When it comes to paying our bills, the U.S. is a nation of Wimpys.That's not "wimps," mind you, but "Wimpys." Wimpy, 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. That's because: 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.
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.
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.
If the world is aging, buy health-care stocks that will take advantage of that trend -- take a look at the product pipeline at Sanofi-Aventis ( SNY), for example, or buy dialysis-center owner and operator DaVita ( DVA) 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, BHP Billiton ( BHP) is well stocked with projects that will bear fruit in the rest of this decade. In Canada, look at Encana ( ECA), 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 ( RIO) or Vedanta Resources, 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 Conergy, for example. Or an insurer such as American International Group ( AIG) 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.