Weekly Market Update by Retirement Lifestyle Advocates
Last week, I pointed out that using the long-accepted definition of recession, the United States finds itself smack in the middle of one despite the fact that there are politicians and policymakers who would like to change the way a recession is defined.
This past week, the Washington politicians collectively passed a bill that will do exactly the opposite of its name. It seems that the “Inflation Reduction Act” will now become law.
While an “Inflation Reduction Act” sounds like a good idea, the act will add to the inflation problem we are now facing in my view.
Before I get into some of what this law will do, let’s revisit some simple math.
When the government or any other entity spends more than it takes in, we say that expenditures exceed income, and the result is a deficit. Deficit spending needs to be covered by borrowing money to make up for the shortfall.
Repeated, chronic deficit spending will eventually see the pool of lenders willing to cover deficit spending shrink ultimately reaching a point where there are no lenders left to cover the operating deficit.
That is essentially where the US has been with the Federal Reserve becoming the lender of last resort creating currency to (at least indirectly) cover the operating deficit. As we all know that massive level of currency creation has led to inflation despite attempts to spin the inflation story more favorably.
Bottom line is this: the math is undeniable. When deficit spending can only be covered by currency creation, a point of no return has been reached. The math dictates that expenditures must not exceed income if currency creation is to cease.
That math is a reality in every place on the planet except in Washington DC.
Only in Washington DC could a group of politicians pass a massive spending bill that will likely require more currency creation to fund (despite the narrative to the contrary) and call it an “Inflation Reduction Act”.
It’s laughable if the ultimate economic consequences of this recklessness weren’t so serious.
Former guest on my radio program and past Presidential candidate and congressman, Ron Paul commented this past week on this topic. (Emphasis mine) (Source: http://ronpaulinstitute.org/archives/featured-articles/2022/august/01/inflation-reduction-act-another-dc-lie/)
The Affordable Care Act, No Child Left Behind, and the USA PATRIOT Act received new competition for the title of Most Inappropriately Named Bill when Senate Democrats unveiled the Inflation Reduction Act. This bill will not only increase inflation, it will also increase government spending and taxes.
Inflation is the act of money creation by the Federal Reserve. High prices are one adverse effect of inflation, along with bubbles and the bursting of bubbles. One reason the Federal Reserve increases the money supply is to keep interest rates low, thus enabling the federal government to run large deficits without incurring unmanageable interest payments.
The so-called Inflation Reduction Act increases government spending. For example, the bill authorizes spending hundreds of billions of dollars on energy and fighting climate change. Much of this is subsidies for renewable energy — in other words green corporate welfare. Government programs subsidizing certain industries take resources out of the hands of investors and entrepreneurs, who allocate resources in accordance with the wants and needs of consumers, and give the resources to the government, where resources are allocated according to the agendas of politicians and bureaucrats. When government takes resources out of the market, it also disrupts the price system through which entrepreneurs, investors, workers, and consumers discover the true value of goods and services. Thus, “green energy” programs will lead to increased cronyism and waste.
The bill also extends the “temporary” increase in Obamacare subsidies passed as part of covid relief. This will further increase health care prices. Increasing prices is a strange way to eliminate price inflation. The only way to decrease healthcare costs without diminishing healthcare quality is by putting patients back in charge of the healthcare dollar.
The bill’s authors claim the legislation fights inflation by reducing the deficit via tax increases on the rich and a new 15 percent minimum corporate tax. Tax increases won’t reduce the deficit if, as is going to be the case, Congress continues increasing spending. Increasing taxes on “the rich” and corporations also reduces investments, slowing the economy and thus increasing demand for government programs. This leads to increased government spending and debt. While there is never a good time to raise taxes, the absolute worst time for tax increases is when, as is the case today, the economy is both suffering from price inflation and, despite the gaslighting coming from the Biden administration and its apologists, is in a recession.
The bill also spends 80 billion dollars on the IRS. Supposedly this will help collect more revenue from “rich tax cheats.” While supporters of increasing the IRS’s ability to harass taxpayers claim their target is the rich, these new powers will actually be used against middle-class taxpayers and small businesses that cannot afford legions of tax accountants and attorneys and thus are likely to simply pay the agency whatever it demands.
Increasing spending and taxes will increase the pressure on the Federal Reserve to keep interest rates low, thus increasing inflation. If Congress was serious about ending inflation, it would cut spending — starting with overseas militarism and corporate welfare. A Congress that took inflation seriously would also take the first step toward restoring a free-market monetary system by passing Audit the Fed and legalizing competition in currency.
I believe Dr. Paul has this absolutely correct. The math doesn’t lie and no matter what this bill is called, more inflation will be the result.
A less-reported aspect of the bill is that the IRS would double in size as a result. Stephen Moore (Source: https://marketsanity.com/the-so-called-inflation-reduction-act-will-add-87000-irs-agents/) reports that another $80 billion for the IRS will mean the workforce of the IRS will more than double and the end result will be 1.2 million new audits and 800,000 new tax liens.
The IRS will become one of the largest agencies in government as a result of this bill. This from a piece written by Jazz Shaw (Source: https://hotair.com/jazz-shaw/2022/08/06/inflation-reduction-act-would-make-irs-among-the-largest-agencies-in-government-n487847):
Tucked away in the hilariously-named “Inflation Reduction Act” that Joe Manchin has been working on with Chuck Schumer is one significant bit of spending that has been mostly flying under the radar. The measure would fund a massive expansion of the Internal Revenue Service to the tune of eighty billion dollars. And we’re not using the word “massive” in a hyperbolic fashion here. This money would go toward hiring an additional 87,000 employees for the detested agency, more than doubling the size of its workforce. As the Free Beacon points out this week, that would make the IRS larger (in terms of manpower) than the Pentagon, the State Department, the FBI, and the Border Patrol combined. And what do they plan to do with that many people? Do you really need us to tell you?
The “Free Beacon” piece referenced by Shaw suggested that the additional IRS funding is integral to the Democrat’s reconciliation package. A Congressional Budget Office analysis found the hiring of new IRS agents would result in more than $200 billion in additional revenue for the federal government over the next decade. More than half of that funding is specifically earmarked for enforcement, meaning tax audits and other responsibilities such as ‘digital asset monitoring’.
While I don’t know precisely what ‘digital asset monitoring’ means, it seems that the politicians are hoping to use the IRS to control the use of crypto-currencies and maintain their monopoly in currencies.
Bottom line is this in my view. This bill will ultimately mean more inflation not less inflation.
If you don’t yet have precious metals in your portfolio, now is a good time to consider them in my view.
Metals prices are comparatively low at this point, and it may be a good time to add this asset class to your portfolio.
History teaches us that as fiat currencies evolve and are replaced, tangible assets like precious metals are where one should keep assets.
This week’s radio program and podcast features an interview with Alasdair Macleod, head of research at Goldmoney.
I talk to Alasdair about the credit markets and the strong possibility of a looming crisis in the banking industry. Listen now by clicking on the "Podcast" tab at the top of this page.
“We should make politicians dress like race car drivers. When they get the money, make them wear the company logos on their suit.”