What's A Deficit?

And I'm back. I'm sure you all were waiting with baited breath, relentlessly checking the blog for my latest post. Or not. Anyway, I had the pleasure of being a stay-at-home mom last week as my wife was out of town on business. Needless to say, the blog was the furthest thing from my mind. We had a great time, but it was truly a baptism by fire! Much respect to all of the mothers out there--especially my wife (my wife added everything after the hyphen).

Now to the markets. We have seen a healthy comeback from the lows of the Japanese disaster. However, proceed with caution. Volumes (the number of shares traded on a given day) are very low. This is telling me that despite the rising stock prices, real conviction is lacking, and the market is moving north in a subtle manor. Historically speaking, light volumes are often followed by very sharp declines but not always. Something I found very telling were the earnings that were reported by Nike. Nike has been a solid mover and earnings producer throughout the recovery. Nike shares were pounded when they reported earnings that were significantly less than analysts' expectations. Nike cited higher input costs (oil, cotton, dye, energy, etc.) as being the main reason for the earnings' miss. This is precisely what I have been worried about. It will be very tough for companies to keep increasing profits (higher profits = higher stock prices) when they can no longer cut costs (jobs), and the materials that are necessary to produce their goods are more expensive. As for me and mine, we are cautiously moving forward--never hestitating to take profits. A wise man once said, "It's impossible to go broke taking profits."

So what's a deficit? That could quite possibly be the most often thought yet never spoken question. We constantly hear people talking about government deficits and debts; I have referenced them myself in previous posts. I realize that I have mounted my soap box and addressed this in previous entries, but I believe I failed in explaining in simple terms exactly what "deficit" means. It is vitally important that we all understand what a deficit is and what it means. I will do my best to explain: simply put, a deficit--as it relates to government spending--is the amount of the budget we are forced to borrow. Government generates "revenues" (I hate using the word revenue when it pertains to taxing the public) through income taxes, fines, permits, etc. Currently, government revenues are somewhere around $1.6 trillion a year. Our budget is around $3 trillion a year. That difference is made up through borrowing. The vast majority of that borrowing is done through issuing bonds. So, our deficit is $1.4 trillion this year alone. That breaks down to about $4 billion per day going directly on the proverbial credit card. Numbers this big are staggering--almost incomprehensible to the human mind. Our national debt is a whisper from $15 trillion. Next year, our debt will reach 100% of our GDP (Gross Domestic Product - the number that represents the total output of the U.S. economy) for the first time in our country's history. I truly believe it is important to understand the fiscal and political trends in any economy before you can put your money to work and invest. The question we should all be asking is this: how much debt can we handle? This is not a political question as neither party seems to show any real commitment to restoring fiscal sanity. However, it is a question that will impact all of our lives and our ability to provide for our families. Knowledge is power. Hopefully, when you understand the terms and parameters of the discussion, you will be able to sift through all of the noise out there and be able to make an informed decision.

On another note, I still have not received a single question. Email me directly with any topics that you would like me to address. All questions are confidential, and I will not use any names. Trust me, I have plenty of topics swirling around in my overactive mind. However, I would much rather address questions or concerns that you have.