The Economy: “Long-Term Scared”

by | Jul 5, 2010 | Healthy Money Relationships, In The News, The Economy, Weekly Column

“Short term bullish, long-term scared.” That’s how Nick Calamos, Chief Investment Officer of Calamos Funds, described the current US economy to a group of financial advisors visiting his firm’s home office last week.

One of the ways I keep current on investment trends is through periodic meetings with managers of funds I include in my clients’ portfolios. The meetings I’ve attended in the past few weeks haven’t exactly left me feeling exuberant about our economic future.

Calamos feels the stimulus money spent by Congress early in 2008 had some positive short-term effect on the economy, but added, “When the stimulus runs out, what happens?”

Economic indicators seem split on whether the economy is in recovery or whether it may slip back into recession. Some of the issues that most concern Calamos are our high national debt, the anti-business climate in Washington, tax increases, low consumer savings rates, and high unemployment.

Probably the most sobering threat to the global economy is that almost every developed country has borrowed far beyond its means. Even though Greece cheated on its financial statements, most other European countries are in just as bad shape.

Because we’ve borrowed so heavily to support the Keynesian model of running huge deficits to buoy a falling economy, Calamos predicted our debt to GDP ratio is going to 100%. It’s currently estimated at 94%. Just last month I listened as portfolio managers for American Century Investments predicted that the “best case” scenario for the US was a debt ratio of 200% by 2040. Worst case was 400%.

Why is a lot of debt a bad thing for a country? “A high debt level increases vulnerability,” noted Calamos. Some economists say that once a country passes the 90% debt ratio level, its ability to respond to economic downturns, natural disasters, and military conflicts becomes muted. No country can sustain its lifestyles or global economic leadership with that debt load.

Certainly, the US had a higher debt ratio just after World War II, when it was around 125%. One big difference is that almost none of our debt was owned by foreign governments. Today, almost 50% of our debt is owned by China and Japan, further compromising our economic options.

Most European countries, seeing the handwriting on the wall, are abandoning the Keynesian model of borrow and spend, and are raising taxes while slashing spending. For example, England is doubling its capital gains tax, increasing its national sales tax to 20%, and talking of taxing incomes of under $50,000 at a 40% rate. The Times of London on June 10 also reports the new government is slashing “hundreds of thousands” of public sector jobs and warning citizens that things will be very hard for the next several years as they struggle to pay back the massive national debt.

Unfortunately, while the US has massive tax increases planned for 2011 and 2013, there is no such talk of slashing spending. Instead, President Obama implored world leaders at the G-20 meeting to follow the US lead and keep borrowing and spending to stimulate their economies. The fear, a page from the Keynesian economic model, is that a move to balancing budgets and paying down debt today will sink the world into a global depression.

Continuing to borrow and spend, however, may only postpone the inevitable. As European countries shift away from Keynesian economics, advisors like Calamos will no doubt be watching closely to see what happens.

Next week I’ll report further on the Calamos Funds meeting, as well as offering a few thoughts on what individuals can do in the face of “long-term scared.”

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