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Posted on 12/02/2012 4:07:37 PM PST by betty boop

Middle-Class Wealth Protection, Post-Fiscal Cliff
By Jean F. Drew

I don’t know about you, but I’m a lifelong, middle-class working stiff who has managed to accumulate a certain modest amount of “wealth” designated to be sent to the future, to supply my support and lifestyle needs when I am “old” and no longer have employment income. I’m speaking of my 401(k)s and IRAs.

The way I have assets deployed in these accounts very likely will need to change, given the absolutely predictable outcome of the much-hyped impending fiscal cliff. At least, that is my supposition.

Consider: We get the fiscal cliff if the GOP does not abjectly cave to every demand being made by this ersatz president: a tax hike on the most productive citizens of our society, to the tune of $1.6 trillion dollars over ten years; deficit “reduction” of $600 billion (all “cuts” being unspecified at this time); plus a $300 billion “stimulus package” for “infrastructure investment.” No interest in reforming entitlement programs, such as Social Security and Medicare, which are currently running at least $47 trillion in unfunded future liabilities. Needless to say, such a proposal does absolutely nothing to restore the exploding federal budget to anything remotely sane or within the ability to pay by the increasingly hamstrung (thanks to federal taxation and regulation, etc.) productive capabilities of our nation.

People are fooled if they believe 0bama only wants to tax “the wealthy.” Allowing the top tax rate to rise to 39.6 percent on the “top 1 percent” of taxpayers yields only about $86 billion dollars (over ten years). The federal government spends $86 billion on its current operations every eight days. So, how serious a deficit reduction proposal is that?

The middle class, meanwhile, thinks it will not be touched by tax increases in any way. But please do note there is a vast difference between the $86 billion that can be wrested away from “the wealthy” by means of a rate increase on the top 1 percent, and the $1.6 trillion in new revenues that the president’s plan proposes. Guess who gets stuck with paying the difference?

If the GOP fights the president over his insistence on raising tax rates, while showing no deficit savings in his proposed budget, then the president will blame them for hiking taxes “on the middle class.” For if the GOP holds the line, tax rates will rise on everybody, to the tune of about $2,000 per year per middle class household.

0bama doesn’t mind this result in the least. So, what is the possible basis of any “compromise” between 0bama and Speaker Boehner? 0bama believes he “wins” either way, whether we go over the fiscal cliff; or have to live with some entirely unprecedented new reality designed to avert it.

Elections have consequences, as he likes to remind us. Since he feels he has a “mandate,” not only will he not back off; he will double down. As he has done — to the extreme discomfort of the roughly half the American populace who did not vote for his reelection. The other half — the morons who voted for him — are about to find out what they actually voted for. I doubt they will like it.

For so many reasons, this last election was unprecedented, and of lasting historical significance, I daresay. Which brings me back to certain investment decisions I will have to make soon.

Making investment decisions necessarily involves making predictions about the economic and investment climates as they evolve in the future. It would be very helpful to me to know, as an investor, whether we as a nation are on an inflationary, or a deflationary course, mid- to long-term.

Two years ago, I was pretty much convinced that the future course was decidedly inflationary. So I put 20 percent of my investment portfolio into physical precious metals — gold and silver U.S. Eagle Proof coins. Given the history of QE I, II, and III, plus “Operation Twist,” it would seem this was a good move: For when the Fed prints money out of thin air in order to buy totally crappy mortgage-backed securities, just to “juice” the money supply and the stock market in the short-term (coincident to an impending presidential election), then any sane person would have to say, there is something terribly wrong going on here. The effect is, We the People had our pockets picked to buy tons of crappy mortgage-backed securities. What value did we get in return? How did we get “money out of nothing?”

We didn’t. We were mugged, and our wealth stolen — perfectly “legally,” I hear.

Did you know that, at the time of the Federal Reserve Act of 1913, a U.S. dollar was worth exactly 100 cents??? But that now, 99 years later, that same U.S. dollar is worth exactly 2 cents? So much for the “good stewardship” of the Fed as the regulators of the money supply and, thus, of the value of money.

One saves for a lifetime, only to have his wealth SUBTILY, silently stolen in this manner? But where did the wealth go? Wealth is the by-product of human creative activity and, once created, it doesn’t just “magically disappear.” It can only be transferred from one person’s pocket to another person’s pocket, by means fair or foul.

But I digress.

My investment portfolio is geared to inflationary conditions, what with the precious metals, and its around 70 percent commitment to equities; i.e., the stock market. Historically, on a long-term basis, both asset categories have been shown to be excellent performers in terms of the preservation and growth of the purchasing power of invested capital.

My late research, however, suggests that what we as a nation face is not inflation, but deflation. Massive deflation, on a 1930’s depression scale.

If the recent activities of the Fed were the only determinative principle of the value of money, then, taken in isolation, we face an inflationary future. And my precious metals purchases are entirely warranted.

However, recently I have been drawn to demographic considerations, which may very well be the main driver of future economic developments, which the force majeur of Fed action cannot overcome.

The story goes this way: The Baby Boom (of which I am a card-carrying member) is the single biggest generation, demographically speaking, in the history of our nation. Roughly around the Clinton years, this generation was in the prime of its earning and spending capabilities: It could afford the big-ticket purchases that fuel the economy — bigger houses or second homes, nice cars, “lifestyle” purchases of all descriptions, etc.

But as any generation ages, sooner or later, its spending on lifestyle needs declines in favor of saving behaviors. That is to say, Baby Boomer monies increasingly are being diverted from current consumption, to long-term savings designed to provide for a “comfortable” retirement.

In other words: This biggest generation is now in hunkering down mode. Their consumption is down. If their consumption is down, then the business enterprises that had heretofore catered to this demographic will lose customers. If they lose customers, they lose revenues; if they lose revenues, this will shrink manufacturing capabilities; if manufacturing capabilities are shrunk, then this necessarily entails less demand for commodities and labor.

Looks like a depression to me.

The generation following the Baby Boom is typically characterized as “the Baby Bust.” Comparatively, demographically speaking, there is not any comparable spending power to drive a flourishing economy in this demographic cohort.

And so, given the perfectly calculated ministries of Captain Zero and Friends, We the People are about to reap the whirlwind.

But we can all console ourselves with the “truism”: Elections have consequences.

Speaking for myself, I’d rather experience death by a “coup de gras,” than death by “a thousand cuts.”

And so I say: The sooner this fiscal cliff is “realized,” the better.

Let the people actually see what they voted for. Let them “feel the pain” of it; for pain is surely coming.

And pain is often an excellent teacher.

And yet I must say, as a human creature, that I wish to avoid pain. To that end, my best friends are personal experience and lessons to be gleaned from human history.

Short-term predictions: No "Santa Clause effect" in the stock market this year. I am referring to the typical short-term bump in stock prices that more often than not follows Christmas most years.

This year, stock investors have a prime incentive to dump their holdings under the present tax regime (the so-called "Bush tax cuts") than wait 'til next year, when the rates will be much higher.

Look for a sell-off by year's end.

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