Good Afternoon Everyone
It’s been some time since I last wrote a letter talking about markets - which have been kind of a snore.
I thought it prudent to remind those of you who have not yet taken me up on my offer to please consider an annual review. A review will only take 15 minutes of your day, and we can talk about risk tolerance, expectations, and all that good stuff.
On to the letter:
A few key issues are beginning to vex our progress. But before I drill down, let me be clear: we are fixable, and my overall outlook is semi-bullish.
The biggest risk to our progress: [drumroll please] The Debt.
That's it!
The virus, China, trade, politics, inflation- all of these can be fixed with policy, and if resolved, would help markets worldwide continue their upward progress.
Debt, on the other hand, is a cut that might not heal.
Since April of 2020, Global policymakers have gone bananas with stimulus. You heard things like infrastructure spending, extended benefits, moratoriums, and paycheck protection programs policymakers created to help us, the citizens of the modern world, live comfortably through the pandemic.
To make the debt bubble worse, the central bankers in Europe and the USA are out on the back porch doing shots of tequila in total ignorance of the monster they created.
Debt doesn't go away! You either pay it off or inflate your way out.
Let me be clear: I am not an economist. I don't work at the Treasury or the Federal Reserve, and I am not claiming that there isn't a solution I haven't thought of. Looking at the math, it's pretty clear that between all the debt issued by corporations and global governance, they rely on low rates to service the trillions of bonds created over the last 18 months.
Right now, we have 28.7 trillion dollars in national debt (as of 9.8.21) at a current rate of 1.4% interest, according to the Congressional Budget Office, with an annual net interest of about $404.8 Billion dollars a year.
If for some reason, the interest on our debt went to a mere 2% annually instead of 1.4% It would be approximately $574 billion in interest annually.
That means we would have to find $170 billion dollars lying around somewhere. Ok, no panic. I'm sure politicians can find that. (Sarcasm: we just tax the rich, it’s a secret….don’t tell them)
What if the interest on our national debt went to 2.5%? That's roughly $718 billion in interest annually. That number would be a disaster! For reference:
Our current budget for National Defense is $731 billion annually
A measly 1% rise in our national debt interest would have very high implications and throw our current budget out the window. Not only would you have to (whisper…tax the rich), you would also have to absorb fiscal restraint. Something that hasn't happened in decades.
I have a solution to all those readings. It’s really quite simple.
All we need to do is inflate our way out of the debt and grow our economy at a higher rate than in previous years.
higher GDP growth = higher tax revenue
If we grow our economy higher than the interest required as a percentage of GDP, then the required ratio to service our national debt stays manageable.
Additionally, if policies are put in place to help asset prices rise, like stocks, housing, and more, then the government can collect higher levels of taxes on increased prices.
Regardless of which side of the aisle you vote for, the key players who advise and control our government for the most part, recognize they can ill afford to have a serious downturn in the economy.
My conclusion is to, therefore be optimistic! I encourage you to put your fears aside. America is an amazing place to live, work and invest.
God bless us all.
All my best.
Chris
Christopher R. Lakian
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