The table below shows major tax changes scheduled to take effect on January 1. (There are about fifty less important tax increases).

The biggest percentage increase for lower wage workers comes from ending the Bush tax cuts and the payroll tax increase.  In addition, various taxes associated with the “Affordable” Health Care Act will kick in.

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I would encourage everyone to take some time in the month of April to creatively speak with a young person about the importance of saving.  Pass your knowledge as an investor down to the next generation so that they desire to begin saving early.

By Nate Baumann, Vice President – LVZ Advisors, Inc.

www.financialliteracymonth.com

As a Fed member from 2002-2005, Bernanke voted for the inflationary policies that created a speculative boom in the economy and specifically in housing.  Then, as Chairman, he engineered a highly restrictive policy which ushered in the worse collapse in spending since the 1930s. 

The current policy of promising to keep interest rates artificially low for the next two years will likely prove to be a third mistake with serious consequences. 

Last year Fed policy produced an increase in bank reserves of more than 20%.  This compares to an average increase of 6% in each of the two previous years.  The increase in reserves produced a 10% increase in other key money measures.

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However, reports of sluggish increases in spending and income have created mixed signals.  It is rare to find economic numbers all pointing in the same direction.  Many numbers are revised extensively as time passes.  Hence, it is important to consider the totality of information available.

Among the more disturbing signs of sluggishness are the data on consumer spending.  They show an increase of only a 1.6% annual rate in the three months ending in January.  These data along with reports of lower new orders early in the year are out of line with other numbers.  They are also far from my forecast of a 5% pace for current dollar spending in the current quarter and a 6% pace for the remainder of the year.

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Some believe the recent massive increase in federal spending has helped to prevent an even weaker economy.  Others believe the increase in federal spending prevented a more vigorous recovery.  Examining the historical relationship between federal spending and economic activity can provide insights regarding the normal relationship between federal spending and economic activity. 

Throughout most of the past century rapid increases in federal spending have been associated with periods of economic weakness.  The usual explanation for this pattern is that federal spending increases in response to a weak economy and then slows as the economy strengthens.  While this may be true, it doesn’t resolve the issue.  

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By comparison, bank reserves (ex-excess reserves) increased at roughly a 5% annual rate in 2009 and 2010.  The massive recent acceleration in liquidity has important implications for both financial markets and the economy.   

There tends to be a lag between the Fed’s creation of bank reserves and its impact on money and spending.  The first sign of a large infusion of liquidity usually appears in the form of rising stock prices. 

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However, even in the midst of the Great Depression, pouring money into the economy produced major gains in real growth and jobs.  This is what happened from 1933 to 1937.  In the midst of the Great Depression spending and growth averaged increases of roughly 10% a year.  The unemployment rate went from 25% in 1933 to 14% in 1937.  The turnaround occurred when Fed policy turned from highly restrictive to highly expansive.

Hence, Fed policy can create what appears to be a recovery in spite of serious negative forces.  This past year the Fed increased bank reserves by more than 20%.  This compares to an average annual increase of only 6% the prior two years.  So far problems in the banking system have muted the impact this policy has had on the pace of spending.

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Gingrich’s 21^st Century Contract with American represents a detailed framework of plans for transforming the US economy.  If adopted, there would be a greater shift in US economic policies in the direction of classical principles than at any time in modern history.

For starters, the Contract proposes to eliminate the tax on capital gains, reduce the individual tax rate to an optional maximum of 15%, lower the corporate tax rate to 12.5% and eliminate the death tax.

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On specific occasions, Bernanke noted the Fed was increasing its purchases of securities by tens or even hundreds of billions of dollars.  During those periods, bank reserves often declined. 

The mismatch between what the Fed says and what it does means it’s important to focus on what the Fed does, not what it says.  During the period following the financial collapse, monetary policy was not as expansive as many have suggested.  This is one reason current dollar spending has remained subdued.

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There is a much to approve of in today’s statement issued by the Euro leaders.  From a positive perspective, the leaders succumbed to market pressures by accepting a more realistic value for Greece’s debt.  One of the major problems to this point had been a failure to recognize the loss of value on Greek bonds and the implications for bondholders, including French banks.  Just this past summer, European bank stress tests had assumed face value for all sovereign debt.

The failure of US money market funds to renew deposits with European banks created the potential for a liquidity crisis.  Fortunately, quick action by the European Central Bank, in cooperation with the Federal Reserve, restored the shortfall in dollar deposits and avoided a liquidity squeeze.  Three years ago, perverse action by US regulators promoted such a squeeze leading to the meltdown in the US financial system. 

Read the rest of Dr. Genetski’s comments regarding Europe here