Best of the Week
Most Popular
1.The Trump Reset, US Empire's Coming Economic, Cyber and Military War With China (2/2) - Nadeem_Walayat
2.Now Is the Time to Buy Gold - 5th Jan 17 - John Grandits
3.CIA Planning Rogue President Donald Trump Assassination? Elites "Manchurian Candidate" Plan B - Nadeem_Walayat
4.The Trump Reset - Regime Change, Russia the Over Hyped Fake News SuperPower (Part1) - Nadeem_Walayat
5.Most Popular Financial Markets Analysis of 2016 - Stock Market Crash Postponed Again - Nadeem_Walayat
6.No UK House Prices Brexit Crash 2016 Despite London Weakness, Forecast 2017 - Nadeem_Walayat
7.President Trump Understands the NSA, CIA... LIE, America's Intelligence Agencies Crime Syndicate! -Nadeem_Walayat
8.President Donald Trump's 2017 New Year Message, BBC Fake News, Was 2016 a Dream? - Nadeem_Walayat
9.Major Stocks Bear Market Still Looms - Zeal_LLC
10.Biased 2017 Forecasts - Debt, Housing and Stock Market (1/2) - James_Quinn
Last 7 days
Time for Crude Oil Price Drop below $50? - 21st Jan 17
AI and Robotics - We Are All Low-Skilled Workers Now - 21st Jan 17
The Trump RESET Starts on US Presidential Inauguration Day 2017 - What to Expect - 20th Jan 17
Will the CIA Assassinate Rogue President Donald Trump Like JFK? - 19th Jan 17
Bonds, Dollar, Stocks, Gold, Silver Major Markets at Turning Points - 19th Jan 17
Populism; the Danger? What About Debt? - 19th Jan 17
Gold Price 50-DMA Breakout - 19th Jan 17
Turkey, 'Axis of Gold' and End of US Dollar Hegemony - 19th Jan 17
The Most Important Market Chart on the Planet - 19th Jan 17
Trump Deficits Will Be Huge - 19th Jan 17
Stock Market Trading Patience Pays Off with CHK Using Momentum Reversals - 19th Jan 17
Gold - How to "Buy Low and Sell High" Like a Pro - 19th Jan 17
State of the Global Stock, Financial and Commodity Markets Report 2017 - 19th Jan 17
The Hunt for Russia's Next Enemy - 18th Jan 17
Returning Gold Bulls - 18th Jan 17
Biotech Breakthrough Could Create A $11.4 Trillion Opportunity - 18th Jan 17
Bitcoin and Gold - Outlook, Volatility and Safe Haven Diversification - 17th Jan 17
Stock Market Uptrend on Borrowed Time - 17th Jan 17
The One Stock to Retire On - 17th Jan 17
Trump anti-Communist Counter Revolution - 17th Jan 17
US Stock Market Update as the Trump Inauguration Approaches - 17th Jan 17
The American Crisis - Common Sense 2017 - 17th Jan 17
Obama Leaves, Hope Arrives, Will Stupid Stay? - 17th Jan 17
Damage Inflicted by Precious Metals Manipulation Is in the “Multi Billions” - Keith Neumeyer - 17th Jan 17
Gold Price Forecast 2017 Update - Video - 17th Jan 17
The Story of the U.S. Regime Change Plan in the Philippines - 16th Jan 17
Gold Price 2017 Trending Towards $1375 as Forecast - 16th Jan 17
'Deep State' CIA Director States We are Not NAZI's, Warns Trump Does Not Understand Russian Threat - 15th Jan 17
UK House Prices Forecast 2017 - Crash or Bull Market? - Video - 15th Jan 17
SPX Stocks Bull Market Update - 14th Jan 17
President Trump vs the Deep State that Hides in Plain Sight - 14th Jan 17
The Impact of Sir Alex Ferguson's Retirement on Man United's Share Price - 14th Jan 17
What Can Stock Market Tell You About Politics? - 13th Jan 17
Big Gold Buying Coming 2017 - 13th Jan 17
A Bullish Case for Gold 2017 - 13th Jan 17
Will Stocks Bull Market Continue to Charge or is it Time to Sell the News - 13th Jan 17
Gold and Silver Off To Shining Start to 2017 - 13th Jan 17
Gold’s Fundamental Outlook for 2017 - 13th Jan 17
Is trading stocks and shares just as luck-based as roulette? - 13th Jan 17
Trump CIA Like Nazi Germany - Fake MI6 Intelligence leaked to Fake News Mainstream Media - 13th Jan 17
USD in Decline. SPX and TNX May Follow - 12th Jan 17
CIA War On Trump - Leaks Fake MI6 Intelligence to Fake News Broadcast Media - 12th Jan 17

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

State of Global Markets 2017 - Report

Death Knell of the Economic Recovery, the Future of Inflation

Stock-Markets / Stock Markets 2013 Jan 07, 2013 - 12:56 PM GMT

By: Clif_Droke

Stock-Markets

Call it the "shot heard round the world." Its aim was ostensibly to reduce the U.S. budget deficit, its effect was tantamount to a bullet in the chest of the consumer recovery.

Last week the U.S. working class was hit with a significant payroll tax increase, a blow which couldn't have occurred at a worse time. Just as the economic recovery was starting to gain some traction, our elected officials took the proverbial wind out of its sails by raising taxes. A tax increase is the last thing needed when the economic undercurrents are deflationary, as they are now. This measure will eventually beget even more deflation as consumers reign in spending once they see their paychecks diminished courtesy of the U.S. Congress.


Reading through scads of news articles and blog postings pertaining to the tax hike, I'm amazed at the lack of outrage among its victims. Few seem to realize the enormity of the situation: a $100/month paycheck cut is coming for many wage earners in the U.S. this year, yet few seem to grasp the implications.

To put into perspective just how much $100 a month is for the typical American, let's look at the expected cost of living increases for the coming year. Along with smaller paychecks because of Social Security and healthcare deductions, Americans also face higher grocery bills. Retail food costs for 2013 are projected to rise 4 percent, according to AOL Daily Finance. That adds up to about $40 a month for the average family.

Health care premiums will rise by $20 a month, once the new rates are implemented in February. Internet service will increase by $2 a month as service providers raise rates once again. Cable TV will also go up $5 a month due to rising rates. "This means your total expenses could be $70 a month higher this year, assuming gas prices remain the same, and do not exceed $4 a gallon," observes John Matarese of EW Scripps Co.

For even more perspective, consider the findings of a recent study by the Center for Responsible Lending: the typical American has only $100 after monthly expenses. The study found, "After controlling for inflation, the typical household had less annual income at the end of 2010 than it did at the beginning of the decade. Moreover, as worker productivity increased, the workplace has seldom rewarded them with higher pay."

The study went on to say that the combined effect of stagnant wages, unemployment and under-employment is forcing many families to curb spending and use any available assets to remain financially solvent. It concludes with this warning: ""In order for the U.S. economy to grow again, individual households must find themselves in a position to increase their spending. This will be difficult as long as households continue to face stagnant incomes, increasing expenses, increasing levels of debt, and declining net worth."

It's not a stretch then to surmise that the the tax hike represents at least one nail in the coffin of the U.S. consumer's recovery. Much of what Wasington has done in the last four years to revive consumer spending has been sacrificed by this thoughtless act. The "self-inflicted wound" the president spoke of before the vote has become reality.

The bi-partisan tax hike also undermines the claim by Congress that lowering the unemployment rate is its top priority. As Sal Gentile observed in an MSNBC article, "The political class has apparently convinced itself that unemployment is no longer a problem, despite the fact that only 58% of Americans have jobs, essentially the lowest number since 1983 and virtually unchanged since the end of the recession." The expiration of the payroll tax cut will likely make it worse. Writes Gentile, "According to the Congressional Budget Office, the payroll tax cut did much more to stimulate the economy than income tax cuts, because most households pay more in payroll tax than income tax."

Adding insult to injury, whatever money was earned for deficit reduction as a result of the tax hike was immediately squandered. As Gentile wrote, "The payroll tax increase, it turns out, will save about $95 billion in 2013 alone. But Congress turned around and gave most of that savings away in tax breaks for businesses like NASCAR, Hollywood studios and Wall Street. The Joint Committee on Taxation estimates those so-called 'tax extenders,' tucked into the bill with little notice, will cost $68 billion in 2013."

Despite what members of Congress may think, it's the middle class that is the backbone of the U.S. economy. Responding to the problem of diminished tax revenues by raising taxes on the those already financially distressed won't do anything to solve the government's fiscal problem. Lowering taxes on middle wage earners would have been the more sound approach.

Socialism's last stand?

Credit David Knox Barker (www.LongWaveDynamics.com) with this interesting observation: "Even the New York Times recognizes the lousy job government does in spending the taxes it collects. The flight from France after tax increases is increasing the conversation on whether government has gone too far. The article concludes, 'No matter how high the taxes, there is never enough.' In France and the U.S., the tax grab and will evoke its own reversal."

The future of inflation

Despite the clear deflationary implication of Congress' latest act, many on Wall Street are actually worried about inflation.

"It's Not Too Early to Worry about the End of Fed Easing" proclaimed one recent news headline. The article was written in response to the release of the minutes from the U.S. Federal Reserve's latest meeting which were released last Thursday. The minutes revealed that Jeffrey Lacker, Richmond Fed Bank President, is concerned that the Fed's bond-buying stimulus plan will eventually stoke inflation.

"It is unlikely that the Federal Reserve can push real growth rates materially higher than they otherwise would be, on a sustained basis," said Lacker. "I see an increased risk...that inflation pressures emerge and are not thwarted in a timely way." The minutes showed several members of the Federal Open Market Committee foresaw a chance that asset purchases would need to be slowed or halted altogether before the end of 2013.

Just like that, Wall Street has a new worry going forward, viz. the end of quantitative easing (QE). This is in marked contrast to Wall Street's worry of just a few weeks ago that the Fed was going overboard with QE. Investors are now apparently torn between the fear of inflation and the worry that the Fed's efforts at re-infllating the financial market will end too soon.

A straight forward reading of the long-term Kress cycles tell us that inflation won't be a major concern until after 2014. The dominant long-term components of the 120-year cycle, the 40-year and 60-year cycles, will both bottom around October 2014. The increasing descent of these cycles into late 2014 is expected to create significant deflationary pressures on the economies of developed nations, particularly the U.S.

This is one of the main reasons why the Fed's intensive efforts at re-stimulating the economy through QE have been relatively ineffective. As the following graph vividly shows, each successive QE has resulted in a less vigorous increase in equity prices, to say nothing of economic output.

S&P 500 Peak Performances during each Fed action

Inflation is also being kept at bay through the deflationary policies of the U.S. Congress (payroll taxes, Obamacare taxes, etc.) as well as the austerity policies of other major governments around the globe. The year 2013 will ultimately tell the tale of whether the Kress deflationary scenario comes to pass. My best guess is that we'll start seeing an erosion in retail sales by the second quarter with increasing deterioration in each subsequent quarter. By the end of the year corporate profits will be in decline, then the real trouble begins entering the fateful final year of the 120-year cycle - 2014.

2014: America's Date With Destiny

Take a journey into the future with me as we discover what the future may unfold in the fateful period leading up to - and following - the 120-year cycle bottom in late 2014.

Picking up where I left off in my previous work, The Stock Market Cycles, I expand on the Kress cycle narrative and explain how the 120-year Mega cycle influences the market, the economy and other aspects of American life and culture. My latest book, 2014: America's Date With Destiny, examines the most vital issues facing America and the global economy in the 2-3 years ahead.

The new book explains that the credit crisis of 2008 was merely the prelude in an intensifying global credit storm. If the basis for my prediction continue true to form - namely the long-term Kress cycles - the worst part of the crisis lies ahead in the years 2013-2014. The book is now available for sale at:

http://www.clifdroke.com/books/destiny.html

Order today to receive your autographed copy and a FREE 1-month trial subscription to the Momentum Strategies Report newsletter.

By Clif Droke

www.clifdroke.com

Clif Droke is the editor of the daily Gold & Silver Stock Report. Published daily since 2002, the report provides forecasts and analysis of the leading gold, silver, uranium and energy stocks from a short-term technical standpoint. He is also the author of numerous books, including 'How to Read Chart Patterns for Greater Profits.' For more information visit www.clifdroke.com

Clif Droke Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife