The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

Opposing Forces

08/06/2020

First, there is an increasing certainty of future tax increases.

Both Republican economists and Democratic economists agree on one thing — an over-concentration of wealth is bad for democracy.  Of course, that’s where the agreement ends!  The Republicans think it is a small problem that will eventually fix itself, as succeeding generations divide up the wealth.  Democrats think it is a clear and present danger.

My perspective is that this pandemic has revealed a two-speed America.  There are those who are financially untouched, while there are those who are financially damaged.  (Of course, there are those who made more money accepting unemployment insurance than working, but they are so few and only cloud the fact that so many are hurting.)

My fear is that the pandemic will make this concentration-of-wealth problem even worse.  The easiest way to start correcting this problem in the long-run is with taxes, such as personal and corporate income taxes and estate taxes.  Pressure is also increasing rapidly to increase taxes in the short-run, to deal with the massive pandemic-fueled deficit and the continuing entitlements.  I see little likelihood that we can avoid a tax hike, regardless of the November Presidential election.  Biden will increase taxes more quickly to fund the continuing deficits and entitlements.  Trump will delay the inevitable increase, while increasing the national debt to fund it.  Either way, it ain’t good . . .

(The President’s argument is pure Supply-side economics — tax cuts improve business conditions, which improve tax revenue.  Sometimes that works, and sometimes that doesn’t.  Assuming tax cuts always pay for themselves without increasing debt is a triumph of hope over experience.)

Second, there is a concerted effort to create some badly-needed inflation.

Currently, the Fed is rapidly increasing the money supply (>20%), which is inflating the stock market.  But, the Fed is thinking longer-term and is increasingly concerned with our low rate of inflation.  First, deflation must be avoided at all costs — it is much, much worse than raging inflation.  Second, inflation is a good tool to manage our enormous national debt – “inflate it away.”  Inflation will cause our national income (GDP) will increase faster than the debt, which is good.  Third, the primary tool of the Fed for increasing inflation is greatly increasing the money supply, which they have been doing and may soon increase it more and faster.

We may have a situation for higher taxes depressing the economy at the same time inflation breaks out — do you remember stagflation?

Of course, there is certainly no certainty to this scenario.  If there was, I would consider precious metals in the short-term, inflation-protected Treasuries (TIPs) in the mid-term, and consumer stables in the long-term.

We are a fee-only advisor providing best interest fiduciary services to clients
in Chesapeake, Newport News, Norfolk, Suffolk, Virginia Beach, Williamsburg, and the surrounding areas of Hampton Roads.

CONTACT BAY CAPITAL ADVISORSWe Will Respond Promptly

Contact Us Bottom