The U.S. Government Wants You in Debt
I’m going to out on a limb and make the bold statement: the United States government wants you in debt, rather than you saving money. Politics aside, I am going to discuss why I believe this statement to be true. If you accept my premise, I will then discuss ways you can use it to your advantage.
Government taxes serve more than the purpose to fund federal obligations. Taxes (either increases or decreases) have been a method in which a government can modify personal behavior. If the government wants people to stop smoking, it creates a “sin” tax to make it more costly to smoke. When a government offers tax incentives for acquiring debt, they are basically stating they want you to purchase things with debt. The government then rewards you when you comply. Why else would the government have implemented these policies to stimulate the economy?
- Federal Reserve policies have forced the average one-year CD interest rates to currently below 1.5% APR. In addition, the FDIC recently ruled banks that are not “well capitalized” will not be allowed to sell fixed investment products for more than 75 basis points (or 0.75%) above the national average. This effectively punishes savers and fixed income retirees, while rewarding people who have debt with lower loan rates.
- Offering the Cash-for-Clunkers program rewarded people to buy new cars (mostly likely with an auto loan), while trading in existing working cars (more than likely these cars were debt free).
- A tax credit of $8,000 to buy a home, originally just for first time homebuyers, now is for anyone. Congress liked the plan so much, they have extended it into 2010. How many people bought a house with cash only?
- Why is it people who did not take on too much debt are indirectly punished, while others who over extended themselves are excused of their loans? Can you say moral hazard?
It’s been said many times over 70% of the U.S. economy is consumer based. If the consumer disappears what happens to the economy? This might be the core reason why the United States policy might be trying to continue spending any way possible.
You might be thinking, “Investor Junkie, you must be a Republican, since you are mentioning policies of the current administration.” You'd be wrong. Examples have existed for many years regardless of which party controls government — some as long as the Federal Reserve has been in existence.
- George W. Bush stated after 9/11 that we must go out and keep spending.
- The Federal Reserve’s economic policy has always favored inflation, while deflation is considered “evil.” Deflation by itself is assumed to be bad, but that’s not always the case. Deflation helps savers as the value of your money saved increases. Deflation when you have massive leverage (as our government and many people on a personal level do) makes debt cost more. This causes the government to be in a bad situation; so the goal of the Federal Reserve is to re-inflate what was deflated. I personally believe the Federal Reserve is doing this at no cost spared, and will cause future ramifications.
- Since the Federal Reserve has been created in 1913 the dollar has lost 95% of its value. Don’t believe me? Visit The Inflation Calculator, and plug in one dollar, enter 1913 as the start year, and 2008 as the end year. What cost $0.05 in 1913 now costs $1.00. Because of inflation the value of your money, if you don’t do anything with it, decreases. Would you rather save it, or immediately buy something with it? Better yet, if you buy with debt that debt will be worth less in the future. Inflation causes you to make this decision.
- Your home’s mortgage interest is tax deductible. Netherlands, Sweden, and Switzerland are the only other countries to offer a tax deduction, effectively saying you should not only buy a home, but also buy a home with debt.
- Businesses can take on loans to purchase equipment and it’s considered capital improvements. When purchasing via a loan, you can take a tax deduction from the interest.
- Freddie Mac, Fannie Mae, and banks were mandated by the federal government to make subprime loans.
- Inflation, on average for the past 97 years, has been around 3.43%. This means any debt that’s held for one year is worth 3.43% less than it was the previous year.
- The government taxes interest earned from most savings and investments.
Yet again you might be thinking, “But Investor Junkie, the U.S. government offers tax deductions for retirement accounts.” Yes this is very true! There are examples of tax deductions for savings, but it usually only delays taxes, and does not eliminate them. Currently Roth IRAs are an exception to this rule.
Let’s not forget about estate taxes. If you have saved over the years and have a sizeable nest egg, a good portion of that nest egg could die with you. By default, your heirs are taxed considerably on your inherited savings after a specific dollar amount. Taxes are delayed, but usually never eliminated.
Use the U.S. government policy to your advantage!
From the many examples I have shown, the United States government wants you to acquire debt. I’m not sure this is a done on purpose or by accident. Don’t fret — not all is bad. If you understand what’s occurring, you can seize the opportunity.
How to take advantage of this situation:
- Acquire fixed rate debt on assets that increase in value with inflation. A perfect example is to own a home and real estate investments. Use Bankrate.com web site to calculate your real interest rate after taxes. Mortgage rates are at historic lows and probably will be higher in the future.
- Where the government does offer incentives to save, use them. This can include any of the following investments: 401K, 403b, IRA, Roth IRA, 529.
- If you believe we are going to have higher inflation in the next 10-30 years than the previous 30 years, you are best to purchase hard assets. Commodities and real estate do very well in high inflation environments.
- Plan methods to minimize or delay your taxes every step of the way, including at death.
- For the more adventurous type, owning a business is another method to acquire debts that are tax deductible and earn income in the process.
In the end, it’s been said the only sure things in life are death and taxes. Having debt is also almost another sure thing, and best to use government policies to your advantage.
What are your thoughts on the topic? Do you think the government wants you in debt? Do you believe it’s on purpose or by accident?
This is a guest post by Investor Junkie, who likes likes to discuss what it's like being an entrepreneur and investing. He's about making money work for you by talking about passive and active investments. Read more articles by Investor Junkie: