By John A. Dougherty, Dougherty Investment Advisors
We’ve seen the headlines: Washington is in turmoil. Bureaucratic chaos. Constitutional crisis. The end of democracy.
Meanwhile, the stock market has mosied along quite nicely with a rather stable rise of 3% this year. How can this be? And what on earth is happening?
To understand the answer, we have to set the backdrop. And the backdrop is even uglier than the current chaos: The national debt is currently at $36 trillion and growing worse by $2 trillion–each and every year.
To put this another way, we borrow 35% of what we spend every year. Think about that for your own household. It’s as if your income is $100,000, but you’re spending $135,000 so you need to go out and borrow the extra $35,000 to meet your expenses–year in and year out.
The result is that the federal government now spends more on interest expense than defense. From an economic point of view, it means that the more the government borrows from the economy, normal businesses have less access to borrowing. If a business can’t borrow as much, it can’t spend on things like new equipment, research, and development, as well as having funds to hire new employees to expand and grow.
In addition, as the government borrows more and more, the people lending money to the government become increasingly nervous, and as a result, demand a higher interest rate on their loans for the assumed increased risk. These higher interest rates not only cost the government more, but they also filter down to higher interest rates for everybody else, including people buying cars and houses, and that new set of golf clubs charged to a credit card.
The alarming government debt is one of the reasons that interest rates have remained high for the last several months, even though the Federal Reserve began to lower its benchmark interest rate last year. Lenders have a little more anxiety about the future.
Our national debt, the total that the government owes, has doubled in just 10 years–under both political parties. The alarming figure amounts to more than our nation’s annual production of goods and services, called the GDP or gross domestic product. This is historically high, and no doubt about it, scary.
Ironically, as the economy has grown in the last several years, our tax revenues have grown fairly quite well. But our government spending has grown even more. How do we fix this problem?
Some of the noise in Washington claims we don’t need Musk and his dramatized actions. Congress says they have spending authority and could control expenses. But they haven’t. Department heads of governmental branches, such as defense and foreign aid, say their department heads can reduce expenses. But they haven’t.
Fortunately or unfortunately, things in our democracy tend not to happen until there’s a crisis. In the minds of many, we are on the precipice of a crisis with our financial budget. It’s hard to tell what the Trump-Musk team will do in their efforts to reduce spending, but it’s important to understand the crisis we have reached with government disbursements and how it affects each one of our pocketbooks and our enduring stability.
In short, the financial markets may perceive long-term benefits from the Musk pillaging.
If you have any ideas on how to more effectively reduce our government spending, please call your congressman or drive to Washington DC as soon as possible. But remember to wear a football helmet…You’re bound to get knocked around a little.
John Dougherty has been involved with helping his clients wade through the complexities of investments, taxes, and estate planning in Florida since 1989. John and his family have lived in Spring Hill for more than 30 years.
