Catastrophe - Dick Morris [19]
China, which holds more than $700 billion of our debt, is clearly worried about the chances of an inflationary spiral in the United States. If prices should get out of hand, the value of its investments in Treasury bills would be decimated. The interest rates on the T-bills it is holding wouldn’t go up, but the worth of the bills would drop steeply. For this reason, China is insisting on short maturities on its Treasury debt so it can raise interest rates each time they roll over as a hedge against inflation.
When Chinese officials wondered publicly about the credibility of the American debt China is holding, the media attacked them. Obama and Secretary of State Clinton rushed to reassure the Asian powerhouse that its investments were secure. But China’s doubts make sense, and they’re worth listening to.
In the meantime, the Fed just keeps on increasing the money supply. On March 18, 2009, it announced a new trillion-dollar program of purchasing T-bills and issuing credit to banks in an effort to put more money into circulation.
As with its efforts to date, the Fed can give banks money, but it cannot make them lend. More likely, the banks will continue to park their money on the sidelines and bring it all out when conditions improve. The Fed will then be faced with the daunting, and likely impossible, task of mopping up all the surplus currency it is creating.
But by just printing money—not even really borrowing it—we face the frightening prospect of a global loss of confidence in currency. This unprecedented situation could bring back barter and other off-currency transactions and could spell total disaster for the markets. Nobody really knows what the effect of such a loss of confidence would be. We may be about to find out!
AROUND THE CORNER: TAX INCREASES
But we do know what’s around the corner: big tax increases. It isn’t just that Obama’s stimulus package won’t work. His tax policies are ensuring that it won’t! Everything Obama is giving with his stimulus spending, he’s taking away with the tax increases he’s proposing.
With his right hand, Obama is offering business increased tax incentives and reductions. But with the left he is proposing to raise income, estate, and payroll taxes on those same businessmen in two years. He promotes real estate sales by offering first-time home buyers a tax credit. But then he proposes cutting the tax deduction for mortgage interest in two years!
Knowing the magnitude of the coming tax hikes, households making more than $200,000 a year aren’t spending money in response to Obama’s stimulus enticements. They’re hunkering down, trying to conserve their assets so they’ll be able to afford the tax increases they know he has in store for them.
And what increases they will be!
First, he’ll increase the top brackets to 35 percent and 39.6 percent respectively—a 9 percent hike for the first group and a 13 percent rise for the second.
Then he’ll impose the FICA Social Security payroll tax on all income over $250,000 per year. (He has yet, as of this writing, to submit a proposal to Congress, but he promised to raise these taxes in his campaign, and when it comes to tax hikes he usually keeps his word.) For these taxpayers, it will mean paying an extra 6.5 percent tax if they’re employed (and an equal amount by their employer) or, more likely, a 13 percent tax increase if they’re self-employed.
And he’ll cut the amount that taxpayers making more than $200,000 a year can deduct on their taxes (for home mortgages, charitable donations, state and local taxes, and so on) by 30 percent.
Add in state and local levies that