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2 Will the Federal deficit eventually lead to a U.S. economic crisis? Could a too rapid attempt to fix the problem lead to another recession? Federal budget deficits are nothing new. In fact, the U.S. government has been operating in arrears nearly continuously since the early 1970s. 1 So what makes this deficit different? It s size. The federal budget deficit is projected to reach a new high in 2011, exceeding even the record deficits of recent years. The high deficit may warn of ominous consequences for the economy and the government s ability to continue to function in its present state. An aging world population, rising health care costs, and growing unfunded public pension liabilities are confounding the problem - and are likely to do so for decades to come. Getting our fiscal house in order is essential for the long-term growth and prosperity of the nation. Yet doing so will take time and require sacrifice. There is no way to get the deficit down to acceptable levels without raising taxes and/or making large cuts in Medicare, Social Security, and defense, which together with the interest in the national debt represent more than $3 trillion in costs. 2 Is your portfolio positioned against the potential consequences of the debt issue? 1 The Bureau of Economic Analysis 2 Standard & Poor's, U.S. Investment Policy Committee Notes 2

3 In recent years, we have been running huge deficits (that is, on an annual basis, spending has been exceeding revenues) and this is generating a fast-growing national debt. The national debt is expected to hit 97% of GDP by (the highest level of federal deficit in the post-wwii era) 1 If lawmakers extend many of today's current policies otherwise set to expire soon, the national debt would likely rise by $12 trillion over the decade from 2012 to More than half of the accumulated debt will be the result of the interest payments Chart 1 below shows the path of federal deficits from fiscal year 1961 to fiscal year 2010 and the Congressional Budget Office s (CBO) estimate of deficits expected through fiscal year 2021, if the President s 2012 budget were fully enacted. 2 Chart 2 shows what this would imply for the federal debt, which, of course, grows each year by the amount of the federal deficit. 1 The Budget and Economic Outlook: Fiscal Years 2011 to Congressional Budget Office (January 2011) 2 Congressional Budget Office, An Analysis of the President s Budgetary Proposals for Fiscal Year 2012 (April 2011) 3

4 On Friday, August 5, 2011, Standard & Poor downgraded the U.S. long-term sovereign debt rating one notch from AAA to AA+ Credit ratings indicate the credit worthiness of issues/issuers and generally range from AAA, Aaa, or AAA (highest) to D, C, or D (lowest) for S&P, Moody s, and Fitch respectively. Credit costs for virtually all U.S. borrowers may increase over time Immediate operational consequences from recording risk and trading systems to evaluating collateral and liquidity Downgrade of municipal bonds with direct links to the federal government S&P downgraded over 3,000 bonds deemed directly linked to sovereign credit rating on August 08, Impact on business and consumer confidence with increased uncertainty Domino effect of rating downgrades for states such as Virginia, Maryland, California, New Mexico or Illinois because of their ties to federal funds or federal presence The silver lining to the S&P downgrade is that it may serve as a wake-up call for U.S. policy makers 1 The Other Shoe Drops by Joseph Deane, PimCo: August

5 Higher interest rates A recovering economy combined with still massive federal debt issuance and an end of QE2, ought to push Treasury rates higher after almost 30 years of decline Decline in value of U.S. dollar Slower U.S. growth Government borrowing takes investment assets away from private sector Annual economic growth falls by roughly 1% when a country s debt to GDP ratio exceeds 90% The Congressional Budget Office projects that if current spending policies continue, US debt will reach 97% of GDP within the next decade Higher taxes Higher tax rates or lower rates with fewer tax deductions and credits 5

6 Do you have strategies in place that may lessen or even take advantage of this crisis? Which of your current investments do this? How correlated are your current investments and how does this put you at risk? Is your portfolio U.S. centric or global? What percentage of your investments are dollar denominated? What type of strategy are you currently employing? Do you think you could benefit from your financial advisor working in coordination with your CPA or attorney? If you need answers to these question or would like a second opinion, please visit us at: 6

7 With government debt continuing to increase here at home as well as around the globe, there are likely to be dire forecasts about the effects of deficits on stock and bond market returns. For the most part, investors should ignore the wind out of Washington and Wall Street and stay focused on their long-term investment plans. The appropriate response to the debt issue is not to panic, but rather to ensure that your portfolio is large enough and protected as much as possible from both higher taxes and higher interest rates. The likely outcome is that the federal budget will be fixed but that will require time and sacrifice. The federal deficit issue should not be seen as a mortal threat or a reason to sit on the sidelines. However, investors need to be prepared for potentially rising interest rates, higher taxes, a weaker dollar and sluggish economic growth. Here at Whiteside Wealth Management, Rex Whiteside, a Registered Principal of RJFS and his team can help you develop a financial strategy. Your Wealth Management Plan (WMP), built through a collaborative effort, will help you stay focused on your investment objectives and goals. Whiteside Wealth Management can assist with: Developing a collaborative and actionable plan Implementing the plan through appropriate allocations and investment decisions Monitoring your plan, performance and progress Please contact us at (866) for more details 3104 Edloe, Suite 310 Houston, Texas 7

8 Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing involves risk and investors may incur a profit or a loss, including the loss of all principal. Diversification and asset allocation does not assure a profit or protect against a loss. Dividends are not guaranteed and must be authorized by the company s board of directors. Unless certain criteria are met, Roth IRA owners must be 59 1/2 or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five year holding period. Converting a traditional IRA into a Roth IRA has tax implications. An investor should carefully consider the source of funds used to pay the taxes owed on a Roth conversion. Penalties and taxes may apply if the investor uses money from the IRA as a source for conversion taxes. Consult a tax advisor for details. 8

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