Permanent Inflation

Total Federal spending for fiscal 2023 stands at over $6 trillion with a projected deficit of $2 trillion by the nonpartisan Committee for a Responsible Federal Budget (CRFB). This marks a reversal from last year’s drop, increasing concerns over deficits, inflation, and spending. The proposed budget for FY24 is $6.9 trillion, fanning the flames of the debate over allocations and deficit levels. The 19% inflation experienced since January 2020 is permanent. There are no deflationary plans to bring back price levels to what they were in 2020.

Our best hope, therefore, is only to slow the amount that inflation continues to increase in the future. At the long-term average inflation rate of 3% since the formation of the CPI index in 1919, a dollar depreciates to 74 cents in a decade, and to 22 cents in 50 years.

The dollar has lost over 96% of its value since the Federal Reserve was founded in 1913. Investors are encouraged to strategize for long-term preservation and growth amidst the prevailing economic inflation scenario.

Budget Overview

Projected Budget: $5.8 trillion (vs over $6 trillion actual)
Discretionary Spending: $1.6 trillion
Projected Deficit: $1.2 trillion (vs $2 trillion estimated by CRFB in September)
FY24 Projected Budget: $6.9 trillion
Increase from FY23: $1.1 trillion
FY24 Projected Deficit: $1.8 trillion (26% of the proposed budget)

Economic Projections & Deficit Impact

President Biden’s budget proposal is anticipated to curtail the deficit spending by approximately $3 trillion over the next decade which sounds impressive but may be more political since the deficit over the same period is still projected to grow by $17.1 trillion.
Economic expansion is projected at 3.8% nominal rate in 2023 and 3.9% nominal rate in 2024, underscored by growing concerns over the pace of debt and deficit which are growing much faster than the economy.

Inflation Outlook

Milton Friedman said the only reason for inflation is the government printing of money. He referred to inflation as “taxation without representation.”

“There is one and only one basic cause of inflation: too high a rate of growth in the quantity of money — too much money chasing the available supply of goods and services. These days, that cause is produced in Washington, proximately, by the Federal Reserve System, which determines what happens to the quantity of money; ultimately, by the political and other pressures impinging on the System, of which the most important are the pressures to create money in order to pay for exploding Federal spending and in order to promote the goal of ‘full employment.’ All other alleged causes of inflation — trade union intransigence, greedy business corporations, spend-thrift consumers, bad crops, harsh winters, OPEC cartels and so on — are either consequences of inflation, or excuses by Washington, or sources of temporary blips of inflation.”
Milton Friedman

The recent inflation surge stems from extensive money printing during the Covid crisis to offset federal budget deficits. Inflation is projected to stabilize to 3.4% by the end of 2023 and possibly to 2.3% in the subsequent years.

Investor Considerations

The prevailing fiscal environment and projected economic metrics necessitate astute investment strategies. A focus on long-term growth is imperative to navigate the permanently diminishing value of the currency.
A structured, well-informed investment approach is crucial to counterbalance the potential fiscal challenges and leverage the arising opportunities.
Areas receiving the most federal dollars are Education (13% increase), Health and Human Services (11% increase), the EPA (19% increase), and the Treasury (15% increase).

Conclusion

The evolving fiscal landscape, marked by significant over budget allocations and persistent deficits, demands prudent investment strategies. Balancing risk and opportunity while focusing on value preservation and long-term growth is paramount in the current economic context.
If Congress pulls back sharply on spending, or if there is another negative shock to the economy, the potential for job losses, deleveraging, and lower prices on risk assets remains high. Whenever the Federal Reserve begins the next rate cut cycle, long dated bonds stand to benefit.
With the recent rise in interest rates, the bond market may offer an opportunity to break even with inflation, but experience no real growth. If the interest earned is consumed, there is no inflation hedge. Growing companies with pricing power and limited debt may enable the equity markets to overcome the downward pressure of inflation, although volatility is historically higher.

In 2002, Equitas Capital Advisors, LLC was established as a unique company that blends the resources of a large global corporation with the flexibility of a small boutique firm. The registered service mark of Equitas Capital Advisors is Engineering Financial Solutions® and the purpose of Equitas is to design, build, and deliver investment solutions to meet the goals and objectives of our investors. Equitas Capital Advisors, LLC, located in New Orleans, has over 200 years of combined investment management consulting experience providing professional investment management services to investors such as foundations, endowments, insurance companies, oil companies, universities, corporate retirement plans, and high-net-worth family offices.

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