Pieces of the Deficit Pie

by Elyse Andrews on August 23, 2008
originally from Cabot Wealth Advisory
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Pieces of the Deficit Pie

On Thursday night, I saw the movie, "I.O.U.S.A.," which focuses on the national deficit. It has been hailed as "An Inconvenient Truth," without a celebrity-type lead like Al Gore, but I found it equally interesting. While it's not a "sexy" topic (as one man in the film kept reminding everyone), unlike global warming, it's something we can all agree on: Our nation is in debt up to its ears and way past that.

The film explains how we got into so much debt by dividing the problem up into four categories: budget deficits, savings deficits, trade deficits and leadership deficits. What's the total figure for all of these deficits? According to the filmmakers, it's somewhere in the neighborhood of $53 trillion as of the end of last year, with about $11 trillion coming from publicly traded government debt, the amount the federal government owes to employee pensions and the cost of environmental cleanup of federal land. The rest comes from projected shortfalls in Medicare and Social Security, which are only expected to get worse as Baby Boomers begin to hit the retirement age.

The film follows former U.S. Comptroller David Walker as he travels with Robert Bixby, of the Concord Coalition (a nonpartisan organization dedicated to fiscal responsibility) around the country on a Fiscal Wake Up Tour to try to bring awareness of the enormous fiscal debt (or "fiscal cancer" as Walker terms it) to regular Americans. On the tour they meet a group of college students at the University of Pennsylvania who are trying to wake their fellow students up to this very same issue.

Time to Save for a Rainy Day

The students in this group, Concerned Youth of America, complain that the government doesn't reflect their own values. Many say their parents raised them to save for a rainy day and not overspend, exactly the opposite of what the federal government has been doing. So these students are taking to the streets to wake their peers up to the reality that it will be their generation that is left to handle the burden of the soaring national debt.

As someone who graduated from college not too long ago, I was trying to imagine these students on my campus. It was difficult to picture 20-year-olds getting excited about the federal deficit and in the film many of the students' peers seemed less than thrilled to be hearing about it. I see this as a huge problem because our generation will be the one to pick up the pieces from this mess, especially if no action is taken to stem the ongoing increases in the debt now. Many people in my generation do not see the value of saving their own money for a rainy day mainly because they have never seen one. But I think there will be rainy days in the future and many Americans will be ill prepared.

The trade deficit, the result of importing (consuming) more than we export (create), was the third piece of the debt pie. To illustrate this problem, the film took viewers to a scrap yard where formerly useful things were being stripped of their valuable metals and shipped to China, Vietnam and other Asian countries to be made into new things. There was a time when these pieces of scrap metal would have been shipped somewhere in the U.S., but that's no longer the case. This puts the U.S. in the position of being a huge importer of things from other countries, while it has little left to export.

The film followed some of the pieces of scrap to China where they were put to work in a factory. Two of the workers, said they, unlike many American workers, save nearly half of their income after paying their bills. They spoke of saving for a rainy day, a theme repeated many times in the film. It was a stark contrast to the American lifestyle of excess that has been cultivated during the last several decades. It reminded me of what I imagine America was like several decades ago. Somehow we have lost sight of this sense of working toward the future instead of just living in the present and that is precisely what has gotten us so far into debt.

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Calling for Leadership

The final piece of the deficit pie was leadership, or a lack thereof. The film was nonpartisan, but clearly was meant to be a wake up call not only to regular citizens watching at 358 movie theaters across the country, but also to elected officials in Washington, D.C., and perhaps most importantly, to the next president. I think both candidates should watch this film because I think we are all in desperate need of a fiscal wake up call before it's too late. And the candidates would do well to listen to the solutions offered in the film.

One solution was to put the federal budget on a diet by raising taxes or cutting spending, or both. One of the films' backers, Peter G. Peterson (co-founder of the Blackstone Group and former commerce secretary under Richard Nixon) advised raising the retirement age for Social Security to at least 70 and having a Medicare income test where people with more money would pay more of their health care costs. Other solutions were to decrease the cost of health care, reduce the trade deficit, use more alternative energy and end America's addiction to oil.

Mostly the people interviewed in the film said they hoped that the Republican and Democratic candidates for president would acknowledge the enormous amount of debt and pledge to have a bipartisan coalition work on solutions. It's clear that they think a rainy day is looming.

Just as "Sexy"

But the film isn't all serious business, several regular Americans are asked to estimate the federal deficit (one clever teenager offers, "$69 million," as his friend giggles next to him). A highlight of the film was a "Saturday Night Live" skit with Amy Poehler and Steve Martin struggling to understand a one-page pamphlet called "Don't Buy Stuff You Can't Afford."

Unfortunately, most of the hilarity comes from the truth behind it, that Americans don't realize the enormity of the national deficit and aren't aware of how their own debt is dragging them down. In fact, $85 million was added to the federal deficit while the film was playing. By January of 2009, it is projected that the national deficit will be about $10 trillion.

I think the film could be huge wake up call to people who don't know much about the national debt. Whether it will make people take action is less certain. As one of the people in the film said, Americans don't act until there is a crisis. What the film did is show that we're either at the crisis point or that it's coming soon.

If you didn't get to see the "I.O.U.S.A." on Thursday, look for it. It's going on a 12-city theatrical run. It's very entertaining, with excellent graphics and some humor to spice it up. But most of all, it explains the national debt in terms that are easy to understand and get behind, making it just as "sexy" as global warming.

I'd love to hear what you think about the national deficit, hear possible solutions to get our country out of debt and any feedback if you've also seen "I.O.U.S.A." Write to us via email or go to The Iconoclast Investor to comment on our blog.

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In case you didn't get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, we have links below to each issue.

Cabot Wealth Advisory 8/18/08 - Solve Liquidity--Cut Off the Tips

On Monday, Timothy Lutts wrote about the liquidity crisis and the long-term factors he sees affecting it. Tim discussed a company called General Compression, which isn't public, but has some new ideas in the alternative energy field. Tim also wrote about a company you can invest in now, VisionChina Media, which was featured on the watch list in both Cabot Market Letter and Cabot China & Emerging Markets last month. Stock featured in this issue: VisionChina Media (NSDQ: VISN).

http://www.cabot.net/Issues/CWA/Archives/2008/08/Solve-Liquidity.aspx

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Cabot Wealth Advisory 8/21/08 - Answers to Readers' Investing Questions

On Thursday, Michael Cintolo answered some of our readers most commonly asked questions. He explained the market bottoming process, as well as his thoughts on the bear market of the last nine months. Mike also discussed shorting stocks, offensive selling and stocks that are thinly traded.

http://www.cabot.net/Issues/CWA/Archives/2008/08/Investing-FAQs.aspx

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Cabot Wealth Advisory 8/22/08 -Tired of Business as Usual

On Friday, J. Royden Ward wrote about his frustrations with the government's lack of initiative on pressing issues of today. He applauded T. Boone Pickens plan to get the country relying more on alternative energy than on traditional fuels. Roy also wrote about how the determination of Olympic athletes has inspired him. He recommended an undervalued stock that is the largest publicly traded private equity fund in the U.S. Stock featured in this issue: American Capital Strategies (NSDQ: ACAS)

http://www.cabot.net/Issues/CWA/Archives/2008/08/Tired-of-Business-as-Usual.aspx

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Editor's Note: Are you new to investing and unsure of where to start? Cabot Stock of the Month offers a taste of all of our different investing styles; each issue features a Green, momentum, growth, value or emerging markets stock. The stocks are chosen from across the spectrum of Cabot's newsletters, giving you the very best stock for current market conditions each and every month. Click the link below to find out which investing style is right for you.

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Until Next Time,

Elyse Andrews
Editor of Cabot Wealth Advisory

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