Many people rightfully have concerns about the consequences on the world financial system if the debt ceiling limit is not raised by August 2. Speculation has been all over the news lately about what could happen if the US Government chooses not to pay its debts because of their political differences. The purpose of this email is to tell you what we think about this and find out if you have any of your own concerns that you would like us to help address. Our opinion is shaped by information from a variety of sources which we believe to be accurate. Given the complexity of the US Government's finances, there is no assurance this content is 100% accurate.

OUR SUMMARY:

1) We do not believe that our government will default on its debt. There is of course a remote chance of this occurring or the present political debate would not exist.

2) We believe our governmental system of collecting taxes, budgeting expenses, providing entitlements, and managing debt is flawed and our politicians need to improve it or we could run into serious long-term economic problems.

3) We would like to discuss how this and other factors that are difficult to control affect your personal financial situation. We would like to do this now if you have concerns, or during our next visit.

We will address these three items individually. On the first one, in our opinion politicians and media appear to be sensationalizing the situation to get votes and sell advertising, which of course is not unprecedented. The reasons we believe there will not be a default or severe debt crisis include:

• History - until 1995 debt increases were virtually automatic which is the case today in many governments around the world. Since January 1980 there have been 38 increases in the debt ceiling, more than one per year on average. We had a short government shutdown in 1995 and lived through it without major economic impact.
• Policy and Constitutionality - President Obama may have the authority in the Constitution to continue to fund the government's operations and debt payments without congressional approval. He has the congressional authority to do additional extensions of the debt ceiling but has taken this off the table stating that he wants a longer term solution.



• Political Job Security - A debt default or major crisis would not be tolerated by a significant segment of the electorate that would vote against all incumbents associated with the default in upcoming elections.



• Equity Market Behavior - For the most part, the US Stock market has shrugged off the possibility of a default. If it were imminent, one would expect equity and debt investments to be suffering.



• The US is Number 1 in the World - (economically by many standards ) During the 2008-2009 world financial meltdown foreign money poured into US Treasuries as we are still viewed as one of the safest economies in the world.

Regarding item 2, that the present system needs fixing, we should consider this situation a call to action and a symptom of problems that could worsen in the future if we stay on the same course. The problems embedded in the US economic system include recent annual governmental spending of over a trillion dollars more than revenues collected, a 10 year forecasted addition to the current $14 trillion dollar national debt of $7 trillion - another 50% increase, the potential for the percentage of budget going to debt payments becoming being too large, and the estimated $60 trillion dollars of promised entitlements for to the next several generations.

We do not know all of the possible fixes to these problems. We need to demand appropriate taxation, reasonable expenditures, and we need to get more people in office that are not driven by politics or greed. It might be a good idea in our opinion to lessen the financial rewards of elected public service, make the election process easier for people who are not wealthy or politically connected, and find a way to elect people who will act more as stakeholders than politicians and bureaucrats. Of course, this is easier said than done and does not apply to all elected officials.

Finally, if you have immediate concerns about the debt crisis or any other financial matter, please let us know as soon as practical so we can attempt to address them. Otherwise, next time we visit we will talk about important issues like this that can affect your financial security.


Securities and Advisory Services offered through VSR Financial Services, Inc., a Registered Investment Adviser and Member FINRA/SIPC. Spectrum Financial Services is independent of VSR Financial Services, Inc.