Don’t Get Distracted

We are faced with a big problem that is threatening to sink our economy, and it’s crucial that we take action now.

I have a dear friend who is a magician.

I’ve been lucky enough to attend one of his stage shows where he’s escaped straitjackets, swallowed needles and hidden half of a $10 bill in a lemon. He’s amazing to watch.

But while all these flashy tricks are stunning, my favorites are still his sleight-of-hand tricks.

Sitting around my house, I’ll hand over a new deck of cards or a coin and just watch him work. Telling stories or jokes, he keeps us distracted while his fingers are a blur of action as he shuffles, cuts and pulls out cards … as if by magic.

While this distraction is harmless and fun, we are faced with a big problem that is threatening to sink our economy, and it’s crucial that we take action now.

Painful Downgrades

America has a debt problem. That’s not really a surprise. It seems everyone is quite aware that the federal government is nearly $20 trillion in debt, and, sadly, we’ve become numb to that information.

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That’s become the distraction.

We don’t seem to have noticed that the country is also struggling with a mountain of debt at the state level.

Earlier this month, Moody’s Investors Service and S&P Global Ratings downgraded Illinois’ debt rating to just one step above junk — the lowest debt rating for any U.S. state on record. And S&P warned that if the state doesn’t come up with a solution to lower its debt by July 1, it could be downgraded again.

Illinois continues to struggle with its budget, and there is currently no end in sight. The fifth most-populous state in the union has more than $14.5 billion in unpaid bills, and on June 30, it will owe $800 million in just interest and fees on its unpaid debt.

But one of the biggest culprits of its debt problem is its underfunded pension system … and the state of Illinois isn’t alone.

In May, Connecticut saw its bond rating downgraded from Aa3 to A1 after both Fitch and S&P Global downgraded the state’s bonds due to falling state income tax receipts, a drop in its budget reserves and its underfunded pension plans.

In March, New Jersey’s debt suffered its 11th downgrade since 2010 due to its growing pension debt and low cash reserves.

It’s a Pension Problem

Earlier this year, the Pew Charitable Trusts revealed that for 2015 (the most recent year for data available), we had a $1.1 trillion pension gap. This is a 17% increase from 2014. In addition, the percentage of funded pensions dropped to 72% from 75% in 2014.

We are faced with a big problem that is threatening to sink our economy, and it’s crucial that we take action now.

Weak investment returns are largely to blame for this pension shortfall. When the pension plans were created, they assumed a long-run return of 7.6% each year. In 2015, the median overall return was 3.6% — less than half the expected return!

For 2015, the following states had under 60% of their pension programs funded:

We are faced with a big problem that is threatening to sink our economy, and it’s crucial that we take action now.

With more and more states struggling under the growing weight of their underfunded pensions, we are inching closer to a crisis. State governments are left with the choice of either revising their pension plans so that they pay out less benefits, or they are taking money from other state-supported programs to pay into their pensions.

Diversify Now

While we’ve been distracted by shenanigans in Washington, states have hollowed out the country with their rampant debt and massively underfunded pension programs that will leave us on the brink of collapse.

It’s critical that you take steps now to make sure that your portfolio is properly diversified against the next shock wave to pummel the financial market.

We survived the 2007/2008 collapse from the housing sector, and we survived the 2000 dot-com bubble popping. We can get through the next collapse brought on by an avalanche of state debt.

Regards,

Jocelynn Smith
Sr. Managing Editor, Sovereign Investor Daily

  • jringo55

    America has a debt problem — ya think? Maybe we should give more tax breaks to the rich people and more corporate welfare and spend more money on the military sacred cow. Lets face it, only the people on Main Street know what it’s like to have to live within your means. Govt clearly doesn’t understand spending as in needs and having to give up wants. Like we really need to spend money we don’t have on missions to Mars. This is just one example of reckless spending. There are plenty more. I sure wish I could spend money on credit and dump the bills from my spending on people who are not yet born. If I had it going on like govt does, why, I could sure have me a good time. Govt needs to budget just like we do. Cut back spending from the top down. Just like we do.

  • Bruce Allen

    The American economy is a house of cards waiting to collapse. It’s only a matter of time.

  • maguro_01

    A problem is the massive shift over years of income and assets to a tiny fraction of the population. The US economy has to make massive changes to become a domain of Lords and Peasants. Don’t blame Amazon for retail’s problems – the economy has to restructure to adjust to lower and lower real average incomes and a lower velocity of money. Massive trade deficits for decades have lowered the velocity of money enough as it is.

    The increasing taste for virtual goods will only increase in the future with the maturing of Virtual Reality technology. How well that will paper over declining real incomes and a decline of personal possibilities is a question.

    Our present problems have been enabled by our infamous Pay-To-Play political system which at long last is bringing down the United States. The Right and our would-be Plutocrats have pushed Humpty Dumpty off the wall.