The chorus of concern over projected federal deficits has grown louder in recent weeks. Warren Buffett sounded the alarm in a New York Times commentary in which he wrote that, “unchecked greenback emissions will certainly cause the purchasing power of currency to melt” and that the “dollar’s destiny lies with Congress”.

In the August Ten Year Budget and Economic Outlook update the Congressional Budget Office estimated that the government will record a budget deficit of $1.6 trillion in 2009. The estimate, which assumes no changes to existing laws or policies, projects that the deficit will shrink from its current level but continue to grow at three percent of GDP per year throughout the 2010–2019 period. As a result, debt held by the public would reach 68 percent of GDP by 2019. The White House Office of Management and Budget put the 10-year deficit at $9.051 trillion.

Absent drastically reduced spending, all of this debt portends higher taxes and/or inflating. Politicians are eager to increase spending further and with weak economic growth projections and political pressure, the Federal Reserve’s ability and willingness to tighten monetary policy will be put to the test.

As always, we defer to capital markets’ “judgement” in pricing assets (and interest rates), but our faith in the market’s wisdom is pressed as hard as ever when we look at the slope of the yield curve, TIPS’ spreads, and the gold price. Inflationary expectations are mild and appear to be outweighed by short-term anxiety over continued global economic malaise and possible deflation.

We have made no changes to our recommended portfolio allocations. However, investors who have refrained from purchasing gold related assets, inflation protected Treasuries (TIPs), and foreign equities, should consider filling any gaps in their portfolios.

Also In This Issue

Indexing Imperfections
Better Than Indexing
The Price Of Privacy
The High-Yield Dow Investment Strategy
Capital Changes At Citi Group
Recent Market Statistics
The Dow Jones Industrials Ranked By Yield
Recommended Investment Vehicles