There is something critical about our government most people don’t know.
Under a law passed in 1974, Congress is supposed to pass 12 separate spending bills every year by October 1. That’s how the budget is supposed to work.
But, of course, it hardly ever happens.
In the past 50 years, it’s only happened four times. The last time? 1997, or about when you got your first free America Online compact disk.
So, what does Congress do instead?
They pass convoluted “continuing resolutions” or “omnibus” packages that cram together dozens of spending plans into one ugly monster. That’s why every budget is filled with waste, loopholes for special interests, and last-minute “deals” covered in pork. The proper process is busted. It has been broken for a long time.
But that’s not even the biggest problem. And this one is even harder to fix.
In 2022, the U.S. government collected $4.9 trillion in taxes. That was an all-time record. And still, the U.S. ran a deficit. To the tune of $1.38 trillion.
Since 2020, the government has spent at least a trillion more than it earned every single year. In 2020 alone, the deficit was over $3.1 trillion.
How is that possible? And what does it mean for investors like you?
Let’s walk through it.
The Real Problem
People love to point fingers at politicians or political parties for the precarious situation with the national debt.
But the truth is simpler.
Medicare and Medicaid are projected to face an $87 trillion shortfall over the next 30 years. That’s almost $3 trillion every year. Remember, the most taxes ever collected in a year were less than $5 trillion.
No tax hike can cover that. No political party has a serious plan to fix it. Why? Because most voters don’t want to cut these programs. And most voters believe – incorrectly – that the combined 2.9% (employee + employer) Medicare tax entitles them to the same benefits as their parents. But just like Social Security, the math doesn’t add up.
In practice, each U.S. taxpayer would need to pay an additional $17,000 in annual Medicare taxes just to cover what’s already being spent.
That’s not to mention that Medicare and Medicaid expenses grow much faster than the overall economy. And that interest expense has grown so much that it’s now a larger annual expense than the entire U.S. military.
So, the government keeps spending. Citizens keep voting for deficits. And the debt keeps rising.
Will the U.S. Go Bankrupt?
No.
The U.S. will not default on its debt. And the U.S. dollar isn’t going to zero. But the government will continue to print money. That’s called “monetizing the debt.” Sometimes the Federal Reserve buys government bonds directly. Other times, inflation is used to reduce the value of the debt over time.
Either way, it means your dollars lose value – but assets go up.
That’s exactly what happened during COVID. The government created nearly $5 trillion out of thin air. And what happened? Stocks, real estate, and other assets soared. Cash lost value.
It’s a straightforward argument…
The dollar may be “printable,” but the real businesses represented by U.S. equities are not. All else equal, they hold their value against inflation, especially for businesses that own physical, useful assets, and provide mission-critical services. The same goes for real estate. As they say, they ain’t making any more of it.
Now, imagine that trend not just continuing, but accelerating.
What You Can Do
There are two smart moves you should consider:
1. Own real assets. Invest in companies. Buy real estate. Over time, quality assets rise in value as the dollar declines. That’s one reason the S&P 500 has been one of the best inflation hedges historically.
If you’re a subscriber to our Wide Moat Letter, you’re already ahead of the game. Brad and Nick have worked on your behalf to find quality businesses – that own real assets – and provide mission-critical services for their industries. Plus, the Wide Moat Letter includes an entire real estate investment trust portfolio as well. So, you can gain exposure to world-class real estate assets with the benefit of reliable dividends.
2. Embrace voltality. Markets go up and down, and sometimes quickly. Most investors consider that a bad thing. I consider it one of the best opportunities markets have to offer. It’s the one constant you can plan for. If you know how to use volatility, it can generate real competitive advantages. As the rest of the world realizes what we talked about today, I expect volatility to rise.
And if you’re already a subscriber to Intelligent Options Advisor, that’s great news.
That service is designed to literally turn volatility into profits. We have a multiyear track record of success. With volatility creeping up again, the timing couldn’t be better for a service like this.
The United States will never balance its budget. In all likelihood, it will just get worse.
There’s nothing you or I can do about that. What we can do is prepare for it.
That’s what we do here at Wide Moat Research.
That’s what we’ll continue to do on your behalf.
Regards,
Stephen Hester
Chief Analyst, Wide Moat Research
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