Executive Summary
Election day is finally upon us! Everyone wants to know who is going to win, and what will happen to the economy and the stock market. I am here to give you the answers…just kidding. As a follow up to last week’s commentary, the Congressional Budget Office predicts the U.S. 2025 fiscal budget deficit to be around $2 trillion. The interest payments on the debt could eventually result in a financial crisis. The second graph shows how the government reacted financially to the pandemic. First, Federal stimulus, which increased money supply, and then led to inflation (lag effect). The bottom line shows the U.S. is inching closer to the point of being forced to make the tough decisions necessary to solve our fiscal crisis. Will our elected leaders (whoever wins) have the willpower to make the required choices?
Please proceed to read The Details below for more information.
“Some people use one-half of their ingenuity to get into debt, and the other half to avoid paying it.”
–George Prentice
The Details
Election day is finally upon us. This newsletter is being posted on Tuesday, November 5, election day. Everyone wants to know who is going to win, and what will happen to the economy and the stock market. I am here to give you the answers…just kidding. It is impossible to know the outcome or the ramifications of this election. Many readers might remember election night in 2016. Initially the stock market plunged in after-hour trading. Then, by morning, the market was soaring.
The one thing that is certain, as a follow-up to last week’s missive, is that Federal spending will continue to outpace revenue by a large margin. The Congressional Budget Office predicts the fiscal 2025 (ending September 30, 2025) budget deficit to end up around $2 trillion. Some readers might have seen the analysis by the nonpartisan Committee for a Responsible Federal Budget (CRFB) showing the projected added costs of each candidate’s proposals over the next ten years. I don’t know how these numbers were derived or how accurate they are. This is not my opinion, but that of the CRFB’s. Their chart below was obtained from John Mauldin’s recent newsletter.
What I do know is that the above analysis does not really matter. This additional spending is on top of already massive projected Federal deficits. If deficits continue as projected, interest on the debt will eventually force a financial crisis.
In the chart below, prepared using the St. Louis Fed FRED database, I illustrate how during the pandemic Federal stimulus spending skyrocketed (orange line). This pushed up the money supply (blue line), which then led to inflation soaring (red line). Notice in the graph that inflation initially fell during the recession, but then jumped with a lag after the Federal spending was implemented.
Using history as a guide, my prediction is that when the brunt of the next recession hits (which could be soon), the Federal government will again return to a large stimulus program in attempts to stimy the recession. The amount of stimulus imposed during the pandemic was over double the amount spent in response to the Great Recession. Each crisis seems to require more stimulus dollars. If the next recession follows this progression, the amount of stimulus, on top of the existing $36 trillion debt, could stimulate a resurgence in inflation (refer to red line above).
No matter who is elected, the proposed programs will add to existing trillion-dollar deficits requiring growing debt service payments. Interest expense is already spiraling out of control. Do we need a U.S. version of Argentina’s president Javier Milei? Would austerity help or hurt?
The U.S. is inching closer to the point of being forced to make the tough decisions necessary to solve our fiscal crisis. Will our elected leaders have the willpower to make the required choices?
The S&P 500 Index closed at 5,729, down 1.4% for the week. The yield on the 10-year Treasury Note rose to 4.36%. Oil prices decreased to $69 per barrel, and the national average price of gasoline according to AAA fell to $3.10 per gallon.
© 2024. This material was prepared by Bob Cremerius, CPA/PFS, of Prudent Financial, and does not necessarily represent the views of other presenting parties, nor their affiliates. This information should not be construed as investment, tax or legal advice. Past performance is not indicative of future performance. An index is unmanaged and one cannot invest directly in an index. Actual results, performance or achievements may differ materially from those expressed or implied. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy.
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