Is America about to go broke?

Prices dropped last year. But we still need to invest to protect ourselves from inflation. That's why our retirement-plan investing needs an inflation "tilt." You'll understand why in a few paragraphs.

How bad will future inflation be? I don't know. Neither does anyone else. It could be a normal inflation of 3% to 4% a year. It could also be a banana-republic 10% a month.

What we know is that all governments make promises they can't fulfill. Our government certainly has. Under both political parties, it has taken promise making to a high art. This is not hyperbole. The figures can be found in regularly published government reports.

Much worse than you probably think

The figures exist, but they are ignored. News reports regularly inform us of the growing federal deficit, projected at a stunning $1.75 trillion for fiscal 2009 and $1.17 trillion for 2010. But regularly reported, less visible government obligations have been growing much faster.

In the four years from January 2004 to January 2008, the Medicare trustees reported that the unfunded liabilities of Social Security and Medicare grew by a stunning $10.4 trillion. The average annual growth topped $2.5 trillion.

That was well over the expected formal deficit of $1.75 trillion this year.

In the 2008 trustees' report, the unfunded liabilities of Social Security and Medicare -- promises of future retirement and health care benefits -- total $42.9 trillion. In a few days, we should be able to read the 2009 report. It's a good bet that the unfunded liabilities will show an increase in the new report.

Ironically, payroll tax payments are still large enough that the Social Security and Medicare programs don't need every dime. The extra money goes into the program trust funds as Treasury debt. The actual cash is spent elsewhere. Basically, the employment tax has been subsidizing other federal spending. This has been going on since the 1983 "reform" of Social Security, a disaster chaired by Alan Greenspan, later the Federal Reserve chairman.

Today's deficits? That's nothing

Last year's Social Security trustee report estimates that OASDI (Social Security retirement and disability) and HI (hospital insurance), excluding book entry interest for the trust funds, will have more revenue than expenses until 2015. If higher cost assumptions prevail, however, the last year of positive flow will be 2010.

That's next year.

I am not making this up. It is public record. You can see for yourself by examining table VI.F9 on page 191 of the 2008 trustees' report.

When Social Security and Medicare costs exceed their revenues, the Treasury will have to borrow money to cover the shortfalls. When that happens, today's stunning deficits will look small.

That's why our future contains inflation, not deflation.

The upside-down nation

There is another way to see how serious our situation is: Compare the unfunded liabilities of Social Security and Medicare with the net worth of every household in America.

According to the Federal Reserve flow-of-funds figures for year-end 2007, our collective net worth as consumers was $62.7 trillion. By the end of 2008, the same figure had fallen to $51.5 trillion. Another year of growth for Social Security and Medicare liabilities would bring total unfunded government promises to about $46 trillion. That's nearly 90% of our net worth.

If consumer net worth fell an additional $5 trillion -- the same amount it fell in the last three months of 2008 -- we'd be broke.

Yes, you read that right.

Government obligations for basic programs would exceed the net worth of every household and nonprofit organization in America.

We'd be the upside-down nation.

The only way out of this is to print more money, inflating the value of assets relative to the amount of debt.

Cutting the expense of investing through index funds alone wouldn't solve the inflation problem. In addition to cutting expenses, we would have to invest a portion of our money in assets that give us a hedge against inflation: Treasury inflation-protected securities, real-estate investment trusts and energy companies.

Would this be perfect protection? No way. But it would give our savings a fighting chance.

U.S. Is Bankrupt and We Don’t Even Know It

Let’s get real. The U.S. is bankrupt. Neither spending more nor taxing less will help the country pay its bills.

What it can and must do is radically simplify its tax, health-care, retirement and financial systems, each of which is a complete mess. But this is the good news. It means they can each be redesigned to achieve their legitimate purposes at much lower cost and, in the process, revitalize the economy.

Last month, the International Monetary Fund released its annual review of U.S. economic policy. Its summary contained these bland words about U.S. fiscal policy: “Directors welcomed the authorities’ commitment to fiscal stabilization, but noted that a larger than budgeted adjustment would be required to stabilize debt-to-GDP.”

But delve deeper, and you will find that the IMF has effectively pronounced the U.S. bankrupt. Section 6 of the July 2010 Selected Issues Paper says: “The U.S. fiscal gap associated with today’s federal fiscal policy is huge for plausible discount rates.” It adds that “closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.”

The fiscal gap is the value today (the present value) of the difference between projected spending (including servicing official debt) and projected revenue in all future years.

Double Our Taxes

To put 14 percent of gross domestic product in perspective, current federal revenue totals 14.9 percent of GDP. So the IMF is saying that closing the U.S. fiscal gap, from the revenue side, requires, roughly speaking, an immediate and permanent doubling of our personal-income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance Contribution Act.

Such a tax hike would leave the U.S. running a surplus equal to 5 percent of GDP this year, rather than a 9 percent deficit. So the IMF is really saying the U.S. needs to run a huge surplus now and for many years to come to pay for the spending that is scheduled. It’s also saying the longer the country waits to make tough fiscal adjustments, the more painful they will be.

Is the IMF bonkers?

No. It has done its homework. So has the Congressional Budget Office whose Long-Term Budget Outlook, released in June, shows an even larger problem.

‘Unofficial’ Liabilities

Based on the CBO’s data, I calculate a fiscal gap of $202 trillion, which is more than 15 times the official debt. This gargantuan discrepancy between our “official” debt and our actual net indebtedness isn’t surprising. It reflects what economists call the labeling problem. Congress has been very careful over the years to label most of its liabilities “unofficial” to keep them off the books and far in the future.

For example, our Social Security FICA contributions are called taxes and our future Social Security benefits are called transfer payments. The government could equally well have labeled our contributions “loans” and called our future benefits “repayment of these loans less an old age tax,” with the old age tax making up for any difference between the benefits promised and principal plus interest on the contributions.

The fiscal gap isn’t affected by fiscal labeling. It’s the only theoretically correct measure of our long-run fiscal condition because it considers all spending, no matter how labeled, and incorporates long-term and short-term policy.

$4 Trillion Bill

How can the fiscal gap be so enormous?

Simple. We have 78 million baby boomers who, when fully retired, will collect benefits from Social Security, Medicare, and Medicaid that, on average, exceed per-capita GDP. The annual costs of these entitlements will total about $4 trillion in today’s dollars. Yes, our economy will be bigger in 20 years, but not big enough to handle this size load year after year.

This is what happens when you run a massive Ponzi scheme for six decades straight, taking ever larger resources from the young and giving them to the old while promising the young their eventual turn at passing the generational buck.

Herb Stein, chairman of the Council of Economic Advisers under U.S. President Richard Nixon, coined an oft-repeated phrase: “Something that can’t go on, will stop.” True enough. Uncle Sam’s Ponzi scheme will stop. But it will stop too late.

And it will stop in a very nasty manner. The first possibility is massive benefit cuts visited on the baby boomers in retirement. The second is astronomical tax increases that leave the young with little incentive to work and save. And the third is the government simply printing vast quantities of money to cover its bills.

Worse Than Greece

Most likely we will see a combination of all three responses with dramatic increases in poverty, tax, interest rates and consumer prices. This is an awful, downhill road to follow, but it’s the one we are on. And bond traders will kick us miles down our road once they wake up and realize the U.S. is in worse fiscal shape than Greece.

Some doctrinaire Keynesian economists would say any stimulus over the next few years won’t affect our ability to deal with deficits in the long run.

This is wrong as a simple matter of arithmetic. The fiscal gap is the government’s credit-card bill and each year’s 14 percent of GDP is the interest on that bill. If it doesn’t pay this year’s interest, it will be added to the balance.

Demand-siders say forgoing this year’s 14 percent fiscal tightening, and spending even more, will pay for itself, in present value, by expanding the economy and tax revenue.

My reaction? Get real, or go hang out with equally deluded supply-siders. Our country is broke and can no longer afford no- pain, all-gain “solutions.”

'Alternative' Medicine Is Mainstream

The evidence is mounting that diet and lifestyle are the best cures for our worst afflictions.

In mid-February, the Institute of Medicine of the National Academy of Sciences and the Bravewell Collaborative convened a "Summit on Integrative Medicine and the Health of the Public." This is a watershed in the evolution of integrative medicine, a holistic approach to health care that uses the best of conventional and alternative therapies such as meditation, yoga, acupuncture and herbal remedies. Many of these therapies are now scientifically documented to be not only medically effective but also cost effective.

President Barack Obama understands that if we want to make affordable health care available to the 45 million Americans who do not have health insurance, then we need to address the fundamental causes of health and illness, and provide incentives for healthy ways of living rather than reimbursing only drugs and surgery.

Heart disease, diabetes, prostate cancer, breast cancer and obesity account for 75% of health-care costs, and yet these are largely preventable and even reversible by changing diet and lifestyle. As President Obama states in his health plan, unveiled during his campaign: "This nation is facing a true epidemic of chronic disease. An increasing number of Americans are suffering and dying needlessly from diseases such as obesity, diabetes, heart disease, asthma and HIV/AIDS, all of which can be delayed in onset if not prevented entirely."

The latest scientific studies show that our bodies have a remarkable capacity to begin healing, and much more quickly than we had once realized, if we address the lifestyle factors that often cause these chronic diseases. These studies show that integrative medicine can make a powerful difference in our health and well-being, how quickly these changes may occur, and how dynamic these mechanisms can be.

Many people tend to think of breakthroughs in medicine as a new drug, laser or high-tech surgical procedure. They often have a hard time believing that the simple choices that we make in our lifestyle -- what we eat, how we respond to stress, whether or not we smoke cigarettes, how much exercise we get, and the quality of our relationships and social support -- can be as powerful as drugs and surgery. But they often are. And in many instances, they're even more powerful.

These studies often used high-tech, state-of-the-art measures to prove the power of simple, low-tech, and low-cost interventions. Integrative medicine approaches such as plant-based diets, yoga, meditation and psychosocial support may stop or even reverse the progression of coronary heart disease, diabetes, hypertension, prostate cancer, obesity, hypercholesterolemia and other chronic conditions.

A recent study published in the Proceedings of the National Academy of Sciences found that these approaches may even change gene expression in hundreds of genes in only a few months. Genes associated with cancer, heart disease and inflammation were downregulated or "turned off" whereas protective genes were upregulated or "turned on." A study published in The Lancet Oncology reported that these changes increase telomerase, the enzyme that lengthens telomeres, the ends of our chromosomes that control how long we live. Even drugs have not been shown to do this.

Our "health-care system" is primarily a disease-care system. Last year, $2.1 trillion was spent in the U.S. on medical care, or 16.5% of the gross national product. Of these trillions, 95 cents of every dollar was spent to treat disease after it had already occurred. At least 75% of these costs were spent on treating chronic diseases, such as heart disease and diabetes, that are preventable or even reversible.

The choices are especially clear in cardiology. In 2006, for example, according to data provided by the American Heart Association, 1.3 million coronary angioplasty procedures were performed at an average cost of $48,399 each, or more than $60 billion; and 448,000 coronary bypass operations were performed at a cost of $99,743 each, or more than $44 billion. In other words, Americans spent more than $100 billion in 2006 for these two procedures alone.

Despite these costs, a randomized controlled trial published in April 2007 in The New England Journal of Medicine found that angioplasties and stents do not prolong life or even prevent heart attacks in stable patients (i.e., 95% of those who receive them). Coronary bypass surgery prolongs life in less than 3% of patients who receive it. So, Medicare and other insurers and individuals pay billions for surgical procedures like angioplasty and bypass surgery that are usually dangerous, invasive, expensive and largely ineffective. Yet they pay very little -- if any money at all -- for integrative medicine approaches that have been proven to reverse and prevent most chronic diseases that account for at least 75% of health-care costs. The INTERHEART study, published in September 2004 in The Lancet, followed 30,000 men and women on six continents and found that changing lifestyle could prevent at least 90% of all heart disease.

That bears repeating: The disease that accounts for more premature deaths and costs Americans more than any other illness is almost completely preventable simply by changing diet and lifestyle. And the same lifestyle changes that can prevent or even reverse heart disease also help prevent or reverse many other chronic diseases as well. Chronic pain is one of the major sources of worker's compensation claims costs, yet studies show that it is often susceptible to acupuncture and Qi Gong. Herbs usually have far fewer side effects than pharmaceuticals.

Joy, pleasure and freedom are sustainable, deprivation and austerity are not. When you eat a healthier diet, quit smoking, exercise, meditate and have more love in your life, then your brain receives more blood and oxygen, so you think more clearly, have more energy, need less sleep. Your brain may grow so many new neurons that it could get measurably bigger in only a few months. Your face gets more blood flow, so your skin glows more and wrinkles less. Your heart gets more blood flow, so you have more stamina and can even begin to reverse heart disease. Your sexual organs receive more blood flow, so you may become more potent -- similar to the way that circulation-increasing drugs like Viagra work. For many people, these are choices worth making -- not just to live longer, but also to live better.

It's time to move past the debate of alternative medicine versus traditional medicine, and to focus on what works, what doesn't, for whom, and under which circumstances. It will take serious government funding to find out, but these findings may help reduce costs and increase health.

Integrative medicine approaches bring together those in red states and blue states, liberals and conservatives, Democrats and Republicans, because these are human issues. They are both medically effective and, important in our current economic climate, cost effective. These approaches emphasize both personal responsibility and the opportunity to make affordable, quality health care available to those who most need it. President Obama should make them an integral part of his health plan as soon as possible.

Creative Genius – Michael Jackson

There are two camps of thought on Michael Jackson. There are those that are in the first camp that claim he was a brilliant and misunderstood human being. One whose music, lyrics, and body of work show a vulnerable and compassionate human being, deeply effected by public opinion and media scrutiny. People from Paul McCartney to Deepak Chopra align themselves with this line of thought. Then there is the other camp.

We’re deeply saddened by the loss of this one of a kind individual and plant our stake firmly in the first camp. Groupthink too often (successfully) attempts to rip apart over- achievers. In an unending belief that greatness is too good to be true, the group attack effect is triggered and beauty is made to look ugly. Let’s resist that natural force.

For a look at beauty, check out the unedited version of Michael’s “Black or White” video. The message of the song is classic MJ, and the extended ending includes one of the sickest footwork sessions ever recorded.

http://www.youtube.com/watch?v=ufE1OiM78-I