September 2010 Market Update

September 2010 Market Update 

 

 

As summer draws to a close, we can say one of the issues that have been assaulting us in the headlines for months has reached resolution; BP has FINALLY capped the well!!  Now all we have to do is “cap” the bloodletting in the economy.

The evolving dilemma I outlined in my last posting, whether to further stimulate anemic economies or attack exploding deficits, continues to develop. The Wall Street Journal ran an article this week entitled

Obstacle to Deficit Cutting; A Nation on Entitlements”

 

The statistics quoted from the Tax Policy Center, a nonpartisan research organization, are nothing short of mind boggling;

  1. Nearly 50% OF ALL AMERICANS LIVE IN A HOUSEHOLD IN WHICH AT LEAST ONE PERSON RECEIVES GOVERNMENT BENEFITS.  This has never been the case before in the history of the country.

 

  1. 45% OF HOUSEHOLDS PAY NO FEDERAL INCOME TAX.  Either because they do not make enough money or they have so many exemptions and deductions they don’t owe any.

 

The classic ways of cutting the deficit are raising taxes and cutting back on federal programs. How do you do that when half the people don’t pay taxes and half are living on some kind of government benefit??

The answer, which the politicians know, is that 80% of the taxes are paid by the wealthiest 2% of the populace.  So taxing the wealthy is an obvious solution.  However, I have also come across another interesting statistic; 37% of consumption (consumption is 70% of our economy) is directly attributable to that wealthiest 2%. If they stop buying because their taxes are going up we have gotten exactly nowhere.

What happens when governments try to cut back on entitlement programs? We have examples playing out in numerous European countries that have the same deficit dilemmas.   French President Nicholas Sarkozy faced mass demonstrations and a national strike week when he tried to change the national retirement age from 60 to 62. Angela Merkel, the German chancellor, had to exempt pensions from her program of severe budget cutting under pressure from retirees. Greece literally and figuratively had blood running in the streets when it cut pension benefits.

These are extremely complex situations that have taken decades to develop and will not be resolved in a matter of months or even years. They certainly will not be resolved when our government representatives cannot manage to hold a civil conversation with one another.  But until there is some solution, economies around the world are in limbo.

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