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You have heard on more than one occasion, that Americans as a group do not save enough. We have a zero rate of savings and this actually moved into negative territory as the stock market moved higher. Who in their right mind would save when there was so much money to be made investing. Economists had pointed their accusing little figures at Japan with their savings rate and compared us to them. Were they wrong? A quick look at Japan's economy and the shambles it is in may lend one to think that savings is inherently not good for the economy. But is it a bad thing? According to some economists, if we started saving now, it would not be good for the economy. Businesses have come to
depend on our loose pocketbooks as a way of propping up their companies. With two thirds of all spending generating from us, an attempt by us to start saving would send the economy into a tailspin.
This argument is largely bunk. Sure, in the misty world of macroeconomics, a place where no clear answers point to the way to economic health, that seems like the best solution to the problems of an overextended, largely in debt economy. But for me, it doesn't make a lick of sense. Investing has never seemed like a better idea than now, but rolling some of that risk into a safer place just seems like rainy day thinking. And that is a good thing...even if it brings the economy down.
An investor, and analyst and an economist are traveling on a train. This
train speeds by what looks like a black sheep standing in profile. The
conversation turns to what they had just seen. The investor concludes that
all sheep are black. The analyst tries to be analytical and suggested that
some of the sheep are black. The economist points out the existence of at
least one sheep, and at least one half of that sheep is black.
They are all looking at the same object but they see it in different ways.
Why do you suppose this is? Are investors inclined to see things in such a
conclusive way because eventually they have to make up their minds, one way
or another, right or wrong?
Do analyst try to be political about what they observe because the agenda
they work under is neither clear nor concise? It is merely a state of
recommend or not, buy or sell. And is the economist inclined to offer an opinion that is both based in
science and observation, but like a running stream... moving and changing,
but always appearing the same?
Part of the problem with investing in any market is our overall view of
what is happening. We no sooner make a decision about one thing, make our
move, only to find that we are apt to second guess ourselves within weeks,
months, or even perhaps hours. Like the running stream, we can not measure
our ability to choose wisely no more than we can stop the movement of the
water. What we can do is be confident that we have made the right choice.
Be assured that we can change our minds. Be aware of who we are and what
we are trying to achieve. And most of all, be realistic.
Over the past week we have had various economic powerhouses do slightly different things. We had Alan Greenspan continue his dramatic gesturing to the economy that short term interest rates and the supply of money will have a quicker effect than anything that the President's proposed tax cuts will do. The drama was in the timing of course.
Do it while the markets were moving north of what looked like their bottoms. The "move" is based on optimistic reduced forecasts for earnings, in other words, expecting less profit, and the unusual coupling with a media, who does not like to report negative news about everything in front of them. A little negative is okay, but I can see their point, journalistically, the bottom is not much fun to report about. Period.
And then, Alan's second in command, Vice Chairman Roger Feruson mentions that this is not necessarily the bottom of the interest rate barrel. Leaving the question hanging, "how low can rates it go?" And then Paul O'Neill, US Treasury Secretary decides that he will address the issue telling us that first off, the tax cut will happen, and sooner than early fall. It will be because the surplus is still on target for this year's estimates. The key word "this" should be noted. But what does it mean? As the Senate approved budget continues its journey around the Capital, the size changes somewhat, and the delivery is always the big question. We will probably get the equivalent of $200 at that point. That would cover the difference between the $1.2 trillion Democrat suggestion and the $1.6T Republican offer. What will you do with it?
Last evening, I spent mine, or what would be the equivalent of a $200 tax cut. I took my thirteen year old and wife to see AC/DC in concert. Tickets for three, a t-shirt, and two drinks, and it was gone. I couldn't help wondering if the members of Congress know how little economic stimulus that kind of money can have.
Mr Bush is not pushing a little harder for the tax package he has submitted to the Congress. He does not want to see his package altered in any way from the $1.6 trillion he originally suggested. He has gone so far as to gently suggest that his tax cuts would do more for economic vitality than the Senates $1.2 trillion cut. According to the Bush camp, the difference is in the additional spending for programs that were not addressed in Mr Bush's budget.
But there are two things you can count on. First, the tax cut will probably go through as originally proposed with a broader horizon for full enactment. Knowing that the plan is based on numbers that are guesstimates at best over ten years, the President hopes to sell the plan with additional time. Stretching a bad idea over three terms of a Presidency sounds like a good idea!
Secondly, no matter how long it will take, it is still not what it appears to be for the middle income family. The number of people that would benefit from the cut is still as small as originally proposed but now, the economic impact of the plan may have consequences not yet seen. The cost of prescription drugs, something many of our elderly parents will not be able to afford will be paid by someone. You. Will $616, the real number that we can expect to receive, be of much help with those costs?
How is it that the market can be down, the value of mutual funds are down, and you can still owe capital gains tax? How is it that despite this, the President's tax plan never addresses what is one of the most inexpensively administered types of cuts?
Capital gains on long term holdings ( anything over a year) stands now at 20%. These taxes are against gains received when stocks or stocks in mutual funds are sold. Receipts from this tax will make up 20% of this years total taxes paid. As they tweak the bill downward to the Senate's blueprint of $1.2 trillion dollars, the capital gains will come under
consideration. Some have suggested lowering the total percentage. Some have suggested that small investor's receive some sort of exemption, perhaps $3,000 to $5,000. Others have suggested shortening the holding period that is currently required to something like six months.
If this should happen, good things will come of it. Trillions of dollars worth of assets are sitting out of circulation because of this tax. Money that would be better used back in the pool of spendable cash, in the end doing more to stimulate a slowly stagnating economy.
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