In a recent blog, I mentioned that all of us need to cut back, consumers and businesses alike. But right now, there's a significant exception to this rule -- the U.S. Federal Government.
The government is moving towards a budget that will raise the national deficit to almost $2 trillion dollars. $2,000,000,000,000. That's alot of zeroes! Even the Chinese government this weekend, expressed concern about American deficits and its impact on U.S. Treasury obligations. Now when the Chinese, the biggest buyer of U.S. debt express concern, you know deficits are real and there's something to be worried about.
It's an economic jump start carpet bombing strategy that may be what is needed to avert a deeper downturn. The Fed Chairman, Ben Bernanke, said in an interview with 60 Minutes,it's his view that intervention was critical and needed. And he sounded an alarm that we need to rein in spending and a gigantic money supply at some point. Absolutley true. We need to be vigilant and make sure we don't start the descent down a very slippery slope. Spending money you don't have can have some very ugly consequences.
If all goes well, the deficit will stop at $2 trillion and eventually be reduced as economic growth returns and spending restraint takes hold. I hope this is the case. But deficits generally spawn an ugly outcome -- higher inflation, higher interest rates. In the longer term, deficits usually yield a weaker economy. This is not a good destination to be sure.
As investors, we need to be aware of how higher deficits will affect our investments. You can expect commodities to do well: energy, agricultural products, gold and other precious metals. Beware of long-term bonds when rates rise, that's the next potential bubble to unwind.
Treasurys, the safe haven so many have fled to in this scary world, are quite expensive right now and could provide unwelcome capital loss when risk appetite returns.
As higher interest rates impact the economy, look for staples companies like Johnson & Johnson and Campbell's that provide goods that we all need (basic goods , health care, food products). Firms like McDonalds , WalMart , and Costcothat cater to tougher economic times will also likely benefit from economic tailwinds.
For better or worse, 2009 will be a government spending party. It may be necessary for us to take this risk now as the limping economy needs somebody to spend. Consumers and businesses are shutting down. Something needs to be done and it's the government stepping in to save the day. At least that's the desired outcome.
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With the economy deleveraging, the U.S. has credit card in hand, ready to spend America out of this downturn. But remember $2,000,000,000,000 must one day be repaid. You can't print money without consequence. Hopefully, the debt will paid from economic growth and fiscal restraint. The alternative is not pleasant and one we all hope to avoid.
Here's to keeping our fingers crossed.
Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). Michael oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. He appears regularly on CNBC and CNBC Asia and can be reached directly at email@example.com.