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Janet Yellen’s Magic Wand and Why I Moved to Puerto Rico

“If I had a magic wand I’d raise taxes and cut retirement spending” Those were the words of former federal reserve chairman Janet Yellen in a recent interview where she described the country’s debt path as unsustainable.
The U.S national debt is quickly approaching $22 trillion. Budget deficits rose to almost $900 billion in fiscal 2018 and that doesn’t include unfunded liabilities. The trump tax cuts, which were implemented in the absence of spending cuts, have put the country in an accelerated path to insolvency. We are basically adding around $100 billion per month to our national debt, and few people on wall street or main street seem to be concerned about it.
Think about it. What would happen to the U.S economy if we had to, as Yellen suggests, both raise taxes and cut government spending in an environment of rising interest rates? We’d likely see a recession much worse than the one we saw in 2008. According to Janet Yellen, that’s what we as a country must do in order to avoid a bigger disaster down the road. Ironically, this is the same Yellen who said that another financial crisis was unlikely in our lifetime.
Yellen is right about one thing though. Magical powers of some kind are required in order for us to get out of the mess we are in. Close to one quarter of the $100 billion that we borrow every month is spent on paying interest on the existing debt. Five years from now, It’s expected that servicing the debt will overtake defense spending.
It’s just common sense folks. If I find myself heavily in debt, the only way I can come out of the hole is for me to stop digging. I must try to increase my income, and also cut my expenses so that the debt can be repaid. Countries are no different. One alternative to raising taxes and drastically cutting government spending would be to just default on our debt. That event would also produce a severe crisis. So it seems that no matter what we do, nothing will save us from the inevitable: a combination of a currency crisis and very difficult period of stagflation.
Then there is the other stuff that doesn’t help:
  •  Rising inflation due to fed policies
  • Tensions with our trading partners and creditors
  •  Hostile rhetoric towards immigrants who come here to invest, work, and pay taxes.
  • Increase in the recurrence of natural disasters
  • Increased geopolitical tensions
It won’t be long before one of these issues becomes the proverbial straw that breaks the camel’s back, and we’ll wake up to a very different America. One of extreme austerity and massive tax hikes. One of hyper inflation and ruin. This is the kind of crap I saw growing up in Venezuela. Once it starts getting really bad for everybody, the government will be out for blood as “the rich”,  and “greedy corporations” will become the scapegoats to the catastrophe that idiotic politicians created.
 So what can be done at this point? Frankly I believe this problem is so massive that we are at a point of no return. There are however a few things we can do individually to try to weather the storm:
    • Move to a jurisdiction that will give you at least 10 years of visibility on what your taxes will be. I moved my company and myself to Puerto Rico. Here in Puerto Rico, corporations approved for Act-20 are granted 4% corporate income tax by decree for 20 years. Dividends and capital gains are tax free for individuals under Act-22.
    • Put on an inflation hedge. Invest in gold and stocks of commodity companies (oil, copper, gold etc.). I would not buy bitcoin at these levels and would prefer gold, but would definitely buy some if it dropped to $3k.
    • If you have a business, try to expand internationally. At Bidwise we constantly try to diversify our revenue sources so that we don’t depend too much on any one customer or geography. That way we can mitigate the effect of getting paid in currencies that are sure to lose value due to central bank policies after a sure–to-come economic downturn. If you can’t expand your business internationally, invest in productive assets overseas.
I don’t have a magic wand to change the outcome of what’s coming, but we can all use common sense to get in front of these issues and try to position ourselves for success no matter what. I hope you all do the same.
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