There’s a lot of movement in the economy. Several different news threads and innovations have the ability to change the direction and velocity in which our economy moves. In today’s newsletter, we’re going to talk about some of those economic pressures, what they entail, and what they mean for our economy.
Taxing corporations and the wealthy
A news story recently came out about taxes. More specifically, this news shed light on how the wealthy manipulate the tax code in their favor.
I think the information shared in this story was well known already, or assumed rather, but served as a confirmation. A large number of wealthy individuals aren’t “paying their fair share” in taxes.
This will only add fuel to the fire. The fire I’m talking about is the tax overhaul in the tax code. The Biden administration has said that they want to increase taxes on corporations and wealthy individuals/families.
If they’re successful, it would mean more tax revenue for the federal government, which is a good thing. Is there a chance that the increase in taxes creates a disincentive for those corporations and wealthy individuals?
Perhaps, but I don’t think it’s very likely, broadly speaking. I have only one reason…those corporations and individuals are good at making money, and I believe that will continue.
Government spending
As I said, the change in the tax code will generate more income for the federal government. You may be thinking, “Great! We can reduce the national debt!”
I think that’s very unlikely. That may sound skeptical, and it probably is on some level, but both parties are spenders now. It doesn’t matter if it’s a Republican or a Democrat in the White House, they’re both going to print money to push forward their agenda.
Borrowing costs
I’ve talked about inflation a lot lately, and I promise I’ll tone down after I make this point, but I haven’t explained why runaway inflation is a bad thing.
Now don’t get me wrong, there are advantages (i.e. increased rates on savings accounts), but the disadvantage is higher prices. Households can run into trouble because they can’t afford necessities anymore.
The larger problem, however, is the cost of borrowing. Over the last, almost 15 years, rates have been low. And they’ve stayed low, other than an attempt to increase in 2018.
People and corporations borrowed a lot of money. Some bought things they didn’t need. Others to increase research, development, and innovation. Some people used record amounts of leverage to take part in the wild stock market (as of late).
With that said, the cost of borrowing will go up and the cost to service that debt will go up. The higher rates go, the more money that will be needed to pay for/down the debt. When that happens, less money will be spent on “productive” things.
That can slow growth and negatively impact the economy. That’s why central banks reduce rates in times of negative or low economic growth. It reduces borrowing costs and incentivizes people and companies to spend money instead of saving it.
Labor
The last thing I’ll say that has the ability to tie into the last point is the current labor shortage. There are more jobs available right now than people to take those jobs.
Small businesses, in particular, find it especially difficult to fill vacancies. Couple a labor shortage with a strong push from workers, unions, and government bodies to increase wages, and you get wage inflation.
When wage inflation becomes more prevalent, price inflation (CPI) becomes more likely. If companies have to pay their employees more, they need to account for that increased expenditure somehow. They turn to increase the prices of their products and/or services.
Demand is unlikely to suffer because of higher wages. People are making more money, so they should be able to afford higher prices, right?
Conclusion
If you read back some of my other posts, you’ll see I’m optimistic in select areas of the market, and I’ll stay optimistic in those areas no matter what type of economic pressures the country faces.
With all that I said, I believe there are enough economic pressures to cause a decline in the market and the economy, but there’s no telling when that’ll actually happen.
Related reading:
Employment, Stimulus, Rising Prices
Inflation, Gold, Semiconductors
Why Financial Literacy is Important
Disclaimer
**Securities offered through Securities America, Inc., Member FINRA/SIPC. Advisory services offered through Securities America Advisors, Inc. Securities America and its representatives do not provide tax or legal advice; therefore, it is important to coordinate with your tax or legal advisor regarding your specific situation. Please see the website for full disclosures: www.crgfinancialservices.com
My name is Jacob Sensiba and I am a Financial Advisor. My areas of expertise include, but are not limited to, retirement planning, budgets, and wealth management. Please feel free to contact me at: jacob@crgfinancialservices.com
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