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Deficits, Inflation, and Your Retirement Planning Thumbnail

Deficits, Inflation, and Your Retirement Planning

Do budget deficits matter to the health of the U.S. government and economy?

That's been a hot topic of conversation among economists, especially as debate raged about the most effective way for the government to support folks during the pandemic. And it's been a topic that's popped up on a few of our Keen on Retirement episodes and blogs as well.

But while ideas like modern monetary theory are ... well, just theories right now, the battles in Congress over the federal debt ceiling and President Biden's Build Back Better Plan are going to have some real-world consequences before the end of the year. So, on today's show, we address some of the questions that we have received about federal debt, inflation, market volatility, and long-term retirement planning.

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1. Putting federal debt in context.

The latest round of negotiations in Congress pushed back a final decision on raising the debt ceiling until December. With all the bitter criticism surrounding this story, you might think that raising the debt ceiling is unprecedented, or at least unusual. But, according to LPL Financial, Congress has agreed to raise the debt ceiling 79 times since 1960: 49 times under Republican presidents and 30 times under Democratic presidents. As much as our elected representatives like to argue about debt, history tells us that, eventually, they come around to the idea that taking on more is preferable to defaulting on the government's financial obligations, including things like Social Security payments.

There are strong arguments for and against the way that our government manages money. And while we at Keen Wealth do have some concerns about how spending on the CARES Act and the Build Back Better Plan could affect the economy, it's important to remember that federal debt isn't the same as consumer debt. The government has tools at its disposal that households don't when it comes to paying the bills, such as raising taxes, adjusting interest rates, and, yes, printing more money.

2. Avoiding stagflation.

Some individuals who lived through stagflation during the 1970s are understandably concerned that we're heading down a similar path. But there are some important differentiators between then and now.

First, we're not nearing double-digit inflation rates yet. With a 0.4% increase in September, the Consumer Price Index is at 5.4% over the last 12 months.

While some economists have been disappointed by the job numbers in recent months, unemployment is low, falling in September to 4.8%.

And as we've discussed on previous episodes, the economy did rebound from pandemic lows once vaccines started to roll out and businesses began to reopen.

That brings us to the biggest difference between the 1970s and 2021: COVID-19.

In some ways, life and business have started to feel more normal this year. But in crucial ways, the global economy is still adjusting to the pandemic. Many folks are unemployed not because they can't find a job, but because they're choosing not to rejoin the workforce due to health concerns or new professional goals. This is driving up wages as employers try to entice workers back into the fold.

Labor shortages and COVID-19 testing requirements have also slowed the global supply chain, which is creating some product shortages and, in turn, driving up inflation.

3. The case for "reflation."

In fact, rather than worrying about stagflation, it might be more accurate to call this economic environment "reflationary," meaning the economy is, in fits and starts, beginning to expand again after pandemic contraction.

Yes, the combination of increased federal spending and COVID-19's disruption of traditional business is hitting consumers in their wallets right now. But that same inflation is also driving up hard asset prices, and with them, corporate earnings, and market returns.

Also, all the hang-ups between suppliers and retailers are driving up consumer demand, another source of inflation. These disruptions might continue through the 2021 holiday season. But once the kinks shake out of the supply chain, all that pent-up demand -- and all the unspent money that folks saved during lockdowns -- will have an outlet, which could mean good things for the markets and our overall economy.

Of course, that's the scenario many folks were anticipating for this past summer. In the short term, lingering challenges from the pandemic and political divisions may have slowed that growth potential a bit and created some market volatility. In the long term, folks who ignore the noise and stick to their financial plans are positioning themselves for a successful retirement.

If you still have some questions about deficits and inflation after listening to this episode, we can talk through them at your year-end financial review meeting. Now is a great time to get a meeting on the books before the holiday rush starts up. Don't hesitate to get in touch!

About Bill

Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.

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