THE NATIONAL DEBT AND ALL THAT INTEREST
The national debt (sum of all the annual deficits) is approaching $34 trillion according to USDebtClock.org. That works out to about $101,000 per person in the U.S. or on a taxpayer basis about $260,000. Remember that investors who bought government bonds are expecting interest payments on the bonds and notes that they hold. According to Bloomberg, the average interest rate is just a little under 3% and creates about $1.1 trillion in interest payments. Worse, not only are we adding to the debt every day, but the average interest rate will also be going up as long as interest rates generally stay high. Let’s put that into perspective. For fiscal year 2023 (ending in September) total tax revenues were about $4.4 trillion – translated which means about 25% of revenues are going to pay interest. Ouch!
THE FED GOES FULL DOVE
The Fed decided to pause its benchmark interest rate again and signaled the end of its historic rate hiking campaign to combat post-pandemic inflation. The news came on the heels of November consumer and producer price data that showed steady inflation trends. Though the Fed believes inflation is still too high, it also sees a high likelihood of a soft landing where inflation will come down to tolerable levels without crushing the economy and labor market. The bigger news was the Fed’s extremely dovish language and hints at cutting interest rates before it gets to its 2% inflation target.
Stock and bond markets reacted overwhelmingly positive to the Fed news, welcoming the prospect of a lower interest rate environment that is more supportive of economic growth. Before we break out the party hats, there are some risks to address. If the Fed cuts interest rates too early, inflation could rear its ugly head back up and cause more harm to the economy than it would otherwise. Lower short-term interest rates also may incentivize more risk-taking in financial markets, possibly inflating asset bubbles. The popularity of money market mutual funds and CDs over the last year and a half will reverse, given the lower yields offered, as investors pile into riskier assets. In the near term, this apparent Fed pivot is a positive for markets. Longer-term, let’s hope the Fed pendulum isn’t swinging too far in one direction. The swing back is usually quite painful.
LET’S NOT MAKE A FEDERAL CASE OUT OF IT
When does a dispute over a $14,279 capital gains tax find its way to the U.S. Supreme Court? When husband and wife taxpayers think it is unfair to tax an unrealized capital gain. Yes, unrealized. How can that happen? About 20 years ago, this couple made an investment in India. The investment has done well, but the couple has not received any income, nor have they sold any of the investment. Because of change in U.S. tax law from 2017, however, the gain can be taxed. In essence, they are arguing that this is a “wealth” tax, not an “income” tax. The case was heard a few weeks ago and the ruling will likely not come for several months. The reason all of this is a big deal has to do with a tax proposal that President Biden has put forth that taxes wealth each year. A decision in favor of the government would likely open the door to the constitutionality of taxing wealth while a decision in favor of the couple would likely kill the idea. Even if found constitutional, it has many issues: what date do you tax the investments; how do you value private businesses and investments; can you take discounts; and where will the taxpayer get the cash to pay the tax.
WHAT IS OLD, MAY BE NEW AGAIN
In the early 80s, an interesting new retirement plan began being offered as an alternative to the traditional retirement plan. Today, it is known as a 401(k) which is a defined contribution plan. An employee defines how much they are going to contribute from their paycheck and this amount may be matched by the employer up to a certain dollar limit. The money is invested into mutual funds and the eventual retirement benefit is unknown.
Before the 80s, corporations that offered a retirement plan used a defined benefit plan. A defined benefit plan is usually paid for by the corporation and provides for a predefined retirement benefit at a specific age. The defined benefit plan in the private sector has basically gone the way of the dinosaur as both employers and employees became increasingly comfortable with the 401(k).
Most public jobs (government, teachers, etc.) have continued with the defined benefit approach but may offer 457 plans which are similar to the 401(k). But now the defined benefit plan may be making a comeback. As further proof, IBM will begin offering this benefit starting January 1, 2024. It is going to be interesting to see how employees react to going back to the future as the defined benefit plan generally rewards long-term employees over those that come and go.
TRAVEL IS WHAT CONSUMERS WANT
One of the things that has continued to prop up our economy is the desire of many consumers to travel and have new experiences. According to American Express based on data from their travel agency and over 6,000 travel agents around the country, here are top ten destinations that people are exploring and booking: 10) Adelaide Hills, Australia – wine country; 9) Bodrum, Turkey – “Little Istanbul”; 8) Santa Fe, NM; 7) Niseko, Japan – skiing; 6) Porto Servo, Italy – northeast part of Sardina; 5) San Miguel de Allende, Mexico – artist colony; 4) Seychelles, Indian Ocean; 3) Udaipur, India; 2) Zermatt, Switzerland – Matterhorn; 1) St. Kitts and Nevis, Caribbean Sea. That is certainly an odd mix of places to go for winter vacation. Where are you planning to travel this winter?
Now that you want to travel and know where others are thinking about, here is a list of the ten safest places to visit which comes to us from Berkshire Hathaway Travel Protection: 10) Venice, Italy (watch out for the canals and the flooding); 9) Seoul, Korea; 8) London, England (careful of the fog); 7) Copenhagen, Denmark (dropped a few places due to illness and terrorism); 6) Dubai, UAE (seems immune to all the issues in Middle East, but who knows); 5) Amsterdam (can’t think of anything); 4) Sydney, Australia – (avoid the typhoons); 3) Reykjavik, Iceland (volcanoes); 2) Montreal (bad atmosphere from forest fires) and 1) Honolulu, Hawaii (natural disasters). Even the safest places still have issues.
A NEW PROVISE HOLIDAY TRADITION
We hope you continue to stay safe and well.
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