In what was largely a surprise Donald Trump was elected the 45th president of the United States last Tuesday.
His most ardent supporters no doubt believe he will “make America great again” and his opponents feel as though the world has come to an end. While I won’t say that elections don’t matter there are several problems that won’t be solved, irrespective of who was or was not elected.
HowIGrowMyWealth.com caters to a global audience and because the United States is one of the top two largest economies in the world US politics and issues can have a far reaching impact on the global economy.
United States national debt is $19.1 trillion. The total debt-to-GDP ratio is 109% and has been rising. This means that United States is taking on more and more debt with less and less GDP growth to show for it.
Foreign central banks, whom the United States have been able to export inflation to in the past, have become net sellers of US treasuries.
Neither candidate placed emphasis on reducing the debt. If Hillary was elected and raised taxes and regulations but didn’t cut spending that would slow the economy and reduce tax revenues (even at a higher rate) and the US government debt would grow.
Tax revenue in the US has never gotten above 13% of GDP anyway. So even if you wanted to grow government revenue, the best and only way to do so is to grow the economy.
If Trump lowers taxes and regulations that would grow the economy but not enough to pay for the out of control government spending. And since Trump in no way emphasized reducing government spending that will also cause the national debt to grow.
No candidate discussed both cutting spending and reducing taxes–which is what it would take to reduce the debt.
The continued expansion of debt in the US is unsustainable. I don’t think the US will do a traditional default on debt. The debt will most likely be reduced via monetization, which will destroy the value of dollars.
With international purchases of US debt in decline, and no political will for the US government to reduce spending, only the US Federal Reserve will be in a position to step in and purchase US debt.
Social Security and Medicare Insolvency
Social Security and Medicare face serious budget shortfalls according to the trustees of these programs.
Source: http://www.wsj.com/articles/social-security-medicare-trust-funds-face-insolvency-over-20-years-trustees-report-1466605893 Note: if you search for this article on google and click on it through the search engine you can access the full article even if you are not a WSJ.com subscriber.
Not only that but they account for a large portion of US government spending and hence add to the debt. The above cited WSJ article states, “Medicare and Social Security accounted for 41% of federal spending last year, up from 36% in 2011.” Proposing any change to Social Security that would reduce benefits or control costs is taboo in American politics so the issue will continue to grow worse until it blows up completely.
Candidate Trump has vowed to save social security and did not discuss any type of cuts or raised retirement age. Candidate Hillary held basically the same position.
US Stock and Bond Markets are in a Bubble
I’ve written about how US Stocks and Bonds are in a Bubble. While I can say with certainty that US stocks and bonds are overvalued based on fundamentals and historical precedent I can only guess when these bubbles will burst. However, I think it is likely that President Trump will encounter a large stock market correction and perhaps a dollar crisis during his first (and maybe only) term. This day of reckoning can only be delayed not prevented.
Whichever political party is in control when the bubble bursts will be blamed. However, a bi-partisan coalition of Democrats and Republicans in both congress and the presidency, fueled by a reckless US Federal Reserve, have over the past few decades caused this problem and are responsible for the stock market and bond bubbles.
It would be best if the bubbles popped sooner rather than later. That would result in shorter term pain but it would be very beneficial in the long term.
But whoever is in power will always have the political incentive to delay the pain, which only makes the inevitable pain even greater when it does come to pass.
If the stock market does crash the Federal Reserve will do the few things it can do: lower interest rates and buy assets with printed money. With already historically low interest rates the Federal Reserve will likely resort to more quantitative easing, asset purchases and perhaps even negative interest rates.
Regardless of who had been elected these issues are not going away and even though the out of power party will blame the in power party; the reality is both are to blame.
Despite the huge challenges in store for the United States that would likely spill over into the global economy I’m very optimistic. There are practical steps I’m taking to prepare for these trials.
I’ve written about them on HowIGrowMyWealth.com for months. You can buy gold to protect yourself from a dollar crisis. I buy physical bullion but I also buy gold through Goldmoney.
I’ve written about how I keep a month’s worth of income in physical cash in the event there are capital controls or negative interest rates.
I think gold and select foreign stocks provide incredible value at this time and with the dollar unjustifiably strong now is a great time to trade dollars for better assets.
Politicians make a lot of promises and try to inspire hope in exchange for votes. If they are successful in doing good things then that would be a nice change but it is important to make preparations on your own. The problems the US faces are too big for one person to solve and if you put your hope in a politician or government you’re bound to be disappointed.