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That 70’s Show (continued)
In my last post I wrote about how there is a parallel between government policies in the late 1960’s and early 1970’s and now. And that I believe there will be a similar stock market reaction to those policies. And since money to pay for these entitlement and international programs doesn’t come out of thin air, the way politicians try to have their cake and eat it too is predictable: Tax the rich and print the money. In the last post I tried to show you how taxing the ‘rich’ predictably reduces jobs and stops the stock market in its tracks. No new jobs and no stock market movement is a bad thing for getting re-elected so politicians will try to reduce the impact of taxation in a time-honored bit of incredible stupidity. They will go for Door #2 - Print money.
The Federal Reserve Bank can do this legally. This new money will have a brief positive impact as it rolls through the economy. It makes people believe for a time that things are okay. I give it 3-5 years max before the positive impact evaporates and prices begin to rise on commodities like gas and food. Higher prices in commodities come from less production due to less investment and higher demand due to increased cash in the economy. So they will print more money to ‘help’ people deal with price increases and that will cause prices to increase even faster. In Zimbabwe, it only took a couple of years to inflate prices so much it now costs 15,000,000,000 Zimbabwe dollars to buy a loaf of bread because the government policy unintentionally discouraged the producers of wheat while increasing the production of paper money.
But wait! There’s more! Inflation makes lending on a long term basis very risky. You lend $1 million of
buying power today but are paid back in five years with $500,000 of buying power plus some interest. That doesn’t work for lenders so they either stop lending or they charge more to make a business loan. We are seeing the effect now of massive government borrowing essentially mopping up all the bank liquidity and driving up rates to business borrowers. In five years, expect 20% or 30% or 100% interest per year. Lending stops. Businesses can’t borrow so they can’t grow. If they can’t grow, their stock prices go down.
Income taxes and printing money. What we should do is stop taxing productivity (income and capital gains taxes) and begin taxing consumption (national sales tax – see fairtax.org). We won’t, but we should. Instead we’ll keep electing people who are all about getting us entitlements and we’ll be stuck in stagflation land until we get so sick of it we elect people who have an economic brain.
Next: How to profit from the stupidity of our fellow Americans
Now go play.
Phil Town
The Federal Reserve Bank can do this legally. This new money will have a brief positive impact as it rolls through the economy. It makes people believe for a time that things are okay. I give it 3-5 years max before the positive impact evaporates and prices begin to rise on commodities like gas and food. Higher prices in commodities come from less production due to less investment and higher demand due to increased cash in the economy. So they will print more money to ‘help’ people deal with price increases and that will cause prices to increase even faster. In Zimbabwe, it only took a couple of years to inflate prices so much it now costs 15,000,000,000 Zimbabwe dollars to buy a loaf of bread because the government policy unintentionally discouraged the producers of wheat while increasing the production of paper money.
But wait! There’s more! Inflation makes lending on a long term basis very risky. You lend $1 million of
buying power today but are paid back in five years with $500,000 of buying power plus some interest. That doesn’t work for lenders so they either stop lending or they charge more to make a business loan. We are seeing the effect now of massive government borrowing essentially mopping up all the bank liquidity and driving up rates to business borrowers. In five years, expect 20% or 30% or 100% interest per year. Lending stops. Businesses can’t borrow so they can’t grow. If they can’t grow, their stock prices go down.
Income taxes and printing money. What we should do is stop taxing productivity (income and capital gains taxes) and begin taxing consumption (national sales tax – see fairtax.org). We won’t, but we should. Instead we’ll keep electing people who are all about getting us entitlements and we’ll be stuck in stagflation land until we get so sick of it we elect people who have an economic brain.
Next: How to profit from the stupidity of our fellow Americans
Now go play.
Phil Town
