U.K., other countries showing the courage to get policy right!

Here in the U.S., we have a problem: A lack of courage in Washington. Specifically, the courage among policymakers to make the difficult decisions — and take the difficult actions — to deal with our financial problems.

For one thing, our politicians are preaching budget restraint, but pursuing the greatest budget-busting tactics of all time. The National Commission on Fiscal Responsibility and Reform’s report, released December 1, 2010, has been all but forgotten.

President Obama’s budget, released just over 10 weeks later, proves it. It projects a massive $1.65 trillion deficit for fiscal 2011 … and more than $7.2 trillion in additional deficits in the decade thereafter!

On Capitol Hill this week, Bernanke didn’t rule out expanding the so-called quantitative easing program.

For another thing, our central bankers say their mission is to fight inflation. But they’re pooh-poohing surging prices, refusing to slow down the printing press, and pegging interest rates near zero percent. Fed Chairman Ben Bernanke made it crystal clear in Congressional testimony this week that he has no plans to change tacks.

As a result, our currency is tumbling against virtually every form of money on the planet — especially gold, which set a nominal new record of $1,437 an ounce this week. Meanwhile, other agricultural and energy commodities are going ballistic!

But there are many countries that appear to be taking a different approach. And there’s one nation in particular whose fiscal and monetary policies appear to be taking a turn for the better. That country?

The U.K.!

U.K. Trying to Right the Ship, Deal
with Financial Threats Head On

Like the U.S., the U.K. has spent several years overpromising, over borrowing, and overspending. That has left the U.K. with a debt load equal to roughly 61 percent of GDP — the highest since 1970. Its budget deficit surged to 11.4 percent of GDP in 2010, one of the worst among developed economies.

But unlike the U.S., fiscal and monetary policymakers are taking steps to right the ship. It’s a titanic battle between reckless, Keynesian policy in the U.S. and painful, but necessary, austerity in the U.K. And I believe it’s one the U.K. will win.

Will it be easy? Not at all. Prime Minister David Cameron is jacking up taxes and slashing spending in several arenas …

* In national defense, Britain is cutting its 37-billion-pound ($60 billion) annual military budget by 7.5 percent. The country plans to scrap or sell its 70-strong fleet of Harrier jets and mothball its flagship Ark Royal carrier.

* In public services, Cameron is proposing that volunteers or charities take over the operation of many schools and hospitals to reduce government costs.

* In retail, the country’s Value Added Tax just rose to 20 percent from 17.5 percent. And in education, the cost of attending university will double at many schools in 2012. Some students will pay three times the tuition they had to pay in 2011.

“The duty of this government is to deal with the economic mess that’s been left. We have got to deal with that deficit, we have got to make these cuts, we have got to put up these taxes.” — British PM David Cameron

Over on the monetary policy side of the ledger, the hawks are starting to spread their wings as I alluded to recently. We now have three Bank of England policymakers explicitly voting for interest rate hikes, much more dissent than we have here in the U.S.

I’m not going to suggest these moves are without consequences. Short-term growth is suffering, with British GDP slipping by 0.6 percent in the fourth quarter. But I believe the short-term pain will be offset by long-term economic gains.

The Lesson:
Invest in Disciplined Countries,
and Avoid the Rest!

You can already see the process starting, with money flowing away from the U.S. and toward the U.K. in the currency markets. The Dollar Index is at multi-month lows and threatening to break down from a three-year uptrend, while the pound is just shy of a 14-month high.

This underscores the message I’ve been preaching for some time: You want to invest in the countries with disciplined, prudent fiscal and monetary policies … and avoid the rest.

Some countries that make the cut, in my book, include the U.K., Brazil, Singapore, New Zealand, Australia, Switzerland, and Canada.

You can invest in their short-term government debt securities … companies based in those countries with U.S.-listed shares … or ETFs that offer you diversified national exposure. Think the iShares MSCI Canada Index Fund (EWC) or CurrencyShares Swiss Franc Trust (FXF) here.

Until next time,

Mike

P.S. You don’t have to watch helplessly as Washington avoids doing what’s needed to dig the U.S. out of the mess we’re in. Click here to learn how my Safe Money Report can help you profit from countries that have the courage to take a prudent fiscal and monetary policy stance.