Why Are Washington Politicians Fighting?

By Raymond M. Mullaney – October 2, 2013
with updated graphs on May 19, 2016

Dear Reader,

Naturally you want to invest with great confidence. However, because America has amassed $17 trillion in debts and the government needs to borrow about $1 trillion each year to keep operating, the risks to stocks, bonds, to insurance companies and even to banks, is very high.

Politicians, Wall Street, and the mass media tell us that everything will be fine, all that is required to “rebuild America” are more loans. Frankly, I do not know how to “fix” America. However, greater and greater debts will not fix America; greater debts weaken America and make a financial meltdown more likely.

Thank you for reading the enclosed report. You’ll find additional reports at RayMullaney.com.

We cannot promise you that our investment ideas will protect you; we see risks in all investment strategies. We’re doing our best to find the safest and most reliable long-term strategies to protect our client’s assets. At this time in America’s history, this is a very serious challenge.

We welcome your calls and questions.

Raymond M. Mullaney

President

Why are Washington Politicians Fighting?
And
How Will Washington Policies Affect You?

Politicians, like everyone, fight about money; who gets more and who gets less. The US has borrowed $17 trillions of dollars to pay its bills, there is only one explanation why, because it has run out of its own money. When a country (or a family) runs out of money, internal conflicts increase. Washington politicians are fighting about how they will spend the money that they have borrowed from banks, pension plans, IRAs and foreign governments. (Do you know where your bank invests your savings?)

Since Feb 26th 2002, Washington has added $11 trillion to our children’s debt.

Intelligent Americans are asking 4 questions about this debt:

  1. Was the past deficit spending necessary?
  2. Will present deficit spending continue?
  3. What are the consequences of the debt buildup?
  4. Does, or will, America have the ability to pay-off these debts?

There are other important questions, but I will briefly address these 4 today.

As to the first question:

1) Was the past deficit spending necessary? Current and previous politicians borrowed money to spend it for one reason, to please voters. America ran up deficits, now amounting to $17 trillion, because the majority of American voters wanted more things than they could afford to buy themselves. We have deficits (and debt) because Americans failed to act and vote prudently. Every politician in the past 30 years used emotional arguments to justify borrowing more and spending more. It started out innocently enough; years ago politicians borrowed relatively small amounts of money to improve our infrastructure. That was reasonable.

Today, Washington borrows and spends an amount equal to nearly 6% of the entire economy, therefore, they tell us, if we don’t authorize further borrowing and spending, the entire US economy will collapse, and they are right. We are now hostages to the borrowing and spending.

Let’s briefly review the actual numbers. If Washington had raised taxes by $1 trillion for each of the past 10 years, in theory, we wouldn’t have had to borrow the $10 trillion. Today, we would have a $6 trillion in federal debt rather than the $17 trillion we now have. Unfortunately, it is impossible to know the consequences of economic policies that were not taken. If Washington raised taxes by $1 trillion per year, even if only on wealthy people, the US economy would be radically different today. Since tax bills can only be paid by depleting savings or selling assets, Americans would have been forced to deplete their savings or sell assets to pay taxes. Therefore, it is very likely (but not certain) that tax increases would have had a very negative impact on real estate values, banks, the prices of stocks and the standard of living of nearly everyone. Job creation and new business startups may have declined significantly. Maybe the money that has been used to loan to Washington would have been used to grow the economy. Maybe not. We know money cannot be in two places at once, so if Washington had taxed $10 trillion dollars out of the economy, rather than borrow it, we might have had much slower economic growth. Slower growth would have caused much higher unemployment, and consequently much lower total income tax revenues to Washington. That would have caused even larger federal deficits! If you are getting the impression that our economic system is … broken beyond repair, you’re not wrong at all. Clearly, the politicians we have elected to solve these problems are completely over their heads; since 1951 they have done nothing but add to the problem. Borrowing more is not the solution to our economic problems; it just creates greater problems for future Americans (our children). I have studied and written about the economy for 30 years, I have no idea what the solution is. I suspect that politicians (who created this mess) that tell us they know how repair our economy may be exaggerating about their capabilities. We can only speculate on how different things may have been, if, if, if…. Let’s look at what $10 trillion in deficit spending probably “gave” us over the past decade.

$10 trillion in deficit spending may have created 10 million jobs that paid $100,000 per year for 10 years, or it may have created 40 million jobs that paid $25,000 per year. This spending assured the politicians who spent our money they would get many more votes from those who received their generosity (with taxpayer money). Should you be more cynical about our political processes? One cannot possibly be cynical enough! The only thing we know with certainty is that NOW we owe $17 trillion. The consequences cannot possibly be possibly be positive. I suspect that at some point, taxes will rise significantly. That will not be good for anyone. What is next for America and your money?

2) Will present deficit spending continue? There are two ways to close the deficit:

  1. Raise personal income taxes by $800 billion or about 70%, or
  2. Cut spending by $800 billion, which is 23% of total Federal spending.

If we follow either course the US economy would immediately shrink by 5% to 10%. Neither political party has ever shown a willingness to make serious changes in our tax policies or our spending. It appears the US will continue to borrow and spend until there is no one who will loan us money. This will likely have very negative long-term implications for the majority of Americans. I am not optimistic. Since the future will be determined by events that have not yet occurred, as well as past events, we cannot be certain of the future. Prudent individuals will prepare for the worst, closely monitor economic and market changes and have large amounts of cash for exceptional opportunities in the future. Remember, a stock market crash is a gift to those who have cash to invest. We advise clients to hold lots of cash for far better opportunities in the future.     

3) The real cost of paying interest on today’s debt:

  1. We have $17 trillion in federal debt
  2. The average interest rate for US bonds over the past century has been about 4%
  3. Therefore, if the US were required to pay interest on our debt in cash (like every other debtor), rather than simply issue more debt, our annual interest payments would be $17 trillion X 4% = $680 billion per year.

4) DOES OR WILL AMERICA HAVE THE ABILITY TO PAY-OFF THESE DEBTS?

In every year since 1951, America has paid interest in debt, not with cash but with more debt. It is clear, America does not have the ability to pay interest on its debts with cash, so we issue more debt instead of cash. Since we cannot pay the interest on the debt, with cash, how can we possibly pay the principal on the debt with cash? Is there any other way to off debt, other than with cash? Neither political party has a plan to stop going deeper into debt. In the absence of an actual economic plan to stop going deeper into debt, is it prudent to assume that the same politicians who buried America in debt will rebuild America with more debt? Can America keep borrowing any amount it wants? I do not believe or trust Washington or Wall Street to solve America’s economic problems. Maybe the people who disagree with my analysis are right. Maybe politicians can borrow endless amounts of money and build the greatest welfare state in history. Politicians and Wall Street economists assure us that, Washington and Wall Street will rebuild America if your bank savings are exchanged for US government bonds that do not pay interest. That is what is happening today. Maybe they’re right, but if they’re wrong, America will collapse like Rome.

How Will Washington Economic Policies Affect You?

I have read that, “if something must stop at some time, it will stop.”

Our borrowing must end someday, and therefore, our borrowing will stop.

When investors decide to loan much less of their savings to the US government, or investors demand much higher interest rates for making these loans or investors demand to be paid interest on their bonds in cash:

  • The stock and bond markets will experience great declines,
  • Financial institutions will be under great stress, many will fail, and
  • We may have hyper-inflation or deflation, at least for some period of time.

At Mullaney Trust, we focus on finding the safest investment approaches that may withstand the stresses of a serious financial crisis. We focus on preserving the purchasing power of our client’s savings.

Please contact us for a personal review of safe investment options for you and your family.

Over the past 40 years, the nation’s economy has grown about 1000%.

Federal government debt has grown at a far faster pace.

If politicians didn’t spend (with borrowed money) as much as they have, perhaps our economy would have grown at a much slower pace. It seems Washington borrows and spend to create jobs and that’s what voters want. But now we are strapped with $17 trillion in debts. These debts appear to be well beyond our capacity to repay.

Politicians raise the debt limit every year and spend more every year. This cannot bring America prosperity, just greater debts.

The masses demand and vote for benefits without costs. Politicians heed their call and pay Wall Street, very well, to find investors for the bonds. The risks of these bonds is greatly underestimated by the public.

This growing debt threatens our standard of living as well as the investment markets. Investing is very dangerous. Our focus is on protecting your capital.

Raymond M. Mullaney