By Eric Singer
The main driver of the collapse of the dollar is the liquidity provided by the Fed at nominal interest rates, which invites a worldwide army of investors to short the dollar and buy foreign stocks and bonds. If the dollar continues to fall in value, these investors are effectively paid to borrow as long as their other investments are higher in dollar terms when they unwind the trade. Professor Roubini has a good article on this subject. He predicts that current policy is creating an international stock market bubble which will be followed by a collapse.
It is not a coincidence that the dollar’s decline relative to other currencies and gold has accelerated over the last three months since the health care debate has culminated for the moment in the passage of H.R. 3962, the Affordable Health Care for America Act. To get a true sense of Congress’s irresponsibility, it is necessary to outline at least a portion of the breathtaking scope of what they are attempting. As listed before, the Act is grossly inflationary because it mandates or results in (1) more coverage requirements per person, (2) more people covered, (3) fewer doctors per patient to provide care, (4) more adverse selection, (5) unreformed and unrepentant tort lawyers, (6) sharply higher health care unionization, and (7) less private interstate competition. The similar Senate proposal, which would effectively end much of private insurance, is discussed in an earlier CWDM here.
By CBO estimates, the Act commits U.S. taxpayers to spending over one trillion dollars over the next ten years. Through the magic of a projection that would be fraudulent if done by a publicly traded company subject to Sarbanes Oxley, the law was deemed to be a revenue-enhancer because it collects taxes beginning in 2011 while providing benefits only beginning in stages in 2013, one year after the presidential election. Deficits in the years beyond 2019 have been ignored by congressmen touting the bill. Among other major economic drags in the bill is the requirement that we all purchase insurance directly if our employers no longer provide it. This is because the employers will pay a cheaper payroll tax in order to shuck us off to the government pool, a tax on so-called gold-plated insurance plans, new taxes on pharmaceutical and medical device companies, and a 5.4% income tax surcharge. Including state income tax rates, many successful United States entrepreneurs will now face over 50% marginal tax rates, which will sharply reduce their incentive to start new small businesses — are the backbone of job-creation. In their talking points, the Republicans plausibly claim that the bill may cost five million additional jobs.
There is not the slightest chance that the assumptions underlying the bill will be reflected in reality once people have the chance to game the system. In the same way the government could not keep up with the acceleration of demand created by the cash-for-clunkers initiative, health care insurers and providers will not be able to keep up with the distortion in demand created by not having use of the system tied to a cost. Many employers will opt to pay an 8% payroll tax rather than provide private insurance. Millions of employees, knowing they can wait until they are sick, will pay the penalties associated with not having insurance, or ignore them altogether, only seeking insurance once they feel they need serious coverage. The penalties range up to a misdemeanor failure to insure (up to $25,000 and one year in jail) to a felony failure to insure (up to $250,000 and five years in jail). Representative Camp (R-MI) put it well when he said that “This is the ultimate example of the Democrats’ command-and-control style of governing — buy what we tell you or go to jail.” These penalties are so severe, so unjust, and so unconstitutional that they will never be uniformly enforced (if they are enforced at all).
These facts, coupled with how invincible we feel when we are young, will result in many millions of people delaying coverage for years knowing they cannot be denied government coverage for any preexisting condition. In a Fitch forensic survey of a 2007 mortgage pool that went bust, 47 out of 47 mortgage applicants lied to get their loans. Similarly, this law will encourage many U.S. citizens to work off the books now that they have coverage. As a result, as an unintended consequence of this act, fewer people are likely to actually be insured. While the poor may gain coverage, the middle class will lose coverage. And our smartest students will veer away from medicine.
With new health care industry taxes, the destruction of private insurers, and the likelihood of more arbitrary reimbursements, the pharmaceutical and medical device industries will stop innovating in the United States at the level that brought them to the top of the world in knowledge competitiveness. The large international companies will do more and more of their drug innovation elsewhere.
There will be a migration away from innovation in the United States and towards a focus on process: “Did you get to see a doctor?” or “Did you get to see a nurse practitioner?” instead of “Did you get well?” The vibrant health care industry, with its equity in public companies alone valued at $1.9 trillion in today’s dollars, will likely be bisected in value over the next five to ten years as the same forces that made Amtrak unprofitable are brought to bear. For those families fortunate enough to own some stocks in a pension or a retirement or private account, the average losses attributable to the wipeout of health care could be on the order of $15,000 to $20,000 per household in today’s dollars. The losses are likely to be unequally distributed, with health insurers losing the most.
This is above and beyond the annual burden that will be imposed by forcing everyone to buy non-economic, government-based insurance. To the extent the dollar collapses, it may well be that in dollar terms, the industry does not lose as much value. But in real terms, the loss of value will be clear. For example, all sorts of drugs, operations, and procedures that are considered routine today will be considered unnecessary and unreimbursable tomorrow.
Congress acts as if we can borrow and borrow and never have to worry about repaying. We have issued $12 trillion in debt, and the new law would add another trillion at a minimum. This is in an economy with only $14 trillion of nominal GDP. As the total United States debt begins to climb to over 100% of our GDP, other nations will increasingly move away from the dollar.
Every time Congress spends, or evens threatens to spend, without getting full value in return, they effectively destroy value compared to what might have been and what should have been. Disrespecting the dollar by trashing private health care will do nothing but destroy one of our truly world-class industries, result in fewer people getting actual health insurance, wastefully spend money we don’t have, and invite fraud on a level that will make Fannie Mae blush.
Eric Singer is the Fund Manager to the Congressional Effect Fund that seeks to avoid political risk by investing in the equity market only when Congress is on recess, and primarily in interest-bearing instruments when Congress is in session.
