Buckle Up
It's going to be a wild ride. Volatility is the name of the game, and we don’t know when it is going to end. The Dow dropped more than 1,000 points two days last week: Monday 2/5 and Thursday 2/8. Concerns over the bond market and inflation are capturing most of the headlines.
AH, INTEREST RATES
There is an inverse relationship between interest rates and the value of bonds. In other words, the value of the bond declines when the interest rate increases. Thanks to quantitative easing after the 2008 market decline, interest rates have remained artificially low for a number of years. Until now. The Federal Reserve is committed to slowly unwinding the 2008 stimulus program. Former Federal chairwoman Janet Yellen started small interest rate hikes during her term, and her newly sworn-in successor Jerome Powell will likely follow suit.
THE DEFICIT
My economic concerns extend far beyond interest rates. The U.S. federal deficit is out of control. In fact, current estimates indicate a $1 trillion deficit by 2020.
Have you seen how many times the U.S. government was close to shutting down or actually did shut down (albeit temporarily)? Each time this happens, think of it like adding a band-aid to a bodily injury. The key to recovery is eventually removing the band-aid and exposing the cut to fresh air. Except we have no fresh air. The band-aids continue to pile up.
I recently published two articles on 2017 tax reform, showcasing the benefits to individuals and businesses. But I failed to articulate how this historic tax package would be funded.
If you’re ever short on money, you have four possible solutions:
1) Increase your income
2) Cut expenses
3) Sell an asset, or
4) Borrow more
Let’s take a look at each in the context of funding the Tax Cuts and Jobs Act of 2017.
RAISE MORE REVENUE
Trump is optimistic that the deemed repatriation of accumulated foreign earnings will raise a sizable amount of revenue in the short-term. But it is anyone’s guess if that tax revenue will truly offset the lucrative tax breaks.
SLASH FUNDING
After my article in Kiplinger, a handful or retirees reached out to me and expressed concern about Social Security. And rightfully so. For a federally-funded program already in trouble, the outlook is bleak.
According to the Committee for a Responsible Federal Budget, Trump’s second 2019 budget proposal has a total of $3.1 trillion in budget savings relative to current law. Rather than cutting benefits to beneficiaries, Medicare policies in the 2019 budget improve efficiency and value of care. Furthermore, there don’t appear to be any direct cuts to Social Security in the recently proposed budget, and that is good news.
Even with these changes, deficits would rise to over 4% of Gross Domestic Product (GDP) for the next few years and then gradually decline. Additionally, the budget calls for a 42% reduction in non-defense discretionary spending over the next 10 years that’s unrealistic.
This is just a snapshot. For the full article, please head to the WorthyNest blog.