It's The Economy Stupid?

The recent downturn in the economy has caught the attention of the most ambivalent American. Home prices decline (or at best go flat), oil spirals higher and higher as the dollar correspondingly nose dives. Americans are beginning to feel the pinch, and the worst hasn’t even begun. We are yet to feel the full effects of the aging Baby Boomers and the huge economic draw they are going to place on Social Security and Medicare. Unfortunately, many Baby Boomers woefully underestimated their retirement needs. Especially as medical advances improve and the average life expectancy continues to grow.

So, what role does the military and specifically the Department of Defense play in all of this? The national budget is composed of two parts: discretionary and non-discretionary spending. Often referred to as on budget (discretionary) and off budget (non-discretionary). Off-budget items include Medicare and Social Security. The reason these are off-budget is because Congress does not have to pass annual or reoccurring authorization and appropriation bills for these accounts. They are considered fixed or “must pay” bills. This is good news for you if you are a recipient of these programs, but it is horrible news for the Congressional budgeters. As the population ages and we start entering a period of time where we have more people collecting benefits than paying into the system, one of two things must happen. Fist there is going to be growing pressure to move funding from the other accounts (discretionary) to the non-discretionary accounts. But even this will not be enough to fix the problem. It is going required the Federal government to increase its cash position by either raising taxes or borrowing more money.

The current economic meltdown (or maybe more appropriate would be slowdown) is due to several competing factors. Certainly the cooling or normalizing of the housing markets (did anyone really expect housing to continue rising at double digits?) and sky rocking oil prices have hurt the average consumer. But another more insidious factor is stealing your buying power and that is the combination of the devaluation of the US dollar and increasing inflation pressures. The dollar has been in steady decline against the Euro for several years. For most Americans this didn’t matter because of the Chinese Governments policy of fixing the RMB against the US dollar allowing us to continue purchasing Chinese made goods and service at relatively fixed prices for years. But now, we are seeing the impact as oil is no longer priced in dollars, but rather in the stronger Euro Most of the recent run up in oil prices has less to do with supply than it does with the declining value of the dollar. The recent effort by the Fed to drop interest rates to rock bottom (although temporarily good for the stock market) should only accelerate inflationary pressures and drive more foreign money out of the United States resulting a near collapse in the value of the dollar.