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Dealing with the Country's Deficit; Healthcare Reform
Aired November 14, 2010 - 15:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
ALI VELSHI, CNN HOST: The government you want versus the government you're willing to pay for. Welcome to YOUR MONEY, I'm Ali Velshi; Christine Romans joins me in a moment to break down what cuts President Obama's bipartisan deficit commission is proposing. How it is going to affect you.
But first I want to bring in CNNs chief national correspondent John King who hosts "John King, USA," airs every week night at 7:00 pm Eastern. John, the proposal calls for $4 trillion, $4 trillion in cuts to the deficit. This CNN National Exit Poll found that voters felt reducing the deficit was the highest priority for this next Congress, higher than creating jobs, higher than cutting taxes. John does this mean that a politician could actually get away with either raising taxes or cutting programs if it means a serious reduction in the deficit and a reduction in the debt?
JOHN KING, HOST, CNNS "JOHN KING, USA:" My friend, welcome to Washington. Yes, we wish that were the case. Already, you saw the initial reaction. From the left it was dead on arrival because it touches Medicare and Social Security. From the right it was dead on arrival because it has revenue increases, meaning tax increases. And so you have instant polarization, which is the reason we haven't dealt with any of these big issues whether it is the deficit or entitlements for about a quarter of a century now.
Bill Clinton tried couldn't get much done, George W. Bush tried, couldn't get much done. Because both parties immediately retreat into their ideological special interest bunkers that is why they try to have this Ali it's like a base commission. You have to have an up or down vote in the Congress. They won't get a majority for this report for that. So we'll see going forward but the early reaction tells you quite a bit.
VELSHI: All right. But at least the discussion is happening and hopefully continues to happen. Let me just give our viewers a sense of the debt. The deficit is the yearly shortfall between how much revenue the government comes in and how much they spent. The accumulation of those deficits is the national debt. Here we are right now. Debt is about 60 percent. U.S. debt is about 60 percent of the GDP that is the size of the whole economy. That's particularly high. It's not double our normal historical levels but it is pretty high.
Now look what happens under current law. If nothing changes, follow the red line with me. You'll see that our deficit -- our debt will continue to grow all the way out to 2040. We're going to be crossing 80 percent of GDP. But current law is going to change. Things are changing. If it did change based on policies that we're expecting, follow the light blue line with me all the way out we cross, we're getting to 200 percent of GDP. Can you imagine if your debt were double the size of your entire economy? I mean at 100 percent you're basically looking at bankruptcy.
Now the Deficit Commission that we're talking about. Take a look at this. This is the dark blue line, under their proposals, if the proposals that they suggest go through you will see the debt actually dropping to under 40 percent of GDP by 2040. David Walker, you've seen him on our show. David Walker is the founder and CEO of The Come Back America Initiative, he is also the former U.S. controller general and he is a deficit hawk.
David, for all the complaining about this whole thing, by 2040 if you enacted all the proposals in this commission you'd still be at 40 percent of GDP for our national debt which is higher than people think it should be.
DAVID WALKER, FOUNDER & CEO, THE COME BACK AMERICA INITIATIVE: That's right, Ali. In fact, when you look at truth in accounting, we're already over 60 percent of GDP with public debt you mentioned. That's only the second time in the history of the United States we've been that high. The only other time was World War II. If you count what we owe Social Security and Medicare we're 92 percent of GDP already. We're only three years away from where Greece was when they had their crisis. We have a problem. The fact the far right and the far left have a problem with the proposal is good news because the answer is in the sensible center.
VELSHI: Christine, there are a lot of cuts here. John was saying this is why everybody gets into their ideological bunkers. Let's talk about cuts; defense gets cut just like everything else. To bring military savings up to $100 billion in 2015, here is what the panel is recommending. Freezing pay, including noncombat pay in the ranks, cutting procurements, the military actually ends up buying less and closing overseas military bases by a third. That's the Pentagon side of things.
Take a look at domestic spending. The panel is recommending freezing government pay by -- freezing government pay and cutting the workforce, the government workforce, also eliminating all earmarks. This is what the critics have called pork. Although as we know, earmarks don't amount to a whole lot of difference in the federal budget. Then there's the issue of taxes. The panel says to reform and simplify, cut tax rates into three rates, but also cut important some deductions including for many people with big mortgages the mortgage interest deduction. There is also a proposal to raise the gas tax by $0.15 a gallon.
Christine, the president asked for tough cuts. Everything had to be on the table. This is going to be a hard sell and its alienated people with any of these interests.
CHRISTINE ROMANS, CNN HOST, YOUR MONEY: It has. And I agree with David Walker that so many people are alienated and it shows that maybe they struck a nerve here. How does the president sell it? In one way it maybe gives the president and Congress some cover, if you can get this commission to propose these tough cuts and sell it to America people and if you look we've got to do this.
But listen here is what budget analysts say, if you don't do this now, take for the gas tax, for example, you won't have a job to drive to in 25 years where you're putting gas in your car or you won't be able to afford the car to put the gas in. These are the things that have to happen now so we can have a vibrant economy down the road. We have to pay for what we have already spent and make sure that we do it in a way that doesn't hurt economy and recovery right now but and the time has come. That's what the president and Congress have to sell to American people.
VELSHI: Diane Swonk is the chief economist with Mesirow Financial. Diane we have a few issues here, we want to make sure that this commission doesn't end up like the 9/11 commission where nobody does anything. But that danger really does exist. They were told do what you have to do to figure out an answer to this debt and deficit question. Did they overreach to the point, as John suggests, it might be dead on arrival?
DIANE SWONK, CHIEF ECONOMIST, MESIROW FINANCIAL: You know I think no matter what they did was going to be dead on arrival. I think John points out something really important, what the American people think they want and the reality of what that actually means for their lives are two different things. The gap in bridging that is very difficult. And in fact I agree with David I mean I still think the commission fell short in terms of what they could have done. They didn't want to overkill and sort of go where they thought they really needed to go to deal with the real structural deficit out there. This really doesn't have much on entitlements over the longer haul.
But on the other side of it they were trying not to go so far that they wouldn't get any negotiation. At the end of the day, the background research on this Pull and Pearson Research (ph) says we need have new budget accords; we need to have new rules that Congress has to act. That's what is lacking in all this. We can have all the commissions in the world and point out the commissions to advise us but if we don't have rules in which we have to get Congress to actually be disciplined to have a discussion, they are going to continue to act like children. I really am kind of ready to give the whole Congress a time-out at this point.
ROMANS: A time-out. But if you could somehow so that when they overspent they have automatic tax increases. Right, Diane? You automatically have triggers that when we --
SWONK: Spending freezes. Absolutely.
ROMANS: So that they had to -- that would also give them the political cover as well. They could say to the constituents, look, these are the rules. Because nobody wants to take the blame at the voting booth for actually doing the things that the people at the voting booth say they want done.
VELSHI: One of the things that is going on here, a proposed increase in the retirement age from 67 to 69. We saw what's going on in Europe, in England, protests --
SWONK: But it is over decades Ali. I mean -- come on, how much lower can you do it?
VELSHI: People who are going to be affected by this will have 30 or 40 years to plan for it.
VELSHI: John, who carries this ball and tries to get it through Congress?
KING: The president says he will carry the ball Ali and he says he will try to get both sides to listen. Look this is a town that is dictated by the politics of the moment. And something just happened in the midterm elections that I believe is a significant obstacle unfortunately to having a grown-up conversation about the issues you're talking about.
And that is for the first time Republicans won the elderly vote, the senior vote by a big margin, it was a huge shift toward the Republicans. So will they the Republicans who have said that reforming Social Security and Medicare is critical to deficit reduction and long term structural fiscal sanity in Washington will they now be willing to take the risk of alienating those voters they just won over. If you're the Democrats you just lost the elderly vote, you have long said you wouldn't do this, you would stand up and fight this, well you now think the way to get them back is to say no, we will not raise the retirement age, no we will not subject more income to taxation. Short-term politics of this are unfortunately right in the middle, right in the way, a giant speed bump if not road block.
VELSHI: OK, hold the thought. We're going to take a quick break; we're going to continue with all of you here. Let's continue this discussion. We know we have to cut the deficit but why? What would change in your life if we did not actually do anything about this? I know David Walker has some thoughts on this so does Christine. We'll talk about that in a moment.
VELSHI: The economy is issue number one for Americans. It has been for about three years now. But here is something interesting. The deficit has overtaken jobs as the number one concern for Americans who voted in last weeks mid term elections. I want to ask David Walker a question about this. David, let's look at these projections about the national debt in the United States. If we do nothing, it stays online and by 2035 or 2040, we're at 80 percent of our GDP, 80 percent of what we create economically as a nation, our debt will be at that level.
If things continue the way they are going and current policies are enacted, which are going to cost us more money, look at where that line goes way up above 200 percent. Here is my question for you, David. I know what joblessness is all about. I know people who have lost jobs. What happens? Tell me what it feels like to have deficits and debts going the way of this line chart. What does that actually mean? How do I feel it? What happens to me as a person in this country?
WALKER: What it means over time, not now, but over time if we don't correct our course is much higher interest rates, much higher inflation, a dramatic decline on the value of the dollar, higher unemployment, lower economic growth, and lower standard of living for our children and grandchildren.
Look, Ali, American people get it. Washington is a lag indicator. These surveys about Social Security and taxes are incredibly superficial. I've been to 440 states, hundreds of thousands people talking. I'm in Chicago today. People get it. They want leadership. They want truth. They want tough choices and it's time they got it.
VELSHI: Diane, let me ask you this. How much debt should a country have? Should we have no debt at all? Is there a certain amount of debt that's OK as a percentage of GDP? Where should it be?
SWONK: That's the million dollar question that no one has the exact answer to, alls we know is that we have too much debt now and we are on the wrong trajectory. That said we have reserve currency as well. We've been given extraordinary privileges in the world with the U.S. dollar being a reserve currency. So not only does rising debt cause all of the things, and I agree 100 percent with what David is saying, a debt crisis may be sooner rather than later as some on the commission were quoted saying could have been news on an other nice slow news day to cause a crisis in the financial markets in the next two to three years.
VELSHI: All right. John, the issue here is that we know that this is what people are concerned about. Someone is going to have to have an answer. Is this going to become the biggest issue of the presidential election?
KING: I think it will be for the next two years and into the next presidential election. David Walker is dead right the American people are ahead of their government and their politicians on this. Because Ali you know this, over the past two or three years every family in America has had to make incredibly difficult choices and do things they didn't want to do. And so they look at Washington and they say why won't you do things that you don't want to do, why don't you break your rules and do something about this and be grownups?
VELSHI: John, the bottom line is we've had sacred cows, things that were never going to be touched. But people in their own homes have had to deal with those sacred cows. So I guess it's time that the government does, too.
KING: But the politicians don't trust each other. They often don't trust the very voters that just sent them here to Washington. The trust deficit between the Democrats and the Republicans is what gets in the way here. Because they think they will go into a room and cut a deal and then in the next campaign somebody will run an ad that says Ali Velshi just raised your taxes, he is going to make grandma work until she is 70, and he froze military pay for our heroes overseas. That is what they see; they see the short term politics of these attack ads. They won't get in the room and make grown-up decisions. The American people look out and say we have to do this, why can't you. It is the perfect environment for Perot like independent movement however the one thing the two parties agree on is making it hard for there to be a third party.
ROMANS: But it also makes it sound like we can all just sit here and watch Congress drive us into a ditch. It makes me feel very powerless sort of if so many people and the American people say they are so worried about this John but you can't change the DNA of Washington.
VELSHI: Even after a midterm election like the one we just had.
KING: It is why the president tried to set this up so that you force Congress to have an up or down vote. Everybody has to do it together. Essentially you all walk the plank together. But if they can't get the fourteen votes for this one report, there will be a couple of other proposals coming down the road just in a minute, that won't happen, and when that doesn't happen look, the new Republican House does not trust the president of the United States. And many Republicans think that their best effort is to carry this debate over into the next presidential election where they think they can win the White House and have a favorable political climate. Politically they might be right. But to the structural issues you are all talking about, everybody knows the sooner we deal with this, the easier it is, it is hard but the sooner the better, but this town does not seem capable of doing big things at the moment.
VELSHI: I hear you. John, your show every week day at 7:00 pm Eastern right here on CNN, "JK USA" thanks for joining us.
The health care battle is over, right? Well no, it isn't. The Republicans want to repeal the health care bill. But that might not be possible. So they have another plan and I'm going to tell you about it when we come back.
VELSHI: The results of the midterm elections could bring changes to your health care coverage because Republicans are trying to dismantle President Obama's health care reform. Dana Bash is CNNs senior congressional correspondent, Dana, while repealing the legislation entirely is not likely, given that the Republicans only have control of the House, they can fight health care reform in other ways by passing legislation or blocking funding. What are they planning to do?
DANA BASH, CNN CONGRESSIONAL CORRESPONDENT: That's exactly right. I just got off the phone with a senior Republican source who used this term, death by a thousands cuts. They know full well just as you said that they don't have the votes to fulfill their campaign promise to fully repeal. But one thing that they do have in Congress is the power of the purse.
For example, there is money that is required to put forward this legislation. For example, hiring IRS agents to do that. They can try to block that funding. They can try to block funding to implement specific regulations. So they are going to try to do that one by one. Still having said they can't pass it, I will tell you that they are going to try. In fact I was told that the very first month Republicans have the majority they are at least going to push that repeal bill forward just to say politically look we can do it and we did it in the House.
VELSHI: Christine, put aside the politics for a second, although one can really never do that, we've been talking about the rise in the deficit and ways to curb spending, is health care on the table for cuts, if I want to continue that analogy?
ROMANS: When you look at the deficit reduction plan that come forward this week, yes, health care is in there, because the government is a huge consumer of health care. Here are a couple of things that are on the table for discussion for how to get down the governments bill in health care. First of all, the doc fix, how much are you going to pay doctors? Are you doing to pay doctors for defensive medicine? Also, the military, health care in the military. Tri-care, the military health care system was kept out of health care reform. But it's right there in that draft proposal for how to cut the deficit, moving more of the cost of health care onto military retirees. All of these things still being talked about, not all of them very popular at all, I will tell you. So that's where politics come right back in.
VELSHI: Our friend Andrew Rubin is the VP of Clinical Affairs at NYU Langone Medical Center, he is also the host of Sirius XM Doctor Radio, Andrew what are some of the benefits available to Americans now as a result of the health care reform that was passed? That those could be at stake as well depending how the Republicans move forward.
ANDREW RUBIN, NYU LANGONE MEDICAL CENTER: They can be at stake. The American public likes a lot of the things that have kicked in so far. You know covering the dependent age children up to age 26. You know tax credits for small businesses to provide insurance for their employees when they have fewer than 50 employees. Closing the Medicare doughnut hole, the portion of the drug expense that seniors pay themselves out of pocket this year. The elimination of lifetime caps on insurance payouts. These are big things that the public really likes.
VELSHI: Dana was just talking about how the Republicans can try and cut funding or not let some of the new initiatives that haven't been put into place not happen because they won't fund them. How much of this debate comes from how to pay for these protections? Is the law that has been put into place funded?
RUBIN: So health care reform is paid for. Insurance reform is paid for but it is paid for by very unpopular items which are easy to go after. Quite frankly I'm not sure everybody understands it. Taxes on high income individuals and families, tax on these so called Cadillac plans, these are the expensive insurance plans, forcing corporations to provide insurance for their employees or make them pay a penalty. There's a lot of easy targets for any party to go after if you don't like health care reform.
VELSHI: Now Dana, this health care reform, it was a signature policy of this administration, of this Democratic Congress that was just defeated. How do Democrats who like health care, how do Americans who like the benefits that Andrew was just talking about, how do they fight back against Republicans who want to dismantle it?
BASH: You know what? When hearing Democrats say is the same thing we heard them say during the campaign, that they have to do a better a job, basically what Andrew just said, explaining it in plain English, this is what is going to help you; this is what you should like about it. It's not just big bad government as Republicans are pointed out there taking over the health care system. So that's going to be their big challenge. Look if they didn't do it before with the bully pulpit and control of Congress, get that message out there, it's going to be unclear how they are going to do it when they have the Republican rhetoric very much louder to battle against.
VELSHI: We remember those town hall meetings; we remember all that yelling, and the White House lost control of that message right from the beginning. So maybe round two might be more successful. Dana thanks so much, good to see you.
BASH: Thank you.
VELSHI: Andrew good to see you as well.
It is the showdown in Seoul or was it. Did global leaders make any decisions after their long trek to South Korea for the G-20? Richard Quest joins the conversation after the break.
VELSHI: The G-20 Economic Summit this week in Seoul, Korea, the group of 20, includes these countries you see in red. They are 20 countries, they are the world's biggest or fastest growing economies and together they represent 85 percent of the world's economic output, 85 percent of the world's GDP. We always talk about that.
China and the U.S. and their currencies are particularly in the spotlight this year. The Chinese Yuan, the America dollar competing currencies. The Chinese are accusing the U.S. and, by the way, vice versa, of driving each other's currency down. Driving your own currency down. Why would a country want to keep its currency low? When the Chinese currency is worth less, Chinese products can be sold for less abroad.
Last month alone, China sold $27 billion more to the world, it exported $27 billion more than it actually imported. For years in the United States it's been the other way around. The U.S. has imported far more than it sold to other countries. In September that difference was $44 billion. The U.S. imported $44 billion more than it exported. The Federal Reserve decided last week to pump more money into the U.S. economy by buying up treasury bills. We described that as QE 2, quantitative easing. That has lowered the value of the U.S. dollar as expected. When you take all that money and you put it into the economy it makes that U.S. dollar worth less money. Now most people only think about currency when it effects their decisions to take a trip or things like this. VELSHI: But this currency battle, war what ever you want to call it, how does this trickle down, how does it affect regular people?
ROMANS: Currency affects jobs and I mean that's the fundamental battle here right now. Because a weaker currency allows you to export your stuff. When you are exporting more stuff that means your factories are going, your mines are going, your industrial output is up and you're shipping things around the world and that's helping you.
The question here is are all these countries around the world trying to drive down their countries so that they can give their export machines a little bit of an edge and who does that hurt in the process. That is what they are squabbling about here.
VELSHI: Now Richard Quest the host of CNNIs "Quest means Business" joins me now from Abu Dhabi, which is only halfway to Seoul because I suspect he didn't think that whole G-20 was going to be worth the trip. Richard, President Obama said that this week in Seoul the best thing that the United States can do for the world economy is to grow because the U.S. is a huge engine for other country's growth. Is that true?
RICHARD QUEST, CNNI S HOST, "QUEST MEANS BUISNESS:" Absolutely. The U.S. president's words were completely and utterly accurate. There is no doubt as the consumer of last resort when the going gets tough the Americans go shopping. Until now, of course, in this recovery that has not happened. But the reality is the U.S. economy is in no structural position to enjoy that sort of fast recovery the president talks about.
Hence, the need to massage it with all these other things, like currencies, a GE 2. This the communique. It is three pages long. Frankly, you and I, Christine, we've all plowed through more than enough of these. I've never read a more irrelevant and frankly more pathetic description for a communique.
VELSHI: Bottom line is they punted on decisions. Christine you were at a G-20 in Pittsburgh last year. There was a strong feeling then. We were in the midst of that crisis. We still felt like the crisis, the world had come together. They were going to be coordinated in their efforts to prop up the world's economy. Central bankers were making deals with each other. It feels like this year it's everyone for themselves.
ROMANS: I completely agree. You're absolutely right Richard that in the annals of communique speaks. They tried very hard not to say what everyone wanted to hear here. I mean it is a question of do you talk about competitive evaluations of currencies which no one wants and making real arrestment on that or do you talk about fixing global imbalances which are still there in spades or do you say we agree to agree on something down the road. Things happen slowly in diplomacy. After last year in Pittsburgh Ali, I thought that you would have the world talking more in one voice.
VELSHI: And they weren't doing that, Richard. QUEST: The problem is, there have been these great moments in history like Breton Woods after the second World War when the nations have come together, the G-20 in Washington, in London and in Philadelphia -- sorry, Pittsburgh, when they came tamed together to try and solve these problems.
What they are now doing is tinkering at the edges. The House isn't burning but it is clearly moldering somewhere in the basement. And the real risk Ali is if they don't start dealing with these imbalances as the president of the World Bank has said, as more and more people are saying, eventually those embers will be set afire again.
ROMANS: Let's be clear those imbalances are, China saves too much exports to much. United States spends too much and imports too much. Europe needs to invest more. That's exactly what happened before the crisis. Many people said those huge -- magnetism of these big imbalances, structural imbalances are what created the whole problem in the first place that allowed the housing crisis to erupt and it's all still there.
VELSHI: Richard, good to see you my friend. Try to bring a little more energy next time you join us. We'll take a break. Bacon, cereal, coffee, sounds like a great way to start your day if you can afford it. Rising commodity prices are taking a big bite out of your breakfast. I'm going to talk about that next.
But first from the world of finance to styling pets. Stephanie Elam has the story of a Wall Street veteran who turned his career upside down in this week's "Turnaround."
(BEGIN VIDEO CLIP)
STEPHANIE ELAM, CNN CORRESPONDENT (voice over): After two decades on Wall Street, Eric Diaz traded his suit and tie for tails and paws and he couldn't be happier.
ERIC DIAZ, AUSSIE PET MOBILE FRANCHISE OWNER: I woke up one morning and said, I don't want anything to do with the financial business anymore. I want to do something different that's totally unrelated to money.
ELAM: Eric took an early retirement package from Merrill Lynch. After equal parts researching and soul searching he took the career leap from being a corporate employee to a franchise owner of Aussie Pet Mobile, a mobile grooming company.
DIAZ: And now I own my own business. You have to have the business knowledge to be able to do so.
You're doing to get a nice bath there. Good girl.
My territory is all of Hudson County, New Jersey, which calls for about seven vans. The franchise afforded me the opportunity to go at a slow pace and get one van at a time until I built up a client base.
ELAM: His client based has grown to over 400 furry customers in just a year and a half and he says demand isn't slowing down.
DIAZ: We call you and you come and groom.
ELAM: Eric credits the franchise model with his success.
DIAZ: The franchise is well established. They have a name for themselves, a brand for themselves, they have a current system that is working and in place. Their marketing team is already established and available. My ultimate hope is that I'm able to have a team of groomers with at least five to seven vans to service my community and my territory.
ELAM: And he's working toward that goal one fuzzy client at a time.
Stephanie Elam, CNN, New York.
(END VIDEO CLIP)
VELSHI: From what you eat to what you wear, your cost of living is increasing. Tom Jackson is an agriculture economist at IHS Global Insight. Tom coffee, wheat, sugar, cotton, why are we paying more for these things?
TOM JACKSON, AGRICULTURE ECONOMIST, IHS GLOBAL INSIGHT: Well I think part of it is a function of the weakening of the dollar. For all this to be happening all at once, I do think there's a correlation that these commodities are being used as a hedge really more against a weakening dollar as much as a hedge against inflation.
VELSHI: Christine, how much of it is plain old supply and demand? I know in some cases we've seen with the recession ending more people buying cotton then we've had less cotton production.
ROMANS: Some is. I mean you have China as a huge consumer, India is a huge consumer. We're talking about oil that is always a factor there. But looking in the U.S., gas demand is actually down a little bit. You do have this rush into these commodities. You also have I think a drought in Russia. You've got cold, wet weather for coffee. All kinds of different things coming together, so the usual supply and demand things against this new backdrop of a weak dollar. Boom, you get an explosion in commodities.
VELSHI: We've seen this play out with oil in the past. Let's bring in Jeff Rubin. Jeff we've talked to him a lot. He is the author of "Why your world is about to get a whole lot smaller." Jeff, oil prices moving higher as well. Again, tell me the story there. Is this global demand because the world's economies are getting better? Is it a hedge because money can be made in oil? What's going on?
JEFF RUBIN, ECONOMIST: Well, I think we're going to find, Ali that the same consumers that drove oil to triple digit prices in the last cycle are going to do it again. That's not going to be the U.S. consumer or, indeed, any of the OECD economies. China is already almost at 9 million barrels a day. In the next couple of years, we're going to see what happened in coal 10 years ago happen in oil, which the developing world now is consuming more than the developed world. In a world where the oil supply is hardly growing then consuming oil becomes what we call a zero sum gain. Which means that if China is going to consume more, countries like America will have to consume less.
VELSHI: So if you're sitting home and thinking all right you know so my gas prices are going to go up, and then there are these commodity prices that might go up, but ultimately that doesn't mean inflation for the whole economy, Jeff, it ultimately does mean inflation for the whole economy. Because if food prices are going up and energy prices are going up that works its way through to almost everything we spend money on.
RUBIN: That's exactly what happened last cycle, Ali, when inflation went from 1 to 5.5 percent and the Fed fund rate had to rise and blew up the subprime mortgage market virtually all that inflation was coming from two components of the CPI, oil and food, just like we're seeing again.
VELSHI: Tom, what happens when commodity prices for food increase? Do we find people backing off a little bit, buying less of it, or are we talking about things that people can't really choose to get out of their lives?
JACKSON: I think you do see some adjustment in consumer behavior, especially in the current environment. Really this time around it's not the U.S. consumer that's driving these higher prices that much. Margins have been squeezed an awful lot between the wholesale and retail level already. That's going to be the big tug-of-war especially in 2011 is who is going to win that battle. Certainly consumers are fighting back a lot more than they probably did.
VELSHI: Someone is going to have to absorb any of these increases. It's a good discussion. Guys, thanks very much. Jeff good to see you again. Tom thanks very much for being with us as well.
OK. Let's talk gold. Three questions. One, did you miss your chance to get in? Two, are these high prices of gold here to stay? Three, what can you do with gold that you own? We'll have the answers to those questions coming up next.
VELSHI: Welcome back to YOUR MONEY. Take a look at this blue line on the chart. This is the S&P 500, a broad-based stock index that you may have mutual funds that mimic those in your 401(k). If you go back to 2005, the S&P 500 is basically down roughly 1.75 percent over the past five years. Take a look at the red line, that's gold. If you had put your money in a fund that tracks the price of gold over the same time period our return would be substantially higher, about 200 percent.
You might look at this and say gold seems like a sure bet. But this is always the question we have. Gold topping $1400 an ounce this week. Does that mean it's too late? Does that mean you should be getting in? What are you supposed to do? Let's bring in Stephen Leeb he is the author of "Game Over" and several other books. He is a friend of our show. Stephen what do you do now? You are not a gold investor should you be starting now?
STEPHEN LEEB, AUTHOR, "GAME OVER:" Yes, I would start now Ali, but not go in whole hog. I mean what I would look to do is buy some now and maybe buy some more if you get a correction of 5 to 10 percent. I would aim to get at least 20 percent of your assets into gold.
ROMANS: Twenty percent, really?
LEEB: And for me Christine, if you would have asked me this question 15 years ago, I would have said, what do you mean by gold. They are all nuts. I'm not a gold bug by nature. But this is what the world is giving you right now. When you see a chart like you just presented, that's not an accident. I mean gold is a major reflection of economic trends that are happening in the world and that are not really changing.
And you just have to, you know, face reality. I mean maybe someday, and I hope someday soon, I'll be able to say it changed. We have growth; we have real substantial economic growth and get out of all your gold. I would love to be able to say that.
VELSHI: You don't think now?
LEEB: No. I don't.
ROMANS: I man you always also say you need to have a portion of your portfolio in these things as a hedge against what's happening elsewhere. But one thing that I worry about is the people getting in now when the real smart people who made a lot of money over the last year and a half are all getting out. Like you could really get slaughtered if there's a pullback in gold here and you put too much of your nonrisk money into it.
LEEB: Right. Well, first of all, I mean that's absolutely true. I mean, gold unlike stocks are more than stocks are volatile. Any investment, virtually any investment is volatile and gold is more volatile than most. Would I be surprised, Christine and Ali if gold went down 15 percent to let's say $1,200? Not at all.
ROMANS: But you would buy it?
LEEB: I would absolutely buy it. Unless I saw something really fundamentally changing in this country. Unless I saw that dip, not as so much a dip, a natural correction, but really a reflection of an underlying fundamental change. Then I'd be glad to say I misled you, you should not have bought it at $1,400, don't buy more, get out of what you did, go back into the stock market and you know look forward to wonderful times.
VELSHI: One of things we talk about, is that gold, people hold it because it's easy to get rid of and it is easy to exchange, it is a hard currency but there are a whole lot of people going into these stores that are popping up all across America with their jewelry and their trinkets and they're getting a very poor return on it when they go sell it. If you have gold and you wanted to sell it, what are you supposed to do? LEEB: First of all, I mean, you've got to shop around. If you have, like jewelry. If that's what you're talking about? Wedding ring, like this, I want to get rid of it. No, I don't want to get rid of it. I would do a lot of research on the Internet. I mean just common sense. I would not go to your typical guy on this street or that street. I would really look on the Internet, find -- there must be some -- it is out of my area of expertise, but there must be agencies or organizations that endorse particular people that say, yes, they can buy it. I mean if you're buying gold at Tiffany's, that's a bad mistake.
LEEB: I men, unless, you want that little blue box. Whatever. It's not a good -- it's marked up 300, 400 percent. If you want to buy gold, the reverse of it, you want the same thing. Go to the Internet. Find credible gold dealers. Make sure it's not being marked up. If you want to sell gold, credible people are out there.
LEEB: But you can - yes Ali, you can absolutely get murdered doing something like that. Just don't do it willy-nilly and you know, it's a terrible mistake. Really do a lot of research.
ROMANS: You're going to hock your wedding ring you better make sure you get a good price for it.
VELSHI: All right. Good to talk to you, as always. Thanks. We'll stay on this topic. I imagine we'll be talking about gold for a long time.
$88,000 in debt and all of a sudden debt-free, it took him three years to do it, it can be done. Smart is the new rich. We'll tell you how, next.
VELSHI: From $88,000 in debt to debt-free in three years. Sounds unrealistic right? But Christine, it's actually a very, very real story.
ROMANS: It is an amazing story. I met this couple who had $88.000 in credit card debt, all kinds of debt and they made a decision that they were going to cut down that debt. They had a five-year plan and they got out of it in three years. It's possible.
(BEGIN VIDEO CLIP)
ROMANS (voice over): There are more than a dozen accounts here that you had to close off.
DON CARROLL, PAID OFF $88,000 DEBT: Oh, yes.
CAROL CARROLL, PAID OFF $88,000 DEBT: Yes. ROMANS: Three years ago Carol and Don Carroll were $88,000 in debt. Today, they're debt-free.
D. CARROLL: It wasn't like we went, let's go buy a Mazaradi. All it takes is one little pickup to start this horrible, horrible snowball effect going downhill.
ROMANS: The Carroll's spent every penny and then some on credit cards, gas cards, and medical bills even though they had health insurance. Then Don lost his job.
You were literally near a nervous breakdown over these bills?
C. CARROLL: When you can't sleep it's just -- it's just -- it gets to you.
D. CARROLL: Yes.
C. CARROLL: And that was -- that was the straw that broke the camel's back. I stopped sleeping.
ROMANS: They did not want to file for bankruptcy.
C. CARROLL: We made the debt. We should pay for it.
ROMANS: A nonprofit credit counselor put the Carroll's on a five-year payment plan. They finished in just over three.
GAIL CUNNINGHAM, NATIONAL FOUNDATION FOR CREDIT COUNSELING: I think if there is a silver lining to the recession it is that it's refocused people's attention on their own personal finances. I think they are ready to move back over into the driver's seat.
ROMANS: So how did the Carroll's do it?
D. CARROLL: You just have to get organized. I don't know if you really call it having less. It's just not having it immediately. You learn to live with what you need. Not with what you want.
ROMANS: What is your message for people who might see your story and think, wow? I have $40,000, $50,000 $60,000 in credit card debt. I will never get out from under this.
D. CARROLL: Never say never.
C. CARROLL: It is totally fixable. But you have to take the steps to say, I need help.
(END VIDEO CLIP)
ROMANS: The Carroll's used a nonprofit credit counselor who helped them with a pretty elaborate payment plan and they really stuck to it following each one of these lines a real flow chart of all their debts and whittling them down. The bottom line is for everyday items, the Carroll's now only buy something if they absolutely need it and they have the cash on hand to pay for it. Four million Americans sought debt counseling from the National Foundation for Credit Counseling. That's a lot of folks in this boat and there are others who are not sleeping at night who haven't sought help yet. The average income was $38,800, the average debt, Ali was $27,000. Talk about America's debt to income load, 70 percent of total household income the average number of credit cards in these households, 5.7 credit cards. These people were amazing.
VELSHI: I love that story.
ROMANS: They never wanted to file for bankruptcy. She said we made the debt, we went out to dinner, we ordered food, and we went on vacation.
VELSHI: It's organization. And that feeling of overwhelm -- we hear it all the time. But tackling it sitting down and understanding it. There are resources available. Get that credit counseling that is fantastic. I really like that. You have a full chapter on this in your book.
ROMANS: I do because I have this challenge. This debt free and three, I mean can you be credit card debt-free in three years? Do you think you can do it? Believe it or not, lots of people can and I profiled people and how they do it. There are some pretty easy steps, if you're organized, they are easy steps. You can get out of from under that debt.
VELSHI: Get the book, "Smart is the new Rich," because smart is the new rich. And Christine's written all about it.
That wraps it up for this show. But you can keep in touch with us on twitter, Christine and I read every message we get, @Ali Velshi and @Christine Romans. We are here every weekend, Saturday's at 1:00 pm Eastern, Sunday's at 3:00 and you can also log-in 24/7 to CNNMONEY.com. Have a great weekend.