Hi All, my name is Ed Leone. I have been a clinical practicing dentist for 39 years (need a dentist www.leonedmddentalcare.com) and have a very high level of interest in financial matters. In 2005, I achieved a professional studies certificate in financial planning and in 2009, an MBA in financial planning. As you read, you will determine that I am an expert on only one thing–my opinion. The purpose of this blog is to share information. You can contact me over blog issues or financial planning issues at leonee@vzw.blackberry.net.
There are more than just a few pressing issues of late which deserve our attention. One of those is the prospect of a Value Added Tax to help government cover the programs and debt it has committed to in this past year and four months. The VAT affects consumers since it is a tax on consumption. It is a national sales tax. You buy and you pay. It is not a progressive tax. In European countries where the VAT is prevalent, the revenues are used to fund such government programs as health care. By observation in these countries and as a matter of common sense, it is easy to see how such a tax will slow economic growth since with higher consumer prices, there is less money available for just about everything else. Another has to do with current studies done by Fidelity showing that the average 65 year-old couple retiring this year will likely spend $250,000 on health care during their remaining life times not including nursing home costs which could add up to $80,000 per year. How are the members of the baby boomer generation going to deal with this? Along with all of this, we have the potential for another colossal piece of legislation moving through the congress in the form of financial reform. Bills have passed through the House and the Senate and are now due for reconciliation through a conference committee structure. These bills deal with consumer protection, executive compensation, the rating agencies, credit derivatives and issues surrounding systemic risk. Outcomes will be a significant matter to the financial industry and citizens in general. This legislation is likely to be as sweeping as the measures taken in the late 1930s.
I have spent time in previous blogs talking about the Keynesian influence on strategies executed by the federal government to bring us out of recession, but have not spent any time discussing the alternative theory which I believe could be more effective. I am referring to supply-side economic theory. President Reagan quoted this theory in his push to increase tax cuts as an incentive for people to save and invest in order to expand economic activity which would trickle down to the smaller participants in the economy. The theory affects tax policy, regulatory policy and monetary policy to increase economic growth. The Keynesian approach calls on government to stimulate the economy with fiscal and monetary strategies in the event of recession to mitigate a fall in consumer demand which is a temporary measure. The supply-side theory says that demand does not matter. If there is over production, there is excess of inventory which is reduced as prices decrease. The same dynamic works for shortages. Prices go up creating an incentive to produce more. Lower tax rates give people incentive to be more productive and invest more. If regulatory policy is contained, this is a further incentive to produce and invest. Supply-siders like to see a monetary policy which leads to discipline over the money supply to stimulate growth without the treat of excessive inflation.
So where are we now? First quarter 2010 GNP grew at a rate of 3%. This would be respectable under conditions where we were at the peak of the business cycle. During the acceleration phase, we need more like 8%. We are not seeing that rate of growth due to actions and lack of actions by the US Congress as we have noted before. Unemployment is a lagging indicator and is not likely to reduce significantly in the near future with growth rates as they are now. These factors are likely to keep inflation at bay for now. The economy exhibits too much excess capacity to foster much of a rise in inflation at this time. It is clear that problems in the European economy along with a wind down of the temporary stimulus crafted by the federal government are reflected in the poor performance of equity markets in the month of May. We need a credible policy that balances the federal budget. It is possible that in the forseeable future,we could see an economic train wreck in this country. If we see high inflation coupled with restrictive monetary policy and federal borrowing crowding out the prospect of a reasonable cost for business and private borrowing, we could find ourselves facing the same problems which now exist in Greece, Spain and Ireland.
For the Record:
DJIA 10,136.63
NASDAQ 2,257.04
S&P 500 1089.41
Suggested Reading; “‘Winning the Loser’s Game” by Charles Elis
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