TIGER 21 speaker: U.S. can’t pay the bills

By Staff | October 10, 2012 | Last updated on October 10, 2012
3 min read

The next U.S. president will have some tough decisions over the coming years, said Wells Fargo chief economist John Silvia at a recent TIGER 21 event.

“[He will] have to come to grips with the economic situation,” said Silvia. “It will become clear as ever that there is no way to pay the bills.”

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Though the economy is showing some signs of growth (e.g. moderate job gains, household debt service ratio is sustainable), there is still a long way to go. Consumer spending is slow, resulting in lower state sales tax revenues; capital goods orders are slowing down from a surge after the recession; and commercial property has also seen an uneven recovery, said Silvia.

Read: U.S. housing sector to grow at slower pace

Also, small business owners are less optimistic about the prospects for a full economic recovery. This contrasts greatly with big business in America, which seems to be returning to normal, added Silvia.

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Here are a few highlights from the Q&A session:

How will the wave of baby boomer retirements impact the U.S. economy?

Statistics show the majority of retirees have an average retirement account balance between $60,000 to $80,000, which makes them totally unprepared for retirement, according to Silvia.

“These people will be counting on certain entitlements that the country cannot afford to sustain.”

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Also, the U.S. labour force participation rate has increased in 55 plus age group, further demonstrating that boomers are unprepared.

Is unemployment cyclical or structural?

During the past few years, as the U.S. unemployment rate has decreased, year-over-year wage growth has also decreased. This indicates there is a huge structural problem, according to Silvia. If it were just cyclical, a declining unemployment rate would be associated with higher wages because companies would be chasing after skilled workers.

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Because the U.S. is experiencing structural unemployment, printing more money to extend unemployment benefits will not solve the problem, said Silvia. Instead, Americans should look towards a voucher program that would aid displaced workers in obtaining new skill sets.

What are the prospects of America going back into recession, especially if QE ends? In the short run, Silvia thinks the U.S. has just enough consumer spending, just enough housing, just enough commercial real estate, and just enough investment spending, as well as federal, computer and software spending for a 2% GDP.

However, forecasting what happens five months from now is complicated because of the looming fiscal cliff. If it happens and 2% to 3% is knocked off the GDP, then the U.S. is in a recession.

Read: Fed leans toward further easing

The nation has entered unchartered waters in fiscal policy. What’s next?

“In short run things will be fudged, but in the long run we have a real problem and it is coming at us a lot faster than many people expected. We are in a position where we have not really faced up to our problems and they are not resolvable by current policies,” explained Silvia.

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Advisor.ca staff


The staff of Advisor.ca have been covering news for financial advisors since 1998.