New York Times columnist and economist Paul Krugman won the Nobel Prize for economics in 2008, primarily for his work in the areas of international trade and economic geography.  He recently wrote this interesting article.

He makes a case, with caveats, that three factors saved us from a second depression: 1. government spending in the face of falling revenues 2. rescuing the financial sector 3. the American Recovery and Reinvestment Act (the Obama Stimulus Plan).

Three things initially struck me about the article: 1. Why did Krugman make no mention of the dangers of our budget deficits and national debt? 2. Has Krugman considered the possibility that the rescues and spending could prolong the economic downturn, especially if it leads to killer inflation and/or loss of our AAA credit rating? 3. I’m not as confident as Krugman that we have avoided a second depression, as I’ll cover in my portfolio update at the bottom of this blog.

After digging around on Youtube, I did find this clip of Krugman discussing how much debt he thinks this country can handle.  I now have a theory as to why Krugman isn’t too concerned about the issues I raised.  Incredibly, I don’t think he’s considering Social Security and Medicare entitlements when estimating the viability of our future debt-to-GDP ratios!  Is this possible?

Note that at 2:50 in the video, he makes the statement that “Deficits do matter but we have 5-6 trillion dollars to play with here.”  How do we have that kind of money to “play with” when you consider the trillions of entitlement debt?

Can a Nobel prize winning economist really be ignoring tens of trillions of dollars in debt?  It seems hard to believe.

Bill Gross founder of Pacific Investment Management Company has a very different view from Krugman, as quoted in this Bloomberg article. Look how much estimated debt-to-GDP ratios change when entitlements are considered.

From Bloomberg: “Gross, manager of the world’s biggest bond fund, said on May 21 the U.S. will ‘eventually’ lose its AAA credit rating after Standard & Poor’s lowered its outlook on the U.K.’s AAA to ‘negative’ from ’stable’ amid an escalating ratio of debt- to-gross domestic product. While U.S. marketable debt is at about 45 percent of GDP, annual deficits of 10 percent will push the amount to 100 percent within five years, a level that rating companies and markets view as a ‘point of no return,’ he wrote.”

“The U.S. growth rate ‘requires a government checkbook for years to come,’ Gross wrote. Coupled with Medicare and Social Security entitlements, government borrowing could reach 300 percent of GDP, meaning ‘the Chinese and other surplus nations cannot fund the deficit even if they were fully on board,’ he wrote.”  (Bloomberg)

For an illustration of how important entitlements are when estimating debt-to-GDP ratios, please check out this clip from the Glenn Beck show.

Quote of the Week:

“We’re going to go bankrupt as a nation.  Now, people when I say that look at me and say, ‘What are you talking about, Joe? You’re telling me we have to go spend money to keep from going bankrupt?’  The answer is yes, that’s what I’m telling you.”

~Joe Biden, speaking during an AARP Town Meeting in Alexandra, VA (here’s a link to the video).

Portfolio Update:

I’m not sure we’ve reached the bottom of this downturn.  I’m still standing by my prediction of Dow 5,500 or lower.

And don’t worry, I’ll still take credit if there’s a big terrorist attack or H1N1 flu outbreak that helps tank the economy.

I believe we will have another market downturn within weeks or months, so I’m still being very cautious.

For now I’m holding core positions in IShares Silver Trust (SLV) and SPDR Gold Trust (GLD).  I’m also trying to trade around the ups and downs of silver and gold.

In addition, I have a position in Agnico Eagle Mines (AEM) and a position in Federated Prudent Global Income Fund (PSAFX).

I’ve taken a horrible hit on my speculative position even though it’s more than doubled since the first of the year.  Broadwind Energy (BWEN) manufactures wind turbines and are one of the purest wind plays around.  ‘

Shortly after I bought it at around 27 bucks, Jim Kramer said on his Mad Money show, “Broadwind’s going to 40.”  It never reached 40 but tanked instead.  For a while there I thought that rascal meant 40 cents instead of 40 bucks!

Buried News of the Week

Are compulsory H1N1 Flu Shots Being Planned?

Some of us are old enough to remember the swine flu shots of 1976.  If shots are being planned, I hope they do a better job this time.  (In ‘76, over two dozen people died from the vaccine and the vaccine turned out to be unnecessary.)

See you next time!

I refer to the latest crisis as the “So-Called Swine Flu” because I’ve heard that the pathogen is a combination of human, swine, and avian flu.  I believe this is referred to as a recombinant virus.  I’ve also heard that these qualities could enable the germ to pass from humans to animals and back again, possibly mutating into a more deadly form.

I think we need a new and easier name for this illness.  How about “Cocktail Flu?”

Are there any Stephen King fans out there?  How about “Captain Trips?” Well sorry, that would be premature at this point…maybe later…let’s pray not.

I have listened to several different epidemiologists and docs on talk radio and in mainstream news stories over the last several days.  The general consensus seems to be that we don’t know yet if this flu outbreak will be a pandemic or peter out.  (Many of the docs I’ve heard on alternative media think there’s a possibility this virus was cooked up in a lab and either released accidentally or on purpose.  Gary Ridenour, M.D., was all ready with a book on the pandemic potential of avian flu.)

Until we know what this virus is going to do, I think extreme caution with any long positions would be wise. Obviously, if this turns into a pandemic, your portfolio will suffer.  (Gold, silver and other hedges should be OK.)

Quote of the Week:

“When there are two conflicting versions of a story, the wise course is to believe the one in which people appear at their worst.”

~H. Allen Smith, as quoted in the April 27, 2009 issue of Forbes magazine.

Buried News of the Week

I had a very strange experience last night. In listening to all the commentary about this flu outbreak, I realized, hey, I heard something like this a couple of weeks ago.  Then I thought, “Hey wait a minute.  A couple of weeks ago, there was no flu outbreak.”

Having said that, I am NOT vouching for the veracity of what the woman in the clip below says.  Quite frankly, there are several things in her story that don’t make sense to me.

However, I do find it very strange that a few short weeks before this outbreak, someone called into a radio show claiming that the Department of Homeland Security was transporting large amounts of bird flu virus to various parts of the country.

The woman provides an incredible amount of detail, ostensibly to back up her story.  That leads me to believe that if this is just a “lucky” hoax, it should fall apart fairly quickly due to the level of detail she provides.

If anyone has any theories about this caller, I’d be happy to share mine as well.  Please comment!

Check it out at your own risk!