March 2010
Deficits Home and Abroad
We’re all hearing a lot about U.S. budget deficits, which are high by historical standards. According to figures compiled on the website www.usGovernmentSpending.com, the projected deficit in 2010 will be 8.54% of U.S. GDP (a measure of total economic output in the country). This percentage has been exceeded only six times in U.S. history: 1918 (11.88%), 1919 (16.86%), 1942 (12.04%), 1943 (28.05%), 1944 (22.35%) and 1945 (24.06%). A more normal figure is in the 2% to 5% range, although there were four recent years — 1998 through 2001 — when the government balance sheet showed a surplus. The government also managed surpluses in 1969, 1960, 1956-57 and 1951-52.
The size of the deficit is worrisome to economists. But an article in the January 14 issue of The Economist magazine says that we may have gotten through the recent banking meltdown fairly inexpensively. Previous systemic banking crises have, on average, cost 13% of GDP to resolve, according to the International Monetary Fund. But because the U.S. government offered its assistance in the form of loans (which were mostly paid back with interest by the big investment banks) and stock (which may appreciate in value), the final cost is now projected to be somewhere around $90 billion — almost all explained by losing investments in General Motors, Chrysler and AIG, and by subsidies to homeowners to help modify their mortgages. A proposed special tax on large investment banks could further reduce the cost to practically zero, and the Federal Reserve and the FDIC both made money on loan and bank-bond guarantees. The article cautions that a fair accounting would include the $111 billion capital infusion into Fannie Mae and Freddie Mac, which brings the total bailout cost to something less than 2% of GDP.
Of course, the U.S. government is also spending money to pull the country out of recession. However, almost unnoticed in the deficit debate is the fact that almost all other countries in the world are also running up deficits — for the same purpose. A chart in the January 23 issue of The Economist (page 90) ranks the world’s economies according to their 2009 deficits as a percentage of GDP. Of the 40 countries listed, only two were not running a deficit (Saudi Arabia and Norway). The U.S.’s 2009 deficit was 10% of GDP, giving it a fourth place ranking (behind Britain, Greece and Spain).
While the U.S. deficit is higher than the global average of 5.42%, it is not unusual and certainly not the worst. It is also probable that a higher percentage of its deficit will go toward jobs growth than countries which handled their banking crises less thriftily. Even countries that are running a surplus are still spending more than they generate in taxes in an effort to avoid a second dip from this recession. Around the world, virtually everybody is following the same course to bring global economic growth and prosperity in 2010 and beyond. Let’s hope it works. -By Bob Veres
Spring Cleaning
If one of your New Years resolutions is to clean out your financial records, here’s a list of what to keep vs. toss (and by “toss” we mean “bring to the Silver Oak office for shredding”).
- Tax returns & records: Most CPAs say you only need to keep them for 7 years. Personally, I keep the actual returns forever, and the backup documentation for the last 7 years. I think it’s interesting to go back and look at the numbers. Also if there’s ever a question with your Social Security earnings report, you have the documentation on hand.
- Investment statements & policies: Keep the December statements for each year and shred the rest. Schwab keeps 10 years of statements online that you can access, and Silver Oak keeps copies as well. DO NOT KEEP prospectuses or annual reports. Keep 1099s with tax info above. Keep original annuity contracts until distributed or surrendered.
- Paid bills: Keep utility and other recurring bills for two years (current and last year’s). Keep credit card statements for 5 years. Keep receipts for “Big Purchases” in a separate file forever.
- Bank records: Keep statements and canceled checks for last 3 years. Keep checks related to taxes (e.g., payments of quarterly tax estimates) with tax records above.
- House and rental properties: Keep forever: closing statements for purchases and sales, paperwork related to major remodeling (that adds to cost basis), mortgage info. Keep paid property tax statements with tax info above.
- Insurance policies: Keep copies of current policies in force for auto, life, disability, house, rentals, umbrella, health — plus copies of most recently replaced policies.
- Health records: Some health professionals recommend keeping a journal of all prescription medications you’ve taken in your lifetime, as well as surgeries and major procedures.
- Other: When I applied to take the bar exam in California, I had to list every single address of where I had lived all my life. Fortunately, my parents were still alive and had great memories. I vowed then to keep that list going in case I was ever asked that again. (Better add that to my “to do” list.)
- Identity theft protection: Visit the FTC Identity Theft website to refresh your education about how to protect against identify theft. Consider ordering a fresh copy of your credit report annually (call Jessi or Ben for help if needed).
Upcoming Workshops
The next "Investment Boot Camp" programs will be held:Saturday, April 24th, 9:30 to 11:30 am
Seating is limited; please RSVP to Linda at (503) 242-1715 or register on our website.