Weekly Market Update by Retirement Lifestyle Advocates

“The Path To Record Deficits”

         That’s the title of an article in a recent issue of “The Wall Street Journal”.  (Source:  https://www.wsj.com/politics/policy/us-budget-deficit-timeline-2ad66b64)

         The article points out that in fiscal year 2000, the federal government ran a budget surplus, and the non-partisan Congressional Budget Office projected surpluses into the future, projecting that the US Government would collect more in tax revenues than it laid out in expenditures.  The CBO, in calendar year 2000, went so far as to suggest that by 2010 the US Government would run a surplus equal to 4.3% of gross domestic product.

         Of course, that didn’t happen.

         The piece in the “Journal” suggested that “an aging population, tax cuts, wars, the 2008 financial crisis, expanded healthcare spending, the Covid-19 pandemic, and rising federal assistance to households” were the combined causes of the US Government losing what appeared to be solid financial footing.

The article’s authors paint the Clinton Administration as the budget-balancing masterminds, leaving one relevant fact:  the Clinton Administration didn’t actually balance the budget.  Every year that Clinton was president, the national debt rose.  That can’t happen if the budget is actually balanced.  (Source:  https://dailytorch.com/2016/10/national-debt-went-every-year-bill-clinton-president/)

The last time the national debt of the United States actually declined was 1957, when Dwight Eisenhower was president.  That’s nearly 70 years ago.

The Journal article gets one other thing wrong as well.  That tax cuts are to blame for the budget deficits.  Economist Dr. Arthur B. Laffer proved that this is not the case.  Dr. Laffer pioneered a tax theory that is today dubbed “The Laffer Curve”.  Simply stated, the Laffer curve suggests that at a 0% income tax rate, the government would collect no tax revenues, and at a 100% tax rate, there would also be zero tax revenues.  That’s why tax revenues have often risen when tax rates have been reduced.

For example, from 1976 to 1978, when the top capital gains tax rate was 39.875%, annual capital gains taxes collected by the government averaged 2.14% of gross domestic product.  (Source:  https://taxfoundation.org/data/all/federal/federal-capital-gains-tax-collections-historical-data/).

When capital gains tax rates were reduced to a top rate of 20% from 1982 to 1986, annual capital gains taxes collected by the government averaged 4.13% of gross domestic product.

When the capital gains tax rate was cut nearly in half, tax revenues from capital gains nearly doubled.  That’s the Laffer curve perfectly illustrated.

The article does get one thing right – the federal government will operate with $2 trillion+ annual deficits for as far as the eye can see.  Ultimately, that will likely force the Federal Reserve, at some future point, to become the buyer of last resort of US Government debt.  That will further fuel inflation.

Another reason to have some of your portfolio in tangible assets moving ahead.

What We Can Learn From a Russian Economist That Stalin Hated

         Russian economist Nikolai Kondratieff was executed in 1938 at the age of 46 by the government of Joseph Stalin.  Stalin, who despised capitalism, took an extreme dislike to Kondratieff, who developed the Long Wave economic theory.

         In short, the Long Wave theory suggests that capitalism works just fine, but the business cycle has 50-60 boom years, which are then followed by a bust or deep recession that typically lasts about 1/3rd as long as the boom cycle.

         Kondratieff labeled the phases of the business cycle after the seasons of the year, with the winter season being the recession or depression part of the cycle.  Kondratieff postulated that during this winter season, debt excesses had to be dealt with or purged from the system.

         The Economic Long Wave Research Group, whose work is based on the theories of Kondratieff, recently published a piece that suggests the winter season or bust part of the cycle may be on the horizon, given the number of debt-fueled asset bubbles that have been created since the time of The Great Financial Crisis.  (Source:  https://theeconomiclongwavejoseph.substack.com/p/the-great-bubble-parade-how-400-years)

         Here are just a few of the asset price bubbles we’ve witnessed since that time:

-The 3D printing bubble, which happened from 2012-2014.  Once the hype surrounding this manufacturing technology subsided, share values of many of these companies fell by 80% or more.

-The cannabis stocks bubble, which happened from 2018 to 2021.  Some high-flying marijuana stocks saw gains of more than 350% before crashing.  The article referenced above notes Tilray stock, which fell from hundreds of dollars per share to just pennies per share.

         We’ve seen the meme stock bubble burst and are now in the middle of an artificial intelligence bubble, in my view.

         According to The Economic Long Wave Research Group’s study, real estate bubbles deflate the most violently.  With housing inventories now approaching the levels seen prior to the Great Financial Crisis, it could be that the winter season is nigh.  Are you using exit strategies to help manage risk in your portfolio?

RLA Radio

         This week’s RLA radio program features an interview that I did with Mr. Kerry Lutz, the founder of The Financial Survival Network and best-selling author of the recently released book, “The World According to Martin Armstrong”.  I chat with Kerry about the most important lessons from his book.

         The interview is posted and available now by clicking on the "Podcast" tab at the top of this page.

Quote of the Week

“Laughter is inner jogging.”

                                    -Norman Cousins