Now that Democrats are taking control of the US Senate, the Presidency, House, and Senate will all be Democratic for the first time since Barack Obama’s first term from 2009-2011. Democrats are chomping at the bit to implement their agenda, whether it’s getting back at President Trump or passing legislation that has been on their wish list for years.
Much of that legislation will affect the economy in one way or another, and will likely impact investors’ bottom lines. So what should investors expect over the next two years? Here are four areas to keep in mind when thinking about how Democratic policy will affect your investments.
1. Government Spending
While both parties in government have been big spenders since 2008, split government has usually held that spending in check. With COVID still circulating, however, and with the precedent for massive unfunded spending having been set with two stimulus bills, don’t be surprised for the Democrat-controlled Congress to pull out all the stops in its efforts to spend more money.
Where the first spending will occur is up in the air, but expect $2,000 stimulus checks to be one of the first ideas on the table. That would likely be accompanied by further generous unemployment benefits, bailouts to major corporations such as airlines, etc. And just like the latest stimulus bill, expect a whole bunch of extra pork to make its way in too.
Something as audacious as a full-fledged Green New Deal is unlikely to pass, if only because Sen. Manchin (D-WV) is unlikely to vote for anything that would harm the coal industry. But less ambitious energy spending proposals could very well end up being passed.
Housing bills will likely take center stage as well, along with proposals to eliminate student debt and provide for subsidized or free higher education. Those education proposals alone could cost trillions of dollars.
2, Monetary Policy
Just as with the recent stimulus bills, expect the Federal Reserve to get involved by monetizing all the new debt that will be issued to pay for all this government spending. With the potential for trillions of dollars in continuing unfunded spending, the amount of debt that could be added to the existing national debt could be enormous.
Federal debt held by the public is currently around $21 trillion. If we assume $1 trillion annual deficits each year before stimulus and an additional average of $1 trillion in stimulus spending each year, that would result in a nearly 40% increase in debt held by the public just in Biden’s first term. And considering that Fiscal Year 2020 saw a total budget deficit of over $3 trillion and FY 2021 is already looking at a potential $2 trillion deficit, that could even be a conservative estimate. A doubling of debt held by the public over the next four years isn’t out of the question.
Unlike the 2008 financial crisis, the Fed hasn’t been trying to keep its debt monetization from dramatically impacting money supply. Previously the Fed used interest on excess reserves to keep money supply growth steady. Now, the Fed is allowing the money supply to shoot up significantly, hoping to force inflation upward. But if it allows inflation to rise above its target or get out of control, it could find itself in a pickle. That would severely limit its ability to monetize new debt without risking runaway inflation.
In short, we face a future in which monetary growth and spending growth could combine to create a perfect storm of rising inflation that causes million of American households to fall even further behind in their ability to maintain their standard of living.
3. Tax Policy
All of the spending the Biden administration wants to undertake will have to be paid for somehow. While much of it will be funded by deficit spending, Biden will also likely try to raise taxes.
Democrats will likely try to couch their tax increases as soaking the rich, and will try to minimize the tax impact on middle class households, but that may not be completely avoidable. Expect rollbacks of some of the Trump tax cuts on higher income earners, as well as potential movements on corporate tax rates.
The net result of rising taxes will likely impact investors negatively, as it could put downward pressure on corporate earnings and stock prices, and negatively impact many companies’ ability to pay back or roll over their bonds. Coming at a time when the economy is still reeling from the effects of lockdowns, and when the long-term effects of those lockdowns have yet to be felt, that could stymie any further movement towards economic recovery.
4. Regulatory Policy
When the White House changes parties, one of the biggest fights is undoing regulations enacted by the previous administration. And with Trump having loosened regulations in many industries, the Biden administration will likely look to start putting some of those regulations back into place.
Regulations impose costs on those subject to the regulations, and the effect of more regulations on US industry will be a higher cost of doing business. As with any regulation or tax on businesses, it’s ultimately the consumer who pays the bill for that, i.e. you the customer. Whether it’s a regulation on energy companies, a new fee on financial transactions, or some other regulation, businesses will always find a way to pass on that cost to their customers in some way. And those extra costs being imposed on you could not only eat into the amount of money you’re able to save and invest, but could also impose additional costs and restrictions on your investments as well.
Bernie Sanders’ campaign platform floated the idea of a financial transactions tax. It’s not a new idea, but rather one that has been floating around DC for years. Biden poached that idea for his campaign, and now we could be one step closer to seeing something like that put into place. How exactly that would look is unsure, but it would likely include fees for purchases and sales of stocks and bonds. Some previous proposals have been drafted so broadly that even pulling money out of an ATM would be taxed by the government.
In an era in which investors still struggle to make consistent long-term investment gains, can you really afford to pay extra taxes and fees to the government for the privilege of investing your money? Can your retirement plans withstand the effects of new taxes and fees that could reduce your investment earnings by multiple percentage points?
One Way to Protect Yourself
More and more investors are turning to gold and silver to protect their investment portfolios against loss, and to hedge against the effects of a future market crisis, runaway inflation, or higher taxes. Gold gained 25% in 2020, while silver gained 48%, far outclassing stock markets. And with higher inflation, higher taxes, and higher government spending looking likely over the next four years, that should drive higher demand for gold and a correspondingly higher gold price.
As a physical investment asset, gold and silver will be far more difficult for the government to exercise control over than assets safeguarded electronically such as stocks and bonds. And none of the most popular financial transactions tax proposals impose taxes on purchases or sales of precious metals.
Even better, if you invest in gold and silver through a gold IRA or silver IRA, you can choose to take your distribution in physical coins or bars if you choose to, allowing you to continue holding and benefiting from the ownership of precious metals. If that sounds too good to be true, it really isn’t. The future for gold and silver looks incredibly bright, and demand for gold and silver should continue to climb in 2021. Call Goldco today to find out how you can protect yourself and your assets by investing in gold and silver.