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Robert L. Reynolds: Meeting America's Solvency Challenge

Robert L. Reynolds: Meeting America's Solvency Challenge

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Published by Putnam Investments
Edited from a speech given to the Investment Advisor Association, Boston, Massachusetts, on April 28, 2011
Edited from a speech given to the Investment Advisor Association, Boston, Massachusetts, on April 28, 2011

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Published by: Putnam Investments on May 04, 2011
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05/04/2011

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Meeting America’sSolvency Challenge
Robert L. Reynolds
President andChie Executive OfcerPutnam Investments
Edited from a speech given to the Investment  Advisor Association,Boston, Massachusetts,on April 28, 2011
My topic today is America’s solvency challenge — a very timely topic that we seereected these days in the news media all the time. By defnition, this talk has to touchon some very serious problems beore it sketches out some positive solutions centeredon reorm o America’s retirement systems. Even there, I need to warn you o a newthreat to retirement savings incentives that we will all ace.So beore I talk about some o these hazards, let me assure you that I have always beenan optimist about America, and I still am. This is an incredibly creative, dynamic, andresilient country. I believe we will rise to meet the challenge I’m here to talk about. And Iam actually bullish about the next year or so. Our economy is growing. We will prob-ably see record corporate earnings this year, which is what ultimately drives stockprices. And yet, I think all o us know that our country is at a critical inection point. Wereally do ace a choice between decline and renewal.
Our choice: Decline or renewal
I believe we all know in our bones that America’s uture economy has to be verydierent rom our recent past. We can’t go back to 2007, with an ocial savings ratenear zero, houses turned into ATM machines, and leverage rising everywhere. Weshouldn’t want to replay that movie. We know how it ended.We have to fnd a way orward to renewed national solvency. We have to make a tough,sometimes painul, transition away rom old patterns o debt, leverage, and debt-ueledconsumption toward a new economic model centered on higher saving, investment,new business ormation, and job creation. Our goal should be to reboot a solventAmerica that can compete, win, and grow in tough global markets. And it’s about time.Because these budget debates we read about and see on TV every day are not mediahype. The surge in ederal spending since 2008 has our national debt growing byabout $2 million a minute. So i I talk this morning or hal an hour, we’re all going toowe about $60 million more by the time I take questions. By next week, we will addmore than $20 billion to the national debt. We’re on a dangerous, unsustainablecourse, and no one can say we haven’t been warned.
We have been warned
Just last week the
Wall Street Journal 
ran two ront-page leads, letting us know that thetectonic plates o the global economy are rumbling. First, we saw the S&P drop its long-term outlook on U.S. debt prospects rom “stable” to “negative,” noting that they mayalso lower America’s triple-A credit rating within two years. The next day, China took
I believe we all know in our  bones that America’s utureeconomy has to be very diferent rom our recent  past. We can’t go back to 2007, with an ocia savings rate near zero, houses turned into ATM  machines, and leverage rising everywhere. We shouldn’t want to replay that movie. We know how it ended.
 
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new steps to make the yuan more readily available in global markets, one more steptoward being able to compete with, or displace, the dollar as a global reserve currency.Some here may recall that just a ew weeks earlier, the International Monetary Fund hadquestioned America’s “credibility” on our national debt. This week, the IMF issued areport suggesting that China’s economy could surpass America’s as early as 2016, inpurchasing power terms, not per capita. These are the kinds o signals that make it eelas though history is on ast orward, and it’s not moving in our avor.Americans are worried, and rightly so. Recent polls show confdence in our uture at anall-time low. For the frst time ever, a majority o Americans expect that their children’sutures won’t be as good as theirs. Clearly, the ater-shocks rom the Great Recession,especially stubbornly high unemployment, play into that. But so does concern aboutUncle Sam’s historic, post-crisis defcits.
Our defcits are among the world’s largest 
2010 budget deficit as a percentage of GDP in some AAA-rated countries
U.S.U.K.FranceCanadaAustraliaGermany10.6%10.4%7.0%5.5%4.6%3.3%
Note: IMF calculations or the U.S. dier rom Congressional Budget Oce fgures, which put the U.S. defcit at8.9% GDP.Source: International Monetary Fund.
Federal defcits now claim a ar larger share o our economy than comparably ratedtriple-A sovereigns, like the United Kingdom, France, Canada, Australia, and Germany.When the world’s largest economy also runs the developed world’s largest defcits,worry is well grounded, not hysterical. That may be one reason why the largest bondhouse in America, PIMCO, announced some time back that they were getting out o U.S.Treasury bonds.Our political leaders show no sign o being willing to collaborate, or compromise, onways to deal with this — at least not yet. Instead o serious bargaining and action to curblong-term debt, this year in Washington promises little more than political positioning,head butting, and games o chicken. Concern or America’s credibility and solvencyseems to be taking a back seat to the politics o the 2012 presidential election.
Federal decits now claima ar larger share o our economy than comparably  rated triple-A sovereigns,like the United Kingdom,France, Canada, Australia,and Germany. When theworld’s largest economy also runs the developed world’s largest decits,worry is well grounded, not hysterical.We have to nd a way orward to renewed national solvency. We have to make a tough, sometimes painul, transition away rom old  patterns o debt, leverage, and debt-ueled consumption toward a new economic model centered on higher saving, investment, new business ormation, and jobcreation. Our goal should be to reboot a solvent America that cancompete, win, and grow in tough global markets.
 
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 America’s national debt is skyrocketing
(%) 2001501005001930195019401970196019801990200020102030E2020E U.S. FEDERAL DEBT AS A PERCENTAGE OF GDP
“Crash”of 2008148%VietnamWar eraWorld War IIThe GreatDepression22%108.6%Over 90%
Sources: Heritage Foundation compilations o data rom U.S. Department o the Treasury, Institute or theMeasurement o Worth (Alternative Fiscal Scenario), Congressional Budget Oce, and White House Oce oManagement and Budget.
While political kabuki plays occupy Washington’s attention, the national debt is skyrock-eting. The Congressional Budget Oce advises us that President Obama’s recentbudget would raise total national debt held by the public rom roughly 63% o GDPtoday to more than 90% by 2020 with no end in sight! That is a debt-to-economy ratiothat America hasn’t seen since World War II.
Interest costs on Uncle Sam’s debt will quadruple by 2020
8006004002000INFLATION-ADJUSTED DOLLARS (2009)2000 2020
$768.2$280.1$186.9Actual Projected
2005 2010 2015
      (      $      B      i      l      l      i     o     n     s      )
Source: White House Oce o Management and Budget, 2010 estimates.
This fscal time bomb is ticking, and uture interest costs on our debt are on track toexplode. Unless we change course, interest on our debt will quadruple by 2020,reaching nearly $800 billion a year. A sustained rise o just 1% in interest rates would add$150 billion more a year to this burden! Albert Einstein once described compoundinterest as “the most powerul orce in the universe.” And we’re gambling against it!
The Congressional Budget Oce advises us that President Obama’s recent  budget would raise total  national debt held by the public rom roughly 63% o GDP today to more than 90% by 2020 with no end in sight! That is a debt-to-economy  ratio that America hasn’t seen since World War II.

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