Capital Ideas Newsletters


The Debt End

July/August 2011

That is the status of the American government today. It is now Sunday, July 31st, and I am watching CNN as Senator Reid is speaking on the 1pm vote — at this point much of the damage has been done. Who would ever believe that this government would go from bad to worse? Though I believe a deal will get done, we have proved to the rest of the world that we are as irresponsible as a 10th grader who crams for an exam by pulling an “all nighter.” It is incredible that as of today, Apple Computer has more cash on hand to pay its bills ($78 billion) than Uncle Sam!

Since banks have tightened their lending, Americans are turning to their 401(k)’s for money. According to The Wall Street Journal, companies that run these plans reported double-digit increases in borrowings since 2009. This is not a good sign.

It seems inevitable that we are falling into a period of “stagflation,” a concept I’ve discussed before — slow or no growth in the economy with inflating costs. The unfortunate consequence of stagflation is a lower standard of living for most Americans.

We believe that strong individual tax incentives are needed to reignite this economy — NOT tax reductions or excessive government spending. Government spending as a percentage of GDP will be over 40 percent. Enough already!

The rain in Spain falls mainly on the banks… When Banco Santander went to the credit markets in June, the markets bought only about half of the deal. This speaks volumes to the nervousness in Europe. I do not know how they are going to keep it “all together” there.

Headlines of U.S. government dysfunction, the European debt crises, and the slowdown in China have the markets very skittish. Even so, American businesses continue, for the most part, to report good earnings — and their balance sheets are in good shape. “Private Enterprise” is better equipped to bring the economy back than the government.

Tax Freedom Day is the first day of the year in which a nation as a whole has theoretically earned enough income to fund its annual tax burden. This year, it was April 12th, the 102nd day of the year. Taxpayers worked more than three months before they earned enough money to pay this year’s federal, state and local taxes. Americans will pay more in taxes in 2011 than they spend on groceries, clothing and shelter combined.

There is so much controversy about how to get the economy going. The simple math is that we, as a nation and individually, have been living beyond our means. Deleveraging this economy will continue to be painful. There are no quick fixes.

Americans spent $55 billion on pets last year… amazing given the current environment. I guess the bark is as big as the bite.

Even though the stock market has been choppy, our portfolios have done well with foreign bonds, specialized mutual funds, hedge funds and income-based equities. Total return vehicles should play well in the deleveraging economy.

If we could get health care spending under control, it would go a long way to reducing the stresses on citizens and the government. This should be a national priority.

Quentin Crisp said, “Never keep up with the Joneses. Drag them down to your level. It’s cheaper.” The United States needs to learn this lesson.

Stay nimble and do not be afraid to make changes in your portfolio — the only constant is change.

The best is yet to be!

Join Our Newsletter