Deficit

U.S. National Debt to Surpass GDP for Third Year in a Row

By George Leong for Investment Contrarians | Mar 18, 2013

The more I look at the size of the national debt, the more I get squeamish. With the national debt at $16.7 trillion and growing, something needs to be done, as the Federal Reserve continues to print money, creating the artificial economy that is making people think America is faring well and forgetting about the national debt.

The sequestration program will help, but will it hold as the two parties continue to argue about where the cuts should be from and alternative revenue sources? Budget cuts due to the sequestration are already at $17.2 billion and running (source: U.S. Debt Clock web site, last accessed March 14, 2013), but as I have said on numerous occasions, $85.0 billion a year will likely do very little to tackle the mounting national debt. Just the interest on the national debt is already around $223 billion, so the national debt will continue to expand in spite of the sequestration cuts. I wonder if the government gets it. You have $17.2 billion in cuts as of March 14, but $223 billion in interest costs. Something just doesn’t add up here.

The U.S. national debt as a percentage of the country’s gross domestic product (GDP) stood at 102.9% in 2011. (Source: “List of Countries by Public Debt,” Wikipedia, last accessed March 15, 2013.) This was just below the massive 208.2% in Japan and the 160.8% in Greece, according to the International Monetary Fund (IMF).

Translation: America is in a financial mess, and it will not be easy to get out of it.

And despite the national debt burden, the Federal Reserve has its hands tied. … Read More

Why the Budgetary Talks Are Critical to America’s Future

By George Leong for Investment Contrarians | Jan 31, 2013

Budgetary Talks Are Critical to America’s Future The national debt ceiling debate was initially expected to be resolved by January 1; but when that date came around, it was extended to May 18, as the two sides continue to debate the budgetary cuts, the deficit, and the increase in the debt ceiling above the $16.4-trillion legal limit.

While something needs to be done, President Obama and Congress must also understand that major cuts in fiscal spending to lower the deficit, at this point, could hurt the current economic recovery, which has been showing encouraging signs over the past year. The housing market is hot, with rising construction and sales and home prices that are edging higher. The Federal Reserve’s buying of mortgage bonds and the existence of near-zero interest rates together were the catalyst.

The combination of fiscal and monetary policy is clearly helping the economy, so it would be a grave error to cut spending at this critical time. Taxes for those earning over $400,000 have jumped. Those earning less are also seeing some increases in taxes. The end result was a decline in the consumer confidence reading to 58.6 in January, well below the 61.0 estimate by briefing.com and the 66.7 reading in December. The numbers suggest that consumers may become more hesitant in wanting to spend, given the tax increases.

For the government, the current debt limit will be reached soon. Without the extension of the debt ceiling deadline, the government would have run out of money to pay its employees, support programs, and cover other key spending items.

Nobel Prize economist Paul Krugman is not in favor of cutting spending to curtail the … Read More

32 Days: Countdown to the Fiscal Cliff

By George Leong for Investment Contrarians | Nov 30, 2012

Countdown to the Fiscal Cliff There were two winners of the Powerball lottery jackpot of $588 million Wednesday night. I was wondering if there was any chance they could help out with paying down some of the country’s burgeoning $16.2 trillion in national debt, its out-of-control deficit, and its runaway spending. Hey, isn’t that what the fiscal cliff is all about?

With 32 days remaining in the year to resolve this financial crisis, President Barack Obama and Republican House Speaker John Boehner are hard at it, trying to come to a compromise.

The reality is that, like many of you, I’m growing weary of hearing the “FC” term: financial crisis. Let’s just deal with the financial crisis stalemate and work out a deal that makes both parties happy, and slows down the frivolous printing of money that has allowed America to spend endlessly and create the financial crisis that is now lurking.

When I think about it, the government is operating a Ponzi scheme. They’re printing money and using it to pay for the undisciplined spending; when the money runs out and payments are due, they go out and print more money to cover them, and so on. This Ponzi scheme must be halted.

Just take a look at the market action. We are seeing a ridiculous number of U.S. companies declaring “special dividends” to try to help investors avoid higher dividend taxes in 2013 if the fiscal cliff is allowed to move forward.

From the end of September to mid-November, Bloomberg reports that 59 companies belonging to the Russell 3000 Index announced special cash dividends, versus 15 companies in the same timeframe in 2011. … Read More

Why You Need to Keep Your Money Out of Japan

By George Leong for Investment Contrarians | Nov 16, 2012

Keep Your Money Out of Japan Japan continues to be in an economic abyss, void of any gross domestic product (GDP) growth. There’s minimal growth and the country is mired in a multi-decade-long comatose state; it requires major resuscitation. Despite producing some of the top brands in the world in electronics and cars, along with an efficient workforce and technological innovation, Japan’s GDP growth contracted 0.9% in the third quarter, or 3.5% on an annualized basis, and appears set for another recession since GDP growth is estimated to fall in the fourth quarter. (“Japan Economy Shrinks 0.9% in Third-Quarter, Points to Recession.” CNBC via Reuters, November 12, 2012.)

The problem is that Japan’s government has pushed expansive fiscal and monetary policy to try to re-ignite what used to be the pearl of the orient; but so far, it has probably helped to prevent a deep recession, rather than drive GDP growth.

The country’s interest rates are already at zero, so there’s little space to maneuver. Given that interest rates have been at zero percent since 2010, the failure of the country to rebound is puzzling. Consider that the high point for interest rates since 2005 was a rate of just over 0.5% in 2007. (Source: “What is the Japanese yen (JPY)?,” GoCurrency, last accessed October 22, 2102.) That’s seven years with extremely low interest rates and not much has improved with the country and GDP growth.

Some argue that Japanese banks could be looser in their lending policies, but this could lead to some potential credit issues down the road. Just think of what happened here.

The Markit/JMMA Japan Manufacturing Purchasing Managers Index (PMI) came in … Read More

What’s Around the Corner Now the U.S. Election’s Over

By George Leong for Investment Contrarians | Nov 8, 2012

What’s Around the Corner Now the U.S. Election’s Over Investors bid up stocks prior to the presidential election on Tuesday, when President Barack Obama won his second term. Investor confidence was due to some uncertainty eliminated with the election, but the nervousness quickly resurfaced on Wednesday morning, impacting investor confidence; stocks plummeted on the realization that Obama still has many hurdles to overcome and the fact that the global economy, namely in Europe and China, may be prone to more weakness that will negatively impact investor confidence.

I’m sure President Obama is relieved that the election is over; but I can tell you, it’s only the beginning of some difficult times ahead that will challenge his patience and fortitude, while also impacting investor confidence.

While the uncertainty of the election is over, there is a lot of work ahead for Obama, as he now needs to immediately deal with the pending fiscal cliff. This will not be an easy feat, but it must be done to instill some investor confidence in the equities market.

The major problem is that President Obama must be careful, as he will need to cut and control the deficit and national debt of over $16.0 trillion, while at the same time not allowing the full extent of the $607.0 billion in broad budget cuts to take place on January 1; if he doesn’t balance the two, he will likely kill the economic recovery, 2013 and 2014 gross domestic product (GDP) growth, and investor confidence.

Moreover, any agreements or decisions made by President Obama will need to be agreed upon by the House. This will be problematic, given the continued political gridlock, as the Republicans … Read More