Over the Edge?

Why is it always cliffs and crises?

If you’re like me, you’re thoroughly sick of all the talk of fiscal cliffs, budget deadlocks, and back-room last-minute deals that will or won’t avert some Congressional deadline that does or doesn’t threaten to push us over an economic precipice.

Part of the reason we’re so tired of the subject is that it always comes up and no one ever seems to deal with it. It’s like we have chronic fatigue syndrome with regards to the deficit: Reagan deficits, Bush deficits, Obama deficits—it seems that the deficit is perennially criticized by the party that’s out of power, while the party in power funds its pet projects.

It’s important to understand, though, that our current trajectory of debt and deficits is well outside the norm. While the deficit isn’t anywhere close to an emergency, we really don’t want to fritter away any opportunity to deal with it. If you examine a graph, a pattern of volatile but growing deficits emerged starting in 1970, briefly interrupted in the late ‘90s by the peace dividend (from the end of the Cold War) and revenues from the dot-com boom. Well those days are over.

It’s been clear for decades that the US budget would run into trouble when the Boomers started retiring. Before the Financial Crisis, we thought we had 20 years to tweak Social Security formulas and deal with rising health care costs. Now, with the economy weaker and another layer of debt built up from the recession, it’s more like 10 years.

Economist Herb Stein once quipped that if something cannot continue it will stop. Well, it’s time for the brinksmanship and partisan bickering to stop. Because these deficits cannot continue.

Douglas R. Tengdin, CFA

Chief Investment Officer

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