The Double Cost of Deficits

Deficit spending kills buying power and adds significant burden to the federal budget.

In the summer of 2009 Oil traded $159.55 a barrel and Gasoline topped out at $4.68 a gallon. This worked out to a ratio of 34 gallons per barrel.

Today Oil opened at $67.41 a barrel and Gasoline sat at $2.87 a gallon. This works out to a ratio of 23.4 gallons per barrel. Reflecting a loss of more than 31 % in value of the $ over the past 10 years while Federal Debt has doubled increasing from $ 10.6 to over $20 Trillion.

With the deficit exceeding $20 Trillion, each .25 point increase to the Fed Funds Rate adds approximately $50 Billion in annual interest expense. With two more .25 point rate hikes expected by the Fed this year, another $100 Billion in annual interest expense will be added to the budget. To put this in perspective the Military Budget is $639.1 Billion for Fiscal 2018. Please note rate hikes are based on the assumption inflation will not exceed 2 %.

Historically tax cuts have proven to pay for themselves by driving sustainable growth (Kennedy, Regan).  So I will keep them out of this discussion. Please note the Tax Cut and Jobs Act created the added benefit of an estimated $3 Trillion being repatriated.

After passing of the budget busting Omnibus Spending Bill increasing deficit spending for 2018 to $800 Billion, investors need to ask themselves how fast application of technology (Blockchain eliminating Social Security, Medicare, Medicaid, Welfare, and Voter Fraud), punitive regulatory clawback, immigration reform, downsizing of government, and meaningful budget cuts (entitlement reform) can be achieved.

If budget reform is not accomplished by the start of Fiscal 2019 (October 1), Continuing Resolutions will maintain the insane spending benchmarked by the Omnibus Spending Bill.

Investors (at least the smart ones) will be listening for Representatives, Senators, and candidates to prove how well they comprehend the need for budget reform and communicate their commitment to achieving it. Raising taxes is not the solution (see California, Connecticut, Illinois).

If consensus for effective budget reform is not achieved (Fiscal 2019 Budget passed) then look for a bloodbath in October.