By Professor Ricardo “Rick” Ulivi, Ph.D.
August 2017

As a fiscally conservative individual, I feel too many investors are ignoring reality. They are not seeing the writing on the wall, and when I tell them what’s on it, they think I am a pessimist, or worse yet, they disregard my warnings completely.

What do I see? Let’s review some of the issues.

We are spending what we don’t have

The federal government is spending more money than it collects. Let me give you some numbers that should chill you, yet it seems most investors are ignoring. In 2016, the federal government’s deficit was a whopping $585 billion. The cumulative deficit since 2007 is a horrifying $7.9 trillion.

What are the consequences of this over spending by borrowing trillions of dollars? What do you think caused the financial crisis of 2008? We may be heading toward a similar period.

What’s the solution? Cut spending by $600 billion or raise taxes by an equal amount. Do you think politicians today have the courage to do so? Can you imagine how either of these measures would affect the economy?

We have politically motivated low interest rates, and that’s wrong.

We have had nine years of economic growth, we are at full employment, with a horrendous budget and trade deficits, and yet we continue to have near record low interest rates. How is this possible? That’s because of a political decision. Former president Obama needed someone to keep interest rates artificially low to insure his re-election, and he therefore named Janet Yellen as chair of the Fed. She got the plum job, and she delivered.

What are the consequences of all this irresponsible money printing to keep rates super low? Inflation will come back, and it will reduce most people’s standard of living.

What’s the solution? Eliminate the federal deficit.

We have trillions of promises that cannot be paid!

If the Federal budget deficits don’t scare you enough, please do a Google search on the unfunded pension liabilities that most states and cities in the USA have.

What are the consequences of these obligations? Most likely, benefits will be cut or city and state taxes will have to rise dramatically. Imagine the hurt that either of these two solutions will produce.

The trade deficit can’t go on!

We buy from everybody, and few buy from us. As a result, we pile up huge trade deficits. How do we pay for these? The Chinese are happily lending us the money, however, one day they will want their money back, and then all hell will break loose.

Tax reform: are you nuts?

Congress will start working soon on crafting tax reform. What are they trying to do? Lower taxes? We have a massive federal deficit, and we are at full employment. Lowering taxes will most likely make the federal deficit worse, and that is really bad news.

Will Congress try to increase taxes? With a Republican Congress and a Republican president, I doubt that’s what they have in mind. So I don’t understand what this tax reform is all about, except to favor a few to the detriment of others. For example, eliminate the inheritance tax to benefit a few billionaires and then raise some other tax to pay for this transfer of wealth. Either way, this much talked about tax reform may end up like the attempted dismantling of Obamacare.

The value of the dollar is down

I grew up in Argentina, where the value of the local currency kept devaluing against other currencies like the dollar. What was the result of this continuous devaluation? Poverty increased dramatically over the decades since I left.

In the USA today, the dollar is down over 8% since Trump took office. What do you think this devaluation will cause? At minimum, think rising inflation.

Enough!

I have just reviewed some of the reasons why fiscally conservative guys are worried. We have become a nation of profligate spenders, and that will have consequences. If I am correct, the stock market should decline, interest rates should increase, bond prices will drop, and the standard of living for most Americans will decline.

Be safe; invest wisely. To set an appointment to discuss this further or to review your finances, call me at 1-714-771-6000.