Rate Watch #770 At Least They Are Talking About It

April 8, 2011
by Dick Lepre
[email protected]
www.loanmine.com

Analysis

A federal government shutdown! Why didn't someone think of this sooner? Can we keep it shutdown until the end of the year? I think that we can get enough high school students to do this (run the government) for free as volunteers. They will be out of school in less than 2 months so the timing is right. Then all the statements about acting like 9th graders will have more meaning.

To be a bit more serious, what is absurd is 1) the small difference between the cuts each party wants and 2) the fact that the numbers they are talking about are completely and utterly insignificant compared to the size of the deficit.

If there is a shutdown will it affect the mortgage business? It would appear that the "monkey wrench" is the processing of IRS form 4606-T which is used to verify your income. Without that, loans might not fund. Stay tuned.

Talking About It

As those of you who have been reading these newsletter for years already know, I have been campaigning for over five years for fiscal sustainability. My "agenda" is neither left nor right. I am not going to tell anyone what tax rates should be. I am not going to tell anyone which government programs should be cut. I simply believe that the attitude of those is D.C. (and I by no means those currently there but everyone in power for decades) has never taken a serious look at fiscal sustainability. We cannot continue to spend $1.5 trillion more than we are taking in. In the past we have had prolonged periods of recession and deficits. The difference now is that entitlement spending (social security, Medicare, Medicaid) is much lager relative to the tax basis. This is a consequence of 1) demographics and 2) years of avoiding the problem.

The best starting point should be Simpson-Bowles. What Congressman Ryan suggested this week also gets the discussion moving. We must not address only items in the budget but also social security and Medicare. Social Security is a relatively easy fix. Medicare is not an easy fix and the failure of last year's Obamacare was that it did not address the core issue which is reducing the cost of medical care.

My belief, roughly, is that Federal spending needs to be decreased and tax revenue need to be increased. Almost nothing should be spared. There are entire departments which should vanish and the military budget should be cut. Again, Simpson-Bowles should be the starting point both regarding spending and taxes.

The government must start to admit that the social security and Medicare Trust Funds have been spent and that without substantial changes the future obligations of these two (Medicare especially) dwarf everything else.

Higher taxes and lower spending will take bites out of GDP but if we do not do both of these we are fiscally domed.

Surveys show, more or less, that most people want this but they they also want nothing that they like to get cut. That is not going to work. Someone needs to tell all of the citizens and other residents of the U.S. that government spending must be cut and taxes must be increased and that this is going to hurt and that everyone is going to lose something that they want from the government. Politicians and the media must start letting the public know how serious the fiscal problem is and the the solutions will be painful.

Ryan is correct in stating that the size of the gap is enormous compared to that which was discussed the previous week. If the two parties could not agree about $60 billion in spending cuts it seems unlikely that they can address the real problem which is around 15 times that size.

A comprehensive path toward fiscal sustainability is likely to hurt all of us in the short run. Not doing this ASAP will only make the problem worse. It must be emphasized that the biggest items are Medicare and Social Security. Any "fix" to the budget which does not make SS and Medicare self-sustaining is merely a hallucination.

If we do not address fiscal sustainability in the next 2 years we are likely to see a sharp increase in Treasury yields which will make the future cost of servicing the national debt much higher than present. Both fiscal and monetary policy are serving to erode the value of the U.S. dollar.

We need to decide what we want and we need to pay for it. Running the nation on one massive negative amortization adjustable rate loan is simply not going work.

 

 

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Dick Lepre
RPM - SF
1400 Van Ness Avenue
San Francisco, CA 94109
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[email protected]
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