An economic downturn is a scary proposition.
It has a ripple effect that can harm people in unexpected ways.
And a new report shows why a financial collapse is inevitable.
Federal spending has spiraled out of control.
According to a report, the federal government has spent nearly $1.2 trillion for the first quarter of fiscal year 2020.
If that trend continues, the government will easily shatter a spending record.
Federal spending exploded under the Obama administration—the debt doubled from $10 trillion to $20 trillion over Barack Obama’s eight-year reign—and with an adversarial Congress in place, it has continued under Donald Trump.
Trump’s tax cuts and regulation have allowed the economy to keep humming, but we’re long overdue for a recession.
Many predicted it would happen in 2015 or 2016, but the rally has continued because Trump has presented a business-friendly climate for investors.
But federal spending must absolutely be cut, or else the country is going to be in a world of hurt.
Entitlements have spiraled out of control.
Social Security started as a 1% tax on employees that would be matched by employers.
There were also dozens of workers per Social Security recipient.
That number has ballooned to a 6.2% tax on both employees and employers, and there are only a precarious two workers for each recipient.
For that reason, Social Security is now insolvent.
Former Speaker of the House Paul Ryan tried to reform entitlements, but he backed down when Democrats accused him of wanting to push old ladies off of cliffs.
This is how spending spirals out of control.
Once an entitlement is put into place, it’s almost impossible to get rid of.
You’re stuck with it until it goes bust, which is inevitable.
That’s why Democrats are willing to expend so much political capital to cram through massive government programs like Social Security.
Excessive federal spending creates terrible ripple effects.
Democrats propose tax hikes to generate more revenue, but they don’t understand the incentive structure.
As economist Art Laffer once pointed out, there’s a plateau effect to jacking up corporate taxes and taxes on top earners because they just choose not to work as much, or find other ways to lower their tax base.
So the higher taxes have the dual effect of not raising more money, and hampering economic growth.
And in order to “stimulate” the economy, the government will print more money and the Fed will cut interest rates artificially low.
Inflation reduces the purchasing power of the dollar, and the low-interest rates discourage saving.
Low-interest rates lead to “cheap money,” i.e. money that can be borrowed at a lower rate, which has led to corporate debt reaching $10 trillion or 47% of GDP.
When the market correction occurs, these debt-strapped companies that are overpriced will come tumbling down, and that’s when the belt-tightening will begin.
It’s imperative to protect yourself against the inevitable downturn.
Now would be a good time to boost your emergency fund to prepare for a rainy day.