[Mb-civic] Stepping back and looking at the big picture: Is this the end of Medicaid and social security no matter who gets elected? Your thoughts please?

[Jim Fouratt]

Well this certainly shook me up ... As someone who will be dependant on both
programs to survive in the future... Any ideas of what to do ... Neither
party is realistically looking at these issue,

Jim 

------------------------------------

ECONOMIC EXPERTS OUTLINE PRECARIOUS FINANCIAL SITUATION (Georgia Anne Geyer)
August 20, 2004

By Georgie Anne Geyer

WASHINGTON -- In this season of political disunity and destructive
campaigning, one diverse group of Americans is coming together on a campaign
subject that ought to be of greatest importance to us all -- the financial
stability of the nation.


Paul Volcker, former chairman of the Federal Reserve (news - web sites)
Board and a Republican, says we face a 75 percent chance of a financial
crisis within five years. Robert Rubin, former economic chief under
President Clinton (news - web sites), says we are confronting "a day of
serious reckoning" and that "the traditional immunity of advanced countries
like America to a Third World-style crisis isn't a birthright."

But perhaps Peter Peterson, former chairman of the Federal Reserve Bank in
New York, chairman of The Blackstone Group and a moderate Republican, put it
most succinctly. "We are not paying our own way," he says. "As a nation, we
are running on empty. If the ultimate test of a moral society is the
heritage it leaves to its grandchildren, I would say we are failing that
test."

In short, these men -- our best and brightest -- are telling us that, while
the nation is fixated on delusions of empire in the Near East and illusions
of omnipotence, we are simply going broke.

"There are three realities we must deal with," Peterson said at a recent
meeting at the Institute for International Economics here. "First, we are
risking our national security to fight two wars: one overseas and one at
home. We have seriously underestimated the cost. Our military is stunningly
successful, but it is also stunningly expensive. One billion dollars a week
for just two divisions in Iraq (news - web sites) -- and we have no war
budget!

"The second new reality is our huge foreign currency account deficits.
Currently we import $4.4 billion of foreign capital a day. Even the
International Monetary Fund (news - web sites) is giving us hell. Our
borrowing is at unprecedented levels for an industrialized power. None of
the specialists believe that this is sustainable, and half of the experts
say we risk a hard landing. America must consume less and save more, export
more and import less."

Finally, Peterson points out that America is part of an "aging world," with
77 million of the baby boom generation coming to middle and old age in this
decade. Yet Americans today expect endless Social Security (news - web
sites), Medicare and other entitlements that are dangerously close to being
unfundable.

All of this and more is detailed in clear and crisp prose in Peterson's new
book, "Running on Empty: How the Democratic and Republican Parties are
Bankrupting Our Future and What Americans Can Do About It."

I don't usually review books (just a good way to lose friends, I always
thought), but thoughtful Americans owe it to themselves and their country to
read this book and consider its message. We shouldn't need men like
Peterson, Volcker and Rubin to tell us what we can all see and feel -- that
in general we're not behaving like a stable country should. And yet we go on
and on with it.

Peterson takes both political parties to task in his book. The Democrats
went from the New Deal (a necessity then) to a culture of entitlements with
their benefit lobbies that never end -- although the funding long ago did.
The Republicans did their part by signing on to their own form of voodoo
spending without taxation. Ironically, it was Bill Clinton (news - web
sites) who balanced the budget.

But above all, Peterson wonders whether we as a nation are deeply and
psychologically the sources of this "deficit culture."

"A lot of things happened in our culture the last 40 to 50 years," he mused
that day. "It's reflected in the boomer generation. Somehow we've got to get
the country reoriented to our long-term future. The '60s had a great effect
on the country. Something cultural is going on in the United States which
makes the long-term problem more serious."

When you complicate those cultural changes with the unfunded imperial
delusions of this administration, one has to question whether we are not
already in an unsustainable short term.

Yet there is hope to be found in Americans such as these. To our
considerable relief and expectation, we find groups like this one --
essentially moderates and rationally minded people from the centers of both
political parties -- finally coming together again.

The 9/11 Commission is another example. The extraordinary response to its
elegantly honest report shows that there is some degree of hunger out there
for this state of mind.

The next challenge is to integrate these budding groups -- these more
traditional Americans -- into mainstream American life.

_____________________________________________________________________

Speeches Ignore Impending
U.S. Debt Disaster;
No Mention of Fiscal Gap,
Estimated as High as $72 Trillion


By Caryolyn Lochhead
San Francisco Chronicle
Sunday, September 12, 2004


WASHINGTON -- The first of the 77 million-strong Baby
Boom generation will begin to retire in just four years.
The economic consequences of this fact -- as scary as
they are foreseeable -- are all but ignored by President
Bush and Democratic challenger John Kerry, who
discuss just about everything but the biggest fiscal
challenge of modern times.

Yet whoever wins the 2004 race will become the first
U.S. president to confront what sober-minded experts
across the political spectrum describe as an
impending "fiscal catastrophe" lying right around the
corner.

Astronomical federal debt, coming due as the Baby
Boom generation collects Medicare, Medicaid, and
Social Security, is enormous enough to swamp the
promises both candidates are making to voters,
whether for tax cuts, health care, 40,000 more
troops, or anything else.

"Chilling" is the word U.S. Comptroller General
David Walker uses to describe the budget outlook.

"The long-term budget projections are just horrifying,"
adds Leonard Burman, co-director of tax policy for the
Urban Institute. "I've got four children and it really
disturbs me. I just think it's irresponsible what we're
doing to them."

What these numbers portend are crippling tax
increases on workers, slashed benefits for retirees,
gutted budgets for homeland security, highways,
research and everything else, and an economic
decline or a financial collapse that devastates the
middle class, as happened recently in debt-strapped
Argentina. Eventually, analysts insist, someone --
today's children or tomorrow's elderly or both -- will
pay this debt.

Traditional budget measures used by politicians and
the press give what Walker and many others call a
highly misleading view of the U.S. debt. These focus
on publicly held debt already incurred, now at $4.5
trillion, or 10-year budget forecasts like the one
released last week by the Congressional Budget
Office showing a record $422 billion deficit this year
and a $2.3 trillion 10-year deficit.

'Fiscal gap' in the trillions

But these figures, worrisome enough, are deceptive
because they ignore future liabilities such as Social
Security and Medicare payments to the Baby
Boomers. An array of government and private
analysts put the actual U.S. "fiscal gap," which
means all future receipts minus all future
obligations, at $40 trillion (Government
Accountability Office) to $72 trillion (Social
Security Board of Trustees).

These are not sums but present-value figures, heavily
discounted to show in today's dollars what it would
cost to pay off the debt immediately. The International
Monetary Fund estimates the gap at $47 trillion, the
Brookings Institution at $60 trillion.

"To give you idea how big the problem is," says
Laurence Kotlikoff, economics chairman at Boston
University, who has written extensively on the subject,
to close a $51 trillion fiscal gap, "you'd have to have
an immediate and permanent 78 percent hike in the
federal income tax."

These obligations are not imaginary. And unlike the
1980s and 1990s, economic growth cannot bail out
the government because the Baby Boom retirement
is at hand. Those born in 1946 will reach age 62 in
2008, allowing them to take early retirement and
receive Social Security benefits.

"It's a number that's so large that people find it
implausible, and so they don't think about it," said
Alan Auerbach, an economist and the University
of California at Berkeley who studies the issue and
consults for the Kerry campaign. "But it's based
simply on the projections we have for Social
Security and Medicare. People aren't making
these numbers up."

A pathbreaking study by Jagadeesh Gokhale of
the Federal Reserve Bank of Cleveland and Kent
Smetters, a former deputy assistant secretary
of the Treasury Department -- commissioned by
former Treasury Secretary Paul O'Neill --
estimated a $44 trillion fiscal gap. It laid out a few
painful options on how to meet the liabilities:

-- More than double the payroll tax, immediately
and forever, from 15.3 percent of wages to nearly
32 percent;

-- Raise income taxes by two-thirds, immediately
and forever;

-- Cut Social Security and Medicare benefits by
45 percent, immediately and forever;

-- Or eliminate forever all discretionary spending,
which includes the military, homeland security,
highways, courts, national parks, and most of
what the federal government does outside of the
transfer of payments to the elderly.

Such corrective actions grow more severe each
year. Waiting just until 2008, the end of the next
presidency, would mean raising the payroll tax to
33.5 percent instead of 32 percent, the study found.

Gokhale said that fresh numbers from the Medicare
trustees show the fiscal gap has since grown to $72
trillion, trillion of that for Social Security and an
astonishing $62 trillion for Medicare, the government
health care program for the elderly.

"The long-term picture is pretty bad," Gokhale said.

Election's absent issue

These numbers are seldom discussed, least of all
in the 2004 presidential race. Ironically, as the Baby
Boom retirement has neared -- and the remedies
grow more painful -- political discussion has faded.
Gone is Ross Perot's anti-deficit crusade. Gone is
Newt Gingrich's call for Medicare restraint. Gone is
Al Gore's "lockbox" for the Social Security surplus.

Instead, Kerry and Bush promise only to halve the
current deficit in four years -- both "relying on pretty
imaginative accounting to get there" said Burman --
while promising more spending and more tax cuts.

Yet today's deficit is a tiny fraction of the government's
actual liabilities, which are so daunting they promise
to make Bush's tax cuts a distant memory and Kerry's
health care plan a fantasy.

While Bush and Kerry propose to address parts of the
problem, "the numbers don't add up on either side,"
Walker says.

Medicare makes up the bulk of these liabilities, driven
mainly by the expanding elderly population and rapidly
rising health costs. Social Security, more often
discussed as a looming problem, actually accounts for
far less in future debt.

While Congress squabbles over whether the Bush
administration hid the new prescription drug benefit's
10-year cost -- pegged by the White House at $534
billion versus CBO's $395 billion -- the actual liability
incurred by the new drug benefit is estimated at $8
trillion to $12 trillion.

Kerry and Democrats call the drug benefit inadequate.
They would do little to restrain Medicare costs other
than allowing the importation of price-controlled drugs
from Canada.

Bush and Republicans added the drug benefit along
with costly subsidies to providers. Even optimists do
not expect their modest market reforms to cut costs.

Promises, promises

Kerry has promised not to cut Social Security. "I will
not cut benefits," he said recently. "I will not raise the
retirement age."

Democrats generally cite "trust fund" numbers that
show Social Security -- and Medicare to a lesser
extent -- remaining solvent for decades, even though
government officials repeatedly call the numbers an
accounting fiction. CBO director Douglas Holzt-Eakin
last week said the funds contain nothing but
"electronic chits" that measure government
obligations to itself.

Bush proposes adding private accounts to Social
Security for younger workers, which could reduce
future government obligations, but would do so by
diverting a portion of the payroll tax, adding $1
trillion to the short-term deficit. That might have
been feasible when Bush took office in 2000 facing
a projected $5.6 trillion surplus, but the surplus is
gone. Similar plans in Congress that instead rely
more on benefit cuts have gone nowhere.

"The country's absolutely broke, and both Bush and
Kerry are being irresponsible in not addressing this
problem," Kotlikoff says. "This administration and
previous administrations have set us up for a major
financial crisis on the order of what Argentina
experienced a couple of years ago."

If this sounds farfetched, former Bush Treasury
Undersecretary Peter Fisher and former Clinton
Treasury Secretary Robert Rubin both alluded to
such a scenario at a June budget forum in
Washington.

"Having been involved in markets for a long, long
time," Rubin said, "I can tell you these things can
change unexpectedly and without warning,"
referring to potential financial market reactions to
the U.S. fiscal position.

Fisher warned of a "pivot point" when "the collective
wisdom of bond traders thinks that the deficit horizon
has turned," adding, "Both Bob and I are nervous."

The world has seen fiscal imbalances of this sort before,
in Asia and Russia in the late 1990s and more recently
in South America. Such financial panics can be
triggered by any number of events -- a flight from
Treasury bonds by the foreigners who buy much of the
U.S. debt, for example -- if investors' views of the
market, which are focused on the short term,
suddenly change.

"If you look at financial crises, they occur seemingly
overnight," Kotlikoff says. "More and more pieces of
straw drop on the camel's back, and all of a sudden,
the camel collapses. ... Nobody knew exactly what
day Argentina was going to go south or exactly what
day Russia was going to default. The timing is up for
grabs."

But early signs of a problem are now appearing,
analysts say, starting with the mounting deficits under
Bush caused not just by the recession and terrorist
attacks but also by enormous spending increases and
tax cuts. The brief window of surpluses that appeared
during the late 1990s economic boom offered a chance
to address long-range liabilities, but those surpluses
now are gone.

"Maybe the public doesn't want to hear it," Kotlikoff
says. "Maybe politicians think ... the American public
can't understand the truth or hear the truth or bear the
truth. I think this is garbage. I think that people care
about their kids and grandchildren and need to know
the dangers facing them -- and us."

_____________________________________________________
And what to do about it:

Richard Russell (Dow Theory Letters):

"Just as in the year 2000 stocks climbed higher than almost anyone thought
possible, before this bear market breathes its last, I'm betting that stocks
will sink further than even the bears think possible.

You may wonder what set of circumstances could bring about such an extreme
of undervaluations. One answer (discussed above) is unfunded liabilities.
This piece should give you some idea of what can happen before this bear
market is over.

By the way, after reading this piece you will better understand the reason
for holding gold. I think as we move closer and closer to the debt reality,
gold will start heading higher. Technically, from a strict accounting
standpoint, "the country's broke." As this fact and its implications start
hitting the investors, I believe there will be a move to gold, then a rush
for gold -- and finally a panic for gold.

The reason -- gold, unlike everything else that is weighted down with
debt -- can't go broke. Gold is the only intrinsic money. When the chips are
down and reality hits, the investors of the world, to their horror, will
realize that all paper currency is merely a central bank-generated note.
It's the same currency that the Founding Fathers warned against in the
Constitution."



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