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Moneybeat: Calm for now, debt forever

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WORLD Radio - Moneybeat: Calm for now, debt forever

David Bahnsen on Middle East risk, relative market steadiness, and why only entitlement reform can touch the debt


A B-2 bomber returns to Whiteman Air Force Base Mo. on Sunday following a strike on Iranian nuclear sites on Saturday. Associated Press / Photo by David Smith

Editor's note: The following text is a transcript of a podcast story. To listen to the story, click on the arrow beneath the headline above.

MARY REICHARD, HOST: Coming up next on The World and Everything in It:

NICK EICHER, HOST: Time now to talk business, markets, and the economy with financial analyst and adviser David Bahnsen. David heads up the wealth management firm The Bahnsen Group. He is here now. Good morning to you, David.

DAVID BAHNSEN: Good morning, Nick, Good to be with you.

EICHER: I do want to spend some time on the national debt—I appreciated the work you put into Dividend Café on that topic, and honestly, I don’t think we can talk about it too much.

But that said, the U.S. direct strike on Iran has massive implications, even if we can’t anticipate them all just yet.

So between that, the spike in oil prices after Israel’s initial strike, and all the usual noise around the Fed, interest rates, and earnings season right around the corner—it feels like a lot is swirling. How are markets handling the mix?

BAHNSEN: Well, it’s difficult in a week like this—so captivated by geopolitical and foreign policy stories playing out in the Middle East. Obviously, the impact on oil markets was significant. That story had actually begun a week ago—we talked about it last week—but the ongoing uncertainty paused a bit of market activity.

There was some indication of movement into safety, but equities didn’t sell off. I don’t think you’re looking at a big risk factor. The Fed did exactly what we expected: they didn’t raise rates and stuck to a status quo approach. They still seem to think they’re going to cut a couple of times by the end of the year.

But I think, right now, the big questions are how the Senate is going to get this big, beautiful bill through—and, of course, where President Trump is going to go with some of his decisions around Iran. Those are major issues.

In the meantime, we’ll be into the month of July soon enough, and then a new quarterly earnings season begins. Companies will start reporting how they did in Q2, starting in mid-July. That’s probably the next thing I’m focused on—finding out what companies are saying about the impact of the uncertainty back in April, when President Trump was first threatening those really draconian tariffs.

So, there are a few things lingering out there, Nick. All of them are interesting—but that’s kind of why they say markets never sleep.

EICHER: So let’s return to the question we started with: What if Washington does nothing to address the national debt? Given the political incentives and track record, inaction seems not only likely—it seems almost inevitable. So what does that mean? If Washington continues down this path of doing essentially nothing to fix the debt mess, what happens next? What are the long-term consequences?

BAHNSEN: Well, I think the problem is that the way in which they do nothing is not necessarily totally clear either. There are different ways you can do nothing—and I know that sounds kind of counterintuitive—but along the way, certain things will become more evident. The question is how they respond to those things, which don’t all happen at one time.

That’s one of my big criticisms of this whole issue. A lot of people have this view in their minds that there’s this big buildup of national debt, and then one day there’s kind of an explosion—like a bomb going off. And then the question becomes: what are we going to do after the bomb has gone off?

I don’t think that reflects a real, careful understanding of history or of how debt-fueled financial problems actually unfold. It isn’t often that there’s just one big moment. More often, there’s an eroding effect over time.

The argument I make in Dividend Café is that the most likely scenario is the one we’re already experiencing. That is: a slow effect on growth over time—in other words, downward pressure on economic growth. And it doesn’t come in one moment. It comes, as T.S. Eliot talked about, as a whimper, not a bang.

I think this hasn’t yet been as bad as some would have predicted. But I still consider it a really significant development in American economic growth. We’re all just used to growing 30 to 40 percent less per year than we were accustomed to for the 70 to 75 years after World War II. That impact, over time, becomes really problematic for the opportunities our kids and grandkids will have.

In terms of the eventual changes that I think are all but inevitable—changes to Social Security, changes to Medicare—what I’m arguing is that if nothing is done, those changes become forced. Then they come with higher magnitude, at greater speed, and with more pain.

What I’m not arguing is that there’s some scenario where, if we just act now, we can avoid pain altogether. Pain is definitely unavoidable at this point.

EICHER: And that’s just it, isn’t it? We go to great lengths—and I shouldn’t presume to speak for everyone, just for myself—but I’m definitely a Thomas Sowell devotee who understands there are no solutions, only trade-offs. Still, we find ourselves wanting a silver-bullet solution, even though we know in our rational minds that one doesn’t exist.

That said, if you could implement a single structural reform, what would it be? Would it be something like a balanced budget amendment? And in the unlikely event that Washington were ever inclined to act, what’s the one change you’d prioritize?

BAHNSEN: I don’t believe there’s one silver bullet—and I don’t believe that even the most obvious one addresses the national debt directly. What that one does—which is, most definitely, the first and most important thing I would suggest—is simply to stop adding to the problem. It’s basically a way of saying: “Okay, before we fix the damage that’s already been done, let’s at least stop digging.”

So yes, I do think some form of balanced budget amendment, combined with other spending reforms, is necessary. But even then, we’re still not dealing with the current level of debt. We’re just trying to contain the annual deficit.

If you’re asking what we need to do to really address the debt—what that silver bullet would be—anything that doesn’t start with entitlements like Social Security, Medicare, and Medicaid is a complete waste of time. That’s the issue. That’s where it has to start. That’s the low-hanging fruit.

I use an analogy all the time: imagine a household where 40% of the monthly expenses are the mortgage, and they’re a few thousand dollars over budget every month. But instead of addressing the mortgage, they focus on their Wi-Fi bill. Most of us would just laugh at that. What are you really accomplishing by trying to shave $20 or $40 off your bill when you’re thousands of dollars overextended?

In a way, that’s what our national fiscal situation looks like. The big, screaming, obvious issue is Social Security, Medicare, and Medicaid. But we talk as though we can tweak a few things around the edges—turn a knob here, a knob there—and somehow make a difference.

Look, I want to turn all the knobs we can. I don’t want to waste any money. But if we’re serious about dealing with the debt and the country’s unfunded liabilities, it has to begin with a meaningful, grown-up conversation about Social Security, Medicare, and Medicaid.

EICHER: All right, David Bahnsen is founder, managing partner, and chief investment officer at The Bahnsen Group. He writes regularly for WORLD Opinions, and at dividend-cafe.com. David, thank you so much. We’ll see you next week.

BAHNSEN: Thanks so much, Nick.


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