Which Would You Prefer, Higher Taxes or Higher Inflation?

Which Would You Prefer, Higher Taxes or Higher Inflation?

Guess what folks? You’re getting both…and it’s not going to get better anytime soon!

Journalist Melissa Lee was on the “Today” show on 2/27/08 telling “everyone” that they should be 75% in stocks and 25% in bonds because “that is the only way to beat inflation.” The problem with this statement is that journalists like Lee, and other financial advisers who want us to invest to “keep up with inflation,” don’t address the real problem as to why there is inflation? Heck, the Presidential Candidates, sans Ron Paul, don’t even address inflation, so why should the media?

But why is “keeping up with inflation” a goal at all? If there was no inflation, couldn’t we just spend our time finding companies to invest in that are going to return us a profit? Isn’t this what investing is all about?

There’s an old saying that goes, “ignorance is bliss.” From a theological standpoint, bliss means “the joy of heaven.” When it comes to the ignorance that Americans have in understanding money and inflation, I can’t really say that there is heavenly “joy,” but our government and the corporate owned media would have you think this is the case. In reality, the definition of ignorance is, you don’t know what you don’t know…yet one still has to “pay” for this lack of intellect through higher taxes and the hidden tax of inflation.

The saying, “ignorance is bliss,” actually comes from 17th century English poet, Thomas Grey who said; “Where ignorance is bliss, ‘Tis folly to be wise.’” The latter part of that saying is what I hope this post accomplishes in exposing what our government and the Federal Reserve are really doing to the economy and what the inevitable consequences are for you in planning for your future.

Corporate owned media has a vested interest to say, “put your money in the stock market!” They are corporations themselves! They typically want you to put 50% or more of your money into stocks and what’s left into bonds (debt) and cash (which contrary to popular belief is also debt)…., but I’ll save the debt analysis for a future blog.

Of course the government too wants to keep the stock market moving along so they can tax the capital gain when one sells their appreciated stock. Even better for the government taxing authority, otherwise known as the IRS, is they get to collect taxes on 100% of the withdrawals that have appreciated over the years in IRA’s, 401k’s, SEP’s and other private pension plans.

Even the Federal Reserve is in on the stock market action by artificially lowering interest rates to perk up the market. The resulting increase in the money supply means The Fed is causing more inflation. The Fed doesn’t even want you to see their monetary maneuvers any longer so they hide the M3 statistics (they don’t want you to know about credit expansion or how much money they are printing out of thin air), but there are still organizations that track these numbers.

They show that over the last few years M3 has risen about 40%. The Fed is inflating at an unbelievable rate! Remember, the definition of inflation is an increase in the money supply (don’t believe your college economic textbook definitions).

What we don’t know is if you are going to have to pay more taxes in the future. Or do we?

Let’s look at our present economic situation. Where might the government need to collect money (taxes) from us now and in the future to pay their bills?

There’s a laundry list of possibilities…. but let’s define one item for you first so you can comprehend the big picture. This really isn’t difficult to understand, so bear with me….

Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period. GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory. So in a nutshell, “GDP is commonly used as an indicator of the economic health of a country, as well as to gauge a country’s standard of living.” The important words in the above definition for us to concentrate on are “government outlay” or what the government spends.

Taxes, along with the above mentioned inflation, affect your standard of living and both are the means by which the government pays its bills (spends). If the government doesn’t have enough money to pay its bills, then this is called a deficit. When the government has a deficit, they need to borrow money and this becomes debt.

So let’s see what the government actually says about future taxes via the Congressional Budget Office (CBO). The CBO projects that, under current law, receipts from individual income taxes will remain at 8.5 percent of GDP in 2008 and then climb to 10.9 percent in 2018, a gain of 2.4 percentage points.

So let’s look at the “health” of our country and see if there is any potential for higher taxes above and beyond what the government claims there will be. Below are the type of statistics you won’t hear about via the corporate owned media. We’ll take a look at five areas; U.S. National Debt, Budget Deficit, Trade Deficit, Pension Deficit and Projected Federal Spending. You see the words “debt” and “deficit” quite a bit there don’t you? I hope you’re sitting down….

1. U.S. National Debt: Now OVER $9.3 Trillion
Debt held by public is $5.56 trillion, about 37% of GDP

Most of this debt is owned by foreigners including China and Japan: who aren’t too happy about a falling dollar.

2. Budget Deficit for 2008: $410 billion, close to the record of 413 billion in 2004

3. U.S. Trade Deficit $711 (2007) Billion: 5.1% of GDP

4. Pension Deficits backed by our government: Total Under-funding among the 1,108 weakest defined benefit pension plans in the U.S. reached $353.7 billion at the end of 2004 according to the agency that backs this debt, the Pension Benefit Guaranty Association. This agency, as of the end of 2007, is now over 18 billion in debt.

5. Projected Federal Spending Over the Long Term: $59.1 trillion primarily for Social Security and Medicare (2008 cash on hand is about 6 trillion). This will end up at more than 30% of GDP as this CBO chart shows.

All of the above eat away at our GDP as they are bills that our government have to pay now or in the future. Keep in mind I didn’t include the potential for more funding needed for current wars, future wars, bailout of banks involved in the sub-prime debacle or the highly probable, unregulated, over the counter derivatives meltdown. There won’t be any future expenditures needed for any of that right? You can count on the government and the Federal Reserve to handle the economy right? They’ve done such a wonderful job so far right?

Or have they? Annual Real GDP Growth is down four straight years. Some define a recession as two consecutive quarters of lower GDP. What does 4 years in a row of lower GDP signify? Are we in the middle of something worse than a recession? A deck of cards propped up by the last-ditch Federal Reserve intervention?

Are you hearing any of this from the corporate owned media? CNBC? Fox Business Channel? The Wall Street Journal? They’re still telling you to invest 75% of your money into the stock market! But what happens during a recession to the stock market? “Based on historical experience the stock market is likely to fall sharply by about 28% from peak to the trough according to RGE Monitor’s Nouriel Roubini. Or you can just go on believing everything is just fine like our Commander-in-Chief.

So what’s keeping this game going? You can thank the American Consumer who has an infatuation with debt! During the Greenspan years, it was the artificial lowering of interest rates that caused the increased housing equity for consumers to tap and spend and keep the economy going. What did this Fed induced spending create? The burst of the greatest real estate bubble in U.S. history and the largest sub-prime debacle to boot. Is the Fed still sticking its nose into the economy?

Today, the consumer is still spending according to the CBO; “Consumer spending on services, exports, and investment in business structures were major contributors to the 2.2 percent growth in real GDP in 2007.” How much longer can the consumer keep spending?

The consumer needs to take responsibility for their own actions….but again, “ignorance is bliss right?” The consumer trusts in their government, the Federal Reserve and the media to be in their best interest right?

The facts above may state otherwise.

Naturally, now that you have the information at hand, you will come to the conclusion that higher taxes and higher inflation are with us today and embedded in your future.

The good news is, there are ways to profit, and I’ll discuss this in a future blog.

Doug Eberhardt

Related posts from the Fed Up Blog:

1. Is Warren Buffet Right About Inflation?
2. The Demise of GM and How the U.S. Is On the Same Course “As GM Goes, So Goes the Nation”
3. Digger’s Friday Triple Play
4. Current Thoughts on the Stock Market: Caveat Emptor!
5. Bernanke and the Fed Have Saved Us: Recession is “Very Likely Over” Don’t Believe It!