What will the U.S. federal government do in its inevitable financial death throes due to out-of-control entitlements. Probably similar to states and other countries who are farther down that road.
IL, in the worst financial shape of any state, is now raising its maximum income tax rate. Is that the proper solution? Probably not. They need to cut spending especially on pensions and health care for state government employees.
Raising tax rates runs the risk of pushing IL rates past the peak of the Laffer Curve. That is a graph that shows increasing rates increases revenue as the rates rise from zero. But there comes a point where the rate is so onerous that the public change their behavior to avoid the tax. After that point, INCREASING rates results in a REDUCTION in revenue.
The Laffer curve applies to marginal tax rates, mass transit fares, and the “house” take percentage in lotteries and casino gambling.
IL also plans to borrow more. That may be the straw that breaks the camel’s with regard to the bond rating agencies. IL is now one notch above junk, the lowest rating ever for a U.S. state, even worse than during the Great Depression. Each notch by which the rating falls increases the interest rate IL has to pay when it borrows.
Illinois paid about 4 percent on its last issue, compared with a median rate of 2.34 percent for AAA-rated state bonds, according to Richard Ciccarone, CEO of Merritt Research Services, a provider of research and data on municipal bonds.
The federal government is different in that it can “print” U.S. dollars. This is done by the Federal Reserve purchasing U.S. government bonds with money that the Fed does not have. It conjures it out of thin air. Increasing the supply of dollars makes them have less purchasing power. In other words, inflation or hyperinflation.
This is currently what is happening in Venezuela because of the government there printing too many bolívars. Price and capital controls, which always are passed by hyperinflation governments, empty all store shelves, pharmacies, and fuel tanks.
The correct solution is to cut spending. That will not happen because any candidate who advocates it or votes for it will lose.
What then? The non-cut alternatives are raising taxes, increasing the national debt, and printing money. After a point—and we are there—each of those makes the situation even worse.
This is happening. The universal response I get to pointing this out is a demand that I prove it will happen and happen soon.
Irrelevant. You have a one-year fire insurance policy on your home. That implies you believe it will burn down this year. In fact, you have the insurance because your house COULD burn down this year, it would be FINANCIALLY DEVASTATING if it did, and reasonably-priced INSURANCE IS AVAILABLE.
Many cling to not-gonna-happen saviors, namely, illegal immigrants who pay taxes but who do not collect entitlements, economic growth that provides additional tax revenue that pays down the national debt, innovation.
These are fairy tales. No reasonable assumptions about any of them produce more than a drop in the bucket towards the vast unfunded liabilities that will crush the US. federal government either through default on U.S. bonds or via hyperinflation.
You can protect yourself and your family, but you will never have a choice at the ballot box that will save the federal government. The U.S. federal government is doomed financially. The U.S. government is not the nation, but the government has enormous power to hurt its citizens and businesses.
Salvation for you and your family comes from moving your net worth substantially out of USD-denominated assets into hard assets and foreign currency. You need USD for routine bill paying and routine occasional expenditures like replacing a car or air-conditioner. But your rainy-day cash should be in selected foreign currency.
Your passports and those of your family must be current, not expired so you can leave the country. If you or a family member never got a U.S. passport, get one now. Foreign passports work, too. Without a passport, you will be incarcerated in the US. That has never been a problem here. But it was in hyperinflated countries like Germany in the early 1920s.
We also never faced our current national debt-to-GDP ratio and our current unfunded liabilities before.
Hard assets are mainly things you need in the future—housing, food, fuel, computers, cars, medicine, etc.—that you can buy now. The vast majority of hard assets are illiquid. But you must have some liquid assets because you cannot by food or fuel with, say, real estate. Examples of the few liquid hard assets include forever stamps, nickels and pennies, “junk” silver.
Leaving the country per se probably will not be necessary, but living in the U.S. next to the Canadian border likely WOULD be necessary. Their store shelves probably will not go empty, but they will not trade goods for worthless USD. If you live far from the Canadian border, how will you get there to shop? With fuel unavailable here, you won’t. But if you live in, say, Blaine, WA, you can get the fuel you need in Canada, assuming you have sound money to buy it with like Canadian or other foreign currency.
All the current blather on TV about Obamacare, tax cuts, etc. is mere rearranging the deck chairs on the Titanic. THE story is the pending bankruptcy of the U.S. federal government and how it will affect you. If you get a check of any kind from the federal government—social security, pay check, pension—it will at the very least be reduced and may stop coming completely, or you may get the check but it will not longer buy anything.
The typical person who does not need my warnings will find them selves bartering away expensive things like pianos and god watches for bags of groceries. Or at least that is the typical pattern in the many episodes of hyperinflation in other countries in the past.
A word to the wise is what I do for a living. I shudder at the thought of the future of the unwise.
Read my web article The Day the Dollar Dies for depiction of the first day of the problem. https://www.johntreed.com/blogs/john-t-reed-s-hyperinflation-deflation-blog/65672771-the-day-the-dollar-dies
For the long-term view, read Anna Eisenmenger’s diary Blockade which is available for free on line. The latter was such depressing reading that I went out to buy an uplifting book after I finished it. I was on a train trip to LA at the time and needed something to read on the way home. Blockade is more powerful than The Diary of Anne Frank, and almost as scary. It should have been made into a movie.