The biggest problem the developed world is facing is that the governments and banking institutions that got us into the present mess are not capable of solving the problems they themselves created. Not even with new leadership.
Why? Not enough income growth and too much government spending. That is obvious looking at the combined income statements and balance sheets for the United States, Euroland and Japan. The bottom line is that the combined take home pay, whether taxed or not, of everyone in the United States, Europe and Japan is not sufficient to generate enough taxes to pay all current government expenditures. Let me repeat that, the developed worlds take home pay is not sufficient to generate enough taxes to pay for current government spending.
And that does not include one dollar, euro or yen in interest and/or principal payments on already existing government debts. And what is worse, take home pay would have to grow by 50% here in the US to generate enough taxes to just pay today’s rate of government spending. And remember current spending levels do not include ballooning entitlement payments as the developed world’s post WW II baby boomers retire and start collecting.
So, the income statement shows no hope of solvency anytime soon. And the combined balance sheets are just as ugly. For example, the US government and Federal Reserve combined owe about $15 trillion. Compare that with $14 trillion in the household value of stocks and $7 trillion in home equity. To compound the weak balance sheet, my guess is without government support, which has included printing money and depressing interest rates, stocks would probably drop by 50%. That would leave the net value of homes and stocks equal to federal government debt. Not good.
For the record, I do not expect interest rates to surge anytime soon. Therefore, stock price declines are still limited in nature. But that means when interest rates do rise, stocks will drop big time.
Not a pretty picture. The ostriches, who believe in keeping their heads in the sand to avoid reality, say all we need is an improving recovery. Really? Let’s take a look at that nonsense. In the US take home pay is growing by about $200 to $300 billion annualized. Meanwhile the US government and Federal Reserve is borrowing and printing about $1.5 trillion annually, while take home pay is only is growing by $200 to $300 billion a year. Is this insane or what?
A major question is whether take-home pay would grow at all without the US government borrowing and printing $1.5 trillion a year? Maybe. Maybe not. Whatever the case, it is unlikely the world will allow us to keep printing and borrowing these huge amounts for very much longer while take-home pay only is growing by $200 to $300 billion a year.
Moreover, I don’t believe that the governments and the banking structures of the US, Euroland and Japan can solve the problem they have created: An explosion in spending without real economic growth..
Meanwhile, outside of the government mess, the underlying global economy, particularly in the developing world, has been experiencing sustainable robust growth due to first broadband and now wireless. Unfortunately the current governments in the US, Euroland and Japan are anchors that could drag us down. Unless, of course, we wake up and act in time to save the day.
President & CEO, TrimTabs Investment Research
Portfolio Manager, TrimTabs Float Shrink ETF (TTFS)
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