Looking 30 years ahead the growing federal deficit as forecast by a Congressional agency implies the U.S. will become a Banana republic with high interest rates and an unaffordable gigantic budget deficit.
Since people may become alert to this and take steps ahead of time to overcome the problem then I expect the following things to occur:
* Defense spending greatly reduced, resulting in less global stability and greater flight capital into the US and similar countries. The increased flight capital puts downward pressure on interest rates.
* Social Security starting age raised to 72, forcing more workers to delay their retirement, creating a surplus of job seekers, which is deflationary.
* Medicare and Medicaid spending reduced through new laws busting up medical oligopolies and manipulative pricing, thus cutting costs. This is very deflationary, as health care employees with sharply reduced income will have to reduce consumption.
* People respond to the excessive debt and higher taxes (tax increases are deflationary) by reverting to a 1950’s lifestyle where families lived in a 1,000 square foot home instead of the current 2,500 square feet, thus cutting costs, fossil fuel use, and consumption of goods stored in homes, further contributing to a disinflationary climate.
* Higher taxes on the affluent will act to dampen consumption, thus reducing inflation.
* Some of the current high debt balances in the private sector will vanish in a puff of smoke during the next recession as it is “easy” for corporate debtors to file bankruptcy and erase debt. Of course, it is not really “easy” since they would lose everything. This would contribute to a disinflationary climate. Employees seeking to job-hop to pursue a pay raise wouldn’t be able to do so, thus dampening wage inflation, which is the key to suppressing inflation. New corporations with low debts would arise from the ashes of the failed debtor companies and make “job” offers to unemployed low paid Gig economy workers to work as independent contractors.
In the inflationary 1970’s it seemed interest rate and inflation kept rising to ever-higher levels with no hope of a solution. Eventually the Federal Reserve acted to stop it and fortunately Congress and the President didn’t interfere and the program worked. The oil crisis of 1973 and 1979 was scary and at times it seemed hopeless but eventually new solutions were designed and now the U.S. exports oil. I believe that the U.S. won’t degenerate into a hopelessly indebted Banana republic.
Interest rates were kept very low by the UK after the 1815 Napoleonic war until 60 years, and even 80 years later, so rates can be amazingly low for an entire lifetime. Investors need independent financial advice about the risks of a debt crisis.