Much like a company or a household, to properly run a government, revenue must meet or exceed expenditures. When spending is more than the revenue obtained, there is a budget deficit. One way to reduce the deficit is through budget cuts. Budget cuts for the government can come in many forms, including reducing services and administration. Ultimately, budget cuts are needed to maintain a balance between spending and revenue.
Politicians and the mainstream will certainly love this…
Last week, Moody’s Investors Service changed its outlook on the U.S. national debt from negative to stable. (Source: Reuters, July 18, 2013.)
Despite the credit reporting agency’s “upgrade” on U.S. national debt, my opinion remains the same: the U.S. national debt has taken on a life of its own, growing like a bad cancer with no cure in sight.
In June of this year, the U.S. government registered a surplus of $117 billion after a budget deficit of $139 billion in May. On the surface that sounds great. But look a little closer, and we see that interest paid on the U.S. national debt for the month of June was $93.03 billion.
In the fiscal year so far (October 2012 to June 2013), the U.S. government has paid $345.26 billion as interest. For the full fiscal year (ending October 31, 2013), interest rate expense on the U.S. national debt is expected to reach $420.61 billion. (Source: Department of the Treasury, Financial Management Service, July 11, 2013.)
That’s almost half a trillion per year on interest payments only! And we must remember the Federal Reserve is keeping interest rates artificially low. If interest rates doubled (which is not a long-shot concept, considering that even if rates did double from here, they would still be below the 30-year average), the government interest rate payments could read $1.0 trillion a year!
Looking at the U.S. national debt as a percentage of our gross domestic product (GDP), it stood at 105.07% at the end of the first quarter of this year. (Source: Federal Reserve … Read More
There’s a belief that the rich become richer because they are frugal and know how to save. The budget cuts and tax increases at the beginning of the year saw higher income taxes for those earning over $400,000 annually. President Obama had hoped to place higher taxes on those making over $250,000 annually but had to settle for $400,000 as a compromise.
With the higher taxes, there was widespread fear that the affluent would halt their spending, which would ultimately impact consumer spending in the retail sector and gross domestic product (GDP) growth.
Well, here we are, four months into the year with higher taxes, and it appears that the affluent have continued to spend in the retail sector. The Shullman Luxury and Affluence Monthly Pulse is an excellent metric, detailing the spending habits of the wealthy in the retail sector. The research focuses on the luxury consumer group who spends on luxury goods, comprising of those households with income levels in excess of $500,000. The “affluent” group is defined as those households where the income is between $250,000 and $499,000.
The Shullman research indicated that 55% of the luxury consumers polled said the advent of higher taxes has not impacted their spending pattern in the retail sector. Moreover, about 61% of the affluent group offered a similar response. (Source: Frank, R., “Wealthy Say Higher Taxes Don’t Hurt Spending,” CNBC, March 27, 2013.) According to the research, less than 25% of luxury consumers said they would change their spending pattern this year.
Given the findings, it appears the luxury brand stocks will continue to fare well in the retail sector…. Read More
Money printing by the Federal Reserve will continue into the near future. And while it will help America avert a recession, the flow of easy money will be disastrous over the longer term.
The reality is that the current bull market and rebound in the housing sector that has made some people very rich is a by-product of the Federal Reserve, as the central bank has built this artificial economy in America that’s driven by the availability of cheap money. Recall the subprime mortgage crisis in 2008 was also driven largely by cheap money.
The problem is that the Federal Reserve had some tough decisions to make. Either let the country revert back to a possible recession or offer loose monetary policy to drive spending. Of course, the Federal Reserve only really had one choice.
While I agree with the Federal Reserve, with the economy now in recovery, you kind of have to wonder why the Federal Reserve continues to allow the flow of easy money; based on the central bank’s policy statement from its Federal Open Market Committee (FOMC) meeting last Wednesday, the cheap money will continue. The Federal Reserve will continue to buy $85.0 billion a month in bonds, adding to its debt in the process.
The Federal Reserve said it would maintain its interest rates at record-low levels until the country’s unemployment rate falls to 6.5% from the 7.7% in February. However, the Federal Reserve predicts this will not occur until sometime in 2015, so that’s another two years of easy money and the building up of massive debt. In reality, achieving an unemployment rate of 6.5% … Read More
In technical analysis, the chart tells a story. On Monday, the S&P 500 closed below 1,500 for the first time since February 4, driving fears of a multi-year topping, which I have discussed in the past. (Read “Alert: Bulls Should Be Careful Despite an Impressive January.”) The Dow Jones failed to hold above 14,000 for the third time over the past several weeks. With the decline, the NASDAQ, Dow Jones, S&P 500, and Russell 2000 are back in negative territory for February, with the final trading session taking place today. The trading is similar to what we saw in 2012 following a positive start, and 2012 turned out to be a year of caution, so you need a prudent investment strategy.
Currently, we have the sequestration budgetary cuts set to take effect tomorrow. The automatic $85.0 billion in annual budget cuts (the planned sequester will total $1.2 trillion over the next decade), could have a widespread impact on the country and the economy, including program cuts, job losses, and chaos. (Source: Cowan, R. and Lawder, D., “U.S. government won’t fall apart on “sequester” day of reckoning,” Reuters, February 20, 2013.)
Face it; the country’s money printing presses are stopping. The Federal Reserve suggested the possibility of needing to reduce or stop its $85.0 billion in monthly bond purchases. The Fed’s bond buying has added further liquidity into the economy to keep it going. This has also been the case with numerous central banks around the world. The problem is that the monetary easing has created an artificial economy that’s supported by the printing of money.
Then there’s the political uncertainty … Read More
With all of the recent focus on the fiscal cliff and now earnings, traders appear to be forgetting the massive mess across the Atlantic in Europe and the eurozone. Remember Greece? The European debt crisis took Greece down with two separate bailouts. It was so dire for this beautiful country on the Mediterranean Sea that Greece actually needed a second bailout to pay the payments on its first emergency loan, or risk default!
The reality is that the eurozone financial crisis is still around—the market just pushed it aside for the election, the fiscal cliff, and now earnings. But be aware that the problem overseas is not going away. Consumer confidence in the eurozone came in at a muddled -26.5 in December, according to the European Commission. I’m not sure about you, but I believe this cannot be good.
The problem with the eurozone is not only the massive debt loans that have impacted Greece, Spain (read “Spain Is Delusional Believing Everything Is Okay.”), Ireland, Portugal, and Italy, but also the current recession and muted growth that will likely last into this year and perhaps into 2014.
At the same time, a major issue is the super-high unemployment rate encompassing Europe and the eurozone. In the eurozone, the unemployment rate was 11.8%, or about 18.8 million unemployed, in November, the highest number since the eurozone formed in 1999. (Source: “EU unemployment tops 26 million for 1st time,” Yahoo! Finance via Associated Press, January 8, 2013.)
Spain has about a quarter of its people out of work. Greece’s unemployment stands at 23.1%, while Portugal is at 15.7%, Ireland is at 14.9%, … Read More
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