Video: Economic Progress Report – Inflation, Debt and Taxes
Friday, December 10th, 2021
Smart Money Show Episode 19
  • Stephen: If you’ve been wondering what’s going on with the world economy, inflation, government debt, and possible tax increases, then you’re gonna wanna watch the rest of this video.
  • Welcome back and thanks for tuning in to another episode of “The Smart Money Show”. I’m your host, Stephen Rischall, along with my cohost, David Jacobs. Now look, the media continues to report all sorts of conflicting and confusing messages right now about the current economic situation.
  • Now it’s true there is a lot going on, and in case you’re confused by all the thing you’re reading and seeing, we thought it might be helpful to give you our take on what’s going on. David, I’ll toss it over to you.
  • David: Well, yeah, there’s no doubt the media’s job is to really make us confused and scared so they can sell ads and get our attention, but there is a lot going on and it is confusing. So let’s start off by talking about government spending. Many of you noticed that the government just approved a one-trillion-dollar infrastructure bill. They’re now moving on to what’s likely to be 1.75-trillion of government spending in social and climate spending. Stephen, what’s that bill referred to as?
  • Stephen: The Build Back Better Plan.
  • David: The Build Back Better Plan, there you go. Originally, it was supposed to be three and a half trillion, so it’s about half what we expected, and regardless of how you feel about it, the reality is, on top of what we’ve spent in the last 18 months on COVID, that’s a lot of money, more than we’ve ever seen before.
  • So where is that gonna come from? How are we gonna pay for it? Well, one of the obvious ways is to raise taxes. So we all know it’s very likely, and almost certain, that taxes will go up in 2022. We’re likely to see an increase in the corporate tax rate, maybe another three to five percent on corporate taxes. We’re likely to see increase in the highest earners, so federal taxes rates probably go back to 39.6. We’re also probably gonna see an increase in capital gains taxes, possibly up to 25% from 20%, and maybe even a wealth tax on billionaires.
  • The important thing to remember, through, is that every move in Washington right now is being carefully calculated against a backdrop of next year’s mid-term elections. So taxes are unlikely to go up as much as originally feared.
  • Having said that, once the results of the elections next November are in, all bets are off. If the democrats continue to hold the House and the Senate, it’s very possible that we see even more tax increases in 2023, and if the Republicans take back the House, or The Senate, or both, we may see a reduction in taxes.
  • Stephen: Yeah, I think that’s pretty true, David, and that’s possibly coming down the pipeline here. But look, another way for the government to fund these programs, well, it’s to take on more debt. So you’ve probably heard that the Senate recently extended the debt ceiling through mid-December.
  • Now let’s be clear, that was just a Band-Aid. So you’re gonna hear more about the debt limit, the debt ceiling limit. That’s gonna come up again here at the end of the year. Expect to see it in the news. This is all to pay for some of those recently-passed, and also still-proposed, government programs.
  • The government debt is probably going to expand significantly. We do think that’s the case. There’s really not much of a way around it, because like David mentioned earlier, we don’t plan to see tax increases by the end of this year. So it’s true: The United States already has accumulated a pretty significant amount of debt, at about $2.8 trillion, that’s trillion, with a T.
  • David: With a T, 2.8 trillion. If that doesn’t make you think, let’s just put that in perspective. US debt is at an all-time high relative to our GDP, our gross domestic product, which is basically our entire economic output from the United States. That number is now over 100%.
  • Real perspective is, the last time it was this high was following World War II, and if you look at the projection in the chart, after World War II, our percentage of GDP dropped dramatically. But according to the Congressional Budget Office, if things don’t change going forward in 30, 40, years, our percentage of GDP, our debt-to-GDP will be over 200%.
  • So it’s really likely that we’ll see some significant changes down the road. Still, it’s much easier for politicians to add to debt than to raise taxes, ’cause remember, politicians are motivated to get reelected. So while we do think there will be tax increases next year, we really don’t know how drastic they will be, but we’ll be watching very carefully.
  • Stephen: Yep, and look, some people are really sounding the alarm on the prospect of higher taxes. I know we had all sorts of conversations with clients about the possibility of higher taxes. So far, that doesn’t seem to have really come to fruition today, in 2021, but like we said, we think it is likely to come down here in 2022 and 2023. But look, there still are a lot of reasons that we think to be optimistic. First and foremost is that the US economy, we’ve added about 530,000 jobs, 531,000, to be exact, in October, and unemployment fell to 4.6%.
  • Now I just shared a chart on the screen, and as you can see, this actually puts us almost, almost at pre-COVID employment levels, and that’s a really good sign. Now look, while there still are about three million workers, or fewer workers, today in the workforce then there were before COVID, we think a lot of these folks are gonna go back to work soon, they already have, and that’s mainly because unemployment benefit programs have largely expired, and also schools are opening back up. So particularly for those that have children, they now have fewer daycare problems, and that’s actually a big chunk of the population.
  • Another nice sign is that wages have also increased. People are actually earning more money in their paychecks, in terms of dollars. And look, if more people do keep going back to work and keep working, they’re gonna earn more money. They’re gonna spend that money. The holidays are coming up, and New Year’s, and that’s gonna ultimately stimulate the economy, is our view.
  • David: Of course, the economic outlook isn’t 100% rosy. While consumer spending is growing, the rate of that growth is slowing, and to put it in perspective, consumer spending, which is us spending our money on goods and services, travel, homes, et cetera, it’s over two-thirds of our economy, as that slows down, it will affect our economy greatly.
  • It’s also because people aren’t getting government checks in the mail as they did last year, so they have less cash, although we haven’t been doing much throughout the pandemic, so many of our bank accounts are higher than they have been, which is why many people have chosen not to go back to work.
  • As Stephen suggested, that will be changing soon. But this increased demand which has caused this inflation is eventually gonna hurt us because our dollar’s not gonna be stretched as far. We see it at the gas pump. We see it in certain areas like travel and restaurants and so forth. So even though people are making more, their money, while making more money, their dollars are worth less than when COVID started, and that’s because of inflation.
  • The month of October, we saw the highest increase in the Consumer Price Index, CPI, than we’ve seen in over 30 years. It was over 6%, which is pretty crazy. And while we don’t necessarily think that 6% is sustainable, we do expect inflation to be higher than it has been for the last 10, 20 years, at least throughout the rest of our economic expansion.
  • Stephen: Yep, and look, bottom line: It does mean that your turkey’s gonna cost a little bit more this Thanksgiving holiday. There’s no question about that. But look, the economy, it is actually looking pretty good. People are going back to work. Supply chains are slowly ramping back up. And demand is high, and as David mentioned, that’s actually really key. We’re a domestic consumption-driven economy, meaning our GDP, so if demand is high, that’s always a really positive sign.
  • But we’re still cautiously optimistic. We’ve got these three really big concerns that are lingering: inflation, government debt, and we’re likely to see those tax increases. So while inflation could settle down as the supply chain gets back up to full strength, it could also get worse because of government spending. So we’re gonna have to wait and see, and you know that we’re definitely keeping a close eye on that. In the meantime, we’ve been making adjustments to our investment strategy, and it might actually be a good time for you to consider taking some profits off the table and reducing risk in your portfolio.
  • So if you’ve got questions about that, let’s talk. Let’s set up a meeting. It’s a really good time to review your financial plan, coming into the new year here. And remember, if you learned something new today and you liked this video, be sure to share it with your friends, your loved ones, family, ’cause they might have some of the same questions about these types of things that you do. Until next time, thanks for tuning into another episode of “The Smart Money Show”. We’re wishing you a happy holiday season and a happy new year, a healthy new year. I’m your host, Stephen Rischall and that’s David Jacobs.