by Jim Kirby
The Debt, The Deficit, and Quantitative Easing
Many people are aware of the fiscal crisis in Washington. Investment portfolios need to take into consideration macroeconomic trends and the risks of inflation that may result from the fiscal crisis. Here is an excerpt of some key points made in the latest issue of our newsletter.
- The money supply is expanding at an alarming rate not just in the U.S. but around the world. The Federal Reserve, Alan Greenspan (former Chairman of the Fed), Bill Gross (manager of the world’s largest mutual fund) and others have said that expanding the money supply leads to high inflation. Economist and Aftershock co-author David Wiedemer, PhD has said that this will lead to multi‐hundred percent inflation in the United States in the next ten years.
- The national debt is now $16.7 trillion and increasing daily. If interest rates return to the 55 year average of 6.38%, interest on the $12.404 billion net national debt would be $791 billion per year or 29% of the government’s $2.712 trillion budgeted receipts (for the year 2013).
- The national debt, huge as it is, is not the biggest fiscal challenge facing the United States. The greatest fiscal challenge facing the country is the $60 trillion present value of future entitlement payments (Social Security, Medicare, federal pensions, etc.). The national debt plus the entitlements total $77 trillion. That is more than 4 times GDP ($16.2 trillion) and exceeds the annual economic activity of the entire world ($71.8 trillion). It is $243,000 for every man, woman and child in the U.S. ($77 trillion divided among 317 million).
- Today’s stock market is not supported by fundamentals. It is bolstered by the Fed’s quantitative easing. Quantitative easing must end at some point. When it does, it is likely to hurt stocks.
- Bonds are coming off a 30 year bull run in which interest rates recently hit lows. As interest rates increase, bond values will fall.
- How do you avoid losses if high inflation comes? If inflation increases, interest rates will rise. If interest rates increase dramatically, real estate and bond values will fall dramatically. Therefore, it may be wise to avoid stocks, bonds and real estate. Perhaps a diversified portfolio that includes, among other things, investments in precious metals including gold, platinum and silver, foreign currencies, funds that short stocks, and funds that short bonds may be the safest place to be until the current financial crisis passes.
These are just some of the things investors should be concerned about. Our newsletter goes into detail about the issues facing investors and what you can do to protect your wealth and secure your family’s future. Contact me or visit my website for a free copy of the entire newsletter.
To learn more about Jim Kirby, view his Paladin Registry profile.