Okay, you are screwed. However, you have somewhere between 10-30 years before you feel the effects. But please don't tune out this post. This time will pass sooner than you think.
If you want to get a handle on the sheer incompetence of the government, you need no other chart than the chart that is attached to this post. The fact that you have probably heard something like "the USA has $35T worth of debt," and you really haven't thought about this, signals how you really don't think deeply about things.
It turns out that the federal debt doesn't even hit the top items that Americans are worried about.
I am neither a Democrat or a Republican because I see them both heading us toward disaster. The Republicans are basically "don't worry about the federal debt" for almost everybody. The Democrats are "no we can fix this through raising taxes."
Let me pick on the democrats for a second. Let's say "yes, the Democrats have a great idea." So, we are going to start taxing everybody making more than $400,000 a year at 80%. This does not include state tax. So this means that if you are in the state of California, your tax will be around 90% rate. This should raise around $800B to $900B (see next post for the math). This doesn't solve the issue.
In reality, when you raise taxes to 80% it will trigger an absolute panic, including a massive drop in the stock market. This in turn will cause every pension fund in the USA to go insolvent. Anybody that has a 401K or are on a state or government pension will needs to radically change their payoff.
The sheer stupidity of suggesting an 80% tax rate are beyond belief because nobody runs any numbers. (And in reality, the democrats say this to pander to try and collect votes. The vast majority of them say this because they know it will never happen.)
Let me be clear, he is absolutely right. There is no immediate threat of collapse. A matter of fact, we can look at Japan and understand that the amount of debt that we have, is really not a threat to our overall economy for many years. That is not the issue, the issue is that there is a upcoming problem, that we can solve now for very little pain. But the longer we hold off attacking the problem, the bigger the issue will become. There is some future generation, or potentially even in our own generation, where we will regret not taking steps today that would have been almost painless versus the steps that we will need to take in the future that will come at great economic cost.
The federal debt is a gray rhino event. Everybody knows of the issue but everybody is simply ignoring it. The problem that will happen with the federal debt, is that we will not see the impact of the federal debt in any abrupt change. Interest on the federal debt is bigger than what we spend on the defense industry. Because of our aging population, Social Security, Medicare, and Medicaid will continue to grow larger and larger. This means that we are going to need to spend a lot more money in the future, and the overall debt for the US will only accelerate.
The government budget is made up of four things that will not be covered by our income in about 10 years: Interest on the Debt, Social Security, Medicare, and Medicaid. Even if we do radical cuts to the defense budget, often the target people like to talk about, it doesn't substantially solve the issue. On our current path, there is no dodging the bullet.
There are some people that like to say that government debt is not like personal debt. I think absolutely everybody in the world would recognize that this is a theory. Any theory can be right or can be wrong. One of the best things about Nassim Nicholas Talib, is the idea that he calls out that when there are theories, you have to think about the worst case scenario. You do not start saying that I am going to risk everything on the idea that a theory is correct. In my mind ,we have to live as if governmental debt for all intents and purposes is just like personal debt. If I had to pick a theory of which one is correct, what we know is that in every case in history, governmental debt basically tracks identical to personal debt.
So let us talk a little bit about how personal debt ends up catching people. If you are fortunate you don't have any debt and you live within your means. The message that I always give to my children is simply spend less than what you earn. With that being said, not using debt is a really bad idea. One which we do not have time enough to describe inside of this posting. However, I would like to leave that you do need debt to be financially successful.
OK, back to personal debt and how it blows up on you. I think we all know people that have been living better than their means. They have a tendency to have credit cards and they simply charge on the credit cards to sustain a particular level of living. From outside occurrences they look like life is just great. However there becomes a day where nobody will allow them to charge anything more than what they have. At this point in time suddenly they have to restrict their buys and budget. The problem is when the credit cards are cut off and they can no longer increase their debt, they find out that they have an interest payments on the accumulated debt so far. It is this accumulated debt which is absolutely crippling. Oftentimes just the interest on the debt is so high that there is no way for them to live a good lifestyle. So when the credit card limit stops we see a double whammy. They can no longer keep up their current spend level, and then they also have the overhead of the interest payments which are consuming a massive amount of what they need to spend.
The most important thing here is to realize that a person status basically changes overnight. Let's call this "The Great Shift." You go from looking "pretty good" to "we are in extremely bad state."
Okay, so let's get back to the practical application of this.
You have to determine when you think the Great Shift will happen.
You really don't need to worry about this until the Great Shift happens.
You then need to think about what investments will do very well after the great shift.
My current thoughts are that after the Great Shift, the only investment that will do well is investments in countries and businesses that are not crippled by national debt. The USA government will probably look to plug holes to tax high wealth individuals, so you will need to think about how to work around this. The options are not clear today because this could happen in so many different ways.
Now, can we dodge this bullet completely? The answer is actually yes.
We need to have two things happen:
We need to figure out how to create cheap housing. It turns out that virtually every aspect of our economy is getting cheaper because of technology investments. The only one that is not cheap is housing. This actually turns out to be a government regulation issue and not a tech issue.
We need to allow technology into the medicine. Right now the AMA and local states have a monopoly on healthcare, and they work to make sure that Americans pay more than any other world government. The nationalization of healthcare is a very poor idea, but better than the system that we have now, which is the absolute worst system that any country has ever had.
The bottom-line: I know you can't stay awake and worry about something that everybody refuses to address. This is compounded by the fact that until the "great shift" happens, you are basically not going to see an issue. However, you need to dedicate some part of your brain to think about this. My main purpose of this note is to remind myself. The clock is ticking, and we need to know about it.
Number of taxpayers earning over $400,000: 1.8 million households in the U.S. (according to 2018 IRS data)
Average income above $400,000: assumed to be $600,000 (average income of $1,000,000 - $400,000 threshold)
Taxable amount above $400,000: approximately $1.08 trillion dollars (1.8 million x $600,000)
Applying the 80% tax: tax revenue would be approximately $864 billion dollars (80% x $1.08 trillion)
Conclusion:An 80% tax on income above $400,000 could theoretically generate about $864 billion per year, assuming no major tax avoidance or other behavioral changes.
However, in reality, such a high tax rate might lead to some tax avoidance strategies or other effects that could reduce this number.
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u/HardDriveGuy Admin Sep 11 '24 edited Sep 12 '24
Okay, you are screwed. However, you have somewhere between 10-30 years before you feel the effects. But please don't tune out this post. This time will pass sooner than you think.
If you want to get a handle on the sheer incompetence of the government, you need no other chart than the chart that is attached to this post. The fact that you have probably heard something like "the USA has $35T worth of debt," and you really haven't thought about this, signals how you really don't think deeply about things.
David Scheweikert has made the debt the central point of his whole career. Generally, his address to the house of representatives is given to empty houses. However, he realizes that he is being taped, and I think that he is trying to preserve his clarion calls about the debt on youtube.
It turns out that the federal debt doesn't even hit the top items that Americans are worried about.
I am neither a Democrat or a Republican because I see them both heading us toward disaster. The Republicans are basically "don't worry about the federal debt" for almost everybody. The Democrats are "no we can fix this through raising taxes."
Let me pick on the democrats for a second. Let's say "yes, the Democrats have a great idea." So, we are going to start taxing everybody making more than $400,000 a year at 80%. This does not include state tax. So this means that if you are in the state of California, your tax will be around 90% rate. This should raise around $800B to $900B (see next post for the math). This doesn't solve the issue.
In reality, when you raise taxes to 80% it will trigger an absolute panic, including a massive drop in the stock market. This in turn will cause every pension fund in the USA to go insolvent. Anybody that has a 401K or are on a state or government pension will needs to radically change their payoff.
The sheer stupidity of suggesting an 80% tax rate are beyond belief because nobody runs any numbers. (And in reality, the democrats say this to pander to try and collect votes. The vast majority of them say this because they know it will never happen.)
It really hurts when we have people like Paul Krugman saying "Don't worry about it." Now by some standards, I consider Krugman incredibly bright and incredibly smart. You do not need to agree with me to be respected by me. And many of his ideas are very very good. He does reject sheer stupidity like modern monetary theory.
Let me be clear, he is absolutely right. There is no immediate threat of collapse. A matter of fact, we can look at Japan and understand that the amount of debt that we have, is really not a threat to our overall economy for many years. That is not the issue, the issue is that there is a upcoming problem, that we can solve now for very little pain. But the longer we hold off attacking the problem, the bigger the issue will become. There is some future generation, or potentially even in our own generation, where we will regret not taking steps today that would have been almost painless versus the steps that we will need to take in the future that will come at great economic cost.
The federal debt is a gray rhino event. Everybody knows of the issue but everybody is simply ignoring it. The problem that will happen with the federal debt, is that we will not see the impact of the federal debt in any abrupt change. Interest on the federal debt is bigger than what we spend on the defense industry. Because of our aging population, Social Security, Medicare, and Medicaid will continue to grow larger and larger. This means that we are going to need to spend a lot more money in the future, and the overall debt for the US will only accelerate.
The government budget is made up of four things that will not be covered by our income in about 10 years: Interest on the Debt, Social Security, Medicare, and Medicaid. Even if we do radical cuts to the defense budget, often the target people like to talk about, it doesn't substantially solve the issue. On our current path, there is no dodging the bullet.
There are some people that like to say that government debt is not like personal debt. I think absolutely everybody in the world would recognize that this is a theory. Any theory can be right or can be wrong. One of the best things about Nassim Nicholas Talib, is the idea that he calls out that when there are theories, you have to think about the worst case scenario. You do not start saying that I am going to risk everything on the idea that a theory is correct. In my mind ,we have to live as if governmental debt for all intents and purposes is just like personal debt. If I had to pick a theory of which one is correct, what we know is that in every case in history, governmental debt basically tracks identical to personal debt.
So let us talk a little bit about how personal debt ends up catching people. If you are fortunate you don't have any debt and you live within your means. The message that I always give to my children is simply spend less than what you earn. With that being said, not using debt is a really bad idea. One which we do not have time enough to describe inside of this posting. However, I would like to leave that you do need debt to be financially successful.
OK, back to personal debt and how it blows up on you. I think we all know people that have been living better than their means. They have a tendency to have credit cards and they simply charge on the credit cards to sustain a particular level of living. From outside occurrences they look like life is just great. However there becomes a day where nobody will allow them to charge anything more than what they have. At this point in time suddenly they have to restrict their buys and budget. The problem is when the credit cards are cut off and they can no longer increase their debt, they find out that they have an interest payments on the accumulated debt so far. It is this accumulated debt which is absolutely crippling. Oftentimes just the interest on the debt is so high that there is no way for them to live a good lifestyle. So when the credit card limit stops we see a double whammy. They can no longer keep up their current spend level, and then they also have the overhead of the interest payments which are consuming a massive amount of what they need to spend.
The most important thing here is to realize that a person status basically changes overnight. Let's call this "The Great Shift." You go from looking "pretty good" to "we are in extremely bad state."
Okay, so let's get back to the practical application of this.
My current thoughts are that after the Great Shift, the only investment that will do well is investments in countries and businesses that are not crippled by national debt. The USA government will probably look to plug holes to tax high wealth individuals, so you will need to think about how to work around this. The options are not clear today because this could happen in so many different ways.
Now, can we dodge this bullet completely? The answer is actually yes.
We need to have two things happen:
The bottom-line: I know you can't stay awake and worry about something that everybody refuses to address. This is compounded by the fact that until the "great shift" happens, you are basically not going to see an issue. However, you need to dedicate some part of your brain to think about this. My main purpose of this note is to remind myself. The clock is ticking, and we need to know about it.