By: Ivory Johnson, CFP, ChFC, Founder, Delancey Wealth Management, LLC

Americans have witnessed three decades of economic success through the prism of cooked books and lofty promises – $85 billion in unceremonious budget cuts would be a rude awakening. Two roads diverged in a yellow wood and it looks like Congress might choose the sequester.

Voracious demands for small government notwithstanding, the United States economy experienced 13 straight quarters of gross domestic product growth until the military cut spending by 22 percent in the 4th quarter and broke the streak. Should the sequester take effect, 800,000 defense workers will be furloughed and other privileged dominoes are liable to lose their balance. (Read More: Voters Tune Out as Budget ‘Sequester’ Cuts Near: Poll)

It has always been quite the preposterous assumption that we can cut spending and grow the economy at the same extraordinary rates as when houses were used as ATM machines and C students lived like they got A’s. The government owes $16.5 trillion, borrows another $1 trillion each year and must satisfy the will of a voting populace intent on receiving $1.8 trillion in annual tax breaks for buying a house, medical insurance or saving for retirement.

There is, however, a silver lining to it all: Americans might rediscover the things that really matter in life.

Television ads, shopping malls and product placement marketing defined our success; credit cards only allowed us to buy it. Sure enough, consumer debt as a percent of disposable income jumped by 75 percent from 1980 to 2010, just as the economy became increasingly addicted to consumer spending, growing from 62.5 percent of GDP to 70 percent during the same period.

(Read More: Obama Warns Sequester Will Cause Job Losses)

What a terrible bargain.

Despite being the richest nation on earth, the United States is also the most anxious, with nearly a third of Americans likely to suffer from an anxiety problem in their lifetime. If one were to ask patients with a terminal illness what they regret not doing, it’s doubtful that anyone would mention a bigger house, a nicer car or a walk-in closet. With few exceptions, the luxury cars don’t make us happy; it’s the person in the passenger seat.

In some ways the Congress has the difficult task of tempering our material expectations without dampening our will to be great, to be responsible and to build something for our children at the expense of ourselves. What a delicate balance to maintain, to foster innovation and full employment while also satisfying debts accumulated over the last five administrations.

These things are imminently possible. Domestic industries are destined to evolve and workers will become better trained, but it takes time and it requires patience and it demands sacrifice and it means that some of us will not have as much stuff in the meantime. Petulant free market panderers may argue in favor of laissez faire economics, noting its many favorable qualities, but if capitalism were more than just a caricature of itself we wouldn’t be so concerned about these budget cuts in the first place.

Prehistoric humans lived shorter lives in part because younger generations, in dire need of shelter and lacking the requisite knowledge to build a house, ultimately displaced their elders. The American taxpayer, having demanded its cake and austerity measures too, is once again faced with a scripted day of reckoning.

We might find ourselves better off after all.

Ivory Johnson, CFP®, ChFC, is the founder of Delancey Wealth Management, LLC and has over 20 years of investment experience. He can be followed onDelanceyWealth.com. Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Delancey Wealth Management, LLC, A registered investment advisor and separate entity from LPL Financial.

http://www.cnbc.com/id/100485513

The United States has a renewed sense of optimism.

There are 3.4 million unfilled positions waiting for qualified applicants and jobless claims have fallen to their lowest level in four years. Meanwhile, manufacturing jobs are being created for the first time since 1997, corporate profits are at their apex and General Motors is the world’s best-selling automaker.

Who’d of thunk it? In September of 2009, El Erian, president of the largest bond manager in the world, called his wife and asked her to withdraw as much money from the bank as she could because he thought the financial system was about to collapse. That’s where we were, teetering precariously on the brink of the abyss, just a stone’s throw away from everything we thought we could never become.

What ensued was a chorus line of knee jerk reactions, best described as being in a room with trusted friends, only to discover that somebody had a contagious disease transmitted through conversation – people stopped speaking to each other. That was the basis of the liquidity crisis; banks didn’t know which balance sheet was infected and investors wanted nothing to do with toxic assets.

The government responded with over $12 trillion of commitments, acting as an investor, insurer and lender of last resort. These programs included the guarantee of money market funds, commercial paper, Asset Backed Securities and TARP. The FDIC insured senior subordinated debt issued by banks and poorly performing assets owned by banks, as well as non-interest-bearing deposit accounts used by businesses to run day-to-day operations. The Fed also made low-interest loans and opened the discount window to the tune of $1.4 trillion.

The argument can be made that the Fed’s actions were unconstitutional; that our founding fathers believed only Congress had the ability to create money. Perhaps, but time was short, dominoes began to lean on one another and consumer spending wasn’t 70 percent of America’s 18th century economy.

There’s nothing glamorous about where we’ve been, America’s aura of economic invincibility challenged by a housing bust and budget deficits as far as our black eyes can see. And while it’s convenient to poke holes in doctored accounts of prosperity, namely the U6 numbers and absence of food and energy in the calculation of CPI, progress cannot be ignored.

It has, however, become a race against time, our economy speeding towards an oncoming truck carrying $15 trillion of debt and explosive derivatives, hoping to make it to the exit ramp just in time. Congress and the administration have borrowed money to reinvest in a family business that’s seen better days, banking on higher tax receipts and reduced dependence on a federal government that subsidizes 50 percent of all U.S. households.

The candlestick maker had time to ponder the sale of light bulbs, while today’s creative destruction moves at a blistering pace. What a fine game of chicken we find ourselves in? We’re in better shape than before, although future stability will be measured by how fast we navigate the gap between a thriving economy and the due date of our obligations. There’s something to be said about playing to win, but this is a deal with the devil, and I’m told he charges one hell of a hard bargain.

Ivory Johnson, CFP, ChFC, is the director of financial planning at Scarborough Capital Management, Inc. and has over 20 years of investment experience. Mr. Johnson attended Penn State University, where he received a Bachelor of Science degree in finance. He can be followed on www.IvoryJohnson.com.

http://www.cnbc.com/id/46383946

By: Ivory Johnson
Scarborough Capital Management, Inc

Federal Reserve chairman Ben Bernanke went to the well of make-believe wealth once again, setting the stage for more bond buying in last week’s announcement. With a sullen economy supported by 36 months of smoke and mirrors, the punch bowl was never far away.

The lead singer get most of the attention, but the drummer directs the band. Let’s be clear, the equities markets rebounded in 2009 in response to unprecedented central bank interventions, as the Fed swapped cash for trash so the large banks could buy stocks with money that wasn’t backed by anything of value.

When Quantitative Easing II  expired in July of 2011, the market dropped by 15 percent over the next six weeks and only rallied after the Fed stated they would keep interest rates artificially low. Once again, stocks avoided a day of reckoning, their unofficial bailout financed by people who diligently saved money and have no yield to show for their efforts.

To its credit, Europe resisted counterfeit measures to fix decades of reckless economic policies, fearful of hyperinflation that engulfed Germany during the Weimar Republic. Each unflattering headline, however, led to market declines later rectified by news of stabilization funds, long term refinancing operations and IMF  assistance. Talk might be cheap, but fake money is quite the bargain.

As American money market funds reduced their exposure to European banks, the ECB opened swap lines with the Federal Reserve to supply European banks with U.S. dollars, forgetting that in August of 1921 Germany employed a similar tactic. Adam Fergusson explains in “When Money Dies” that the German government bought foreign currencies at any price with paper marks and accelerated inflation. Of course, history might not repeat itself – this time they got paper money in return.

So what’s an investor to do?

The stock market used to be a place where companies could attract capital to finance business activities in exchange for equity. Share prices cooperated accordingly, reflecting potential profit and fundamental analysis to determine a fair value. Today’s climate demands a different approach, one that addresses both the symptom and the disease.

Fervent monetary policy is government’s reaction to a terrible cold, a sign that the unimaginable has become omnipresent, a functioning system atrophied into something far less authentic. These are the actions of sovereign nations who can’t possible pay their bills, and still in possession of unparalleled survival instincts, resort to methods that go beyond the scope of free market activities.

Risk management demands the identification of potential losses and a means to protect wealth against known threats. Entrepreneurs will always find a way to make money and workers have a storied history of adaptation – private industry will be fine. Rhetorical predators, however, renowned for prowling the halls of government on both sides of the aisle, present a far greater danger.

Investors have the unenviable task of protecting assets against fiat currency while simultaneously participating in central bank induced rallies. Ben Bernanke’s most recent carrot remains intact, as stocks are unmoved by the Fed’s latest peace offering. We’ll know in due time if somebody else holds the stick; let’s hope the Fed has purchased that too.

Ivory Johnson, CFP, ChFC, is the director of financial planning at Scarborough Capital anagement, Inc. and has over 20 years of investment experience. Mr. Johnson attended Penn State University, where he received a Bachelor of Science degree in finance. He can be followed on www.IvoryJohnson.com.

With Europe in despair and the U.S. economy still sputtering, consumers rolled their eyes like dice, wagering family budgets on Black Friday. Sales increased by 6.6 percent the day after giving thanks for what we already have, an indication that Congress isn’t the only house with a spending problem.

As a whole, Americans have $2.4 trillion in consumer debt, $800 billion of which is from credit cards. It’s important to note that paying $300 a month on a $10,000 balance of revolving credit at 10 percent would take 10 years longer to satisfy than a fixed loan with identical terms. In the words of Toni Morrison, “every brothel don’t hang a red light in the window”.

It’s worth noting that consumers moderated their debt and increased savings rates in the wake of the great recession. Whether these modifications are a function of responsible behavior, strict lending practices, the lack of home equity value or some combination of the three remains to be seen. One can only hope the recent $11.4 billion shopping spree doesn’t exhume past indiscretions.

Money, however, is often used to mask perceived shortcomings. Some employ luxury items to prove past naysayers wrong while others showcase material possessions to legitimize their self worth and make amends for a deprived childhood. There are also legions of financially disabled children marching through the malls, handicapped by the exuberant lifestyle of parents they attempt to imitate without the proper means.

The opportunity costs of shopping is reflected in the lackluster savings rates, as the average 401(k) balance is $74,900 and 25 percent of baby boomers have nothing set aside for retirement. Compared to other industrialized countries, the U.S. ranks behind Canada, Italy, France, Germany and the United Kingdom in the rate of household savings.

And while retirement savings have increased by three percent from 2010, a five percent distribution from a diversified portfolio has an estimated 35 percent chance of running out of money within 30 years due to market volatility – every dollar counts. Even those on sound financial footing with clean balance sheets might be unable to maintain the same quality of life once they leave the workforce without an adequate nest egg.

Oddly enough, reckless consumer spending contributed to the housing bubble.

It seems that Americans bought inexpensive goods made oversees with U.S. dollars obtained from cash-out refi’s that were subsequently used by foreign investors to purchase our government bonds. As the price of fixed income increased, interest rates declined, prompting more exuberant behavior that started the cycle all over again.

A fair number of Americans are determined to accumulate more stuff by hook, crook, or in one case, pepper spray. Keeping up with the Jones’ was appealing, but it turns out the Jones’ were trying to keep up with the Kennedy’s – good news when 70 percent of GDP comes from consumer spending and 19.4 percent of total retail sales are the result of holiday shopping. It’s great in theory, but then again so was communism, and we all know how that turned out.

Ivory Johnson, CFP, ChFC, is the director of financial planning at Scarborough Capital Management, Inc. and has over 20 years of investment experience. Mr. Johnson attended Penn State University, where he received a Bachelor of Science degree in finance. He can be followed on www.IvoryJohnson.com.

http://www.cnbc.com/id/45477919

By: Ivory Johnson
Scarborough Capital Management, Inc

In a matter of just 25 years, defined contribution plans have become the predominant retirement tool available to American workers, many of whom have little investment experience. Nevertheless, the novelty could be wearing off, as 401(k) plans may be ill-suited for the current economic environment.

By: Ivory Johnson
Scarborough Capital Management, Inc

Europe’s recent attempt to manage the persistent debt crisis still remains a source of great concern. Naturally, the issue is magnified by the constructs of the European Union, overwhelmed by healthy egos and very little money.

The European Union is a confederation of 27 nations who collaborated to facilitate the free movement of goods, labor and capital. In fact, the majority of all EU trade is done internally in what has collectively become a $16 trillion economy. It was originally established to maintain peace in the aftermath of WWII, believing that nations who trade together stay together, preferring bottom lines to bombs.

In 1993 the EU ratified the Maastricht Treaty, which led to the unification of the currency of 11 member states into a single denomination in 1999 that has since grown to 17 nations. During the course of unifying the currency, the European Central Bank was formed to issue money and maintain price stability.

If everyone knows it’s broken, make it too complicated to fix. The European Commission can both propose and initiate legislation and is responsible for upholding treaties. The European Council, on the other hand, is composed of the heads of states and offers strategic direction, albeit with no formal authority.

The Council of Ministers, heavily influenced by France and Germany (who diluted the Stability and Growth Pact meant to safeguard against excessive debt levels to suit their own purposes), sets medium term goals and approves the budget and legislation proposed by the European Commission. There’s also a European Parliament, the only elected political body in the EU that exercises legislative functions in conjunction with the European Council.

These competing bodies must then referee supranationalism and intragovernmentalism. The former sentiment is generally adopted by European Commission, who believes the health of the EU goes beyond national interest. The Council of Ministers, however, promotes cooperation between national governments often associated with the latter argument.

The recent events necessitate financial contributions from wealthier member states and austerity measures from ailing countries that require approval from their respective bodies of government, all of whom maintain different interests and historic relationships. To put the current dilemma into context, these elaborate bureaucracies and legal principles must now coordinate with one another to manufacture economic growth and prevent a sovereign debt crisis.

Germany may be the only successful child amongst a family of high school dropouts who can dig the EU out of this hole, despite an impertinent spouse tired of writing checks and supporting weaker members of the brood. Please note that the taxpayers of Germany heard stories from their grandparents about the Weimar Republic and fear hyper inflation the way Americans ignored the savings habits of the greatest generation.

This meandrous process has produced cosmetic remedies, such as leveraging the European Financial Stability Facility to provide insurance for suspect Italian and Spanish debt, at best a high stakes game of chicken. Private investors can either throw good money after bad or watch capital disappear in a disorderly liquidation of sovereign debt. It’s Mary Poppins at her best – pick your poison and pretend it’s a spoonful of sugar.

The global markets are all watching Europe’s efforts to unscramble scrambled eggs; the one size fits all monetary policy apparently appropriate for no one. Things might work out in the end, but sooner or later this collage of erudite politicians must play the role of a tailor, a vocation for which few of them have any experience.

Ivory Johnson, CFP, ChFC, is the director of financial planning at Scarborough Capital Management, Inc. and has over 20 years of investment experience. Mr. Johnson attended Penn State University, where he received a Bachelor of Science degree in finance. He can be followed on www.IvoryJohnson.com.