Get Your Money Out of Stocks, Now!

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Jon Markman at MSN Money has some very wise advice for 401K investors with savings in stocks. While he is focusing in on market forces and indicators, there is a broader background to the Bear market that is upon us. That background includes politics, economics, and what I call the "empty reserve" factor.

Despite what politicians tell you, our national debt and the interest on that debt is seriously impinging upon our nation's ability to bounce back from another major national fiscal hit, like 9/11 or Katrina. Under current laws already passed since 2001, our national debt is going to grow to over 11 Trillion dollars in just the next 5 years. And that does not include any new spending, new disasters, or new overseas military engagements.

11 Trillion national debt will be unsustainable for workers from 2011 to 2075, for the following reasons. 1) Entitlement tax increases or entitlement cuts will diminish significantly consumers ability to bail us out of our next recession. Our last recession was mild and rescued by middle class consumers. Middle class consumers are, as a percentage, about to become inordinately represented by retired workers.

As pensions continue to belly up, and either taxes increase or, entitlement checks get reduced, the purchasing power of this growingly significant portion of the consumer base will be left in no position to purchase the U.S. out of its next recession. Combine this with the downward pressures on real wages by the working middle class, and the only logical conclusion is, the next big recession won't be rescued by consumers. That leaves government spending as the only alternative. And that friends, means our national debt will move well beyond 11 trillion and interest rates spiralling.

As the national debt becomes more unsustainable, interest rates will have to rise in order to compensate for increased risk in investing in U.S. treasuries. That will mean a growing number of foreign investors who now float over 40% of our debt, will begin looking for less risk overseas. The day is coming when more and more foreign investors will look elsewhere, and when that day comes, the U.S. will begin its trek toward bankruptcy. Or, in other words, Americans will see a recession turn quickly and abruptly into a depression rivaling, or worse than, that following the 1929 stock market crash.

Foreign investors won't pull the trigger until it becomes obvious that the U.S. taxpayer can't support the nation's debts. So we still have a few years, perhaps a decade or two, if we are lucky, (no more 9/11's or Katrinas) before investors are faced with the decision to take higher interest returns on debt that may not ever be honored, or pull out. Foreign investors know full well, as the interest rates increase for American treasuries, the U.S. will be going ever deeper in debt both as a result of higher interest payments on the debt and American politician's out of control deficit spending.

And it's a vicious cycle we are entering. Should Congress radically cut entitlement spending or raise taxes to end the deficits, a recession brought on by lack of consumer activity will surely follow. And the slower economic growth will translate into ever greater deficits due to losses in government revenues. Which in turn will lead to more entitlement cuts, and round and round it will go down the toilet.

In the short term however, Jon Markman is right, now is no time to be in stocks. But America's economic future also appears to be telling us, to watch closely and be very wary of very long term positions in stocks as well. Timing is everything in the stock market. And for 401K investors, who don't time their entrance and exits in stocks, these next few decade's sustained and increased volatility are going to wreak havoc on their savings.

Americans have adopted an extremely dangerous psychology on fiscal matters. That psychology is tax phobia. Tax increases during times of good to strong economic growth are a primary tool for managing fiscal debt and deficits. Unfortunately for our economic future, Americans have bought into the Republican tax phobia, and that is translating into nails for America's future economic coffin.

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This page contains a single entry by David R. Remer published on June 10, 2006 10:49 AM.

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