When it comes to paying our bills, the U.S. is a nation of Wimpys.
That's not "wimps," mind you, but "Wimpys."
, for all of you who have less gray hair (or just more hair) than I do, or who spent fewer hours in front of a TV when you were a kid, is Popeye's perennially mooching friend. He was famous for his plea, "I'd gladly pay you Tuesday for a hamburger today."
Which is why the big debts that we're running up to pay for today's consumption -- ranging from the federal budget deficit to the current-account deficit -- worry me so much. I have argued that the record $805 billion current-account deficit that the U. S. ran up in 2005 was even worse than it sounded.
The long-term trends, if left unchallenged by our politicians, would make the problem bigger year by year.
There's very little chance that our political leaders will tackle any of our debt problems -- from the federal budget to the current-account deficit -- until the handwriting on the wall is written in letters of fire 6 feet tall.
In this column I'm going to take a look at the way these deferred bills are putting the squeeze on all our futures and what you and I can do about it as investors and individuals.
The Global Tease
The period between 2010 and 2030 will see overseas investors gradually present their IOUs for payment. Right now, the world is awash in excess capital, largely the result of mindboggling savings rates in Asia.
That makes it easy for the U.S. to fund its twin deficits by selling bonds, equities and assets to overseas investors. And borrowing this money is cheap. A 10-year U.S. Treasury bond yields just under 4.7% right now. That's near 20-year lows for yields, which averaged 6.4% from 1986 through 2005.
You've heard of teaser rates, the ultralow interest rates that mortgage lenders use to entice you into buying a new house or borrowing on the equity you've built up in your old one. Well, that's exactly what this low 4.7% rate -- just 1.1% after inflation -- is. It's a teaser rate being offered by global investors to U.S. consumers and taxpayers.
And it has the same problem as any teaser rate. The low initial rates encourage massive borrowing, because the monthly payments at the teaser rate are so low. Once that teaser rate expires, however, those monthly payments skyrocket and may indeed turn out to be more than the borrower can afford.
Why should the global teaser rate go up for the U.S.? Two reasons:
Overseas investors are going to need their own money back to pay for their own old age.
Japan is the biggest holder of U.S. Treasuries, and, demographically, it is the oldest country in the developed world. Europe isn't far behind. The U.S. is aging, too, but at a comparatively slower rate.
The real demographic story, however, is taking place in China and India. By 2020, the median age of China's huge population will be higher than that of the U.S. India is further behind, but by 2050 the median age of its population will be 37.9 years, making the country as old as the U.S. is today.
China and India are both going to get old before they get rich. Because of global demographics, we're looking at a world in transition from a period of surplus capital to a world of tight capital as aging populations go from savers to consumers of savings. Tighter capital means higher interest rates.
Overseas investors may lose faith in our intention to pay our debts.
Sovereign nations saddled with too much debt have an option that's not available to the overstretched homeowner. Instead of declaring bankruptcy, they can just roll the printing presses and create money in order to inflate their way out of the debts.
But overseas investors aren't likely to sit still as the value of the dollars they hold and the dollars they receive in interest are slashed as the presses roll. As countries such as Argentina have learned, once investors have decided that the government has lost all discipline, they will demand punitive interest rates. Short-term interest rates broke 100% in Argentina in 2002, for example. Once a country has forfeited the faith of the markets, it takes a long time to earn it back. In Brazil, now lauded for its fiscal responsibility, the equivalent of the U.S. federal funds rate was above 16% in December.
Stealing From the Future
Look at a recent bit of budget sleight of hand in Washington and see how much confidence you'd feel if you were a lender to the U.S. The Bush administration and the Republicans want to extend the tax cut on dividends and capital-gains investment that will otherwise expire at the end of 2008.
Whether you think this is a good idea or not, you'll have to agree that it's expensive. The cost of the two-year extension proposed by the House of Representatives is $51 billion, according to the Center on Budget and Policy Priorities. That's a hard sell when, even by the government's accounting, the budget deficit is set to swell to $423 billion in fiscal 2006, a new record in dollar terms.
But Congress knows how to fix the problem. It's called, "Shove it into what are called the 'out' years." Those are the years beyond the five-year period covered by the government's budget projections.
So here's one idea currently in discussion between House and Senate committees: The extension of the dividend and capital-gains tax cut would be paid for by a measure to allow individuals to convert their current retirement accounts, which require you to pay taxes when you withdraw the money, into new retirement accounts that offer tax-free withdrawals. Investors would have to pay taxes at the time of the conversion, and that would produce a huge short-term boost to tax revenue.
Of course, the government would lose all those future taxes on the withdrawals. And that just adds to a huge future deficit in the years when baby boomers start to retire, when spending on health care and Social Security are set to soar.
The politicians who created these problems will be long gone by the time we have to pay the piper. But we're going to get stuck with the bill -- for the federal budget deficit that's being piled up in the out years, for the trade and current-account deficits, and for the consumer debt that's powering the consumer spending boom.
A Five-Step Plan
So what do we do about it?
Since you can't trust their accounting, do your own and be brutally honest.
You've probably got some plan for retirement, but do you have a plan to pay for health care after you retire? Fidelity Investments does an annual calculation of how much a couple without employer-sponsored health care should set aside to pay for health-care costs after 65. This year, the recommended health-care nest egg hit $200,000, up 5.3% from last year and up from $160,000 in 2002, when Fidelity started its surveys.
Save, save and save some more.
It won't do the trick alone, but without capital, you're at a huge disadvantage in a capitalist society. Right now, you should be saving for retirement, and for health care in retirement and for the kids' college education -- and for a rainy day, too. There's no way you can do all of that without some pain, so grit your teeth and think of saving like exercise. You may not enjoy it, but your future will be a whole lot brighter if you do it every day.
Invest what you've saved as intelligently as you can.
Every dollar you receive from your investments is a dollar that you don't have to save or earn at your job. I'd divide my portfolio in half. Use half as a core that -- either through individual stocks or mutual funds (or ETFs) -- puts you on the side of identifiable long-term trends.
If the world is aging, buy health-care stocks that will take advantage of that trend -- take a look at the product pipeline at
, for example, or buy dialysis-center owner and operator
on the next dip.
Think the dollar is headed lower over the long term? Think stocks in countries such as Australia and Canada with lots of hard-asset exports backing their currencies. In Australia,
is well stocked with projects that will bear fruit in the rest of this decade. In Canada, look at
, a natural-gas producer that has traded international assets for reserves closer to home.
Think younger (populations) are better, at least for a while? Look at Brazil's iron-ore giant
Companhia Vale do Rio Doce
, a zinc-and-copper producer with major mines in India. And look for shares of companies that are working, for a good profit, to solve the problems looming ahead. A solar-systems wholesaler such as
, for example. Or an insurer such as
American International Group
with a big presence in the exploding market for insurance in Asia.
Put the other 50% into shorter-term opportunities that are likely to be created by the volatility of the years ahead.
Pay up for education.
Whether it's for yourself or your kids, it's the single factor likely to make the most difference in the years ahead. Wage growth stagnated last year, with real wages -- that's wages after inflation -- actually falling from the fourth quarter of 2004 to the fourth quarter of 2005 by 0.8%. If that's the beginning -- or, some would argue, the continuation -- of a trend, then the only way to fight back is by constantly upgrading your skills. And our children are now competing in a global economy where the best jobs are increasingly likely to go to the best educated -- no matter where they live -- and where the only way to justify higher pay is by higher competence or productivity.
Throw the bums out.
I'm not here to preach to you about how to define a bum, but it's clear that we aren't getting the foresight and leadership we need out of our political leaders of either party. So why put up with them? Do more than vote -- that's a minimum. Give money, organize, stand on the table and yell, whatever. Force them to pay attention.
Otherwise, we'll deserve the politicians we get.
At the time of publication, Jim Jubak owned or controlled shares of the following equities mentioned in this column: American International Group, Conergy and Encana. He does not own short positions in any stock mentioned in this column.
Jim Jubak is senior markets editor for MSN Money. He is a former senior financial editor at Worth magazine and editor of Venture magazine. Jubak was a Bagehot Business Journalism Fellow at Columbia University and has written two books: "The Worth Guide to Electronic Investing" and "In the Image of the Brain: Breaking the Barrier Between the Human Mind and Intelligent Machines." As an investor, he says he believes the conventional wisdom is always wrong -- but that he will nonetheless go with the herd if he believes there's a profit to be made. He lives in New York.