The state of the financial system in the US is horrible and we are on the road to becoming a second rate economy.  It’s a huge combination of monetary policy, fiscal policy and regulation of the financial sector.  When the financial companies are no longer good stocks to buy, you are staring in the face of trouble.  To me, the financial sector is the indicator for the health of our economy.  Currently, the financial sector indexes are lagging the general S&P 500 composite.  If the following things don’t get addressed, investing in the US stock market will be hard to do successfully.

The first big problem is the US debt.  The deficit arguments aren’t really addressing the spending problems.  Both sides have a point.  You need to raise taxes and cut spending.  It’s not one or the other.

Unfortunately, these aren’t good ideas to implement right away.  As the Fed Chairman Ben Bernanke said recently, these austerity policies could derail the painfully slow economic recovery if it takes affect too quickly.

The other major problem is the Fed.  Their balance sheet is so inflated it’s not even funny.  They basically printed tons of money for QE1 and QE2.  That’s after the government bailed out the banking industry.  The government has no cash and it’s only getting worse.

Really, the only painful cuts that will make a difference are massive cuts in entitlement programs.  That means touching Medicare and Social Security.  It will also mean cutting defense budget spending.  That will certainly mean getting out of Afghanistan.

The other thing that is happening is the government is putting on oppressive regulations on the financial industry.  They are overreacting, and this posture will drain capital from US banks and into other international markets.  Economic and financial influence is already moving overseas.  This may be putting the nail in the coffin.