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Your Money
Deficit of Leadership; Finding Your Voice; Reinventing Yourself for Your Next Job; The Rising Interest Rate Environment; Cleaning Up the Gulf; Is Gold a Good Investment or Not?
Aired April 23, 2011 - 13:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
ALI VELSHI, HOST: I'm Ali Velshi. Welcome to YOUR MONEY.
Ratings agency Standard & Poor's lowered its outlook for America's credit from stable to negative. For now, the U.S. credit rating itself remains AAA, but may not stay that way if elected officials don't get a handle on our fiscal problems.
David Gergen, CNN's senior political analyst. David, is this a vote of no confidence in America's leaders to seriously deal with our debt crisis before it gets out of hand?
DAVID GERGEN, CNN SENIOR POLITICAL ANALYST: It's certainly a vote of faltering confidence. I'm not sure it's no confidence. What they're saying is there's a one in three chance that the U.S. credit rating of AAA, a credit rating we've held all the way back to the first world war, would be lowered if we don't act soon.
And, Ali, what I found particularly interesting about the S&P analysis was what the conventional wisdom in Washington is, wait until the 2012 elections, fight it out over that and then come and act in 2012 and 2013.
And the S&P says, no, too late, can't wait until the 2012 election. What they're saying one in three chance. They're going to lower our credit ratings if they don't act before the 2012 elections with a credible plan.
VELSHI: OK, that's the issue. You got to deal with it sooner than later according to S&P. Stephen Moore is an editorial writer with "The Wall Street Journal."
Steven, one thing that economists do agree upon and they don't agree on much, most economists agree we have to deal with our deficit at some point and in some fashion. Now walk with me over to the wall for a second. If nothing is done to reduce our deficit, here are the realities.
The realities are that your taxes, corporate or personal, are likely to go up. Government services are likely to be reduced. They'll be able to provide less for you. And most importantly after this big recession we've been through, the government's flexibility to respond to unanticipated needs are going to go down.
Stephen Moore, you are a conservative. Let's keep the politics out of it for a second because you're a very smart guy. In the simplest terms, what I've said, all of those things. How would they change the day-to-day life of an American if we don't bring down our long-term debt? Never mind our current deficits, our long term debt?
STEPHEN MOORE, EDITORIAL WRITER, WALL STREET JOURNAL: Let me first start by giving you some good news, which is that I think the S&P is wrong. The idea that the United States government would ever default on its debt, I think -- the probability of that is very close to zero.
The U.S. debt is still the one place that investors go whenever the world gets in trouble. So I don't think we're looking at an imminent default on debt. But I think the answer to your question about why these deficits and this enormous $1.5 trillion deficit per year matters to Americans is it's like termites in the basement.
They're eroding the economic foundation of our economic house. If you let those termites continue to eat and eat and eat, it collapses after a while. I think the long-term implications would be higher inflation, Ali, and higher interest rates. Those both have very negative impacts on the ability for the American economy to compete.
VELSHI: Good point. Termites, you don't know there's a problem until one day your staircase collapse --
MOORE: Except that we do know. That's what's so frustrating. We know we have termites in the basement. We're still not doing anything about it.
VELSHI: Chrystia Freeland, editor with Thomson Reuters Digital. Chrystia, you have a fantastic column out and I just want to read from it. It says, there are a lot of reasons the S&P call should be taken with a grain of salt.
For one thing, the ratings agencies hardly covered themselves with glory in the run-up to the financial crisis and surely no longer deserve oracle status, if they ever did.
I keep telling everybody I know, Chrystia, to watch the movie "Inside Job," an academy award-winning documentary. It uncovered just how solid some of these rating agencies calls actually are. Listen.
(BEGIN VIDEO CLIP)
UNIDENTIFIED MALE: Bear Stearns was rated AAA like a month before it went bankrupt?
JEROME FONS, FORMER MANAGING DIRECTOR, MOODY'S RATING AGENCY: More likely A2.
UNIDENTIFIED MALE: A2?
FONS: Yes.
UNIDENTIFIED MALE: A2 is still not bankrupt? FONS: No, no. It's a high investment grade. Solid investment rating. Lehman brothers, A2 within days of failing. AIG, AA within days of being bailed out. Fannie Mae and Freddie Mac were AAA when they were rescued. Citigroup, Merrill, all of them had investment grade ratings.
UNIDENTIFIED MALE: How can that be?
FONS: Well, that's a good question.
(END VIDEO CLIP)
VELSHI: In fairness, he wasn't with S&P. He was with one of the competitors, Moody's. I'm telling you. Everybody's got to see this movie. Chrystia, why should we even trust what S&P says about America and its credit rating?
CHRYSTIA FREELAND, EDITOR, THOMSON REUTERS DIGITAL: Well, I am glad that you're making this point, Ali, because I do think, you know, the -- if you're looking for a single villain in the financial crisis, which is the worst thing that's happened to the economy since the great depression, you know, the rating agencies wouldn't be a bad choice.
And the S&P call at the beginning of this week wasn't based on any new news. It wasn't as if they uncovered something that none of us knew about before and there was a little bit of judgment there. I also think that these guys are running scared a little bit. So they --
VELSHI: Running scared because everybody's discovered that they were the emperors with no thrones.
FREELAND: Right. They didn't call subprime and we all make fun of them. So now I think, you know, they want to be careful not to be behind the curve when it comes to sovereign debt. Having said that, you know, I'm really with what Stephen had to say, that it's not a new issue. We do know the debt is an issue.
He's also right that America isn't going to default because in contrast with, say, countries like Greece or Ireland, the European countries that are really running into trouble right now, America controls its printing presses.
So at the end of the day, even if the deficit problem isn't controlled, you can always print more money. I'm not saying that's a smart economic solution.
VELSHI: Regardless, that still brings you inflation. David Gergen, let's just talk about this for a second. You know that people like Pete Peterson and people like David Walker have for years tried to outline the danger of America's growing deficits and debt.
But the reality is, some sort of award should go to the Tea Party for putting this front and center in the discourse leading up to the midterm elections. Is it, in your history and experience, is this really the catastrophe that some people are painting it as?
GERGEN: Well, look, I think we're conflating and mixing up two different problems. One is the debt ceiling problem and the other is the question of long-term American debt. When S&P came out with its warning, it didn't tie it to the debt ceiling.
It talked about whether we, in fact, have a credible plan to deal with the deficits in the medium term and long term. And that is serious and the S&P is not the only group and the IMF has warned of this.
Look at what PIMCO did in bailing out of all of its Treasury bonds and warning that interest rates could easily go up in the next few months. So I think the long-term debt problem is a serious problem, regardless of what happens to the debt ceiling.
On the debt ceiling, I agree, I don't think we're going to go over the debt ceiling. I think we're going to have one hell of a fight between now and then. And frankly I don't blame the Republicans for trying to attach something to it.
This is what Democrats have done in the past. It's worth remembering when Democrats were in control, they tied the stimulus bill to the increase in the debt ceiling. This is politics as usual in Washington. We just don't want to let it get totally out of control.
VELSHI: That is going to be a discussion that this whole country is going to be having within one month because some time in the middle of May, we will hit up against that debt ceiling. That's the equivalent of Americans running up against their credit limit on their credit cards.
All of you stay right there. David, Stephen, Chrystia, when we come back, we're going to talk about what happens to your money and your standard of living if we actually hit that debt ceiling. Stay with us.
(COMMERCIAL BREAK)
VELSHI: Frankly, if I weren't me and I turned the TV on and somebody was talking about the debt ceiling, I'd probably find another channel. But the fact is, you need to know about this. This is important.
The debt ceiling in the United States is like a credit limit for the government and it can only be raised by Congress. Right now, our debt ceiling, $14.294 trillion. That's the credit limit. Our debt has piled up to more than $14.26 trillion, about $30 billion shy of the limit.
We're going to hit that inside of a month if our debt reaches the ceiling, the Treasury would not be able to borrow any more money. The same way you can't charge it on your credit card when it's maxed out.
Treasury Secretary Timothy Geithner recently explained why not raising the debt limit would be a catastrophe.
(BEGIN VIDEO CLIP)
TIMOTHY GEITHNER, TREASURY SECRETARY: If we did that, we'd tip the U.S. economy and the world economy back into recession, depression. I think it would make the last crisis look like a tame, modest crisis.
It would be much more dramatic. The cost of borrowing would go up for everybody and would have a permanent, devastating damage on our creditworthiness as a country.
(END VIDEO CLIP)
VELSHI: David Gergen, you started this discussion so you pick it up. Do politicians get what is at stake here as we debate not increasing the debt ceiling?
GERGEN: I think so, Ali. Give some credit here to Wall Street executives. They're in the doghouse for so much. In this case, they really have been raising it out with the Republican leaders making sure they understand.
I think John Boehner has reflected that in his recent comments. I think the politicians increasingly understand that it would be a catastrophe to allow it. But, again, this is so much about politics and the long-term debt that are being tied to the issue.
I think we have to appreciate that from a Republican standpoint, this is one of the few opportunities they have for leverage to try to get some sort of agreement going into the future on lowering the rate at which we're borrowing money.
VELSHI: Let's talk about that specific leverage. This is what Republicans are doing. Senate Minority Leader Mitch McConnell, a Republican, just one of many in Congress who are drawing exactly that connection that you just made between spending cuts and raising the debt ceiling.
(BEGIN VIDEO CLIP)
SEN. MITCH MCCONNELL (R-KY), MINORITY LEADER: A serious, incredible path forward, not only short term but long term, to reduce spending is the only thing in my judgment that will get the votes in the Senate to raise the debt ceiling.
(END VIDEO CLIP)
VELSHI: Stephen Moore, a week ago, you and I had a great conversation with CNNMoney's Jean Sahadi who reminded us and I think you agreed with her raising the debt ceiling, like increasing your credit limit, is not necessarily a license to spend more.
It is a license, perhaps, to pay bills that we are already committed to. Shouldn't the decision to raise the debt ceiling be kept separate from what we actually spend on and how much we spend? MOORE: No, I don't think so, Ali. In fact, David, I've been talking to a lot of my Republican sources on the Hill and they're saying on this, they're not going to back down, they're not going to blink. I think the Republican position is exactly as Mitch McConnell just laid out, Ali.
The Republicans are saying, yes, we will raise the debt ceiling. Of course, that will happen by the end of the year. But Republicans are saying, we are not going to do that until we have this plan in action that brings us to a balanced budget in 10 or 12 years.
Look, this is what any household would do. This is what any business would do if it gets into a real credit crisis. It reorganizes its debt. It changes its spending patterns so it can pay its bills. So this is going to be a real Mexican standoff with the president in the weeks ahead.
VELSHI: Chrystia, deficit hawks have voted against spending in the first place. You've heard people saying, Stephen Moore himself has said it. This is not a revenue problem. This is a spending problem.
In other words, the mantra that brought so many conservatives into the House of Representatives in November, stop spending, cut the spending. How are those people particularly the Tea Party contingent in the party, the Republican Party in the House going to be convinced to vote to raise this debt ceiling?
FREELAND: Well, I think in two ways. First of all, I think the point you made, Ali, before that this is really about Americans agreeing to pay the bills they have already racked up. There's no way to sort of rewind history. That is money that America owes other Americans, it owes pension funds and it owes the rest of the world.
And I think that people actually get that. Sure, there's a lot of politicking around it, but people get that part. The other thing -- and here I would slightly disagree with David who I admire and respect so much with his historical comparisons with previous debates about the debt ceiling.
Something has changed and is changing, which is America's relative weight in the world economy. America is used to being the country that owns the reserve currency that's the single biggest dominant economy and it gets away with stuff that a lot of other smaller countries haven't been able to get away with.
That is starting to be less the case. Nowadays, these debates around the debt ceiling, it doesn't just matter what we think, what people in New Hampshire or Iowa think about it.
It matters what people in Beijing and Dubai who are America's creditors, think about this stuff. If America doesn't seem politically mature and serious, then that can be a problem going forward.
MOORE: You know, Chrystia, I completely agree with what you just said. But actually that's exactly the reason -- it circles back, Ali, to what we were just talking about. About why does this enormous debt matter?
The reason it matters is because if we continue to borrow a trillion a year, it erodes our ability to be competitive on a global stage. You know, when I give my lectures around the country, I always tell people the biggest issue for our country is are we going to be able to compete in the next 10 and 20 years with China and other emerging countries?
And I guess, what I've say, Chrystia is, if we don't get this debt under control, this continues to weaken our position on the global stage.
VELSHI: Let me ask you. Let me ask you this so, David, because they're picking on you so I want to ask you about this. If the world -- let's just take Chrystia, her idea at its word right now.
If the world is judging to see whether America has the maturity to deal with this thing, what would the mature thing be to do? To understand that we have debts, we have obligations and we have to raise that debt ceiling or to say, we're going to stop spending and we're not going to raise it?
GERGEN: Well, I think the mature thing and I hope we do this, is we don't have this up to the last minute kind of fight we just had over the budget. I do think that would send a signal to the world and send a signal to Americans. Americans reacted very negatively to that.
But the other thing is I agree that we're at a point -- I think she's right about this. We're at a point where the world is judging us through a different lens. And what the world is asking us to do is, of course have mature politics about the debt ceiling.
But they're also asking, to go Stephen's point, do you have a credible plan to lower your deficits and lower your debt as a percentage of GDP? And it's worth understanding now. The world is seeing France, Germany and Britain all adopt credible plans, as the S&P pointed out.
They've all adopted credible plans to get their debt down as a percentage of their GDP. The United States is still the outlier on that. And that is, I think, ultimately is what, to go to Stephen's point, is what the world is judging us on and determining whether this reserve currency is one they can rely on.
And, of course, there's also the question about quantitative easing and all these other issues that the world is also questioning.
VELSHI: I'm going to want to get you all back to have that particular conversation. Is it working in France, Germany and the U.K. --
FREELAND: And especially in the U.K. VELSHI: Some are saying it might be making things worse in the short term, but look, we're going to get you back. This is a great conversation.
David, Stephen, Chrystia, thanks very much for your contribution. All of them, by the way, have been writing on this on these topics. It's worth following. They have different opinions, but they all matter. Thanks very much.
Listen, changing careers, following your passion, I'm going to take a look at one incredible story and then ask the real question -- is it a good idea for you to follow your passions in this economy or could you be making a horrible mistake?
(COMMERCIAL BREAK)
VELSHI: We've all heard these uplifting stories about people losing their jobs then starting a new career doing something not that is lucrative necessarily, but something that they love.
Brad Karsh is president and founder of Job Bound. He joins me now. Brad, before we talk about this, I want you to watch this remarkable story about a guy named Andy Lunsford then I'm going to ask you to point out if people like Andy are smart, lucky or dumb. Listen to this.
After losing his business and declaring personal bankruptcy, Andy popped in an opera CD one day. It changed his life. Here's Alina Cho with his story.
(BEGIN VIDEOTAPE)
ALINA CHO, CNN CORRESPONDENT (voice-over): Call him the accidental tenor. Hard to believe just a few years ago, Andy was selling granite countertops. When the economy went south, so did his business.
ANDY LUNSFORD, ACCIDENTAL TENOR: You feel the weight of the world on your shoulders at that time. I think I was just looking for anything that could lighten the load.
So I had this CD on my desktop. And I put it into my CD player and I turned it on and I just shut my eyes and tried to breathe and relax and listen. And it just started getting interesting.
CHO: Then it got really interesting.
LUNSFORD: Then I just found myself singing out to it and I found out I could sing loud and I could sing high. And I had no idea I could do that.
CHO: Neither did his wife.
KENYA LUNSFORD, ANDY LUNSFORD'S WIFE: I did kind of turn my ear a little more to listen. And I thought, he can really hit those high notes. He can sing louder than I can. CHO: So Andy Lunsford, just shy of age 30, took a chance. He applied to opera schools and to his surprise --
LUNSFORD: Got scholarships everywhere. There were schools were fighting over me a little bit.
CHO (on camera): How did that feel?
LUNSFORD: Great, validating, of course.
CHO (voice-over): He settled on Indiana University's Jacob School of Music, one of the best in the world. And uprooted his family, moving from suburban Denver to Bloomington, Indiana, where the Lundsfords live on food stamps so this 31-year-old can focus full time on his craft.
UNIDENTIFIED MALE: He's an amazing instrument.
CHO: A star student who recently travelled to Los Angeles to perform for real stars like Harrison Ford. The dean says Lundsford's story is as unique as his voice.
(on camera): You say you know it when you hear it. It's sort of chilling, isn't it?
GWYN RICHARDS, DEAN, INDIANA UNIVERSITY JACOBS SCHOOL OF MUSIC: It is. You get goose bumps. Your feet tap. People hold hands. When you watch an audience, you can tell whether they're being moved or not.
CHO: And Andy has that?
RICHARDS: He's got that.
CHO (voice-over): Even though some might ask, a career in opera? Is he nuts?
LUNSFORD: Probably. Is there ever a good time to start a career in opera?
CHO: Alina Cho, CNN, Bloomington, Indiana.
(END VIDEOTAPE)
VELSHI: I love that story.
Brad Karsh, he's the founder of Job Bound and the author of "How to Say It on Your Resume."
Brad, our tenor: smart, lucky or dumb?
BRAD KARSH, PRESIDENT, JOBBOUND OUTPLACEMENT: I'm going to call him lucky with a dash of smart in him because it worked out. But lucky in the sense that he had this extraordinary talent to do something that obviously is in high demand. I say lucky as well because I don't want people out there thinking, my gosh, I love baseball, I should give it all up and try out for the Chicago Cubs. You have to have that innate talent.
And in some ways, I relate it to the advice I give entrepreneurs. When you're thinking about making a decision like this, think about the fact that there are going to be all sorts of risks.
You have to measure those risks. It is a high-risk decision, but if you are passionate about it and you feel strongly enough about it and you're willing to take the risks, go for it.
VELSHI: Brad, I hate these stories because I find it inspirational, I love that guy. But I hate it because when we air it people say, you know what, if he can do it, I can do it.
The opportunity cost right now today for leaving your job and retraining into another job are, in my opinion, lower than they've been in 15 or 20 years because it's not like you're, in many cases, giving up some great-paying job to go learn opera. Is this a good time, disregarding what you're doing, is it a good time to reinvent yourself for your next career?
KARSH: I really do think it is. I agree with you, Ali, primarily because the job market is what it is. And especially for people who are in jobs that are, if you will, beneath where they feel they should be on a pay grade or on an ability grade or if you're unemployed, now is the time to think about this stuff because we know that the job market isn't great, but we know it's getting better.
If you want to think, I'm going to invest a year or two or 18 months, think about it, a year or two or 18 months from now, the job market is much more likely to be better. And if you're going to re- emerge then, you'd probably have a better chance of getting a job.
VELSHI: All right, Andy, didn't have to give up a high-paying job for this. You just said, if you're underpaid or underemployed or unemployed. Not a bad time.
What about if you're employed full time with benefits, what are the most important things you need to think about before you risk it all to pursue your passion in an entirely unrelated field?
KARSH: Well, one of the things that you're definitely going to do is, can I do this on the side if you will? So can I keep my job, can I keep my benefits? Can I do this at night? Can I do it on the weekend?
Or can I go to my employer and say, can you move me to a part- time schedule with benefits? Some employers may want to do that, especially if they're looking to do a few more cuts. They might move you to four days a week or three days a week, which would allow you to pursue this while keeping your job.
I always advise people the first thing you should think about is, can I keep my job and try and do this on the side? VELSHI: Brad, always good to talk to you. You've always got this great advice and frankly between us, I did like that guy's story. Brad Karsh is the president of Job Bound. He's also the author of "How To Say it on Your Resume."
People always ask me about how to do their resumes. Brad has a great book with actual resumes in it. It's not theoretical so you should pick it up. Brad, good to see you.
All right, borrowing money might get more expensive soon, but it could be good news if you're a saver. Investors, you want to make more money. I'll tell you how to do that too. Savers, borrowers, investors, all of you, you go to be one of them stick around. I'm going to tell you what you need to know about rising interest rates.
(COMMERCIAL BREAK)
VELSHI: As a financial journalist, there's very little I can be certain about, but I'm pretty sure that interest rates are going up, and I'm going to give you at least three reasons why that's happening. Now, this matters to you if you're a saver. It matters to you if you are a borrower. And it matters to you if you are an investor. I'm going to tell you in a couple minutes how to take advantage of it, but let me tell you why I think I'm right about this.
Number one, the U.S. dollar is dropping. This week, it hit a 15- month low against the euro. There are a lot of reasons for that, but all you need to know is the U.S. dollar is worth less. That pushes inflation up.
Number two, our credit rating here in the United States -- which, by the way, is excellent -- is at risk. S&P, the credit rating agency, said earlier this week that, well, you know, if Congress doesn't get its house in order dealing with our massive debt, they could downgrade the U.S.'s credit rating. That makes it more expensive to borrow. That pushes interest rates up.
And number three, the economy, while some of you may not feel it, is heating up. There are lots of indicators that say we're doing better here in the United States. But they're doing better all around the world, and that means an increase in demand for commodities like copper, like silver, like gold, like oil, and that pushes prices up. That affects inflation.
Let me give you a history of interest rates going back about 57 years. In July 1954, effectively, the interest rate was 0.8 percent. Take it up to June 1981, the high point if any of you or your parents were getting mortgages back then, 19.1 percent. Right now, April 2011, we're basically at 0.1 percent. These are the Fed rates. Add another 3 percent to that and you've got prime rate. And of course, you may be paying prime or more than that.
Interest rates are at historic lows right now, near zero since December of 2008. You don't have to be a genius when you look at that chart to guess where they're headed next. So in this unfamiliar environment for many of you of rising interest rates, the old rules may not apply.
Doug Flynn is a certified financial planner with Flynn Zito Capital Management, a good friend of ours. Let's talk about investment strategies, Doug, to capitalize on the inevitable rising interest rates. Let's start with people who are low-risk.
DOUG FLYNN, CERTIFIED FINANCIAL PLANNER, FLYNN ZITO CAPITAL MANAGEMENT: Right. So most people are just unfamiliar with investing prior to the last 30 years. They're unfamiliar with what do you do when rates go up. And so if we are in that environment, one of the things that you know is that if inflation picks up, a low-risk way to do this would be to look at TIPs, which are Treasury Inflation Protected Securities. And the idea is you get a low interest rate, but every year, it bumps the principal up by the rate of inflation. The only problem is, if you need income from it, it's not going to provide a lot of annual income.
VELSHI: All that matters is your capital is not losing value because of inflation.
FLYNN: Right. Right. Most bonds, when interest rates go up, are going to lose money after inflation. This will keep you at least at pace with it.
VELSHI: So this is equivalent to the kind of person who may be keeping their money in an interest-bearing bank account or a CD or a money market, something that's paying low interest -- this is a slightly better insurance policy --
FLYNN: Slightly better if you hold it to maturity, that's true.
VELSHI: OK, let's bump it up to people who are, you know, medium risk-averse. What would you do there?
FLYNN: Right. Here's a great opportunity for people, and really, there are a lot of opportunities. We keep hearing how bonds are going to be terrible in a rising rate environment. I hear it every day. What people are talking about mostly are traditional Treasury bonds --
VELSHI: Right.
FLYNN: -- and perhaps even municipal bonds. But if you go to something like a flexible income fund or a strategic income fund, you're going to bring in additional opportunities. The investment manager may have Treasuries in here.
VELSHI: Right.
FLYNN: And you could have a spot where when quantitative easing ends at the end of June, which --
VELSHI: Quantitative easing is this throwing money into the economy to keep interest rates low.
FLYNN: That's right, so -- VELSHI: And that's going to end. The Fed said so.
FLYNN: At the end of June, unless they do a third one --
VELSHI: Right.
FLYNN: -- that's going to end. Treasuries could bump up, but eventually, they're going to come down in terms of the value as the rates go up. And so the manager in this not only has Treasuries in here, but they might have global bonds, which can take advantage of the currency fluctuations. They might have corporate bonds, high- yield bonds and floating rate bonds and floating rate loans, which reset in an upward environment and let your rate -- let your interest rate go up. And so it allows you to take advantage of a rising rate environment. And what this will allow you to do is rather -- if you own a Treasury fund and Treasuries are going to go down, a Treasury --
VELSHI: That's all your -- that's all your can do.
FLYNN: You're finished. You can't do anything. Right.
VELSHI: Right.
FLYNN: This type of fund -- and all the major fund families have this kind of a fund --
VELSHI: Yes.
FLYNN: -- and there are different levels of risks -- gives the manager the opportunity to bump out of Treasuries into something else --
VELSHI: Yes.
FLYNN: -- all within here and take advantage of a rising rate environment. So it's a more moderate way to do this.
VELSHI: Let's give an example to our viewers, the Fidelity Strategic Income Fund, FSICX. The concept of having "strategic" or "flexible" in the name means exactly that. It doesn't have to be in just Treasuries. It doesn't have to be in just high-yield. It doesn't have to be in just municipals. It can be in a bunch of other things.
FLYNN: That's right. And you're giving them -- you're turning over the daily management of someone else who's looking at this every day to try to keep you and move you at the right times.
VELSHI: All right, Doug, good advice for people who want to take advantage of this high-risk -- this inflationary environment because as you're right -- you're right, if you have -- if you've grown up in the last 30 years, you've never seen anything like this. You've never seen interest rates going up, you've only seen them going down.
FLYNN: That's right, not for an extended period of time.
VELSHI: That's right. Doug Flynn is a certified financial planner with Flynn Zito Capital Management.
The solution to clean up the oil spill in the Gulf of Mexico might be found in this room. Director James Cameron, Google CEO Eric Schmidt, many others were there. Find out what they were doing to tackle the world's biggest challenges, up next.
(COMMERCIAL BREAK)
VELSHI: It's been a year since the BP Deepwater Horizon disaster sent millions of barrels of oil spilling into the Gulf Coast. Scientists say large amounts of the oil remains in the ocean. But the problem is, there's no way to know how much or really how to get it out. If BP's oil spill has shown anything, it's more advanced technology is needed to clean up and control those oil spills.
Wendy Schmidt is the president of the Schmidt Family Foundation and the title sponsor of the X Prize Foundation's Wendy Schmidt Oil Clean-Up X Challenge. She's taken matters into her own hands. She's teaming up with the X Prize Foundation to sponsor an oil clean-up challenge, a chance for entrepreneurs to make $1.4 million if they can come up with a solution.
Wendy, you've put your own money into this. I want to ask you, even if we found a solution today -- and we might be close -- can we clean up the damage that's been done to the gulf so far?
WENDY SCHMIDT, SPONSOR, X PRIZE: That's a great question, Ali. Of course, we won't clean up the damage that's already occurred. It's ongoing. We're looking at a solution to clean up oil on the surface of the water. That's the limits of the challenge that we've created.
A lot of the oil from the Deepwater Horizon spill never made to it the surface. As you know, it dispersed under the water. Bacteria ate some of it. Some of it dropped to the bottom -- the heavier compounds to the bottom, where we have an oily graveyard that's buried the sedimentary creatures who live there, caught all the other sea life on the way down. And from what I understand, if you go stir that up now, it'll all come up again. So we have a problem if there's a hurricane in the gulf based on this last episode.
VELSHI: Yes. Well, the X Prize has some A-list investors and advisers that reach far beyond the oil industry. Filmmaker James Cameron is one of them. Take a look at the brainstorming session that you all held last weekend.
(BEGIN VIDEO CLIP)
JAMES CAMERON, FILM DIRECTOR: We've got this vast column of water out there in the ocean that we get data points from different places at different times. We don't have a daily kind of weather satellite snapshot of what's going on out there in a way that we can work with.
(END VIDEO CLIP)
VELSHI: That's how the X Prize comes up with its ideas, and then teams from around the world, from universities, from businesses submit their ideas, in your case, to try and figure out how to clean up that oil that comes out of a spill. What exactly are the judges looking for? How do you win that prize?
SCHMIDT: Well, we had a fantastic response to this prize, first of all. We had 350 pre-registered teams. So from my point of view as a philanthropist, this is an amazing tool to bring solutions to a problem with one phone call. We'll have 10 finalists in this competition. And our panel of judges -- there are eight of them -- are experts in ocean science, they're experts in -- I'm sorry -- the Coast Guard. People who have to clean up the mess are on this panel. People from the oil industry are on this panel.
So they see all sides of the problem that we're trying to address, and they will be judging our competitors based on the feasibility of their technology, the market effectiveness of their technology, can we actually scale this? So it's a very practical, hands-on kind of competition that we'll be holding this summer.
VELSHI: Now, Wendy, questions remain as to whether oil companies or the government can either prevent or mitigate future oil disasters. We've just had a recent CNN Opinion Research poll says 57 percent of Americans are not confident in the federal government's ability to prevent another oil spill, 41 percent are confident, which shows me that there's some hope there. Drilling picking back up again, the motivation to drill offshore, picking up again, given the price of oil.
If another disaster like this one were to happen again, where is the solution going to come from? Do you think by the time you judge -- the panel judges these 10 final entrants, we're going to have a solution?
SCHMIDT: I think the solution is probably unlikely to come from government or from industry. If $1.4 million can bring about people coming out of the woodwork to offer solutions, you have to say in the billions of dollars of profits that have gone into the oil and gas industry, why don't we have a solution? Obviously, there's no economic incentive for either the government or industry to come up with a solution. So perhaps it will come from private venture money. That's certain what seems to be happening here.
And I don't think we can say "if" this happens again, I think it's a question of when. We're drilling deeper and deeper into more exploratory regions. The Deepwater Horizon spill was not a particularly deep spill --
VELSHI: Yes.
SCHMIDT: -- and the industry was surprised when it happened because the geology's fairly well understood. So we're really pushing the envelope. We're doing it under water and we're doing it on land.
VELSHI: And you and I share the view that a lot of it has to do with our insatiable thirst for oil. Wendy Schmidt, good to see you. Thank you for doing this, and thank you for being with us. Wendy Schmidt is a competition benefactor of the Wendy Schmidt X Prize Challenge to solve the problem of another oil spill.
All right, gold hit another record high this week. Is it time to get in or is it time get out? Some specifics after this.
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VELSHI: I haven't even started this segment on gold, and we've already got an argument with my panelists. Why? Because they say this chart doesn't go back far enough to tell the whole story. So I may try and get you a chart that goes further back, if I can.
But let's just go back to 2005. Gold was around $500 an ounce, and it was debatable back then whether it was a good deal, whether it was a good investment. We know who was right, gold now over $1,500 on ounce, hitting record highs again this week. But the bulls and the bears are still battling about whether or not gold remains a good investment.
Our bull -- you might have guessed -- our friend, Steven Leeb, capital -- president of Leeb Capital Management, and our gold lover extraordinaire. Our bear in this argument, Charles Lieberman, chief investment officer at Advisors Capital Management.
Charles, you think gold doesn't pan out as an investment. Why are you hating?
CHARLES LIEBERMAN, CHIEF INVESTMENT OFFICER, ADVISORS CAPITAL MANAGEMENT: I don't hate it, it's just not an investment. Gold is a speculation. It's a commodity and it moves like a commodity. So it can go up dramatically. It can also go down dramatically. If you want an investment, an investment either gives you a return or potentially generates income for you somewhere down the road. Steel stocks can be an investment to generate income. Companies are profitable. They pay out dividends. That's an investment. Gold is --
VELSHI: Would you buy gold stocks?
LIEBERMAN: I would consider buying gold stocks, but I would not buy gold. That is a commodity. You may as well look at gold the same way you look at pork bellies, the same way you look at wheat. You don't think of wheat as an investment, it's a commodity.
VELSHI: What do you think, Stephen?
STEPHEN LEEB, AUTHOR, "GAME OVER": Gold is in a certain sense a commodity, Ali, but it's also a currency. And when you buy gold, you do get a return when inflation is rising. And certainly, some of the measures of inflation right now are quite low, but if you look at commodity inflation, it's gone crazy.
And what happens when you have high commodity inflation like we do, commodity scarcity, you have to print ever more money, ever more currency. I believe it's a race to the bottom. With euro, with the European debt problems right now, our own debt problems here, we're going to have to continue to print more and more money. And what happens, your return on that money is not positive. It's negative.
If you investment in Treasury bills right now, you're getting .05 percent. In the context of commodity inflation, which may be 20 or 30 percent, that's a loss. So you want something that can keep up with inflation, and that's going to be gold.
VELSHI: OK, Charles, and we had this discussion a little earlier with Doug Flynn. That's a reasonable argument. We do see the U.S. dollar weakening. We see inflation starting to poke up, and we don't see that that's going to stop necessarily. We think interest rates are going up. What's your best alternative?
LIEBERMAN: If you really are worried about inflation, then buy tangible assets, whether it's real estate, whether it's pipelines. Those are tangible assets. They benefit from inflation. They generate income while you own them. And they have the capacity to generate rising income because of inflation, and the asset values will definitely go up also because of inflation and also because those are operating businesses. Gold could go down even if inflation goes up.
VELSHI: I'm going to ask you a one-word question. Where do you think gold is going?
VELSHI: I think it's going much, much higher, Ali. And I hope I'm wrong. I really do. I hope this world transitions into a wonderful place, everything good. But from what I see right now, I think it's going dramatically higher --
(CROSSTALK)
VELSHI: I'm a money manager, not a speculator. I don't know. Gold could go down as easily as it could go p.
VELSHI: Short term, yes. I'm talking longer term.
VELSHI: I will surmise that you gentlemen disagree on this, but you've given us some very good points and I know or viewers are very, very interested in them. Thanks to both of you for this, Stephen Leeb of Leeb Capital Management and the author of "Game Over," a must-read, and Chuck Lieberman, chief investment officer of Advisors Capital Management. Guys, good to see you both.
Hey, investing in gold, this bright, shiny object, just one of the things that our brains have been grappling with more than a thousand years. It's just one of many financial choices that we are confronted with on a daily basis. Why is it that smart people do dumb things with money? Well, it might be because of the way we're wired. My good friend Christine Romans takes a closer look inside our brains.
(BEGIN VIDEOTAPE)
UNIDENTIFIED MALE: It's Mega Millions!
CHRISTINE ROMANS, CNN CORRESPONDENT (voice-over): The odds of you standing there with the big check are just north of zero. So why do we buy a ticket? UNIDENTIFIED FEMALE: Are you ready?
ROMANS: Scott Huettel is part of Duke University's neuroeconomics team, exploring, among other things, why smart people make foolish decisions with their money.
SCOTT HUETTEL, DIR., CTR. FOR NEUROECONOMIC STUDIES, DUKE UNIV.: People don't buy a lottery ticket just because they have a chance of winning. They buy a lottery ticket because over the next couple of days, it allows them to fantasize about what they would do if they won the lottery. In a sense, they're paying for that experience, rather than for the chance of the lottery itself.
ROMANS: And it's not just the lottery. Jazon Zweig, author of "Your Money & Your Brain," knows firsthand. He put his brain to the test with Scott's team at Duke.
JASON ZWEIG, AUTHOR, "YOUR MONEY & YOUR BRAIN": It's a combination of neuroscience and economics, basically using the tools of scanning and other measurement technology that neuroscientists have used for years to study how the human brain evaluates risk and reward over time, which is what investing is all about.
ROMANS: From investing to buying a home to why and how often we go on a spending spree, what researchers are learning is that when it comes to money, our brains are in some ways stuck in the stone age.
(END VIDEOTAPE)
VELSHI: And cavemen didn't have to deal with rising interest rates or investing in currency. Listen, this is a great series Christine has. Join her for a special edition of "YOUR BOTTOM LINE: Your Money and Your Mind" to find out how you can take on your inner caveman and do better financially. Next Saturday, 9:30 AM Eastern.
Well, is cash the key to unlocking the solution to the world's greatest challenges? My "XYZ" is next.
(COMMERCIAL BREAK)
VELSHI: Time for the "XYZ" of it. Last weekend, I got a chance to sit in on the X Prize Visioneering (ph) Weekend in Los Angeles. I'm a big fan of the X Prize. You heard of the Ansari X Prize, which awarded $10 million to the first non-governmental organization to launch a reusable manned spacecraft twice within two weeks. On this show, we introduced you to Wendy Schmidt, who backed the $1.4 million X Challenge to come up with a way to clean up the oil spill in the Gulf of Mexico, as well as future spills.
The concept incentivized competition is not new. Remember Charles Lindbergh and the Spirit of St. Louis crossing the Atlantic for the first time in 1927? He won a $25,000 prize for doing that. The X Prize was developed in that spirit, award only the winner, but create investment to spark innovation that will address something that neither the free market nor government is adequately addressing and create an industry and the jobs that go with it in the process. Thirty-seven teams are vying for the X Challenge to clean up oil, many of them probably spending more than the prize money to achieve that win. But can you imagine the bragging rights and the business opportunities that accompany winning that challenge? Within six months, we may actually have a way to quickly and effectively clean up the more than 4 million barrels of oil that slipped into the water after the Deepwater Horizon explosion a year ago.
We need solutions to the world's problems and we need new ideas to create new businesses and jobs. Incentivized competition isn't the only answer, but I think it's a pretty good one.
That's my "XYZ."
Thanks for joining the conversation this week on YOUR MONEY. We're here every Saturday 1:00 PM Eastern, Sunday 3:00 PM. Stay connected 24/7 on Facebook and Twitter, my handle @alivelshi.
Have a great weekend.
