Episode 78: How Biden's Executive Orders Impact Your Wealth

Announcer:
This is The WealthAbility® Show with Tom Wheelwright. Way more money, way less taxes.

 

Tom Wheelwright:

Welcome to The WealthAbility Show, where we're always discovering how to make way more money and pay way less tax. Hi, this is Tom Wheelwright, your host, founder, and CEO of WealthAbility. So, today, you will discover how the fast-changing economic policies in Washington are going to impact your business and wealth. Never in my lifetime, at least not since perhaps Ronald Reagan, have I seen a president come in and upend economic policies the way president Biden has.

And we have an absolute expert on this, Todd Buchholz, he's a renowned economist. Everybody knows you, Todd. He was White House director of economic policy under George H. W. Bush, managing director of the $15 billion Tiger Hedge Fund, Harvard economics professor, and author of a brand new book, New Ideas from Dead Economists. I love it. Then Introduction to Modern Economic Thought, just coming out in it's fourth edition right now. So Todd, welcome to the show. And if you would, just give us just a little bit of your background and what you're doing right now.

Todd Buchholz:

All right. Well, thanks Tom. It's a pleasure to be with you. Well, as your audience and listeners just heard, clearly I'm the guy who can't keep his job, I'm scotched around from Washington to Wall Street. And in fact, to be honest, I've made my career in money management, as well as presidential advising and corporate board of advising on the idea of connecting the dots between what happens with money and Wall Street and people's investments and what happens in politics. And what does it mean when the president cuts taxes or raises taxes or the Federal Reserve Board becomes concerned about inflation or deflation and what is the nexus there? Because Tom, I'm sure you've found in your career so many people who are so expert at the finances feel totally clueless when it comes to the political side. Now on the other hand, people in politics generally don't have any idea whatsoever what it means for everyday people when politicians make policy changes. So that's what I've done. And I'm happy to bring any ideas or thoughts I have to your listeners today.

Tom Wheelwright:

Well, I appreciate that. Our listeners are pretty much investors and entrepreneurs, so none of us can hold a job. So we totally relate to that. So, I'm just fascinated with what President Biden is doing, because I mean, here's any economy that, by all appearances, is well on its way to recovery, so many people saying that it's going to recover by June without any stimulus, and yet here he has this huge, I mean, incredible stimulus bill, almost $2 trillion to stimulus. And he seems, right and left, he's changing policy. So here's what I want to know. Todd, what's going on? What's really happening here?

Todd Buchholz:

What's happening is the president wants to show that he's not Trump and the president wants to show that he's changing all of the levers and he's doing that to placate people on the left side of his party as well as people in the center part of the party. And if you find anyone on the right side of the party, let me know, other than the West Virginia Senator who's wielding a lot of power at this moment. But look, Rahm Emanuel, some of your listeners may remember that name.

Tom Wheelwright:

Absolutely.

Todd Buchholz:

Rahm Emanuel, recently mayor of Chicago and Chief of Staff of Bill Clinton, famously said in Washington, never let a crisis go to waste.

Tom Wheelwright:

Right.

Todd Buchholz:

So we are still in the middle of the COVID crisis and that's a golden opportunity for President Biden to reshape and spend money and so on. Now, I have to say, there's a very interesting [inaudible 00:04:26] that was written this week by Larry Summers. Larry, as you'll recall, he worked for President Obama, worked for President Clinton. I talked with him-

Tom Wheelwright:

He's not too happy with our President Biden right now.

Todd Buchholz:

Exactly. Because Larry thinks that a $2 trillion stimulus program is more than what the economy needs and different from what the economy needs. And Larry is not a tightwad when it comes to spending. Ever since 2009, he keeps on saying the federal government should be spending more. But he's very concerned about this current spending, and I think for good reason.

The economy is rather lopsided, maybe you might want to call it barbell like in how it's forming. Clearly, there are many people hurting. The unemployment rate is 6.3%. Millions of people are out of work. And especially those who've worked in hospitality, travel, leisure, entertainment. And I have to tell you, Tom, I feel this in my household. I have a daughter who's a director of strategy for Princess Cruise Lines. The ships have not been sailing for roughly the last nine months. So I understand that there are a lot of people who are idle, a lot of people who are hurting.

At the same time, you do have to look at the economy and say are there other parts of the economy that are actually doing okay? And the fact is, when you look at housing, it's strong, autos have been quite strong. I mentioned the word barbell a moment ago, when COVID hit last spring and I couldn't go to my local gym, I needed some barbells and dumbbells at my house. Well, there was a shortage of dumbbells. It took Sporting Goods about two months to get me dumbbells. So if you see me on video and I look a little weakened, it's because I haven't been able to work out as well.

But the point is, certain sectors of the economy have actually done well. Disney+ signed up, I don't remember the exact number, 50 to 80 million households, for Disney+ this spring and this summer. So not every family is suffering. And so I think part of the Summer's argument is that it should be more targeted. And the idea of simply sending out $1,400 checks without regard to whether the family has suffered or whether in fact they've prospered is not a very prudent way to run fiscal policy.

Tom Wheelwright:

Well, there seems to be some pretty strong evidence that our savings rates are higher than ever right now, that the $1,400 should it go out, a lot of that will go into savings, it won't even go back into the economy. And it's just interesting to me. So help me understand this, other than the obvious partisan politics. So the Republicans twice now, twice, first in August, and again now, have come up with a very targeted bill. So they've come up with unemployment, PPP, and [inaudible 00:07:33] check, but only to those really lower-income households. Okay. That's their $618 billion bill, right? And they came up with a similar type bill, frankly, in August, effectively, that bill was passed in December, but the Democrats held it up until after the election. So, is this just partisan politics or is there something more deeper or even sinister going on here?

Todd Buchholz:

Well, to be fair, it was President Trump in November and December that started raising the bid and talking about $2000 per person.

Tom Wheelwright:

That's true.

Todd Buchholz:

I mean, most of the Republicans in Washington were trying to be a little bit more restrained. But President Biden, in talking about 2000, and now he's come down to 1400, pretty much was just echoing. He felt he was in a bidding war with Trump. Now, after winning the election, he could have toned back, he could have stepped back some and said, “Okay, given where the economy is, given that the vaccines are beginning to go out and penetrate, and given the unemployment rate is beginning to fall, we no longer need that.”

But there are many people who were advising President Obama after the stock market crash and financial crash in 2008, 2009, who thought that Congress made a mistake by not going bigger and that the economic recovery under President Obama had been retarded because government hadn't spent enough money. I think that's wrong. I think that that is a total misinterpretation of what took place during the Obama years and that it wasn't for lack of government spending, it was a lack of incentives, it was higher taxes, it was more regulation and various other forces that stood in the way of more vigorous economic growth. But I think the Biden people said, “Hey last time around Obama compromised too much with Republicans and the bills were not large enough. This time around, hey, let's go for broke until we literally become broke.”

Tom Wheelwright:

So okay. So what's the impact here? Let's say that they use reconciliation and somehow get Joe Manchin onboard and Kyrsten Sinema, one of my senators from Arizona, and they get on board and they pass this thing using reconciliation. And so they've got another 2 trillion. So that will be a total of what? Over $5 trillion in the last year? What's the effect of that on the future of, first of all, prices and second of all, especially on businesses?

Todd Buchholz:

Ultimately, the US is going to have to pay back debt. There's an old canard that goes around and say, “Well, we owe the debt to ourselves.” But the fact is [inaudible 00:10:35] US debt is held by foreigners and a big proportion of that is China and the other big proportions by the UK and Japan as well. But we're going to have to pay the money back. So ultimately the impact is on your grandchildren who will likely face higher taxes or have to cut spending in the future in order to pay back.

We are now at a ratio of debt to GDP that's equivalent to where it was after World War II, literally 100% ratio of debt to GDP. Now we paid it back after World War II because we were very smart, very savvy and we were [inaudible 00:11:16] with money in the fifties. And the government, in fact, after the war, deregulated the economy, which helped economic growth. And we renegotiated debt and stretched out the duration. I mean, your sophisticated listeners should know that the average duration of US debt is about five or six years. That means we're going to have to roll it over.

I have argued in the Wall Street Journal and in my book, New Ideas from Dead Economists that we should be issuing 50 to 100-year debt. Currently, interest rates are virtually zero. We should be locking in the 0% interest rates for the rest of our lifetimes and several to come. Now, some people say, “Todd, that's foolish. Who would possibly buy a hundred-year bond?” Well, you know what? Tom, Mexico has issued 100-year bonds. The Netherlands has issued wonder 100-year bonds. Disney Corporation issued Sleeping Beauty bonds. Even Norfolk Southern Railway… Now think about this, will there be even railroads in a hundred years? I don't know. Elon Musk may have us just flying right through vacuum tubes. But a railroad was able to issue 100-year bonds. So why does the US not lock in this super-low interest rate, which might be the only way to avoid a terrible debt crisis in the decades to come?

Tom Wheelwright:

Well, especially when you think a lot of our listeners are real estate investors, right? And every real estate investor right now is looking for that long-term lock on their debt, they're looking for… they can get 10-year fixed, that's great, if they can get 20-year, even better. I know some that are getting 40-year fixed rates on mortgages, on commercial properties. And I'm going, “Why would you not take that?” Because interest rates, it's not like they can go down. Right? I mean, they can go up, but it's pretty hard to get them to go down. So I think that's fascinating.

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What about though, Stephanie Kelton and her MMT, Modern Monetary Theory, as I call it Magic Money Theory, and her folks that say, “You know what? You don't really have to do that. If you're the one printing the currency, you really don't ever have to pay it back.”?

Todd Buchholz:

Yes. Well, I'm glad you call it Magic Monetary Theory, because it really is not just magic but dangerous magic. It's a little bit like… Picture a David Copperfield or one of these magicians doing a trick where it appears that they saw the lady in half who's in the box, but it's a lot like that magic only the lady really gets sawed in half in the box. And we taxpayers we represent that that poor figure that's locked in the box.

No, I mean, Magic Monetary Theory… I had written a piece that was published around the world that was called something like Hamilton Beach MMT. Those in your audience who are either familiar with the history of Alexander Hamilton and the nation's founding, or they're lucky enough, have seen the Broadway show, which also was available on Disney+… By the way, I'm not an investor in Hamilton. I don't make any money on its endorsement. But Alexander Hamilton persuaded the US to pay back the debt of the states after the Revolutionary War.

Tom Wheelwright:

Right.

Todd Buchholz:

Now according to Stephanie Kelton and MMT, he was an idiot. Why would you possibly pay back the debt? Why not just keep printing more money and not paying back the debt? MMT would justify that. But he paid back the debt because he knew that that would create a treasury bond market and give the US credibility. Other countries have tried to print money in their own currency and then have utterly failed and fallen into inflation.

Back in the 1970s, Britain was run by the Labor Party. And the Labor Party was issuing debt in Pound Sterling, their own currency. And essentially debtors went on strike. And the British government had to figuratively crawl on its knees to the IMF and beg for a bailout. Now that's Brittany, I'm not talking about banana republics, I'm talking about Great Britain had to crawl to the IMF and beg for bailout. That's something that's not understood by the MMT people.

In the 1990s, Canada and Sweden, each faced punishing debt crises were in Sweden the overnight interest rate went up to, get this, this sounds like something out of GameStop, overnight interest rates went up to 500% because people were taking all the Swedish krona out of the country because the country had racked up too much debt in its own currency. So this NMT stuff is not just nonsensical, it's actually downright dangerous in the long run.

Tom Wheelwright:

Well, I 100% agree. And especially when you consider that their argument is, “Well, we'll raise taxes when we need to.” Only, you don't get to… If you're not choosing when to raise taxes, and you don't raise taxes when there's a strong economy, then what you do is you just continue… I mean, tax is a burden by definition, right? It's taxing, it's a burden, it's a dead weight on economic growth. So if you have this, all of a sudden you say, “Well, we need to raise taxes.” but you're in a tough situation… Plus politicians hate raising taxes in the first place, unless they can just do it on people that don't vote for them. So to me, it is a dangerous situation.

But let me ask you this. So, the Democratic Party has said that their position is that MMT is the right way to go. And you have Janet Yellen, former Federal Reserve chairman in the treasury talking about this kind of stuff and talking about writing regulations to raise taxes through regulations. So what do we do? What do we do as business owners? What do we do as investors to deal with this that we really don't have any control over?

Todd Buchholz:

Well, if you assume we have no control over it, and you assume the politicians won't come to their senses, generally those are safe assumptions. But I do have to remind myself from time to time that in the early 1990s, when the deficit was growing very large, that diminutive, nasal-sounding billionaire, Ross Perot came out, I don't mean them to mock him, but someone who on the surface, did not look photogenic, did not look like someone would take them seriously, he created a real storm in the US among Democrats and Republicans and forced Bill Clinton and George Herbert Walker Bush to grapple with the idea of the deficit, which is why in the 1990s, Bill Clinton actually worked with Republicans. They drove down to deficit, for the first time in years, got to a surplus and the economy boomed. So the American people, from time to time, do get fed up with the idea of governments bankrupting them and force politicians to become more responsible.

Will there be a Ross Perot in our future? Well, it would be good if we had business people demand some discipline in Washington, DC. John McCain had said something to the effect that whenever he hears people accuse Congress of spending like a drunken sailor, McCain would say, “Wait a minute, I've been a drunken sailor and we never spent like that.”

Tom Wheelwright:

That's awesome. But what do we do? Let's say it does continue, I mean, clearly we got at least several trillion dollars, even if that's gone to the economy, we've got a lot of money chasing goods out there. What do we do? I mean, what are the practical steps to do?

Todd Buchholz:

The practical step, first of all, as I suggested to the government and you are discussing in real estate, the idea of locking in these borrowing rates for as long as you possibly can, is a savvy idea. Secondly, we do need to be concerned about inflation. Now I am not waving the inflation flag and telling people to run for the hills. To be honest, I've been dovish about inflation for quite a few years. After the Great Recession in 2008, 2009 financial market meltdown, many of my friends condemn the Federal Reserve board for printing so much money, for QE2. And they warned that inflation was going to be raging and the US dollar was going to fritter away to nothing. Tom, I didn't agree with those critics at that time. Those critics are Bernanke and Yellen, because I was convinced inflation was not coming back soon.

Having said that, at this moment, there is a more substantial risk in 15 to 20 years. And that means that they need to at least think about their portfolio and what would give them some protection if inflation were to come. And that might mean, and this is not financial advice because I'm not on the show to do that, but just thinking about short treasury bonds, thinking about some place in the portfolio for commodities and perhaps crypto is part of that… I mean, there needs to be some part of your portfolio that would give you protection against inflation. Again, not because I think it's about to rage, but I think it's chances of raging are higher than they'd been in quite some time.

Tom Wheelwright:

Well, and always better to be prepared, right? I mean, no matter what happens, at least you're prepared for it.

Todd Buchholz:

Well, to the extent you can prepare for these sorts of things. But yes, yes. I believe you can't just blindly go by and say, it's all going to be the same because the levers of policy are being pushed and pulled in different directions and ultimately the economy is going to feel that.

Tom Wheelwright:

Hey, if you like financial education the way I do, you're going to love Buck Joffrey's podcast. Buck's a friend of mine, he's a client of mine, he's a former board-certified surgeon and he's turned into a real estate professional. So he has this podcast that is geared towards high-paid professionals. That's who he's geared towards. So if you're a high-paid professional, you're going, “Look, I'd like to do something different with my money than what I'm doing, I'd like to get financial educated, I'd like to take control of my money and my life and my taxes.” I would love to recommend Buck Joffrey's podcast, which is called Wealth Formula Podcast with Buck Joffrey. I hope you join Buck on this adventure of a lifetime.

Well, these are awesome. And this is been amazing. Thank you so much, Todd. So any final thoughts for our listeners? Any final words of wisdom that you've got, that you might recommend that people think about?

Todd Buchholz:

Well, look, in the end, as I said, I want people to think about education. It's not what today's interest rate is, it's not what tomorrow's inflation rate is, the most important economic variable is education. How are your children being educated? Your grandchildren? What are you doing to become smarter today than you were yesterday? I hope that includes listening to Tom's programming, buying my book, New Ideas from Dead Economists, but I'm sure there are other things you can do as well.

Tom Wheelwright:

Well, both really good suggestions, Todd. Thank you very much. And I agree, I've actually done some studying and continue to study. And maybe another time we could talk about this, but is the effect of education on just world economies, because to me… Especially income and wealth inequality, because to me, it's an education issue. And first and foremost, it's an education issue. So I think that's-

Todd Buchholz:

Yeah. I've become very deeply involved in mathematics education for children. If you were to Google my name and the word Math Arrow or Kyle Counts, I've devised new ways to teach arithmetic to children. And we've got iPad apps based on them because, look, it's a cliche, the children of the future. But if there is a future, children are the future and we've got to be giving them the tools so that they can prosper because the world is far more competitive than it was when we were children. And we've got to give, as Winston Churchill beg Franklin Roosevelt, we've got to give them the tools so they can do the job.

Tom Wheelwright:

Amen to that. Well, once again, Todd Buchholz, thanks so much. New Ideas from Dead Economists, the Introduction to Modern Economic Thought, highly recommend this. I will be reading this book for sure. Fascinating information. Thank you so much, Todd, for taking time to be with us today.

Todd Buchholz:

That's great. Thank you very much. Good luck to everyone.

Tom Wheelwright:

Thank you very much. And just remember everybody, when you do get that education that Todd's talking about, what always happens is you always end up making way more money and paying way less tax. We'll see you next time.

 

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