Change needed

Let me introduce you to two phrases to contemplate, the “ring of fire” and “financial repression.” In his October investment outlook letter titled Damages, PIMCO’s bond guru Bill Gross returned to his imagery of a “ring of fire” meant to describe those countries with the largest fiscal gaps and debt levels. Greece and Spain are in there. So are Japan and the U.K., among the worst profligate debtors. But the U.S. is right alongside them. Here is how Gross described the recent reports of some key non-partisan financial institutions such as the International Monetary Fund and the Congressional Budget Office, regarding the fiscal balance sheet of the United States and its reliance on deficit spending: “The U.S., in fact, is a serial offender, an addict whose habit extends beyond weed or cocaine and who frequently pleasures itself with budgetary crystal meth. Uncle Sam’s habit, say these respected agencies, will be a hard (and dangerous) one to break.” The truly scary thing, according to Gross, is that when you add in future IOU’s for Social Security, Medicare and Medicaid, our $16 trillion official deficit balloons to $60 trillion, or 500% of current GDP! He concludes that if we don’t immediately address our fiscal gap that “we will begin to resemble Greece before the turn of the next decade.” This brings us to “financial repression” and the response of Ben Bernanke’s Fed to our “new normal”, a series of quantitative easings (we’re now on QE3). The respected economist Carmen M. Reinhart, a senior fellow at the Peterson Institute for International Economics, wrote an opinion piece in Bloomberg earlier this year titled Financial Repression Back to Stay. As she explains, in response to the current financial crises, governments and central banks are “increasingly resorting to a form of ‘taxation’ that helps liquidate the huge overhang of public and private debt and eases the burden of servicing that debt”, which is called “financial repression”. This is achieved through “consistent negative real interest rates (yielding less than the rate of inflation) that are equivalent to a tax on bondholders and, more generally, savers.” In other words, quantitative easing. So what does all of this mean for the young and the old? If you are retired and trying to fund your retirement from income generated from CD’s or other traditional “safe” investments such as bonds, the financial repression needed to give our government some hope of being able to continue to service its debt obligations mean that you the saver are screwed. You are being forced into riskier investments to chase a real yield. And if you are young, you don’t want to know how much you are on the hook for thanks to the “budgetary crystal meth” to which our government has become addicted. Moreover, financial repression tends to crowd out more productive investment, retarding growth. And slower growth is also a result of high debt to GDP ratios, such as we now have. In other words, young people can look forward to more debt and fewer jobs. America is rapidly running out of time to fix our mess. What has Obama done? In four short years he has added $6 trillion to our deficit, bringing it to $16 trillion, and he ignored the recommendations of his own bipartisan National Commission on Fiscal Responsibility and Reform, known as Simpson-Bowles, to attempt to reverse the fiscal gap and curb our growing deficits. He is, quite simply, part of the problem, and not part of the solution. We need change – before it is too late.

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