HOPE FOR TOMORROW
The United States will soon face an economic storm of immense proportions created by a Congress, who for decades have made promises that they cannot fulfill. They have engaged in a process of buying votes in the present while postponing future financial needs. The baby boom population (78 million people) is approaching 65 and will be asking for Social Security benefits and Medicare benefits that are underfunded. In addition, the states have the responsibility to provide nursing care for the elderly who are impoverished. This system is called Medicaid. It too is largely underfunded.
On top of this, the government is engaged in a process of selectively bailing out businesses who have mismanaged their assets primarily in the financial sectors and more specifically banks. Banks are required to have 5% in reserve and before the crisis the average bank had less than .7%. When the bailout occurred it is my belief that the funds were used to bring the reserves back to 5% leaving no money for new loans. The economy needs credit to work efficiently for commercial loans, car loans, mortgages and the like.
The government has only three solutions for the need for money. They can borrow, tax, or inflate the currency. Borrowing comes in the form of treasury notes, bonds or bills. We have been borrowing from the Chinese and the effective rate is higher because unlike the U.S. citizens the Chinese pay none of the interest back in the form of taxes.
Taxing is the second alternative but raising taxes does not necessarily generate more revenue for the government. Income taxes can cause people to cheat or look for legal ways to avoid them. The rich set up sophisticated entities offshore and the poor trade services. Corporate taxes can reduce the ability of companies to compete in a global economy and are really a tax on the consumer who buys the goods and services.
This then leads to the most likely scenario which is to inflate the currency. I have in my possession currency issued by a bank in 1860. It says on the currency that this receipt can be exchanged for one bushel of wheat, barley, rye, corn etc. Let’s assume you put on reserve a bushel of wheat and I, as the banker, issue you a receipt. The next day someone comes into my bank requesting money for services to the bank, and I issue them a receipt against your bushel and likewise the day after I issue another receipt against the same bushel. In business we call that fraud; when the government does it, we call it inflation. Inflation raises taxes because of our graduated tax scale without a vote by Congress and steals purchasing power.
So what are the solutions to these problems facing each of us?
1. We need to look for ways to live within our means. Saving Without Sacrifice is a book and workbook (Saving Without Sacrifice in Action) that can help you achieve this goal.
2. All debt, particularly variable rate debt, needs to be eliminated.
3. Homes on bus lines, with low square footage, and close to commerce will have higher value than homes that are not.
4. Assets should be purchased that will protect you from inflation.
5. Everyone needs a plan B that will create income in the event of loss of employment. For those seeking to start a business as their income source, begin planning and strategizing before loss of employment and use Saving Without Sacrifice for Small Business to help you. For those desiring employment through a business or government, begin building your network of people who can help you find work, if you lose your job. Remember, you need to be a friend to have a friend.
6. We anticipate a short term recovery for you to prepare for the next economic challenge.
Robert Ostrander CFP®
President SWS Advisors, Inc.
Tags: business, debt, employment, financial, heat, income, inflation, money, network, tax
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