Sustainability is a big deal. Large companies have hired chief sustainability officers whose job it is to ensure that the company minimizes its negative impact on the environment. They’ve found that it is often possible to increase profits while also reducing their companies’ impact on the environment.
In theory, a company must achieve environmental equilibrium to be sustainable. While that’s not achievable, a great deal of progress has been made. Economies throughout the world still rely on fossil fuels, but conservation efforts have made the air and water cleaner and safer in many countries.
This Can’t Go On Forever
But what about financial sustainability? That’s an area where we all have a long way to go, both in the U.S. and around the world. We can think of many examples of financial unsustainability that could lead to economic collapse or, at the least, a lowering of living standards. Here are a few:
Greece. Consider the ongoing saga of Greece. Greece has been in such sad shape for so long, the rest of Europe has agreed to bail it out—not once, not twice, but three times. And now, unsurprisingly, Greece may be going for a fourth.
As further proof that socialism is a nutty idea, Greece continues to resist more stringent austerity measures while allowing its debt to continue to build. The International Monetary Fund (IMF), which is hardly ever a voice of reason, is arguing that “Greece’s debts are unsustainable and on an ‘explosive’ path to reaching almost three times the country’s annual economic output by 2060.”
Of course, other European officials are arguing that the IMF is being way too gloomy. And while Greek bond yields are soaring, “an increasingly bitter fight between the nation’s creditors over its fiscal targets raised concerns it is running out of time to complete another review of its bailout program, and even sparked concerns a fourth Greek bailout may be in the offing.
Who believes the results will be any different the fourth time?
U.S. Federal Debt. During the waning days of the Obama presidency, the Government Accountability Office (GAO) issued a report reminding us that the federal government is “highly leveraged in debt by historical norms and on an unsustainable long-term fiscal path caused by a structural imbalance between revenue and spending.”
To translate, “structural imbalance” means the federal government is spending more than it’s taking in, in spite of the current high rate of taxation.
While the U.S. debt doubled over the past eight years, the annual deficit was practically cut in half from just a few years ago, when it exceeded $1 trillion a year, to $587 billion in fiscal year 2016. And yet it remains way, way, way, way out of control, driven largely by increased costs of Social Security, Medicare, Medicaid and interest on debt held by the public, according to the GAO report.
The U.S. Debt Clock is a mind-numbing example of just how profligate we’ve been. As federal debt approaches $20 trillion, eliminating the debt would cost $166,775 per taxpayer. When we wrote about the debt in April 2015, it had just cleared $18 trillion and the cost per taxpayer was calculated to be $154,122. So, even after sequestration, the cost per taxpayer for paying off the debt has increased by $12,653 in less than two years.
Writing about the GAO report, The Blaze noted that, “The government’s net operating cost, the difference between the money coming in and the money going out, rose to an astonishing $1.05 trillion in fiscal year 2016—more than double the previous fiscal year, which was $514 billion.”
The debt clock says the external debt-to-GDP ratio stands at 98.708%. That’s not nearly as bad as Japan’s (173.97%) or the United Kingdom’s (332.63%), but China’s ratio of external debt to GDP is only 8.2166%.
President Trump has pledged to better control federal spending. Good luck. Most of the costs are ongoing obligations and the military has been underfunded for years even as the world grows more dangerous. Planned tax cuts would have to stimulate significant economic growth just to be revenue neutral.
Stock Prices. Tax cuts, deregulation and other pro-growth, pro-business changes are giving stock prices a boost. The most recent jobs report was encouraging, as nonfarm payrolls increased by 227,000 jobs in January, beating consensus estimates of 175,000 new jobs.
The market reacted, with the Dow Jones Industrial Average increasing 0.9% (186.55) points to close at 20,071.46, its biggest gain of the year, on Feb. 3.
But before you go all in, keep in mind that stock prices have been unrealistically jacked up by the Federal Reserve Board’s accommodative policies for the past eight years. As a result, stock prices are in an artificial state of Nirvana.
We recently noted that Shiller’s cyclically adjusted price/earnings ratio (CAPE) as a mean average for all stocks was at 27.2, which puts it historically in the 95thpercentile. The historical average since 1870 is 16.7.
If the p/e ratio doesn’t scare you sufficiently, consider the price/revenue ratio.
“To offer some idea of the precipice the market has reached,” Zero Hedge noted, “the median price/revenue ratio of individual S&P 500 component stocks now stands just over 2.45, easily the highest level in history. The longer-term norm for the S&P 500 price/revenue ratio is less than 1.0. Even a retreat to 1.3, which we’ve observed at many points even in recent cycles, would take the stock market to nearly half of present levels.”
Predicting a correction in our future, Lance Roberts of RealInvestmentAdvice.com says, “A sharp rise in interest rates or inflation, a downturn in economic growth, deflationary pressures from the Eurozone, or a credit related issue in the ’junk bond’ market could all do the trick.”
So, yes, we’re concerned about the environment. Who isn’t? But we’re far more concerned about the financially unsustainable actions of governments around the world. While politicians continuously delay action, the debt clock moves faster and faster.
An environmental catastrophe could happen. Unless action is taken quickly, a financial catastrophe will happen.