Debt: Friend or Foe

The Obama Administration and leading economists hope to revive the economy through low interest rates and corporate capital spending. My belief is that our huge record debts at all levels of the economy coupled with people not saving enough will continue to stall our economic growth through 2015.

The American public does not save enough anymore. Why is this important? Because savings in bank accounts, money market funds, mutual funds, retirement accounts are the real fuel for economic expansion, not government spending. Why don’t we save? One reason is consumerism; the desire to always purchase and not to save. Many consumers would rather have the newest car, boat, computer, television, shoes, whatever, than deposit cash in savings. Another reason for lack of saving; the emergence of the 401(k) funds with matching employer money began the switch to defined contribution plans where the employees were expected to save for retirement. This replaced a pension in the private sector with the employer determining the saving contribution and management of the fund. Now people are expected to save for their own retirement instead of an employer contributing to a pension trust.

In the 1990’s single family homes now have four/five bathrooms, high school students had to have cars, education costs outpaced personal income growth, vacations more expensive, thus no saving and increased use of credit. Corporations and the public use debt to provide for income generating assets and better quality of life. In turn income generating assets create more profits and higher personal income can pay back this debt. But with the market and real estate crash of 2008 the ability to pay back this debt has shrunk.

Debt is now a foe, sapping government funds, draining retirement savings, and pushing corporations to cut costs to payback this debt. A growing generation of Americans will come in to retirement with very little money to live on. This will increase more government spending for Social Security and Medicare to support more and more elderly Americans.

Americans must begin to think less, our quality of life can still grow but we need to spend less and save more. Downsize our life style, the American dream of home ownership will never happen for some of us, do we really need a television and computer in every room? In doing this future generations will have more resources and more equity. Corporations can make their profits, pay their dividends and as our quote of the month from Henry Ford says: “A business that makes nothing but money is a poor business.”

JAKE ASS OF THE MONTH – Tough choice this month, Arnold Schwarzenegger. Mr. Schwarzenegger, hasn’t the histories of Richard Nixon, Tiger Woods, Bernard Madoff and John Pomierski tells you that “one way or another, they always find out.”

Men and women in power, with social responsibilities continue to think they can get away with being sleazebags. One good thing about all this, Arnold does not have to worry about dyeing his hair that awful red/brown tint anymore; his youthful looks have nothing to do with his public image anymore. Mr. Schwarzenegger might be qualified now to run the IMF but his movie career could be over.

BIRTHDAYS THIS WEEK – Birthday wishes and thoughts this week to Kris Draper (40), Bob Dylan (70), Clint Eastwood (81), Heidi Klum (38), Brent Musberger (72), Joe Namath (68), Larry Robinson (60), Charlie Watts (70).

BUSTING THE CAP - Dow Jones: "The Treasury Department auctioned $56 billion in new debt Tuesday and Wednesday, enough to take the U.S. over its federal debt ceiling when the three- and 10-year notes settle on Monday. Treasury officials last month flagged May 16 as the day the government would hit the $14.294 trillion debt limit. ... As of Tuesday, total debt subject to the limit was $14.274 trillion ... The federal budget deficit widened in April, with the government spending $ 40.49 billion more than it collected last month, a Treasury Department report said Wednesday."

WHAT WILL HAPPEN? NOTHING GOOD - Princeton professor and former Fed Vice Chair Alan S. Blinder in a WSJ op-ed: "What happens if we crash into the debt ceiling? Nobody really knows, but it's not likely to be pretty. .... If we hit the borrowing wall traveling at full speed, the U.S. government's total outlays ... will have to drop by about 40 percent immediately. How in the world do you do that? No one really knows. ... At some point, Mr. Geithner could wind up brooding over horrible questions like these: Do we stop issuing checks for Social Security benefits, or for soldiers' pay, or for interest payments to the Chinese government? Such agonizing choices are what make default imaginable."

INDY 500 – Dan Wheldon wins the Indianapolis 500 mile race on the last lap over rookie J.R. Hildebrand, Graham Rahal third, Tony Kahaan fourth and Scott Dixon fifth. Danica Patrick over rated again. You sure you want her NASCAR?

CHAMPIONS LEAGUE FINAL – Barcelona 3 – Manchester United 1, Lionel Messi is the best soccer (football) player on the planet. The difference between this soccer and MSL (American) soccer, night and day.

BUCKEYE NATION - Embattled coach Jim Tressel, two months after apologizing for fallout that resulted in suspensions for him and several of his players, has resigned from Ohio State. "After meeting with university officials, we agreed that it is in the best interest of Ohio State that I resign as head football coach," Tressel said in a statement Monday morning. "The appreciation that Ellen and I have for the Buckeye Nation is immeasurable."

We feel deeply for Ohio State this morning, NOT!

COMMENCEMENT 2011 – Congratulations to B.E. for her doctorate degree, time to relax and smell the roses. Congratulations to R.H. 48 students who graduated with M.B.A. degrees, remember this, “take your careers and work seriously, but never take yourself seriously.”

RIP MARK HAINES – R.R. and the rest of the financial world was devastated to learn this past week of the death of CNBC's Mark Haines at age 65. Haines, the tough but warm founding anchor of "Squawk Box" and long-time face of the network, was a television genius capable of making even the most arcane financial discussions lively and engaging. And he was pretty much immune to spin, often trading tough words with top CEOs. Every morning we watched Mr. Haines on Squawk Box and Squawk on the Street he did something to make us seem smarter than we actually are. He was a giant and will be deeply missed. CNBC story: http://bit.ly/jZcBY3 NYT story: http://nyti.ms/mBAe3g

MEMORIAL DAY – two words, “Thank You.”

ON MEMORIAL DAY, we're humbly grateful for those who sacrifice. Pentagon casualty figures: Operation Iraqi Freedom - total deaths, 4,421; wounded in hostile action: 31,931. Afghanistan - total deaths, 1,475; wounded in hostile action: 11,541.

Next week, here come the summer movies.

Until next Monday, Adios.

Claremont, CA
May 30, 2011

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