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Boom, Bust, Black Magic???
Written by Steve | Published: |
When I was a kid around Halloween time, we played a game called “black magic.” Essentially someone held out a broomstick, the “witch” would have to close their eyes and plug their ears and then the rest of the group would pick a spot on the broom and mentally mark it.
The “witch” would then come back and pretend to sniff the broom stick and would successfully guess the spot we marked every…single…time…
How did the “witch” get it right every time…BLACK MAGIC.
I’ll have to explain the trick some other day.
We definitely have some spooky stuff going in the market but the Fed is up to their own version of black magic.
Since 1966 the government’s debt-to-GDP ratio has climbed more than three times.
To put that in context an individual debt-to-income ratio for borrowers getting a mortgage is around 33%. Imagine if you tripled that to 99% just for your mortgage. How would you pay for anything else when debt took up 99% of your income?
Right… you couldn’t…
But the Fed plays by a different set of manipulation…rules…
As they print more and more money they kept the interest rates low, so although there was much more debt in the system the interest expense to GDP was actually lower than in prior years. (see chart below)
Now that rates have been climbing the Fed is in trouble…big trouble…
The CBO projections below show the interest cost as a percentage of tax climbing exponentially as shown in this chart below.
Since the government doesn’t directly produce anything to increase GDP, they can increase taxes or lower interest rates (or a mixture of both).
What do you think they will do?
If they raise taxes, politicians will get slammed and the people will revolt since you are already spending over 50% in tax when you combine all the different types of taxes.
If they drop rates they will spike up inflation again and cause all sorts of volatility in the markets.
What I know for sure is that either way it is going to cause a lot more volatility in the market.
I think we will see the “boom and bust” cycles become more intense and more frequent as the market attempts to adjust to the Fed’s playbook.
I have a strategy for my clients that will allow them to ratchet up their wealth in a systematic manner. But first you have to qualify and make sure you have the proper balance between speculative and actuarial based assets.
If you don’t feel prepared financially, I urge you to reach out and find a spot on the calendar so we can see if we can make it work for you.
I am on a mission to save as much of America’s wealth as possible…but the clock is ticking.