A Financial Plan for America is Long Overdue

From time to time, our firm finds it necessary to discuss debt management with our clients as part of their overall financial plan. Successful people can acquire debt through business lines of credit, home equity loans and mortgages and even responsible credit card debt. It’s part of growing wealth if the money is invested wisely and if there is a disciplined plan in place to manage and eventually eliminate the debt. If not, uncontrolled debt can destroy one’s financial future. As debt service takes a bigger chunk out of their budgets, investors have less income available to invest. Fewer dollars invested means fewer opportunities for the power of compounding to work its magic.

Similarly, when a nation like the U.S. is saddled with debt, it will have less to invest in its own future. As that debt rises, it means fewer economic opportunities for its citizens as economic growth and business investment are effectively crowded out from the budget. It also increases the expectation for higher inflation and erosion of confidence in the U.S. dollar.

The Congressional Budget Office (CBO) expects a budget deficit of $1.9 trillion in 2024.

They expect revenues to reach $4.9 trillion, or 17.2 percent of GDP, in 2024, which will rise to 18.0 percent by 2027 and remain at that level until 2034. Estimates place the adjusted deficit at 6.9 percent of GDP by 2034, nearly twice the average of 3.7 percent over the previous 50 years.

Since December 2019, US government debt outstanding has grown by $11.6 trillion, and over the same period, nominal GDP has grown by $6.7 trillion.¹

Deficits are always a spending problem. The prevailing sentiment in Congress that the U.S. has unlimited resources seems to suggest a belief that our country can spend its way to prosperity.

The COVID emergency and subsequent $7 Trillion in additional spending bills blew budgets out of the water, and we never recovered or changed our thinking about debt.

History offers many lessons on why this is a bad idea. The Roman Empire's debt contributed greatly to its decline. As the empire's economy declined, Rome’s politicians increased spending, borrowing and war funding. They raised taxes to pay for the increased costs, but this widened the gap between the rich and poor. Some wealthy people fled to the countryside to avoid taxes and set up independent fiefdoms. Hyperinflation and increasingly worthless money made trade difficult, and by the end of the 3ʳᵈ century, the barbarians were at the gate.

Should Americans be worried about the reckless pace of borrowing? Of course they should. That is if they care about higher taxes, weaker growth, and the declining purchasing power of their salary and savings. As consumers' budgets get tighter, so do their purse strings. When people stop spending on goods and services, company revenues tend to take a hit. When corporate revenues go down, it can create an ensuing recession and inevitable volatility in the markets.

While growing government debt draws increasing attention, an important question for investors is what the potential impact is on the long-term interest rate environment. What could it mean for fixed income and equity portfolios? Higher rates make bonds more competitive with stocks and this could put more pressure on stock prices.

An economy that generates an annual deficit of more than 6 percent of GDP to achieve a mere two percent annual growth is on a dangerous path, even if that kind of growth is sustained.

Inevitably, at the first sign of a recession, the government could be compelled to spend even more. That means passing the burden of the state on to the next generation, making the unborn poorer before they see the light of day. Even the most successful estate plans are vulnerable to its impact. While investors work to create generational wealth, the nation’s debt burden will make this more and more difficult.

No matter the intention of this or future administrations, eliminating this irresponsible borrowing path won’t happen overnight. Especially if nothing is done to change direction on taxes and entitlement programs. The only way to pump the brakes on America’s fiscal destruction is to deploy pro-growth policies that trend GDP growth upward by promoting business growth.

Smart money management begins at home. A proper financial plan includes managing interest expenses, paying off credit cards, locking in a low interest rate mortgage and other fiscally responsible strategies. These things seem obvious to all of us, but apparently not to the U.S. Congress. Just as we work with our clients to find the right balance of debt reduction and growth strategies, the powers in Washington would be wise to exercise that same fiduciary responsibility. Putting America’s financial house in order would truly serve in the best interest of multiple generations of taxpayers.

Thanks for reading.

¹ Apollo Academy, August 2, 2024 https://www.apolloacademy.com/comparing-growth-in-government-debt-with-growth-in-nominal-gdp/