Search This Blog

Wednesday, December 8, 2010

New Tax Law Promises Each American BOHICA

New Tax Law Promises Each American BOHICA
BOHICA (pronounced bo’ hic a’) is a medical term most often used by comedic proctologist. The acronym stands for Bend Over Here It Comes Again. The agreement by Republicans and President Obama on legislation designed to avert the catastrophic expiration of the “Bush tax cuts” is the latest in a long line of government probes. 
Regardless of your stance on Mr. Obama’s agenda, one must be in awe of his ability to borrow and spend money. Given the results of last month’s election, the chances of another stimulus package passing through a Republican controlled House is as strong as a fresh vapor on a hog farm. Yet, with this new law, that’s exactly what he gets; a $390 billion stimulus package!
By increasing spending and expanding the deficit in the face of last month’s election, the Congress and the President have spit in the face of the American electorate. Republicans nor Democrats get it. Do we really need any further proof our government doesn’t work? Balancing the “give with the take” is entirely subjugated to reelection efforts. The concept is nonexistent in the Washington lexicon.
On probably the most critical piece of legislation having to do with job creation since the onset of the Great Recession our political leaders kicked the can down the road again. Two years from now (probably during another lame duck session of Congress following the presidential election) our esteemed friends will present us another tax law with equal or even less deliberation. It’s the quality of work our politicians have found acceptable to Americans.
In return for his agreement to not raise taxes on the highest income earners (small business owners who are going to create jobs, if any get created), Mr. Obama negotiated a 30% reduction (FICA tax cut from 6.2% to 4.2%, the media is reporting a 2% reduction!) in the amount workers must pay in Social Security tax and a 13 month extension of unemployment benefits.
A quick look at the legislation reveals three disheartening aspects of the law. 
First, and foremost, not a single hard decision was made. Our govern refuses to govern.  The report received from the “debt commission,” with legitimate ways to curb the deficit, is a macabre joke in the hands of these perpetual campaigners.
Incredibly, these boneheads on both sides of the isle, who ballyhooed endlessly about their commitment to fix Social Security, have decided to cut funding going in to the program. Social Security is on a collision course with mathematics and this legislation ignores the reality of addition and subtraction. 
The extension of the unemployment benefits will cost about $120 billion. Was there any consideration given to the idea of reducing spending to pay for this? Don’t be ridiculous!
Twenty three days is not long enough for such a debate! Unfortunately, twenty three years would not be long enough for this debate. 
What are the immediate ramifications of this new law? First I would say that a double dip recession is now almost completely off the table and I can assure you that a double dip recession was America’s best case senerio. The stock market will probably do well over the next two years (sell your bonds now!). Unemployment will stay about the same.  Ben Bernanke’s commitment to QE 3, 4, 5, 6 ……. assures that stock market prices will remain steady or slightly improved. The economy may also improve marginally over the next two years, enough to get Mr. Obama reelected. But there is no free lunch.
The inescapable truth is that America is headed for a day of reckoning which is beyond anything in our nation’s history. Americans do not have a context for measuring the woe that will eventually befall this nation. And it is coming, make no mistake about it. This “balancing of accounts” will surprise Washington and Wall Street because our policymakers are not trained to think like this. Alan Greenspan, David Walker, David Rosenberg, Mohammed El Arian, Nessim Taleb, and Nouriel Roubini do know how to think in this context. Don’t take my word for it, read what they are saying.
My speculation above that we have put off, for at least two years, this day of reckoning is predicated on no monumental unforeseen strain being forced on the economy. A large natural disaster, an attack on the homeland, gasoline at $5 per gallon, or a cascading collapse of European banks and/or sovereign debt issuers changes everything. Of course, lurking out in the future is the unimaginable event. They are the most likely to occur and potentially the most devastating. 
The American economy’s ability to put food on grocery store shelves is dependent on the US government being able to sell US Treasury debt at auction and have the Federal Reserve Bank buy what other countries or investors don’t want. How long can the Federal Reserve issue checks backed by the very same debt being purchased? No one knows, but everyone agrees not indefinitely. On 60 Minutes Sunday night Mr. Bernanke stated that he felt “100% confident” he could control inflation by raising interest rates. What Mr. Bernanke did not say was that every time interest rates rise the US government debt sitting on the Federal Reserve’s balance sheet loses value. 
What difference does the Federal Reserve’s balance sheet make? Good question. No one knows, but if history has any credibility as a teacher, one day the value of the assets on the Federal Reserve’s balance sheet will be the only thing that matters to America. What day will that be? That, my friends, will be the day of reckoning; the mother of all BOHICAs. 

No comments:

Post a Comment