The government shutdown has been in the news a lot, one party blaming the other party for this, the other party blaming that party for that. One thing I do know is that the American population is getting older, the cost of Medicare is going up and more people are collecting Medicare and Social Security.
Total spending for the 2013 federal budget is as follows: 25 percent Medicare and Medicaid at $852 billion; 23 percent Social Security at $809 billion; and 23 percent nondefense discretionary at $820 billion. This is where the cuts would be best to come from. Defense is the third-biggest expense at 22 percent, or $751 billion.
Interest costs are not as high as many may think, coming in at 6 percent, or $223 billion.
There is a pro and con here. The pro is many bonds from 30 years ago and notes from 10 years ago are coming due and being replaced by lower-interest notes and bonds. The bad side is that the current deficit is $642 billion, which has to be funded by more debt.
While there is no way to figure out the savings on the lower interest cost, I can tell you that at 3 percent interest rate, the new $642 billion in debt will cost roughly $19 billion more in interest.
I do believe the cost saving on the refinancing of debt exceeds that $19 billion in new interest. However, those lines will cross as the debt continues to grow and interest rates increase over time.
The current debt to gross domestic product is about 79 percent. The congressional budget office extrapolates out the increased cost of health care and the borrowing along with the interest costs, and by 2036, the estimate is a debt to GDP of 190 percent.
While I’m not, and never have been, a person who rings the worry bell all the time, this is a problem, and we can’t just pass the budget again and again in hopes that maybe things will get better.
I do not like the government shutdown or the potential default on the debt, because this will cause problems in the markets. With that said, I also realize that we cannot keep on the current path; a line must be drawn in the sand and we have to reverse this path.
Like any belt-tightening, whether for a business or personal or the government, someone is not going to be happy. The alternative in 20 years is much worse if nothing is done now.
I do not think there will be a default on the debt. It appears that both sides are playing chicken to see who will blink first. It also appears that one side is looking long term at what could happen, while the other side appears to be somewhat shortsighted and not concerned with what today's results could do to our country in 20 years.
What I also think is sad is that too many people don’t understand the effects of spending more than what one brings in and putting what you can’t afford on the credit card. I know many people hate finance and find it boring, but those same people need to learn a little and think about their lives and their children’s lives 20 years from now.
This country brings in nearly $3 trillion a year in revenue from all sources. Our political leaders need to come together, think long term -- not just the next four or five years -- and think of how to increase revenue by growing the economy, not just by taxation, and also find where to cut spending.
We have heard this before, but the clock is ticking and time is running out. I don’t care if you’re a Democrat or Republican; we are all Americans, and if this isn’t fixed soon it may become too large to ever fix.
What I expect will happen in the markets is that as each day passes, the worry gauge will rise and the markets will continue their slide from the peak on the Dow of 15,700 reached not too long ago.
The debt ceiling will be reached Oct. 17; the government will still have some money to pay their bills from revenue coming in, but it won’t be enough.
I would not expect a deal until the 15th or 16th. It is simply a negotiation tactic from both sides with the tough talk; there is no reward for giving in early.
I have been waiting on the sidelines with nearly 30 percent of my portfolio in cash for the last couple of months. I have five potential companies that I will buy at the right price, which I expect could become a reality in the next week or so.
I recommend you do the same and be prepared to buy on the dip and think about where that company will be in the next 12 to 24 months.
Wilsey is president of Wilsey Asset Management and can be heard at 8 a.m. every Saturday on KFMB AM760. Information is provided by Reuters.