Train Wreck Ahead

Regular visitors to this site are aware of my concerns about the serious economic problems confronting the U.S. Lately though, it seems we’ve passed a tipping point of sorts, with potential implications more ominous than the 2008 crisis that almost brought the country (and the world) to its knees. Forgive me for sounding alarmist, but you really need to know what’s going on and what, if anything, you can do about it.

Should you care about my opinion? Well, before becoming an economics teacher, I spent 15 years in the investments business in the 1970s and ‘80s: as a market analyst, a commodities trader, and ultimately a V.P. with a major brokerage firm. There were also 15 years teaching finance and investments courses at colleges in the 80’s and 90’s. And studying and teaching economics for the last 20 years. Plus, I’m not selling anything: not writing a book, running for office, or pushing an investment. So yes, you might want to listen.

Contrary to my normally wordy nature, I’m going to cut to the chase here. The U.S. dollar faces a huge loss of confidence worldwide. Exacerbating the trend in that direction were several remarkable and very disturbing things that happened in the last few weeks. Congress fought like cats and dogs until the very last minute to come up with a budget that cut the deficit by a measly $38 billion. They almost shut the federal government down because they couldn’t agree on whether to cut spending by $30 billion or $40 billion – this with a total budget deficit of $1,655 billion. Right then and there, it became obvious to me and anybody else watching that there is no way that Congress is going to get our ruinous debt under control. Will not happen. This is a big problem, but one that most Americans don’t really understand or care much about.

The key to taming this runaway debt train is to make major changes (cuts, basically) to the “entitlement” programs, e.g. Social Security, Medicare, and Medicaid. But nobody wants to do it. A recent ABC poll shows that 78% of all Americans are opposed to such changes. So that’s just not going to happen, at least not any time soon. Spending on health care, welfare, and pensions – a similar category to the entitlements we’re talking about – accounted for just over 40% of all federal spending in the 1970s and 80s. It’s risen sharply in the last 20 years, however, and now eats up over 60% of all federal dollars. The trend is higher still and nobody has the cajones to stop it.

None of this has been lost on the financial markets, as the dollar has swooned and gold and silver have soared. These trends accelerated last week after Standard and Poor’s signaled that for the first time ever, the United States credit rating was in danger of being downgraded. In other words, investors may soon be less willing to loan Uncle Sam more money, which would present a huge problem to a country addicted to borrowing and unable to cut more than $38 billion out of its deficit. Meanwhile, the other day for the first time I heard relatively intelligent people talking about the outside possibility of the U.S. defaulting on its debt. That possibility, which I previously would have estimated at 1 in 100, may now be as high as 1 in 4. Still unlikely, but not such a long-shot anymore.

All of this is incredibly disturbing, as the U.S. dollar is the lynchpin of the world’s economy and U.S. debt is the world’s “gold standard”. Let me put a finer point on it: if the world loses confidence in the U.S. dollar and our debt, it’s game over, the house of cards tumbles – pick your metaphor. I’m not even going to get into all the ramifications, but they are ugly and, again – ominous - and could have us looking back rather fondly at the gentler times of 2008’s Great Recession. At the very least, these developments imply that the U.S.’s standing in the world, and our own standard of living, are certain to continue sliding for many years to come. It’s very sad, actually, having front row seats for this train wreck that is slowly but surely developing.

What can you do about it? Well, encouraging our politicians to get real and get over their political selves would be one thing. But on a more personal level of protecting yourself, you should re-evaluate your investments. Don’t have any? Well geez, you may be in for a tough ride, as the general cost of living will probably rise sharply from here, with incomes lagging far behind. But for the rest of you, here’s some ideas:

The biggest thing is to diversify out of dollars. Money in the bank, money in bonds – those are likely to lose value in the future, perhaps dramatically so. That’s why the stock market, oil, precious metals, and certain foreign currencies are going up. Investors are shifting out of dollars and fleeing into anything that has real, intrinsic value. Now if things start getting ugly, the U.S. stock market’s not going to be happy, so you don’t want to be heavily invested there. Foreign markets? Asian and the BRIC markets should fare better, but remember: “when they raid the whorehouse, they take ALL the girls”. Translation: still not a great place to be.

Oil and other natural resources could be a decent play for a small chunk of your money. They’re a bit expensive now, but will likely move higher in the long run, especially if the dollar really tanks. All the recent reporting about how higher oil prices are just a scam by the oil companies and speculators misses the big picture, which is about political risk in oil producing countries and currency risk the world over. I like DBE (on the NYSE), which invests in a variety of energy markets. There are lots of other ETF (Exchange Traded Fund) natural resource plays out there, too.

Gold and silver might be the best way to protect yourself from what’s coming, although quite risky (in the short run) at these high prices – especially silver. There's been a literal panic into silver in the last couple of weeks, all around the world. But in the long-run, they’re still likely to go much higher as people scramble for alternatives to a crumbling dollar. Look for mostly lower prices for a few months, before things heat up again. Buy bullion gold coins and silver rounds, and/or invest via the gold and silver ETFs of GLD and SLV, when prices dip.

The most interesting option at this point may be the Swiss franc. Unlike the U.S. dollar and the equally shaky euro, the franc benefits from the Swiss penchant for living within their means and protecting the value of their currency. And really, where else are people going to put their money? In the BRIC’s rupees, rubles, reals, or yuan? Maybe. In the Japanese yen? Perhaps, but the franc is the world’s premiere stable currency, and its outlook is bright. The Australian dollar is another possibility; you can buy FXA to participate in that currency, or FXF to be in the Franc. Unlike gold and silver, they’re more reasonably priced now and not as volatile (don’t move up and down so wildly).

The Chinese have a saying: “May you live in interesting times.” So perhaps we should consider ourselves blessed. I may be wrong; the politicians and the public may have a change of heart before it’s too late and my fears may all be for naught. But the smart money’s not betting on that horse, and if they’re right, we’re in for something much more than just a little hiccup. Make sure your financial house is in order, since the country’s isn’t. Limit your exposure to a discredited U.S. dollar as much and as soon as you comfortably can.

A Really Big Question, part 4

Last time we looked at how Americans' unholy obsession with more and bigger everything explains why the nation can no longer provide many basics that it could 40 or 50 years ago. We see this in the $40,000-$60,000 luxury SUVs, Mercedes, Lexus and other high end cars on the road today. Those are no longer the exception, toys of the rich; instead, they're so commonplace as to not even warrant the special attention that such a car would have gotten back in the day. Compare this to 1965, when the average new car cost $2650. Then there are our homes, averaging $355,000 in San Diego today, vs. $20,500 in 1965. Of course, cars, houses, and most everything else have better features now than they did in 1965, but still - people paying 18 times as much for cars and 17 times as much for homes, when overall prices are only 7 times higher today than back then? Hmmm......

I'm going to let others calculate how much we've got tied up in housing, cars, electronics, etc. today, vs. back in the 1960s. But can we just agree that it's probably tens of trillions of dollars, many more than in 1965 even after adjusting for inflation? Still, I wonder how much of our money has ended up in the pockets of Wall Street pirates, corporate fat cats and foreign billionaires, thus hobbling the nation's capacity to function smoothly. I mean, it's one thing if we stupidly but knowingly sacrificed the nation's future for the benefit of our own conspicuous consumption, yet it's quite another to have been duped out of billions or trillions by these unsavory characters.

I guess that's the question: Is it many billions, or is it trillions? Because if the big bankers ripped us off for tens of billions over the years, corporations lined their pockets and those of their stockholders with tens of billions more, and we've sent tens of billions in wealth abroad without it coming back to us in some form or another, then that's a bummer, but hardly explains the mess we're in. On the other hand, if the big banks and brokerage firms have pocketed many hundreds of billions or even trillions in ill-gotten gains, while corporations and foreigners have matched their thievery or - especially in the case of foreigners - perhaps rather fairly-gotten gains, well - that's a pretty big deal, isn't it?

I'm not sure which it is. Nor am I sure I want to do all the research to figure it out. But I'd like to have some idea, and think Americans (or at least readers of this blog) should know which is more likely. No sense blaming corporate America and avaricious foreigners for all for our ills if it's not really their fault!

Where to start? Well, knowing how much Wall Street firms and the big banks made over, say, the last 20 years would be a good starting point. Next, we could take a look at total pay (including bonuses & stock options) for top corporate executives over the past 20 years, using perhaps the 30 companies in the Dow Jones Industrial Average. Measuring how much foreigners have "ripped us off" over that same time period would be, I think, just too difficult. There are so many variables there, not the least of which is the incredible growth in their own country's markets, the degree to which they became wealthy "fair and square", and other considerations. So, now that I think of it, I'm just going to focus on home-grown theft by "Wall Street" and "Corporate America".

You don't know it, but I just took some days off to look for the kind of information mentioned in the previous paragraph. Didn't have a lot of luck. Bits and pieces, such as the nation's brokerage firms made $61 billion in 2009, a record year, but lost $23 billion in 2008. Well, I'm going to use those bits and pieces, some knowledge of the business world and economics, and some common sense to come up with some "guesstimates". These are not hard, reliable figures, but they're a start; an honest effort to gauge where some of our money has gone.

Going back to the early '90s, it seems that Wall Street lost money only a few times, but otherwise made something like $10 billion-20 billion a year most of the time, with plus $69 B and minus $23 B being the outliers. Let's take the middle of the range, and say that they averaged $15 billion a year in profits, or $300 billion total over the last twenty years. But what about all the bonuses they paid out? In most cases, those would have come out before figuring profits, so there's another big chunk of money that Wall Street walked away with. Last year those amounted to nearly $21 billion, the 5th largest amount ever. Let's go out on a limb somewhat and guess that maybe those have averaged about $15 billion a year also, or another $300 billion over twenty years.

That's perhaps $600 billion that Wall Street's taken home since 1990. Certainly much of that found its way into the pockets of millions of Americans, either in the form of dividends or the trickle-down effects of the wealthy spending their money. And a big chunk went for taxes; despite the conventional wisdom that the rich avoid paying taxes, the fact is that something like 70% of all income taxes collected come from the richest 10% of Americans. Let's cut to the chase: I'm guessing that Wall Street fat cats have pocketed, held onto, squirreled away perhaps $200-300 billion over the last twenty years; that's $200-300 billion moved into Swiss bank accounts, $20 million houses, $10 million works of art, etc.

That's a lot of do-re-mi, as they say. But not enough to explain why we're $15 trillion in debt, can't afford to fix our roads, and so forth. There's also the corporate profits, and increase in stockholder wealth, though. Again, it's really hard to get a handle on those numbers, at least without going out and doing the serious research that - well, let's be honest - I don't want to bother with right now.

What I do know is that the 5000 largest corporations were worth about $4.5 trillion in 1990, and are worth nearly $17 trillion today. That change would about account for the increase in our national debt over the same time period, but such a comparison would be totally bogus. First, because those corporations grew by creating tens of trillions of dollars worth of goods and services that went to us Americans, so it's hardly saying that they "stole" their greater value. Second, because nowadays more than half of all Americans own stock, either directly, indirectly, or both. So much of that increased value has, again, gone into the pockets of tens of millions of Americans, not just a relatively few fat-cats.

Another thing to consider is how much profits have been earned by U.S. corporations. This is different from how much the companies are worth (the subject of the previous paragraph); a big chunk of the profits are paid out every year, and thus become income for stockholders. Twenty years ago, U.S. corporations had total profits of about $400 billion a year; by the end of the 1990s, profits were over $800 billion a year. In the last five years, however, total profits have been in the $1 trillion - $1.6 trillion range a year. That implies that total corporate profits these days are about three times as high (or more) as they were twenty years ago and, by extension, we might suppose that an "extra" $10 trillion or more has gone to corporate America in the last 20 years.

Now, not all that money was paid out in the form of dividends; only about 50% of profits get paid out that way. But still - an "extra" $5 trillion or so going into the pockets of U.S. stockholders in the last 20 years? That's a lot! Still, let's remember that while a big chunk of that ends up in the accounts of the $20 million mansion crowd, quite a bit goes to many millions of more ordinary Americans.


Let's try to connect the dots now. First of all, the data is really scattered and it would be unwise to make definite conclusions out of what I've presented here. Nevertheless, it DOES seem a safe bet that many hundreds of billions, probably trillions, of dollars have found their way into the hands of corporate big-wigs, wealthy investors, and other Wall Street types in the last twenty years or so. Probably much of that was earned fair and square, but it's just as likely that much of it was excessive, unwarranted, and unfair. CEOs making 30 or 40 times what their average employee makes? OK - probably deserved. CEOs making 500 times the typical employee's salary? Not so much. Guys like Bill Gates, who revolutionized our world and created incalculable real value for all of us, becoming a multi-billionaire? Well done, Bill! The 22-year old kid becoming a multi-billionaire for creating an on-line chat room, or big bankers earning $300 million bonuses for figuring out new ways to game bloated, dysfunctional mortgage markets? I don't think so.

So is the nation a poorer place, unable to pay for good schools, roads, and avoid government shutdowns because of Wall Street's greed? Probably so, at least in part. Let's remember, however, that there's plenty of blame to go around - as discussed in earlier parts of this blog. Wall Street avarice and the full-contact form of American capitalism may be the bad guys, but they are hardly the only ones.

A Really Big Question, part 3

The U.S. today is 3 to 4 times richer than it was 50 years ago, yet we can't afford many of the basics that we took for granted back then. Why is that? Where'd the money go? That's where we left off last time, after concluding that the nation's massive accumulation of debt (a.k.a - living beyond our means) is probably a big part of the answer. Related to that is the sad story of consumerism gone mad in the U.S.

During the 1950s and 1960s, the nation grew ever more prosperous, while memories of hard times (the Great Depression and WWII) faded from people's minds. The last really tough economic times were the late-1970s and early-1980s, when the twin devils of high inflation and high unemployment spiraled the nation into a pessimistic funk. Ronald Reagan, supply-side policies, the collapse of European communism, advances in technology and communication, and improved monetary policies out of the Federal Reserve (rank these according to your political views) led the country into the fabled "Goldilocks economy" of the mid-1980s to late-2000s. Notwithstanding the dot-com bubble collapse of 1999 and 9/11/2001, the country enjoyed an unprecedented period of low unemployment, low inflation, and high growth - a near miracle that made it the envy of the world.

In this glorious economy Americans, aided by the increasingly finely tuned instincts of the advertising industry, responded by demanding more of .... EVERYTHING. Whereas the typical 1950s family of six managed just fine with an average house of 1100 square feet and a modest four-door sedan, average new home size grew to over 1500 square feet in the late-1980s, and a ridiculous 2200 square feet by 2005 - while average family size dropped to less than four! Meanwhile, the basic sedan was replaced by the 1990's larger, signature vehicle - the Ford Explorer. But by the turn of the century, the Explorer didn't convey the idea of conspicuous consumption quite enough, and Americans traded up to even larger Expeditions, Excursions, Escalantes, Tahoes, etc. Yup - $40,000 four-wheel drive vehicles that seat nine, for families of three, who lived and stayed in the city. WTF?

It was the same across the board. Why buy $25 Levis when you could buy $100 designer jeans? Why eat at a modest local diner once a month when you could dine finely a couple of times a week? Why watch a the 26" inch TV that was plenty big in 1980, when you could get a 60" flat-screen for about five times as much? We never felt the need to be connected previously to everyone we know, minute by minute, but now how many people can get by without their cell phones, the minute-by-minute texts and tweets, the e-mails - all for a low, low $150 a month?

Americans spent, then spent more, then borrowed to spend even more. Meanwhile, the thought of saving money receded into the distant memories of "back in the day...." In the 1960s, the average American saved about 8% of what they made. In 1975, the rate was as high as 14.6%. But then it started dropping, as we all decided that "wants" were actually "needs". By the early 2000s, the nation's average savings rate was essentially zero; for every person who saved, there was another person with no savings, but debt instead. As a country, we stopped saving and just spent, spent, spent.

We became stupid. We equated happiness, success, and personal worth with - vast amounts of stuff. Expensive, unnecessary, superfluous stuff. So the money, hundreds of billions - trillions, actually - of American wealth went into the pockets of the advertisers, manufacturers and merchants that told us what we needed, and then happily gave it to us. Average Joe and Jane Smith became real estate wizards who made millions on the idiocy of millions of other Smiths trying to keep up with one another and the Joneses. Techie geniuses came up with devices so appealing that we simply couldn't live without them. The world (China!) opened up to us, offering their unlimited quantities of every-damn-thing to us at ridiculously low prices. Americans bought and bought and bought, their money lining the pockets of realtors, developers, entrepreneurs, and foreign businessmen at incredible rates.

The world's multi-millionaires became multi-billionaires. Broke-ass Chinese, all riding bikes 25 years ago, have come to have the second largest number of billionaires (64 of 'em) of any country in the world today; additionally, almost half a million Chinese are millionaires. CEOs in the U.S. regularly make millions of dollars a year, plus bonuses. The stock market, as measured by the Dow Jones Industrial Average was around 1000 in 1980; it's twelve times that today.

All the money we've made in the last 40 or 50 years, apart from being financed from borrowing, from debt, has gone into all the stuff we own and the pockets of the people who made and sold us all that crap. We've got bigger houses and cars and fancier and more of everything than we need, and that's where the money went. From there it lined the pockets of the bankers, the entrepreneurs, the stock owners, the real estate scammers, the foreigners. Instead of into better schools, roads, parks, health care for virtually everyone, a cheap college education, government offices open 5 days a week, every week.

Don't blame them. They're doing what they do: they create, they produce, they promote; they capitalize on opportunities. It's not their fault they've got our money. But that's where a lot of it went.

A Really Big Question, cont.

Last time I raised the big question of: even though the U.S. is much richer now than it was 40 or 50 years ago, why is it that we're missing so many of the basics that were part of our lives back then? Where did all the money go?

The nation's GDP, or Gross Domestic Product, is about $14 trillion today. GDP, which is the most widely used measure of a country's wealth, tells us how many goods and services are produced in a year. If we want to know how wealthy the average citizen is, however, we're better off looking at GDP per capita, or the amount of goods and services produced in a year, per person. Our GDP per capita is about $45,000 these days, which is one of the highest figures in the world.

By contrast, let's look at the year 1965, which in many ways was a high point for this country. The Vietnam war was not really a problem yet, inflation and unemployment were virtually non-existent, the U.S. was the unquestioned manufacturing giant of the world, and civil and generational upheavals were mostly a couple of years down the road still. All of these things would change quickly, but in 1965, the nation's real GDP (GDP that is adjusted for inflation) was about $3.5 trillion, or about a fourth of what it is today. GDP per capita, also adjusted for inflation, was about $18,000, or a bit more than a third of what it is today. So it's pretty fair to say that as a country, the U.S. is about 3 to 4 times richer today than it was in 1965.

Getting back to the original issue: why is it that today's much wealthier nation - 3 to 4 times wealthier than in 1965 - cannot provide many of the basic services that were a "given" back then? Why have police, firefighters, teachers, librarians, sanitation workers and other key public servants' jobs been eliminated, with many more cuts likely? Why are key government offices closed several days a month, and school years being cut, just when we need to focus more on education, not less? Why are our bridges and roads falling apart after decades of neglect? Why is medical care an unaffordable luxury for so many Americans?

As previously mentioned, one part of the answer is probably the nation's debt. The federal government owes about $15 trillion, while state and local governments, businesses, and individuals owe about another $60 trillion. Even after adjusting for inflation, that's a lot of money! The federal debt in 1965 was $261 billion, so today's federal debt is about 60 times greater than it was in 1965; neither inflation nor GDP have gone up that much since 1965! According to the federal Bureau of Labor Statistics, overall prices have increased about 600% since 1965, so the federal debt has grown almost ten times faster than overall prices. I'm guessing that state and local debts grew then also (for schools, for roads, etc), while business debt (for new factories, research and development, etc.) and individual debt (for homes, cars, college, etc) grew quite a bit as well since 1965.

Now debt's not always a bad thing. If you or I or a business or the government borrows money to make a sensible investment, then debt can be good. So if I borrow to pay for a solid college education, a business borrows to build a new factory, or the government borrows to build a better transportation system for the country, then those things are most likely going to pay me, the business, and the country back several times over in the long run. Similarly, if the government borrows to fight a necessary war, well - that's a necessity, isn't it? That's good debt.

On the other hand, though, if I borrow so I can take a high-end European vacation, the business borrows to pay its top executives un-Godly large bonuses, and the government borrows to pay for wasteful pork or an expensive war that perhaps was unnecessary, then all of us are going to end up with nothing to show for it down the road except a reduction in our net worth. That's bad debt.

I think the reality is that a lot of the borrowing that we saw in the 1980s was associated with a number of supply-side policies, and that it was "good debt". Starting in 1981, marginal tax rates for businesses and individuals were cut, giving them more incentive to work harder and invest. Regulations on businesses were cut back, making it easier and more profitable for them to operate and expand. More savings was encouraged by opening up IRAs and 401(k) plans to millions of Americans, helping to reduce the cost for businesses to borrow. The end result of all this was that more money went into research and development, into opening new businesses and expanding existing ones. All this investment (along with major developments in technology, communication, and trade) then set the stage for the explosive growth of the late-1980s and all of the 1990s.

To be sure, a lot of the borrowing of the 1980s, and especially the 1990s, went for silly, materialistic stuff as Americans became more and more interested in "having it all." I'm just guessing here, but my intuition is that a lot of borrowed money went into productive businesses, research, infrastructure, etc. in the mid-1980s, but the percentage going there gradually dropped as the '80s became the 90s, and then the 21st century. My guess is that more and more borrowed money went into replacing smaller cars and houses with bigger cars and houses, eating at home with eating out, sensible clothes with designer label stuff, and so forth. And more money on an endless variety of government programs and bureaucracies.

To whatever degree that is true, then the nation switched from focusing on a better future, to having a better now. This would be a reversal of countless generations of thought, where it was always: "I want my children to have a better life than I did." And to whatever degree this is true, then, the answer to "where did all the money go?" is that it went to the banks, the wealthy, and the foreigners who lent us the money. By borrowing, we basically got lots of stuff, and they got lots of IOUs that are now starting to strangle the country. Next time, we're going to take a closer look at this huge paradigm shift, this gonzo consumerism that came to characterize the United States in the 1990s and continues even today.

A Really Big Question

TIME magazine's cover this week is titled: Yes, America is in Decline. I guess their premise is pretty obvious, and it's one that would come as no surprise to readers of this blog. Take the essay posted here last week, for example. But here's the Really Big Question, and I've been wondering about it for quite a little while: "How come we're SO broke?"

What I mean is, the U.S. in the 1950s and 1960s was MUCH less wealthy, even after adjusting for inflation. And yet, where I grew up, a lower-middle class town ..... Nearby state and national parks were fully staffed and fully serviced; open all the time. Every school had a full-time librarian, a full-time nurse, and at least a part-time music teacher that taught virtually every kid to play an instrument. New roads and bridges were constantly being created, and existing ones were kept in decent condition. All government offices were open five days a week. Almost every kid was in scouts or played Little League, or both. School class sizes were modest, school supplies and books were never in short supply. College was located just next door to free. Cities ran smoothly, and nobody talked about draconian budget cuts. Nobody even thought about health insurance; everybody could afford to go to the doctor.

Nowadays, when even after our recession and whatnot the U.S. is still much wealthier than it was 50 years ago, many parks are shut down and/or have limited services. School librarians, nurses, and music teachers are endangered species. Roads and bridges are old, worn out, and not being fixed. State offices are closed several week days a year. Scouts and Little League are too expensive for a lot of people. Schools are laying off teachers, class sizes are growing, teachers often buy their own supplies or do without. Even state colleges are starting to be beyond many students' ability to pay. Cities are going bankrupt or slashing staff and services. Health care is almost a luxury. Why is that???

I can think of a number of possible answers, and will explore these here over the next few weeks. Most likely culprits include: the huge government debts built up over the last 40 years; Wall Street and corporate greeders that have raped the country for countless billions; the insane, mindless consumerism of the past 30 years; the wars of the last 40 years; and...... perhaps the reality that things really AREN'T worse than 50 years ago, the natural tendency to remember the past more fondly than it really was.

So stay tuned and check back once in awhile.

The Party's Over, and People Don't Get It

That's what I wrote on the board in one of my classes the other day, as we were watching the story about Wisconsin's budget problems. Like other states, voters there are reluctant to raise taxes, and this leaves the state with no other alternative than to cut spending, including areas where they'd really rather not. One of the places Wisconsin would prefer not to cut is in education; another is from the pensions of public employees who've worked so hard to get a decent income in their retirement years. To do so would just be so wrong! But as I often ask: What's the alternative?

Not much, it seems. Mostly we just hear that Wisconsin can’t do that, without hearing what they CAN do. I don't know if reducing the power of unions, and reducing public employee salaries and pensions are the only way or even a good way to deal with these daunting state deficits, but I do know this: The financial problems that the states, and the federal government, face are .... absolutely disastrous. Probably worse than in the Great Depression; perhaps the worst this country has ever seen. And people just don't get that yet. You explain how THERE'S NO MONEY, and drastic cuts HAVE to be made; they listen, shake their heads in agreement and then go "yeah, but what's this got to do with me? where's my raise? why can't I retire at 55?"

Most Americans hear about the $15 trillion dollar federal deficit, California's $26 billion deficit, and the like, and just sort of say "Well so? Fix it! Cut government waste, tax millionaires more, you know - just fix it!" Or else they figure the "problem" is just a phony one, or will just sort of go away by itself.

But it's not even remotely that simple, and there are no fixes that won't involve serious amounts of pain for almost all Americans, for many years to come. The bottom line is that almost all of us are going to have to live with smaller paychecks and smaller pensions, work longer, and get less in the way of government services and support. No use whining about it or marching around with tired old 60s-era “hey, hey, ho, ho, government cuts have got to go” chants, because that’s just the way it’s going to be. Here are a couple of reasons why this is inevitable.

First is politicians’ decision to kick the can down the road for 40 years or so. I remember back in the mid-1970s when I started in the investments business; conservative analysts were alarmed by the federal government spending more than it took in, year after year. The nation's debt was rising at a then-alarming rate, while the value of the U.S. dollar was rapidly eroding. We have to stop this now, they said, or else our children and their children will pay a heavy price down the road! Congresses and Presidents came and went, but nothing fundamentally changed. To fix the problem required raising taxes and/or cutting government spending - two equally unacceptable policies. Anyone who pushed either option would likely be voted out of office by angry voters: "You raised my taxes!" "You cut spending on my favorite program!"

So Congress borrowed more money instead, kicking the can down the road, letting the next Congress deal with the problem. Disturbing annual deficits in the tens of billions of dollars in the 1970s became shocking deficits of hundreds of billions in the 1980s and 1990s (except for a few surplus years in the late-1990s), and then insanely high deficits that eventually exceeded $1 trillion a year by the late-2000s. Each time, as Congress refused to make the tough decisions (cut spending and/or raise taxes), everybody said: "If we don't fix this now, it's today's children who will pay the price." Nobody pretended to not understand that their inaction would put the burden of their decisions on the back of future generations; the presumption was always "well, we didn't fix it this year, but next year we will!"

But it was a cruel hoax, a deceit. Most politicians knew in their heart of hearts that they couldn't solve the problem, that they didn't have the nerve to take the tough actions needed to do so. And besides, by the time the problem got totally out of control - they'd be long gone. Someone else's problem!

Well, the shell game is winding down and the future is now. The debt is so big, the economy so unable to deal with it using conventional means, that the party, the game of musical chairs, is about over. Today's Americans, especially the young ones, are getting presented with the bill for all the living high off the hog of the past 40 years. Not right away. Not all at once. Not always in obvious ways. But it's clear that it's happening; it has to happen. And most people don't get it.

My wife and I were in Mission Valley the other day, and couldn't believe the parking lots. They were all full, with people waiting for someone to leave so they could park. In this bad economy. When Internet shopping is taking more and more business away from physical stores. Still - stores were packed. People were buying stuff right and left; lots of it overpriced, frivolous stuff. Paying $11.50 to watch a movie, and then $13 for a large Coke and popcorn.

Many of these same people will quickly tell you how the economy sucks right now: prices are up, jobs are hard to find, and government is cutting its services. But they've still got their cells with unlimited texting, their $30,000 SUVs that get crappy mileage, still eat out twice a week, still consider shopping at the mall a sensible hobby. These people don’t get it.

Meanwhile, there is the other America; the 10% or 20% or 30% of Americans whose lifestyles have already taken a huge hit. They lost their jobs, lost their homes, lost their meager savings, don’t have health coverage, and after a couple of years see no light at the end of the tunnel. Or they’ve got a job, a home, lousy health insurance, but no pension to look forward to and are just barely scraping by. They don’t understand all this talk of the economy improving, don’t understand how the stock market has almost doubled in the last two years, don’t understand how so many others have money to just throw away at the malls.

So here’s the second thing. Many of those people are part of the old economy. Despite all the calls for Buy American, the old ways are gone. If you used to work at a lumber mill or a manufacturing plant; if you used to earn a good living with just a high school education and a skill set that isn’t really needed anymore; if you had a non-essential job and somebody found a way to get by without you, then you’re a casualty of the new economy. Globalization changed things, and there’s no putting the genie back in the bottle.

The changes in the American workplace were inevitable and, in a way, we should be happy about how things are working out. Because if you think about it, a big reason that Americans were able to live so high on the hog, even after we started getting a little lazy and feeling entitled, was because we were still one of the Big Dogs, benefiting from old colonial and imperialist realities.

We had lots of military and political muscle, long-standing commercial arrangements the world over; bargaining advantages of many types that gave us a huge edge over so many other countries. We had the U.S. dollar, trusted basis of the entire world’s financial system. We had good education, great inventions, good roads and hospitals and phone systems. Free markets and strong laws to protect entrepreneurs and foster civic strength. Meanwhile, the majority of people elsewhere lived in the third world, in desperate poverty, with little or no education, no military or political muscle – nothing. Or they lived in communist countries, essentially dictatorships where their futures were seldom promising.

So it was relatively easy for us to live off the fat of the land (the world) during the 60s, 70s, and 80s. But that really started changing about 20 or 25 years ago, with the fall of communism, with China’s adoption of free market policies, and with advancements in technology, communication, and transportation. Now, everyone can see what life is like in rich western countries – and they want that. Now, everyone has access to technology and information and can use them to level playing field after playing field. Now everyone has an incentive to work hard, to create, to build wealth. The Chinese work harder and much, much cheaper than Americans, so they make everything. Meanwhile, the Indians work harder and cheaper than Americans, so they’re starting to do everything (think: call centers, surgery centers, accounting services). Meanwhile, they, and other parts of the former third world, are jumping ahead of us in education, in modern infrastructure, in the things that will allow them to inevitably catch up and perhaps even surpass us.

We should be happy for them, shouldn’t we? Shouldn’t we feel bad that for decades we had the great lifestyles, at least in part because of policies that exploited poorer countries? We won the Cold War; we brought down communism! Shouldn’t we be proud that – with our help in many cases – many countries are now following our lead, and catching up? Shouldn’t we be glad that they’re now starting to have decent lifestyles, even if it means that we’re living a little less high on the hog? Hmmm…. I don’t think most Americans are quite that gracious about it.

But shouldn’t they be? I mean, the poorest Americans still aren’t starving to death. Most of them still get a decent education, have a roof over their heads, have personal freedom and a chance to make something of themselves, are free from having to worry about ethnic cleansing and bloody revolutions. So what if our GDP per capita (basically – average income per person, per year) falls from $45,000 to $35,000? We’re still well off; still in better shape than 95% of the world’s population. Can we really begrudge other people in the world the chance at bettering themselves? Do we really think that all those high paying jobs are our God-given right, for perpetuity - that nobody else should be able to take them from us?

I think the answer is yes. Americans had it all, for so long that they think that having it all is their natural right. We benefited from our world dominance, and from the buy now/pay later philosophy of our government for so long. It’s a lot harder to give up the good life when that’s all you’ve known. Americans, proud and hard-working for so long, now feel, more than anything else, entitled. But the party’s over. And that sense of entitlement is going to make it harder for people to accept what is essentially inevitable.

Amendments Two and Fourteen - similarities?

This originally appeared a few months ago. Now, with the recent shootings in Arizona and Tea Partiers again bringing up changing the 14th Amendment, this is a pretty relevant topic.

Anti-illegal immigrant groups have been talking about changing the Fourteenth Amendment to the U.S. Constitution, so that when people who are in the country illegally have children, those children are not U.S. citizens. As with anything else related to illegal immigrants - "undocumented residents", if you're more sympathetic to their plight - this is a very controversial proposal. It's also unlikely to get very far any time soon, which even its supporters admit. Still, I think it makes a lot of sense. Further, it reminds me of the situation with another controversial Amendment: the Second, which protects (or not, depending on your beliefs) the right to individual gun ownership. Here's what I mean.

Everyone agrees that illegal (undocumented) immigrants are a big problem. The disagreement mostly centers around whether we need to make it easier for people to enter and stay in the country - essentially an immigrant-friendly view, or that we need to make it harder for them to illegally enter and then stay in the country - the anti-illegal immigrant view. Please note that nobody claims to be against immigrants coming here legally, although Americans have long tended to not welcome foreigners of any status, and that tendency doesn't seem to have disappeared yet.

Among the problems that the anti-illegal immigrants ("antis" from now on) point to is how many illegals have children here who, under our Constitution, are automatically U.S. citizens. This creates all kinds of problems, not the least of which is: if mom and dad are deported, what happens to their U.S. citizen kids? The scale of the problem is huge, as many pregnant women apparently sneak into the country specifically so that their child is born here, gaining that prized U.S. citizen status. The Pew Hispanic Center recently reported that one in every twelve children born in this country was born to a mother who is in the country illegally, and other groups, including the antis, agree that number is about right.

But you can't change the 14th Amendment, top lawmakers say. Citizenship for those born in the U.S. is among the most sacred of our constitutional rights, and if we start fiddling with that right, which other rights will be next? Those proposing a change to the Amendment, they say, are merely playing politics, trying to win the antis' votes.

I'm not convinced.

When contemplating the Constitution and its Amendments, a crucial element is always: what did its authors have in mind? The related, implied consideration is: given what they had in mind, would they have written it the same way today as back then? The Second Amendment illustrates that point. Whether or not the Founding Fathers meant it to protect individual gun rights or merely the right of militias to own guns, as the two sides argue endlessly these days, the fact is that today "the right to bear arms" is a much more complicated proposition than it was 220 years ago.

As a strong supporter of the right to gun ownership by individuals, I nevertheless agree with the need for reasonable limitations on that right. Machine guns, grenade launchers, shoulder mounted surface-to-air missiles - could the Fathers ever have imagined such heinous weapons? If so, would they have felt that everyone - every one of us - should have unlimited access to those? Even convicted violent criminals? Avowed terrorists? Mentally unstable postal workers? What would the Founding Fathers think about people going into a McDonald's or a school or their workplace and shooting up innocent people with automatic weapons? What would they think about what happened in Oklahoma City in 1995 or on 9/11 in 2001? Could they have even imagined all the types of "arms" available today, and the horrific ways that twisted people use them?

It is reasonable, IMO, to think that the Fathers would have written the Second Amendment differently if they were to write it today. Or at least, since they tended to keep the Amendments short and simple, agree that the courts could clarify that certain limitations do not violate the Amendment's intent. Limitations on certain types of weapons that Joe Everyman can own, restrictions on certain types of people having access to guns - it seems to me that they would have wanted that in today's world. I don't think such limitations go against what they had in mind, even while I recognize my more conservative friends' fear that once you limit certain types of gun ownership, you're on a slippery slope that can lead to a near total gun ownership ban. They've got a point, but I still think the responsible and rational course of action, consistent with what the Founding Fathers had in mind, would be to have some limits on the right to bear arms. We do, after all, need laws that deal with the realities of today, not of those 220 years ago.

Let's consider the Fourteenth Amendment from a similar perspective. Following the Civil War, the states ratified the proposition that "All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States." This, of course, was primarily about making former black slaves, as well as Native Americans (Indians), U.S. citizens. There was no such thing as an "illegal-immigrant" in the U.S. at that time. In 1868, when the Amendment was added to the Constitution, huge swaths of the country were still unpopulated and immigrants were actively encouraged to come to America with few if any restrictions. In fact, the first immigration law in the U.S. wasn't even passed until 1875. Obviously, the implications of granting citizenship to the children of people who had illegally entered the country was the farthest thing from anyone's mind back in 1868.

Fast forward to modern times and ask yourself: would the Amendment's authors, and the state legislators that ratified it, have wanted it to be abused the way that it is today? If those legislators could see the situation today, with all the problems of illegal immigration and with people purposely breaking the laws of the U.S. in order to have their child born here, do you think they would want that child to be rewarded with U.S. citizenship? Obviously, I don't.

I still have mixed feelings about what to do with illegal immigrants overall, as my earlier writings on the topic indicate. But on this one small issue, it seems like there is an obvious and simple answer. Why should we not adjust the Amendment to reflect our modern realities? As with the right to bear arms, our government has an obligation to operate under laws that make sense given today's realities, not in the world as it was 150 years ago. We do, after all, pride ourselves on being a nation of laws; requiring that someone be here in line with our laws in order to get citizenship - how is that a problem? Perhaps something as simple as adding the word "legally" in front of the phrase "born" in the Amendment, although it would probably have to be more like "born to a mother who was legally in the country at the time" - or whatever.

How, exactly, would this modification detract from the Constitution, the rights of legitimate American citizens, etc? It's a huge stretch, IMO, to say that such a minor, simple, and logical change sets a precedent for weakening our Constitution and our constitutional rights. Similarly, the answer to those who say: well, if we change this Amendment, what happens to those who were born here under illegal circumstances before the change? That's a simple one: they are grandfathered (exempt from the change), just as people are usually grandfathered when any new law changes the rules.

As this site's title reminds us, things usually aren't as simple as we think they are. So maybe I'm missing something here. One problem may be that we really don't want to start tinkering with the wording of Amendments; changing Amendments is a serious and difficult process. Well fine; just as with the Second Amendment, we could simply allow the courts to rule that not granting citizenship to children of parents of illegal status doesn't violate the intent of the Amendment. Because, if it's OK to tweak the 2nd Amendment to fit the times, then why doesn't the same apply to the 14th? What's good for the Goose.... as they say.