How a Paul Ryan and Mitt Romney Win Will Impact Your Investments
With the recent move by Mitt Romney to choose Paul Ryan as his running mate for the upcoming election, I believe this sends a strong message to the American people and the rest of the world that the U.S. is finally going back to its roots by getting on the path to reducing the budget deficit and preventing a financial crisis.
A financial crisis usually stems from a lack of confidence. If the lenders feel that a borrower can’t pay, they sell their securities and refuse to lend unless the rates are extremely high. This is how the financial crisis in Europe is unfolding, as the budget deficit for many nations remains high. They are continuing to spend more money than they earn. Running a budget deficit for a short period of time might be okay, if a surplus is eventually generated to reduce the overall debt. This has not occurred for many years in dozens of nations, including the U.S.
Ryan understands that the real victims are the American people if a budget deficit is continually generated. This puts the country at greater risk of a financial crisis, as investors begin to lose credibility in the nation as a whole. The U.S. is fortunate that so many other nations are also poorly managed, running up a huge budget deficit and cresting on the edge of a financial crisis.
One of Ryan’s ideas is reducing government spending by 2015 to 20% of gross domestic product (GDP) and a long-term target of 15% of GDP. Reducing government expenditures is a needed step in reducing the budget deficit. Such a move will surely be seen by international investors as a further sign of confidence in the U.S. and the dollar as the world standard. If you were an institutional investor, would you lend money to European nations that continue to run a high budget deficit and with no end to the financial crisis, or to a nation that has put its foot down on runaway government spending? I think the answer is quite obvious.
An idea, which I think is great, is simplifying the tax code. By eliminating a lot of the loopholes that the wealthy use and using only two basic tax rates, 10% and 25%, one of Ryan’s earlier proposals provides a basic foundation for less tax evasion. In addition, eliminating capital gains taxes results in one thing—more money being used for investments. It’s a basic law of the universe; the more you tax something, the more you’ll see people come up with ways to avoid the tax.
Of course, not all of these policies will be enacted. Politics is all about creating a discussion with the public over what issues are important. I think with the financial crisis erupting in Europe, America needs to get serious about the looming budget deficit situation.
What does this mean for your investments? Assuming some of these policies are enacted, we would be dealing with a short-term stock market that might have some headwinds, as the adjustment process involved in reducing the budget deficit hits the government sector. But as fears erode of a financial crisis erupting in America, this will increase foreign investments over the long term.
Having a stable base from which an economy can grow has always been the key for investors. This also means that the U.S. dollar will gain strength, reducing prices in commodities like gold. Government sectors would be hit, but the long-term policies that would create an environment of economic strength would also decrease the budget deficit and reduce the chances of a financial crisis from hitting America’s shores. This would be quite bullish over the next decade for America.