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The Ten Trillion Dollar Gamble: The Coming Deficit Debacle and How to Invest Now: How Deficit Economics Will Change our Global Financial Climate

The Ten Trillion Dollar Gamble: The Coming Deficit Debacle and How to Invest Now: How Deficit Economics Will Change our Global Financial Climate

by Russ Koesterich

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The next economic storm and how to prepare for it--from a top decision-maker at BlackRock

An economic calamity is already looming on the horizon, and it's going hit the U.S. on a scale equal to the recent mortgage meltdown and liquidity crisis of 2008-2009. In February, President Obama announced that the 2010 budget deficit would surpass $1.5


The next economic storm and how to prepare for it--from a top decision-maker at BlackRock

An economic calamity is already looming on the horizon, and it's going hit the U.S. on a scale equal to the recent mortgage meltdown and liquidity crisis of 2008-2009. In February, President Obama announced that the 2010 budget deficit would surpass $1.5 trillion, an amount greater than the total debt of our nation in its first 200 years of its existence. And things only get worse from here: between 2010 and 2019, America will add one trillion of additional debt every year.

In The Ten Trillion Dollar Gamble, Russ Koesterich, who manages over $100 billion for the world's largest money management company, offers compelling evidence supporting his prediction that the global economy is on the verge of more, even greater upheaval and provides his unique insight into:

  • The structural weaknesses underlying the economic meltdown
  • Why commodities will be so important in the next economic climate
  • Likely ramifications to the real estate market
  • The best stocks to buy and which ones to avoid

Today's investing strategies will be rendered useless in the next storm's wake. Written by one of the most qualified people in the business, The Ten Trillion Dollar Gamble offers a plan for protecting your wealth and preserving the power of your savings.

Table of Contents

Chapter 1. Why Worry About the Deficit?
Chapter 2. Why the Deficit Will matter to You
Chapter 3. What to Watch
Chapter 4. How to Manage Your Cash and Debts
Chapter 5. Investing in Bonds in a Rising Rate Environment
Chapter 6. Stocks to Buy and Avoid
Chapter 7. Why You May Need Commodities
Chapter 8. What to do with Real Estate
Chapter 9. Putting it All Together
Chapter 10. Conclusion: Can We avoid the budget debacle?

Editorial Reviews

Library Journal
The main thrust of Koesterich's (The ETF Strategist: Balancing Risk and Reward for Superior Returns) new book is his advice for sound personal investing in the shadow of the advancing tidal wave of U.S. debt and the collateral damage to follow. After lucidly discussing the past and the future of that debt, he outlines the economic consequences of unrestrained state profligacy. He contemplates what should happen (higher inflation, slower growth, etc.), why it should happen, and where to look for signs of escalating problems. Specific indicators, data sources, release dates, agencies, and websites are named. Discussion of debt's consequences morphs naturally into financial advice, as the author encyclopedically catalogs various asset classes along with how they would perform in "a deficit debacle." Koesterich not only recommends what investors should consider for their portfolios, but also covers why they should buy assets and how. This is not a quick general investment lesson but a helpful, methodical "financial playbook" for realistic investors. VERDICT Highly recommended for those planning to invest over the next five years or more. It is not easy to find books that combine debt macroeconomics with sound financial advice, but Koesterich manages it well.—Jekabs Bikis, Dallas Baptist Univ., TX

Product Details

McGraw-Hill Education
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The McGraw-Hill Companies, Inc.

Copyright © 2011Russ Koesterich
All rights reserved.
ISBN: 978-0-07-175357-9



Why Worry about the Deficit?

ANOTHER FLOOD OF RED INK dismays economists, bankers, and consumers alike." A headline from yesterday's Wall Street Journal? Actually it came from Time magazine in 1982. We have been agonizing over the U.S. deficit for nearly 30 years. Economists have puzzled over it, pundits have debated it, and elections have been fought over it. And yet for most of that period the economy has expanded, interest rates have fallen, and despite a few speculative bubbles, the stock market has increased tenfold. So why is the deficit going to start to hurt us now?

It's a matter of time. Some things get better with time, but the U.S. federal deficit is not one of them. In the mid-1980s, the last time the deficit was particularly high, the Sony Walkman was introduced. If you used a 60-minute cassette—if you were born after 1990, ask your older siblings—you could maybe get about 20 songs on it. The iPod 8GB Nano holds around 2,000 songs, and, adjusted for inflation, it costs the same. We have far cooler gadgets today.

When it comes to federal deficits and our national debt, however, the picture has gotten far worse. In 1984, the federal deficit was around $200 billion. In 2010 it was approximately $1.3 trillion, and given the recent extension of the Bush tax cuts, the 2011 deficit is likely to be of a similar magnitude. In 1984 total U.S. nonfinancial debt was approximately $5 trillion. By 2010, it was more than $35 trillion, a sevenfold increase. Between 1983 and 1984 our economy grew at over 6 percent a year. Today, most economists and politicians would be thrilled if we could grow at half that speed. In 1984 the United States had net national savings of nearly $300 billion. In 2009, our net national savings were ?$300 billion. And finally, in 1984 the average age of a U.S. citizen was around 30. Today it is 37. As a country, we are more indebted, slower, and older. That is why the deficit is going to start to hurt us now.

The problem with having large, persistent deficits is that someone has to finance them. This is what investors do when they buy a country's debt. U.S. deficits have gotten so large that it now takes a considerable chunk of the world's savings just to fund our deficits. And these record deficits, the largest ever recorded during peacetime, are distinguished not only by their magnitude but also by their persistence. Except for a brief period in the late 1990s, the government has spent more money than it takes in every year since 1970. This pattern of large and consistent deficits will continue over the next decade. Then it gets even worse, with deficits growing to truly astronomical levels as the country ages and medical costs skyrocket. This means fewer working-age Americans paying the bills and more retired Americans receiving benefits.

Those economists who 30 years ago predicted a day of fiscal reckoning were not wrong, just early. Our deficits are primarily driven by runaway entitlement spending, which will only get worse over time and which cannot be repealed without huge political cost. There is no evidence that today's generation of politicians is willing to pay that cost or confront the problem in a meaningful way. The cumulative effect of this will be record national debt, which eventually will have to be repaid, repudiated, or inflated away.

Over the coming years, financial markets will start to pay attention to the approaching train wreck. Investors will demand higher interest rates to buy government bonds. Higher rates will punish both bonds and stocks. Politicians will probably offer a few token efforts to rein in the deficits, so we will see higher taxes, at least on the affluent, and probably some curtailment of benefits. But this will not be enough, so deficits will continue to rise throughout the decade, and financial markets will get increasingly nervous.

There are a few scenarios for how this all ends. From a purely economic point of view, the optimistic one includes the government making a serious effort to reduce benefits and fix the long-term problem. This is not likely to happen without a crisis that forces the government's hand. In the absence of a crisis, the political costs of real deficit reform are simply too great. If you need a visual picture of what such a crisis would look like, think of burning banks in Athens, Greece, in the spring of 2010. And if you thought Greece was scary, it is worth noting that in 2009 the United States actually had a higher ratio of government debt to revenue than Greece. In other words, by one measure our fiscal position is actually worse than that of Greece!

That said, the United States is not Greece. For now, the world is still happy to lend us lots of money, and there is little danger of bank burnings in the near future. The more likely scenario is that we will muddle along with higher taxes, higher interest rates, and a slower economy. But there is a worse scenario, and that is inflation. This is the real nightmare possibility. If the government, through the central bank (that is, the Federal Reserve System), continues to buy its own debt, sooner or later this will cause an increase in the nation's money supply and eventually a surge in prices. Inflation will erode the value of the debt, making it easier for the government to pay it off in inflated dollars. But this will come at a huge cost to the standard of living of virtually all Americans.

As depressing as this all sounds, there are things you can do to protect your finances. That is primarily what this book is about. But to lay the groundwork, so that you will understand what is going to happen and why, I am going to start with a couple of chapters on deficit economics. After that, I am going to describe the warning signs to look for and how to read the economic tea leaves. Then I am going to dig into what you need to do.

While I recognize that fiscal projections and charts from the Congressional Budget Office (CBO) are not most people's idea of a relaxing afternoon, there are several reasons to persevere with a little budget math. First, it will help you to appreciate the severity of the problem. Understanding the economics will also help you to recognize the warning signs that I am going to describe in Chapter 3. Finally, I think that history is instructive. These problems have been building over decades. Understanding how we got into this mess will illustrate how difficult it will be to extricate ourselves from it. That said, those of you who feel that you already get it and who have started to stockpile canned goods and gold can skip ahead to Chapter 4, which will start to focus on how to position your portfolio. But I think you are going to do a better job of managing your finances if you keep reading here—although, full disclosure, it will get a bit nasty.

Today's Deficit: Think in Trillions

What are fiscal deficits and the national debt? Why do we have them, how big are they, and why can't we get rid of them?

The U.S. federal deficit for 2009 was approximately $1.4 trillion, by far the largest in our country's history. When the current annual deficit is measured as a percentage of the gross domestic product (GDP), it is the largest since World War II (see Figure 1.1). While the deficits of 2009 and 2010 were magnified by the government's continuing efforts to stabilize the economy, deficit spending had become the norm long before the financial crisis hit, and it will be with us long after we have forgotten the miseries of 2008. As a result of perpetual deficits, today the amount of gross federal debt outstanding—that is, the sum of all previous deficits and surpluses—is approximately $14 trillion. Of that amount, r

Excerpted from THE TEN TRILLION DOLLAR GAMBLE by RUSS KOESTERICH. Copyright © 2011 by Russ Koesterich. Excerpted by permission of The McGraw-Hill Companies, Inc..
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Meet the Author

Russ Koesterich is Global Head of Investment Strategy for BlackRock Scientific Active Equities. He previously served as Senior Portfolio Manager in the US Market Neutral Group for Barclays Global Investors. Koesterich is the author of The ETF Strategist.

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