Banking, Health Care, and Inflation

From the current Kelly Letter research stream come these four tidbits.

Ben Stein pointed out at Yahoo Finance that taxpayers are paying bank profits but getting no benefits. Admittedly, this is old news to those who’ve been paying attention but a lot of people haven’t been paying attention, so it’s worth putting out there again:

The government completed the circle of bank rescue by not only letting the banks borrow at almost zero, but then by allowing the banks to invest the money they borrowed in totally risk free Treasuries at roughly 3.6 percent. . . . The banks started making staggering profits again. So, what has the banking sector done with the profits and their new found health?

Bankers now — again — routinely take home $5 million to $10 million bonuses just for doing an ordinary job. . . . At Goldman Sachs, bailed out by the taxpayers a scant few months ago, secretaries and bookkeepers are making hundreds of thousands in bonus.

The taxpayers pay the interest on the trillions (yes, trillions) in Treasury bonds that allows the banks to make the lollapalooza profits they are making on their free money. . . . So, what do we have right now? A banking sector looking out entirely for itself, bailed out by all of us, at wild expense, and not lifting a finger to help end the mortgage and housing crises.

Onto the divisive health care discussion. The outcome of the reform proposal is important to us not just as Americans, but as investors. If runaway health costs are not brought under control, they will harm the long-term growth of the economy. However, if the federal deficit and debt are not managed properly in the creation of a new plan, they will swell to even more dangerous proportions which will threaten the viability of the dollar and the solvency of the Treasury. Finally, if taxes are seen as the way to provide everybody with health care, then consumer spending could be permanently impaired. Because it powers some 70% of the economy, damaging consumer spending even a little would bring big adjustments.

Princeton professor Uwe Reinhardt said at CNN that the central issue of too-expensive health care is being missed in the discussion:

Americans need to be taught a basic lesson on the economics of employment-based health insurance before they will feel as smugly secure with it as they do now and before they will stop nitpicking health-reform efforts to death over this or that detail.

If efforts at better cost containment fail once again, and health care costs rise to $36,000 on average for a typical American family of four under age 65 — as almost surely it would — that $36,000 will be borne entirely by the family.

Here it must be remembered that the wages and salaries of the solid American middle class have been relatively stagnant in recent years and are likely to remain so for the next decade.

This prospect — relatively stagnant family incomes combined with family health-care costs that double every decade — is what America’s middle class should contemplate as it thinks about the imperative of health reform.

It is a pity that this central issue seems to have been shoved aside by mendacious distortions

Some in the medical industry have felt insulted at the comments about U.S. health care lagging behind the quality seen in other countries. I can tell you firsthand that that idea has always seemed odd to me, because even here in Japan the care is not as good as what I’ve received in the U.S. The health care system in America has not only saved my life from cancer at the age of 12, it also saved two other members of my family from life-threatening situations. I’ve always wondered, “If U.S. health care is so bad, why do people travel from so far away to get it?”

Part of the answer was provided by Steve Chapman at the Chicago Tribune, who found that U.S. health care is tops if you remove deaths caused by crime or accidents:

It’s true that the United States spends more on health care than anyone else, and it’s true that we rank below a lot of other advanced countries in life expectancy.

One big reason our life expectancy lags is that Americans have an unusual tendency to perish in homicides or accidents. We are 12 times more likely than the Japanese to be murdered and nearly twice as likely to be killed in auto wrecks.

In their 2006 book, “The Business of Health,” economists Robert L. Ohsfeldt and John E. Schneider set out to determine where the U.S. would rank in life span among developed nations if homicides and accidents are factored out. Their answer? First place.

That discovery indicates our health-care system is doing a poor job of preventing shootouts and drunk driving but a good job of healing the sick. All those universal-care systems in Canada and Europe may sound like Health Heaven, but they fall short of our model when it comes to combating life-threatening diseases.

Finally, in case you need another reason to give up hope, Warren Buffett wrote in the New York Times that lawmakers are probably going to choose inflation as the way out of the mess their profligate spending has caused:

With government expenditures now running 185 percent of receipts, truly major changes in both taxes and outlays will be required.

Legislators will correctly perceive that either raising taxes or cutting expenditures will threaten their re-election. To avoid this fate, they can opt for high rates of inflation, which never require a recorded vote and cannot be attributed to a specific action that any elected official takes. In fact, John Maynard Keynes long ago laid out a road map for political survival amid an economic disaster of just this sort: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens…. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

Congress must end the rise in the debt-to-G.D.P. ratio and keep our growth in obligations in line with our growth in resources.

If you’re still depending on government for a solution, you’re a slow learner. Take control of your own finances under the assumption that you will never get a dime from government for retirement. Then, anything that ends up coming your way will be icing on the cake. As for the cake, better bake it yourself.

This entry was posted in Uncategorized. Bookmark the permalink. Both comments and trackbacks are currently closed.
  • The Kelly Letter logo

    Included with Your Subscription:

Bestselling Financial Author