Our government’s budget deficits are growing rapidly, and there’s no end in sight. Where is all that capital going to come from? They’ll make anyone who has money pitch in, and they will use every source they can legally tap into. Here is how the next years may unfold.
Things are going from bad to worse
The US has been deeply in debt for years. Just a few months ago, government debt was 106% of GDP and debt securities for the financial system as a whole were over 400% of GDP. Then, the pandemic erupted, and now—thanks to the lockdowns—we have entered what looks like the beginning of a depression. First, we need to look at how bad things are going to be and how much more stimulus and money printing will be required to address the issues. Then, we will deal with the ultimate question of how it will be paid for and by whom. Let’s start with the first step and see how the pandemic has affected our economy:
- From mid-March to mid-May, around 40 million Americans filed new unemployment claims.
- Retail sales dropped 8.3% in March month over month and then another 16.4% in April.
- The Industrial Production index fell 11.2%, its largest drop since 1921.
- Production of motor vehicles declined by 30% in March and a stunning 71.1% in April, the worst numbers since 1972.
- In April, new housing construction starts fell 30.2%, and existing home sales dropped 17.8%, which is the biggest drop since the Great Recession.
- According to Sheryl Sandberg, Facebook’s COO, almost one-third of small businesses have already folded up, and another 11% are expecting to shut down within three months.
- Three regional Federal Reserve models forecast a decline of 31% to 48% in GDP.
- The housing market saw 5.2 million home-loan delinquencies in both March and April, the biggest increase on record. An additional 4.7 million mortgages are in forbearance.
- 15 million credit cards are in financial hardship, a 10-fold increase from 2019; 3 million auto loans are in a similar shape, a 7-fold increase.
- New York, California, and Illinois were already close to being insolvent and are now close to collapsing due to crumpling tax revenues.
What’s our government’s approach to dealing with these serious issues? Adding trillions of dollars to the economy. In the past three months, our central bank has printed close to $3 trillion dollars, and our government has implemented stimulus programs in the amount of $2 trillion, with another $3 trillion in the works.
But… will this be enough to bring the world’s largest economy back on its feet? Probably not.
The reason is simple. For a full recovery, we need to get everyone back to working and spending again, but it does not look like even the people that can go back to work want to, and they have good reasons why.
Our government incentivized Americans to stay at home
According to a study by the University of Chicago, 68% of unemployed Americans are receiving an average of 34% more in unemployment benefits than what they would receive had they been able to work. So, for 68% of Americans, it pays more not to work. I personally heard it from two employers that have employees who don’t want to go back to work until their unemployment benefits run out. If you aren’t driven by goals or ambitions, why go back to work if you are making more money when you aren’t working?
So, when a large percentage of the workforce are deterred from going back to work, and with the uncertainties surrounding COVID-19, there’s the real possibility that our government will need to keep financing trillions of dollars in unemployment benefits. For how long? We don’t know, but it looks like it will be much longer than anyone had anticipated.
So, how do we pay for all of this?
A lot of the capital needed will be financed via debt, and the debt markets may be able to pull some of the weight, but it’s just a matter of time before our government will be seeking new sources of capital. They’ll find those sources among you, me, and the rest of the US population. Here’s what the government can do to finance their needs:
Taxes will be going up
I just finished a seminar given to Financial Advisors, and the core of the seminar was tax planning around a leading hypothesis that taxes are going to be rising significantly, and how that should influence the decisions of Financial Advisors. Here’s a chart showing historical US top Federal tax rate. The seminar organizers prediction was that tax rates we had in the ’70s will arrive at one point during this decade. Not tomorrow, but they will be coming, and the seminar was addressing long term financial planning around this assumption.
A top tax bracket of 70% to help support an economy in turmoil is not unforeseen and has happened before, but what happens if this won’t be enough?
Desperate measures in desperate times
Don’t you worry… there is a plan. It’s not your plan. It’s not mine. It has been in place since 2011, when new laws came about that tell us that the government and the financial elites saw a crisis coming, and they prepared for it. They can now:
- Freeze bank accounts and use your deposits to “bail-in” banks and other financial institutions. In return, you will get some of the bank’s stocks—which will be crashing at the same time. If you think that this cannot be possible, then contact us to get our free report on this specific topic. We created the report for our clients that have money in savings accounts, checking accounts, and CDs they can’t afford to lose.
- Close your access to your investment funds and money market funds.
- Enforce wealth taxes.
- Seize unused assets.
In fact, the IMF has already recommended that countries across the world impose a 10% wealth tax on net wealth to help pay for the response to the pandemic.
What are you going to do about it?
How do you think Americans will react to all these actions to block, freeze, take over, and replace their easily accessible digital wealth? How do you think that will affect the price of precious metals, known as the “flight to safety”?
If you have hard-earned savings and a retirement to protect, something you care about and want to make sure stays yours, contact us to learn more on how you can protect and grow your wealth outside of the reach of the banks and the government.
May you stay safe and healthy during these trying times.
Joseph Sherman, CEO