The percentage of total income made up by government payments has been increasing from 1960 to 2021. According to Gundlach, the percentage of income due to government transfers was at a low of 5.87% from 1960 to 1970 before spiking up and ranging from ten percent to fifteen percent from 1970 to 1980.
From 1980 to 1989, it stayed relatively the same with a slight decline over that decade. But then it would gradually rise again from 1990 to 2000 and hover around the 13- 14 percent level. It would rise again from 2000 to 2010 and hover around the 15% level before spiking up to twenty percent during the Great Financial Crisis.
It had stayed at an elevated level from 2010 to 2020, at around 16% before jumping to its highest level over the pandemic. The level of government transfer payments would make up about 30% of personal income before declining to around 26% at the present point.
But why is that a problem? Why is it an issue if an increasing portion of personal income consists of government transfers? That shows a decline in economic output, and then can tie into the trade balance deficit, and more importantly, shows that government spending is rising, while the tax base is shrinking.For instance, if more citizens are relying on the government for incomes, it causes the government to pursue policies that impose more taxes on the remaining portion that is working and earning at or above certain income limits.
Can The Federal Reserve Backstop the Financial Markets?
The reason why the recent talk by Gundlach is important in these times is because there is a growing number of investors and people trusting in the Federal Reserve to backstop markets. That trust can translate into reckless behavior as noted in the recent frothiness of asset markets across the board.
One can note that reckless behavior was present in the Gamestop stock, in Dogecoin, and other assets that have no reason to be at extremely high valuations.
For instance, equities, digital asset markets, new ways of listing onto the markets, and other financial vehicles have made it to where investors have speculated a great deal over 2020 and 2021.
But the problem with elevated markets that have no bearing in reality and current performance is that it can create market havoc when the reality starts to sink in. If the market were to gradually decline, that can cause more individuals to lose quite a bit of their financial value.
Gundlach notes that corrections already present highly volatile assets like bitcoin and other high flying tech stocks but that more additional tax policy pressure and other factors can create significant declines. The simple point being that taking personal risks makes sense for individuals if they can keep a large portion of the potential gains. But taking significant risks on moonshots like bitcoin, ethereum and various risky assets makes little sense when the individual would have to turn over a large portion of those potential gains to Uncle Sam.
All the while, the Federal Balance Sheet is rising, showing that it is becoming more integral in the market.
Conversely, as the Federal Reserve’s balance sheet grows, the trade balance continues to decline, the United States stimulus programs benefit China and other trade partners as more products are imported to the United States.
In the meanwhile, we can also note that the costs of imported goods are also trending up over time. According to Gundlach the costs of imported goods are rising as seen in freight rates, the cost of shipping, and imported goods will be up over six percent on YoY basis.
The Official Budget Deficit Does Not Include the Entire Government Budget
Gundlach notes in his presentation that the official government budget does not account for all aspects of the actual budget. For instance, it does not include wars, natural disaster relief, or other aspects that are supposed to be temporary but are now increasingly perpetual.
Government Transfers Are Not Sustainable
All of this data points to the fact that the government’s liabilities are increasing in several ways. At the same time, its revenues may not stay as strong and will increasingly come from a smaller portion of the population. Therefore, the Federal Reserve may not have the capacity to continue further backstops of the market. As such, one would be prudent to watch how they are allocating their funds in their respective personal consumption and investment.