Depression, Recession Part 2, Stagflation, or Hyperinflation… Take your pick!
Published : August 17 2010 at 22:52 EDT
Many headwinds for the stock market await. Rising taxes, potentially rising tariffs, overregulation, the eventual rise of interest rates, and the reckless printing of money all work against an economic recovery. Here are some possible scenarios:
DEPRESSION? It could be argued we are already in a depression. Big headwinds lie ahead for the stock market due to higher taxes and potentially higher tariffs. Rising taxes and potentially rising tariffs which could spark trade wars are a repeat of what went on in the early 1930s. In the UK, the effective tax rate for companies and high tax bracket earners last year went from 40 to 50% with an effective 60% being the reality, prompting such companies and individuals to relocate to other nearby countries, thus lowering total tax revenue. In the U.S., the Bush tax cuts are set to expire on January 1, 2011. Taxes not just on a federal level but also on a state, city, and local level have already been on the rise in the U.S. As an interesting comparison, in June 1930, the egregious Smooth-Hawley tariff was passed into law which sparked trade wars between nations. Then from 1931-32, taxes were raised on a variety of levels which was the final nail in the coffin. History now knows the 1930s as the decade of the Great Depression. Are we on the path to repeat history?
Congress should keep the Bush tax cuts going. History has shown time and time again that lower taxes for the middle class and wealthy as well as cuts for corporations of all sizes spur growth in the long run. The reason why governments and politicians keep making the same mistakes is because they’re politicians first, and look to get reelected. They can garner more of the popular vote and win reelection by hiking taxes on the rich and on corporations, even though history has shown this is anathema to growth.