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Do you know what the most important financial number in the world is? 56 | Smith Investment Management

Do you know what the most important financial number in the world is? 56

October 25, 2011 by  

56…that is num­ber…56.

56 is the ratio of Gov­ern­ment Promises to its income.  To give you some per­spec­tive on that num­ber, think of how big of a promise the bank let you make when you bought your first home. Lots of peo­ple I know bought their first home with a mort­gage (their promise) that was 3 or 4 times their income. What would have hap­pened if you bought your first home with a mort­gage that was 56 times your income? You don’t have to think about that to long…cause you would have lost the house.

Gov­ern­ment Promises today are approx­i­mately 130 Tril­lion Dol­lars (US Trea­sury Debt 15 Tril­lion, Social Secu­rity 15 Tril­lion, Pre­scrip­tion Drug 20 Tril­lion, and Medicare 80 Tril­lion). Gov­ern­ment Income today is approx­i­mately 2.3 Tril­lion (from  per­sonal income tax, pay­roll tax, and cor­po­rate tax). SO…the Promise to Income ratio is cal­cu­lated by tak­ing the 130 Tril­lion of Promises and divid­ing them by 2.3 Tril­lion of tax income which equals 56. If our Gov­ern­ment reduced their promise by 90%…we are still not guar­an­teed that our Gov­ern­ment will be on sound finan­cial foot­ing. “Har­ris­burg Penn­syl­va­nia, Files for Bank­ruptcy”…the State Cap­i­tal of Penn­syl­va­nia, files for bank­ruptcy with promises about 5 times its income. A cou­ple of years ago I worked through the books of the State of California…and at that time their promises were about 6 times their income.  COMMON SENSE WOULD SAY THAT THE US GOVERNMENTS PROMISES TO INCOME MUST BE REDUCED TO UNDER 5…TO BE SUSTAINABLE. THAT MEANS REDUCING PROMISES OVER 118 TRILLION DOLLARS.

What does this mean to you and me?

At some point these promises collapse…and the US Dol­lar with them. I hear many say that the US will not default on our promises. But I also can remem­ber how many times peo­ple told me that Home val­ues do not go down. To me, this Promise Bub­ble today, is much larger than the Real Estate Bub­ble that started to burst in 2006, and nation­wide home val­ues have declined in 32%.

There is no con­ceiv­able way that we can duck the dif­fi­cult and painful path of hav­ing over 118 Tril­lion Dol­lars of Promises reneged on. Our Gov­ern­ment will likely renege in both of the ways it has avail­able to it. By Implicit Default…which is print­ing a lot more money, and debas­ing the currency…”paying with dol­lars that are worth pen­nies”. And by Explicit Default…”paying pen­nies on the dol­lar”. An exam­ple would be chang­ing full Social Secu­rity retire­ment age to 73, and cap­ping the ben­e­fits. It is eas­ier for politi­cians to get elected with Implicit Default…the print­ing of more money, so expect that in increas­ing quantities.

The next 5 to 10 years will likely be much more chal­leng­ing and dif­fi­cult than the last few years.

What can we do?

Cre­ate diver­si­fied sources of income from your deposits and invest­ments that are not depen­dent on the health of the US dol­lar.  You can call or email me to talk about this.


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