Contributors
Founder and Chair – LMFC
Vice Chair – LMFC
President and CEO – The Bank of Northern Michigan
SVP of Shared Services - LMFC
Senior Vice President, Traverse City Market Manager

Hear from the founder of Lake Michigan Financial Corporation, Rich Lievense, and his insight on what this blog encompasses.

In 2008, the world dodged a second Depression by avoiding the mistakes that led to the first.  There are further lessons to be learned for both Europe and America. 

Read "There Could Be Trouble Ahead" from The Economist.

It used to be that if you worked hard, you were guaranteed a certain kind of life.  There are reasons success is no longer a straight shot.

Read "The Dwindling Power of a College Degree" from The New York Times.

The world is swimming in debt.  While the United States government has the most debt of any country in the world, many other countries also have huge debt burdens. More troubling, however, is the relation of debt to each country’s gross domestic product. These high debt levels make it harder to invest in domestic economic growth. If countries stop investing in domestic economic growth, the situation can spiral out of control. How did we come to find ourselves in this situation? 

For decades, politicians around the world have been making long-term commitments without an appropriate funding plan. The Soviet Union (now Russia) and the United States made commitments to defense spending during the Cold War. This commitment ultimately caused the Russians to default on their international debt. European countries and the United States have made social commitments to their people in the form of retirement and long-term health care that were not adequately funded. These commitments were probably well intentioned.  Since our political process encourages short-term thinking, the long-term concerns about funding were never resolved. In the famous words of Scarlett O’Hara in ‘Gone with the Wind’, “I’ll think about that tomorrow”. Unfortunately, tomorrow is now here. 

The United States came face to face with this problem when the debt exploded after the financial crisis of 2008. Prior to that time, debt to GDP was in the 30to 40 percent range and, while large, was certainly serviceable.  The costs associated with increased unemployment programs increased rapidly, tax revenues fell dramatically as the economy went into recession, we were in the midst of two major wars, and the demographic-related expansion of health care costs started to really hit home. In the space of one short decade, we transformed a national budget surplus to a $1.5 trillion deficit with no end in sight. While historically low interest rates make it easier to pay this debt, the situation in Europe shows us that eventually there is a price to be paid. 

Europe hit the wall when they came to terms with member nations who had significantly over-borrowed to fund social programs when their domestic economies could not afford to fund these commitments. Rather than making difficult political choices, the easy solution was to borrow the money and “think about it tomorrow”.    Unfortunately, some of these countries did not make the changes necessary to compete in a world economy and found themselves uncompetitive just when they needed additional growth to meet these commitments.  Germany and a few other Northern European countries were exceptions and developed competitive economies while prudently managing their financial positions. 

Japan’s economy was adversely affected in 2000, and the government implemented a spending program to replace private spending resulting from a decade-long recession. It made a massive commitment to public works and transformed the country’s infrastructure.  The projects were funded with borrowed money and now Japan leads the world in public debt as compared to domestic GDP.  Since the country has a legacy of high personal savings, it was able to fund this borrowing domestically. The debt will, however, need to be serviced as the population ages, shrinks, and the number of retirees grows. 

So what should we do? The solution is very straight forward but politically difficult to implement:

  • Developed country social commitments to retirees and health care costs need to be reduced. People need to work longer and we will need to make difficult moral decisions about the level of health care spending that we can afford. 
  • The United States will need to address its role in defending the world and decide which efforts truly affect our national interests. 
  • Taxes will need to increase to meet the actuarial financial needs of the programs outlined above. 
  • We need to encourage private sector growth in the United States. A commitment needs to be made to become more competitive in the world economy, add jobs, develop innovative new industries, and educate our workforce for the jobs of the future. 

We will see if our political processes around the world are up to the task.  We believe significant changes will be made one way or the other. Let’s hope we can be proactive instead of reactive.  Market reaction to the United States budget battles and European debt crisis are just two examples of what happens if we delay.

An expanding world population, extreme weather patterns, and pollution are making usable water a scarce commodity.  Michigan is surrounded by the largest source of fresh water in the world.  It seems to me this will have a positive impact on our long-term outlook.

Read "Beating the Coming Water Shortage" from CNNMoney.

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