By Edward Leone Jr. DMD MBA CFP RFC
Contact Information: leonee@vzw.blackberry.net
It is January 6th at the time of this writing. It was important to me that the Holiday Season focus on family. It was also important to allow the news media to spread the word for a few days on H.R. 8 (the American Taxpayer Relief Act of 2012) before I choose to comment. This was a vote to maintain the status quo. There is no tax relief here as the title implies. For those at higher income levels ($400k single, $450k joint), marginal tax rates, capital gains rates and qualified dividend tax rates are increased. The payroll tax cut which in my opinion, should never have been instituted given the economic status of the programs it supports, has been discontinued. Expense reductions contained in the sequestration strategy have been delayed. The legislation states that marginal tax rates and the estate and gift tax structure are permanent. They are only permanent until Congress wants to change them in my opinion.
So what does all of this mean for us? I suspect that although we are in a week economic recovery, that the recovery will continue at a slow pace with high unemployment, stunted consumer demand and increasing inflation along with a gradual increase in interest rates. It is likely that even if the tax code is revised and the federal budget, if ever established, can be reduced that impact of these actions will not be visible for two or three years. Fiscal policy is on hold, but monetary policy is blasting along. Liquidity in the economy is essential and has improved the banking system. The price for continued aggressive Federal Reserve action will be higher interest rates, higher inflation and higher taxes. Taxes and interest rates go up during periods of high inflation to take away the driver of the inflation which is excessive consumer demand as a result of the increase amount of currency they possess even though it buys less. We definitely need clear communication from government and credible data on the results of government actions. Examples of the miss information we are receiving are as follows:
1. The calculation of unemployment is a moving target. If we were calculating unemployment today as we did in the early 1990s, it would be 23%.
2. For the year 2011, CPI was 1.1 percent. Consumer expense inflation was 2.7 percent. Which one of these numbers represents the impact of inflation on the citizen best?
3. The cost of future obligations of the Federal Government is somewhere between $77 trillion and $200 trillion depending on the source of information. What is the real number and what does it really mean?
We face many risks to establishment of a more vital economy. These risks are both domestic and global. Here at home, the new 77,000 pages of federal regulations to be imposed this year along with the impact on insurance premiums resulting from the Affordabe Care Act will place a drag on the economy. The potential issues surrounding the federal debt limit and appropriate federal expense reductions in the current political environment can be a big problem. It will be interesting to observe the effects of these potential risks and the evolving remedies. On the global front, we have much less influence on mitigation of potential risks. The economic status of the Euro Zone, unrest in the Middle East, slowing economies in emerging markets and a potential for accelerating energy prices can have meaningful impact on the US economy. Do we have the international posture to exert some influence on such events if they turn in a negative direction?
There is a birthday to celebrate this year!! Both the Federal Reserve Bank and the IRS are 100 years old. These agencies are very powerful tools in the hands of politicians. In the above paragraphs, the influence that tax rates have over economic growth are evident. The Federal Reserve has a charge to control inflation. In 1913 if you had $1, you would need $23.61 today to have the same purchasing power. It will be interesting to observe the nature of any celebrations of these entities give their high-profile in the news at this current time.
For The Record:
DJIA 13,435.21
NASDAQ 3,101.66
S&P 500 1,466.47
Suggested Reading:
“Quantitative Investment Analysis” by De Fusco, Mc Leavey, Pinto, Runkle
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