Tatum LLC

Sam Norwood is a Senior Partner at Tatum LLC who provides financial staffing and advice throughout the country and monthly conducts the Tatum Survey. As our partners in their review of the economic conditions we have found their monthly insight to be one of the highest value added insights to the economy. Sam overseas the monthly survey and his thoughts here reflect his personal opinion of the economy.

"I am trying to be optimistic about the mid-to-longer term, but my view is actually quite pessimistic. At this stage we cannot grow our way out...it would take double digit growth for over a decade, and this is not in the cards. We3 cannot tax our way out...it would take 15 percentage points added to each level of the marginal tax rates. This is not in the political cards, and even if it was attempted, the result would be economically disastrous. Can we borrow our way out? I don't think so. Currently our own Fed and the Chinese account for over half the purchases of new Treasury bills, notes, and bonds. What happens if China boycotts our debt, just as the OPEC nations stopped shipping us oil for a while in 1973? And, while our Fed probably NEEDS to be buying our debt now in order to keep interest rates low (artificially) what happens when the time comes to unwind the excess levels of liquidity that has been injected to bail the world out of the crash a year ago? No, I think borrowing is also not in the cards to provide a way out. If the healthcare passes, we will be adding another very expensive entitlement our spending, like Medicare/Medicaid and Social Security. If you consider that the sum of entitlements, military, and interest on the debt account for over 80% of Federal spending, that leaves less than 20% that is discretionary. It would take a catastrophe to bring about meaningful spending reductions. Monetary policy can accommodate only so much in accommodating irresponsible deficit spending. Projections currently visualize trillion dollar deficits many years in the future. Typically these projections are optimistic. Then add universal healthcare which the Liberals are now seeing as a fundamental right. The outlook is for an unsustainable trend. As Herb Stein devlared in a profound moment of insight: An unsustainable trend will come to an end". Wonderful. We just do not know how or when, but my view is that it will be a wrenching period of adjustment.

This is not the first time in history that irresponsible governments have gone through extended periods of spending beyond their capacity to tax. The ultimate solution has always (not just sometimes, but ALWAYS) been to debauch the currency. Just run the monetary printing presses and let inflation ultimately bail out the borrowers. We will pay off our debts with cheaper dollars. Our Federal government is not the only entity over its head in debt. How about our states, such as California? The states cannot bail themselves out through currency devaluations (and therefore self-imposed inflation. Therefore, they have a Constitutional requirement to balance their budgets. But many states, especially the more "progressive" are ignoring this legal requirement. They are also playing cook-the-books to hide the biggest part of their liabilities. In the case of California, the reported general obligation debt is approaching "only" $100 billion. State Agency debt, not included in the G.O number, is over $200 billion, and unfunded pension liabilities are also over $200 billion. So, California's debt is over a half a trillion dollars. The rating agencies are threatening to cut their debt ratings. There is talk of the Federal government (our tax dollars) guaranteeing all state debt. If we thought there were corporations that were too big to fail, how about states? States are too big to fail. They would also benefit from a dose of inflation so they can pay off their debts with cheaper dollars.

Individual households are deeply in debt. Much of the middle class is maxed out on their credit cards after having used their homes as ATM machines in refinancing to support their excessive lifestyle for many years. Lower classes are in worse financial trouble. A large percentage of homes are under water financially. A dose of inflation could bring them back so their values might again be higher than the mortgages financing them. Suppose by magic inflation were to double the value of homes and double personal income overnight. Wow. Homeowners could instantly afford their mortgage payments with their higher income. I believe that a populist government, recognizing that there are more voters that are borrowers than lenders, and not being very mindful of the interim turmoil caused by an inflationary spiral, might see inflation as a positive thing and would hope to see more of it. The last thing any administration wants to do is to see the collapse happen on their watch. No administration wants to be the one that has to reduce spending, particularly reductions in "entitlements".

Greece is a perfect example of what could happen in our states. Facing certain defaults on its debt, Greece had to admit to hiding 3/4 of their deficit. The IMF is stepping in with requirements that Greece must implement a severe austerity program that will last for many years. There is rioting in the streets. In Europe this could spread to Spain and Portugal, maybe Italy and Ireland and Belgium. While Greece is small, if the other countries fell into the same situation, the stresses would be come large. These countries are in debt way over their heads through an imbalance in receipts versus disbursements. They cannot bail themselves out using the traditional method of debauching their respective currency because their currency is the Euro. Germany, and to a lesser degree, France, are the only internal sources of European bailouts. How do you think the German and French taxpayers are going to feel about bailing out their less responsible neighbors? This situation could rip the EU apart.

A part of the U.S. investment community seems to be unmoved by these developments. They look at current inflation and say, "What inflation? As long as the Economy is weak we don't have to worry about inflation. You can's push a string. It takes rising demand to pull the string for rising prices". Well, I for one would hope that the current statistical recovery will morph into a full fledged period of economic growth, when we will indeed see the CPI basket of goods and services rise. But inflation can also be seen as the declining purchasing power of the dollar. By flooding the market with liquidity (for instance through the Fed buying huge amounts of Treasury securities) we inevitably diminish the value of each dollar, and this will inevitably show up in a rising CPI.

The overall point of all of this is that as I look out over the next 5 years I am pessimistic because I do not visualize the world getting fiscal control. The ultimate adjustment, when it comes, will be horrific. In the near term, I sometimes feel like the guy who has jumped off roof of the 20-story building and says, as he passes the 11th floor, well, this doesn't seem to hurt a bit."