America has been through a lot within the past year, and while many thought things can only get better from here, it seems like 2021 is telling 2020 to “hold my beer.”
The federal government has been spending and printing money at historic levels and the long term affects of doing so seem to be completely ignored by members of congress. We are still experiencing a crisis and some of the federal spending was necessary. However, the unnecessary spending and fiduciary negligence at the federal level will have consequences that will affect us all.
At this point, large increases in inflation are virtually inevitable and unless the federal government continues to keep interest rates artificially low, we will likely see sharp increases in interest rates as well. In the 1980s we saw historic interest rates on mortgages that were upwards of 14%, money market accounts and other fixed income assets also saw incredibly high interest rates. That coincided with the economy experiencing incredibly high inflation.
This was the result of massive federal spending in the 1970s. When we see massive inflation rates, the unintended but necessary consequence is to see a “devalue” of currency. This is commonly done through increases in interest rates.
Some other indicators of this impending economic change are:
- 1/3rd of all US currency in circulation was printed in the last 24 months
- Tax revenue took a significant drop yet federal spending is at a record high
- Interest on federal debt is close to becoming the largest federal budget expense
- Many countries are no longer using the U.S. dollar as a median of exchange between currencies
- The “federal line of credit” has been cut off by China and other large owners of US debt
- Russia and other countries with large economies are taking steps to have complete independence from the U.S. dollar
The best-case scenario from the above is interest and inflation rates making significant jumps and our economy will balance out in a decade or so. The worst-case scenario is hyperinflation which would take decades to economically recover from, if ever.
Many of us just saw people we care about and/or personally experienced extended periods of time without essential elements like potable water, electricity, and stocked grocery stores. These are unfortunately typical scenarios and a part of ordinary life when hyperinflation hits a country.
While I am the forever optimist, and I do not anticipate hyperinflation just yet, taking steps to prevent it still seems necessary. So, what can we do? Email, call, text, and/or mail letters to your congressional representatives and tell them this needs to be addressed. The unnecessary spending needs to stop, and the federal government needs to start practicing fiscal responsibility.
In the likely event that our congressional representatives do not start practicing fiscal responsibility and address the massive spending, what actions can we take to prepare for ourselves and our businesses?
- If you are planning on obtaining any financing, such as a mortgage, do so sooner rather than later and make sure your interest rate is locked.
- Businesses that have 25 or more employees could review a Payroll Tax Reduction Plan to increase their profit margins on payroll, increase employee retention, and make up for the inflation rates many will be unable to match with cost of living raises.
- Businesses that are already paying multiple 6 figures in insurance premiums can review their feasibility for Captive Insurance. Captive Insurance can turn insurance premiums into a profit center and give them the ability to invest those premiums taking advantage of the increasing interest rates.
- Business can review a Medical Cost Sharing Community to potentially reduce health care premiums by 50% or more.
If you have any questions regarding the above, you can always schedule a quick introductory Zoom meeting or call with one of our partners or reach out to our office.
Dan Nuwash, MBA is the Founder and Managing Partner of Finance For Thought and can be reached through our office.