How a worsening U.S. debt problem could be great for VC

Financial advisors view the national debt as one of the most urgent policy problems, but most experts see few signs that either Democrats or Republicans would slash it after the election.

And that inaction points to further appeal for venture capital investing and bracing for the social and economic tumult that could finally force lawmakers in the two parties to act in some way toward significantly reducing the deficit and the country's debt, according to planner Bruce Lee, the founder and CEO of Chicago- and Scottsdale, Arizona-based Keebeck Wealth Management. Since "people are still asleep about how the ramifications of AI are going to affect us," a race to technology-powered productivity gains will reverberate far after next week's election, Lee said.

Keebeck Wealth Management

More than 200 advisors and other wealth management professionals surveyed last month by Financial Planning parent firm Arizent displayed a clear preference for Donald Trump to win the White House and the Republican Party to control both houses of Congress — even though they thought at the time that Kamala Harris was more likely to win the presidential race. Billionaire Trump donor Elon Musk has pledged to help a Trump administration cut $2 trillion from the federal budget, but neither he nor the campaign have outlined any details. Further, the extension of the Tax Cuts and Jobs Act and other Trump policy proposals would actually hike the deficit by a much larger amount. Plans released by Harris would boost the deficit as well.

READ MORE: Key business tax moves to consider, whoever wins on Nov. 5

In that murky picture with macroeconomic implications, "you have to look at disruptive technologies, and you have to take a look at disruptive opportunities to raise productivity," because venture capital spurs economic growth outside of government spending, Lee said. Rising debt interest payments that are drawing more investors to bonds in anticipation of Washington's inaction could lead to the weakening of the dollar and other fallout.

"There's no more money left, in my humble opinion. That's going to create a problem in the public markets," Lee said. "Nobody feels politically that it's their problem, and the only way they're going to feel that it's their problem is if we have a catastrophe."

Lee's concerns came as a survey of investment professionals by the CFA Institute Research and Policy Center showed that nearly two-thirds expect the U.S. dollar to lose its "reserve currency" status in the next five to 15 years as a result of the budget deficit and national debt.

"Unfortunately, in the 21st century, the U.S. political leadership has concluded that deficits don't matter," former FDIC Chair and current Chair of the CFA Institute Systemic Risk Council Sheila Bair said in a statement. "Both Republicans and Democrats have settled on deficits as the easiest way to pay for politically popular initiatives, be they lower taxes (Republicans) or higher spending (Democrats). They have become wary of braving the political pain of deficit reduction, knowing their successors could easily squander those hard-fought battles with more deficit financed spending and tax cuts."

Estimates of the cost of the two campaigns' proposals suggest that, if enacted, their plans would put the country deeper in debt. Over the next 10 years, Trump's plans would add $7.75 trillion to the debt, and those released by Harris would stretch it by $3.95 trillion, according to figures updated earlier this week by the nonpartisan Committee for a Responsible Federal Budget.

"As the campaign season has progressed, candidates have offered a longer list of tax breaks — from eliminating tax on Social Security and tip income to removing the cap on state and local income tax (SALT). Estimating the net budgetary impact is a moving target that is trending more deeply into the red," Kevin Lynyak and James Benadum of Morgan Stanley Investment Management subsidiary Parametric wrote in a blog post last week. "Unfortunately for our long-term fiscal health, neither candidate's proposals appear to pay for themselves — let alone cure the structural drivers of the deficit. Serious reform likely requires higher revenues than proposed taxes and tariffs produce."

In the survey last month of 213 advisors and other wealth management professionals, 57% rated the national debt among the most important policy areas for the next presidential administration and Congress to address. That was second only to the 58% of respondents who picked "the economy" as the most urgent. Another budget-related issue, "tax reform," came in third place at 48%, as the industry and its clients await answers to the question of which expiring provisions of the Tax Cuts and Jobs Act will be extended past their current sunset at the end of 2025.

The group is backing Trump over Harris — even though 61% said they thought the Democrats had a better chance of keeping the White House. On the other hand, 62% forecast Republicans retaking control of the Senate and 51% expect the party to retain the U.S. House. When asked about the potential impact to wealth management from either Trump or Harris taking office, 62% said a second Trump administration would be "very" or "somewhat" positive to the industry, and 60% said Harris being president would be "very" or "somewhat" negative. And 60% said a Republican administration would be best for their company and the industry.

However, the group expressed some flexibility around the question of higher taxes in terms of shoring up Social Security and reducing the deficit. While 56% said the government should slash its budgets to address deficit shortfalls and lower U.S. debt, 32% called for a combination of higher taxes and smaller spending. And more than a third — at 34% — said Congress should push up taxes on higher earners to address Social Security's solvency.

READ MORE: Financial advisors favor Trump, doubt his 2024 election prospects

If "the value of our paper is less" due to the country's fiscal picture, that will put the traditional 60-40 portfolio into a "tailspin" and bring "a lot of social pressure" for even more government spending to aid lower-income Americans hurt in the economy, Lee said. The fact that AI is "compounding at a level that I don't think I've ever seen in my career" may alter that equation and will certainly add to the attraction of venture capital as an investment, he said.

"The reality is, 20 years ago, venture capital was in the orbit and the older economy was in the core, and now venture capital is in the core and the older economy is trying to figure it all out," Lee said. "Venture capital is not only alive and well, it is going to be a very meaningful part of not only our social vertebrae but our learning vertebrae."