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Consequences of Inaction – Investor Perspective

• Short Term, No Problem Yet
– Global bond investors, in part, have looked past USA Inc.’s deteriorating financials because growth, inflation, and Fed purchases matter more, and because income statements and balance sheets of many other developed countries (such as Greece / Spain / Portugal / Ireland) are worse.

• Long Term, Consequences of Inaction Could Be Severe
– If USA Inc.’s “managers” and “board” continue to ignore rising unfunded entitlement spending, investors could eventually demand a higher return to lend money to USA Inc. – leading to rising bond yields / higher borrowing costs for USA Inc. At some point, USA Inc.’s currency could also weaken significantly.

Source: Richard Berner, "America’s Fiscal Train Wreck" (7/2/2009), Morgan Stanley Research.
KP
CB www.kpcb.com
USA Inc. | Consequences of Inaction 415

For Perspective, USA Inc.'s 55% Public Debt as % of GDP (2009) is in Middle of Pack When Compared with ‘Top 25’ Global Peers, Though Rising to 90% ‘Warning’ Level*

[Table Header]
Rank Country 2009 Net Debt Outstanding ($B) Y/Y As % of World Total Net Debt as % of GDP 2009 2005 05-09 Change 2009 GDP ($B) Y/Y As % of World Total 2009 Budget Surplus / Deficit ($B) As % of World Gross Deficit 2009 Unemployment Rate Y/Y (pps)

1 Japan $9,149 12% 26% 181% 162% 19% $5,049 -5% 9% -960 33% 5% +1
2 Italy 2,434 0 7 116 106 11 2,090 -5 4 -0 -- 8 +1
3 Greece 374 8 1 111 99 12 338 -2 1 -27 1 9 +2
4 Belgium 454 0 1 98 92 6 461 -3 1 -1 0 8 +1
5 France 2,028 5 6 77 66 11 2,635 -2 5 -105 4 9 +2
6 Germany 2,423 1 7 75 68 7 3,235 -5 6 -16 1 7 +0
7 Austria 263 2 1 70 64 6 374 -4 1 -5 0 5 +1
8 India 854 -3 2 69 80 -12 1,243 6 2 31 -- -- --
9 UK 1,444 3 4 66 42 24 2,198 -5 4 -49 2 7 +2
10 Canada 870 -5 3 66 70 -4 1,319 -3 2 44 -- 8 +2
11 Netherlands 503 -1 1 64 52 12 790 -4 1 4 -- 4 +1
12 Argentina 178 -7 1 59 59 0 301 1 1 14 -- -- --
13 USA 7,811 23 23 55 37 17 14,266 -2 25 -1,438 50 9 +3
14 Poland 223 -11 1 53 47 6 423 2 1 26 -- -- --
15 Spain 757 20 2 53 43 10 1,438 -4 2 -125 4 18 +7
16 Norway 187 -17 1 51 45 6 369 -2 1 38 -- 3 +1
17 Sweden 175 -5 1 44 51 -7 398 -4 1 9 -- 8 +2
18 Brazil 650 -6 2 44 44 0 1,482 0 3 40 -- -- --
19 Switzerland 212 5 1 44 53 -9 484 -1 1 -10 0 4 +1
20 Denmark 125 7 0 40 38 3 308 -5 1 -8 0 3 +2
21 Turkey 219 -14 1 37 52 -15 594 -5 1 36 -- -- --
22 Australia 309 -3 1 34 36 -3 920 1 2 8 -- 6 +1
23 Venezuela 95 11 0 27 27 0 353 -3 1 -9 0 -- --
24 China 609 7 2 13 18 -5 4,758 9 8 -38 1 -- --
25 Russia 92 -15 0 7 14 -7 1,255 -8 2 17 -- -- --

Top 1-25 $32,438 0% 94% 55% 52% 3% $47,081 -3% 81% $2,790 97% 7% +1
Global 34,632 8 100 68 66 2 57,937 -2 100 2,885 100 7 +2

Note: *Carmen Reinhart and Kenneth Rogoff observed from 3,700 historical annual data points from 44 countries that the relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of GDP. Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more... We note that while Reinhart and Rogoff's observations are based on 'gross debt' data, in the U.S., debt held by the public is closer to the European countries' definition of government gross debt. For more information, see Reinhart and Rogoff, "Growth in a Time of Debt," 1/10. Pps is percentage points. Source: IMF, Business Intelligence Monitor.
KP
CB www.kpcb.com
USA Inc. | Consequences of Inaction 416
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