I subscribe to the saying “A picture is worth a thousand words.” This picture tells the real story about the future of our country:
During 2012 our government spent $1,856 per household in interest costs to service the federal debt. The most striking aspect of the graph is that the cost to our government to service the debt is less than it was in the mid 1990s, but the amount of debt has grown a whopping 460%!
How has this happened? Easy explanation…. interest rates have declined dramatically over the last several decades. What drives rates… supply vs. demand just like any other product, and our Federal Reserve has been gobbling up all the supply pushing up prices and driving interest rates down. (Click here to view our past Blog post on Fed Bond Purchases)
The problem occurs when Treasury holders (individuals, retirement plans, foreign countries) start to doubt the ability to get a return of their principal. This “flip of the switch” will be sudden and unexpected like a “thief in the night”. The result of this will be a sharp rise in interest rates, which causes a ripple effect into currency prices and the cost of goods. We have seen this destruction before: Germany after WWII, Argentina in the mid-1990s and recently Greece.
We do think we have enough time to prevent this type of outcome, but we have to start addressing it now! It won’t be fixed in a month or year, but it will take a decade to reverse course. We do feel sound minds will ultimately prevail.
Our best guess of a plan that makes sense is the Simpson-Bowles plan, as both the Republicans and Democrats dislike their proposals. Here is a video worth watching on their plan from Bloomberg Businessweek:
We will return to some positives next week, but wanted to take the time to hopefully help educate you on this this issue.
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