by Brian DeChesare Comments (74)

The 2012 US Presidential Election Results: Financial Apocalypse, Round 3?

I’ve gotten a few questions on the 2012 US election and how the results – another 4 years of Obama – will impact the finance industry.

While I had fun writing the Occupy Wall Street post last year and pissing off a whole lot of people reading it (but mostly random visitors who wanted to complain…), I haven’t had the chance to do anything like that this year.

So let’s get started.

First, I’ll admit who I voted for and why… and then we’ll get into the implications of the election both for the economy as a whole and for the finance industry specifically.

The Truth

I was exceptionally unenthusiastic about either candidate, even more so than in 2008.

Generally, I am in favor of smaller government and less spending on entitlements – mostly because, as we’ll see below, the US is going bankrupt and simply CANNOT afford its current spending levels anymore.

My position has nothing to do with ideology – after all, there should be a “social safety net” in the richest country on Earth – and is 100% related to the finances of the US instead.

I look at what’s going on in Europe right now and say, “I do NOT want this country to end up like Greece or Spain – even if it means some short-term pain.”

On the other hand, I found it difficult to get behind Romney’s “Cut taxes by 20% and… we’ll grow the economy by so much that we’ll reduce the deficit!” logic.

If you do the math you’ll see that it’s completely impossible to reach the “break-even point” unless the US GDP grows at 6-7% this year and next and then 4-5% after that for years – in other words, completely impossible growth rates that are more in-line with emerging markets than this country.

Oh, and this is without those 20% tax cuts:

What we need to do to fix the fiscal problems is straightforward, but nearly impossible to implement: raise taxes AND cut spending and restructure programs like Medicare and Medicaid.

Liberals, of course, want to raise taxes and increase spending, while conservatives want to cut taxes and cut spending, with both groups unwilling to acknowledge that a compromise is needed.

And then they create gridlock in Congress and prevent anything substantial from ever getting done.

My Vote Went to…

Taking into account two candidates that I was extremely unenthusiastic over, I was able to make my decision very easily… but she was a bit of a “dark horse” candidate (or should that be “dark dragon” candidate)?

Yes, that’s right: Daenerys Stormborn is clearly the best choice to lead the country.

The public is unwilling to accept higher taxes? Or reduced government spending?

Just unleash one of those 3 dragons and you can instantly solve a bunch of problems.

Unleash all 3, and we wouldn’t even need a government to do anything.

The fact that I live in New York State, where my vote is completely irrelevant, also made it easier to go with such a bold and unexpected choice.

In All Seriousness

No, I didn’t actually vote for a fictional character from Game of Thrones, but I was very tempted to do so.

What I wrote above is just the tip of the iceberg of what I’ve been thinking about over these past few months; both parties had so many laughable positions, promises and “policies” that it really did feel like we were living in a fantasy kingdom with a Mad King who burns his enemies alive.

I am deeply concerned about the direction of the country, and I don’t think much of what was proposed by either candidate will fix anything.

Why No Policy Will “Fix” Economic Growth

There has been a ton of debate over tax policies and other government decisions, but all of this discussion ignores one simple truth: the president has limited power to “fix” the economy and macroeconomic / industry trends matter FAR more than policy decisions.

Yes, the economy boomed under Bill Clinton in the 1990’s and he balanced the budget… but how much of that was due to the IT revolution and the Internet vs. his own policies?

The biggest problem with the economy today is that there’s too little investment into “empowering” innovations that actually transform industries and/or create entirely new industries – which means that new jobs are barely being created, regardless of what the tax rate is.

See “A Capitalist’s Dilemma” for more on this one.

A secondary, but related, problem is that companies that employ hundreds of thousands of people simply aren’t being created anymore.

Technology and automation have made everything so much more efficient that the kind of labor force that was required in the 1950s – 1980s is no longer needed.

For a simple example, consider a business like this site and BIWS: getting to this level with a relatively small team would have been impossible 50 years ago.

Back then, I would have needed more like 40-50 people to run everything: someone to manually input transactions, trainers to go teach classes in-person, someone to print out and deliver newsletters on paper, someone to manually call customers on their land-line phones… and damn, Excel didn’t even exist.

So much of that has been automated and streamlined that the net impact is that even new, highly successful companies simply don’t create that many new jobs.

This is one of the reasons why each recovery since the 1980s has taken longer and longer and why the current “recovery” is so anemic.

And then you have other factors, like the shift from full-time or part-time “employment” to more and more contractor work, outsourcing many functions overseas, and more.

The bottom-line: I don’t think the official unemployment rate will drop back to “normal” levels of 4-5% anytime soon – regardless of who’s in office or what tax rates are.

Read more about this topic here.

How to Fix the Country

What would your “investment recommendation” be if you were analyzing a company and its annual cash flows looked like this graph below?

You would say, “Do NOT invest – stay far, far away unless you’re a turnaround / restructuring expert.”

And yes, that graph is the true financial profile of the USA as outlined in the excellent USA Inc. report from last year.

If you drill down into the data, you’ll see the primary reasons for the US fiscal problems: Medicare and Medicaid, combined with lower tax revenue.

If you’re outside the US and are unfamiliar with these, Medicare is a guaranteed health insurance program for citizens over the age of 65, while Medicaid is a guaranteed health insurance program for families with low income and resources.

Forty years ago, combined spending on these programs comprised 5% of total expenses in the US; today they represent 21% of all spending.

To give you an idea of the problem this presents, here’s what the Liabilities on our “Balance Sheet” look like:

But here’s the punch-line: by 2025, if left unchecked, entitlement spending plus interest payments will exceed TOTAL revenue – leaving no room for spending on anything else, and ultimately bankrupting the country:

While spending in other areas arguably needs to be cut or tweaked, Medicare and Medicaid make the US fiscal situation completely unsustainable – primarily because:

  1. Healthcare costs have risen at twice the rate of inflation over this time period;
  2. The number of people enrolled in these programs has skyrocketed, jumping from 12% of Americans in the 1960’s to 31% now;
  3. And, to be blunt, Americans are extremely unhealthy and “suffer” from many completely preventable “conditions,” like obesity (see pg. 112 of USA Inc. for more).

These are complex problems and I don’t have all the solutions.

But any solution will have to involve both increasing revenue and cutting expenses – the 3 most important points are:

  1. Raise Taxes – And it needs to be more comprehensive than the “Make The 1% pay even more!” line of reasoning. Yes, that will help a little… but as Michael Arrington points out, one huge problem right now is that “stored up wealth” is not being taxed at all. Should there be a “wealth tax”? Maybe, if it could somehow be used to encourage long-term investment in industries that won’t yield an immediate profit or ROI in 3-5 years. Maybe the solution is increasing tax rates, or maybe it’s expanding the tax base, or maybe it’s some combination of both.
  2. Reform Healthcare – Rather than making slight tweaks to this one, I believe something far more comprehensive is needed. The US system should be more like the healthcare system in Singapore, one of the most successful systems in the world. The main idea there is that everyone is forced to divert some pay into private healthcare savings accounts, which they then must draw on, at least partially, to pay for medical expenses. Nothing is “free,” which prevents the over-utilization that you see in places like Canada and the UK. I did mention that 60% of Medicaid spending goes to “optional recipients,” right? (see pg. 15 of the USA Inc. report).
  3. Encourage Long-Term Investment in New Industries – Perhaps you do what the “Capitalist’s Dilemma” article recommended and introduce 0% “super-long term” capital gains tax rates for investments held for 8-10 years or more, or provide some other type of incentive for investing in transformative industries that would actually create jobs. Alternative energy is one of the most likely candidates here, but there may be others.

Yes, we should have a “social safety net” and programs like Social Security should continue to exist.

I am not one of these crazy Tea Party people or “Libertarians” or Rick Perry arguing that it’s a “Ponzi scheme.”

I agree and disagree with both parties on many issues and don’t follow a particular “ideology” other than “Do what works and even if a solution seems crazy on the surface or is extremely unpopular, implement it if it solves the country’s problems.”

So my motivation for all the points above is not about ideology, but rather making the numbers work.

Will Any of This Happen?

If the past few years are any indication, the answer is a resounding no.

There’s way too much gridlock in Congress and no one is willing to acknowledge that entitlement programs need to be radically altered, not just tweaked slightly.

So I am quite pessimistic about the future of the country and the possible resolution of these fiscal problems.

I think the US credit rating will continue to be downgraded as the deficit and debt grow, and that, if left unchecked, the country will be on the path to bankruptcy within 15 years.

The only options to “solve” it are: 1) The government introduces massive inflation to pay off its debt; 2) Entitlements are completely gutted, resulting in panic and death; 3) They intelligently rework the tax code and healthcare system (I would put the odds of this one at 0.01%).

Options #1 and #2 would result in apocalyptic scenarios transpiring, but unfortunately they’re the most likely outcomes at this stage.

So in predicting how the finance industry will be affected, I’ll continue to assume that these problems will get worse, not better, because the “general public” (people who haven’t read USA Inc. or who don’t understand it) hasn’t even grasped the scope of these issues yet and how screwed we all are.

The Impact of the Election on the Finance Industry

Four years ago I predicted the impact on take-home pay based on Obama’s victory; this time around I’m not even going to attempt to do that because his proposals were vague other than the “Increase taxes on those earning above $250,000” line.

The bottom-line is that your take-home pay is going down by at least 5-10% because of that pledge, the “fiscal cliff,” and the new taxes that will come into effect as a result of Obamacare.

At the very minimum, the top 2 federal tax rates are increasing from 35% and 33% to 39.6% and 36%, respectively, assuming that the Bush tax cuts expire (which seems likely, at least for these top brackets).

Then you have increases in the capital gains and dividends taxes, the payroll tax increase, and a whole bunch of other increases; you can get a summary here.

The most relevant quote: “The top 1 percent of households face some of the largest tax increases in 2013 and would see their after-tax incomes fall by 10.5 percent if Congress does nothing.”

“The top 1 percent” here refers to almost everyone above the entry-level in the finance industry because of the income threshold; we’re looking at everyone beyond the $200,000 USD per year income level.

So yes, your taxes are going up – maybe by slightly less than 10% if you’re just starting to work full-time, but certainly by some amount.

But everyone expected that. The more interesting question is which industries will be impacted not only by his victory, but also by the looming fiscal disaster in the country.

I don’t have all the answers, but here are a few industries that come to mind:

HealthcareSome people seem to be optimistic about the healthcare sector because now companies will have more customers as a result of Obamacare.

I think the impact will depend on the specific sector; it might help pharmaceuticals, insurance providers and hospitals, but it seems likely to hurt medical device manufacturers due to the 2.3% tax on all sales of medical devices (that’s sales, not profits – ouch ). In fact, it has already resulted in layoffs and planned layoffs in the industry.

Some consolidation and M&A activity will probably result from all this, but the overall impact on healthcare depends greatly on the sector you’re in, and I am not too optimistic personally.

See more on healthcare investment banking and key drivers.

Real Estate & Home-Building – On one hand, the Obama administration has been very friendly to these companies because of “quantitative easing” (don’t even get me started there…) and the ripple effect that real estate has on the economy – and these stocks have outperformed the market as a whole over the past few years…

But then you look at an economic downturn that’s likely to continue, unemployment that may actually get worse, and consumer spending that may decline further as everyone deleverages and it’s hard to see positive trends in office, residential, or retail properties.

But real estate does have one big thing going for it: even in an apocalyptic scenario where the US government goes bankrupt and civilization ends, buildings and land still have some value.

See more on real estate investment banking and the key drivers.

Technology – There haven’t been too many new policies here and there probably won’t be going forward, and trends such as cloud computing and mobile devices will continue.

The most likely impact within the finance industry is not on the overall technology sector, but rather on specific verticals within it.

Healthcare IT, for example, may see a boom because of all the new regulations that make it even more important for companies to automate record-keeping and reduce the compliance burden.

We saw the same thing after Sarbanes-Oxley was passed in 2002: companies offering technology-based solutions for compliance started to spring up and get acquired by bigger players.

See more on technology investment banking and the key drivers.

Mining – Here’s where we might see the real “boom.” A falling USD (and other major currencies losing their value) plus possible runaway inflation mean that investors will sink even more funds into gold and other minerals… further pushing up prices and deal activity.

Learn more about metals & mining investment banking right here.

So, in short: if you don’t know what investment banking group you want to work in, mining just might be a great choice with the election results and the looming apocalypse. Other natural resource sectors, such as oil & gas, may also see a spike in deal activity if commodity prices there increase.

Many other sectors, such as consumer/retail, industrials and clean-tech could be anywhere from “neutral” to “bad,” depending on the overall economy and the specific sub-industry you’re in.

So, What Should You Do With Your Money?

I don’t give “investment advice” on this site, partially because it would get me in trouble and partially because I don’t do much public markets investing myself.

But I’ll make an exception here and give some simple advice: diversify out of the US Dollar and outside of the country.

You should think of your investment strategy in these terms: “In the case of a continued US government credit rating decline, possible bankruptcy, and global apocalypse, what assets would still have value?”

Three that come to mind are commodities, real estate, and agriculture.

Depending on how pessimistic you are, you may want to add weapons to that list as well; bullets apparently last forever and they might just become the currency of choice in the future.

While commodities like gold don’t have much value on their own, other metals and minerals and energy resources will still prove useful and have some value even if everything else collapses.

And agriculture is an overlooked but extremely promising sector – we’ll actually be publishing an interview with a reader who works in agricultural finance in the near future.

Let’s just say that it’s one of the few areas where you can get high returns with minimal leverage. And if humans continue to exist, they’ll still need to eat something to survive.

For Further Learning

My #1 recommendation is Mary Meeker’s excellent USA Inc. report, published last year.

This erases all the hype about what’s going on with the US fiscal situation and uses REAL numbers to show what’s happening.

You may disagree with the recommendations or you might be more optimistic than she is, but the report is 100% required reading if you want to understand the dire straits the US is currently in.

Also check out Rumble 2012: Jon Stewart vs. Bill O’Reilly – a debate between two talk show hosts that was far more entertaining, informative, and arguably even more honest than the actual “debates” during this election season.

To learn more about why the healthcare system in the US is broken and why the one in Singapore works so well, check out The Undercover Economist.

Final Thoughts: Your Moment of Zen

I’ll leave you with one last thought this weekend: what a Romney presidency would have been like.

Watch on YouTube.

I’m not sure about the rest, but I’ll take the “wealthy ladies” any day of the week, please…

M&I - Brian

About the Author

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street. In his spare time, he enjoys memorizing obscure Excel functions, editing resumes, obsessing over TV shows, traveling like a drug dealer, and defeating Sauron.

Break Into Investment Banking

Free Exclusive Report: 57-page guide with the action plan you need to break into investment banking - how to tell your story, network, craft a winning resume, and dominate your interviews

Loading the player...
We respect your email privacy


Read below or Add a comment

  1. Hi Brian,

    Not sure if you monitor all the comments on this (even for old articles like this) so I may well be talking to the wall here.

    Big fan of the site in general. I’ve learned a lot. Just a few points I want to make on this particular article which I feel goes a bit over the top.

    According to the newest CBO projections, the defecit from the mid 2020-30s is going to be in the region of +-5%. Thats not even assuming the recent trend in the declining growth rates in healthcare costs in recent years will continue to go downward, what with Obamacare etc. 5% defecits aren’t great but to compare the situation with Greece is embarrassing. As other commenters above have noted the US borrows in its own currency and furthermore is actually growing as an economy (anemic as it may be) unlike Greece. This says nothing of the structural differences in the 2 economies. Comparing America to Greece is like comparing a water melon to a potato.

    Secondly, I agree with you that America needs to balanced approach to fix its defecit problem.

    Ideally America would just grow out of its defecit. Instead of focusing on cutting all the time, I think there should be more emphasis on growing. The American Engineers Soceity rates many of the bridges in your country as dangerous. The lack of high speed rail in America is astonishing for such a wealthy country. Likewise the educational attainment of American high schoolers is falling behind the rest of the world where once it was a leader. I could go on about the lack of public investment. The financial times ran a great piece on this recently.

    Upskilling its workers and investing in infrastructure should be a priority for the US.

    If there must be cuts, let them be on the bloated defence spending budget where close to 50% of discretionary spending lies and where America spends more than the next 19 nations combined.

    The spending would even induce more economic activity thanks to the multipliers which the IMF has done a good study on in Europe.

    Finally, I think giving your readers the impression that we are heading for an apopylictic scenario where we should invest in “bullets” and guns and farmland is unbecoming of the general good quality of this site. If I had a penny for every time Jim Rogers, Marc Faber etc have been telling me about buying agriculture over the last decade I’d stop working.

    The only apocalypse we should be worried about is the slow burning issue of climate change in my opinion, but I digress.

    Anyways great site overall. Keep up the good work.

    1. Thanks for your feedback. I think we’ll have to agree to disagree – I don’t like to get into extended debates online, but in short:

      -No, America is not Greece. I agree with you.

      -CBO budgets are a joke. Look at the historical data – each decade it has been off by a huge amount if you compare their projections to actual results. 2000-2010 was particularly embarrassing.

      -High-speed rail only works in congested urban areas with high population density (e.g. many parts of Japan, Korea, etc.). The economics don’t work as well for a massive country like the US with lower population density in many regions. This is why services like Amtrak are heavily subsidized.

      -Yes, agree more infrastructure investment is needed but it should not necessarily be high-speed rail.

      -Yes, defense spending can be cut but it is a much smaller problem than entitlement spending – just look at the #s and in particular the growth rates in each category.

      -No, we may not be heading for an apocalypse, but America is certainly in a state of decline. All countries tend to rise and then decline over time. To think that the US will be an exception is foolish – it happens to every world power, and often the warning signs are startlingly similar. There is nothing special or wonderful about the US, and I say that as a citizen of the country who spent most of my life there. Plenty of other countries are competitive, if not ahead of us, in many areas.

      See this book review for more:

      1. Hi Brian,

        Agreed, all great empires rise and fall …eventually. I do see some eerie parallells with the later days of Rome. Massive millitary expansion, the heavy use of mercenaries (or as we call them today ‘contractors’), a corrupt body politic, etc.

        How can you say CBO budgets are a “joke” while at the same time pointing to their numbers to show runaway entitlement spending in the 2020s? I do agree though that as you go further and further out it becomes more art than science whether projecting defecits or entitlement spending.

        Theres a good book by Stiglitz on the $3 tr cost of the wars of the past decade so millitary spending is not a drop in the ocean compared to entitlement spending. A lot of the spending was done off budget if I recall so may not show up in government figures that you present above.

        I agree though in the future entitlements may need to be looked at eventually. I think Paul Krugman makes a good point though in that we shouldn’t be too focused on the problems of the 2020s and more focused on the problems of today like low growth and high unemployment.

        I’ve already read your review of the Great Deformation and it seems like an impressive book. Unfortunately I have no idea where I would get the time to read a book, no tome, of that size!

        I do think your country is witnessing a massive social trend where people are moving back to the cities and gentrifying them while the suburbs are starting to house the working poor. If these trends continue high speed rail becomes quite viable. I think its worked quite well even in medium density countries like France.

        Finally if I had to name one thing that the US suffers from, it isn’t financial problems but political dysfunction. Unfortunately one of your political parties has gone off the deep end. The spectacle of the Tea Party berks putting a gun to the head of the world economy just to make hyper-partisan ideological demands is horrifying to many of us from elsewhere. Its ironic that its the enemies within rather than without who could bring down America in the end. I could go into this further but I believe this site is for finding out about the finance industry and not a political discussion site!

        …Anyways, can you advise me if the CFA is a good idea?

        Lol, just joking. (I have no intention of doing the damn thing).

        Anyways thanks for replying.

        1. Thanks for you reply – again, clearly we don’t see eye-to-eye on these issues but I can respect your opinion.

          CBO figures: if anything, those figures are *optimistic*. So the argument here is, “Look, even with incredibly optimistic figures, we’re still screwed! Now what happens with less optimistic figures?”

          The impact of the Tea Party is greatly exaggerated.

          I don’t know how it’s presented internationally (from your comments I am assuming you are in western Europe), but “gridlock” has happened a ridiculous number of times before in US history.

          On the eve of the War of 1812, for example, we almost didn’t have military funding due to arguments in Congress… even as the armies of Great Britain, at that time the greatest power on Earth, were about to invade.

          Of course, most Americans are too stupid and lazy to know anything about their own history.

  2. AsongofIceandFinance

    Brian I disagree, we’ve seen time and time again Danerys makes decisions based on her emotion and love of the people. America needs someone strong who isn’t afraid to make the tough call…
    Stannis Baratheon 2016!!!!!!!

    1. Haha it depends on which book you’re going by. Ignore A Dance with Dragons, and Daenerys is much better! I’ll pretend that her story ended at the conclusion of Book 3…

  3. I think your obvious and best choice was Ron Paul. You cannot fix the economy until you leave it to the people, not policy makers. We have seen it so far in Sowiet Union and it is going to look this way both in Europe (which I am from) and USA. Monetary policy covering government spending and causing M increase will take you down. Bubbles are not coming from nothing, likewise deficits. I think it is high time people get out on the streets, take sticks and hit policy makers hard with no mercy.
    Keep my fingers crossed for your country, you used to be the greatest free market country ever, which you are no longer and never will be again. Welcome to the new reality, printing machine.

    1. Ron Paul is way too extreme and I don’t agree with his more extreme positions. We need a return to balanced policy, where there is a “social safety net” for people who have truly fallen on hard times, but where there is also not a massive class of people who are dependent on the government and taxing the wealthy.

  4. Hey Brian, great article! Just curious though, what’s the difference between the present US “social safety net” and “Ponzi scheme”? I mean, certainly there SHOULD be a social safety net. Just want to hear about your opinion.

    1. There is a thin line, but the key difference is that a program like Social Security is sustainable because it’s paid for via payroll / employment wage taxes, which can be increased or tweaked over time, whereas a true Ponzi scheme is unsustainable because it demands ever-increasing capital from new investors. And eventually a Ponzi scheme falls apart because it’s impossible to earn massive returns once you get up to a certain amount of capital.

      1. Agree. Too bad we can’t vote for Tyrion in real life. Uhm, if you like George R. R. Martin, you might want to look out for Joe Abercrombie. With reality like this who doesn’t want some good fantasy. Wish you all the best with your site and your show!

  5. I never pegged you for an inflationista. Back in the 80’s the Economist ran a front page that stated “The 2 Trillion Dollar Debt Bubble!” Ever since then inflationista’s have been pounding the table about the coming inflation. No group of market participants has gotten it more wrong. But we’re all suposed to believe them because it has to happen eventually right?!?

    How can you justify calling for austerity in the US because you fear what is happening in Europe? How’s austerity working out for Europe?

    1. From your comment, I can tell that you didn’t actually read anything above but I’ll answer you anyway: at the current spending levels, the US budget is completely unsustainable. It’s not an issue of “Well, let’s keep spending and running a deficit to keep the economy going!” it’s an issue of “If things continue at this rate, the country dies.”

      Inflation? No, you misunderstand: Medicare and Medicaid spending + interest expense will exceed ALL revenue by 2025, creating an endless cycle where we keep borrowing and the debt keeps rising by more and more each year.

      The way I can justify calling for cuts to ONLY THOSE TWO PROGRAMS AND NOTHING ELSE is simple: most of the current spending is wasted on people who couldn’t take care of themselves in the first place and are costing everyone else something as a result.

      And all else being equal, I would much rather have a recession in the next year or two and then a return to fiscal sanity vs. continuing to spend ourselves silly and eventually being unable to repay debt.

      You can’t compare the US to Europe because the economies and government spending are much different… yes, in the short-term across-the-board cuts will slow down growth, but I’m only calling for the restructuring of 2 specific programs here.

      In fact, unlike many other fiscal conservatives I’m not even suggesting that Social Security go away or be changed radically: that program can sustain itself with only minor tweaks.

  6. I’m interested in LevFin. besides knowing LBO in and out, what other interview preparations do i need to stand out from the crowd?

    1. M&I - Nicole

      Perhaps you can check out our BIWS course – Please scroll down and check out our sample video there.

  7. Hey Brian, this is entirely unrelated. What is your take on interning for search fund PE? I’m a sophomore at a non-target in Canada. Do you think the benefit of this internship would outweigh giving up 30 hours a week unpaid?

    1. Eh, it might be moderately helpful but 30 hours per week is a lot. I would try to see if you can scale it back to 10-20 hours per week at the most.

  8. Brian, you can RELAX. IT IS LITERALLY IMPOSSIBLE FOR THE US TO BE INSOLVENT. The reason is that it has its OWN CURRENCY.

    Notice how the US, UK and Japan have high debt/GDP ratios and falling treasury rates, but the PIIGS have experience soaring rates? Not a coincidence.

    The way that the Treasury spends is with keystrokes – there is no limit to keystrokes.

    It does have this legal requirement to match deficit spending with bond issuance, but that’s okay because if it wanted to the Treasury can ISSUE BONDS AND DEFICIT SPEND INDEFINITELY. This is because deficits creates excess reserves in the banking system, and Treasuries are they only way to eliminate them. Plus, there are a few other procedures ensure that the Treasury’s cheques never bounce.

    The downside to extravagant spending and low tax rates is inflation, not insolvency. That is simply a NON-ISSUE right now, given the excess capacity in both capital (e.g. factories) and labour (look at the unemployment rate).

    The upshot is also that the US will NEVER END UP LIKE GREECE OR SPAIN. It can never be at the mercy of bond vigilantes because it has control of its government spending.

    If you are interested, I suggest you consult these sources: (entries 18-29)

    (there are too many to list)

    And follow these blogs:

    Having said that, I do agree with taxing the wealthy. Wealth inequality isn’t something made up by latte-sipping liberals – it’s a reality. The top tax rate in America is low compared to that of other developed countries. And the wealth have done incredibly well since the financial crisis.

    It would also be beneficial to adopt a single-payer healthcare system to reduce costs. There is overwhelming evidence that it is more efficient. Saving in payments to insurers can go to beneficiaries, or to educate, NASA, other useful shit…

    And as for technology and productivity, I don’t have a 100% answer (does anybody). But I think the government can start with stimulatory fiscal policy. That will put more money into the hands of consumers and companies and induce investment by entrepreneurs. Suppose someone thought they could take on Apple – with stagnant growth in consumer income, they would might reluctant to take the risk. The beauty with this approach is that the government would be facilitating the free market in picking winners and lowers.

    And I agree pot should be legalized and taxed. I know pot smokers, they’re not welfare queens and moochers.

    Finally, I agree with not going into your political views on this blog. It’s not necessary, and it detracts on the purpose of this blog.

    1. I hear what you’re saying, but the arguments in those articles assume that the USD will remain the world’s reserve currency forever.

      I don’t think it will, because countries like China are already diversifying away from it. And I think inflation is a bigger threat than the articles describe, because even if we don’t end up up in “hyper-inflation” territory, something as “small” as 10% inflation per year would still have devastating consequences when it’s compounded over time.

      And even if you think that nothing above will actually cause a crisis in the country, we still have a problem with entitlement spending: if it grows so high that the country can invest literally nothing in areas like education, infrastructure or defense, how long do you think the USD will remain the world’s reserve currency?

      The bottom-line: maybe we can keep printing money to avoid default and maybe somehow inflation won’t be that bad… but entitlements still need to be restructured, or we’ll fall further and further behind other countries that can invest more in areas like education and infrastructure.

      Going forward, the US will be less and less relevant in the world and take up a much smaller share of worldwide GDP so it still makes sense to diversify outside of the country.

  9. What is your opinion of Ron Paul’s stance?

    1. I agree with some of what he says (war on drugs = massive waste of money, just tax them and get the revenue), but overall I think he’s too extreme and it would be completely unrealistic for someone like him to win an election. From what I understand, he wants to eliminate multiple branches of the government… not going to happen if you look at historical trends.

      1. Ok, so you think he has a minuscule chance of getting elected. But do you personally agree with those positions regardless of whether or not they can come to fruition?

        1. I agree with some of his less extreme positions. I do not agree with eliminating multiple branches of the government because you need to take a balanced approach when it comes to solving problems.

          Think about what the country was like in the late 1800’s: do you really want to go back to that? A lot of what Ron Paul has proposed would lead to that.

  10. Hey Brian,

    Amazing write up.

    I have a question on the following points:-

    1. Increasing prices of production of goods in U.S

    2. Cheaper sourcing from countries like China, Taiwan, India etc. which are extensively competitive.

    3. Production of goods in developing and labor intensive countries instead of U.S itself.

    Do you think all this is leading towards a major portion of the trade deficit and the increasing unemployment?


    1. Yes, those could all be contributing factors. But they don’t have to be – look at how well Steel Dynamics, a steel manufacturing company based in the US, has done against competitors in cheaper countries. It’s possible to compete, but you have to leverage the advantages of the US to do so. I still think the lack of huge new industries is more responsible than anything else.

  11. Hi Brian–

    I am going to be attending my first information session soon, and I want to be as prepared as possible. Up until now I have had zero networking experience. When asking for a banker’s card, is it customary to just flat out say “Can I have your card?” or is there a more tactful way to put it? Also, should I bother giving them my business card as well?


    1. Read M&I articles my friend…99% of all general questions are answered there

    2. See:

      Yes, just ask for the card at the end. Say you have to run or make up an excuse and ask for their card. I would not give them your card because they’re not going to take the time to contact you anyway.

  12. Brian,

    I wanted your advice regarding my career prospects. So I’m an Econ major, about to graduate from a top uni (outside the USA) and I have an IBD job set for next year at a BB.

    However, the idea of becoming an entrepreneur and making something for myself has been haunting me for a while and I’m worried that I’ll waste my time in IBD correcting font sizes and margins (and in the meantime learn nothing about the real world).

    I am hard-working, willing to learn, globally mobile and sociable – but my problem is that I have no business ideas.

    What would you advise? Worth staying in IBD for 2-3 years and then moving elsewhere (but where?)

    Any particular blogs/stories/books you would recommend me to read?

    –> Basically, if you have no science background (meaning you can’t invent anything) what kind of entrepreneur can you be?

    1. If you don’t know exactly what you want to do yet, I would work somewhere first, whether at a bank or elsewhere, just so you can start generating ideas and gain experience and money in the process. I don’t know if blogs/stories/books would help that much – most entrepreneurs get their ideas from personal experience in an industry and from seeing gaps in the market there.

      You could easily partner up with a tech or science person who doesn’t know anything about business, sales, or marketing and help with that side… or even start something less dependent on tech, such as a media or content-related startup or even something in an “older” industry like construction. Remember that not all new businesses are tech-related… in fact, the vast majority aren’t.

  13. Great article!

    I absolutely agree with the principle that you can’t just raise taxes OR cut spending.
    Don’t remember where I saw it, but the efficiency of US spending in regards to health care and social security is exuberantly low. Compared to the German health care system for example, the per capita spending in the US for health care is almost three times as high, yet the doctor to patient ratio is is much worse (470:1 compared to 230-250:1).
    What do you think, why a systems such as those in Europe or Singapure can’t be adopted/imitated?

    1. It’s a complex problem so I don’t think you can narrow it down to any one factor; a big part of it is that incentives here are completely mis-aligned and there’s no reward for preventative care since no one makes money if you actually stay healthy in the first place. Then there’s the lack of competition, high malpractice insurance, the fact that no one really knows what anything “costs” due to subsidies so they are not incentivized to be efficient, and the list goes on.

  14. Lack of competition for medical insurance, due to antitrust exemption, is a big reason why health care costs are so high. Removing the incentive to provide unnecessary tests, office visits, and treatments for doctors to get paid more is another solution. Solutions are straight forward except for politicians.

  15. What kind of impacts would there be, if any, on financial institutions?


    1. Good question… near-term, deal activity may increase because of Basel III and higher capital requirements (some banks will need to raise capital and/or acquire or get acquired by others). But that is more to do with Basel III than everything above. Longer-term, most US-based banks will be hurting if the US actually defaults on its debt and/or has its credit rating slashed significantly because people will start to move funds abroad.

  16. So how many times more money did the medical care consume than all the needless wars US wages on the rest of the world the war of terror it wages on its own citizens?

    1. From your comment, I can tell that you didn’t read the report or anything I linked to above, but I’ll answer it anyway:

      From 1789 to 1930, 41% of USA Inc.’s cumulative budget was dedicated to defense spending (compared with 20% in F2010), per the Census Bureau.

      So believe it or not, all these “needless wars” actually consumed a MUCH greater percentage of the budget prior to 1930.

      In fact, I’ve even done some additional research for you: see this document:

      Cumulative spending on wars since Sep. 11, 2001 over the next 10 years was $1.283 trillion… over 10 years.

      By contrast, Medicare spending 2010 alone was $452 billion, which was up 2x from the level in 2000. Medicaid spending was $369 billion.

      So, total healthcare spending in 2010 = $821 billion. In 2000 it was $352 billion.

      So just 2010 and 2000 together – only 2 years – nearly equal the cumulative amount spent on wars over those 10 years.

      The report doesn’t list all the numbers in between, but healthcare spending grew each year – so at the very minimum, cumulative healthcare spending exceeded war spending by *at least* 4x if you assume $352 billion in 2000 growing by 10% per year to over $800 billion by 2010.

      This is not to say that I agreed with those wars, or that I agree with how much was spent there and the end result.

      But the problem with the US lies almost entirely with healthcare spending and has much, much less to do with defense spending… which, compared to historical numbers, is a very low percentage of GDP currently.

  17. seriously: what country should we look into? the u.s. was just an experiment anyway. socialism was going to take over eventually. feel the same?

    1. Haha I have no idea. I think Australia is doing better? But that’s mostly because of the mining boom, and somehow the government there is still managing to run a deficit.

      At this point, I really don’t know. Investing in farmland is my strategy. Who needs a country when you have cows?

  18. Amazing informative article. We need more of these. Brian for president! (seriously)

    1. Thanks! Somehow I think that all the references to killing people and doing drugs on this site would prevent me from winning an election…

  19. I’m not as optimistic about mining. Every country tries to support the USD to make sure their exports are competitive. At the same time, economic apocalypse means there will be less demand for natural resources, bringing down their prices.

    1. You might be right, but my point was that metals and minerals will still retain some of their value simply because they can be used for other purposes, unlike many other “assets” (especially anything intangible).

  20. Brian, tax hikes will substantially slow down the economic growth that is already slow. They are doing it in Europe and it doesn’t work. Canada in the 90’s was in a situation similar to ours. It cut both taxes and spending. Same did Ireland and New Zealand. They balanced their budgets and thrived.
    Maybe, if we go that way we’ll not grow out of debt immediately, but we’ll move to the right direction by decreasing deficits and will eventually balance our budget.

    1. Canada had the tech bubble to help them though. That won’t be the case for U.S.

    2. I really doubt that, because most upper income people don’t even spend most of their money on consumption. Did the tax hikes in the 90s slow economic growth? Nope, because macroeconomic trends make far more of an impact than tax policy, especially when you’re talking about 35% vs. 40% for the top tax bracket.

      If it comes down to 35% vs. 70%, then yes, that will make a bigger impact.

      As Jason said, in the 90’s it was easier to do this because of the tech bubble and IT revolution boosting worker productivity… we don’t have that today and no industry is driving job creation.

    3. Actually, Canada raised taxes in the ’90s. Faced with a huge deficit, the Liberals elected in 1993 introduced a package of seven-to-one spending cuts to revenue increases (and also went back on a campaign promise to cut the GST, the national sales tax). Combined with macroeconomic factors, it worked out pretty well!

  21. Great article Brian!
    And that video is fantabulous.

    For the healthcare issue…yeah HUGE problem. The govt should be spending more money EDUCATING ppl on food, diet and exercise. That should reduce costs on heart attacks and other health problems related to diet by more than 50%.

    America has too many FAT ppl!!!!

    That would help reduce Medicare entitlement spending by a lot!!

    Go exercise and burn the fat America!!

    1. Implement a “fat tax” and make all items with excess sugar 500% more expensive. Ok, maybe that’s bit extreme…

      1. It isn’t. I see a trend towards lifestyle management e.g. diet, exercise and smoking in medicine. Look at Alec Baldwin. His girlfriend made him cut out sugar. Probably tacked on 10 years to his life. Even though she made him move downtown.

      2. Instructor

        A fat tax is a good idea. Tax the food stamps on an individual basis. We shouldn’t tax the sugar content of food but the fat content of the individual. This would also be self-regulating. The tax of course isn’t really paid, it’s just deducted from the allowable food stamp amount until it hits zero or balances out. Once it balances out a lot of people will feel so good they may actually get a job. They can stand on a scale mat while standing at the window filling out forms for the stamps. They won’t even know or care if you tried to tell them how their food stamp amount is determined.

      3. Instructor

        One more thing Brian.. A tax needs to be a hardship imposed on a problem or the problem causer. This makes a person take a second look at the decisions they make. The people on food stamps or any other entitlement aren’t looking for value or to save money because its free to them already. You shouldn’t pay more for something just because other people make bad choices. And I shouldn’t have to either. Tax the fat persons BMI if they want to be on an entitlement program like food stamps.

        1. M&I - Nicole

          Haha, I can see where you’re coming from regarding taxing on “BMI”. I just think that tax in America such a complex issue!

          1. M&I - Nicole

            Hahaha good article

          2. That article is why we need to tax people based on BMI or body fat % rather than what they buy. The only way to get out of that tax is plastic surgery, cutting off body parts, or… actually getting in shape. All of which sound great to me!

    2. Instructor

      Cut back on the food stamps. This entitlement is making them fat. Have you seen the junk they buy? They buy all the quick, highly fattening, expensive junk. Maybe a food stamp obstacle course is an idea and a course should be set up in every county in every state. Milestones in the course have to be completed to get various food allowances. Little kids would make it easily and get the food needed, fat people making it only a quarter of the way get a quarter of the caloric value in food. Soon they will lose weight and get farther allowing more food. As they get fat again they will be able to go less resulting in less allowance.. See its self-regulating. lol. This could be their job. When they get tired of working on the course for their food maybe they’ll get a real job and then they can eat all they can pay for like I do.

  22. So… who did you vote for?

    1. I really liked Daenerys, but in the end I went with Tyrion. :)

      1. Dick Tracy

        Come on, who’d you really vote for?

        1. The last time I wrote anything about specific political leanings it generated a massive amount of hateful comments, so I would rather just avoid it this time around.

          1. Dick Tracy

            That’s understandable. It’s too bad people seem to be losing the ability to have rational political dialogue.

  23. The us gov will never default and keep its debt. Why? The US can keep printing money and the whole world is willing to accept lt these dollar bills

    1. lol, this was covered in the article

    2. Not for very long! Not if the US credit rating drops below those of African countries…

      1. But isn’t it wrong to care what how the rating agencies think? They downgraded the US, and yields have dropped. More on this below.

  24. Your comments about how commodities will continue to be okay investments is an interesting one. In your opinion, do diamonds fall into the category of mining? So many people are springing up, offering diamonds as an investment.

    1. Hmm, diamonds might be questionable since they’re more of a luxury item than the others… I would be more optimistic about other commodities, though I’m not an expert on the diamond market.

      1. Actually, over 75% of diamonds are used for industrial purposes. On the other hand, most retail diamonds are less liquid than gold, which could be melted to be used in other ways, and I think gold has a better “goodwill” as inflation protection.

        But I am also not an expert in the market.

    2. Russia just revealed to the world that they have uncovered a huge deposit for diamonds – trillions of carats – underneath a large crater. Diamond prices have been artificially high for several decades because Russia kept this information secret. Diamond prices are expected to fall as Russia pledges to expand production. I’d stay away from diamonds.

      1. Good point, yeah I’d stay away from them.

Leave a Reply to M&I - Nicole Cancel reply

Your email address will not be published. Required fields are marked *