Debt Gone Mad

“Profit Confidential” Column, by Michael Lombard, CFP, MBA

Here are some outlandish, almost frightening numbers I want my readers to be aware of:

  • The government deficit for the current fiscal year (what it spends as opposed to what it takes in) is expected to be a record $1.6 trillion.
  • This year’s deficit will represent 10.6% of the total U.S. gross domestic product (GDP), the biggest percentage since World War II.
  • By the year 2020, the public debt will be
    $18.5 billion.
  • Interest on the debt will hit $800 billion annually by 2020.

Where is all the money going?

Blame wars, Medicare, social security programs, “boost-the-economy” programs and lack of tax revenue mixed with rising interest payments for our increasing debt.

The best news I saw in the 2011 budget plan announced by the President yesterday was a freeze on discretionary spending outside of defense and security.

The worst part of the 2011 budget plan?

Higher taxes, of course. The proposal is to raise taxes on Americans making more than $200,000 a year by almost $970 billion…just part of a broad $1.9-billion tax increase proposal.

I’ve never been a big fan of raising taxes to pay the deficits governments have created. Not because I’m greedy and want to keep more of what I make (the later which is natural), but because raising taxes stifles consumer spending and job creation.

As a businessman, why would I want to go out, take the risk of starting or expanding a business (which will hopefully create more jobs), work so many longer hours, just to pay more tax in the end?

My personal opinion be known, taxes should be lowered and government spending slashed. That’s how I believe we will create jobs in the long term. But my feelings aside, from an economic standpoint, I can tell my readers this.

If we look at history, and we specifically look at countries that through time raised taxes sharply because of fast rising national debt, in all those cases, the currency of those countries eventually fell sharply in value against other world currencies.

My questions: Can the U.S. dollar sustain a $1.6-trillion deficit this year without falling in value? Can the U.S. dollar sustain national debt of $18.5 trillion 10 years from now? The answer to both questions is NO. I pity those foreigners buying the debt we issue to sustain our bad spending habits. Unfortunately, one day, we will be the ones to be pitied.

Michael’s Personal Notes:

Thank you to the 10,094 people who signed up in January to receive PROFIT CONFIDENTIAL — a new monthly record for us. We truly enjoy writing to you each day. Hopefully, we are making adifference…helping you with today’s difficult investment decisions.

Thursday of last week, gold bullion prices fell to a three-month low and, this past Friday in PROFIT CONFIDENTIAL, I wrote about the fire-sale going in the junior gold market. The junior mining companies may have hit bottom here in terms of price. I see great bargains among the junior gold companies.

Where the Market Stands:

Dow Jones Industrial Average starts this morning down 2.3% so far for 2010. An important article appeared yesterday in PROFIT CONFIDENTIAL about the relationship between the stock market and the U.S. dollar. If the dollar is up, the market is down. If the dollar is down, the market is up.

There is no doubt the stock market loves a weak U.S. dollar. This morning, with the U.S. dollar coming under pressure again, stocks are moving higher.

I continue with my view that there is more life left to the bear market rally that started on March 9, 2009.

What He Said:

“Partying Like a Drunken Sailor: The party continues. Stocks are making new highs and people are spending like there is no tomorrow. Why? I really don’t know. Big (cap) stocks, they just continue going up. Wall Street bonuses are at record levels. Popular consumer goods are flying off the shelves. Designer clothes, fast and expensive cars, restaurants with one-hour waits…people are spending in America today at an unbelievable clip. 1932, 1933…who remembers those years? The depression of the 1930s was the biggest bust of modern history. 2005, 2006, 2007…welcome to the biggest boom of the same period. When will it all end? Soon, my dear reader. Soon.” Michael Lombardi in PROFIT CONFIDENTIAL, February 7, 2007. Michael started talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else.