Debt to GDP Ratio and inflation

[Aseahawkfan]

https://www.thebalance.com/national-debt-by-year-compared-to-gdp-and-major-events-3306287

We have not seen a debt to GDP ratio like this since World War 2. They printed 40% of U.S. dollars in existence in the past 2 years. Inflation just came out at 6.2 percent. https://tradingeconomics.com/united-states/inflation-cpi

Cash is going to get devalued at a rate we haven't seen in years as well as fixed income which is basically wage earning and payments like social security.

Then we have looming interest rate increase in the coming years to combat inflation and reduce liquidity in the markets. Who knows when.

The fact is that when you have a Debt to GDP ratio this high the only way out of it is to inflate the GDP with hyperinflation until the Debt becomes a smaller portion of the GDP.

Monetary policy has been pushing towards this since the 2008 financial crisis and the economic shock of COVID has acted as a catalyst for an insane level of inflation being necessary to increase the size of the GDP in relation to debt and drive up tax revenues to service the debt.

We are going to be in for some rough years of inflation. I would spend time learning how to manage your money in an inflationary environment.

[RiverDog]

I agree. I don't follow the financial markets as closely as you do, but I do know that inflation has raised its ugly head and will be with us for several years. A lot of it is due to unwise fiscal policy by the federal government, my pet peeve the labor shortage, and the pandemic related supply chain problems.

I entered the job market in 1978 after graduating from college. We had double digit inflation, double digit interest rates, and nearly double digit unemployment. It was a scary time. Inflation was such that it created panic buying: Better buy it today because the price goes up tomorrow. I'm afraid that we're in for at least several years of 6-8% annual inflation rates.

One of the problems with inflation this time is that one of the ways we got control of it in the 80's is because companies quit agreeing to COLA clauses in their contracts, which allowed them to fix prices without having to worry about their expenses rising the next year. It broke the cycle of increasing wages and increasing prices. With the labor shortage we currently have, that strategy is no longer an option. Employers are going to have to continue to give abnormally high wage increases to keep from losing workers. The labor market is out of balance.

The Fed is going to have to raise interest rates and slow down spending, cut into the demand that is causing all the supply chain problems. Now is not the time to be embarking on more entitlement programs like child care and universal pre school. They just can't keep printing money and expect it not to have an effect on inflation.

[RiverDog]

Here's more evidence of inflation raising its ugly head. A few weeks ago, they announced that all Social Security reciepiants would be receiving a 5.9% raise, which sounded pretty damn good. It's the biggest raise in decades. However, today they announced that Medicare's Part B premiums, currently at $148.50 per month, is jumping to $170.10. That's a 14.5% increase. And to make matters worse, the annual deductible, currently $203, is increasing to $230/year, a 13.3% hike.

Just doing some math, the average monthly Social Security benefit is roughly $1500/month, or $18,000 per year, so the 5.9% raise increases that amount to $19,062/annually. Take the Medicare Part B premium increase of $259.20 per year ($21.6/month increase times 12) plus the additional $27/year increase in the deductible amounts to $286 per year more that most retirees will be paying for Medicare in 2022. Take the new average annual SS benefit of $19,062 minus $286 for Medicare and it comes to $18,776. Subtract the 2020 annual benefit of $19,062 from the 2021 benefit of $18,000 is $776, divided by $18,000 is 4.2%. And that's BEFORE increases in the Part B and Part D supplements, which will take another couple percent bite out of that SS increase. The cost of living for 2022 is projected to increase by over 6%, more than that for seniors.

https://www.fedsmith.com/2021/07/13/202 ... ng-higher/

Bottom line is that instead of a 5.9% raise, seniors that are on Medicare are only going to be seeing 4.2%, and with an estimated 40% of retirees receiving no more than half of their income via SS and 12-15% of those receiving 90% of their income via SS, inflation is going to hurt one heck of a lot of retirees. There's 69 million Americans living on Social Security.

And there's some in Congress that are advocating an expansion of Medicare. SMH.

[Aseahawkfan]

I'm trying to figure out a strategy to invest in this economic situation. Which I see as follows:

1. Inflation is likely not transitory. The Fed and government has to inflate the economy to a level where the debt is far lower than the GDP so the percentage based tax system allows the government to generate sufficient revenues to service the interest on the debt while maintaining a similar percentage of the budget. Many people don't understand government debt and how much of the budget is used to pay the expense of the interest and how bad it can become if the debt is sufficiently larger than the GDP.

2. Interest rates will eventually have to be raised. The Fed is sounding like they won't raise interest rates until late 2022 depending on the health of the economy. This will keep liquidity high in the economy and allow for the continued use of leverage for economic expansion causing a massive debt build up within the private sector and private citizens. This should continue to fuel appreciation in investible assets like property, stocks, and crypto as people pursue gains when saving and lending money is a low return investment that will destroy the value of the investment due to inflation. You have to beat the rate of inflation with your investment or you lose buying power.

3. Where will the inflation be concentrated? That must be watched closely as you want to follow the money. Energy, clothing, food, and many common household goods. Higher wages mean more money for consumers to spend which should cause prices in consumer goods to rise as more cash going after the same goods and services causes price to rise. So an investment in maybe a Walmart might be somewhat defensive.

4. We still have supply chain and labor issues, but for how long? In general supply chain issues with massive demand causes prices to increase, but also attracts new suppliers looking to make money which long-term leads to lower prices. Labor shortages lead to higher wages which gets passed on with higher prices, but also leads companies to seek increased labor supply through out automation, outsourcing, and immigration which eventually leads to a surplus and lowers wages. How long will either of these situations persist?

5. Valuations have already been driven up. Valuations in the stock market are already extremely high in many sectors with the S&P 500 valuations historically high at 21 times earnings. If earnings don't increase at a rapid enough pace, this could cause a major drop if the economy hits a wall in growth. If the earnings keep rising causing price to earnings to compress, then the prices will continue to rise.

It's hard to make a good call in this situation. You can get really burned if you buy the wrong investment and the hammer falls causing a massive price compression. Where best to keep your money when putting it in the bank is screwing you and investing is risky in a market with such high valuations. Tough call.

[RiverDog]

You're a lot more into investment strategy than I am. My financial decisions revolve around how to manage my retirement funds. Currently I'm trying to figure out my 2021 adjusted gross income so I can transfer the maximum amount of funds from my traditional IRA's to my Roth and stay in the 12% tax bracket. If anyone out there has a 401K with a Roth option, I'd put as much money in it as I could. You pay taxes up front but the earnings are tax free. In a traditional 401K account, you'll end up paying taxes on the entire account, your contributions and the earnings.

The other piece of financial advice I have involves Health Savings Accounts. Even if you don't itemize, you can deduct your contributions off your earned income and reduce your taxes by a substantial amount. If you're over 55 and approaching retirement, I'd contribute the max. Yo can only use it for medical expenses so it doesn't make a lot of sense for a younger person to contribute to them unless there's a company match or if you're expecting a medical procedure like knee surgery or something, but it's a critical part of a sound retirement plan. Most HSA's allow you to invest funds just as you would with any other financial investment.

I agree that the Fed is going to have to raise interest rates, and the fact that they haven't done so already is one of the reasons why inflation is increasing the way it is. They need to put the brakes on demand, let the supply chain get caught up.

[NorthHawk]

The GDP ratio can be changed by one of two methods: Increase productivity or lower debt - or some of both.
Either way it has to be paid back at some point and that leaves less money for Gov't spending.
There's been a school of thought recently that debt doesn't matter but it seems that those who promote this have never seen high interest rates.
The other idea is long term debt isn't so bad because over time the money devalues so the debt becomes less in future years (think of how $50,000 in debt was a huge amount in the '70s but isn't much today).
I think both those ideas are dangerous and will necessarily require more taxation in some form or other.

Regarding the market, I believe we are nearing the end times of this Bull run and it might be an even harder correction than might otherwise happen because of the money from the young people who have only
known low interest rates and and advancing stock market. The old expression 'pigs get slaughtered' may very well apply here and those hurt by a correction might just jump out of the market altogether and
create a larger drop than otherwise would happen. As well, if long term interest rates rise significantly that will have a dampening effect on the market as money moves to bonds with a better guarantee of
return than a volatile stock market.

Going to value might be a good strategy for some of your investments. At least plan for that change and position yourself with that option if you see the need. As well, a lot of new investors don't have an
exit strategy. When to sell is often harder than when to buy for many so things like trailing stop losses can be helpful. But you have to know who you are in the stock market. Are you conservative or aggressive?
Or like most of us something in between? People have to know their risk comfort level and allocate their investments to reflect that.
As far as Investment Advisors go, I prefer someone who has been in the business more than 20 years and who has gone through a couple of major corrections. To me they seem more realistic about what is ahead
and have more answers to protect what I currently have.

Good luck to you in whatever strategy you take and I hope that any coming correction has a soft landing.