Two Threats – Inflation and Taxes
I believe in America and the traditional american dream. The dream that hard work can create economic opportunities and wealth. However, there are two critical threats to that dream that truly scare me.
Inflation and Taxes
The twin tower threats of “Inflation and Taxes” are the dynamic forces that destroy wealth and undermine fundamental economic opportunity.
The American federal government spends more than it takes in in tax revenue. Today, the US Senate begins debate to raise the legally authorized debt ceiling by 15% from 12.4 Trillion Dollars to 14.3 Trillion Dollars, an increase of $1.9 Trillion in two years!
Washington covers this spending gap through two methods: it borrows dollars and the federal reserve “prints” dollars.
The US government has increased debt in the last two years by $3.62 Trillion – an increase of approximately 39%.
The federal reserve has increased the money supply in those same two years by $1 Trillion - essentially printing money.
The Economist magazine in 2009 wrote:
“Having spent a fortune bailing out their banks, Western governments will have to pay a price in terms of higher taxes to meet the interest on that debt. In the case of countries (like Britain and America) that have trade as well as budget deficits, those higher taxes will be needed to meet the claims of foreign creditors. Given the political implications of such austerity, the temptation will be to default by stealth, by letting their currencies depreciate.”
No matter how you look at it, this is destructive. Every dollar that the federal reserve “creates” out of thin air reduces the value of an existing dollar. The dollar has already lost 95% of its buying power since the federal reserve was created in 1913.
The long term implications of the increase in debt, and the interest payments necessary to service that debt will require the federal government dramatically reduce spending, increase taxes, or devalue the dollar. If current attitudes in washington prevail, there are no signs of future reductions in spending. More likely are continued runaway spending.
That leaves the twin tower threats of inflation and higher taxes.
In 2005, 32.6% of all adult Americans paid no taxes (zero). Today, that is estimated to have increased to approximately 50%. This will force Washington to collect more taxes from the increasing minority of citizens who are actually taxpayers.
Is there any doubt about the risks of the twin tower threats of inflation and taxes and the subsequent destruction of wealth and economic opportunity?
The risk and the threats are very real.
Filed under: Entrepreneurship
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