The Economic Time Bomb Coming to a Neighborhood Near You

Now that Biden has been elected President, the Democratic Party had better prepare for the Republicans in Congress suddenly turning into deficit hawks. While the King of Debt Trump was in office, debt was good because deficits didn’t matter.

Just ask former Vice President Dick Cheney when former Treasury Secretary Paul O’Neill warned Cheney “that growing budget deficits — expected to top $500 billion this fiscal year alone” — posed a threat to the economy. Cheney cut him off, saying, “You know, Paul, Reagan proved deficits don’t matter.”

This time Democrats have more to contend with than just deficits. Such as:

  • Super-low interest rates, while the Federal Reserve talks about the possibility of negative interest rates.
  • Future deficits caused by the lack of taxes paid, including Social Security taxes because of the pandemic.
  • Ultra-low interest rates will diminish the return from pension funds, IRA accounts, 401(k)s, insurance contracts, annuities, savings
  • Estimates that the US Federal debt held by the public will reach 98.2% of GDP, or $20.3 trillion, by the end of 2020, according to the Congressional Budget Office. Only Japan has a higher national debt-to -GDP ratio, at more than twice the amount of its annual GDP.
  • The future time bomb planted in the Trump 2017 Tax Cuts and Jobs Act.

The disadvantages of a super-low-interest rate

The Federal Reserve sets low interest-rate targets in its effort to spur the economy out of the recession. Lower rates encourage businesses and consumers to borrow and buy things.

The only good thing about super-low interest rates is that borrowers can buy more expensive houses for the same monthly mortgage payment. This includes governments, which can borrow at super-low rates or issue long-term bonds at a super-low rate payable in future years.

However, this situation is certainly not good for bond buyers. Low-interest rates also negatively affect people who live off their interest from their savings. Meanwhile, they cut back on their spending while reducing their incentive to save.

Future deficits because of fewer taxes paid

The lack of taxes paid because of the pandemic, Trump’s tax cuts, and the ill-advised plan to suspend S/S withholding till the end of the year will:

  • Cause the S/S administration to run out of money.
  • Sabotage the S/S ability to pay retirement, disability, and survivor benefits into the future.
  • Leave Congress with more responsibility for propping up Social Security and forcing Congress to increase the deficit once.

Ultra-low interest rates and the effect on all pension funds

Lower interest rates mean lower benefits paid by pension funds, and insurance companies selling life insurance and annuities. All retirement funds depend on fixed-rate government bonds to price their product correctly for the long term. All retirement funds have one thing in common — to invest in stable interest rates and a stable inflation rate. Retirement funds invest for long-term goals and need to rely on rates that are above inflation to assure future benefits.

Government debt next year will exceed 100% of GDP

Record budget deficits for this year are closing in on $4 trillion. The Congressional Budget Office (CBO) forecasts that by the end of this year the amount of U.S. government debt will equal 98% of the nation’s gross domestic product (the total output of goods and services). Next year total government debt will exceed 100% of gross domestic product. That’s a level not seen since the huge government debt buildup in the 1940s to pay for fighting World War II.

So, let’s say that again. Government debt next year will exceed 100% of GDP. But with almost 0% interest rates, our government will benefit because of super-low interest rates on borrowing.

Trump and congressional allies hoodwinked us

The future time bomb was planted by the Trump 2017 tax cut bill.

Nobel Prize-winning economist Joseph Stiglitz warned in The New York Times that many people’s taxes would go up because the controversial Republican tax bill has a provision that will start slowly raising taxes next year. And ultimately, Stiglitz warned many low and middle-income people will pay more than they did before the bill passed in the first place.

“Trump and his congressional allies hoodwinked us. The law they passed initially lowered taxes for most Americans, but it built-in automatic stepped tax increases every two years that begin in 2021 and that by 2027 would affect nearly everyone but people at the top of the economic hierarchy,” he said.

President-Elect Biden has proposed a tax plan that would increase taxes for the wealthy – people earning $400,000 or more per year.  He has promised to enact several policies, including an income tax, a capital gains tax, and payroll tax with tax rates edging up to 39.6% from 37%. The Tax Foundation estimates that by 2021 if Biden’s tax plan were enacted, the top 1% of taxpayers would see their after-tax income reduce by 11.3% and the top 5% would see it shrink by 1.3%

Meanwhile, the Trump tax bomb is still ticking.

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