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Russ

The Fox In The Hen House

A financial bomb went off recently, and most Americans missed it. Standard & Poores and Moody’s both said they could cut the rating on Greece’s bonds by as much as two notches. A country’s bond rating is essentially its “credit score,” and Greece’s would be barely higher than junk bond status.

Therefore, the debate is heating up. Should the European Union ramp up the bailouts to keep Greece from defaulting on its debts, making it impossible to deny aid to Italy, Portugal, Ireland, and Spain? On the other hand, they could hold their ground and not reward Greece for its decades of fiscal irresponsibility.

Holding back aid could hasten Greece’s default, thereby causing massive declines in the value of the Euro. Helping bailout the debt-ridden countries of the Euro zone would mean printing trillions of un-backed Euros, also causing massive declines in the value of the Euro.

Either way, we have the setting for a modern-day Greek tragedy. Now we must ask two important questions: What was the cause of the financial crisis spreading across Europe, and could that same fiscal catastrophe wash up on our shores?

The cause of the European financial crisis is simple… individual governments have spent far more than they made. Years of over-consumption, bloated government payrolls and massive government debt finally reached critical mass. On the eve of the crisis, big brother Germany said they might lend a hand if Greece would get its budget in order. That meant, among other things, they’d have to cut government payrolls. Human greed then took over. The streets of Athens overflowed with government workers protesting their proposed 1% wage cuts.

Not that pay cuts don’t work. In 1931, Neville Chamberlain imposed government pay cuts of 10%, and helped Britain enjoy its five best economic years in history between 1932 and 1937. Contrast that with the United States during the same period. Because of uncontrolled government debt, we sank deeper and deeper into the Great Depression.

So, compared to Greece, how are we doing today? Greece’s government debt is now a whopping 13% of its Gross Domestic Product. That’s almost twice the average ratio of the rest of the Euro zone.

What is our government debt compared to our Gross Domestic Product? It’s also a whopping 13 percent!

Look at payrolls here at home. Taking the numbers from the end of 2008, U.S. Federal Government average pay was $119,932 compared to $59,909 for private workers. Federal workers now make double what private sector workers make!

A 10% reduction in government payrolls could save about 1.3 trillion dollars over the next ten years, but those pay cuts are unlikely. You see, Congress has the power to grant its own pay raises. It’s like putting the Fox in charge of the Hen House.

Here’s a few bits that I found reported on Yahoo! Finance over the past week:

• Premiums for Medicare Advantage plans offering medical and prescription drug coverage jumped 14.2% on average in 2010.
• GM will bring back 1,200 autoworkers to produce the Chevrolet Cruze compact car at a factory in northeast Ohio.
• Bank of America, won court approval for a $150 million settlement with the SEC over alleged misstatements about the purchase of Merrill Lynch.
• Intel and a group of 24 venture-capital companies will invest $3.5 billion in U.S. technology companies over the next two years to spur domestic job growth.
• Sirius XM Radio posted a $14 million quarterly net income, the first profit since its merger and said it expected to add 500,000 new subscribers in 2010.
• The average cost for 4-year public colleges and universities this year was $7,020 and the average annual cost at a 4-year private college was $26,273.
• TRW Automotive reported a $141 million quarterly profit compared to a $946 million loss a year ago.

• We will always arrange our affairs so that any requirements for cash we may conceivably have will be dwarfed by our own liquidity. Moreover, that liquidity will be constantly refreshed by a gusher of earnings from our many and diverse businesses.
• We make no attempt to woo Wall Street. Investors who buy and sell based upon media or analyst commentary are not for us. Instead we want partners who join us at Berkshire because they wish to make a long-term investment in a business they themselves understand and because it's one that follows policies with which they concur.
• We tend to let our many subsidiaries operate on their own, without our supervising and monitoring them to any degree.We would rather suffer the visible costs of a few bad decisions than incur the many invisible costs that come from decisions made too slowly - or not at all - because of a stifling bureaucracy. 

If you have any comments or questions, please feel free e-mail our office at newswire@jalbertfinancial.com.

Russell K. Jalbert, CFP^®, one of the nation's leading financial professionals, has advised successful individuals in the management and distribution of their wealth for more than 35 years. Russ has discovered many alternatives to conventional investment practices. His priority is to educate people to understand they don’t have to accept risk in order to grow their money.