Extending Bush-era Tax Cuts Will Jump-start Inflation and Increase the Debt Burden

Obama Tax Cut Has Barbaric Price Tag

December 20, 2010

Taipan Publishing Group - President Obama signed the latest tax bill, extending the Bush-era tax cuts. Editor Sara Nunnally, co-editor of the new book, Barbarians of Wealth: Protecting Yourself from Today’s Financial Attilas, takes a look at what makes up this tax bill and what it means to your financial well-being.

Hooray! A bipartisan effort to pile another load of debt onto our children’s children’s shoulders! Good for the U.S. government…

On Friday, President Obama signed the $858 billion tax bill that would extend the Bush-era tax cuts for another two years, and extend unemployment benefits for another year, among other tax benefits such as lower estate taxes.

That price tag is huge… It’s $10 billion more than Australia’s GDP in terms of purchasing power parity.

Everyone is hoping this extension will boost economic growth and cut into unemployment. More likely, it will jump-start inflation, and increase our debt burden.

Who do you think is going to pay for this mess? Your kids, your grandkids, perhaps even their grandkids.

Roger Lowenstein, editor for Bloomberg and author of The End of Wall Street, calls this kind of bipartisanship a debt pyramid scheme. He writes:

The tax compromise that the president, after protracted bargaining with Congress, signed into law Friday represents the worst of each party’s principles. Democrats agreed to forgo their insistence on raising taxes to narrow the widening budget deficit. Republicans forgot (again) that they are supposedly the party of smaller government.

In effect, each party stuck to the portion of its principles that will be popular with the electorate right now -- and dismissed the part that would be unpopular. The Washington compromise is symptomatic of the disease infecting government at many levels. It is known as short-termism.

At least everyone’s getting along, right?

Let’s be honest: The two parties only get along when it’s mutually beneficial to their campaign strategies. Their latest effort only proves this.

Lowenstein is right:

Short-termism is running rampant through the U.S. government. The barbaric price tag of the Obama tax bill means more debt and less tax revenues to pay that debt -- all for the sake of gaining a couple more years of popularity.

Just look to the bond market to see how things are really panning out. Prices are continuing to rise, and yields are continuing to fall. Here’s a snippet of what I told Smart Investing Daily readers today about the bond market:

Wally Weitz, manager of Weitz Funds, says, “All the flows we see are into bond funds, and it’s over our protests because there's really nothing very good that can happen from 0% interest rates.”

This happens in times of economic uncertainty. People look for investment that will give them guaranteed income, only now they’re paying more up front for a smaller yield. U.S. 10-year Treasury bonds are yielding 3.330% as of Friday. You could get a better yield from a dividend company.

In times of economic prosperity, people are more willing to take bigger investment risks. That people are still fleeing to bonds shows how uncomfortable investors still are with the economic outlook.

Adding more debt will only make things worse.

We pay these bonds from future tax revenues -- a resource that may not rise significantly enough in the next couple years now that we’ve extended the tax cuts.

We’re already paying hundreds of billions of dollars in interest on our outstanding debt each year. To finance this tax cut, the government will have to sell even more bonds, creating even more debt, and more interest we have to pay.

Take a look at this table from the U.S. Department of the Treasury on public debt.

Available Historical Data Fiscal Year End
2010	$413,954,825,362.17
2009	$383,071,060,815.42
2008	$451,154,049,950.63
2007	$429,977,998,108.20
2006	$405,872,109,315.83
2005	$352,350,252,507.90
2004	$321,566,323,971.29
2003	$318,148,529,151.51
2002	$332,536,958,599.42
2001	$359,507,635,242.41

In the past decade, we’ve paid $3.77 trillion in interest alone! (The fiscal year runs from October through September. That means so far this fiscal year, we’ve racked up more than $43.5 billion in interest.)

The Federal Reserve has put into place a plan to buy $600 billion in longer-term government debt over the next six or seven months.

Using just the 10-year rate, which as of this morning dropped to 3.255%, that’s $19.53 billion…

I’ll leave you today with a quote from Barbarians of Wealth, which Sandy Franks and I co-authored this year. It’s from New York Times best-selling author Charles Goyette.

Alchemists of antiquity, who spent their entire lives trying but were never able to “goldify the lead,” would have been in awe at the way modern central bankers “monetize the debt.” This process of turning debt into money is truly an act of central banking wizardry.

The government runs deficits by spending more money than it has. The government’s debts are then used as collateral for the creation of new money. … The greater the government’s debt, the more money the Fed can create.

Goyette calls it wizardry. We call it barbarism. The creation of money without producing anything of worth leads to inflation, and erodes everyone’s economic prosperity.

That’s just what the bipartisan efforts in Washington have got us with the enormously expensive tax bill.

Note: Think the barbarians are a thing of the past? Well, think again. Attila the Hun and Genghis Khan destroyed villages and towns in the Dark Ages… But today the dirty tricks of Wall Street institutions are robbing people of their hopes and dreams of prosperity. It’s downright barbaric. And our government is not there to help you. They look after one another, not you and me. Learn the truth about this “old boys” network… and what you need to do to defend yourself. Download this Special Report for all the details.