Sunday, May 03, 2009

Obamanomics - What happens when Inflation Meets Deflation? Carter revisited.

According to the
Bureau of Labor Statistics Inflation Calculator
, $100 in 2007, had the buying power of $103.84, however, when updated to reflect the first three quarters of 2009, $100 in 2008 has the same buying power as $98.80 – indicating a rise in the price of consumer goods combined with a drop in the worth of the dollar – or a slight rise in inflation.

Inflastion, in simple terms happens when the price of goods and services raises - the cause- an increase in government spending.
Deflation, is the opposite, (this is where recession and depression occur) – this is caused by an increase in taxes and a rise in the unemployment rate.

According to these two definitions, the U.S. is currently or about to experience both. We have a rise in the rate of inflation due to increased government spending, and a rise in taxes, and a rise in unemployment. In other words, Jimmy Carter’s Misery Index (the combined unemployment and inflation rate) run amok.

The St. Louis Federal Reserve’s latest publication on National Economic Trends is interesting in that, as of May, the Consumer Price Index has fallen, Read GDP growth has taken a dive (to minus 6.14), industrial production is down , non-farm payrolls are down, unemployment rate shows a steep increase, interest rates have fallen (rock bottom), the duration of unemployment has risen, and government expenditures have substantially increased. The only component missing that would send the current economy reeling is an increase in taxes – so far.

The Federal Government (IRS) has recently decided that the “Make America Work” tax credit ($13 per week) already in paychecks nationwide, must be repaid due to an error on the part of the IRS, and next April, penalties are in the wind for many currently receiving the credit in other words, the first tax increase (or backhanded tax cut). Those most at risk of having to pay taxes are individuals who hold more than one job, retirees who have federal income tax withheld from pension checks and Social Security recipients who must work to make ends meet. The IRS has generously provided a Calculator (here)to help individuals avoid paying in April, 09.

Congress is doing its part in ensuring that the economy continues to spiral downward - proposals include: a raise in the capital gains tax from 15 to 20%. The general consensus is that Capital Gains occur only in the Stock Market, or for those who can “afford” to pay a bit more, however, that is not entirely the case. Capital Gains occur anytime a taxpayer makes a profit without incurring a loss. Items on this list include real estate sales, lottery winnings, any monies or assets one receives from an estate. (For example: A $2,000 check that Aunt Ethel left in her will is a Capital Gain.) In other words, an Increase in the Capital Gains Tax affects every rung on the economic ladder. Additionally, an increase in the Federal Gas Tax is on the table.

How to stop the madness? Cut back government spending, revise the current budget system for all government departments (the government penalizes agencies that do not spend every dime they receive by cutting funds) issue across the board tax cuts (industry reacts by hiring and consumers react by spending) and really make work pay – a program similar to Franklin D. Roosevelt’s, by creating a Federal Work program for able bodied American’s currently receiving State and Federal assistance, subject of course, to every tax enjoyed by those working in the private sector.

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