Federal Spending Trending Upward

The American writer and satirist, Sam Ewing, once observed that inflation “is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars…back when you still had hair.”

All good tragedy has a little comedy in it, and vice-versa. The reader may like to decide which is most applicable to Mr. Ewing’s remark.

After three years of cheap, excessively irregular barber visits in the developing world, your editor today ventured into a first world salon across the street from the Fairmont Hotel, here in Vancouver, for a quick “short back and sides.” Given that we rarely keep such polite company, as is present at our annual investment symposium, we figured it was the least effort we could make. We knew we were in for it from the get-go.

More on our little ordeal in a second; but first, let’s take a quick look at the state of the markets…

Stocks recovered from an early morning haircut of their own yesterday to register a reasonably solid, 75-point gain by the close. At one stage the Dow Jones Industrial Average was down some 140 points. A slew of disappointing revenue reports, notable among them Goldman Sachs, IBM, Johnson & Johnson and Texas Instruments, were cited as the catalyst for the selloff.

What turned it around? The Associated Press explains in clear, concise details.

“Analysts were hard-pressed to come up with a reason for the turnaround,” the newswire helpfully explained. It seems that in today’s decidedly lackluster economic environment, no news is, indeed, good news…good enough for a 200-point turnaround, anyway. Trading was “extremely light,” according to the AP, which sometimes tends to “skew” stock prices.

Of course, markets don’t need logical, rational motivations to move in any particular direction. Not over the very short term, anyway. For one thing, stock indexes are not logical, rational beasts. Instead, they are on a constant journey of self-discovery. They overshoot to one side, then to the other. High prices cure high prices and oversold stocks present investors with bargains, ensuring they won’t be cheap for long. For another thing, they represent the myriad individual motivations of illogical, irrational investors and traders, each goaded by his or her own unique goals, timeframes, risk tolerance, etc., etc., etc.

A single day does not a trend make, in other words. But string a few thousand days together and you’re starting to see the embryo of what may one day grow into a nascent, half-reliable trend.

An example: Over the past 14,442 days (give or take a few hundred), federal spending in the world’s largest economy has tripled, net of inflation. That’s according to David Walker, former United States Comptroller General.

“Government has grown far too big, promised far too much and delivered far too little for far too long,” Mr. Walker announced from the podium on day one of our annual investment shindig. This is the kind of trend, probably now in its adolescent stage, that begins to worry the kind of people needed to build a healthy, dynamic economy.

Over the past nine years, unfunded liabilities on the government’s balance sheet – Social Security, Medicare, Medicaid, etc. – has tripled. Medicare alone has a $38 trillion (with a “T”!) hole in its budget. Social Security is now cash flow negative – paying more out than it receives in revenues. Save for a brief flirtation with positive territory in the next couple of years (if all goes well), demographics will propel the nation’s retirement fund further and further into the red…forever and ever, Amen.

Again, this is not the kind of balance sheet management an enterprising small business owner would tolerate (or survive). Alas, government meddlers are not enterprising business owners. The same mottled finances beleaguer the nation’s highway trust fund…it’s airport trust fund…the FDIC…the list goes on. “You can’t trust them; they’re not funded,” Mr. Walker says.

When Social Security was first introduced, there were sixteen workers paying in for every check that was paid out. Today, that ratio is 3:1…and headed towards 2:1 in the very near future. Seniors used to have the highest number of people at or below the poverty line. Today, that dubious dishonor belongs to the youth. Unemployment among the 18-34 age group is the highest of all demographics. And today, the top one half of one percent of earners pay 23% of all taxes. That leaves 43% (and climbing) who pay no income tax at all.

Larger trends are afoot indeed, fellow reckoner. Another worrying one, as we started to mention to at the beginning of today’s musing, is the destruction of the dollar, otherwise known as inflation.

“Just put on one of those robes there,” the helpful young attendant at the salon instructed us. “Your stylist will be right over. Can I get you some tea, or perhaps a coffee?”

Stylist? Robe? Caffeinated beverages? What? We just wanted a haircut and, having left it to the last moment, the closest establishment was the only option. Ninety (90) minutes after he entered the joint, your editor emerged from the salon with a new “do” and reeking of “product.”  The bill: $50, before tax and tip ($63.50, all in).

It was enough to make us reach for a cigarette…from our $14 pack. Inflation: it’s paying $14 for a $7 pack of smokes you used to get for $4…back when you had enough bad sense to take up the filthy habit.

Joel Bowman
for The Daily Reckoning