Anatomy of a Debt Reduction Deal: Five Money Moves to Make Right Now
What’s next? If you have found yourself deeply confused about how a recent debt reduction deal will likely affect your wallet, you have plenty of company.
The small writing displayed upon the contract form often induces more questions than answers. Nearly all discretionary expenditures of the US Government are slated for drastic reduction during the next decade or so. Defense costs are an especially burdensome budgetary item that is overdue to be slashed dramatically. The legislative proposal currently pending before Congress would free up an estimated total of $917,000,000,000 USD in fiscal resources from federal coffers during the first ten years after its enactment. Approximately $350,000,000,000 of that figure falls within defense and national security budgetary categories.
A fact of perhaps even more import is the recent proposal drafted by a dozen-member Congressional committee that would entail identifying areas in which to affect an additional $1.5 trillion in budget cuts. That faction’s fiscal agenda is currently an open slate that portends to entail slicing Social Security funding and increased 2011 taxes. If the committee cannot specify a minimum of $1.2 trillion in total budgetary savings or its recommendations fail to garner sufficient Congressional approval, automatic cuts become effective as of December 23, 2011. This belt-tightening campaign looks to be pervasive and severe. Vital programs like the Armed Forces and Medicare would be affected in a major way, while Medicaid, Social Security, and a few other Federal programs might be spared.
It appears as though all problems have been aptly identified but remain unresolved. This does not mean, however, that individual savings and investment plans should be left by the wayside. Consumers must continue to implement protective measures to shield themselves from the federal government’s impending fiscal fallout. Following are some specific steps to take or immediately preclude right now:
– Employ defensive investment strategies for all private government contractors’ corporate stocks. American Assoc. of Individual Investors spokesman Charlie Rotblut recently advised stock investors whose holdings depend highly upon federal funding must maintain them most vigilantly. Private defense firms will probably lose revenue due to the trickle down effects of these budget cuts. This phenomenon will have universal impact across the board, however. State contracts will also lose out as recession-ravished state economies deteriorate further from diminished federal fund inflows.
Rotblut further observed that national infrastructure is especially vulnerable, due to it being much more difficult for states to complete the construction of roadways, bridges, and highways.
He went on to advise individual investors to thoroughly peruse 10k annual reports of various corporations to glean their true level of relative governmental project dependency.
- Do not be too uptight about bonds. Bonds are no longer as risky as they have historically been. This was the recent observation by Mayflower Capital spokesman Don Martin. Of course, conventional wisdom remains valid about long-term bond values being likely to decrease as interest rates take a hike. The debt deal under consideration is likely to delay the day of ultimate reckoning for several reasons, however. As Congress is honoring its foreign obligations, it reduces the probability that ratings will go down, thereby inches T-Bill rates upward. The pending bill’s proposed budgetary cuts will not take effect until at least 2013. Their specific terms, however, hold out what many commentators believe to be the nation’s brightest rays of hope for future fiscal horizons.
Mr. Martin went on to posit that the current US economic posture is stagnant and threatens to slip into recessionary status on a daily basis. Thus, lowered government stimuli due to American leader’s austere attitudes will mean dramatic falls in bond values and other discrete, short-term investments. While this calls for a cautious approach, it is hardly an occasion for endemic panic.
