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Taxes and Debt; Change Is Coming

January 18, 2011

Taxes and Debt

Federal Reserve Bank of Philadelphia President Charles Plosser spoke yesterday and evoked Milton Friedman by saying:

“..we have come to expect too much of monetary policy…”


There appears to be such a great reliance on the Federal Reserve to guide the economy to recovery.  We can deliberate recovery, its definition and parameters for pages, but let’s assume we are in one – and again, we can engage in a lengthy debate where we are in said recovery.  However, just like a parent, at some point, the parent needs to let the child explore, and potentially fail on their own, while still serving as a safety net for a soft(er) landing.

In my view, the Fed needs to let go a bit.  Perhaps the Fed feels partial guilt and blame (although by no means should it carry the entire burden)  for letting housing prices increase 50% from 2003 through the middle of 2006 with its (unwritten) easy money policy.  Certainly those were times of “irrational exuberance.”  However, what has really changed?

It is widely held that there was too much leverage on the financial system and personal spending was too high.  Now the consumer savings rate has increased and personal (and private/corporate) leverage is down sharply yet the overall spending trend line is about the same.  Why?  Government leverage and government spending.  There has been no real movement in the trend line, only who is influencing its path.

In my observation, there in lies a very real and meaning concern.  If it is widely accepted that such a trend line was a bubble and unsustainable  why continue to maintain it above its inflection point?

Unfortunately I think there needs to be a little more pain to ease the trend line down.  I am confident it can be done in a productive fashion which will be the topic of several observations in the near future.  Governments have only two revenue sources:  taxes and debt.  We will have to pick between the lesser of two evils.  In my view, we can not take on more debt.  If we do, future generations will suffer unlike any generation in perhaps the last 100 years.  Simply, taxes have to increase and spending has to decrease.  Measures are in place for taxes to increase beginning in 2013 and 112th Congress is to embark on a spending debate (or is it rhetoric?).  I have some informed (and perhaps no so informed) thoughts to share in the coming weeks.

Facebook Endnote II (the absolute last, I promise).

It turns out that Goldman Sachs will not be offering a participation in Facebook to its U.S. clients amid (according to media sources) the intense media spotlight and a fear of violating U.S. securities laws.  I suppose if something is too good to be true, then perhaps it very well may be.  I also suspect there may be (i) a purported expert 1934 Securities Act attorney at Goldman ensuring a current resume is in their briefcase and (ii) outside counsel to Goldman writing off time it had previously charged to Goldman advising them on the merits of the 1934 Securities Act.  However, as reported in the Wall Street Journal, even with this “setback” in excess of $7 billion in participation orders have been from foreign investors alone! (More than $4 for every $1 in shares being sold.)


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