Sometimes…no, frankly, maybe too often…we spend time in our life on things that really don’t matter. We would all benefit from being more intentional about the things that really count and quit sweating the small stuff. Rather than suffer from anxiety, we should labor on the big things that matter. From an investment side, the benefit of having that focus is absolutely beneficial and I can assure you that you are doing ALL the right things in your portfolio from a best-practices investment side; ALL OF THEM.
However, I unfortunately observe that on broad economic issues regarding our nation, we are mucking with the small stuff and should focus on the big items – things that contribute to (or stymie) our long-term prosperity and growth. Herb Stein, who was the much-acclaimed Chairman of the President’s Council of Economic Advisors 50-years back, is attributed with an insightful quote that is worth our examining today. Stein said: “If something cannot go on forever…it will stop”. Like the illustrative story of putting the frog in the slowly-heated pot, we would greatly benefit by examining some economic and investment based choices we take for granted today…and unless we make some hard choices they will stop and have grave future implications.
Five Economic and Investment Choices that Need Review
1. Uncontrolled Spending
Fiscal Deficits Matter; Uncontrolled Spending Cannot Be Sustained. On December 31, 2015, the Federal Funds rate was about 0.24%. On July 26, 2023 the effective Fed Funds rate was 5.11%[i]. As we all know that rate increase was driven by the Central Bank to arrest inflation. What is NOT known by all is that the cost to service the Federal Debt is increasing by an alarming amount. In 2015 the net interest cost to our federal budget was less than $200 Billion. In 2022, that figure was $476 Billion, which was up 35% from 2021’s $352 Billion. But, the alarming point to be noted is that will rise to $663 Billion in 2023, and be over $1,400 Billion in 2033[ii]. At that point, the cost to service our national debt will be cost more than ANY OTHER PROGRAM in the U.S. Government[iii]. More money will be consumed at that time on interest expense than on the Defense budget and Social Security combined. Rising interest rates create some of the problem, but not as much as the astronomical level of higher debt ($32 Trillion) we are paying interest upon because we repeatedly spend populist appeal money and create deficits.
2. Social Programs are Going Broke
It is little appreciated, but the last time Medicare insurance rates were increased was in 1986. Social Security last had its rate changed in 1990[iv]. The combined rate is 7.65% but we’re living longer and costs have obviously gone up. The option of changing nothing is a head-in-the-sand approach of going broke…and we are.
3. Economic Implications of War
Wars are expensive; win them or leave them. Wars cost money and sometimes those wars are deemed necessary. However, the longer a country seeks to find a middle road in a war, the more expensive it becomes. It has been estimated that the USA was spending $300 Million per day in Afghanistan and the total cost exceeded $2 Trillion[v] in the 20-years the United States was involved. The ‘special conflict’ in Ukraine has cost the U.S. around $76.8 Billion to date[vi] (with Congressional allocation estimates upwards of $120 Billion at the time of this writing). Wars may be necessary on a global order scale and in the best interests of the United States, but elongated engagements are far more draining than the public realizes, both on the federal debt and on public sentiment.
4. Taxes and the Economic Impact
Picking “national winners’ is impossible; governments should tax economies, not drive them. In the United States at present, we have legions of bright people trying to ‘pick’ the right companies to receive billions of federal dollar awards on green projects (Inflation Reduction Act) and semiconductor / manufacturing plants (CHIPS and Science Act). If one reviewed economic history, we would see government directed economic activity is always well-intended…but has no record of working. Particular failed national efforts we could look to would include:
i. Soviet grain policy in Russia in the 1920’s and 1930’s (leading to the starvation of millions)
ii. Industrial / miliary complex build-up in Germany in the 1930’s and 1940’s (leading almost intractably to WWII)
iii. Communist / Socialist directed economies in Cuba and North Korea in the 1950’s and 1960s’ (the economic stagnation of which is still hamstringing those countries)
iv. The “Miracle of Japanese Management” of selecting winning industries in the 1970’s and 1980’s (leading to the “Lost Score” of ~1% GDP growth for the next 20 years[vii] after the bubble burst in 1991)
v. Chinese government manipulation of economic growth through central committee planning in the 1990’s – 2020 (leading to the real estate and consumer spending collapse currently being confronted along with the exit of entrepreneurs)
5. Youth Education is a Necessary Investment
Youth education is declining; pay for it now, or pay for it later. A qualified workforce leads to good jobs and the spurring of industry, both of which lead to GDP growth. Such growth leads inextricably to two positives; the future economic stability for families and the needed wealth for governments tax (Federal, State and Municipal). The ranked competitiveness of the United States on a global scale fell from first place in 2018, to 3rd place in 2019 to a disappointing drop to 10th place in 2020[viii]. Good education is also the foundation of eliminating income disparities by any measure (race, gender, social stratum, etc.). In the USA education costs for K-12 primary education average $13,185 per year[ix]. With a measly $1 Billion dollars means you could better educate 75,000 students in impoverished areas.
The above trajectories cannot continue, and a little focus would go a long way. It’s all about money and like Senator Everett Dirksen was reported to have said: “A billion here, a billion there, and pretty soon you’re talking real money”. Nonetheless, the issues are solvable, but we need to lean into the task to do it. We need to ‘labor’ on it, to talk constructively together, which seems like an admirable attribute on this national holiday weekend before us.
It remains my deep and distinct honor to serve you well.
Patrick Zumbusch
Founder and CEO
[i] Federal Funds Effective Rate (St. Louis Federal Reserve (FRED), August 1, 2023)
[ii] “Higher Interest Rates Will Raise Interest Costs On The National Debt” (Peter G. Peterson Foundation, May 30, 2023)
[iii] “Net Interest Will Total $10.5 Trillion Over the Next Decade” (Committee For A Responsible Federal Budget, February 23,2023)
[iv] Social Security & Medicare Tax Rates (Social Security website, August 28, 2023)
[v] “The War In Afghanistan Cost America $300 Million Per Day For 20 Years, With Big Bills Yet To Come” (C. Helman and H. Tucker, Forbes, August 16, 2021)
[vi] “How Much Aid Has the U.S. Sent Ukraine? Here Are Six Charts” (J. Masters and W. Merrow, Council On Foreign Relations, July 10, 2023)
[vii] “Lost Decade in Japan: History and Causes” (Clay Halton, Investopedia, September 27, 2021)
[viii] “U.S. Education Rankings Are Falling Behind the Rest of the World” (Kimberly Amadeo, The Balance, March 26, 2023)[ix] “U.S. Public Education Spending Statistics” (Melanie Hanson, Education Data Initiative, June 15, 2022)
