Vermonters for Economic Health

Our Reckoning:

by Tom Licata 2/12/09

The answer to our economic problem is this: We must methodically manage an orderly reduction in our standard of living. We have lived beyond our means, and while there are ways to ameliorate this reduction - which I will touch on later - let me explain just how sobering events really are.

A September 2008 Harvard Business Review article showed that "in 1980, the total value of global financial assets was roughly equal to world gross domestic product (GDP)." In 2007, these same financial assets increased to 356% of world GDP; most of the increase from private and government debt. According to Financial Times columnist Martin Wolf, "the ratio of U.S. public and private debt to GDP reached 358% in the third quarter of 2008." The previous all-time high of 300% was reached in 1933, during the Great Depression. Most of this debt is private, reaching nearly 300% of GDP in 2007. U.S. household debt service (as a percent of disposable income) is at its highest level since the Great Depression.

What are the implications of these numbers? Simply put, there is not enough money – by consumers, businesses or governments - to back up all this debt. Many parts of Europe and Asia are witnessing social unrest, as the implications of this financial reality takes hold.

We are not in the midst of a recession, which is part of a normal "business cycle," we are closer to a depression. Households and businesses are deleveraging, meaning they are attempting to reduce this debt. This "deleveraging process" can occur in four ways: the sale of assets; consuming less and saving more; restructuring of debt; or bankruptcy (where we'll see enormous increases). This "deleveraging process," in turn, is aiding deflation, meaning that prices will generally fall. Slack demand and the "bursting of the bubble" from inflated asset prices - due to the easy credit policies of the past - are also fueling this deflation.

As our Federal Reserve Bank fights both deflation and the bailout of our banking, corporate (think GM), commercial real estate and residential mortgage markets, they do so – literally – by printing money and issuing more debt. As other central banks around the world follow suit, we'll find ourselves in a spiral of currency devaluations and competition in the credit markets on our roughly $10 trillion of U.S. taxpayer bailout programs now going on. Interest rates will rise.

The Vermont Business Round Table (VBRT) recently hosted a forum by the Concord Coalition, a "non-partisan, grassroots organization advocating generationally responsible fiscal policy." Among the disturbing trends presented in their presentation was this: an $82.6 trillion Medicare and Social Security cash deficit. This cash deficit begins in seven short years and ominously grows with our aging, baby-boom generation.

David Coates, a member of the VBRT and retired KPMG partner recently released an analysis of Vermont's rising "mandatory expenditures." It shows approximately $2 billion in unfunded liabilities from Vermont state employee and teacher retirement and healthcare liabilities.

Nearly two years ago, as founder of Vermonters for Economic Health (www.vteh.org), our organization began a series of "Town Meeting Forums" to educate and alert our legislators and the public on these financial matters. VEH identified another $3 billion in unfunded liabilities, for a total of $5 billion in Vermont unfunded liabilities.

A society cannot consume and not produce. During this decade, Vermont government and education spending rose roughly 70%, while Vermont private-sector job growth rose 0%. Growing the economy and creating jobs are the best ways to ameliorate the impact on inevitable cuts in government, education and ultimately our standard of living.

Not only are meaningful regulatory, government, education and tax reforms needed in Vermont, but a reform of culture is needed; a culture that can find its roots in Vermont's 1778 motto of "Freedom and Unity;" a culture that values the human sprit's thirst for freedom, whether that freedom is in the form of the individual, property owner or entrepreneur.