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Changes

Written by Brad McMillan, CFA®, CFP® | Jun 26, 2012 1:35:37 PM

I am a big fan of the Lord of the Rings movies. I would love to embed Cate Blanchett’s witchy Galadriel voice, saying at the start, “The world had changed,” because we are seeing this more and more in the news and in how we look at the world.

I put together a presentation a couple of months ago that talked first about the U.S. economy and then about how it fit into the world and what that meant for our future. As I developed it, I realized that there was actually a consistent narrative that went beyond the U.S. and economics. Simply stated, the primacy of economics and markets as an organizing principle was rapidly eroding and returning to a much more mixed environment of politics, geography (broadly defined), and economics. I will get into this some more tomorrow, including posting a copy of that presentation, but today I want to make a related but different point about how our perception of the world has changed—and how that will affect how we live going forward.

The world has changed even from what it was five years ago, in 2007. Perceptions, and the decisions they drive, have changed even more. Markets are no longer as trusted as they were then. Beyond the lack of trust, or maybe because of it, prosperity is no longer assumed. The financial crises—note the plural—have made voters realize that perhaps things never were as good as they had thought. As the tide of liquidity recedes, the limits of what can be done with real resources are being realized. As those limits start to bite, we are being forced to renegotiate deals that many thought had been settled.

This is showing up at many levels. Greece is the poster child for hitting the fiscal wall. France is trying to deny the problem by electing a Socialist government that will spend more, but they don’t have the money. Lest we get too smug here in the U.S., we had a well-publicized recall election in Wisconsin that was going to roll back public spending cuts—but it failed. In today’s Wall Street Journal, the OpEd page talks about a similar situation in Idaho, where limits to collective bargaining that were passed by the legislature are now the targets of repeal referenda.

This is only the beginning, as the fight begins for the same-sized piece of a smaller pie. The obvious targets are not the only ones, either. As resources diminish, more problems and constraints will emerge that we don’t see today. In today’s New York Times, for example, an article outlines an emerging problem where municipalities have guaranteed the debt of independent authorities. As these authorities and their projects run into trouble, taxpayers are now on the hook. Pension fund funding problems, endemic in the public and private worlds, are additional versions of the same problem: promises made in good times that can’t—and won’t—be kept in bad times.

One of my favorite economics quotations is the line “If something can’t continue, it won’t,” by Herb Stein. We are now realizing that many of the plans and promises we made can’t continue—so they won’t. Getting from here to there is going to be the story of the next 10 years, and it will dramatically affect the way all levels of government operate. More on that tomorrow.