Biden Administration, the Economy, the Market: Week 1, 2021
This is the first week in office for President Biden and Vice President Kamala Harris since their inauguration January 20th, 2021.
After a challenging transition, mixed in with the events of January 6th, the news has been a roller coaster. The new administration is facing multiple serious issues. The administration’s immediate priorities are available online and so far communication, nominations and appointments are in stark contrast from the previous administration.
The economy faces a record-setting deficit, high unemployment, inequality of income (Table H.2 with SAS additional sum columns snapshot included below this paragraph), small business closures, and the continuing course of the Covid-19 pandemic. We had an immediate reaction from the Federal Reserve; they lowered the Fed funds rate to zero and assured markets that rates would stay low for the foreseeable future. The Fed is also buying a massive amount of US Treasury securities as well as mortgage-backed securities. Have you noticed how mortgage rates have set record lows for the past few months? Economists consensus says more fiscal help is needed.
Budget Debt and Deficit
Congress forced President Obama to reduce the size of fiscal stimulus in 2009 after the financial meltdown because of fears of debt and exploding deficits from the proposed $900 billion to the $787 billion that passed. Since 2009, GDP has had tepid growth of between 1.5%-4% and averaging around 2%.
The typical GDP bounce back growth rate of 4-6% has not resulted. Economists now say Obama’s fiscal intervention should have been much larger. With the current stress on the economy, primarily caused by the Covid-19 pandemic response, fiscal intervention has been much larger. The reason is that the pandemic has caused a different kind of recession. This is not a financial meltdown involving credit. The pandemic caused a paralysis of a large part of the service and manufacturing economy reducing demand by an enormous amount as well as historically high unemployment.
Since the financial meltdown in 2008-09, a major cause of the sluggish/tepid growth rate has been weak demand on the part of the consumer and business. One of the reasons for weak demand was Americans began to pay down debt.
Paradoxically, during recessions, consumers and businesses stop spending and pay down debt. In good economic times, consumers and businesses spend. If Americans behave in the opposite way savings in good times would allow Americans to stoke demand in recessions! Imagine changing your own individual savings habits. Now imagine increasing the savings habits of an entire country - difficult, if not unlikely to impossible.
However, it turns out that if we aggregate public and private debt in 2009 and aggregate current debt as a percentage of GDP, we are at a similar debt to GDP ratio. Why? Because private debt declined and public debt increased between 2008-09 and 2020.
An argument can be made to justify our current public debt by using this ratio. Today the Fed affirmed its commitment to keep the current interest rates through 2023 and affirmed its bond buying program going forward. The intermediate and long term economic consequences of geometrically increasing debt have yet to playout.
2nd Newsletter Reminder - Tax Timelines
Forms 1099-R and 1099-Q for tax year 2020 are now both available for your accounts on TD Ameritrade Institutional online at www.advisorclient.com.
- Form 1099-R reports distributions from IRAs and Qualified Retirement Plans (401(k)s for most).
- Form 1099-Q reports distributions from Coverdell Education Savings Accounts (ESAs)
- Form 5498 which reports any funds returned to the IRA or QRP account in the form of a rollover will be issued in May, 2021
To access your 2020 tax documents:
- Login to your account at www.advisorclient.com
- Go to the “Documents” tab
- From the left hand menu, choose “Tax Documents”
- Download your 2020 Forms 1099-R and 1099-Q for your records
- Please pass along these forms to your tax advisor for your filing
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