Surviving the New Deficit Economy: Interview with Russ Koesterich

From 2010 to 2019, the United States government will increase it’s deficit to an approximate 10 trillion dollars.  Official documents released by the Congressional Budget Office (CBO) report the federal government to be in it’s most precarious and unstable financial state ever (outside of a major war).  As the deficit continues to expand, financial disaster lurks around every corner, promising devastating aftermath.  On the brink of another financial crisis, it is critical (now more than ever) to learn how to survive, invest, and adapt in the new deficit economy.

In my recent conversation with investment strategist Russ Koesterich, he explains how the 10 trillion dollar deficit will affect you and what you need to do to secure your financial future in these uncertain times.  Referencing his newest book and investment guide, The Ten Trillion Dollar Gamble, Russ sorts out all the difficult issues and provides guidelines for survival in the new deficit economy.  From the housing market, to stocks and bonds, to investing in commodities, Russ covers all the bases and shows how you can survive the pending financial crisis.

Are you ready to invest safely, securely, and intelligently?  Read an excerpt from our conversation below, then be sure to listen to the full Russ Koesterich Interview for more guidance and insight.


Robert:  As an individual investor (maybe they have 401K money), what should someone be doing now, and why does it really matter that there is this $10 trillion deficit that’s going to accumulate over the next 10 years?

Russ:  Well, it matters in a couple of ways. Some of them we’re seeing in the short-term; some of them are longer-term issues. Let me first kind of frame this issue:  Why should you care? I mean, obviously as citizens we all care, it’s a very serious question for the country, but as an investor how is this likely to affect you? As I go into some detail from the book, there are three ways this will affect you, and the first of which we’re already living through. You know, one of the side effects of the deficit is slower growth. As more money, as more resources go to financing the deficit, the interest on the debt, then the less money there is available for investment, for productive purposes, and over time this is going to exert some drag in the economy. We’re already living through this to some extent; we’re living in a slow growth world. Second of all (and this hasn’t been an issue now), but over the long-term bigger deficits mean bigger supplies of government debt. As with anything else, the more that you’ve got to sell, the cheaper it is, and cheaper debt means higher interest rates. So, another side effect of higher deficits is that eventually we are likely to see higher interest rates. This will affect everything from mortgages to car loans. And then finally, the question investors have to ask themselves is what is the end game for all of this? And depending upon how the government chooses to ultimately deal with the deficit, one other potential side effect could be inflation. And that really is a game changer, because when inflation goes up it very much changes the types of investments you want to own. So, those are three ways in which it can impact people personally over the next five or 10 years.

Robert:  And do you see all three of those happening in the next 10 years?

Russ:  Well, certainly, the first two, absolutely. We’re already living through a slower growth environment, you know. The academic literature is pretty clear. This is likely to be a drag on the economy for a number of years to come. Interest rates we’ve not seen so far, rates have been low, they’ve actually moved lower over the past few months, but I do think this is temporary. Not that rates are likely to jump up in the next six to 12 months, but if you look at it over the next five to 10 years, I do think rates are heading higher (potentially, much higher), and this is something that we haven’t had to live with for a while. I think the big question is inflation, and this really comes down to what policy choices the government makes. If the government decides to deal with the deficit head on, raise taxes, lower spending, this is not going to lead to inflation. However, there are other things the government can do. One thing the government can do is it can have other parts of the government, like the Federal Reserve, theoretically buy back the debt. This is called monetizing the deficit. I don’t think this is going to happen. I hope it doesn’t happen, but if it does in some form this will lead to some inflation, and that’s something investors need to keep in mind.