Headlines (Scroll down for complete stories):
1. Top 5 Cash Investments for 2007
2. GAO Chief: Economic Disaster Ahead
3. Consumer Spending Growth Meager
4. Fed's Lacker: Economy Can 'Withstand' Rate Hikes
1. Top 5 Cash Investments for 2007
With the Federal Reserve hiking interest rates some 17 times during the past
two years, investors have been more favorably inclined toward cash yields of up
to 5% and more.
Cash is an attractive investment option to many investors right now. But experts
say that if you don't know what you are doing, investing in cash can be risky.
Knowing where and how to look makes it more effective to use cash as a safe
harbor for at least 25% of your investment assets.
Story Continues Below
One of the most sound cash investments is money market funds.
Many people prefer to invest in money market funds because of their flexibility
and accessibility. You can get to funds in a money market as easily as you can
grab cash from your checking account.
American banks, competing more fiercely than in the past, also offer high yields
for both savings and money market accounts. It's good, experts say, to research
investments for good deals, remembering that money markets:
- With higher balances will pay more
- Might require minimum deposit amounts.
- That keep investor fees low tend to have the highest yields
These funds usually don't pay as much as a CD, but sometimes they outperform
them-especially in a period of rising rates.
Discover the next 4 safest places to stash your cash. All guaranteed by the U.S.
government. Click on the link below.
Editor's Note:
2. GAO Chief: Economic Disaster Ahead
David M. Walker sure talks like he's running for office. "This is about the
future of our country, our kids and grandkids," the comptroller general of the
United States warns a packed hall at Austin's historic Driskill Hotel. "We the
people have to rise up to make sure things get changed."
But Walker doesn't want, or need, your vote this November. He already has a job
as head of the Government Accountability Office, an investigative arm of
Congress that audits and evaluates the performance of the federal government.
Basically, that makes Walker the nation's accountant-in-chief. And the
accountant-in-chief's professional opinion is that the American public needs to
tell Washington it's time to steer the nation off the path to financial ruin.
From the hustings and the airwaves this campaign season, America's political
class can be heard debating Capitol Hill sex scandals, the wisdom of the war in
Iraq and which party is tougher on terror. Democrats and Republicans talk of
cutting taxes to make life easier for the American people.
What they don't talk about is a dirty little secret everyone in Washington
knows, or at least should. The vast majority of economists and budget analysts
agree: The ship of state is on a disastrous course, and will founder on the
reefs of economic disaster if nothing is done to correct it.
There's a good reason politicians don't like to talk about the nation's
long-term fiscal prospects. The subject is short on political theatrics and long
on complicated economics, scary graphs and very big numbers. It reveals serious
problems and offers no easy solutions. Anybody who wanted to deal with it
seriously would have to talk about raising taxes and cutting benefits, nasty
nostrums that might doom any candidate who prescribed them.
"There's no sexiness to it," laments Leita Hart-Fanta, an accountant who has
just heard Walker's pitch. She suggests recruiting a trusted celebrity - maybe
Oprah - to sell fiscal responsibility to the American people.
Walker doesn't want to make balancing the federal government's books sexy - he
just wants to make it politically palatable. He has committed to touring the
nation through the 2008 elections, talking to anybody who will listen about the
fiscal black hole Washington has dug itself, the "demographic tsunami" that will
come when the baby boom generation begins retiring and the recklessness of
borrowing money from foreign lenders to pay for the operation of the U.S.
government.
"He can speak forthrightly and independently because his job is not in jeopardy
if he tells the truth," said Isabel V. Sawhill, a senior fellow in economic
studies at the Brookings Institution.
Walker can talk in public about the nation's impending fiscal crisis because he
has one of the most secure jobs in Washington. As comptroller general of the
United States - basically, the government's chief accountant - he is serving a
15-year term that runs through 2013.
This year Walker has spoken to the Union League Club of Chicago and the Rotary
Club of Atlanta, the Sons of the American Revolution and the World Future
Society. But the backbone of his campaign has been the Fiscal Wake-up Tour, a
traveling roadshow of economists and budget analysts who share Walker's concern
for the nation's budgetary future.
"You can't solve a problem until the majority of the people believe you have a
problem that needs to be solved," Walker says.
Polls suggest that Americans have only a vague sense of their government's
long-term fiscal prospects. When pollsters ask Americans to name the most
important problem facing America today - as a CBS News/New York Times poll of
1,131 Americans did in September - issues such as the war in Iraq, terrorism,
jobs and the economy are most frequently mentioned. The deficit doesn't even
crack the top 10.
Yet on the rare occasions that pollsters ask directly about the deficit, at
least some people appear to recognize it as a problem. In a survey of 807
Americans last year by the Pew Center for the People and the Press, 42 percent
of respondents said reducing the deficit should be a top priority; another 38
percent said it was important but a lower priority.
So the majority of the public appears to agree with Walker that the deficit is a
serious problem, but only when they're made to think about it. Walker's
challenge is to get people not just to think about it, but to pressure
politicians to make the hard choices that are needed to keep the situation from
spiraling out of control.
To show that the looming fiscal crisis is not a partisan issue, he brings along
economists and budget analysts from across the political spectrum. In Austin,
he's accompanied by Diane Lim Rogers, a liberal economist from the Brookings
Institution, and Alison Acosta Fraser, director of the Roe Institute for
Economic Policy Studies at the Heritage Foundation, a conservative think tank.
"We all agree on what the choices are and what the numbers are," Fraser says.
Their basic message is this: If the United States government conducts business
as usual over the next few decades, a national debt that is already $8.5
trillion could reach $46 trillion or more, adjusted for inflation. That's almost
as much as the total net worth of every person in America - Bill Gates, Warren
Buffett and those Google guys included.
A hole that big could paralyze the U.S. economy; according to some projections,
just the interest payments on a debt that big would be as much as all the taxes
the government collects today.
And every year that nothing is done about it, Walker says, the problem grows by
$2 trillion to $3 trillion.
People who remember Ross Perot's rants in the 1992 presidential election may
think of the federal debt as a problem of the past. But it never really went
away after Perot made it an issue, it only took a breather. The federal
government actually produced a surplus for a few years during the 1990s, thanks
to a booming economy and fiscal restraint imposed by laws that were passed early
in the decade. And though the federal debt has grown in dollar terms since 2001,
it hasn't grown dramatically relative to the size of the economy.
But that's about to change, thanks to the country's three big entitlement
programs - Social Security, Medicaid and especially Medicare. Medicaid and
Medicare have grown progressively more expensive as the cost of health care has
dramatically outpaced inflation over the past 30 years, a trend that is expected
to continue for at least another decade or two.
And with the first baby boomers becoming eligible for Social Security in 2008
and for Medicare in 2011, the expenses of those two programs are about to
increase dramatically due to demographic pressures. People are also living
longer, which makes any program that provides benefits to retirees more
expensive.
Medicare already costs four times as much as it did in 1970, measured as a
percentage of the nation's gross domestic product. It currently comprises 13
percent of federal spending; by 2030, the Congressional Budget Office projects
it will consume nearly a quarter of the budget.
Economists Jagadeesh Gokhale of the American Enterprise Institute and Kent
Smetters of the University of Pennsylvania have an even scarier way of looking
at Medicare. Their method calculates the program's long-term fiscal shortfall -
the annual difference between its dedicated revenues and costs - over time.
By 2030 they calculate Medicare will be about $5 trillion in the hole, measured
in 2004 dollars. By 2080, the fiscal imbalance will have risen to $25 trillion.
And when you project the gap out to an infinite time horizon, it reaches $60
trillion.
Medicare so dominates the nation's fiscal future that some economists believe
health care reform, rather than budget measures, is the best way to attack the
problem.
"Obviously health care is a mess," says Dean Baker, a liberal economist at the
Center for Economic and Policy Research, a Washington think tank. "No one's been
willing to touch it, but that's what I see as front and center."
Social Security is a much less serious problem. The program currently pays for
itself with a 12.4 percent payroll tax, and even produces a surplus that the
government raids every year to pay other bills. But Social Security will begin
to run deficits during the next century, and ultimately would need an infusion
of $8 trillion if the government planned to keep its promises to every
beneficiary.
Calculations by Boston University economist Lawrence Kotlikoff indicate that
closing those gaps - $8 trillion for Social Security, many times that for
Medicare - and paying off the existing deficit would require either an immediate
doubling of personal and corporate income taxes, a two-thirds cut in Social
Security and Medicare benefits, or some combination of the two.
Why is America so fiscally unprepared for the next century? Like many of its
citizens, the United States has spent the last few years racking up debt instead
of saving for the future. Foreign lenders - primarily the central banks of
China, Japan and other big U.S. trading partners - have been eager to lend the
government money at low interest rates, making the current $8.5-trillion deficit
about as painful as a big balance on a zero-percent credit card.
In her part of the fiscal wake-up tour presentation, Rogers tries to explain why
that's a bad thing. For one thing, even when rates are low a bigger deficit
means a greater portion of each tax dollar goes to interest payments rather than
useful programs. And because foreigners now hold so much of the federal
government's debt, those interest payments increasingly go overseas rather than
to U.S. investors.
More serious is the possibility that foreign lenders might lose their enthusiasm
for lending money to the United States. Because treasury bills are sold at
auction, that would mean paying higher interest rates in the future. And it
wouldn't just be the government's problem. All interest rates would rise, making
mortgages, car payments and student loans costlier, too.
A modest rise in interest rates wouldn't necessarily be a bad thing, Rogers
said. America's consumers have as much of a borrowing problem as their
government does, so higher rates could moderate overconsumption and encourage
consumer saving. But a big jump in interest rates could cause economic
catastrophe. Some economists even predict the government would resort to
printing money to pay off its debt, a risky strategy that could lead to runaway
inflation.
Macroeconomic meltdown is probably preventable, says Anjan Thakor, a professor
of finance at Washington University in St. Louis. But to keep it at bay, he
said, the government is essentially going to have to renegotiate some of the
promises it has made to its citizens, probably by some combination of tax
increases and benefit cuts.
But there's no way to avoid what Rogers considers the worst result of racking up
a big deficit - the outrage of making our children and grandchildren repay the
debts of their elders.
"It's an unfair burden for future generations," she says.
You'd think young people would be riled up over this issue, since they're the
ones who will foot the bill when they're out in the working world. But students
take more interest in issues like the Iraq war and gay marriage than the federal
government's finances, says Emma Vernon, a member of the University of Texas
Young Democrats.
"It's not something that can fire people up," she says.
The current political climate doesn't help. Washington tends to keep its fiscal
house in better order when one party controls Congress and the other is in the
White House, says Sawhill.
"It's kind of a paradoxical result. Your commonsense logic would tell you if one
party is in control of everything they should be able to take action," Sawhill
says.
But the last six years of Republican rule have produced tax cuts, record
spending increases and a Medicare prescription drug plan that has been widely
criticized as fiscally unsound. When President Clinton faced a Republican
Congress during the 1990s, spending limits and other legislative tools helped
produce a surplus.
So maybe a solution is at hand.
"We're likely to have at least partially divided government again," Sawhill
said, referring to predictions that the Democrats will capture the House, and
possibly the Senate, in next month's elections.
But Walker isn't optimistic that the government will be able to tackle its
fiscal challenges so soon.
"Realistically what we hope to accomplish through the fiscal wake-up tour is
ensure that any serious candidate for the presidency in 2008 will be forced to
deal with the issue," he says. "The best we're going to get in the next couple
of years is to slow the bleeding."
© 2006 Associated Press.
Editor's Note:
3. Consumer Spending Growth Meager
Consumers kept a pretty firm grip on their wallets in September, boosting
spending by just 0.1 percent, the smallest increase in 10 months.
The Commerce Department's report, released Monday, showed that consumers had a
solid appetite for big-ticket goods such as cars and appliances last month but
they cut spending on nondurable goods such as food and clothes.
The increase in spending in September, down from a 0.2 percent rise posted in
August, matched a 0.1 percent rise in November of last year. The last time
spending was weaker was in August of last year, when consumers trimmed purchases
by 0.1 percent.
Americans' incomes, the fuel for future spending, rose by a brisk 0.5 percent in
September. That was up from 0.4 percent in August and marked the biggest gain
since June.
The income and spending figures aren't adjusted for inflation.
September's spending increase was less than the 0.3 percent gain that economists
were expecting. Income growth, however, turned out to be stronger than the 0.3
percent increases that economists were forecasting.
When consumer spending is adjusted for inflation, which is now easing, the
spending picture looked better. Spending rose by a 0.4 percent in September, a
turnaround from a 0.1 percent dip in August
Even though consumers spent respectably during the July-to-September quarter as
a whole, the economy grew at a feeble pace of 1.6 percent, the slowest in more
than three years. The culprit in the slowdown: the slumping housing market,
which shaved just over 1 percentage point from overall economic activity.
With the Nov. 7 elections around the corner, the latest snapshot of national
economic health fueled fresh debate between Republicans and Democrats competing
with each other to hold sway at the ballot box.
Economists, meanwhile, are hopeful the current October-to-December quarter will
turn out to be better and that the housing slump will not be a significant drag
on overall economic activity. In addition, lower energy prices should help out,
taking pressure off consumers and businesses and making them more inclined to
spend and invest.
With income growth outpacing spending, Americans' personal saving rate --
savings as a percentage of after-tax income -- came in at a negative 0.2 percent
in September, an improvement from negative 0.5 percent recorded in August.
An inflation measure tied to Monday's report showed "core" prices -- excluding
food and energy -- moderated. These prices rose by 2.4 percent over the 12
months ending in September. That was down from a 2.5 percent increase for the 12
months ending in August.
Even with the moderation, core inflation is still above the Fed's comfort zone.
Fed policymakers, however, are betting that slower overall economic activity
along with lower energy prices will continue to lessen inflationary pressures in
the months ahead.
With the economy slowing and energy prices retreating, the Federal Reserve held
interest rates steady last week for the third meeting in a row. Many economists
believe the Fed will keep its finger on the interest-rate pause button through
the rest of this year and probably into much of next year.
To fend off inflation, the Fed had boosted rates 17 times since June 2004,
marking the longest stretch of increases in Fed history.
© 2006 Associated Press.
Editor's Note:
4. Fed's Lacker: Economy Can 'Withstand' Rate Hikes
The U.S. economy is on solid enough ground to withstand further interest rate
hikes if the Federal Reserve has to curb stubbornly high inflation, Richmond
Federal Reserve President Jeffrey Lacker said in a speech on Monday.
"The economy is resilient enough right now to withstand further tightening," he
said, adding that this comes despite the slowdown in the housing market.
Lacker, who has had the lone dissenting vote on the Federal Open Market
Committee's last three decisions to keep rates on hold, said his outlook for
inflation is "discomforting."
"The longer inflation remains elevated, the more difficult it will be to bring
it back down," he said.
"If the Fed allows inflation to remain above target for too long, expectations
could become tightly centered around a higher rate. This danger is what prompted
me to vote at recent FOMC meetings for tactics aimed at bringing inflation down
more rapidly," he said.
Lacker has been a stalwart supporter for more interest rate increases, even
after the Fed raised the federal funds rate to 5.25 percent from 1 percent in
the last two years.
The core PCE price index, widely seen as the Fed's favored gauge of price
pressures, rose at a 2.4 percent annual rate in September, down a touch from 2.5
percent in August, according to data released on Monday.
The boom in housing was driven by fundamental factors that are still quite
favorable, and that while some further retrenchment seems likely in the housing
market, that pullback is not likely to result in a "catastrophic collapse," he
said.
Lacker also characterized the prospect for consumer spending as positive, driven
by his outlook for higher income.
Since the August policy meeting when the Fed injected some uncertainty into the
market by keeping rates steady, financial market participants have weighed every
phrase from policymakers for clues on the path of interest rates.
Lacker said policymakers should do more to clarify the Fed's strategy and
objectives. Markets in turn should pay more attention to strategy rather than
what the Fed's policy actions will be.
"Instead of (financial markets) focusing on what choices we are going to make,
our communications might be more usefully focused on our strategy and our
objectives," Lacker said in answer to a question after a speech.
© 2006 Reuters.
Editor's Note:
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