Thursday, March 31, 2011

Leading With True Courage

You've probably read in the news that democrats and republicans are battling with vicious fury over cuts in the budget between $30 and $60 billion.

Judging from the intensity of the media coverage and the passion our leaders use when speaking about these cuts, my initial reaction was to stand up and applaud their bravery to take on the tough budget issues.

Then I checked the percentage of the total budget they were hoping to remove with this heroic American act:

1.875 %

Yes, that is one percent.  No mistake on the typing.

Our government spends $4 trillion per year, currently owes over $75 trillion when factoring in unfunded liabilities, and they cannot agree on how to remove $30 billion.

Bill Gross, who manages the largest bond fund in the world over $1.2 trillion in size, decided to reduce his position in US government debt last month.  His total holdings today?

Zero.  Nothing.  He dumped it all.

75% of our annual spending is composed of social security, medicare, medicaid, defense spending, and interest on the debt.  These costs are considered untouchable.


If you eliminated every non-defense discretionary (everything else) we would still run a $700 billion annual deficit.

Does it make sense now why $30 billion means nothing?

From Bill Gross this month in his monthly newsletter, explaining exactly what he sees coming:

If I were sitting before Congress – at a safe olfactory distance – and giving testimony on our current debt crisis, I would pithily say something like this:

“I sit before you as a representative of a $1.2 trillion money manager, historically bond oriented, that has been selling Treasuries because they have little value within the context of a $75 trillion total debt burden.

Unless entitlements are substantially reformed, I am confident that this country will default on its debt; not in conventional ways, but by picking the pocket of savers via a combination of less observable, yet historically verifiable policies – inflation, currency devaluation and low to negative real interest rates.

Gold continued its rocked lauch higher today toward new all time record highs.

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