What will the economy be like? What will be the “mood” of Americans? Monetary policy has been used up, and only fiscal policy tools remain. A major fiscal tool is tax policy.

The present tax law is set to expire on December 31, 2012. Will politicians kick the can down the road again? Everyone knows that there are a few major changes that need to be done to have the U.S. economy thrust forward with dynamic vigor. One aspect that must be noted: Any tax policy change must be cemented in place for at least five years. Any prudent individual or business cannot do any worthwhile planning or changing behavior with any shorter time period.

Here are a few changes that will transpire when the extended “Bush tax cuts” expire. Remember, it was the largest tax cut in history when first implemented and got us out of the 911-tech stock implosion of 2000-2003. Consequently, if it is not extended…it will be the largest tax increase in history. Here are just a “FEW” of the changes:

• All tax rates basically go up around 5%. The 10% bracket is eliminated and will be at 15%.
• Dividend rates will go from the present 15% rate to your ordinary tax rates.
• Capital gains rates go from the present 15% rates to rates of 25%. (Gee, I wonder what this will do to your stock market investments? DUH!)
• Elimination of the tax credit for having children. (This will hurt the unwed parents and illegal immigrant parents.)
• The marriage penalty tax will go back into effect. (This will encourage married people to not stay married.)

Since it is obvious that you will be taxed more in every area of your life, doesn’t it make sense to develop a plan to place your monies into programs that will never be taxed? We are here to help at any time.

Come November 2012 it may be beneficial to heed the words of the former Mayor Daly of Chicago, “Vote early and vote often.”

Many people that recently bought gold at over $1900 per ounce have told me they just sold it, as I write this today, with prices at $1690 per ounce!!!

You do not buy gold to make money. It is a hedge against a devaluing dollar, a safety net against war and financial crises. As gold went up over the last few years, all your dollar asset values were dropping due to the devaluation of the dollar so you did not make or lose anything. It is a hedge. It is simply an insurance policy.

Will it go higher from here? Here are some notes from some gold experts who see prices rising due to the following:

•China’s gold jewelry consumption has exploded and will continue to do so as their wealth increases and the affluent buy finer things.

•Although the Chinese government did open up the gold market for jewelry sales in the early 1990s (isn’t that nice of the controlling government to do that?). There still was a value added tax of 17% on gold jewelry and a monopoly in sales by the Chinese government.

•In 2003 most of the controls and taxes were removed in China and thus helped push the price up recently. Demand for gold bars has grown even faster due to (1) rapid income growth, (2) lack of investment alternatives, (3) low interest rates on bank deposits, and (4) as a local currency hedge.

•China is the world’s largest gold producer, but, still must import a great deal to meet demand.

•Also, a growing concern in China over rapidly increasing inflation encouraged the purchase of gold as a safe haven.

•Massive worldwide marketing is also creating more demand in all corners of the globe.

So, should you buy gold now? If you look at the government policies that have created the demand for gold, and you think those negative policies will be reversed quickly, then I would not buy. If you see these negative policies staying around, world income levels rising and it taking a while to solve the world’s financial crisis, then I would be a buyer.

How much gold and at what price? See your financial advisor…. Isn’t that why you pay them their hourly fee?

If I had my way, I wish for the price of gold to drop to zero. Then, there would be peace, harmony and love all over the world. People would be holding hands and singing all day long. With that in mind, I have a bridge in Brooklyn to sell you along with swamp land in Florida! And…a very special deal for you…. I can get Bernie Madoff to be your investment advisor from behind bars. Are you laughing yet?

The Tax Foundation does an annual survey of all 50 states and ranks them according to the degree of tax burdens placed on people within that state.

The northeastern states have the highest burdens. According to the 2009 reports, Connecticut has the worst burden per capita; then New Jersey, New York, Massachusetts, Maryland, and California.

States with the least burden in 2010 were South Dakota, then Alaska, Wyoming, Nevada and Florida.

The “facts and figures” guidebook is available online at www.taxfoundation.org\publications\show\2181.html.

Remember, these taxes are over and above the Federal fees and taxes.

The Treasury wants to widen the pool of potential purchasers of Treasury debt. This will include impossible mandates (where they can do such things) and huge offering incentives (where they cannot get what they want). The rumblings do NOT look good for common folks like you and me.

One proposal is to require 401(k)s to hold a certain percentage of their assets in Treasuries at a risk of losing their tax free status. Another is encouraging pension plans to increase their portfolios with more Treasuries. Here is another… allowing companies with overseas cash to bring it home under a “tax holiday” as long as the majority goes into Treasury debt.

Under such plans (1) your 401(k) returns would be less over the long term, and (2) pension plans would need to increase their holdings from the present 6% to 16%, which would force companies to contribute more, costing companies more and forcing them to cut other costs (jobs).

Thus, Uncle Sam is trying to create demand for Treasury debt via the carrot and the stick. The good part… (hmmm) the U.S. is borrowing money from its citizens to stimulate the economy, so these same citizens will pay themselves back with higher taxes. This becomes an Abbott and Costello routine or a chicken and egg game.

As stated in this blog countless times, get out of your 401(k)s, or, stop contributing at least. Get into a non-qualified program that will grow tax free (not deferred); you take it out tax free and, when you die, it transfers income tax free.

The other evening I almost lost one of my home TVs because I threw my shoe at the set because of what was said. One of the administration’s strategists said, and I paraphrase…

“The government has put money into the economy via the stimulus and created jobs.” (As if the government was an entity. No it is merely taking our money and transferring to another person. The government does not create anything and has never created a job.) “It is now up to business to put money into the economy and go out and hire people.” How dumb! What is a business to do… create jobs by hiring people when there is no demand (work), so all the new hires will get paid for sitting around doing nothing! Duh! Boy, if that isn’t socialist government thinking, I do not know what is. See, the spokesperson was thinking like the government and applying it to business. It is not the government’s money, it is ours. They throw it out and hope something happens. They have no responsibility or accountability to anyone. A business owner, has responsibility to their shareholder’s, the lenders, their employees, the community and their families. Business owners cannot just throw money out, and if they need more, they cannot tax their employees, or go print money. Am I making my point to anyone? If any business owner ran a business like the government, they would be sharing a cell next to Bernie Madoff for breach of fiduciary duty.

Look at the recent employment numbers. They are terrible. Business owners are holding on to their cash and not hiring because:

• Obama care will cripple them financially if they add on employees.
• They cannot borrow money to expand or stay afloat due to the suffocating Dodd-Frank regulations on the banking industry.
• We are two plus years into an economic recovery and the present level of employment is lower than in March 2000. With fewer employees, that leads to less demand, which leads to lower sales and thus no need to hire.
• The present administration’s statements and policies are all anti business. Plus the threat to raise taxes further on business pushes a business to lower costs by laying off more employees and moving jobs overseas.
• At this point in the business cycle, employment should be making new cyclical highs. Barely 20% of the 2008 recession losses in employment have been recovered to date.
• The economy is in the tank because of excessive non-corporate debt, excessive housing inventories, excessive reliance on imported oil and excessive labor market supply.

Remember the old expression… one who does not study history will be doomed to the same errors.

The present administration’s fiscal policies have been used many times in the past 100+ years and have failed every time. There are proven successful policies that have worked time and again, but, they will not use them.

Didn’t anyone but me go to economics class or were they all out protesting something? Hmmm.

As the article explains, back in the 1970’s, with stagnant growth and rising inflation, the term used to describe the economy was “stagflation”. The replacement term is now “screwflation”. This word describes inflation with the screwing of the middle class. This condition, like stagflation, threatens the very health and valuation of the stock market.

• U.S. economy has doubled (real terms) in past 30 years
• Corporate profits are reaching a new peak
• Real wages have made little progress
• Food, energy and other costs are consuming middle class incomes
• Lost decade of stock prices
• Four years of declining home prices
• Drop in middle class purchasing power
• Unemployment has hurt all but the wealthiest Americans

There are 3 megatrends going on:

• Integration and globalization of the world’s economies
• Broad advances in technology
• Temporary hiring as a permanent feature in the workforce

All three of these megatrends are major causes of “screwflation”.

A major shift has come about due to a drop in real estate, especially in the recovery of jobs. Work involving real estate made up 40% of all job growth in the 2001-2006 period. This percentage has plummeted recently. Please note, there are no policies from the present administration to improve this drop. Rather, the Obama administration is doing the complete opposite to reverse the trend and wants to eliminate mortgage deductions to raise more taxes (so they can spend more, NOT pay down the debt). This will hurt real estate jobs even more.

For middle class Americans, the increase in commodity prices hurts the low and middle income families more since it makes up a larger percentage of the necessities of life for them. Then, add in rising health care, education and other costs. Well, it is a poor foundation for growth.

The article suggests some policies that could help.

• Extend the payroll tax cut
• Reduce income taxes for the middle class
• Provide federal funds for infrastructure spending (not to shore up union pension plans)
• Create incentives for business to make new capital investments
• Allow tax-free repatriation of U.S. corporate earnings abroad if used for creation of U.S. jobs
• Launch an energy plan that has domestic resources
• Use Federal housing financing to slow foreclosures

It is a great article and I suggest you read it in full.

“Sorrow looks back. Worry looks around. Faith looks up.”

Many boxers have been hit with two jabs, a right hook and find themselves on the matt looking up. You need to prepare for two jabs coming at you: Increasing inflation and more stock market volatility. The right hook to you will be increasing taxes. You need to prepare for all three. There are ways to protect yourself. One way is not by burying your head in the sand. Yes, I have written many times how most Americans are procrastinators (that is why 97% fail financially). They are also very naïve and unaware of what is taking place around them.

My point is that taxes will need to go up dramatically to fund the massive deficits and debt our country now faces. The Bush tax cut extensions expire in about 18 months. The majority of Americans will wait until 30 days before the expiration date and then try to do some planning. You need to act now. See your advisor for help. I have attached a link to an article from the Heritage Foundation.

http://www.heritage.org/Research/Reports/2011/04/Tax-Day-2011-Deficit-Spending-Hides-Future-Tax-Hikes?query=Tax+Day+2011:+Deficit+Spending+Hides+Future+Tax+Hikes

This organization has a fantastic reputation in all the research they do. I suggest you read it carefully and then make your plans. Even if Congress tries to cut back expenses in order to “save our ship”, it will be massive cutbacks and it will affect you and your families. Americans claim they want austere cuts, but, they want the other person’s programs cut; not there’s. So, even if they put cuts in place, expect higher taxes, since cuts alone cannot solve the problems.

Like the person that eats a quart of ice cream each night, puts on 50 pounds and expects to lose it all in days without pain, well, that person has another thing coming. We, as Americans, let the politicians add government programs since the 1930’s (ice cream). We have never stopped the politicians from adding more programs (eating more ice cream). We have allowed them to tax us to death to pay for the programs. So, to get back in shape, we need severe cuts (stop eating ice cream) and tough exercise (more taxes).

“Contentment isn’t getting what we want but being satisfied with what we have.”

(1) The Community Reinvestment Act of 1978 and further promoted in 1997, whereby banks were forced, by the Federal Government, to issue loans to people who had no chance to pay them back.

(2) Fannie Mae and Freddie Mac, the government mortgage companies.

(3) Senator Dodd and Congressman Frank that continually stated that Fannie and Freddie were strong and no reason to investigate.

In January 2011, a 47,000 word mini book was published, entitled…Dissent from the Majority Report of the Financial Crisis Inquiry Commission.

In this book, Author Peter Wallison dissents the findings of the Commission. His account boldly shows the key factors that brought the U.S. economy to the brink.

You can buy it at amazon.com or download it for free from the AEI website (American Enterprise Institute).

In it, Wallison states…”The housing bubble of 1997-2007 wouldn’t have reached its dizzying heights or lasted as long, nor would the financial crisis of 2008 have ensued, but for the role played by the housing policies of the U.S. government over the course of two administrations.” In other words, says Wallison, “had this massive bipartisan intervention into the housing market not occurred, the economic history of the past few years would have been very different.”

Let’s look at factors that have also led to these oil price increases:

1.) Worldwide economic recovery leading to more demand for oil.

2.) Russia has recently stopped increasing production and is holding at a little over 10 million barrels per day (BPD).

3.) Political problems in Nigeria, Egypt, Tunisia and Libya, all leading to cutbacks in production.

4.) Demand for oil is skyrocketing in all areas of the world.

5.) Societies that are modernizing are using more oil for autos, trucks, airplanes, boats and utilities, pushing growth of demand upward.

6.) Oil companies are straining to get more supply to meet world demand. Will they be able to produce more in 3-4 years? This supply/demand problem is increasing the value of oil in the ground as holders try to add to their supplies.

7.) World production is producing 87-88 million BPD. Capacity is about 5 million more BPD, up to maybe 95 million BPD. This will take place in 4 years, around 2015. By 2020, production will have a hard time going higher.

8.) The U.S. Gulf region has been shut down for almost a year. Only recent applications are being approved, but, it will be a long time before any oil comes out. The regulations are so stiff that it will take many years before production, and jobs, reach the pre-BP spill level.

9.) Most of Alaska is closed to drilling. The northern states in the U.S. are shut off to drilling. Between the two, these areas have more oil than Saudi Arabia, yet, the environmentalists have kept all of us hostage to foreign oil prices.

10.) Companies are not allowed to drill off the East or West coast of the U.S. Thus, the Mideast oil suppliers are having a laughing fit at the U.S. Talk about a security risk for us!

11.) Even if you increase productivity by 1/2 of 1% per year and demand increases 1.5% per year…you do not have enough to meet demand.

Charles T. Maxwell, a noted expert energy analyst, has a prediction for oil prices in the future (he has been right on his past predictions). Using West Texas crude as a price model:

$85 average for 2011
$95 in 2012
$115 in 2013
$140 in 2014
$180 in 2015
$300 in 2020

To prepare for this, start planning on (1) using more natural gas when possible; (2) invest in energy related companies so you can benefit from these rising prices; (3) begin thinking about strategies you can employ around your home to save (minimize) on the use of oil.

Some research from the King Report has shown the price increases in product/services from 2000 through 2010. Look at what the prices have done over the past 10 years:

Homeowners Insurance +108%
Real Estate Taxes +77%
One gallon of heating oil +150%
Average electricity bill +50%
Average gallon of gas +100%
Monthly Medicare Part B premiums +143%
Potatoes +67%
Eggs +93%
White Bread +50%

Washington pundits and the media continue to tell us there is no inflation. Hmm!

Make sure your investment portfolio is growing to provide for taxes and inflation. Your money in the bank account or money market account is earning ½% of 1%, less 25% taxes yields a little more than 1/3 of 1%. Now subtract 3% core inflation and you can see you are losing ground. Sure, the money is “safe”, but, you are going backwards.

To provide a visual for you, picture yourself rowing upstream at ½ mile per hour, (1/2 of 1% return), and not counting taxes, the river is flowing against you at 3 miles per hour (3% inflation). Although you are “safe” in the boat, you are losing ground and purchasing power.

Get it?