The Washington electorate is patting themselves on the back for cutting “a record amount” of $38,500,000,000 ($38.5Billion) from the current year spending. The actual law will not be passed until early next week. By this time THE U.S. GOVERNMENT WILL HAVE BORROWED another $43,000,000,000 ($43 Billion). The point is that the so-called “record amount” is a drop in the bucket toward the annual deficit of $1,600,000,000,000 ($1,600 Billion = $1.6 Trillion).

Many Americans cannot envision the size of these dollar amounts. Perhaps, it is more instructive to ask the question, “When is the deadline for getting the U.S. deficit under control?” Some experts answer this question as 2017. I think it could be earlier.

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“The only thing that overcomes hard luck is hard work.”
                                         – Harry Golden

QUESTION: I am buying a new home and I am trying to figure out when to “lock” in my mortgage rate. Would you lock in the rate now or what until closer to the closing date?

ANSWER: I recommend locking in the rate today. Mortgage rates move up and down in reaction to up and down moves in the rate on 10 year U.S. Treasury rates. While no one can foresee the future on exactly how interest rates will behave there are at least two compelling reasons to believe these interest rates will move higher in the coming months: (1) Investors will demand higher interest rates in the face of the “debt ceiling” debate starting soon and lasting for several months until the U.S. runs out of money on or about 7/16/2011 and (2) The FED will, in my opinion, cease its purchase program (known as QE II) in late June which removes a large buyer from the market.

Feel free to contact me if you or someone you know has this type of situation. Financial Planning and tax planning advice presented here is general in nature, and individual circumstances make applying these general rules tricky; thus, the above answer cannot be applied to all circumstances because the slightest variation could cause a different outcome.

The 2011 Masters was the most exciting golf tournament I can recall. When the young-in-age leader reached the 10th hole there were 11 players within reach of the lead. He fell apart after one bad shot on that hole and the tournament became a toss-up. I felt very sorry for him because I’ve been there – one bad shot can turn a great round into misery. Perhaps Shakespeare was right when he wrote, “The miserable have no other medicine but only hope”.

U.S. Fiscal Meltdown in Spitting Distance: Arguing over lowering our deficit by just 0.4 percent of GDP when we need to run massive surpluses to deal with the baby boomers’ impending retirement is, pick your metaphor — rearranging the Titanic’s furniture, Nero’s fiddling, Custer’s Last Stand.

Is this malign fiscal neglect, or has Congress somehow missed what its own Congressional Budget Office is indicating? CBO’s baseline budget updates suggest the date for reaching what Carmen Reinhart, Kenneth Rogoff and other prominent economists believe is a critical insolvency threshold — a 90 percent ratio of federal debt held by the public to gross domestic product — has moved four years closer, in just nine months!

The CBO releases its realistic long-term forecast — the alternative fiscal scenario — every June. In between, it provides us with periodic updates of its unrealistic 10-year baseline scenario, based on “current law.” Congress, for political reasons, forces the agency to interpret current law in ways that generally make spending much lower and taxes much higher than is likely.

Take It Seriously: consequently, no one should take the projected levels of spending and taxes in CBO’s baseline scenario seriously. But everyone should take very seriously updates to the baseline. Why? Because these changes give us a pretty good idea of how the next alternative fiscal scenario will differ from the previous one.

Last June’s analysis had us going critical (crossing the 90 percent debt-to-GDP threshold) in 2021. But back then the CBO assumed the Bush tax cuts wouldn’t be extended for the rich starting in 2011. In December, President Barack Obama dropped his demand to immediately raise taxes on the rich in exchange for a one-year cut in the payroll tax, which helps fund Social Security. So much for raising revenue at a time when we are borrowing 37 cents to cover each dollar of spending.

In January, the CBO modified its 10-year baseline forecast, taking into account the December deal. By my calculations, this meant the 90 percent threshold would be crossed in 2019.

What a Difference. A lot can change in a few weeks. In February, the president released his budget and, lo and behold, it proposes maintaining the Bush tax cuts for all except the rich not through 2013, as in the December deal, but indefinitely. In so doing, the president conveniently took the issue of tax increases off the next election’s table.

On March 18, when the CBO released a new forecast that incorporated the president’s budget, the 90 percent mark had moved up to 2017. Actually, 2017 is optimistic. Uncle Sam’s creditors will soon start charging exorbitant interest rates — like those Greece, Ireland and Portugal now face. The market’s concern with those countries’ bonds is outright default, which is unlikely in the U.S. What is likely is rising inflation as the Federal Reserve continues to print vast quantities of money to help pay the Treasury’s bills. I generally don’t give investment advice, but Bill Gross, co-founder of PIMCO and manager of the world’s largest bond mutual fund, has it right. It’s time to dump all but your very short-term U.S. Treasuries and other dollar-denominated bonds. A safer alternative is Treasury inflation protected securities, or TIPS.

The real problem isn’t paying for our current spending. The real problem is paying for the 78 million baby boomers as they retire and claim their promised Medicare, Medicaid and Social Security benefits, and as spending on the new health-care exchanges expands far beyond what’s been projected.

There is one bright spot. Paul Ryan, chairman of the House Budget Committee, has included a version of the Rivlin-Ryan Medicare plan in the Republican budget proposal. This bipartisan proposal, co-authored with Alice Rivlin, former CBO director and head of the Office of Management and Budget under Bill Clinton, would transform Medicare from its current fee-for-service, defined-benefit structure into a defined contribution system in which the government’s liability is strictly capped.

Rivlin-Ryan would be a huge step in the right direction, but what’s really needed is a complete redo that would keep total government health-care spending where it is now, at about 10 percent of GDP. (Source: Laurence Kotlikoff and Bloomberg On Line).

The stock indexes barely budge, trading traffic slows to a crawl, and everyone is holding his breath for the big event. No, not that wedding that has sold out every balconied room overlooking Buckingham Palace, and not even the first-quarter earnings that companies will begin reporting this week, but the end of the Federal Reserve’s “quantitative easing” regime.

Since our Fed chairman talked up his $600 billion plan to buy Treasuries last August, stocks have rallied more than 27%, almost uninterrupted. So the looming end of federal largess this June has created paralysis. Will risky assets give back some of their gains?

Crude oil climbed last week to $113 a barrel, the economy has expanded for seven quarters and employers are hiring anew, so the Fed can’t easily argue for another round of quantitative easing, or QE3. So after central bankers meet on April 26 and 27, Ben Bernanke may have to summon his calmest voice and, without ruffling his beard, prepare investors for life after quantitative easing. With the government spending a staggering $1.60 or more for every dollar it earned in tax revenue, that path back to normal could prove anything but normal.

The good news: The central bank will continue to coddle. Stocks aren’t egregiously expensive. Confidence among both companies and consumers is mending, and cash earning no interest at the bank keeps up the pressure to invest. Also, mergers—and merger speculation—help put a floor beneath stock prices, and just last week Texas Instruments (ticker: TXN) snatched up National Semiconductor (NSM), and Diamond Foods (DMND) agreed to buy Pringles from Procter & Gamble (PG)(Source: Barrons Online).

Last week, Foreign stocks increased while U.S. Stocks and Bonds declined. During the last 12 months, U.S. STOCKS outperformed BONDS.

Returns through 4-8-2011	1-week	Y-T-D	1-Year	3-Years	5-Years	10-Years
Bonds- BarCap  Aggregate Index	-.3	.1	5.0	5.2	6.0	5.5
US Stocks-Standard & Poor’s 500	-.3	6.2	10.7	-3.8	-1.6	1.9
Foreign Stocks- MS EAFE Developed Countries	1.8	5.0	9.6	– 6.2	-1.3	2.9

Source: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends.