US Debt and Your Investing

There is a lot of concern about who Trump puts in charge of Health and Human Services, Defense, National Intelligence, and the rest. For the long term the most important pick may be someone who is less controversial than folks like Kennedy or Hegseth. It is the choice of Bessent as Secretary of the Treasury. That is because the continually increasing US debt burden has the potential to overwhelm every other aspect of government and life in the USA. Bessent is an interesting choice because of his expertise in dealing with government spending and debts that are out of whack with national incomes and economies. While this issue is debated on the national stage, investors need to consider the long-term effects on their investments of US debt that seem to be out of control.

Who Is Scott Bessent?

Scott Bessent worked with the Soros group that managed to crash the British pound. His most basic skill set is knowing when the economic policy of a government is inconsistent with economic reality. Bessent’s first job as Secretary of the Treasury will be to help the US avoid the kind of situation that the UK found itself in despite working for a president who wants to lower taxes and start a trade war that could torpedo the US and world economies! That job may or may not have gotten harder as Congress has refused to scrap the debt ceiling and simply upped the debt limit until the next time around which will be during Trump’s first year back in office.

The History of US Debt

Back in the early days of the Republic Alexander Hamilton was Secretary of the Treasury and got a lot of flak for borrowing money from English banks. The US colonies had just gained their independence from Great Britain, and many believed that Hamilton was putting the US back under the thumb of the British king. Hamilton countered that the US needed credit and that powerful English banks that had a vested interest in getting their money back would help keep the King from declaring war on folks who would then not be able to pay their debts.

Over the life of the Republic debt went up during wars and depressions and down when the economy was prosperous. In the 1980s that changed as government spending kept increasing while taxes were cut. The rationale of “trickle-down economics” was that by cutting taxes the economy would be stronger and both companies and individuals would be paying a greater amount in taxes albeit at lower rates. Sadly, that has never worked out. People did pay less in taxes but the total did not make up for steadily increasing spending.

Where Does the US Spend the Most Money?

US Government spending can be broken down into mandatory and discretionary items. Mandatory items include interest on the debt, Social Security, Medicare and amounts to two-thirds of all spending every year. Another fifteen percent goes to defense, which many consider to be mandatory spending. This leaves less than a fifth of the budget for things like national security, infrastructure, and the rest.

The problem is that every budget item on the digressionary part of the budget has its supporters and legitimate reasons for being funded. Thus, it is hard to cut the budget. Meanwhile, it is hard to raise taxes as nobody wants to pay higher taxes either.

How Does an Increasing US Debt Affect Your Investments?

When the government cannot come to an agreement on raising taxes or decreasing spending, the debt goes up. Interest payments go up making the situation worse every year. The way that most nations around the world deal with this sort of problem is that they devalue their currency. Thus, they borrow more but owe less in terms of foreign currencies. Then imported items start to cost more and inflation rages. The response of the Federal Reserve is to raise interest rates and foreigners buying US Treasuries demand higher interest in order to purchase dollar-denominated bonds as the dollar loses its value.

Higher interest rates depress the US economy and can lead back into a recession. Stocks lose their value as bonds pay higher rates. As the economy weakens people get laid off, consumer spending falls, and investments across the board suffer.

What Is Bessent´s Plan to Fix the Debt?

The Trump administration with Bessent at Treasury plans to cut the deficit in half by 2028 with deregulation, cheap energy, reduced spending in the budget while cutting taxes. The only way this will work is if Bessent and the Trump White House can take a machete to the budget, both discretionary and mandatory items. It remains to be seen how effective this approach will be when members of Congress and especially the House of Representatives control the budget and always protect the favorite budget items of each member of Congress.

In the end it is unlikely that Trump and Bessent will be able to significantly cut the budget. It is also unlikely that taxes will go up enough to balance the budget. Thus, investors may wish to consider which investments will be hurt the most by the continuing devaluation of the dollar. And retirees may want to start figuring out how to live on reduced Social Security payments!

Tags: , , , ,
 
Next Post

How Much Richer Will Trump Get with Niche Crypto?

Home Privacy Policy Terms Of Use Contact Us Affiliate Disclosure DMCA Earnings Disclaimer