1. The banking/mortgage/home owner bailout bill has recently been signed into law, yet the worst may be yet to come.
It appears the cost of this bill is unknown, however, the Congressional Budget Office estimates the bailout specific to sub prime lending will be $25 billion, which could increase to as much as $100 billion. This may only be the beginning, as the housing crisis looms large since new construction housing has been practically shut down nationwide. Home prices have seen 25% declines in many metropolitan areas. One in four homes are in foreclosure in Detroit. Homes in Las Vegas that were selling for $500,000 just a year ago are being sold for $350,000. The next wave of problems will come when the people that bought homes for $500,000 look to sell their homes now worth $350,000. An additional wave of bank foreclosures may occur when builders and developers who are sitting on land that is overpriced are forced to sell. Overdevelopment will add additional pressure on the banks as builders and developers are unable to keep up with financial obligations. Finally, analysts suggest the construction industry and related services make up over 20% of every local economy. With new construction failing, employees will begin to feel the pinch, increasing personal bad debt and added pressure on banks. In summary, the banking industry is in for a very difficult future, requiring additional federal bailouts in order to protect depositors money. The FDIC (and their solvency) will be very active in the next 2-4 years.
2. The energy crisis.
Affecting every consumer and business, the cost of energy is rapidly increasing the prices for everything from food to flying. Along with the obvious negative affect on the economy, the Federal Government will be asked to create very large investments in alternative energy. Barrack Obama recently proposed spending $100 billion on alternative energy and paying for the program with a windfall profits tax. An assault on carbon based energy will create pressure to participate in a world agreement to control global warming and global carbon credits costing American business and consumers billions of dollars.
3. The war on terror.
We are slowly recognizing the war on terror is unending and will be similar to the war on poverty. Just as there will always be poverty, we will always have a war on terror. To contain Islamic Fundamentalism, we will continually be faced with costly threats around the globe. With our military stretched to its limits, rogue nations and terror organizations will sense American weakness and become more brazen. Continual vigilance will be required to prepare for an ever increasing dangerous global climate.
The war in Iraq is an off budget item, yet Sen. Obama has proposed to use these funds for other spending programs as he draws down our forces. A battle will occur over where this money is spent, even though the $120 billion per year for the war in Iraq is in addition to the $400 billion deficit. Additionally, we are spending $40 billion per year in Afghanistan and both candidates are urging an increase in troop levels. The war against Islamic fundamentalism is an ongoing effort that will have drastic effects on our troubled economy.
4. The Armed Forces are requiring additional investments.
Keeping morale high in a protracted war will require additional funding to attract new recruits and additional funding will be required to take care of veterans coming back from war. In addition, Vietnam veterans are approaching retirement and will add pressure on an already stressed VA Hospital system.
5. The health care issue is real to a lot of people.
The Democrats are going to push this issue for political purposes and again move for universal health care. Republicans will be made out to be cold and callous to the needs of those on fixed incomes and without insurance. As an example of how completely unrealistic government predictions are, the Medicare Prescription Drug Bill of 2003 was projected to cost $132 billion over a 10 year period. In 2005, the Bush Administration revised their estimates to $1.2 trillion. Today, Democrats are calling for "closing the gap" on the out of pocket expenses required for seniors. With estimates so unreliable, the cost of increasing benefits in an entitlement are outrageous and are not maintainable.
With the rapid technological advances in medicine, an increasing dependance on drugs over healthy lifestyles, an aging baby boomer generation more reliant the health care system, and a third party pay system, costs are getting out of control. A socialized universal health care program seems like a logical answer to the average person because "something must be done." However, since it will be difficult to predict all the costs of providing medical services, providing complete services in a timely fashion to patients who expect the government to pay the tab will lead to "negotiating" better rates with hospitals and service providers which in turn will lead to more government control and escalating costs. The Federal Government controlling the health care of individuals will change the economy in ways we can not even predict--except that it will always cost more than what was predicted and government provided services will always be underfunded.
6. Previously promised safety nets will be bursting at the seems.
An increasing number of unemployed and uninsured should be expected with layoffs and a slowing economy, adding to the pressure on the public health care system including Medicare and Medicaid and entitlement programs such as unemployment insurance and poverty reduction programs. Entitlement spending will skyrocket with a slowing economy. The burden of the heavy social spending by states and Big City Mayors in inner cities may fall to the Federal Government. People aren't talking about this, but regions such as Detroit and large cities are likely to face financial collapse requiring federal bailouts of their bondholders.
7. Social Security.
Despite what some politicians are saying, Social Security will be taking more out of the system than being put into it by 2017--just 9 years away. Democrats have suggested recently this isn't an impending problem, but the Social Security Trust Fund is an Enron-like accounting trick pulled off by our politicians. Excess money ($140 billion in 2008) is collected from Social Security taxes and is used for general fund expenses. An IOU in the form of a Treasury bill is written to the Trust Fund. Al Gore proposed a LOCK BOX--thinking that we would not use the funds, but rather just hold them. His credibility should have been shattered immediately for not realizing that it is impossible for the government to actually save money. The Social Security problem will create a double whammy for the future. First, we will have to raise taxes and/or lower benefits in order to meet obligations. Secondly, we will have to fill the void from losing the excess money collected on Social Security. The political response for politicians is to create a "Blue Ribbon Commission" to deliver the bad news to the consumer regarding the state of Social Security going to show that to be a politician, one must be an invertebrate.
8. The impending airline bailout.
The financial crisis in the airline industry and it's surrogate industries is brought on by a combination of high oil prices, increased costs associated with terror threats and a lower passenger load due to the increased security. It is in the nations interest to have multiple airlines and low costs. The sustainability of this industry is in question and the future of this industry may fall on the shoulders of the Federal Government.
9. The impending collapse and bailout of the auto industry.
General Motors has not produced a profit since 2004 and has lost a whopping $80 billion over the last five years. Ford is considering bankruptcy after recording a $8.5 billion loss this last quarter. International competition and demand for smaller fuel efficient vehicles in the auto industry is creating a low cost, low margin product line with entry level vehicles starting at $10,000. Adding to the complexity is the fact that $1525 of every vehicle sold by an American car company goes toward health care costs for their workers. There is more money spent on health care than steel in the average American car. Along with health care benefits, the outstanding pension obligations of millions of auto workers may become the responsibility of the Federal Government. It is estimated the unfunded portion of pension obligations for General Motors is $58 billion. Add that to the $350 billion of debt General Motors is carrying, the collapse of this company will have a major effect on the US economy. Some analysts predict Chrysler to be the first to collapse, but The Big Three Automakers are in serious jeopardy and may require significant Federal Government assistance.
Update: General Motors posted $14.4 billion in losses last quarter
10. Personal Bankruptcies.
The good news in America is that less than 50% of Americans carry a balance on credit cards. Unfortunately, those that are playing the debt game are in for a difficult time. Since credit cards are still a recent phenomenon (they didn't receive universal popularity until the late 1970's), individuals born before 1945 were not inclined to change their spending habits from a cash basis. However, the baby boom generation and those thereafter have slowly become acclimated to a new economic system which includes carrying large amounts of personal, unsecured debt. This reliance on financing by those under 45 years of age has created a debt heavy culture. As the economy turns south, this may be the first generation raised on credit to face a serious recession.
11. Illegal immigration.
It is estimated that between 10-20 million illegal immigrants are living in the United States. Some suggest between 500,000 to 4,000,000 illegal immigrants (mostly from Mexico) cross the border each year. The costs to control this problem is a controversial and costly problem. As the economy worsens, calls to eliminate this problem will become louder. The Federal Government will be asked to provide benefits to illegal immigrants ranging from health care costs to unemployment and anti poverty programs. In addition to providing benefits, the strains placed on local law enforcement agencies may make this a federal issue as they will require funds to handle the increased costs of these individuals. The additional costs of detainment, legal trials, and extradition has the potential to create a massive federal expenditure.
12. The loss of middle class manufacturing jobs.
Severe competitive pressures are requiring businesses to manufacture goods in cheaper labor markets. Most consumer goods are now being produced overseas in countries without labor unions, environmental regulations and extremely low labor rates. The inevitable loss of these domestic jobs creates an uneasiness in our economy and has deleterious affects on smaller communities as often the move of a major manufacturer has an enormous impact on the local economy. A shrinking tax base leads to lower home values, a declining property tax base, and a difficulty in maintaining the current services such as schools, road improvements, government employees and police. State and federal assistance for communities reeling from the loss of a job base is a growing need.
13. The American Dollar is falling against other currencies and may need to be propped up.
The value of our dollar is determined by the belief other countries have in our country and our economy. The dollar has depreciated 32% against the Euro since 2004 and the world economy and world trade is no longer tied to the American Dollar as it has been for the last 60 years. Some people estimate that over $1 trillion was printed out of whole cloth last year, further declining the real value of the dollar. America is spending nearly $500 billion more each year than it takes in (not counting off budget items such as the Iraq War). In order to keep people buying our Treasury bills, we will need to increase interest rates. This action has a further negative impact on our economy.
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