Tariffs and Currency Games 9-30-2009

September 30, 2009 Edition, Volume III

Inside Signature Update

- 2nd Quarter GDP Revision and More to Come
- Tariffs and Currency Games
- Protectionism and Mistakes of the Past: the ‘Swedish System’ and Chinese Fortunes


2nd Quarter GDP Revision and More to Come

Wednesday morning’s announcement of 2nd Quarter GDP revisions to a decline of .7% from a previously reported -1% may seem slight, but it reveals important corroboration for economist’s expectations of positive growth of 3-4% for the 2nd half of 2009. Domestic output is growing, if ever-so-slightly, and the improvement supports the US equity market’s continued gains for the month of September and the 2nd Quarter as a whole.

The DOW Industrials closed September with a 220 point gain on the month capping a 1,265 gain for the quarter. Market pessimists first called for a lackluster summer and then hoped for a meaningful correction in September; neither of which materialized. Now Bears are positioning themselves for weak October stock market performance and may be disappointed as unemployment levels continue to moderate and a weak dollar continues to add strength to US export activity. Even the beleaguered housing and transportation sectors continue to benefit from current economic trends.

Market expectations of 11,000 on the DOW before the end of 2009 are becoming more status quo than brave projections as we turn to the 4th Quarter. Perhaps more than ever, investor and trader eyes are focused on manufacturing reports, employment levels and retail activity as a ‘tell’ of 2010’s developing market trends.


Tariffs and Currency Games

Throughout history, tariffs have been used as effective tools to aid businesses within developing economies while they mature sufficiently to compete in global or regional markets. When used by fully developed economies, tariffs are most commonly employed as political tools to make a point to foreign governments seeking to gain trade advantage.

Early in US history, the application of a tariff to an imported product was one of the few ways the federal government had to create much needed revenue. In addition, it was a relatively effective way to equalize pricing between products made in fledgling domestic factories versus more efficiently produced products manufactured predominantly in Western Europe. They were used as a means whereby US businesses could compete against foreign growers and manufacturers whilst maturing to the point where they could compete on their own. Often times the revenues garnered from tariffs were used to support the growth and maturation of domestic businesses in an effort to help them compete in foreign markets and at home.

In simple terms, a tariff is a tax on imported goods. Depending on the structure of the tariff, the tax may be paid by the importer or exporter, but in either event it has the effect of increasing the price of the good in the import market. In some cases the exporting country will subsidize the manufacturer of the good in the amount of the tariff, but in most cases the cost of the tariff is added to the cost of the good, making it less attractive to buyers in the import market; thus discouraging the importation of the good.

For small, less mature nations, tariffs on manufacturing and agricultural products can be beneficial as a means to level the playing field while the home team develops in talent, strategy and capital. For highly developed nations, tariffs are used as a way to get around global competitive forces, or as in the case of the newly imposed tariff on Chinese manufactured tires, they can help domestic businesses offset the effects of dumping by foreign manufacturers and counteract the impact of nationalized support sometimes offered foreign manufacturers by their own governments.

In modern times, the use of tariffs has become a game for trade delegations to play while seeking advantage over one another; for consumers, manufacturers and others it can become a very costly game with few winners. A central government can increase the price of imported goods in a number of ways and may choose to do so for a variety of reasons; not all of which are as obvious as one might expect. Applying a tariff is a way of focusing on a particular product, manufacturer or exporting nation – it is targeted and tactical.

A less obvious strategy may be what occurs when a currency decreases in strength relative to one or many foreign currencies. Most think of the weakened US dollar only as a sign of declining US financial strength around the globe, but in reality it is a major means of strengthening US export business as foreign buyers are able to purchase US made goods more cheaply than they can those manufactured in some other nations. In the near term it bolsters US manufacturing and employment at the expense of the foreign manufacturing; in the long run the impact may be much more complex.

A senior Chinese trade delegate recently referred to the US Treasury and Federal Reserve’s willingness to allow the dollar to sink to lower levels as an act of financial terrorism. The comment garnered eager press attention in the midst of a verbal fist fight between Treasury Secretary Geithner and his Chinese counterpart. Most of the coverage seemed to disregard the fact that the Chinese have artificially kept their currency from rising against the US dollar for decades in an effort to continue their new role as exporter to the world of inexpensively manufactured consumer goods.

Many argue that the US consumer has benefited greatly from the availability of lower cost goods, but US manufacturing has paid much of the price tag. Though it is likely that the breadth of the US economy has benefited more than the collective burden born by employees of US manufacturers, many of whom are now unemployed consumers, it’s hard to argue that lower prices for imported goods have benefited everyone.

Likewise, a weak dollar aids in the increase in the price of oil and gold and can stimulate inflationary pressures or even signal a coming recession. Oil, regardless of where it is produced, is priced based upon international supply and demand adjusted for currency exchange rates. The escalation in oil’s trading price in mid-2008 equated to higher costs in transportation, manufacturing, and utilities and negatively impacted the US economy in the midst of a real estate and credit crisis.


Protectionism and Mistakes of the Past: the ‘Swedish System’ and Chinese Fortunes

Protectionism is a short-sighted game for mature governments to play. It can have immediate, and sometimes popular benefit, but games played at the level of global financial giants often have unintended consequences.

The ‘Swedish System’

The Swedish government pursued an aggressively protectionist stance for decades as it developed the ‘Swedish System’. From the 1950’s through the early 1970’s Sweden created a social system like none other. Swedish manufacturing and export thrived and the lifestyle of Sweden’s citizens became one of the most stable and comfortable in Europe. Sweden’s central bank artificially kept the value of its currency stable and the federal government actively subsidized large manufacturing concerns focused on export goods. In an effort to support the expanding welfare state, taxes on corporate income, invested capital and above average personal incomes eventually soared. As a result, in the 1980’s and 1990’s many of Sweden’s most profitable corporations and talented leaders migrated to other parts of Europe, leaving a trail of higher unemployment and lower tax revenues in their wake.

As Germany impacted the economics of Western Europe through its reunification plan, most European currencies first faltered and then declined sharply. Sweden’s currency had been so weakened through federal manipulation that even the enticement of 500% interest rate offered by Sweden’s central bank wasn’t enough to attract needed capital. Then, as the dot com bubble burst in the early 2000’s and the real estate and credit crisis hit less than a decade later, Sweden was ill-prepared to face another round of difficult financial times.

Consequently, the Swedish economy has been hit harder than most, her corporations and citizens have suffered, and the much touted ‘Swedish System’ is no longer able to offer the social welfare and support it once promised. Some estimates show Sweden’s real unemployment rate as high as 26% and Anders Borg, Sweden’s Finance Minister reports the economy at a 30 year low with GDP growth expectations pushed to 2011.

Chinese Fortunes

China, the current star of the international economic stage, is following Sweden’s playbook and some suggest the Chinese economy could suffer a similar outcome. Even with China’s impressive GDP growth in recent years, the infrastructure challenges and social welfare needs of a country coming out of generations of economic malaise are daunting. Like Sweden in decades past, China enjoys a net trade surplus and now owns some $1.3 trillion in US debt. Where China differs is in the breadth of her economy, the still untapped labor productivity gains that will be realized as almost one billion Chinese citizens migrate from poverty level agrarian existences towards middle-class lifestyles, and the riches of her natural resources.

China suffered during the Asian financial crisis of the late 1990’s, as did all of Asia, but her choice to maintain an artificially stable currency later helped the country to capitalize on weakness in regional trading partners. In recent years the Chinese have allowed the Yuan to float upward by as much as 10% against the US dollar to assure Chinese manufacturing an advantage against foreign competition, but increasing pressure from other developed economies such as the UK, Germany, France and the US may finally force China to value the Yuan more aggressively. If the exchange value increase occurs naturally it could damage the Chinese economy, and along with it the rest of the region.

These are but a few examples of the potentially damaging effects of a national protectionist policy. While facing the grim realities of the depression, US policy makers adopted a sharply protectionist stance to no avail. The depression deepened as the policy, coupled with other fiscal and monetary policy decisions drove unemployment to 25%.

Bernanke and company are acutely aware of the mistakes of the past, as well as those of other nations. The Fed’s continued aggressive monetary policy is evidence of their ongoing concerns, even though the costs of current policy may include continued weakening of the dollar and future inflationary pressures. Though there are risks to be avoided as the Fed now seeks a more temperate monetary stance, the unprecedented creativity shown by policy makers in the face of the recent has served us well.

Now, as we appear to be on the leading edge of emerging from one of the most economically troublesome periods in the last 100 years of US history, the Obama administration and Democrat controlled House and Senate are beginning to play the tariff game; as though our weak dollar, trade deficit and soaring federal debt isn’t providing sufficient pressure on our foreign trading partners.

From protectionist language included in the stimulus plan to trade barriers now offered Chinese tire manufacturers, current fiscal policy makers risk offsetting economic recovery trends. This simply isn’t the time for such games – there are more important issues to which the administration and congress should be attending.





Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC

And So It Continues - part two 9-21-2009

September 18, 2009 Edition, Volume III

Inside Signature Update

- The Next Bubble … Gold!
- The Current Account Deficit
- Yield Curves are a Little Like Tea Leaves


The Next Bubble … Gold?

The price of gold rose to over $1,020 in late trading Wednesday as the US dollar continued to sink amid fears over inflation. Many now expect the next ‘bubble’ to be in precious metals with gold leading the way, just as oil did last year, real estate before that, and tech stocks before that. Bubbles can be a great place to be when you’re on the rise, but as we’ve seen all too clearly, they can be devastating when they burst. In this case, the rise in the gold prices is more of a reflection of the weak US dollar and concerns over inflation than anything else and it is likely not sustainable.

In 2008 we saw oil prices heat up and then supercharge as speculative forces captured the markets; then prices crashed. In recent months we’ve seen and heard more from ‘gold bugs’ than at any time since the late 1970’s and early 1980’s. You may recall that this was when gold topped $1,000 an ounce before falling by more than 65%. ‘Gold bugs’ are those proponents of owning gold as a tradable commodity just in case calamity strikes and currencies are no longer of any value. While they offer an interesting argument and make some good points, their presence increases just before gold prices start to rise; about the same time speculation begins to take shape. Just as we experienced in the oil markets in 2008, if gold and other precious metals become the purview of market speculation, and they already have, gold could be in for a wild ride.

That’s the good news. The bad news is that most proponents of precious metals ownership recommend that one take possession of the commodity and that makes it far less liquid than may be prudent for most investors. It’s far easier to purchase tangible gold or silver than to sell it, as most buyers want to make sure they’re securing a pure product. Sometimes this requires an assayer’s stamp or certificate and at the very least, this takes time and often adds expense to the transaction.

The markup on precious metals when taken physically (coins, bullion, etc) is significant unless purchased in large quantities (hundreds of ounces), which also means that the discount at which it may be sold can also be steep. Lack of liquidity and steep discounting of an asset with high price volatility can be a recipe for disaster when markets shift – and they ultimately will.

Investors choosing to step into the commodities game may be better served by purchasing gold based mutual funds or ETF’s than the physical commodity itself. The run up in pricing for these commodities may now be too high to make sense for most as investing into a possible bubble is speculation rather than investing and should never be entered into with resources that ought not to put at risk.


(This is not a solicitation to buy or sell any investment of any kind. Consult with your financial advisor before buying or selling any investment or financial instrument. The purchase of commodities in any form may involve a high degree of risk. Past performance is no indication of future gains.)



The Current Account Deficit and the US Dollar

The US dollar has continued its decline in recent weeks and has reached the point at which some foreign central banks have once again begun to openly discuss an alternative to the dollar as a global currency. Were it not for the fact that there are many trillions of dollars held by foreign investors and central banks, the debate may be credible, but in light of the dominance of the dollar in international trading and the dependence so many foreign governments have on their dollar denominated holdings, the discussion is more amusing than important.

In the short run, the US dollar’s decline actually strengthens the economy as US goods and services become more affordable to overseas markets. In the long run it can lead to inflation and weak economic bargaining power.

The current account deficit, the measure of the balance of foreign trade, has declined (improved) to $98.5 billion from over $104 billion in recent months, and while the impact is helpful, the cause reflects lower US demand for imports owning to the weak economy. The Fed indirectly influences the value of the dollar and the current account deficit by controlling the money supply and setting interest rates. When the US economy can bear higher rates, the dollar will improve. In the mean time we’ll have to suffer threats from the BRIC nations (Brazil, Russia, India and China), some Middle Eastern countries (Saudi Arabia, Iran, The UAE),and a few Central and South American dictatorships (Cuba and Venezuela) as a weak US dollar puts pressure on their economies.

The leaders of some of these same economies rattled their sabers with bravado when the price of oil was higher and their coffers were filled with hundreds of billions in stronger US dollars. Some touted their disdain for the US and vowed to use their resources to challenge our economic superiority. With the price of oil in the $72 range - 50% lower than less than a year ago - their clamors are no less caustic, but their rhetoric has changed. Ironically, their appetite for US treasury debt has increased and their dependence on the well being of our economy has increased. I think Keynes would write this off to ‘animal spirits’.


Yield Curves are a Little Like Tea Leaves

The current slope of the yield curve - reflecting short term debt or credit as less costly than that of longer duration - suggests that we will continue to enjoy a strengthening of our economy and an improvement in the equities markets, but it does not suggest a meaningful strengthening of the dollar in the foreseeable future. Brian Wesbury, Chief Economist at First Trust, suggests the slope of the yield curve confirms his belief that the US equities market is currently undervalued by some 40%. While 40% seems very optimistic (Wesbury is a self-proclaimed optimist), I’m confident that his expectations for continued market improvement are accurate, though perhaps a little overstated. We expect GDP growth of 3-4% for the second half of 2009 with continued gains in 2010. While this may not support a 40% improvement in stock values, it certainly suggests an ongoing bull market recovery for the next 12 – 24 months.

The following chart shows selected treasury yield curves of the last two years, and together they tell a story.

Notice the 9/16/2009 trend line; the near term treasury debt yields little while the 30 year maturity yields more than 4% - this positive sloping curve suggests a normally functioning credit market, though at very low rates. In contrast, the 10/15/2007 trend line – this was when the DOW was over 14,000 - showed a flat yield curve with little additional benefit to owning longer maturities versus those of shorter duration. This was due in part to the perceived benefit of owning stocks over bonds; we now understand that this was also beginning to reflect concerns in the credit and housing markets.

Now look at the 9/8/2008 curve; though it has a positive slope, it reflects a high cost for short term borrowing when compared to longer term commitments – this was the case when the credit markets began to seize and the Federal Reserve and US Treasury were forced to take unprecedented action. The 1/8/2008 curve, in contrast, represents the beginnings of the credit debacle well before it became obvious to the markets. Short term borrowing was expensive and became less so as durations extended to the two to five year range, before shifting higher with ten year maturities and beyond.

This inverted curve was evidenced slightly in the 10/15/2007 trend line when expectations for the stock markets were still high, but its appearance was discounted by most economists.

In retrospect, we recognize that 8 out of the last 10 recessions were preceded by flat or inverted yield curves such as those we saw in October 2007 and early 2008. Likewise, a positively sloping yield curve, similar to those we’ve experienced throughout 2009, foretells a bull market in stocks. Like tea leaves to a fortune teller, the treasury yield curve offers important texture to other economic data and events and ought not to be overlooked. Over time it has become one of the more consistent indicators of equity market trends and the current yield curve suggests Wesbury may be more right than many of us dare hope.


As I said a few weeks ago… this is just starting.




Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC

And So It Continues - part one - 9-16-2009

September 16, 2009 Edition, Volume III

Inside Signature Update

- The Market Should Always Ahead of Itself
- Recovery Patterns and Dynamics
- The Fed Balance Sheet and Money Supply


The Market Should Always Be Ahead of Itself

The DOW Industrials topped 9700 in early trading on Wednesday extending September’s gains and putting to rest most concerns over an early fall swoon in the equity markets. Fed Chairman Bernanke’s comments Tuesday reaffirming his position that the US recession has come to an end helped push the markets forward as investors began to bring money back from the sidelines. The level of money market deposits has now decreased from $3.8 Trillion to $3.56 Trillion as investors and traders have begun to back away from the overly risk averse posture that led to the March 2009 lows in the DOW and S&P 500. During most of the 1980’s through 2000’s the level of money market deposits hovered near the $ 2 Trillion mark; even at $3.56 trillion there is an impressive amount of cash on the sidelines waiting to enter the markets.

Some market pundits continue to suggest that the market is ahead of itself and that we are due for a correction, but in this case these people are ignoring the entire premise on which the markets are based: the equity markets reflect stock values based on corporate and economic activity 6-9 months in the future – they are always ahead of themselves! The real problem lies when the markets are more focused on what happened yesterday and ignore what is likely to happen next month or next year. The wild market swings of the fall of 2008 that led to the market’s decline into the spring of 2009 were driven more by fear than pragmatism. The early 20th century economist, John Maynard Keynes, labeled this type of activity ‘animal spirits’ and suggested it is the inconsistent factor of human behavior that is responsible for wide, or wild, swings in the markets and the economy as a whole.

I think we would all agree that the ‘animals’ have been very ‘spirited’ this last year, as we saw the pendulum swing from being overly optimistic to gut wrenchingly pessimistic in a period of months. One of the few benefits of such activity is the knowledge that calm will return and saner heads will prevail in due course. One of the more disconcerting realities is that we seem doomed to repeat this cycle every ten to twenty years as creative minds suggest that something is altogether different this time than it may have been in the past – rarely is this the case, but it certainly makes for an interesting ride!


Recovery Patterns and Dynamics

The more optimistic voices in the markets suggest that we are in the midst of a ‘V’ shaped recovery rather than a ‘v’, ‘u’, or ‘w’ shaped pattern. The differentiation of ‘V’ versus ‘v’ simply denotes the dynamic of how far we are likely to rise in recovery contrasted by how dramatically we fell in recession – it reflects a level of energy and optimism that may or may not be warranted. The ‘v’ versus ‘u’ description is intended to suggest that the market and economy will rise quickly from its lows rather than lingering near them before recovering, as is the case in a ‘u’, or returning to them, as is the case in a ‘w’. Each variation offers an acceptance that calamity has been avoided and growth will resume.

Seemingly inconsistent with evidence of economic growth and stock market rebound is an unemployment level near 9.7%, causing many to use the term ‘jobless recovery’. Closer examination reveals that the economic recovery in the midst of any period of high unemployment (anything in excess of 7%) begins with a continuation of an increase in jobless claims. In other words, virtually all substantial economic recoveries begin as jobless recoveries as we progress towards full employment.

The production/employment cycle in growth is counterintuitive to some. When an economy begins to recover, or expand, output (production) increases first by utilizing excess inventories built up during the recession, then by absorbing excess labor capacity and finally by adding employees to corporate payrolls. Only then does the employment picture show obvious improvement. A look at the patterns of recent months reflects this progression:

- Retail sales have improved modestly (up 1.1% ex autos last month) and inventories have leveled out (down 1.0% in August).

- Corporate productivity has improved and the rate of jobs lost has slowed.

- The velocity of money has sped up (more money changing hands more rapidly) and both producer and consumer prices have posted moderate gains (1.7% and .04% respectively).

- Industrial production has increased in spite of lower employment levels and an increase in GDP of as much as 3-4% for the 3rd and 4th quarters is becoming more of an expectation than a hope.


The Fed Balance Sheet and Money Supply

Concerns that the Fed will tighten the money supply and stall the recovery abound, but Bernanke and company appear to be walking this fine line better than most realize; not doing so would increase the possibility of the dreaded ‘double dip recession’ so many have warned about. The Fed expanded their balance sheet while also expanding the money supply over the last 12 months. The balance sheet changes aided in returning confidence and liquidity in the credit markets and the money supply increases (evidenced by a decrease in interest rates) have helped limit decreases in consumer spending and employment. Ultimately the Fed must return to a more normalized monetary policy to avoid overheating the economy and igniting inflation and that normalization process has certainly begun, but not at the cost of the money supply. The Fed has reduced its balance sheet from $2.2 trillion to $2.06 trillion over the last several months as those resources have no longer been as necessary to maintain stability in the credit markets, but the money supply remains relatively unaffected. The Fed’s balance sheet was at $800 billion before 2008’s credit and liquidity crisis.

At some point the Fed will have to reduce the money supply to avert inflationary pressures. Doing so now would not only stall the economy, but would unavoidably increase the unemployment rate and push us back into another recession. Again, the line here is thin, but it appears that the Fed is doing the right thing and doing it in a timely manner.





Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC

Stay Tuned... this is just starting

September 3, 2009 Edition, Volume III

Inside Signature Update

- Stay Tuned… this is just starting
- Just What Are We Reforming - part two


Stay Tuned… this is just staring: Markets Rally on Jobs Report

The US Department of Labor reported an increase in the national unemployment rate to 9.7% early Friday morning in spite of lower than expected job losses… and the US stock market rallied. In fact, the markets have posted gains in the face of every Jobs Report since early February, regardless of what those reports revealed. Why?

It’s not because the market welcomes unemployment. The 9.7% figure was worse than expected and surprised many investors and economists, who had expected a figure closer to 9.5% (the rate coming into Friday morning had been 9.4%). But the rate was also better than feared, and that’s the point.

Even though the economy has begun to stabilize and markets have dramatically improved, there’s enough lingering fear that investors breathe a sigh of relief in the face of a certainty, even if it’s less than had been expected. Remember, the markets disdain uncertainty more than nearly anything else.

We continue to face uncertainty in the credit and labor markets, and both are critical to economic recovery. Manufacturing is up, personal incomes have risen slightly, inventories continue to decline and have yet to be replenished (suggesting the likelihood of further gains in manufacturing), and real estate prices and volumes have improved.

With these trends in the economy, we expect unemployment will continue to increase towards 10%, but likely won’t breach that number. We also look for GDP growth in the 3rd and 4th quarters of 2009, extending to meaningful gains in 2010. As the stock markets are forward looking indicators of future economic performance, we expect moderate gains through the end of 2009 extending to more impressive returns in 2010.

Stay tuned… this is just starting.

Just What Are We Reforming – part two

The debate surrounding healthcare reform may seem to have quieted down over the last week or two, but believe me, it’s just getting started. With the passing of Senator Edward Kennedy (D-MASS), some expect the initiative’s proponents are fired up and will attempt to push inadequate legislation through in an effort to get something done. Others recognize that one of universal healthcare’s fiercest advocates is now gone and with him went critical support. Regardless, the changes to current proposals have been more than anyone can keep up with as legislative leaders shift left and right in an attempt to maintain the support of a frustrated electorate. Most objective observers now believe the existing plans have little more than a faint chance of becoming law.

A side-by-side comparison of the major health care reform proposals is available through the Kaiser Family Foundation’s website (www.kff.org). While each proposal has some merit, none deal with only the important issues. Rather, each reflects the personal agenda of their backers, and the byproduct is a group of inefficient, bloated and unacceptable proposals lacking focused articulation of the most important issues of choice, accountability and expectation.

Of the current legislative proposals, the Wyden-Bennett Healthy Americans Act sponsored by Senators Ron Wyden (D-OR) and Robert Bennett (R-UT) appears to have the best handle on these issues. It is far from perfect, and does not enjoy broad bipartisan support, but merits consideration.

In Part One I stated that healthcare is our opportunity, our privilege, perhaps even our blessing, but it is not our right. Some readers of Signature Update have expressed disagreement by including quality healthcare as a facet of our right to ‘life, liberty, and the pursuit of happiness’. I see their point, but can’t help but return to my original position. Perhaps we can agree that we should all enjoy the right to make our own healthcare decisions, the right to be responsible for the choices we make, and the right to be accountable in light of our expectations of our healthcare system. I should add that it may also be the responsibility of those with greater resources to help provide for those who are less fortunate. Likewise, it is the responsibility of those who have sufficient resources to access healthcare responsibly and not become a burden to the system.

As a society we are already funding the healthcare needs of the poor and elderly, but in many cases we’re doing so in a terribly inefficient manner. Redirecting those resources towards medical insurance specifically designed to cover this part of our population may well be more efficient than dispersing it based on crises. Offering a medical safety net for those unable to care for themselves, not unlike welfare or Social Security, seems to not only be the socially responsible choice but also the fiscally responsible option. Medicare is this type of program; it isn’t handled through a ‘public option’, rather it’s open to the healthcare market at large and is as successful a federal program as one can point to.

Choice is an important issue in this debate. It may be expensive, even a luxury at times, but consumers demand it repeatedly. We hold tightly to our right to choose, even though we often don’t take full advantage of it. The proposed ‘public option’ holds little likelihood of expanding choice and would curtail consumer opportunities to choose, as federal funding of the option would drive out existing insurers unable to compete with the federal capital pumped into the option. The open market has driven choice as a key element of many programs and has passed the cost on to consumers, either directly or through their employers. The ‘public option’ will ultimately limit choice and then pass the disadvantages onto consumers with few options.

Among the rationale supporting the opportunity to make our own healthcare choices is our need to have responsibility and accountability. Our society has so encouraged us to be taken care of, rather than to be personally responsible, that we verge on overt irresponsibility. In decades past consumers weren’t pandered to as they are now. President Obama’s victory last fall was largely due to the millions who expected he would step in and take care of them; many of these same voters are those who have now turned against him in the public opinion polls out of a sense of disappointment, discouragement, or worse.

This mentality has overwhelmed our nation’s healthcare providers. Many who are unwilling to consider the real cost of their lifestyle and care simply go to the emergency room when they could have sought primary physician care; had they prepared for it. Others accept any treatment offered, regardless of the cost or likelihood of proposed benefit. And yet others look for outcomes that are unrealistic, which consumers have come to commonly expect ‘medicine as miracle’.

The pressures on the medical community as a byproduct of these expectations and lack of personal responsibility/accountability are enormous and the costs born by insurers have accelerated at an unexpected pace. When consumers are required to see the real expense of their health care, even if they’re not paying these expenses directly, and are expected to share in the burden, whether through better planning, prevention, or direct fiscal responsibility, then the system will be prepared to provide for those who want, and are willing to accept, the outcome of excellent care and all it entails.

Over the years I’ve become a believer in High-Deductable Insurance plans accompanied by well funded Health Savings Accounts (HSA). For those not familiar with how these work we can look at a simple example: John and Mary have an insurance plan that has a $2,500 deductable; in other words, they need to pay the first $2,500 of expense before the insurance covers anything. If the plan is accompanied by an HSA, the funds in the HSA can be drawn on to pay the deductable. Funds accumulated in the HSA can be used for any qualifying medical expense such as eyeglasses, prescriptions, co-pays, dental work, etc. If the consumer has contributed funds to the HSA, they have done so on a pre-tax basis, similar to making contributions to retirement accounts. This gives the consumer the opportunity to scrutinize their health care costs, make sure they know what they’re paying and why, and it allows them to feel as though they’re personally invested, even if they didn’t contribute to the HSA directly.

I’m not advocating that all consumers be responsible to fund the HSA themselves. If there is an employer sponsored plan, or a plan funded with state or federal resources, then it can still be a high deductable plan with an amount being credited to the HSA by the body underwriting the program. If a consumer wants a co-pay for routine visits, then I’m supportive of that, as long as the consumer gets to see the cost of this added convenience and choose it just as we choose accessories on other consumer items. I feel the same way about prescription, dental, eye care plans, etc.

The point here is to allow the consumer to see the fiscal impact of their choices. If we see where our dollars are going, we’re more likely to make efficient choices. If we see the impact of those choices on the balance in an HSA, we’ll be more likely to seek better value in our health care choices, especially if we can also see that a growing balance provides some form of future personal benefit.

So many are willing to turn their healthcare choices completely over to others, and as a byproduct they end up with care that neither meets their needs nor is cost effective. Choice, accountability and responsible expectation are crucial to a successful reformation of our health care system and we simply mustn’t accept anything less.

In an effort to reduce needless cost from the healthcare system, we must advocate specific limits to the liabilities the medical community faces when treating a patient. There are established formulae on which awards can be offered when a physician is found negligent or has made a mistake and these need to be adopted through regulation. They are fair and reasonable, but can in no way make up for emotional suffering; but neither can any amount even the most generous court or jury could provide. These changes would reform the legal process as it pertains to medical liability and substantially reduce liability costs for all in the medical community.

Speaking from a purely economic point of view, the best outcome in this process is one that will limit excess, create surplus and allow for responsible competition while promoting choice. These aren’t hallmarks of government programs of any kind and when dealing with an issue that touches so many lives it’s difficult to keep legislative programs at bay. There is a place for regulation and oversight to keep the healthcare industry safe for consumers and within the bounds of the law, but there ought not to be a place for the government to make our healthcare choices for us.

The medical community must be bound to a standard of care that is both reasonable and responsible, which takes into consideration technological advancements and their costs, and weighs them against the benefit they offer. Those expecting a higher standard of care must be expected to pay for it rather than transferring the cost of low probability procedures to insurers and their broad base of insureds.

Too often tests and procedures are entered into based on a thin possibility of success, but at a high cost. Often times these procedures are performed at specialty hospitals or clinics which only deal with treatments and procedures that are more profitable for the care providers, leaving local hospitals and clinics to provide lower margin care or care for all who seek it regardless of their ability to pay. This needs to change for the benefit of the consumer who may be subjected to low probability treatments, for the benefit of insurers required to pay for costs which may be higher than necessary, and the benefit of a healthcare system required to offer medical treatment even when it isn’t profitable.

Additional solutions to problems in our current healthcare system include providing incentives for those who invest in their own health, providing for ongoing research into the treatment and eradication of diseases, and continued education designed to assist consumers in making choices when it comes to their health and healthcare. Consumers must be allowed to have medical insurance they can take from one job to another and the way in which pre-existing conditions are currently handled must change to meet the needs of a social economy in which mobility has become key.

As consumers we need to expect access to healthcare at costs representative of the level of care we’re receiving. We should take upon ourselves the responsibility to participate in healthcare decisions and understand the real costs and likely benefits of any course of treatment. We should expect to always have access to care as a privilege and treat it as such rather than projecting unreasonable expectations on our system of care providers. Only then will consumers, employers and policy makers be able to enjoy a cost efficient, responsible and excellent healthcare system.



Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC