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July 01, 2009 at 04:00 AM
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.
