“The nine most terrifying words in the English language are: ‘I’m from the government and I’m here to help.’” —Ronald Reagan

I’ve always loved that quote from our 40th President and I’ve been waiting for a chance to use it. I got that chance last week when I was asked to write today’s Daily Pfennig® edition based on our last poll question, which asked readers, “Will Congress agree on a budget during the first quarter of 2014, avoiding a shutdown?”

Readers know that both Chuck and I back the idea of smaller government, and some believe the only way we will get to a smaller government is to starve it by denying it the needed funding. This is the tact several in Congress took last October when they forced a 16-day government shutdown. But the shutdown seemed to partially backfire on those responsible, and only served to increase the sharply negative view of our leaders in Washington.

This was the environment Daily Pfennig readers were contemplating when they answered our latest poll question. The overwhelming answer — with over 57% percent of the responses — was a prediction that members of Congress have learned their lesson and will reach an agreement avoiding a shutdown.

And, in fact, this was at least partially true. A two-year bipartisan budget agreement was reached before the year-end, the details of which should be finalized sometime this week. So the 36 of you who voted that Congress will agree on a budget before the next deadline can pat yourselves on the back. Technically, you are the only ones who got the answer right (thus far).

But the budget agreement didn’t include a provision to raise the debt ceiling and, therefore, Congress still needs to address this issue in the coming weeks. The temporary agreement reached back in October raised the debt ceiling until February 7, 2014, a date that is quickly approaching. So the 69 voters who think another shutdown will occur could still be correct, as could the 21 of you who said the U.S. will go into default. Heck, I guess that last answer could happen no matter what occurs during the next few weeks. History has shown us that reaching a budget agreement or raising the debt ceiling certainly doesn’t mean we are further away from a default. It may be just the opposite; raising the debt ceiling may, in fact, place us closer to a default!

While the budget agreement was bipartisan, the bickering over the debt ceiling is far from over. In fact, the positioning of members of Congress has already begun, with those in the President’s party wanting to see a “clean” debt ceiling increase, while the opposition members are still hoping to use the debt ceiling as a bargaining chip for more budget concessions. New Treasury Secretary Jack Lew wrote a letter to Congress late last month stressing the need for a quick resolution to the debt ceiling debacle. Lew pointed out that the “extraordinary measures” that allowed the Treasury Department to fund the government after the debt ceiling deadline in the past are now limited. “We do not foresee any reasonable scenario in which the extraordinary measures would last for an extended period of time, principally because the government experiences large net cash outflows in February and March due to tax refunds,” Lew wrote.

Brighter Days Ahead For The Economy?
Wherever Congress ends up on the debt ceiling debate, one thing is fairly certain: an improving economy should help improve the deficit. December’s budget numbers were released as I was writing this and they showed receipts rose 5.1% year over year in December while outlays fell 15%. This resulted in a U.S. budget surplus (yes, you read that correctly) for the last month of 2013 of $53.2 billion. Certainly, a step in the right direction, and that surplus left the year to date deficit for the U.S. at $173.6 billion, a very good improvement over last year’s $293.3 billion deficit.

“I’m not worried about the deficit. It is big enough to take care of itself.” —Ronald Reagan, March 1984

But before we get too excited about the recent numbers, we need to realize that ANY annual deficit only adds to our current debt of $17.3 trillion. And to give a little perspective to these numbers, consider that we have only had 12 years of budget surpluses here in the U.S. since 1940. That’s just 12 out of the past 73 years that our government has managed to spend less than it has taken in. The largest of these budget surpluses was a $236.4 billion surplus at the turn of the century. Let’s be optimistic, and say we are going to be able to match 2000′s budget surplus next year, and the year after that. Unfortunately, we would have to have 73 consecutive budget surpluses of $236 billion to “pay off” our current debt. Pretty scary, isn’t it?

So when you hear people say the deficit doesn’t matter, or it doesn’t hurt to raise the debt ceiling by another $1 trillion, keep these numbers in mind. While the problem has been created over the past 73 years, as you can see from the chart below, it has grown exponentially in the years following the fiscal crisis of 2008.

The majority of you readers believe the government will agree to a budget and suspend the debt ceiling again. But we all know that any debt ceiling agreement does nothing to address the underlying problems which this great nation faces. Our debts have grown to what many believe are approaching unsustainable levels. Even the rosiest (and admittedly unrealistic) projection I can come up with doesn’t project an end to our debt during my lifetime, and not even in the life of my teenage children. And don’t forget about the budget impacts of our aging population, and the increases in outlays for interest on this huge debt as rates eventually rise.

While nobody is going to be able to predict where all of this debt will lead us, one thing is not so hard to predict. The U.S. government will continue to print money in order to meet our current and future obligations, and the more they print, the less valuable these dollars will become. This is exactly why you have heard Chuck and the rest of us talk consistently about diversifying outside of the U.S. dollar. Individuals may be able to protect themselves by having a well-diversified financial portfolio, including exposure to a wide variety of asset classes.

The debt numbers can get depressing, but just ignoring them won’t make them go away. And just because we avoid a government shutdown by raising the debt ceiling, the underlying problem that has led to the need to increase the debt ceiling remains — as a country, we continue to spend more than we are taking in. And I will leave you with that cheery thought.

Until the next Daily Pfennig® edition…

Sincerely,
Chris Gaffney, CFA
SVP & Director of Sales
EverBank World Markets, a division of EverBank
1.800.926.4922

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