Fiscal Reckoning Ahead? - WT Wealth Management February 2025 Special Market Update

It is hard to believe that it has been nearly five years since the 2020 Pandemic and the government’s undertaking of the most dramatic stimulus and borrowing policies in U.S. history. Economists hotly debate what will be the fallout, if any, of these unprecedent measures.

Does the U.S. face a looming fiscal reckoning?
We at WT Wealth Management think so.

We believe the United States is staring over a fiscal cliff and a key priority of the current and future administrations needs to be getting government spending and borrowing firmly under control.

America's growing $36.5 Trillion in debt ($106,024 for each person in the United States) is the result of simple math - spending has greatly exceeded revenues for most of the U.S.’s history, especially since the early 2000s, and the balance has added up. ⁽¹⁾ Historically, the U.S.’s largest deficits were caused by increased spending around national emergencies like wars or The Great Depression. Today, deficits have become the norm and are caused by contradictory American political pressures to decrease taxes and increase government spending. This leads the government into the futile exercise of balancing a budget by collecting less and spending more.

The U.S. has run nearly $1.7 trillion budget deficits in each of the past two years. The federal government collected $4.47 trillion in revenue during the 2023 fiscal year. That's a lot (a trillion is a one followed by twelve zeros) but it also represents a decrease of 15.5%, a drop from the 14.3% increase we saw between 2021 and 2022. ⁽²⁾

It’s become apparent, the government has not accepted that printing money creates inflation pressure.

Figure 1: Federal Budget FY 2023

https://usafacts.org/state-of-the-union/budget/

Sadly, the U.S. economy appears dependent on irresponsible government spending, which has created an abundance of government jobs and widespread economic stimulus. With significantly less stimulus forecasted in 2025, an economic slowdown becomes more likely. However, this could be good news as some slowing at the edges of the economy could put the labor market into a better balance and keep inflation in check.

Currently, the Trump Administration wants to cut spending by up to $2 trillion via a thorough examination by the newly created Department of Government Efficiency (DOGE), push for an extension of the 2017 tax cuts, and possibly cut other taxes, like corporate earnings. ⁽³⁾ Could this spark a recession with the lack of government spending? Or will consumer spending offset a reduction in government spending as a result of tax cuts, slowing inflation and lower energy costs? All of this will be closely watched- but the jury is out.

To be clear, there are many reasons to remain positive about the U.S. economy:

Strong GDP growth is forecasted for 2025,
Low unemployment,
American consumers continue to spend in record amounts,
Advancements in artificial intelligence (AI) are expected to drive significant growth beyond the tech sector, increasing electricity demand and creating investment opportunities in energy (particularly nuclear and natural gas), infrastructure, and utilities.

At WT Wealth Management, we expect higher volatility in 2025 than in 2023 and 2024 as stocks trade on news instead of facts. Buzz words like “tariffs”, “immigration”, and “DOGE” being catalysts for quick selloffs that will more than likely quickly correct. High-frequency and algorithmic trading can give short shocks to the financial markets so a well thought out plan and a medium-to-long time horizon is key to successful investing in this environment.

We feel investors should continue to focus on, and add, low/non-correlated investments to their portfolios that act as inflation hedges. (See our January White Paper where we discuss Bitcoin and, more broadly, WTWM’s Mineral Mint portfolio which is designed to do just that.) We feel investor interest in finite supply assets like gold, silver and Bitcoin may gain momentum, driven by inflationary pressures, fiscal uncertainty, and de-dollarization trends.

With the mounting economic risks, uncertainties and swift actions of the current administration, this is an excellent time to speak with your advisor and decide on a game plan for 2025 and beyond.

SOURCES

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