March 2012 - Forecasts & Trends

Under current law, all of the Bush tax cuts expire at the end of this year - for everyone. President Obama wants to keep the Bush tax cuts in place for everyone except those individuals making over $200,000 and joint filers making over $250,000 a year. Either way, Congress must pass a new law before the end of the year. So it looks very likely that income tax rates are going up either way; it just depends upon whom. This will not be good for the economy next year.

Meanwhile, the Budget Control Act of 2011 mandates that there must be automatic, across-the-board federal spending cuts of $1.2 trillion over 10 years beginning on January 15 of next year. While I'm all for cutting out-of-control federal spending, doing so will act as a drag on the economy. The question is, how much will the combination of higher taxes and reduced federal spending negatively affect the economy? Some sources I quote today believe that it could throw us into a new recession next year.

Following that discussion, we look into the likelihood that the US will again hit the debt ceiling before the end of the year. You no doubt remember the partisan political battle in Washington over the debt ceiling last summer. Now it looks like we may face another showdown, this time right around the November elections. Won't that be fun!!

We end today's discussion with some thoughts on President Obama's call for a minimum income tax of 30% on all those making over $1 million a year, also known as the "Buffett Rule." If this law goes into effect, it won't raise a lot of money for the government in the big picture, and it will almost certainly cost jobs. The President knows this but wants the tax hike anyway, because he says it's "fair." What else is new?

This is a lot to cover in one E-Letter, so let's jump right in.

Since late last year, the consensus has been that the Fed will not enact more quantitative easing, or QE3, since the economy is slowly improving. Yet there is new evidence which suggests that the Fed may yet implement QE3, despite the fact that QE is unpopular politically. If this is the case, and no one knows for sure, I would expect the Fed to announce QE3 no later than this summer and maybe even sooner. They don't want to do something unpopular during the election season in the last half of this year.

Following that discussion, we turn to Europe and the fact that the European Central Bank has now made over $3 trillion in bailout loans to banks across the region. That tops even our own Fed which has $2.9 trillion on its balance sheet! Greece has reportedly completed its huge bond swap in which investors took a haircut of 70%. In return, it appears that Greece will get its much needed second bailout loan of 130 billion euros. While Greece may be off the front pages for now, it won’t be for long.