Is your portfolio ready and “stress-tested” for the potential risks and uncertainty ahead?
According to a new report released on September 17, 2013, from the Congressional Budget Office (CBO), now may be the time to act.
Here are the first two sentences of the Summary from the CBO report, The 2013 Long-Term Budget Outlook:
“Between 2009 and 2012, the federal government recorded the largest budget deficits relative to the size of the economy since 1946, causing federal debt to soar. Federal debt held by the public is now 73 percent of the economy’s annual output or gross domestic product (GDP). That percentage is higher than at any point in U.S. history except for a brief period around World War II, and is twice the percentage at the end of 2007.”
The complete CBO report can be downloaded by clicking here.
This report shows the continuing problems of the rapid rise in the U.S. Debt without any corresponding increase in the economy’s output as measured by GDP. This is similar to an individual substantially increasing personal debt without a corresponding increase in pay or annual income.
To illustrate the challenges ahead, here is a chart from the CBO report showing the historical relationship between Federal Debt and the GDP. Note that the U.S. is at the highest point of leverage now since World War II and the leverage is projected to get even higher, creating more risk.
Congress Must Take Action in Coming Weeks
The U.S. Congress will be forced to take action in the coming weeks because of two separate events:
- The U.S. Budget expires on September 30, 2013. This deadline is the same every year and in this year, Congress has not yet taken action. Budget talks have been held for months between the White House and Congressional leadership but there is virtually no progress. Very soon, there will be discussion about a Continuing Resolution (see the CNBC definition here) that will delay the start of the 2014 Budget by “continuing” the current spending. However, there will be serious discussions between the White House and Congress over the outline for 2014 spending and revenue. Presuming the President and Congress can agree (the alternative is to start shutting down the U.S. Government on October 1, 2013, because of no spending authority), any Continuing Resolution will most likely expire in 30-60 days and the showdown begins anew. Will there be a new 2014 Budget or a Continuing Resolution?
- The U.S. Debt ceiling will be reached in October 2013. The U.S. will run out of cash in early October 2013 and will not be able to borrow or issue any debt. The U.S. Debt ceiling is the maximum amount the U.S. can borrow and this amount is controlled by Congress. Jack Lew, the U.S. Treasury Secretary, has stated that Congress should not wait until the last minute to increase the Debt limit. (Here is a recent article.) President Obama has stated that he will not negotiate on raising the Debt ceiling. (Here is the Obama statement.) The current U.S. Debt limit is $16.7 Trillion. The U.S. Debt ceiling was reached in 2011 and because of the delay in negotiating a higher limit, the U.S. credit rating was cut from AAA to AA. Will there be a compromise between the White House and Congress to set a new U.S. Debt limit?
CBO Warns of Increasing Federal Debt
The CBO report, as referenced above, warns of the consequences of increasing the Federal Debt and concludes that it is impossible to determine how long the country could sustain the recent growth rates of debt.
Here is the warning as expressed by the CBO:
“At some point, investors would begin to doubt the government’s willingness or ability to pay U.S. debt obligations, making it more difficult or more expensive for the government to borrow money. Moreover, even before that point is reached, the high and rising amount of debt that CBO projects under the extended baseline would have significant negative consequences for both the economy and the federal budget.”
To demonstrate the warning of the CBO, here are several graphs of actual and expected results from the CBO report:
The Message: Prepare Your Portfolio for Uncertainty.
During the coming weeks, Congress must make several decisions and these decisions will have an impact on the U.S. Budget and the U.S Debt limit.
These discussions will continue perhaps for months as investors seek assurance of the economy in the next year and undoubtedly market price volatility will be evident. However, despite the arguments over the 2014 Budget between all of those in Washington, the economy has already been damaged. The U.S. Debt is at the highest level to GDP in almost 70 years and according to the CBO report, the Debt could go higher over the next 15 years.
As for you, your family and your portfolio, how will you respond to the increasing challenge in the U.S. economy?
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