We are all familiar with one of President Obama’s signature proposals, “Tax the rich.” We have all heard how the rich needs to pay their fair share. And who can forget President Obama exclaiming that we all must play by the same rules or that Warren Buffet, the multi-billionaire, pays a lower tax rate than does his poor secretary who, by the way, collects a six figure income. But there is one item that has always intrigued me, namely that the dividing line between we the normal people and them, those wealthy slackers who need to pay more, is set at $250,000 a year in earnings. I have spent some time considering this arbitrary dividing line, or was it so arbitrary? Well, as it turns out, the $250,000 threshold may as well be an arbitrary line pulled out of the thin air when one finally realized the truth of why the tipping point is completely unimportant. The only difference the dividing line between those who are doing their fair share and the evil rich in the end will only determine how soon everybody, even those on Government support such as unemployment, welfare, or disability, will cross into the classification as rich and having to pay their fair share. The real story will become more evident with time but has, for now, been dampened and kept in check as if what is coming in our future had gotten out of control before the election, President Obama would never have had even the slightest chance of reelection. So, what is this coming catastrophe?
Most of us have heard of Quantitative Easing, especially if you have been reading BTC for some time. Quantitative Easing is usually abbreviated as QE followed by a number to denote which version one is referring. In QE1 the Federal Reserve took control of $175 billion of agency debt securities, $1.25 trillion of mortgage-backed securities and additionally some Treasury Notes. This was done in order to relieve the banking system of questionable and bad securities allowing them to climb out from under the dead weight of these mostly defaulted debts. As bad as QE1 may have appeared, at least there existed some equity in these debts which, where it did not totally offset the entirety of the debts owed, did provide some cushion guarding against a total loss which could have made recovery impossible without severe consequences.
When QE1 proved insufficient stimulus and the economy began to run out of steam, the Federal Reserve felt the need to act again. Initially they remonetized the equities they held from QE1 and purchased Treasury Notes thus supplying the government with additional funds. This expanded its balance sheet by $600 billion, all of which was new monies invented electronically out of thin air as the securities utilized to make this purchase of dollars was basically worthless by this time. It was taking a loan on the assets which you had previously used for a loan elsewhere, which is illegal for you or me to do. Thus far all of these additional dollars have been left sitting in the regional banks and kept from being introduced into the money supply but instead sitting idle supposedly in reserve. Eventually, when the economy really begins a true recovery the pressure for releasing these monies into the local banks allowing it to be loaned and thus giving it the initial shove resulting in it now having velocity. We can picture QE1 and QE2 funds as a huge rounded bolder sitting above our country on a high plateau really close to the edge but still safely in place. When the monies from QE1, QE2, and also QE3 (we will get to this in a moment) are made available for loans and injected into our economy, then somebody is going to give that bolder a little shove. The shove will continue to be more vigorous as more and more of the new monies are injected into circulation. This will eventually push the bolder past the flat and onto the steep slope leading directly into our country and its economy. Once this starts it will gain a life of its own just like the bolder picks up speed rolling down the hill. Now, this would have a limited effect if the bolder was not too large compared to the size of our GDP and other economic indicators and measurements. This is where QE3 comes into play.
Now we are in the middle of QE3 which is an ongoing purchase of bonds, presumably mortgage bonds, at the rate of $40 billion a month, every month until there is a sizeable downturn in the unemployment numbers, the real unemployment numbers and not the relative numbers used to make us believe things are not as dire as they actually are. The second half of this one two punch is that at the same time there is an intent to force the interest rates for banks to remain at or just above zero through 2015. At some point these actions will trigger a burst in the economy which will appear to catch fire and simply take off. This will initially appear to be the end of the doldrums that the economy has been suffering through for the last five years, but this elation will be short lived. This burst of activity will begin the charging of all these additional dollars that were invented electronically (the way we print money in this computer age) out of thin air giving them velocity which will then begin doing what any healthy economy does, act as a multiplier on the available money supply as it gets deeper into the economy. So, what does all this mean?
As the economy recovers with the increased money supply grown through each stage of QE1, QE2, and especially QE3, these dollars become active and get loaned, increasing economic growth which makes those funds available for loaning again and again speeding the economy wildly due to the millions of injected dollars. Now, when there is a great amount of additional money and the economy grows leading to increased purchasing, what happens to the prices of items we will purchase? Their process will begin to increase and they will increase at a rate proportional to the available money supply which has been greatly expanded by the Federal Reserve and our Government through QE1, QE2, and QE3. As prices begin to run away there will be a demand by employees for greater pay and salaries will begin to increase. This will allow more purchasing leading to more inflation and the circle begins to spin faster and faster. This leads to hyper-inflation which is a situation where people begin to realize that saving money is counter-productive and spend every penny they earn. These additional purchasing speeds everything further and eventually the whole thing spins completely out of control, unless there has been some check put in place to draw off these excess dollars and calm the excited economy bringing it back under control. There are two main routes which can be utilized to remove the extra dollars, either raised interest rates or higher tax rates. With everybody’s salaries increasing due to inflation they all pass the minimum qualification for being amongst the rich and this is where making the rich pay their fair share comes in to play. If President Obama could have his way, he would likely raise the tax rates on the rich by setting new tax rate levels, likely every $250,000. So what we would have is a tax rate of 40% on salaries from $250,000 to 499,999; tax rate of 55% on salaries from 500,000 to 749,999; tax rate of 80% on salaries from 750,000 to 999,999; and a tax rate of 99% on all salaries over 1,000,000. Oddly enough, such a system might actually work to prevent the runaway hyper-inflation even though I have my doubts that this was part of President Obama’s actual plan. President Obama is using class warfare to separate Americans into different groups at each other’s throats as it is easier to conquer a divided people. That his tax warfare system might inadvertently have a positive result, it is not likely President Obama planned a check be put in place to counter the reckless financial decisions made by himself, his administration, and the Federal Reserve.
Beyond the Cusp