Sadly, this means nothing in terms of the over all deficit. If our ability to borrow from other countries is down graded, it will create a catastrophic relation in our ability to pay for our promised, citizen right, entitlements.

The ability to offer quantitative easing as a “wiggle room” solution has slowed the inevitable. Fixing the root problem of spending has been pushed to the side in order to not raise taxes, provide services and pay for two wars. A Huffington Post article released earlier today stated that the White House has no alternative to raising the debt limit. Paying off current debts by selling off government assets (gold, land, buildings) also drives us back to the same problem in a mere three months.   

The government also has the option to default on loans with other countries, issue IOU’s and destroy the honest work our country has made for itself. Too much debt without a game plan has proved fatal for countries. See: Greece, Italy, Germany, England, Ireland to name a few. Are we the next Greece? – and are you prepared?

So what does the governments extreme spending mean to you?

Congress and the current administrations decisions are not left up to our individual views of what should or should not be done. However, each of us has the ability to protect ourselves against forces we cannot control. Obviously, we as consumers have a better understanding of where our money should be spent and what is important in moving our economy forward.

What should you do?

Get help with your planning, TODAY. There are proven ways to protect yourself in times of economic uncertainty and even profit. Call or email us for a personal review at 813-490-9595 or via email at kc@lasmanlaw.com to learn more about planning for certainty and success in the years to come.

For more information on the deficit and its impacts please visit ABC News’ Blog.

As the global financial crisis first erupted Buffett praised the government’s actions of infusing enormous amounts of cash into the economy to avoid a total collapse beyond the level of the Great Depression some 75 years ago.

Federal spending soared to avert a total collapse to the tune of a $787 billion economic stimulus package enacted in February of 2009, plus a $700 billion bailout of the financial industry, and takeovers of mortgage financiers Fannie Mae and Freddie Mac. The government, for instance, set aside $3 billion on its 'cash for clunkers' program, which paid up to $4,500 if owners trade in older gas guzzlers for new, fuel-efficient cars.

The public purse also faces lower tax receipts and higher social security costs as unemployment remains dangerous high.

The worst of the crisis was in fact averted by the stimulus but the reality of the cost of shoring up the economy is beginning to sink in each and every quarter in 2011.

Warrant Buffet said in a NY Times interview,

"Enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects. For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself."

In his New York Times column, Buffett cited the 20th Century economist John Maynard Keynes, whose borrow and spend theories were used by President Roosevelt to tackle the Great Depression of the 1930s, just as they are today. Keynes also noted the problem of unbridled use of his plan when he stated,

"By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.... The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."

Buffett's concerns now center on America's $1.8 trillion budget deficit, which represents 13% of the size of the total economy. The previous peacetime record, Buffett says, was 6% in 1920. The interest cost alone is $500 million a day!

Buffett said that the use of spending and quantitative easing is like global warming, and warns of the side-effect of 'dollar emissions' from the 'Greenback effect'.

Buffett further stated, “Unchecked carbon emissions will likely cause icebergs to melt. Unchecked greenback emissions will certainly cause the purchasing power of currency to melt.”

Printing money has a cost.  It creates inflation and with it higher interest rates.  An economist at an influential think tank has warned that LIBOR may spiral “rapidly” as the Bank of England will need to curb runaway inflation.

Andrew Lilico, of the Policy Exchange think-tank, said, “To keep inflation (as measured by the Retail Prices Index) down to only 10% for one year, the economy will have to be able to tolerate interest rates of perhaps 8%.”  The situation in the United Kingdom is no different than the situation we face in the United States.

Each of the actions currently being taken or contemplated by the Federal Reserve Board of Governors, US Treasury, Comptroller of the Currency, etc., to rescue or stabilize financial institutions will create more money.  In the absence of proportionally-higher real output from our workforce, we face more money chasing the same amount of goods.  It is very hard to increase output when unemployment remains extremely high.  This is a text book recipe for inflation and the expectation of inflation, both of which raise interest rates. 

What is an interest rate, really?  Interest rates are the sum of real-economic growth and inflation.  Very-high interest rates are mostly a product of inflation.  In August 1981, the 18.79% 3-month Libor was associated with negative real growth and in the neighborhood of 20% inflation.  Consumption is reduced proportionally by inflation, e.g., 20% inflation reduces consumption by 1/5 per year.

Worse yet, at some point in as inflation takes off, there will come two psychological tipping points:

• Foreigners, think China, will stop wanting to hold US dollar-denominated (noncash) assets.  They will start selling their debt instruments (think Treasuries), and thus debt-instrument prices will fall, which means interest rates will rise; and
• foreigners will not want to use US dollars as a medium of exchange and the US economy will therefore suffer "Seigniorage Shrinkage" 

Seigniorage is economic term which defines the profit a government makes on the money it creates, i.e., the value of the things it buys with money that it prints (most is created electronically) minus the cost of creating the money. 

Up until now, foreigners have produced real things, which we consumed and paid for partly with electronic dollars.  It cost the United States nothing to create money as it is all done electronically with no real costs.  This part of our foreign purchases was until now a gift from them to us, as we consumed their products and sent them none of our products in return.  We only sent them electronic dollars.  China has supported this relationship in order to maintain its own economy.  My Grandfather once told me, “If you are going to borrow then borrow as much as you can.  When you owe the bank a little they own you but when you owe the bank a lot, you own them.”  Well, we owe China more than we can pay back and if we fail they fail with us so who owns who?

However, if China were to switch all transactions to the Yuan and the rest of the world were to follow and use a currency other than the Dollar then they would be buying our output by returning our electronic money.  More dollars coming home than we can consume in our economy reverses the relationship with China.  Thus, we will suffer the reverse in our standard of living that we enjoyed with Seigniorage in the past.  Economics seems so complicated but the effect on you is easy to understand.

The effects of much higher interest rates on the order of 16 times what they are now will have catastrophic effects. Let’s list the obvious one: 

Affected assets include those which provide services or cash in the future, like real estate, life insurance, health insurance, equity stocks, and most long-term bonds.  For many investors and some consumers (those purchasing long-term services like owning rental real estate is like buying a stream of rental services), much higher interest rates will greatly reduce their wealth.  That is, for many assets higher interest rates will discount future cash streams more than it will increase the size of those streams.

This effect is exacerbated by the reduced effective demand for such assets caused by more-expensive and less-available lending.  It is moderated a little by people fleeing financial assets for tangible assets.

Apart from such adverse wealth effects, the object of many people's wealth is consumption (including gifts to charity), which will be separately affected by high interest rates.

Investors and consumers can now access the fixed-income market, to hedge the above-mentioned dangers, very inexpensively.  This low cost is due to several factors that have depressed the price of fixed-income volatility compared to historic levels.  If rates rise substantially, then it will, in a sense, be too late and such protection will be far more expensive so the time to act is now while prices for these investments are low.

So what are we to do?  If inflation is coming and higher interest are coming, is there anything you can do to prepare yourself or even profit from the change? Consider diversifying your portfolio to insure against the inherent risk that comes with high bouts of inflation. Feel free to discuss this with one of our team to find solutions that prepare, protect and even profit during these uncertain times. Risk management is a vital part of estate, business and asset planning.

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Contributors include the following:

Jeffery M. Lasman, Esquire

Jeffery M. Lasman has been a practice attorney for nearly 14 years.  He founded the Lasman Law Firm in 2001 and has successfully provided legal guidance to thousands of clients.  As principle partner at the Lasman Law Firm, Jeff specializes in all facets of estate and corporate planning with a particular interest in wealth transfer, structuring and taxation. 

Prior to successfully opening his own practice, Jeff groomed himself while practicing with some of the most respected firms on Florida’s west coast as well as firms in Boston Massachusetts.  While there, he focused on a variety of legal matters including: Estate planning, taxation, real estate law, wills and trust, probate, and virtually every aspect of corporate planning and structuring. 

After attending the University of Central Florida he went on to graduate, with honors, from the Suffolk University of Law.  Jeff then received his Masters of Taxation Law from the Boston University School of Law.  In addition to his practice, Jeff speaks frequently at seminars and continuing education programs on various estate, tax and asset protection planning strategies.  He remains active with many of the most prestigious national and state bar associations.  With his expertise and experience, Jeff remains one the most sought after attorneys in Florida. 

Ted Rusinoff, J.D., CPA, CFP®

Ted Rusinoff is recognized as one of the nation’s leading financial professionals.  Having spent the last 20 years in the financial services industry, Ted has found creative ways to better manage insurance and investment assets for successful individuals and businesses all over the country.  While earning his Masters in Taxation and becoming a CFP® practitioner, Ted worked at every level of the insurance and investment industry, gaining the knowledge to build the systems and structures necessary to effectively meet the needs of clients and financial services advisors.

Using his experience with financial products and the design concepts developed for business owners and wealthy families, Ted applies his tax knowledge to help clients find efficiencies within their portfolios and their businesses.   Understanding what the client needs and finding the right solution has been a trademark of the value he brings to any team of advisors for his clients and theirs.

Over his career, Ted has been published in industry magazines and periodicals.  He was also identified as a rising star for advisors under 40 by the Association of Advanced Life Underwriters and the magazine Insurance News Net.  Ted has spoken at the Advanced Association of Life Underwriters, The School of Life, The Best Practices Symposium and the Million Dollar Round Table.  As a member of Best Practices of America, Ted helps to set the standard for other financial professionals across the country. 

T.J. Agresti, J.D., LL.M

Thomas Agresti began a successful career as a tax attorney after finishing an extensive and well-planned education that included the University of Maryland, Seton Hall University School of Law, University of Parma School of Law in Italy, and University of Denver School of Law. 

While a taxation specialist for a "Big Six" international accountancy firm, he specialized in domestic and international strategic tax planning or, quite simply, how to reduce a client's overall tax burden. His responsibilities also included financial and estate planning, income, gift, and estate tax reduction, compliance for individuals, trusts, and estates, partnerships, corporations, and tax-exempt entities. After leaving public accounting he practiced tax law with a boutique law firm before forming his own firm. He has lived and worked overseas representing a broad range of clients. He has practical experience planning and implementing multi-national transactions, sophisticated wealth transfer planning, sophisticated life insurance structures, captive insurance, private equity and structured debt instruments.