By Craig Kendall, President of FCI
In 2000, our total debt as a percentage of total GDP, was about 70%. Today it is close to 120%.
In 2008, our total debt as a percentage of GDP was 85%: and now 18 months later it has increased by 41%.
Think about the debt on an individual level; take your income, and figure the amount of taxes you pay. In order for you just to stay even with your standard of living, increase your tax liability by 41% (i.e. your take home is going to be reduced by 41% starting next week).
This is what every US taxpayer is going to have to do, just to keep the US in good credit standing with the rest of the world (holders of US treasuries).
Oh, and don’t forget, you will have to start saving 5% more from every paycheck, because it is now going to take more in life savings to support you during retirement.
Mainstream economists are telling us the economy is in recovery; individuals believe the economy is improving, and individual spending will therefore increase. By the same logic, government spending will decrease.
So in addition to a 41% reduction in your paycheck, a 5% increase in personal savings, an increase in the cost of home ownership (because we are going to have higher interest rates), you are being asked to spend as much as you did in the past. Did I forget to tell you charitable organizations today need more giving from individuals, now more than ever before? So be sure to add to your budget an increase in annual giving to those less fortunate.
Also take into account the 16 million people who have either lost a job, or have taken a reduction in salary. Those facing unemployment and lower wages have additional financing burdens.
In summary, you do the numbers and figure it out. Once you do, you will be known as the one who was able to “Squeeze Blood out of Turnip” as they say.
Consider this; how are the numbers (debt, GDP, etc.) going to add up in a balanced format to allow for a successfully executed debt-reduction-plan under the current terms? Unless each one of us is able to increase our individual annual income by approximately 50% per year, my guess is that something is going to fall short.
Maybe that is why our markets are in such a state of turmoil, why the equity markets are starting to fall, and why certain other countries’ currencies (countries that are starting to default on debt) are starting to devalue quickly.
How can one generate a commendable rate of return by investing in the equity markets given the current forecasts? Remember, the equity market is also counting on more spending in our economy.
Not a sermon, just some thoughts.