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It is with both relief and reluctance that we are changing Granada’s current investment theme from the long-standing mantra of “Kicking the Can.” We’ve used the phrase to aptly summarize the nation’s fiscal and monetary policy of the past two years. The sustainability of this overly accomodative policy has served as a welcome tailwind for the investor of nearly every asset class, but it has reached a point where its livelihood is being threatened.

Even though it has been a nice ride, I’m relieved to now hear political banter that may serve as a prelude to meaningful discussion about the ramifications of such spending. That’s a conversation that has been largely ignored to date. But I’m also reluctant to declare a definitive end to this era of unprecedented economic stimulus. Opportunities still abound for short-sighted politicians and Federal Reserve board members to kick the proverbial can a bit further down a lonely road and achieve their stated objective of raising asset prices indiscriminately.

The prudent investor can’t sit blissfully unaware of the eventual sea change though. A battle is brewing on Capitol Hill – a tug of war between fundamentally different approaches to tighten fiscal and monetary policy alike and finally address the national debt that has ballooned in recent years. There are significant and far-reaching implications for investors worldwide.

China, our biggest creditor, has politely remarked on more than one occasion that the U.S. needs to reign in its spending. Two weeks ago an agency that assigns credit ratings to countries worldwide suggested that without significant change, the U.S. credit rating would be downgraded. Needless to say, that would be particularly painful for the world’s largest debtor nation.

And sadly, it is this minor, often overlooked detail – that this spending splurge was funded not out of a rainy day fund but rather with someone else’s money that will finally bring this maddening can kicking to an end. The shift will be neither dramatic or immediate. Policymakers will hide behind the excuse that the economy is too unsteady to remove the training wheels and instead continue spending money we don’t have. In the process we will string out our creditors for as long as they can bear the pain. We’ll kid ourselves along the way that the U.S. could never lose its pristine AAA credit rating and that the world will always desire our newly minted green dollars regardless of how many we print. But the bond and currency markets have a way of quieting the political bickering and exposing the flawed logic in the position that the stimulus should continue a bit longer. We simply do not have this perceived luxury of time. The issue must be addressed and it must be addressed now.

The tug of war begins in earnest next week when Congress returns from recess. Shortly after arriving on Capitol Hill I expect politicians will set their boots in the mud, grab a hold of the rope – as if their job is really on the line this time – and lean back with members of their party for a good long, back and forth titanic struggle. At least initially the whining and shouting will drown out any reconciliatory advances.

With time I suspect rationale taxpayers and politicians alike will conclude that the issue has to be addressed with both lower government spending and higher taxes. The most relevant issue for investors isn’t how seemingly unfair the eventual reform is to their personal interest but rather the size and speed at which reform is enacted.

Calls to implement sharp and immediate cuts in government spending may appease our increasingly impatient international creditors, but their mere mention is going to be terribly unpopular at home. The combination of reduced government benefits and the associated prospect for lower economic growth will eventually alienate a large contingent of even the most fervent supporters. They will simply shudder at the size of the pill needed to alleviate our economic ills.

Recent history suggests societies prefer to ignore the need for fiscal rehabilitation or at least fail to enact meaningful reform until the financial markets force the issue. As we’ve seen most notably in Greece, it is not a pleasant alternative. This was essentially the message of the independent rating agency mentioned previously. Sadly, they aren’t convinced our government can pass meaningful reform in the next two years and are prepared to downgrade our credit rating as necessary.

The prudent investor recognizes either path has significant investment implications. With no interest in being fleeced of his hard earned savings by free-spending politicians, he monitors the struggle with a realistic perspective and prepares his finances accordingly.