From the July 2009 issue of Research Magazine • Subscribe!

Destructive Financial Planning

Our economic problems are grave, but all is not yet lost.

Writing recently in the Financial Times, Stanford University economist John Taylor points out that America's exploding debt is currently set to double to 82 percent of the gross domestic product in 10 years. This compares to 41 percent of GDP at the end of President Reagan's term in 1988 and the same 41 percent at the end of President Bush's term in 2008.

Such vast debt presents a greater systemic threat than the current financial crisis which has prompted all the recent spending. According to Taylor, only the most draconian policies -- 60 percent across-the-board tax hikes or massive inflation that would reduce the value of the dollar by half -- could address the problems we are on track to have by 2019.

Our economic problems are grave, but all is not yet lost. As Washington sharpens the knives it will use to slaughter the goose that lays the golden eggs, financial advisors -- as centers of influence in their communities -- should be mindful of macroeconomic changes that can reduce the tide of destructive debt.

No more bailouts or takeovers. The original idea behind TARP was to keep credit flowing by shoring up banks' balance sheets. The government's rescue of the auto companies has turned this principle on its head. By subordinating the legally superior claims of Chrysler's secured debt holders -- "a small group of speculators" as President Obama referred to them -- the president has ensured that credit will be less forthcoming and far more expensive to obtain going forward.

Moreover, the government's takeover of GM will force losses on U.S. taxpayers as far as the eye can see; GM, which now trades on the Pink Sheets, would have to have the trajectory of a Google for taxpayers to get their investment back. The taxpayer bailout of homeowners facing foreclosure has also been a bust.

No more earmarks or stimulus plans. Bridges in rural Wisconsin that see a few cars a day will be replaced at the cost of $16 million, to cite just one maddening example of Congress' $787 billion stimulus waste. While this initiative may be good news for Clarabelle the Cow and patrons of Rusty's Backwater Saloon, it will not add much velocity to U.S. economic growth. The entire stimulus was based on earmark spending, the lowest form of appropriation. This is stuff that corrupt Chicago aldermen would be too embarrassed to vote for -- so they're marked up in subcommittee backrooms in Washington.

No more entitlements. For decades, we've known that if we just keep on our current course, the Social Security and Medicare trust funds will run out of money. These and other unfunded liabilities already top $100 trillion. Our politicians need to get existing entitlements properly planned for before they are entrusted to create expensive new ones.

Financial professionals have a special responsibility to give voice to the dangers inherent in America's current financial plan. Until we turn this around, advisors would be well advised to look at alternatives to U.S.-dollar-denominated debt for their clients.

Gil Weinreich, Editor, gweinreich@researchmag.com

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