A Rock and a Hard Place: The COVID Economy

May 12, 2020

My Dear Reader,

Appearing on ABC’s “This Week”, Minneapolis Federal Reserve Chair Neel Kashkari declared that the “worst is yet to come” with regards to the job market and economic conditions set by the lockdowns.  In making an appeal to ABC’s audience, Chairman Neel said: 

“The worst is yet to come on the job front, unfortunately, It’s really around 23, 24 percent of people who are out of work today, and if this is a gradual recovery the way I think it’s going to be, those folks are going to need more help.”

While he’s certainly on point with his analysis of the jobless rate and the economic impact, I believe the implications of any new spending could be dire. It’s not just in the numbers that we see, but also in the numbers that we don’t see. For example, banks who heavily loaned out capital to oil companies are going to see a number of changes in the coming years, and many never see the boom of the Trump economy again, depending on the result of 2020.  On the other hand, Kashkari’s demand for more relief will only hurt the future viability of a low tax environment.  This first impediment to resetting the economy back to where it was is the constant inflation that will occur as a result of these trillion dollar spending programs and currency printing.  Sovereign Man investing details this issue:

“Just when you thought they couldn’t come up with any more crazy ideas, the Federal Reserve announced last night that they will start buying Exchange Traded Funds, effective immediately.

Just to be clear, this means that the Fed is going to conjure money out of thin air, and then use that new money to buy ETFs. But not just any ETF. The Fed is specifically targeting ETFs that own corporate bonds. The key idea here is that the Fed is trying to bail out bankrupt companies across the Land of the Free.”

Should these bonds fail to produce a return, the money printed that was then lost will need to be funded by a bailout, or it could risk the entire banking system.  A bailout would nearly guarantee an increase in personal income tax.  And for the average American, this is the worst case scenario.  This is because 401k(s) not only differ the taxes due today, but they also differ the tax calculation. This means that when it’s time to retire you will pay the tax at whatever rate and in whatever bracket you retire in. For instance, if a doctor put $1 million into a 401(k) in the 1980s, when the plans first came out, he would have deferred the tax due on the $1 million for that year. But if he retired in 2018, he would have effectively deferred a $280,000 tax bill, to pay the federal government a tax bill of $370,000. That’s if his money never grew by another dime.  At this point, most of America is hit with a faulty stock market, but also by a faulty “tax savings” strategy.  This is why I am proud to subscribe to and encourage my clients to follow the Jacksonian Finance Theory. Should you want to avoid the problems that we’ve laid out plainly here, feel free to contact me.

To your creation and potential,

Kevin Prendiville