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Putnam Perspective: Reflections on National and Personal Solvency

Putnam Perspective: Reflections on National and Personal Solvency

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Published by Putnam Investments
Our country's pace of debt accumulation is both dangerous and unsustainable. Substantial reforms must be made to entitlement programs before they drag down our economy. We must transition to a new personal and government solvency based on higher savings and investment. Private and public retirement savings programs both play key roles in the solution.
Our country's pace of debt accumulation is both dangerous and unsustainable. Substantial reforms must be made to entitlement programs before they drag down our economy. We must transition to a new personal and government solvency based on higher savings and investment. Private and public retirement savings programs both play key roles in the solution.

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Categories:Business/Law, Finance
Published by: Putnam Investments on Jun 30, 2011
Copyright:Attribution Non-commercial

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07/02/2014

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Putnam Investments |
putnam.com
As we can all see rom this season’s intense debates in Washington, nding a way torestore our national solvency is the single most critical issue or our uture. But evenas we strive or scal sanity or our government, we should recognize that personalsolvency, grounded on strong household balance sheets and retirement savings, isequally vital. National solvency and personal solvency complement each other. Theyare both key to rebooting economic growth and sustaining America’s uture.
A dangerous, unsustainable course
Our country is at a critical inection point. We really do ace a choice between declineand renewal. The budget debates we read about and see on TV are not media hype.The stark truth is that we’re on a dangerous, unsustainable course — one that couldwreck the America we inherited. Failure is not an option. Nor are inaction, denial,or delay. Federal decits already claim a ar larger share o our economy than thato such peers in today’s global economy as the United Kingdom, France, Canada,Australia, and Germany.
•
Our country’s pace ofdebt accumulation isboth dangerous andunsustainable
•
Substantial reforms mustbe made to entitlementprograms before theydrag down our economy
•
We must transition toa new personal andgovernment solvencybased on higher savingsand investment
•
Private and publicretirement savingsprograms both play keyroles in the solution
National solvency and personal solvency complementeach other. They are both key to rebooting economicgrowth and sustaining America’s uture.
June 2011»Putnam perspectives
Reections on Nationaland Personal Solvency
Robert L. Reynolds
President and Chief Executive
 
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June 2011 |
Our $14.3 trillion national debt is mind-boggling, di-cult to even imagine. I we measured it in $100 bills, thatdebt would create a stack 9,000 miles high! And yetour national leadership in Washington seems unableto engage in serious bargaining to deal with the issue.Amid partisan positioning over the terms o extendingour national debt ceiling, concern or our country’s cred-ibility and solvency seems to be taking a back seat tothe politics o the 2012 election. Meanwhile, the nationaldebt is skyrocketing.The Congressional Budget Oce advises us thatPresident Obama’s recent budget would raise totalnational debt held by the public rom roughly 63% oGDP today to more than 90% by 2020 with no end insight! That is a debt-to economy ratio that Americahasn’t seen since World War II. And while this scal timebomb keeps ticking, interest costs on our debt are ontrack to explode.
Figure 1. America’s budget defcit is among the largest
2010 budget defcit as a percentage o GDP in some AAA-rated countries
U.S. U.K. France Canada Australia Germany10.6%10.4%7.0%5.5%4.6%3.3%
Source: International Monetary Fund. Note: IMF calculations or the U.S. dier rom Congressional Budget Oce gures, which put the U.S. decit at8.9% GDP.
Figure 2. Total national debt is on track to surpass GDP by 2020
U.S. ederal debt as a percentage o GDP
(%) 2001501005001930 19501940 19701960 1980 1990 2000 2010 2030E2020E
“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 the Measurement o Worth (Alternative FiscalScenario), Congressional Budget Oce, and White House Oce o Management and Budget.
Unless we change course, interest on our debt will quadruple by 2020 —reaching nearly $800 billion a year.
 
Putnam Investments |
putnam.com
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America’s dependence on oreign buyers at Treasury debt auctions makesus dangerously vulnerable to what ormer Presidential Chie o Sta ErskineBowles has called “the most predictable inancial crisis in history.”
Unless we change course, interest on our debt willquadruple by 2020 — reaching nearly $800 billion ayear. It is worth noting that this is happening at a timeo historically low interest rates. That means that asustained rise o just 1% in interest rates would add $150billion more a year to this burden! Albert Einstein oncedescribed compound interest as “the most powerulorce in the universe,” and we are gambling against it!What’s worse, we now depend on oreign creditors tonance nearly hal o our debt — 47% — nearly ten timesas large as the 5% share they held in 1970!So ar, most o our oreign creditors still believe thatAmerica can — and will — get its scal act together. Thatis the only reason why the U.S. Treasury can still borrowhuge sums o money 10 years out at roughly 3.5%.
Figure 3. Interest on the debt alone will reach nearly $800 billion annually
Ination-adjusted dollars (2009)
80060040020002000 2020
$768.2$280.1$186.9
Actual Projected
2005 2010 2015
      (       $      B      i       l       l      i     o     n     s      )
Source: White House Oce o Management and Budget, 2010 estimates.
Figure 4. Other countries hold nearly hal o our debt today
Foreign holdings
1970
Debt held by public:$283B
5%
1990
Debt held by public:$2.4T
19%
2010
Debt held by public:$8.4T
47%
Source: U.S. Department o Treasury.

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