March 4, 2001

In my opinion, the Federal Government implies, suggests, that they don't have much to do with the stock market: the Federal Reserve makes numerous comments about how they don't concern themselves with the levels of the stock market, and how they don't adjust fiscal policy to elevate or bring down stock markets even if they feel they are overvalued; the Federal Government constantly talks about how we should not privatize Social Security in any way because, most likely, individuals will invest their individual, Social Security, private, account assets in the stock market which would be risky, unlike the Federal Government who only puts the Social Security trust fund where it will be nice and safe for future generations; the Federal Government never states that they made more money in the stock market in the Nineties than anybody else in the world, including Bill Gates; the Federal Government wants you to think they don't have anything to do with the stock market nor do they make any money (or lose any money) when the stock market moves.

Just the opposite is true: the Federal Government has a lot to do with the stock market and they make a ton of money when it goes up and they lose a ton of money when it goes down. (In 1995 the Fed made $40 billion in taxes off capital gains, by 1999 they would make $120 billion, and don't forget, all those unrealized capital gains that have been made are just sitting there waiting to be realized and therefore turned into tax revenues for the Fed. Note: Even though $120 billion is only about 5% of the Fed's total tax revenues of $2 trillion, without that $120 billion, almost all of the Fed's surplus in 1999 would be wiped out.)

Up until I was thirty years old, I didn't pay attention to anything outside of my own little world. However, when I was thirty and still living check to check with no savings, I started looking into the situation. If I was ever going to have a savings account and good cash flow I was going to have to learn about financial planning and the stock market. Understand, I did not say I was going to be rich, I said have a savings account and good cash flow. To become rich is another issue. In regards to the stock market and becoming rich (there are many ways to become rich from scamming people to starting you own business of which 90% fail within the first year), most likely, you will only become rich via the stock market with a long-term (30 years plus) dollar-cost-averaging method. Yes, people do become rich via the stock market in a short period of time, but those people were either lucky, e.g., they put everything they had extra into one stock and that stock turned out to be Microsoft or the next Microsoft, or they had a ton on money to begin with and they just made a ton more (it takes money to make money thing), or they scammed people and made money off the scam, e.g., all the little guys who bought internet IPOs and got scammed by Wall Street.

So, when I was thirty I realized I had to have a financial plan and invest in the stock market to improve my financial situation. My attention span was increased from my own little world to financial planning and the stock market. This continued until I was forty when I realized that the Federal Government also plays into my cash flow situation. The Federal Government has a lot to do with the stock market. In the mid-nineties, the Federal Reserve (a part of the Federal Government) especially had a lot to do with the stock market.

Greenspan knew stock markets were overvalued based on fundamentals and the past, but he did not go where he should have which were the institutions. The institutions were the biggest buyers of the overvalued stocks and they were the main reason why so many stocks were getting at ridiculous levels. Instead of going where he should have which were the institutions, he used threats of increasing interest rates due to his fears of inflation. Greenspan raised interest rates (because he was concerned about inflation) as early as the first quarter of 1997 just shortly after making his "irrational exuberance" statement in late 1996.

When NASDAQ continued to go up and it started going up at a phenomenal rate in 1999 (over an 80% gain in 1999 alone), Greenspan started aggressively raising interest rates. You see, the market knew there was no inflation from 1997 to 1999 (CPI for 1997=1.7%, 1998=1.5 and 1999=2.7) and therefore Greenspan and his threats which were based on fears of inflation didn't hold any water. However, the real cause of the overvalued stock markets which was the over buying by the institutions went unchecked. With General Motor's market cap sitting at $30 billion, high tech companies such as Microsoft and Cisco had market caps of a half a trillion dollars, twenty times General Motor's.

Greenspan's aggressive rate hikes did exactly what they were suppose to: they slowed the US economy and therefore corporate earnings and therefore the stock markets. Greenspan is correct, if he had not aggressively cuts rates, it would have been worse. The irresponsible institutions would have continued to buy overpriced stocks. However, if Greenspan had gone where the problem was which was the institutions, he would not have had to hurt US and global economies along the way. (And because of weak politicians and a weak media, he'll get away with it, which means the problem will resurface.)

With regard to this story I'm writing, my point is the Federal Government is involved with the stock market, therefore, my web page will address issues involving financial planning, the stock market, as well as the Federal Government.

We are pretty lucky now because we can find out more about what the Federal Government is doing with our money then ever before. C-Span and the cable news channels must go out and dig up politicians to interview, they force the politicians to go on record much more than they ever did before. The politicians who you don't see much of are probably the ones who don't want to go on record because they know their fiscal management is not going to work too much longer. When it all comes crashing down, they don't want to have video tapes of them saying, "There's going to be a $5.6 trillion dollar budget surplus over the next ten years, so let's continue to spend, spend, and give tax breaks [which mostly go to the rich]."

What I want to do is to point out to you some figures on the Federal budget and Federal budget estimates. It gives you something to look back on a few years from now to see how your politicians did as compared to what they said they would do.

First, last week, Mr. Bush stated he was going to solve the problems with: 1) Education, 2) Social Security and Medicare, 3) Health care: Patient's Bill of Rights including prescription drug benefits and even money to help with research, 4) the Military, 5) the environment, and 6) the infrastructure. On top of that, he is going to give you back more of your money and pay off $2 trillion of the National Debt. All you have to do is to come back in a couple of years and see what he actually did. If nothing changed that tells you your vote didn't do shit rather you want to believe it or not, or rather you want to rationalize it or not and say things such as, "I know the politicians aren't going to do what they say." (I hope that someday, voters will realize they could do something about the problem with politicians, don't vote. If no one voted at the 2004 election that would send a powerful message to the politicians and the news media as well. It would tell them that if they do not want to continue to be embarrassed, they had better rethink what being a politician is really about.)

Since the Bush plan has strong support from the public as well as the politicians should only help Bush in fulfilling his promises. I'm not saying the support is 100%, I'm saying that from what I have seen and poll numbers, Bush seems to have good support for his plan.

I am going to lay out some figures here, I want you to realize these are mostly estimates and they are figures that I got out of the jargon of the politicians, I may not get them exact, and for sure as time goes on, these figures, I believe will become less and less accurate which again, should show you how the Federal Government clearly doesn't know which end is up.

From 2002-2011 the Fed estimate is to take in $28T (trillion) or on average, $2.8T per year. Currently they take in about $2T and remember that is during an unprecedented decade of economic growth. Of that $28T they expect to only spend $22.4T. This is the money Bush will use to do all the things he promised. Take the $28T minus the $22.4T to get the estimated surplus for the next ten years of $5.6T. This is an estimated $560B (billion) surplus on average per year for the next ten years. This surplus is what Bush is going to use to pay for the tax cuts.

Remember that during 1993-2000 the Federal Government's gross borrowing ran from $4T to $5.7T (the total National Debt), or the Federal Government had on average spent $200B more than they took in each year from 1993-2000. And that's during a period of unprecedented economic growth.

Most likely, you are already confuse with the (T) trillions and the (B) billions of dollars, the politicians are banking on that, that you're confused.

Remember too, the last recession was 1990 last quarter-1991 first quarter (a recession is two consecutive negative GDP* growths in a row). Currently, the forth quarter of 2000 was 1%, not negative which is required to technically be the first quarter of a possible recession, I say "possible" because you need two negative quarters in a row, but the forth quarter of 2000 was a decline of 4% from the previous third quarter of 2000, so in relative terms it was a significant drop-off in GDP growth. The bottom line, all these surplus projections are being projected when it looks like the economy is slumping and no one knows how bad the slump is going to be. And don't forget that even when there was no recession 1992-2000 the Federal Government was still unable to not borrow any more money let alone run a surplus. Also, the Bush Administration is well aware of the slowing economy, they talk about it all the time.

*GDP is Gross Domestic Product or total government spending plus total business spending plus total consumer spending. In 1984 they used to call the GDP the GNP or Gross National Product, the GNP was total spending: government, business, and consumer, but it also included (exports minus imports). When imports are greater than exports we have a "trade imbalance." In 1984 the trade imbalance became ridiculously high, instead of dealing with the problem they just erased it (exports minus imports) from the equation. That is, the trade imbalance in 1970 was about $1 billion and by 1984 it had gone to $100 billion, the Federal Reserve and Wall Street were very worried about this "trade imbalance." However, like I said they just erased the trade imbalance from the formula and started using GDP vice GNP, and they are glad they did since today, the trade imbalance is over $360 billion. We import $360 billion in goods more than we exports in goods, we consume much more than be produce. I'm not debating if a trade imbalance is a problem or not, I am stating that for the Fed and Wall Street it used to be, but now it's not for whatever reason.

With regard to ten year budget estimates I have talked about the total estimate for the whole ten years and I have also divided by ten to get a yearly average. However, more specifically, most of the total surplus projection of $5.6T is projected to be realized in the last six years, just after the next presidential term begins, that is, only $1.4T of surpluses are projected to be realized during the current four year Bush Presidency. Isn't that convenient, why don't you try it when you go and borrow money from a bank, tell the bank that in 2005-2011, your family is going to make a ton of money and be able to pay back everything you borrow now with no problem.

Now a little about the National Debt. This is "real tricky." Why? Because the Federal Government has split itself up: Payroll Taxes or Social Security, and Income Taxes (with all the other taxes like excise taxes) or General Revenues. The total or gross National Debt is $5.7T, however, the Social Security trust funds holds $2.2T of the total debt and therefore, one could say that the total debt of the Federal Government together is only $3.5T ($5.7T-$2.2T of Social Security trust fund). But note, that means there is no Social Security trust fund at all because you have implied that the $2.2T in the trust fund doesn't have to be paid back. Make sure you separate the apples and oranges. If you say that the total debt the government owes is $5.7T you can say there is a Social Security trust fund of $2.2T, however, if you say the total debt of the Federal Government is only $3.5T then you must say there is no Social Security trust fund at all, it's zero. Note: of the $3.5T the government owes outside of the $2.2T in debt held by the Social Security trust fund the Federal Reserve holds $500B, again, it's still debt, money owed, but the government owes itself vice the government owing someone else.

In conclusion, the Federal Government has a ton of debt and future obligations, and the only way they can make it look like it's not now a severe problem is by making claims that between 2005 and 2011 the Federal Government is going to take in a bunch of money. We will wait and see.

I am going to send a copy of this to my congressman and hopefully, he will read it and write me back about any mistakes I've made with my figures or the amounts. I hope those who read my web page do the same.

Finally, I little tidbit of information. On May 29, 1983 many newspaper business sections ran a story titled, "Regan Administration Draws the Line at Pension Fund Fiascos." The story started out: "In case you were wondering whether any corporate financing scheme was too bizarre to win federal government approval these days, the answer appears to be yes-if the plan involves use of employee pension funds." The story was about corporations taking money from pension plans to fund other corporate interests. The story was written by Louis Rukeyser, 1983, McNaught Syndicate, Inc.

Just about the same time, Social Security (a type of pension fund) laws were changed stating that Social Security recipients would no longer receive full retirement benefits at age 65, if you were born after 1937 your full retirement age would incrementally be increased up to 67 years of age for those born after 1960. That is, an individual born in 1937, and at the time, the early eighties, still twenty years away from full retirement would be told that their full retirement age was not 65, but an older age, and for the Boomers born in 1960, and at the time, the early eighties, still 45 years from full retirement age would be told that their full retirement age was not 65, but 67. And whose to say it won't be raised more, remember this group of individuals doesn't start to retire until 2027. Even today that's still 27 years away.

The Social Security administration, in my opinion, was fully aware of the fact that they had run a "fiasco" as well and if they did not start reducing benefits and increasing premiums (payroll taxes) they would be in big trouble (and remember this was as far back as the early Eighties). And if they started raising retirement age for people less than 45 years of age, most likely, those individuals wouldn't even notice since the oldest one was twenty years away from retirement. (Do I have a right to call the Social Security system a fiasco, I believe I do, if I was an insurance company and I was going to sell earthquake insurance and I did it for 75 years and there was never an earthquake during that period, I could not honestly say my company was a success especially if at the end of 75 years I had spent all the premiums that I had taken in, Social Security from its birth (mid-thirties) to 2010 will have taken in more money than it put out because the US was growing the total number in the workforce as compared to those in retirement, to say that Social Security has been a great or even a good system is clearly giving credit where it's not due. To truly judge the Social Security system means you have to get through the lean years first, that is, 2010-2040, and the Federal Government beyond any reasonable doubt have already told you they anticipate problems: they have already as far back as fifteen years, had to increase retirement ages and increase premiums just to keep their heads above water and that was twenty-five years before the lean years even start. Don't judge an insurance company before you turn in a claim.)

Pre-Boomers (born 1925-1945) state they earned their Social Security. True, but they also allowed the politicians to spend their Social Security premiums. Same holds true with the Boomers, they earned their Social Security as well, but again, they are also allowing the politicians to spend their premiums. The question remains: are the X and Y generations going to allow the politicians to spend their Social Security premiums as well? It looks like the answer is yes.

When I started writing Inside the Stock Market in 1994, I noticed that the breaking point for the Social Security fiasco would start sometime around 2010 and if I got it within five years of so would be good enough for me to plan ahead. It seems like the Federal Government also believes there may be a problem sometime around 2010, but they also believe that the Federal Government will be blessed with a ton of money just in time to deal with the problem. Time will tell.

In two years or less I will have an updated version of this story, you all can compare at the time and draw your own conclusions.