I have been absolutely amazed at the misinformation and contradictory summations of what exactly is going on in Washington regarding the budget and the debt ceiling. So, I'm going to keep all opinion out of my explanation and deliver only the facts. I believe it is imperative that every citizen of this country understands exactly what's going on and what the ramifications are for all proposed solutions. But, let's first take a look at what has been going on in the markets.
I WAS WRONG. There. I said it. I have been opining for months about how this market is overvalued and we are headed for a big sell off. Well, that hasn't exactly happened. Don't get me wrong, the economy is still a disaster. Record unemployment, houses still in free fall, and bad consumer spending are still dogging this so-called recovery. However, Wall Street is in full rally mode and keeps pushing ever higher. This has absolutely confounded me until my recent epiphany. I grossly underestimated the effect of the stimulus and the mountains of free money that the Fed has pumped into the system. Companies have been able to refinance their debt at essentially zero percent, make capital investments they previously could not afford, and use the free money to purchase short-term investments and essentially fabricate profits. Did you know that many investment banks that were bailed out on your tax dollar are borrowing money from the Fed to purchase short-term government bonds? This means that the big banks are using government money to purchase government debt, stripping off the interest payments and pocketing the profit, and then paying the Fed back with the proceeds from the sale of said government bonds!! So, they are borrowing your money to purchase investments that pay interest with YOUR tax dollars. Now, this is obviously unsustainable and is not without its consequences. All of this free money floating around is going to be a millstone around the neck of the dollar's value for years to come. Anyway, my point is simply that at least in the near term, Wall Street will continue to be able to post profits as long as the Fed keeps interest rates artificially low. So, barring any unforeseen events, my position now is that this market will probably keep floating higher. Yet, I am not changing my investment approach as the party has to end at some point and nobody knows when that will be.
Now to the budget. We have discussed the budget crisis at great length in previous posts so I will try to stick to the current debate and not digress to previous discussions. First off, this is not a partisan or politically based issue. People are trying to make it a political issue but it is simply an economic issue. Both parties have been spending more than we are bringing in for some time. Now, our debt has surpassed our entire gross domestic product. We currently do not have enough revenue coming in to cover all of our obligations. So, the President is advocating that we raise the self-imposed debt limit in order to issue more government debt (sell more bonds) to pay our bills. Republicans are refusing to raise the debt limit unless the government cuts spending that at least equals the amount that the debt will be increased. Democrats are advocating that taxes be raised in order to pay for the debt increase. Republicans will not sign on to the debt increase if tax hikes are included and the Dems have vowed to nix any plan that doesn't include tax increases as well as any reductions to entitlement programs like Welfare and Medicaid. We are at a bit of a stalemate.
What's the answer? As much as I hate to say it, we must raise the debt limit, TEMPORARILY. As for raising taxes, we do not have a revenue problem. What other company or organization in the world confronts a budget crisis without making cutting costs an absolute priority? We can no longer pay for programs that we BELIEVE government should provide without considering whether or not we can afford them. As for raising taxes, it's just not a good idea in a recession. First of all, the assertion that raising tax rates equals more tax revenue is ridiculous. Tax hikes may result in a segment of society paying more money, but large corporations and the wealthy will simply move the equivalent amount of capital or business offshore to counteract the tax increases. This equates to less jobs and money here at home. This is best illustrated by the fact that GE profited nearly $14 billion last year and didn't pay a cent in federal income taxes. They simply routed the profits through international channels and absorbed the costs here at home. In short, tax increases are dead weight on an economy and many on the Left refuse to accept it. What we need to do is cut spending and incentivize businesses to do more business here at home. For example, does the government make more money if 100 people are paying 35% of their income in taxes or if 120 people are paying 30% of their income taxes? You don't have to have a mathematics degree from Harvard to realize that more people paying a lower percent will yield more revenue for the government. We need to create more jobs and get this economy cranking again as well as cut government spending in order to pay off this ridiculous debt and avoid fiscal calamity in the future. Let's hope reason wins out in Washington. Well, that may be a bit naive!
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