09.18.09
State of U.S. Financial House
The latest central bank report showed that household net worth grew 3.9% from the first quarter, but still down about 19% since the 3rd Q peak of 2007. Households cut debt by 1.7% annualized in this quarter. All that sounds good on an individual level, but government borrowing surged at a 28% rate owing to aid and rescues packages. State and local governments also incurred more debt, an 8.3% increase annualized. Relative to government debt, what goes up must come down, eventually. This is the part which is most worrisome.
While households become more prudent with their money, so too must the government become a better custodian. Global financial players have pressed the U.S. on this issue, as have American taxpayers. With the federal debt hangover for many years to come, and baby boomers entering the rolls of Medicare, Medicaid, and Social Security (SS), some serious work needs to begin toward putting our house back onto a fiscally sustainable path. Health care reform needs to address misaligned incentives in Medicare, and waste. Pension reform should be considered that creates better generational equity and moves away from clever SS trust fund accounting; Canada’s federal pension fund weathered the financial crisis better than most. It is separated out from politicians’ hands, requires mandatory adjustments for sustainability when things go wrong, and is run with a long-term view. See Boston College’s Retirement Center studies if one wants to dig deeper.
