New Fiscal Spending: File Under - Reasons To Be Cautious

The tricky thing about all this anxiety-inducing talk about a fiscal crunch is timing. It can be hard to know when an unsustainable path becomes a sustained crisis.

But what is far more certain is that reducing spending is not going to be a part of the debate around the US election. To the contrary, all the disagreement is about how and where to spend more, not less.

That is pretty scary for a few reasons but what might be most concerning is almost regardless of who wins the election, the pressure to spend massively more is coming from so many directions.

To the point that "the US election isn't overly important" on this question there is also the fact that this is by no means an issue facing the US alone.

In fact, a higher bill of fiscal fare confronts not just the US but nations all over the world, big and small, rich and poor, developed and developing, Asian and Western.

No matter where you are reading this newsletter, your government is almost certainly going to spend more in the next 10 years than it did in the last 10.

For developed countries like the US there are five main pillars to this new spending, in no particular order:

  • Higher defense spending.

  • The carbon transition that, as we are finding out all the time, is going to cost far more than we were led to believe.

  • Aging populations and unfunded liabilities around entitlement programs.

  • Higher costs of already high debt mountains relative to the size of the economy.

  • Lastly, our new found passion for industrial policies and tariffs.

The first four are relatively obvious even if we are only recently coming to terms with the true cost - and political difficulty - of paying for the carbon transition these days. We haven't begun grappling with the others yet whatsoever.

That should be more than

However, the last point goes almost totally undiscussed right now. That is a pity because it costs the government and therefore the taxpayer serious amounts of money. All of those subsidies and tax credits and write offs don't just come magically from somewhere. They come from you, dear reader.

In other words, Kramer in Seinfeld was wrong.

I somewhat doubt that any of these issues will get a serious hearing in the US election but I would also love to be wrong there. They are important and will only become more so if left ignored or wished away.

Regardless of whether they get a clear and sober hearing over the next 9 months (time flies!) the consequences of these fiscal demands are going to be there regardless.

Governments - and therefore tax payers, individual and corporate - are going to have find new sources of revenue to pay for the above new spending.

The approach we have used over the last two decades - borrow more - will not be possible. Our borrowing is already at a high Furthermore, our existing already high deficit is costing us more through higher interest payments and,

It is important to note that this isn't purely a US problem. Rather, it will be a global phenomenon.

Where this hits you as a voter is:

The tax man cometh.

Where this hits you as an investor is:

The tax man cometh for your investments' profits.

This will likely happen via multiple avenues. It also doesn't have to be direct: High(er) taxes on corporations globally and domestically is one. Higher taxes on capital gains at the state and federal is another and also the death by a thousands cuts that business models still under strain from inflation, the pandemic and the decoupling going on in the global trading system.

This is a pretty sour note during a week when the S&P 500 is hitting an all time record and is flirting with the psychologically powerful 5000 level. It is also true that - though we were bullish for much of last year and into the present day - we would have had a real difficulty believing that the US stock market would reach these heights.

But the dirty secret of today's rosy conditions is they are borrowed from the future. That is what high debt and high deficits do. They bring forward spending from the future to the present day.

That is often worth it. It can be very helpful to bring some spending forward to offset a recession or, say, a global pandemic that shuts down a huge portion of the economy for. But that doesn't mean the bill won't ever come due.

Developed economies spent an average of 23% of GDP on pandemic emergency measures. The US spent even more at around 25%.

Sooner rather than later the inverse situation is going to come. Deficits do matter. While the outcome is still very uncertain, the election is one possible breaking point.

In the US, the coming election and the arrival of a new and emboldened Biden government could be one opportunity for the shift to occur. Nearly all the 2017 Trump-era tax cuts are going to expire in the next Presidency and that might be one way to raise more revenue in a simple manner.

Alternatively, a second Trump administration might be less irresponsible than many fear but even in the rosiest of scenarios it is unlikely that a Donald J Trump Presidency will bring in waves of new taxes and revenues. He is, after all, still very true to his first profession of real estate developer and a great believer in low interest rates and endless amounts of debt.

Before you put on your MAGA hat, however, keep in mind that his Presidency might extend the sugar high of debt financing for a bit but, if it occurs, will only advance the day of reckoning faster.

That is a sobering thought as many investors try and talk themselves into the silver lining of another chaotic and volatile experiment in Making America Great Again.


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