The Unfortunate Consequences of Biden’s Plan to Your Retirement

by Apr 2, 2021Investment Strategy, Market News

Biden's stimulus plan will have consequences for your retirement savings because of increased money printing.

After passing a $1.9 trillion stimulus bill, which followed many trillions of stimulus and money printing done by the Trump administration and the Fed, the Biden team has a plan to boost the economy by throwing 3 trillion dollars at it in various avenues, such as improving infrastructure, addressing economic inequality, and implementing environmental initiatives. And Biden doesn’t want to break it up to reduce it in any way. 

This leaves Americans — even those who back the plan — with one question:

Where is the money for Biden’s $3 trillion package coming from?

Whenever an economic stimulus package or any other package of this magnitude comes into play, you should be asking yourself how we’re going to pay for it because, let’s face it, we are always the ones who have to pay for it, one way or another. 

There are two ways to fund these plans, and both will affect your finances profoundly.

1. Higher taxes are coming

It’s pretty simple. The administration needs a lot of money, so our taxes are going to go up … a lot! There is a proposal to increase corporate taxes in the package, but our corporations can’t carry the whole load, even if their tax rates increase. As Ray Dalio, the founder of Bridgewater Associates, the world’s largest hedge fund, recently wrote, tax increases “could be more shocking than expected.” Additionally, he says, “The chances of a sizable wealth tax bill passing over the next few years are significant.”

And if you’re horrified by having to pay more of your income via taxes and then send the government an additional significant portion of the wealth that you were able to save, don’t be surprised. Our country is trying to ignite growth and avoid the risks associated with high debt by going deeper and faster into debt of a magnitude we never experienced before. 

The chart below shows America’s mounting debt as well as the projected baseline over the next 10 years. See what little visual change is created by adding $3 trillion in debt? Now you understand the mountain of debt we are under.

Projected debt from Covid-19 stimulus packages is considerably higher than pre-covid forecasts.

So, accept higher taxes as your new reality. But since even that won’t be enough, here’s where it gets really bad for us.

2. Who wants to buy Treasury bonds?

Let’s start with the basics. The only way an administration can fund such a significant stimulus plan outside of taxes is by issuing Treasury bonds. Our privilege as the world’s leading superpower is that we issue government bonds and the world buys our bonds. This is how it’s always been. But here’s the kerfuffle: Interest rates are so low that many investors wouldn’t even be able to break even on their bond investments for up to and over 500 years (after adjusting for inflation). Dalio concludes that, because of this, “Investing in bonds (and most financial assets) has become stupid.” Dalio wrote about it here.

This mentality is leading to more and more knowledgeable people leaving the bond market. Even Jamie Dimon, CEO of JP Morgan, isn’t going anywhere near US Treasury bonds. As a matter of fact, Dimon even said he wouldn’t touch one “with a ten-foot pole.”

So, at the same time when the US is “overspending and overborrowing,” big institutional investors like Bridgewater Associates, JP Morgan, and the world’s central banks are not finding much value in US bonds. So when we will be issuing worthless bonds to finance the $3 trillion spending plan with an additional $1 trillion of our standard yearly deficit, no one will be interested in buying. Investors may even be moving to dump their current bonds, all while the government is trying to sell more.

Think about it. The government will try to sell $4 trillion in bonds over the next 12-month period in order to pay for these spending sprees and the deficit. But who’s going to buy those bonds if the free market isn’t interested? There are 2 potential buyers: Market participants will be interested if the Fed raises interest rates to increase yields, or the Fed will need to print more money for the purpose of buying the Treasury bonds that aren’t sold on the free market.

These are the Fed’s options, and there are unfortunate consequences: If they raise interest rates, they will wipe out the stock market and real estate market immediately, bringing pain mostly to the well-to-do class. If they decide to print money, it will further inflate the financial bubble but destroy the purchasing power of your dollar, which will become an indirect tax on you (in addition to the direct IRS and state taxes). 

Which would you choose? It doesn’t matter because the Fed will do what the Fed always does. 

Ultimately, they’ll be going with plan B — printing more money. Not only does this lead to higher inflation rates, but it also works toward completely destroying the US dollar. 

What does it mean for you?

The biggest risk of printing money is devaluation of the dollar and the rise in inflation rates. Inflation weakens the economy and contributes to the already rapid depreciation of the US dollar. 

When you have a situation like we do — which is a slow, sluggish economy that’s barely recovering from a pandemic — and you add to it rising interest rates, you get a recipe for stagflation. This is not something new. It happened to us in the ‘70s. If you worked and earned through it, you probably don’t miss it. 

These days, however, we live in a dynamic global economy where investors and companies have choices and react fast. High tax rates and escalating inflation aren’t a friendly environment, so these companies might try to go overseas, leaving us behind without their tax dollars to lower our burden.

The government at that time may respond by trying to stop the escaping funds by adding capital controls against moving capital out of the country and by implementing prohibitions against moving capital to assets that are not driven by the dollar, forcing us to go down with the sinking dollar.

How can you protect your financial future with these trends?

Imagine a stagflation like the ’70s, where the dollar was crushed, the stock and bond markets plummeted, and commodities, groceries, and oil became more expensive. In these situations, the only assets rising are hard assets like gold and silver. Between 1971 and 1980, the price of gold went up by 1,500%, and silver skyrocketed 2,100%.

However, if the government will resort to new financial controls, you may not be able to invest in gold and silver anymore. If you bought gold before the financial controls were put in place, our government won’t force you to sell; that would be bad PR for a democracy. They just need to stop further bleeding. New investors will be barred from acquiring gold as it’s “bad for them,” the government may claim. And this isn’t the first time it happened.

Now if you think this is far-fetched, then know that all parts of this scenario happened before. We had stagflation in the ’70s, and we had financial controls between the ’30s and the ’60s. It is possible. And if it materializes, what will you have in your portfolio other than plummeting stocks, bonds, real estate, and dollars if we have to relive another version of the ’70s?

Joseph Sherman

Joseph Sherman

CEO, Gold Alliance