Contrary to popular belief, heights are not one of my two greatest fears, although I am not too fond of heights, either. I used to quip that I am so scared of heights that if I was any taller than 5’ 8", I would walk around scared all day. But as much as I dislike heights, there are two things that concern me even more – Taxation and Inflation.
Why are we concerned so much with taxation? In a nutshell – demographics. I don’t want this to be a political blog – not in the least. But obviously there are political forces out there that can influence in our economy. At the present moment, we have Oval Office intent on spending our way out of a recession. To date, we have lent, spent, or promised roughly $13 Trillion. Folks, this money must be paid back at some point in time. Whether or not some of the TARP funds get returned; whether or not some of the taxpayer dollars get paid back; this money has to be returned.
Noticed I mentioned the word demographics, and then criticized the current administration. But I honestly believe that no matter which political party that took office, taxes would have to eventually increase. When JFK was in office, the top marginal tax bracket was around 90%. As more and more Baby Boomers entered the work force, guess what? Taxes came down. The larger the workforce, the more tax revenue. The higher these Boomers moved up in seniority, the more taxes they paid. But unfortunately, the reverse is also true. The smaller the workforce or the lower the average salary, the lower the tax revenue. As Boomers retire, new employees replace them at the bottom of the pay scale. The current top marginal tax bracket is around 35%. And herein lies the problem. For the first time in our nation’s history, we are witnessing a smaller generation follow the current one. According to the H.S. Dent foundation, we have .95 "Echo Boomers" for every Baby Boomer. This is a huge problem.
Just think about it. For every high school that we once had, we only need .95 of them. For every car, we only need .95 of them. And to really bring it home, for every house, we only need .95 of them. That means that for every 1,000 houses owned by Baby Boomers, roughly 50 of them will not be needed. But it also means that for every person on Social Security, we have fewer active workers. For every person on Medicare, we have fewer people paying into the system. And right now, we have a huge problem with Medicare. According to CNBC, Medicare will be bankrupt in 10 years. Now that is a problem!
It doesn’t matter who won the election – taxes can only go one in direction. Want to solve the Medicare crisis? Want to solve the Social Security problem? I can think of only three possibilities, and none of them are good. 1) Raise Taxes. Obviously, current workers would not be in favor of this. 2) Lower Benefits. Obviously, current retirees will not be in favor of this. 3). Do a combination of numbers 1 and 2. Obviously, no one will like this, but it may be the most rational answer.
Now for the second fear: inflation. We are printing tons of cash right now. All things being equal, from an economic standpoint, this should cause inflation. But we are also witnessing a switch to a wants-based economy, as shared in a previous post. As we move to a wants-based economy, we are starting to see demand for some goods decrease, which can have the impression of deflation. But we can also clearly see demand for other goods and services which have the clear impression of inflation. Think about our current environment: many have seen their retirement accounts go down in value, their homes go down in value, and their vehicles go down in value. But take a trip to the grocery store, buy groceries and diapers, or take a trip to the doctor and tell me there is no inflation….
As more and more money gets printed, as more and more money gets promised, there is little doubt that inflation will be heading our direction. The question is: when? Every economist knows that as the Fed lowers interest rates, the value of the dollar should decline. If the value of the dollar declines, the amount of goods that we can purchase also should decline, thus we would experience inflation. But if the entire world cuts rates, then the dollar would not decline as rapidly as one would expect. At some point in time, however, the chickens will come home to roost, the Fed will have to raise rates to help fend off inflation, and many people hiding in fixed income investments will eventually lose purchasing power.
Taxation and Inflation will be heading our way….the big question is how soon?
Of course these are just my thoughts, Clark’s Thoughts.
