Investment Contrarians

Budget Deficit

A budget deficit is when you spend more than you take in as income. Each year, governments around the world create annual budgets, forecasting the amount of revenues they expect to take in over the coming year. From this, the government establishes how much money it will spend on expenses. The goal of a government is to report a balanced budget; this means that revenues equal expenses. When a government incurs a budget deficit, its spending programs are more than the revenue that it takes in from taxes, fees, and tariffs.

The total budget deficit is made up of two types of deficits: structural and cyclical. A cyclical deficit reflects changes in the economic cycle. For example, in a slow economy, tax revenues fall and welfare spending increases. As the economic performance varies, tax revenues and the amount spent on social programs are adjusted to the cyclical rhythm of the economy. A cyclically adjusted deficit removes the impact that the economic cycle has on budgetary health.

A structural deficit is reported regardless of how well the economy is functioning and stems from the amount of spending in excess of the cyclical portion, after the cyclical portion is paid off. In a structural deficit, a government will report a deficit regardless of how well the economy is doing. In a strong economy, revenues rise on the heels of increased economic activity. With a structural deficit, the strength of the economy is immaterial—a deficit will be posted regardless.

How to Protect Your Portfolio as Government Debt Cripples America

By for Investment Contrarians | Oct 30, 2013

Government Debt Cripples AmericaWhenever I’m asked what I think has the biggest potential impact not only on the stock market, but also on our way of life, I always point to the continued increase in government debt.

Over the short term, the Federal Reserve has attempted to stimulate the economy partially by buying U.S. Treasuries. Under normal monetary policy, the Federal Reserve only directly impacts short-term interest rates. To reduce long-term interest rates, the Fed began buying U.S. Treasuries, pushing up the price and lowering the yield.

Over the short term, we can look around today and notice that the sky is not falling. However, as government debt continues to pile on, approaching $17.0 trillion (which doesn’t include unfunded liabilities), at some point, this will impact not only U.S. Treasuries, but also our entire economy.

Part of the reason that U.S. Treasuries are still in demand worldwide is that the U.S. dollar remains a reserve currency. There are benefits from a logistical standpoint in conducting business using the reserve currency to also use U.S. Treasuries for investment purposes.

However, as I’ve mentioned in other articles, large investors in U.S. Treasuries, such as China, are increasingly calling for a new global financial system that relies less on the U.S. dollar.

That sentiment alone should shock the politicians into action and make them realize that our biggest lenders, the ones buying our U.S. Treasuries, are questioning our ability to manage the rising pile of government debt.

The most recent data from August was that China actually reduced its holdings in U.S. Treasuries to a six-month low, according to the U.S. Department of the Treasury. (Source: … Read More

How America Is Shooting Itself in the Foot When It Comes to Government Debt

By for Investment Contrarians | Sep 16, 2013

Government DebtAmerica’s total government debt is rapidly approaching $17.0 trillion. While the budget deficit has dropped over the past year, it’s still in the hundreds of billions of dollars.

This doesn’t even include unfunded government debt liabilities, but let’s stick with just the massive $17.0 trillion government debt.

What some investors might not be aware of is that we are, yet again, embarking on another round of bickering by our so-called leaders in Washington. It now appears that House Republicans, specifically members of the Tea Party caucus, have caused a bill, which would allow the government to spend after September 30, to be cancelled—a move that could lead to a government shutdown.

Officially, America will run out of money at the end of September, unless the U.S. government debt ceiling is raised—yet again.

The big hurdle is the new healthcare plan, the Affordable Care Act. There has been much heated debate over this new healthcare initiative, with both small and large business owners worried about the impact the new regulations will have on the bottom line. With the budget deficit continuing to add to our nation’s government debt levels, the last thing we need is the politicians in Washington putting up additional hurdles considering our relatively weak economic recovery.

Unfortunately, investors will begin to see more bickering among politicians at the federal level, as each side tries to gain favor from the nation’s voters. While both sides talk about doing what’s best for America, they seem to be forgetting that actions speak louder than words. Frankly, regardless of who’s in power, it appears the U.S. is incapable of not running a … Read More

Japan’s Debt Crosses Quadrillion-Yen Mark; U.S. on the Same Path?

By for Investment Contrarians | Aug 13, 2013

government-debtWhen we enter the 2013 fall season, we will surely be hit with yet more talk regarding government debt. As the U.S. hits the debt ceiling once again, political grandstanding will be the name of the game.

While the budget deficit has improved from the depths of the recession, it is still significantly large as it continues to pile onto the government debt total, now approaching $17.0 trillion.

The real problem is that politicians are shortsighted. They’re not interested in what will occur 20 years from now, but what will get them elected over the next couple of years. This causes a huge incentive problem.

Without real structural changes, the government debt is set to balloon to massive proportions. Because the federal government has run an almost continuous budget deficit for years, allowing our government debt to approach $17.0 trillion, unfunded liabilities including Medicare and Social Security are over $100 trillion.

The U.S. is not alone in its current state of a rising level of government debt. Japan’s total government debt just crossed the quadrillion-yen mark (1,000 trillion yen), or US$10.4 trillion. This is more than double the gross domestic product (GDP) of the nation. (Source: “Japan’s debt exceeds 1 quadrillion yen as Abe mulls tax rise,” Bloomberg, August 9, 2013.)

The solution that Japanese politicians are discussing to reduce their budget deficit involves increasing taxes. At some point, this level of government debt needs to be paid back, in addition to the higher costs of servicing it.

The problem is that running a budget deficit, which continues to add to the government debt, will begin to seriously hurt the … Read More

How the U.S. Is a Good Example of What Not to Do to Kick-Start Economic Recovery

By for Investment Contrarians | Aug 12, 2013

Kick-Start Economic RecoveryWhen America began to spend and spend in the 1980s with very little regard for its mounting federal national debt, we all realized it was not sustainable, especially if the cost side was not controlled. The end result was higher taxes and budgetary cuts from the sequestration. When a country’s gross national debt is more than its gross domestic product (GDP), you know you have a fiscal problem.

The same thing seems to be happening across the Pacific Ocean. In Japan, Prime Minister Shinzo Abe desperately wants to make sure his aggressive 10-year stimulus plan goes forward.

In fact, as I have said on numerous occasions, the Japanese appear to be taking a lead from our economic recovery strategy—which is to spend massively with little regard for the national debt and hope the economy follows suit. The problem is that it’s ill-advised. Just take a look at the current economy, where we are seeing only marginal GDP growth after massive spending, adding more and more to the national debt.

Japan will likely also end up in a similar situation as ours, except its gross national debt will be more than two times larger than its GDP. Only Greece has a worse national debt-to-GDP ratio than Japan, and we all know what happened to Greece (though granted, the country was a mess everywhere).

And to funnel the cash and easy money into Japan’s economic vein, the Bank of Japan will continue to offer cheap money in hopes of driving consumption (sound familiar?). Sure, this plan sounds great in theory, but I’m just not convinced Abe will be able to recreate the … Read More

Why Detroit’s Bankruptcy Should Concern You

By for Investment Contrarians | Jul 22, 2013

Detroit’s BankruptcyWell, it’s official—as of last Thursday, the city of Detroit is bankrupt.

Detroit is a sad example of a city that was continually running a large budget deficit. But it grew into such a huge amount of government debt that the only way out was to file for bankruptcy and give investors pennies on the dollar.

While some might not feel sorry for large investors, don’t forget that many pension funds will lose a significant amount of money as the city restructures its government debt. Early reports of the proposed restructuring indicate that retired municipal city workers will get less than 10% of what they are owed.

That just shows once again that you cannot run a budget deficit, spending more than you make, indefinitely. At some point, the government debt grows so large that the cost to maintain it ultimately brings the whole scheme down.

Even over the short term, since 2008, the city of Detroit has had a budget deficit in excess of $100 million each year on average. As the government debt continued to grow, there were no structural changes put in place to increase revenues and cut spending, and Detroit’s politicians simply kept borrowing more and more money, hoping things would turn around. Clearly, things didn’t turn out the way they’d hoped.

But is Detroit alone in continuing to run a budget deficit and build a government debt to insurmountable heights? No.

Just a few days ago, ratings agency Moody’s Investors Service downgraded Chicago’s general obligation and sales tax debt, in addition to further downgrades for Chicago’s water and sewer senior bonds. (Source: “Moody’s downgrades Chicago … Read More