When deficits finally matter

By Brian Ochsner (baochsner@aol.com) While the financial press has been trumpeting the Dow hitting the 12,000 level, I’ve been doing some contrarian financial research. I’ve looked at the prices of certain key commodities and indices – namely, gold, silver, and the US Dollar Index.

I’ve heard well-respected commentators such as Larry Kudlow and Mike Rosen make solid cases about why budget deficits aren’t that important and won’t negatively affect the US economy. This is usually to support the case for continued confidence and investment in the US stock market. They’re correct, based on two big assumptions: 1) The rest of the world still has confidence in the US Dollar as a store of wealth, and 2) Foreign central banks will continue to lend us insane amounts of money (over $2 billion/day) to keep the credit party going.

There’s a great phrase from the book Atlas Shrugged: “Check your premises.” Based on recent statements from foreign central bankers, respected financial analysts, and price movements in the metals markets, I think Larry and Mike may want to recheck their premises. I believe we’re close to the day when these deficits finally matter.

Investing and economics can be complex and confusing issues at times. I’ll give a simple explanation why foreigner’s confidence in, along with the value of the greenback is declining. The US is carrying a huge debt load, and is buying more goods from foreigners than foreigners are buying from the US.

Think of our country as a business: U.S.A., Inc. I’ll use round numbers to make this explanation easy to understand. Let’s say U.S.A., Inc. makes $1 million of gross revenue a year (also known as GDP), but carries about $700,000 of debt on its books (the level of stated national debt). It also has future obligations to pay in the next 15-30 years of about $5 million (Social Security, Medicare, military and government pensions).

And – there’s no guarantee that the gross revenue of this business will increase, or even stay the same. Today, our national GDP is about $12 trillion. The level of stated national debt is about $8.2 billion. According to a report from Professor Laurence Kotlikoff issued through the St. Louis branch of the Federal Reserve, the United States will go technically bankrupt very soon, if we’re not there already.

That’s because of “ballooning budget deficits, and a pensions and welfare time bomb,” according to Kotlikoff, with future obligations of over $65 trillion. This financial problem can’t be pinned on one party or administration. While Democrats are the usual suspects for growing bigger government, Republicans in the past six years deserve an equal share of the blame for this bloating bureaucracy.

This is why more Americans need to be financially and economically literate. That’s to navigate what could be turbulent financial waters ahead. If you haven’t done so already, check out the Mises Institute -- a great resource to learn about Austrian economics. It’ll give you a much better understanding of economics, government policy, and how they affect you and our country.

The Daily Reckoning is where I’ve also learned about the Austrian school of economic thought since 2000. It’s a well-written, entertaining and educational daily e-zine. And for the best weekly webcast on financial issues, check out the Financial Sense Newshour with Jim Puplava and John Loeffler.

What I’ve written may be shocking, and you may not agree with or like this analysis. Believe me, I don’t enjoy being the prophet of future financial pain. However, success in investing – and in life – requires you to look at the way things are, and not how you wish they were.

The reasons I’ve given (which I think are sound) are why I believe we’re at the point where deficits finally matter. Take some time to examine your financial and investing philosophy, and see why you believe what you believe. Checking your premises now could help you avoid financial disaster later.