Advisors should be doing some extra hand-holding this summer as we wait to see how the country’s debt crisis will play out, said David Gergen, senior political analyst at CNN, during his keynote presentation at NAPFA’s National Conference in Salt Lake City, Utah, last week. Gergen told fee-only advisors at the conference that they need to be preparing and protecting clients for the unknowns.
The Republicans and the Democrats are currently in a heated debate and sharply disagree on the proper level of government spending and on where to cut spending, Gergen said.
While these issues might seem a little far afield for some advisors, it is very much something they and their clients need to be aware of, he said. Treasury Secretary Timothy Geithner has said that if the issues of spending and debt are not addressed by Aug. 2, the country will go into default for the first time, and the markets will go haywire, Gergen added.
The problem is, we borrowed so much money to try and stop the financial crisis, that we’re not in a fiscal (debt) crisis, he said.
Previously, our debt to GDP ratio was at 38 percent, a relatively healthy rate, he said. But this last year, we’ve reached a debt to GDP ratio of 60 percent, which is getting into the danger zone. If the debt gets to 100 percent of GDP, then we’re in the red zone, and the growth rate of our economy starts going down and costs go way up. At this rate, “We’re going to break 100 percent in less than a decade,” he said.
According to Gergen, Geithner has said that we need to resolve these issues sooner rather than later. If we get too close to Aug. 2, it could have some negative effects on our long-term wellbeing. “‘If you’re out on a boat drifting toward Niagara Falls, you don’t want to get too close. You’ll get sucked in,’” Gergen recalls Geithner saying. “We are playing really too close to the edge.”