While the world tries to shake off all it’s ailments, here are few of my thoughts on matters that may or will impact our lives.
I don't need ESP to say that the federal debt will continue to increase. As of today the U.S. debt exceeded $27 trillion. The COVID-19 pandemic added significantly (forecasted at 2.4 trillion by the end of this year) to the debt with the “ Cares Act” and lower tax revenues. The U.S. debt to GDP ratio rose to 126% by the end of Q4—which is much higher than the 77% tipping point recommended by the International Monetary Fund.
This level of debt will not be sustainable, as soon as interest rates begin to rise. Higher interest rates will increase the interest payments on the debt. We know that's unlikely in the short term. The Federal Reserve will keep interest rates low to spur growth.
Disagreements over how to reduce the debt may translate into a debt crisis if the debt ceiling needs to be raised. In the long term, balancing the budget means spending cuts because of the impact of prior tax cuts’ impact to the federal wallet. Social Security pays for itself (for now), and Medicare partially does, at least for now. As the new administration tries to find the best way to address the debt, uncertainty arises over tax rates, benefits, and federal programs. Businesses react to this uncertainty by hoarding cash, hiring temporary instead of full-time workers, and delaying major investments. You can guess the impact down the funnel…
Based on published data, extreme weather, such as heatwaves, hurricanes, and wildfires, has the potential of an increase of 50% in North America by 2100. It could cost the U.S. as much as $112 billion per year, according to a report by the U.S. Government Accountability Office (GAO).
The Federal Reserve has warned that climate change threatens the financial system. Extreme weather may force farms, utilities, and other companies to declare bankruptcy damaging lenders’ balance sheets (remember what happened with subprime mortgages during the financial crisis? Munich Re, the world's largest reinsurance firm, warned that insurance firms will have to raise premiums to cover higher costs from extreme weather. That could make insurance too expensive for most people.
Temperatures are expected to increase between 2 and 4 degrees Fahrenheit within this decade. Warmer summers will mean more wildfires. Trees weakened by drought and pests have increased the intensity of these fires. Higher temperatures have already pushed the dry western plains region by 140 miles eastward. A shorter winter will mean that many pests will not die off in the winter. The U.S. Forest Service estimates that 100,000 beetle-infested trees could fall daily over the next 10 years. These dead trees will further increase the intensity of wildfires and this is only a small portion of nature’s impact on the economy.
Droughts kill off crops and raise beef (and related dairy), produce, nut, and fruit prices. Millions of asthma and allergy sufferers must pay for increased medical costs( the insurance companies will pass these expenses to you by increasing premiums). Longer summers lengthen the allergy season. In some areas, the pollen season is now 25 days longer than it was in 1995.
National health care expenditures will increase by 5.4% a year to exceed $6 trillion by 2028. These costs will rise from 17.7% in 2018 to almost 20% of total U.S. economic output over the next decade. One reason is the aging U.S. population and rising enrollment in Medicare. National health spending (who do you think will spend the $$) is expected to grow at an average rate of about 5.5% from 2021 to 2023, versus a 5.2% increase for 2020. Do you know that when insurance companies increase the premiums a good amount of the added expense is passed to the workers? That is the reason why medical related payroll deductions increase every year.
In 2019, the uninsured no longer had to pay the ACA tax, with the new administration this may change. The Congressional Budget Office (CBO) projected that 13 million people could drop coverage by 2027.
As healthy people leave the insurance system, it will raise costs for insurance companies. They will transmit those costs to the insured, further raising health care costs.
As people drop insurance, they are less likely to get preventive care. Low-income families without insurance might use the hospital emergency room for primary care. Hospitals transfer that cost to Medicaid and insurance companies. It could make healthcare more expensive for everyone.
Be aware that without regulation, many personal health insurance policies may not provide as much coverage as ACA plans. People who buy them will end up paying even more out of their own pockets.
The production of crude oil is expected to rise to 14 million barrels per day by 2022 and remain near this level through 2045. Shale oil has driven this growth since 2010. Demand is expected to remain subdued thanks to increased use of alternative energy.
In 2019, the U.S. exported more oil than it imported for the first time since 1973. U.S. oil (barring) changes from the new administration exports are expected to increase through 2033.
Gas prices are expected to remain below $3 a gallon for the foreseeable future. Lower gas prices can potentially (there are many other factors that influence costs) also drive down the price of heating oil and groceries, which benefit from lower transportation costs.
China became the world's largest economy in 2014. As of September 2019, China’s economic growth has been at its slowest since 1990. But the nation is now so large that it will continue to affect the U.S. economy much more than in the past.
In December 2019, the U.S. and China reached an agreement on Phase One of the trade deal in which China has committed to purchasing a substantial amount of U.S. goods and services in the next several years. The U.S. will keep 25% tariffs (we will have to see the direction of the new administration) on $250 billion worth of Chinese exports and 7.5% tariffs on $120 billion of Chinese imports.
If China’s exports decline, it could buy fewer U.S. Treasury notes. Because China is the second biggest purchaser of US debt, as its demand for Treasuries declines, interest rates could rise.
Any changes China makes as part of its economic reform will affect the US dollar value let’s wait and see what Yellen will do). China has maintained a fixed peg to the dollar for its currency, the yuan. It is loosening this peg in its bid to allow the yuan to become a global currency.
Slowdowns in China’s growth could impact the U.S. economy in unprecedented ways. Higher interest rates may increase the cost of loans for U.S. businesses and consumers. They may also increase the interest on the debt. The U.S. government may have to divert more funds to pay off that interest.
A slowdown in Chinese exports may also increase prices for U.S. consumers. “Made in America” means higher costs because U.S. workers get paid more for their work than those in China.
The US dollar value hit a high of 126.5 on March 23, 2020, as the pandemic sent investors scurrying to the dollar's safety. By Jan. 22, 2021, it had fallen to 111.9.
There are several factors that could weaken the dollar, but its role as the world’s reserve currency will keep its value solid. It's used more than any other currency for international transactions.
The Federal reserve has promised to keep interest rates at effectively zero for several years. That could turn off currency investors, who would prefer a higher rate of return for their dollar-based investments. Investors may have switched to the stock market, which has skyrocketed since the pandemic.
Foreign investors may become more concerned about the U.S. debt. They fear that the U.S. wants the dollar to decline (Yellen said NO) so that the relative value of its national debt is less. They may diversify their portfolios with more non-dollar-denominated assets, such as the euro. Watch the Cryptos in the future...China is ahead of most in the development of the digital economy.
A weak dollar makes imports more expensive, contributing to inflation. It also lowers export prices, spurring economic growth. The dollar's value will continue to experience dips and swells, affecting everything you buy.
Core inflation will remain around 2%, according to the most recent forecast by the Federal Reserve. In December, inflation increased by 0.4%, with the core inflation rate increasing by 0.1%.
The most important role of the Fed is managing public expectations of inflation. Once the public expects inflation, it becomes a self-fulfilling prophecy. The Fed can maintain confidence in the economy by demonstrating moderation, resulting in less extreme changes in public economic behavior. The Fed knows this is how the former Fed Chair ended the stagflation of the 1970s. By keeping interest rates high, he reassured the public the Fed was committed to preventing inflation.
Food prices may rise temporarily due to the pandemic. In the long term, they should drop, thanks to lower oil and gas prices.
The cost of living will remain about where it is today. You don't have to worry as much as you did in the past about inflation eating away at your retirement savings.
Home prices will continue to rise in the long term, thanks to low interest rates and low inventory.
The COVID-19 pandemic will affect the housing market through 2021, according to the National Association of Realtors (NAR). After an initial dip in the early months of the pandemic, housing prices bounced back and rose significantly before declining by 2.5% in November 2020. Realtor.com expects sales prices to increase by 5.7% in 2021. Inventory is also expected to be low throughout much of 2021, and this constraint in supply will support home prices.
Once a COVID-19 vaccine is widely distributed, housing demand will return to pre-pandemic levels. One reason is that the Fed has promised to keep interest rates at historic low levels through 2023. This will keep mortgages very affordable until then. The other reason is that it will take years for homebuilders to restore supply to pre-pandemic levels. In December 2020, there was only a 4.3-month supply of houses in the United States.
Low mortgage rates make this a good time to get a fixed-interest mortgage. As many workers look for larger homes, smaller condos and townhomes may become more affordable. Some people are concerned that the real estate market is in a bubble that could lead to another collapse. As long as the Fed holds rates steady, it's more likely that the housing market will remain strong.
The $27 trillion debt and federal budget sequestration that's reduced spending on some items mean that the U.S. really can't afford to wage large ground wars anymore. In March 2019, the government increased the Fiscal 2020 national security budget to $750 billion. The Department of Defense said that this increase will strengthen its competitive edge and help the military succeed by prioritizing innovation and modernization in war for decades to come. Some critics say this spending is not needed, given the lessened presence of the U.S. military around the world. Cyber Warfare has become more of a threat. It's fast, difficult to grasp, far-reaching in the digital landscape, and dangerous.
Money spent on defense increases America's debt. It also takes away from such key areas as health care and education (depending on who you are listening to).
Defense spending is not the best job creator. According to a University of Massachusetts-Amherst study, defense spending only creates 8,555 jobs per $1 billion spent. The same amount of spending on mass transit created 19,795 jobs.
So where do we go from here? It is all speculation because there are so many moving parts to all of that. We do not have control over any of it but we do have control on our trading. Stay focused on the fundamentals and keep your emotional energy in the right place and awesome things will happen.
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