The federal debt crisis has gripped the financial world, while Coloradans shake their heads at Washington ineptitude and wonder how it will affect our everyday lives. It’s been a macabre game of political chicken. Although instead of watching the two sides hurtling toward each other from afar, we have been unlucky hitchhikers along for the ride.
Treasuries have been a “safe harbor” investment for the last century, and a comfort to pensioners who depended on their biannual payments. However, by the time you read this, Standard & Poor’s and others may have revoked our country’s AAA debt rating. Whenever there was a political crisis engulfing the globe or a bear market roaring, you could depend upon a flight to Treasuries. What happens when the safe harbor has a tsunami heading its way?
While it’s not clear how the row in Washington will be resolved, it is doubtful we will have an outright default on the debt. While on Tuesday our country is scheduled to reach the limit of its borrowing authority, as of last week, all signs are that the Treasury will make its interest payments on time.
The debt crisis makes great theater and has caused a lot of concern for investors, who have wondered about our economy when our nation’s political leadership cannot work together. For a moment, take your mind off the Boehner-Obama show and keep the following in mind about how it affects you.
Investing is a marathon, not a sprint. Even those who are nearing retirement will be investors for a long time. Although this year could be bumpy, people close to retirement could require portfolio earnings for the next 30 years. If you find yourself glued to CNN or Fox while checking your portfolio on your iPhone, it’s time to remember that you’re in this for the long haul.
If you’re retired and perplexed, you may need assets in place to provide you with secure cash flow so dinners at the Flagstaff House this year don’t turn into solo StarKist suppers next year.
Inflation may be the result. We are close to $15 trillion in debt and will run a deficit of close to $1 trillion in the next fiscal year. It’s simple math — we need to plug that gap through increased revenues — i.e. taxes — or decreased spending.
There is a third way. Through inflating our currency we make our debts worth less in real terms. After seven years of 10 percent inflation, that $15 trillion in debt would seem more like $7.5 trillion in today’s dollars. Of course, China (which holds over $1 trillion in Treasuries), Japan (more than $900 billion), and our other creditors may not appreciate the debasement of the dollar.
Try to limit the effect inflation will have on your personal spending, such as taking out a fixed mortgage. Ensure your portfolio has some exposure to investments that will help you keep up with inflation.
Entitlement programs will change. Coming to a government program near you: a steady and imperceptible erosion of benefits that have an oversized impact on future retirees. One side will be able to claim victory on reducing wasteful government expenses while the other side has protected valuable benefits.
Look for the Medicare age to increase to 67 and for the wealthy to pay for a bigger percentage of program costs. Social Security benefits will not be indexed to wage increases every year, but will go up at a decreased rate and may be reduced if you’re well off.
If you minimize your level of personal inflation, structure your portfolio so your mood doesn’t meander with the market, and stay tuned for the real story — a reduction in entitlements for future retirees, you’ll improve your ultimate financial security.
Dave Gardner, for the Daily Camera.