A Rite of Passage Awaits the U.S.

By Kevan McCormack


Kevan McCormack

The “Fiscal Cliff” storm is fast approaching, but this one is man-made.  This one will strike the entire United States.  And, this one is unavoidable.  Rather than our country long-ago embracing the unavoidable rite of passage we all must face, this storm will rapidly push us right to the edge of the very issue that will define our country, our generation, and our future.

Last month, Hurricane Sandy blew into town like a storm on a mission, causing massive damage to our country and resulting in an estimated $60 billion monetary loss: 8.1 million homes were without power throughout 17 states; our financial markets were closed for two consecutive days (the first time in 124 years); and there were 15 days of gas rationing in NYC.

But the aftermath of Sandy also saw over 57,000 utility workers from 30 states and Canada come to New York and work together in order to restore the power grid.  It showed that when our country is facing a disaster, the citizens of the U.S. will come together and help each other out.

The Fiscal Cliff is a much more dangerous storm by comparison.  Four years ago, the National Debt stood at $10.63 trillion with a $444 billion dollar annual deficit versus today’s $16.37 trillion National Debt and a $1.1 trillion annual deficit.  That is a 54% increase in national debt and a 148% increase in annual deficits in just four years.  But, the longer term implications are perhaps even more disconcerting for those paying attention.  The combined total of U.S. Unfunded Liabilities, which includes future obligations for Social Security, Prescription Drug and Medicare Liabilities, tops over $121 trillion!  That amounts to 100% of the current level of total U.S. Federal Tax Revenue for the next 50 years!  That amount of money could purchase all New York City real estate 150 times over (based on NYCRC’s 2008 estimate of $800 billion).

conduit lendersIn contrast, the preparations for this storm have only seen bureaucrats come to D.C., argue for a bit and tell the American public that no agreement is in sight.  They seem quite content to play this game of chicken right over the cliff.

So, when you think about the sheer magnitude of the problem that the Fiscal Cliff represents, it is hard to take seriously President Obama’s current proposals to “pay down the debt.”  Along our current trajectory, the National Debt in 2022 would be $25.8 trillion.  If Obama’s plan goes into effect, the National Debt in 2022 would be $25.4 trillion; that is just $400 billion in 10 years.  Why is that?  Because all of the increased revenues and supposed spending cuts Obama’s plan makes are just spent on some other spending increases including: new stimulus measures, the “doc fix” which delays Medicare physician pay cuts, extending the payroll holiday, extending unemployment insurance, and, most importantly, the completed repeal of the Budget Control Act spending cuts.  The net effect is still a $9 trillion increase in National Debt over 10 years.  I am not sure where these guys learned to add and subtract, but at what step does the National Debt actually get “paid down?”

The simple answer is that our Fiscal Problem is not a revenue problem.  It is a spending problem!  Increasing taxes for those with income over $250k of annual AGI is just a symbolic gesture that Obama is trying to win to appease his base.  It goes nowhere towards solving the real problem.  Basing a solution for our Fiscal Problem around only increasing taxes is like basing a solution to a gambling addiction around lending the gambler more money.  Long-term, the same thing is going to happen.

To re-stabilize our country’s Fiscal Issues, it will take a fundamental shift in the way the government and its citizens view the government’s role in our lives.  As long as the role is considered “cradle to grave,” the country will never be able to correct the course.  The real solution will not be easy and will not be without pain for everyone, but if the right course is set now, over the course of a generation, we might be able to deliver a better country for our kids than that in which we lived.

Enough with the doom and gloom political talk.  What does all this mean for real estate?  Long-term, these economic indicators are not necessarily bad for owners of real estate.  In fact, real estate may be one of the best currencies in this type of economic environment.  Why is that?  Because the only other possible solution to the Fiscal Problems we face is for the government to inflate its way out of the problem over time.  But, this is not an easy political move in the world economy and has its own unique set of problems when the Dollar is the world’s reserve currency.  So if that happens at any appreciable pace, and you are the owner of real estate with manageable amounts of leverage, then you might be in a good long-term position where debt is able to be paid off more easily with less valuable dollars.

While this storm has been brewing, Metropolitan Capital Advisors has been busy guiding its clients towards very advantageous financing structures still found in conduit lending.  Conduit lenders remain active and ready to step up and provide debt needed by long-term owners of commercial real estate.  So while the State of Emergency alarm has not been officially rung yet, MCA is helping our clients develop disaster plans for their real estate portfolios.