff.

Global money analyst Marc Faber agrees. He told a CNBC panel that we’re looking at “100% chance” of a global recession in 2013, while Quantum Fund co-funder Jim Rogers put it this way,

America has had recessions and economic slowdowns every 4 to 6 years since the beginning of the Republic. You can add. In 2013 we are going to have another, and when it comes this time it is going to be worse than last time because debt is so much higher.

The U.S. Bureau of Economic Analysis says we’re stuck in what they called a “stall-speed economy.” A 13-page client advisory released on January 14th by CitiBank’s Law Firm Group states emphatically that “the boom years are NOT coming back, get used to it! And a Bloomberg analyst recently insisted we’re already in a full recession – we just don’t know it yet.

3. A Fiscal First for 2013

Every year, the president is required to post an annual U.S. budget. It is put together by the White House’s own Office of Management and Budget. This is important because it means all the numbers that follow are “official.” And the President’s budget for fiscal year 2013 extends to some 256 pages.

Now if you were to examine this document, page 210 would prove to be particularly intriguing. At the top, you would see that everything government does falls into two groupings. One is the kind of spending they label “discretionary.” That obviously indicates stuff we can choose to pay for, like the wars, farm bills, all those research grants, and projects like Obama’s solar energy subsidies. You would see that this kind of spending is only about 37% of the whole budget. Thus, when politicians need to ‘trim the budget’ this is where they start.

Then we have the other type of expenditure called “mandatory.” This is the non-negotiable, must do, like Social Security, Medicare, and all the interest on the money we owe. This “mandatory” stuff adds up to a staggering 63% of your annual Federal budget.

Now here’s where things go bump in the night. Let’s suppose you could shut down all the government agencies; fire everyone, right down to every last toll-booth collector. In all, that would mean putting 4 million government employees out of work. According to the Wall Street Journal, that would save you the grand total of . . . wait for it – only $435 billion.

Tell you what. Let’s go ahead and erase ALL the negotiable costs – every last one of them and just add up the stuff we have to pay for, no matter what. In the fiscal year 2012 which just ended this past September 30, the MUST-PAY bills totaled $2.477 trillion. Remember, these are just the non-negotiable “must-pay” stuff.

Now take a look at this . . .

When you add up all the tax revenue our government collected over that same fiscal year, the total was $2.469 trillion. Notice anything? The money government takes in isn’t just less than all the money they spend. It is LESS than just the “mandatory” money they HAVE to spend.

In other words, for the first time ever, it is now officially impossible to balance the Federal Budget!

Starting this year, in 2013, we are no longer taking in enough money to cover the bills we have to pay. And that’s not all folks. The Congressional Budget Office tells us we’ll owe $4 trillion a year by 2022. That’s double what we owe today.

So here are a couple of the questions that you’re strategic planning needs to consider:

  • At this rate how long can we (all across North America) put off having consumers and companies pay significantly higher taxes?
  • What happens to our economy when Social Security and Medicare alone eat up 100% of the budget?
  • What happens when we have to borrow from the Chinese, the Japanese, the Saudis, and everybody else, just to cover the interest on all the money we owe?
  • What should our firm be starting to do now to protect ourselves???

Uncertainty Is the Watchword

No matter where you look, little seems to be getting better. Greece is still a mess. So are Spain, Italy, Ireland, and Portugal. And now maybe France, too. China is slowing while India is throttled by government and Japan is sinking even deeper than it has already. Any one of these forces could trigger global repercussions.

When America’s National Debt passed the $1 trillion mark under Ronald Reagan, they worried. But now we’re adding $1 trillion in new debt every single year. Admiral Michael Mullen, our Chairman of the Joint Chiefs, is already warning that our soaring debt is so high, it now threatens our national security.

These three factors present a whole big bundle of additional uncertainty for American businesses. And you need to look very carefully at how all of this may effect the changes and directions that your most valued clients proceed in during the next coming few years.

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