Paul Ferraresi

The Fed stopped the QE2 program on June 30, 2011. The whole purpose was to provide liquidity to the Treasury market and to appease the Chinese who hold the greatest amount of Treasury debt. The Chinese were concerned that no one would buy their holdings.

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.

Watching some of the pundits on TV and the present administration’s policies, it is evident that they do have a clue how a business operates, how to get business to hire people, how the economy really works, or else they all got a D- in economics.

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.

Two Left Jabs and a Right Hook

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.”

Many in Washington and around the country believe that the solution to the deficit problem is to add more taxes to upper income Americans. I completely disagree. I remember, as a child, when top tax rates were at 91%. It took a lot of fun out of earning money. Consequently, many people, back then, invested in stupid “tax shelters” or moved overseas to reduce taxes. Remember, anything you tax…you will get less of…The more you tax the rich…the more they will move away and you will have less tax income going to Washington.

According to the IRS, during 2008, those in the top tax bracket earned around $1.2 trillion. The Federal deficit for 2009 and 2010 were $1.4 trillion and $1.3 trillion, respectively, and fiscal 2011 deficit is set to be $1.5 trillion. So, the recent deficits are all greater than all the taxable income earned by the rich. How about charging a 100% tax rate on the wealthy? It would not cover any of the three year’s deficit. That is, take 100% of their income. You may get away with it for 1 year. But, by next year, they will all move away and there will not be any taxes collected from the rich!! Most of the richest people in the U.S. are the one’s creating the jobs. So, if they move, there will be no jobs for everyone else. Thus, no jobs, no income, so, no taxes. Put out the sign on the U.S. borders…”Closed, out of business”.

I hate when people say about government handouts…”Oh, the government will pay for it”. The government is not a person. The government does not pay for anything. It takes from one person to give to another. Let’s change the statement to…”Oh, my neighbors, family and friends will pay for all my benefits.” Change the statement, and it will wake people up to what is really happening.

We are all at crossroads in the U.S.…it is approaching a point where 50% of the people are paying taxes, so, the other 50% of people, who do not pay taxes, are getting the benefits.

Here’s an idea…Why not tax everyone, yes, I mean everyone, even those on Welfare. It can be a very small percentage rate on the very poor. If everyone is paying some tax, they will be contributing and feeling like part of the “American Family”. They also may vote differently, since they are not getting a free ride. Hmmm…the fair tax or a consumption tax.

“Patience is the ability to keep your motor running when you feel like stripping your gears.”

Many people are still looking for answers to why the housing meltdown took place. Immediate reaction points the finger at…

(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.”