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Money Matters

June 6, 2022 by Scott Crosby - Views: 69

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Is the U.S. economy in a recession, or isn’t it?  The S&P 500 is down over 16% from its high in late 2021.  That puts it at roughly the same level as it was back in March or April of 2021.  The losses in some segments could put you back to the level of the Fall of 2020 – a year and a half of investing wiped out.

What is causing that drop?  


The economy has still not fully recovered from the impact of the March 2021 onslaught of COVID.

The President and Congress

S365-1.jpgPresident Biden and the Democrat Congress are on a massive tax-and-spend spree.  

Taxation removes money from the economy that could have been used to invest in increased production of goods.  The shortages due to COVID interruptions of the “supply chain” are exacerbated by the money taken in taxes.

Those tax-and-spend politicians will insist that their spending programs are just as good as private investment for the economy, but money taken in taxes is spent on projects with financial dead-end consequences.  Such projects are economic black holes.  The tax money spent on them is money taken out of the economy.  

That is in pointed contrast to the necessity for a private company to compound its profit and increase its revenue, so it has the resources to grow in size, to increase its sales, to increase its number of employees, to increase the returns it owes its stockholders, etc.  No government agency has that requirement. 

Money taxed is money lost to the economy.  Even when spent on defense or on law enforcement, which are justified expenses of government, that money is spent protecting the economy.  Tax money does not support economic growth.  

But an unscrupulous government has the power to produce a double-whammy.  While taxes reduce productivity, inflation increases the costs of productivity.

While taking money away from the economy, the government can at the same time add “meaningless” money to the economy – also known as fiat money.  The government, in charge of the printing of money, can print “too much” money – inflation.  

In a stable economy, the amount of money in circulation matches the value of the goods and services being bought and sold.  But the government can cheat, and print an excessive amount of money.  President Biden’s “American Rescue Plan” passed in March of 2021.  The result was an increase in the money supply of about eight percent, which resulted in a corresponding rate of inflation.  That was only one part of the over-spending authorized by Congress, and of course, the inflation is continuing.  

We are all very well-acquainted with the nation’s resulting high rate of inflation – the worst since the Presidency of Democrat Jimmy Carter in the late 1970s.  That the two eras are so similar is no coincidence – a fact that the politicians hope goes unnoticed, since a large portion of the population is too young to be aware of the events of the ‘70s.

Russia – Ukraine War

The disruption of the international flow of goods, food, and services has been seriously impacted by Russia’s attack of Ukraine and the resulting sanctions.  

Boomers and Millennials

Very little mention has been made in the news regarding the changes of America’s population.  

For the last forty years, the Baby Boomers were the mainstay of the country’s workforce.  They were the most populous generation in history, and dominated the country’s economics due to sheer numbers.  

Now those Boomers are leaving the workforce.  They have a new lifestyle:  retirement.  

Instead of earning a living, instead of being productive, instead of growing the amount of their savings – instead of building the economy – they are transitioning to a lifestyle that is not economically constructive.  In order to do that, they have begun to withdraw the money from that lifetime of savings.  

The biggest generation before the Millennials is spending their savings instead of building it further.  Instead of steadily buying more stocks, they are now beginning to sell their holdings.

Some of those sales of stocks are not by choice.  The IRS requires a certain amount of withdrawals from 401k and IRA accounts.  That money withdrawn is immediately taxed, as income.  

Boomers cannot simply move stocks from 401k and IRA accounts into after-tax accounts, and sell only what is necessary to pay the bills.  The IRS treats withdrawals as income, so most people will need to sell some additional stock, and withdraw that money to pay the tax.  For the first time in more than four decades, Boomers are taking money out of the economy, in numbers big enough to have an impact.

Meanwhile, Millennials, now the biggest generation ever, are moving into the jobs vacated by Boomers.  Like the Boomers once were, they lack the skills, experience, and knowledge that made the Boomers generation so successful.  Those assets will develop over time, but the current lack slows economic growth, compounding the impact of the problems already mentioned.

Recession:  to be, or not to be?

There is no real problem with the American economy, barring the passage of more large-scale tax-and-spend bills by the President and Congress.  The interplay of the issues discussed above is slowing economic development, but by themselves should not cause an economic deterioration and downhill slide.  

Businesses have money, and, left to their own devices, are pursuing the economic development needed to restore the economy.  

Control vs. Freedom

But the President is determined to follow through with his “green”-oriented policies and legislation.  The impact on Earth’s climate would be small to none.  Such legislation would allow him to have a problematic level of control over the freedoms Americans enjoy.

Life, Liberty, and the Pursuit of Happiness

The “pursuit of happiness” is a poetic equivalent of saying, “economic development and productivity”.  Economic development and productivity require freedom; they are an integral component of freedom.

The loss of freedoms guarantees economic decline.■


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