See Jim's new portfolio to help navigate the treacherous interest-rate environment.
Jubak's Journal Recent articles: • The trade deficit's deep bite, 3/17/2006 • 5 ways to profit from Buffett's forecast, 3/15/2006 • Japan's gain could be your loss, 3/14/2006 More... | Jubak's Journal 5 ways to face our nation's Wimpy mentality Like the cartoon character who offers to pay tomorrow for the burger he wants today, our nation is addicted to borrowing -- despite the painful consequences. By Jim Jubak When it comes to paying our bills, the United States is a nation of Wimpys. That's not "wimps," mind you, but "Wimpys." Wimpy, for all of you who have less gray hair (or just more hair) than I do, or who spent fewer hours in front of a TV when you were a kid, is Popeye's perennially mooching friend. He was famous for his plea, "I'd gladly pay you Tuesday for a hamburger today." Which is why the big debts that we're running up to pay for today's consumption -- ranging from the federal budget deficit to the current-account deficit -- worry me so much. In my last column, "The trade deficit's deep bite," I argued that the record $805 billion current-account deficit that the United States ran up in 2005 was even worse than it sounded. That's because:
The global tease In my column on the growing current-account deficit, I estimated that the period between 2010 and 2030 will see overseas investors gradually present their IOUs for payment. Right now, the world is awash in excess capital, largely the result of mind-boggling savings rates in Asia. That makes it easy for the United States to fund its twin deficits by selling bonds, equities and assets to overseas investors. And borrowing this money is cheap. A 10-year U.S. Treasury bond yields just under 4.7% right now. That's near 20-year lows for yields, which averaged 6.4% from 1986 through 2005. Related news and commentary on MSN Money
You've heard of teaser rates, the ultra low interest rates that mortgage lenders use to entice you into buying a new house or borrowing on the equity you've built up in your old one. Well, that's exactly what this low 4.7% rate -- just 1.1% after inflation -- is. It's a teaser rate being offered by global investors to U.S. consumers and taxpayers. And it has the same problem as any teaser rate. The low initial rates encourage massive borrowing because the monthly payments at the teaser rate are so low. Once that teaser rate expires, however, those monthly payments skyrocket and may indeed turn out to be more than the borrower can afford. Why should the global teaser rate go up for the United States? Two reasons.
Stealing from the future Look at a recent bit of budget sleight of hand in Washington and see how much confidence you'd feel if you were a lender to the United States. The Bush administration and the Republicans want to extend the tax cut on dividends and capital-gains investment that will otherwise expire at the end of 2008. Whether you think this is a good idea or not, you'll have to agree that it's expensive. The cost of the two-year extension proposed by the House of Representatives is $51 billion, according to the Center on Budget and Policy Priorities. That's a hard sell when, even by the government's accounting, the budget deficit is set to swell to $423 billion in fiscal 2006, a new record in dollar terms. But Congress knows how to fix the problem. It's called, "Shove it into what are called the 'out' years." Those are the years beyond the five-year period covered by the government's budget projections. So here's one idea currently in discussion between House and Senate committees: The extension of the dividend and capital-gains tax cut would be paid for by a measure to allow individuals to convert their current retirement accounts, which require you to pay taxes when you withdraw the money, into new retirement accounts that offer tax-free withdrawals. Investors would have to pay taxes at the time of the conversion, which would produce a huge short-term boost to tax revenues. Of course, the government would lose all those future taxes on the withdrawals. And that just adds to a huge future deficit in the years when baby boomers start to retire, when spending on health care and Social Security are set to soar. The politicians who created these problems will be long gone by the time the digestive waste product hits the rotating ventilation enhancer. But we're going to get stuck with the bill -- for the federal budget deficit that's being piled up in the out years, for the trade and current account deficits, and for the consumer debt that's powering the consumer-spending boom. A 5-step plan So what do we do about it? I promised some suggestions in my last column and here they are.
New developments on past columns 3 stocks riding the big trends of 2006. On March 16, the board of directors at Conergy Editor's Note: A new Jubaks Journal is posted every Tuesday, Wednesday and Friday. Please note that Jubak's Picks recommendations are for a 12-to-18 month time horizon. See Jubak's CNBC Picks for shorter six month recommendations. For suggestions to help navigate the treacherous interest-rate environment see Jim's new portfolio Dividend stocks for income investors. For picks with a truly long-term perspective see Jubak's 50 best stocks in the world or Future Fantastic 50 Portfolio. E-mail Jim Jubak at jjmail@microsoft.com. At the time of publication, Jim Jubak owned or controlled shares of the following equities mentioned in this column: American International Group, Conergy and Encana. He does not own short positions in any stock mentioned in this column. | |||||||||||||||||||||||||||||
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