At some point, if a nation does not get its debt and deficit under control, it will lose access to the bond market at reasonable rates. There have been no exceptions. There is a point at which the bond market begins to worry about the ability of a nation to repay its debt with a currency that is now worth less than when the money was lent, and then interest rates begin to climb.
There is no reason to think the US will be an exception to that rule. That is not what is meant by American exceptionalism.
Why do I think the deficit is such an issue? What makes me concerned that we can’t wait another four years until the US loses access to a low-interest bond market? Would that really be a disaster?
First, in a world without Europe or Japan, the US could probably go out to the latter part of this decade running large deficits. We have the world’s reserve currency, we are the major superpower, the engine of free markets, etc.
But I think Europe is likely to hit a real wall by the end of 2013 or the middle of 2014, if not sooner. Ditto for Japan. I am afraid that the bond marketeers will look at their losses in Europe and Japan and tell the US government something like this:
“We have already watched the movies about European and Japanese debt. Those did not have happy endings. The US debt movie seems to be based on the same script; so if you don’t mind, since we know how this ends, we are going to slip out during intermission.”
In my opinion, the deficit needs to be dealt with in 2013. If we wait until 2014, we will be in the middle of another election. As we will discuss below, solving the deficit is going to involve politically unpopular compromises for either or both parties. While I am optimistic that something can be done in 2013, I am cynical enough to think that 2014 is much more politically problematic.
By 2015 the debt will be well above 90% of GDP. As outlined in previous letters, there is increasing evidence that when the debt of a country grows to 90%, GDP slows by about 1%, which of course makes it harder to grow your way out of debt.
Interest rates start to rise as a result, and that makes it harder to balance the budget. Yes, I know, the Fed can hold rates down and print money; but printing money in quantity is not a strategy designed to bolster bond market confidence in the value of the dollar.
Not only the research of Rogoff and Reinhart, but numerous other studies also point out that when confidence goes, it is a fairly quick process. It is indeed the Bang! moment.
If rates start to creep up, perhaps Congress will be forced to do something. But at that point, it will be time for higher taxes and deeper cuts than any of us can now imagine. The longer things go on as they are, the worse the final result and restructuring will be.
We have often been told that borrowing money creates a problem for our children. And that is true. But it is also creating a problem for this generation in the here and now.
Much of Europe and Japan are going to fall into a depression as a result of their unwillingness to deal with the deficits and the structural issues they face. 25% unemployment is an ugly, ugly reality that is spreading across Southern Europe. Japan will face its own version of a debt crisis, and I think the result will be significant inflation in its import prices and a drop in the living standards of its elderly.
Perhaps I am wrong and the US can go on for another four years before we reach our own Bang! moment. Things can sometimes go on for longer than we think, for reasons we (or at least I) do not understand. But waiting longer certainly will not make it any easier. Entitlement programs are steadily getting into worse shape, and interest costs will be another $80 billion a year for the additional debt we will take on (my back-of-the-napkin estimate – you can make your own). Trying to solve the problem four years from now will require decisions even more difficult than those we have to make now.
Let’s be clear. For reasons I have written about at length, there is a significant cost to cutting the deficit. It will impact current-year GDP. I certainly would not advocate balancing the budget all at once or even in a few years. I would suggest cutting by no more than 1% of GDP per year, or about $150 billion a year. Even that little will produce growth headwinds.
Tax cuts or increases have an impact on the economy. Quoting from Forbes:
“A powerful analysis by President Barack Obama‘s first Chair of his Council of Economic Advisers (CEA) indicates the President’s proposed tax increases would kill the economic recovery and throw nearly 1 million Americans out of work. Those are the extraordinary implications of academic research by Christina D. Romer, who chaired the CEA from January 28, 2009 – September 3, 2010. In a paper entitled “The Macrcoeconomic Effects of Tax Changes,” published by the prestigious American Economic Review in June 2010 (during her tenure at the White House), she stated: ‘In short, tax increases appear to have a very large, sustained, and highly significant negative impact on output
Are you facing the facts ? – do you even know what your return was for the last six months ?
Do you have a written record of why you bought a particular stock , the time lines are results you expected , the review and update of your selection(s) ?
Lack of a written plan gives you the ambiguity to mask your performance and avoid the responsibility for the results.
You can make the change :
Ask yourself the hard questions – what are my expectations/ results and what must I do to change if the results aren’t what you want.
You don’t have to have a 500 page plan like that outlined in my book – but no plan is a plan for no success ( pardon the lack of grammar.
How many books on investing did you read this year ?
What are you doing differently from last year ?
Don’t remain in denial – face your demons and move up to success .
Yes- I’d be happy to meet you and put on a one full day seminar.
The cost – $ 249 and the organizer receives his or her seat for organizing the event .
You can contact me direct by email to email@example.com
All You Need To Succeed –
Available at http://www.amazon.com
Stock Market Magic: Building Your Apprentice Millionaire Portfolio 2012: All you need to succeed in today’s stock market [Paperback]
Jack A. Bass (Author)
One of the names that has had a solid run lately is Colossus Minerals, who is currently building their Serra Pelada mine in Brazil. At the recent Denver Gold Forum, CSI management reiterated their commitment to commencing production by mid-2013. The company also noted that initial bulk sample extraction from the ore body is expected in Q4/12, with an initial one-year reserve to be announced in Q1/13. During the presentation the company highlighted the exploration upside for the project, however it is unlikely the market will give them much value for drill results until they get the mine into production.
Once the mine is fully ramped up in 2014 the company expects to produce approximately 200,000 ounces of gold per year along with meaningful platinum and palladium production. The by-product credits from the platinum and palladium production will allow the mine to have some of the lowest gold cash costs in the industry. The company is due to issue another construction update, as the last construction update was issued in April. While shareholders have enjoyed the last several weeks of positive price action, the company’s Gold Linked Note holders are now also benefitting from the move in gold, as the Notes now yield 10% after the price of gold crossed US$1,750 per ounce.