Doug Marshall, CCIM
Market Assessment
Set aside all the arguments for or against the recently passed health care bill. There are good, altruistic people on both sides of the debate that want what’s best for this country.
Forget all that and simply ask yourself this: Where’s the money to pay for it?
Take a look at this simple but frightening chart whose sources are the Congressional Budget Office (in red) and the White House (in orange).
What they are reporting is the best possible scenario – the most optimistic projection that anyone can come up with.
Also remember that whenever Congress passes a new entitlement program, without exception, its estimated cost is always substantially underestimated.
Here’s what the graph summarizes. The Bush administration inherited a surplus from the Clinton years.
But tax cuts, the response to 9/11, and a Republican Congress that spent money like drunken sailors drove the federal government into deficits of around a third of a trillion dollars, annually.
Then, in 2008, the Democrats’ first year in charge of Congress took the deficit up toward half a trillion dollars. Then came the unprecedented deficit of 2009, the year of the financial meltdown on Wall Street and the near collapse of the financial services sector worldwide.
Arguments can be made that some of this spending was absolutely necessary to avoid an economic catastrophe. I am willing to give the Democrats the benefit of the doubt. We will never know for sure.
But now focus on the remaining part of the graph – the years going forward. The projections, mind you, are what the sponsors of “health reform” say will happen if everything goes right for the next 10 years – if all the optimistic assumptions work just the way they hope they will.
By their own forecasts, the money isn’t there.
So what’s the solution? Can we grow our economy fast enough to avoid these deficits? I don’t believe so. Can we tax ourselves to a balanced budget? Not possible.
Do our politicians have the political will to make difficult spending decisions that would reduce our outlays in entitlement programs like Medicare, Medicaid, Social Security, and now health care?
Don’t count on it.
What other alternatives are there? There are really only two: 1) Borrow at levels that are unprecedented in size at a time when the global buyers of our paper – China, Japan and other countries - are beginning to slow their purchases of our US Treasury bills; or 2) expect massive hyper-inflation caused by the government’s ability to print money.
Dr. John Baen, a professor at the University of North Texas, recently spoke to a commercial real estate conference in southern Oregon.
He predicts a 20% chance of a depression and an 80% chance of hyper-inflation, with very little chance of something in between.
Not a rosy picture... My bet in on inflation and, if that is true, how do you best prepare yourself and your clientele for such an event? Historically, what assets benefit during times of inflation?
One of them is real estate of all kinds, but especially commercial real estate that is leveraged with long-term, fixed rate debt.
I believe that those who lock in long-term fixed rate loans before interest rates inevitably begin to rise are going to be the big winners in this coming era of out of control federal deficits.
Sources:
It Takes Money by Joel Belz, World magazine, April 10, 2010
Comments by Dr. John Baen at the Southern Oregon Real Estate Marketing Conference, April 1-2, 2010.
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