Category Archives: The Economy

Where We At? Quick Recap of the Markets, Economy & Taxes And Where We’re Headed!

I don’t have to look at the calendar to know that it’s already August.  All I have to do is notice that people waiting on the subway platform have a look of despair that comes only after giving up the hope of showing up for work wrinkle- and sweat-free.   These days, my dog doesn’t linger on her walks and gets her business done in .0004 seconds.  And if people aren’t already on vacation, they’ll show up for work  in August–sure– but get nothing done.  I mean, why hustle to get something on the boss’ desk when she won’t look at it until September 4?

August also reminds me that the year is passing quickly.  It seems like not so long ago since the American Taxpayer Relief Act (“the tax bill”) was passed (back in January).  Remember how everyone was worried that the moment January 1, 2013 came around, taxes would go up, estate exemptions  would decrease and many credits and middle class benefits would disappear?  And then good ol’ Congress swooped in with a last-minute  bill that kept taxes low for many Americans and increased the tax rate for the “wealthy.”  And other stuff.  For a refresher on all the fun details of the tax bill, see https://moneymoxie.wordpress.com/2013/01/03/new-year-new-deal/

So what’s changed and what can we expect when Congress returns from summer break in September?

1. Taxes

While the tax bill kept taxes at their low rate for most Americans, it allowed income and capital gains rates to go up for individuals/families who earn $400,000 and more.    It also limited certain exemptions for higher earners (Pease and PEP exemptions), let some middle class benefits expire like the payroll tax holiday, and made permanent the AMT exemption.  In addition, 2013 is the first year that an additional 3.8% tax will be applied on investment income earned by higher income individuals, thanks to a provision in the healthcare act.

2. The Deficit

Since the downturn began, politicians and economists alike were alarmed at the drastic increase in the federal deficit; not since the 1940s was our deficit at such dangerously high levels. Under normal circumstances, the deficit to GDP (gross domestic product–ie. national economic output) ratio hovers at around 3%.  In the past few years, however, the deficit reached beyond $1.3 trillion in 2010 and about 10% of GDP, causing the US debt level to increase to historic levels.

The good news is that the Office of Management and Budget announced in July that it expects the deficit to fall to $759 billion for year ending 2013, or 4.7% of GDP, its lowest in five years.  The improvement in the deficit is a result of the economy picking up speed as well as an increase in tax collections and the savings from the automatic spending cuts known as the sequester (for a refresher on the sequester, take a gander at https://moneymoxie.wordpress.com/2013/02/21/the-sequeezter-how-the-coming-budget-cuts-may-affect-you/ .)

3. The Economy

Since the beginning of the year, there’s been a marked improvement in the economy.  Last week, it was reported that the economy grew by 1.7% in the second quarter which was an improvement over the 1.1% growth achieved in the first quarter of 2013. The unemployment rate also decreased to 7.4%, its lowest level in five years, although the increase in jobs was a result of discouraged unemployed workers leaving the workforce.  Going forward, many economists are optimistic that companies across most industries will continue to expand, boosting employment and growth into 2014.

4. The Stock Market

Despite some gloomy reports about US markets in the beginning of the year, as well as the continued downturn in Europe and slowing economies of emerging markets, the US stock market has been on a roll!   Recently, the S & P surpassed 1700 in intraday trading and has been consistently closing above 1500 for months.  The market is  up over 20% to date, and up near 12% from its pre-recession high.

What to expect after summer break…

1. Debt Ceiling Debate

Just when we thought the sunnier economic outlook would result in a more harmonious Congress, BAM!  The debt ceiling debate comes along!  While this winter, we mostly avoided a repeat of the summer of 2010 debt ceiling fights that caused Standard & Poor to lower the credit rating of the US–mainly because the automatic spending cuts were instituted in February which helped to reduce the deficit anyway—get your popcorn ready for another round of debates in September.  While many Republicans and small business owners want the President to roll back the tax increases instituted by the tax bill, the President has called for a decrease in the corporate tax rate from 35% to 28% as long as Republicans will agree to additional spending on infrastructure and development projects.  There are also calls for additional savings by limiting or doing away with tax write-offs of municipal bond interest, real estate interest and charitable contributions.

2. The Stock Market And The Fed

While the market has been on a high this year, many investors fear a pullback if not an all-out crash later this year.  One huge factor in whether the market will continue to boil or bust is if or when the Fed will decide to slow its $85 billion in monthly purchases of bonds known as quantitative easing (QE3). The fear is that once the Fed bond purchases slow or stop, interest rates will go up which could have a drastic effect on investments and wealth.  The good news is the Fed reported earlier this year that it would not begin to slow these purchases until 2014, but could change its mind sooner if the economy continues to improve.

What should you do to prepare for stormy weather?

Make an appointment to speak with your financial advisor to discuss coming events in Washington and Wall Street and how they may affect your investment portfolio.  Don’t wait for your advisor to call you; be proactive. After all, it’s your money!

– If you don’t already have an advisor, find out who is near you and who you click with. http://www.napfa.org/

http://www.fpanet.org/

– Consider low-cost investments that mirror a specific exchange or index like an Exchange Traded Fund (ETF) that can offer strong returns and an alternative to owning stocks or mutual funds.

– To hedge against rising inflation, consider adding TIPS, commodity funds and real estate trusts (REITs) to your overall portfolio.

– If you’re in the higher tax brackets, make sure to include tax efficient investments in your portfolio like separately managed accounts.

– Pay attention to how you invest your retirement account vs. your investment portfolio.  It may be more advantageous to include taxable investments in your retirement account since those will be tax-deferred until retirement, and keep tax efficient or tax-free investments in your taxable  investment portfolio.

But first–enjoy the rest of the summer!

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What Small Businesses Can Learn From The Luxury Market

If you’ve been following business news lately, you might be pleasantly surprised that the stock market reached a post-recession record high yesterday, the highest since October 2007.  Investors who have been “stocking” up on equities will probably see some great rewards from the risky moves they’ve made over the past few years.  Many experts say that the strength of the stock market follows positive corporate earnings and profitability, a strengthening housing market, and the continued perception of the US as the best place to park money compared to global markets.

While the stock market has shown major signs of improvement, the economy still seems to be plugging along at a sluggish pace.  Despite the recent good news, small businesses and large companies are still finding it difficult to navigate the challenging economic environment.  Even the mighty retail giant Wal-Mart has seen its profits decline, thanks to lackluster consumer spending.  A flurry of recent articles indicates that Wal Mart has been struggling to keep sales up and its shelves adequately stocked since the beginning of the year.  Experts link the weakness in consumer spending to various factors, like the expiration of the payroll tax holiday and tax refunds arriving later in February this year than in prior years; hence less disposable income for consumers to shop with.

On the other hand, the luxury market has been pretty resilient during the recession and is still  charging ahead for the most part.  While consumer reports indicate that 2012 was a turning point for many luxury retailers that saw a decline in sales for the first time in many years (such as Burberry, Gucci and Tiffany), other high-end retailers implemented various strategies to maintain and even increase their market share.  Companies like Prada, Hermes and LVMH  focused on ultra-luxury rather than expansion, improved their technology and online presence, entered various emerging marketplaces –and saw sales continue to soar.

Small business owners and entrepreneurs who want to develop and expand their brands would be wise to adapt some of the successful practices of the luxury market.  Simone Esposito is an expert and  consultant who works with luxury and ultra-luxury international companies on branding and business development.  He has worked with companies such as Thomas Pink, Loro Piana and Asprey of London, and has built a reputation as a forward-thinking consultant who anticipates market movements and trends and helps clients develop strategies to take advantage of industry shifts.

Simone Esposito

Simone Esposito

“The time is right for luxury brands to re-engage their customers, making sure to build a long-term loyalty,” urges Simone. “Companies must place the customer experience at the heart of their enterprise.”

Simone also insists that while some companies are doing a good job of adapting to new technologies which helps move sales along, they must continue to reinforce their offline presence as well– and this could ring true as well for small business owners and entrepreneurs. “I think that developing personal relationships with customers is something that all brands should aim for, ” he says. “Many prime brands (I am not only talking luxury here) have invested in upgrading their online presence in recent years forgetting to upgrade their offline, personal relationships. Unfortunately, according to the Luxury Institute, this translates only to 10-15% of luxury customers having a first-name relationship with a sales professional. It has been proven that customers who have a true human relationship with a brand generally buy way more from that brand, and loyalty is a direct and logic consequence.”

Simone insists that luxury companies emphasize customer service, and in today’s challenging economy, all companies would benefit from providing a positive and memorable customer experience. “A luxury brand offers luxury products, of course, but to attract and retain discriminating buyers, it must also offer luxury customer service. In fact, what sets a luxury brand apart from the crowd isn’t only price—it’s also the quality of the overall customer experience.”

Wal-mart and other large companies may find it more cumbersome to increase sales and swiftly take advantage of market upturns, but small companies and entrepreneurs are in a good position to follow the lead of the luxury market, and to innovate and implement smart strategies that can lead to growth.

The “Sequeezter”: How the Coming Budget Cuts May Affect You

A recent USA Today poll revealed that about 25% of Americans know little to nothing about the sequester–the mandatory across-the-board budget cuts set to be instituted on March 1 (that’s next week by the way).  This is alarming since these budget cuts could affect us on a daily basis and could make life pretty inconvenient.  Probably because of this collective cluelessness, another Pew/USA Today poll revealed that if nothing is done to resolve the sequester issue, about half of Americans will put the blame on Congressional Republicans and about 30% will blame the Obama Administration.  And so, the finger-pointing continues in yet another politican-created crisis.

How did we get ourselves into this mess?

The sequester resulted from the debt ceiling debacle in the summer of 2011.  Congress was debating whether to raise the debt ceiling and had a deadline of August 1st to come up with an agreement along with a deficit reduction plan.  A “supercommittee” of politicians from both parties worked together to figure out mutually beneficial tax increases and budget cuts. Not surprisingly, the committee failed to agree on final terms; what they did come up with was a plan to decide to plan to hopefully-maybe-fingers-crossed come up with some deficit reduction options sometime in the inter-galactic future. 

This mandate was part of the Budget Control Act of 2011, and also included the sequestration language; that is, failure to agree on deficit-reducing legislation would automatically trigger the sequester, which are automatic cuts that would affect every discretionary area of the federal budget.

When the Budget Control Act was drafted, no one thought Congress would be so irresponsible as to allow these budget cuts to be triggered.  But like the 2011 debt ceiling debacle that lasted over 6 months and culminated in deadline drama, and the recent fiscal cliff thriller that ended with “cliff”-hanging legislation on New Years Eve, it looks like Congress is going to ride this one out too.

How will the sequester affect government budgets & the economy?

The sequester calls for $1.2 trillion in deficit reducing budget cuts over ten years, about $85 billion in cuts for this year alone.  All areas of discretionary government spending will be affected, including social services, defense, education and housing.  The areas not affected by the sequester are funding Social Security, Medicare, Veterans Benefits, etc.

Economists and politicians fear that implementing the sequester will have negative effects on our economy. Some economists believe that these austerity measures would reduce economic growth by .5% –so that the US economy would grow at 1.5% annually instead of the 2% growth that was forecasted (already well below the healthy 3% minimum growth we’ve seen in past years).  The cuts are also expected to increase the unemployment rate, expected to hover around 7.9% by end of 2013.

Recently, Erskine Bowles, former Clinton White House Chief of Staff and more recently, a co-author of a famous deficit reduction proposal that was commissioned by Obama but that went nowhere (the Bowles-Simpson deficit reduction plan), was quoted regarding the spending cuts from the sequester:

“They are dumb and they are stupid, stupid, stupid. They are inane. There’s no business in the country that makes cuts across the board. You go in there and you try to cut those things that have the least adverse effect on productivity.

“Second, they’re cutting those areas where we actually need to invest: education, infrastructure, research.

“And third, they don’t make any cuts in those things that are growing faster than the economy. And that’s stupid, stupid, stupid.”

What Do The Cuts Possibly Mean For Us?

While the cuts have not yet been instituted, it’s possible that government-funded programs, agencies, infrastructure initiatives, etc. will be curbed in the next few months.  Here are some likely outcomes:

–  Government and military civilian worker furloughs are likely.

– National parks, monuments, camp sites, forests, etc. could be closed or reduce hours of operation and services.  Libraries may also reduce hours, services and close branches.

– Fewer teachers as well as cuts to education funding and grants; access to after-school and Head Start programs may be reduced or eliminated.

– Housing and mortgage assistance could be affected as cuts may affect HUD (that provides housing for lower-income Americans) and government-funded mortagage assistance programs.

– Less spending for research and programs for National Institutes of Health (NIH), Center for Disease Control (think West Nile, bird flu, etc), Food & Drug Administration (the return of cosmetic testing on kittens???  NO!), etc.

– Fewer government workers like the TSA (longer lines at airport security!!!), border control agents, immigration and drug enforcement agents, etc.  IRS agents may also see reduced hours or cuts.

– Budget-slashing at the Justice Department could lead to fewer investigations of wrong-doing and more abusive practices slipping through the cracks.  Budget cuts to other government-funded regulatory agencies like the SEC, FDIC, etc. could result in less oversight and possibly more abuses in the financial industry.

– The sequester could hurt Hurricane Sandy government-funded recovery efforts.

– Cuts to defense resulting in less training for deployment readiness, cuts to equipment and weapons maintenance, investment in weapons, etc.

– Major cuts to defense funding could result in decreased naval and Air Force operations.

The Sequester Squeeze

With a week left to go before the sequester kicks in, Congressional politicians have been busy doing what they do best: finger-pointing while on vacation.  The Republicans have been putting the responsibility on the Obama Administration, calling it the “Obama sequester” (even though the vast majority of Republicans voted for the Budget Control Act and the sequester in 2011.)  The Democrats have taken their turns at the blame-game, accusing the Republicans of dragging their feet and not caring whether the cuts kick  in.

Either way, it looks like we’re in for a bit of austerity starting next week.  If so, now might be a good time to check out a ton of library books you don’t plan on returning and fudging on your taxes.  There may not be anyone on the other side to check up on you.

New Year, New Deal

By now, everyone is pretty sick and tired of hearing about the fiscal cliff.  The fiscal cliff has been discussed, dissected, analyzed, blogged about, and counted down.  It seems every man, woman, toddler and goldfish knows about the fiscal cliff!

Fortunately, Congress finally got its act together and on New Years Day passed legislation that presumably kept the US from falling “off the cliff.”  In other words, if nothing had been done to avoid the fiscal cliff, then on January 1, 2013, taxes would have increased for most Americans, many middle class incentives would have expired and several harsh mandatory budget cuts would have begun to take effect, basically cutting many social services Americans rely on.

Now before we go organize a parade to honor our magnanimous government leaders, let’s get realz.  This fiscal cliff debate had been going on for years and was a major theme of this election.  Everyone knew when the deadline was and what was at stake.  By leaving any negotiations on a deal to the very end and then pushing legislation at the last second, our  politicians acted like a bunch of high schoolers who had been cutting class all semester long, only to be pulled aside by the school counselor and warned that failure to pull a C- on the final would result in failing 12th grade and staying back a year.  So for the last 2 weeks of school (or in the case of Congress, the last 2 days of the year!) the students pulled all-nighters and tried to prove how earnest and hard-working they were about passing chemistry.

So in my mind, there are no heroes in this deal.  Although I do applaud Speaker Boehner and Congressman Paul Ryan for standing up for the Bill during the session AND following up by putting their vote where their mouth is.

But now that we’re here, on the other side of the cliff and no one drowned, there’s a brand-spanking-new piece of legislation to wade through.  So let’s do this:

What’s in the Bill:

1. Extends low tax rates for most Americans

The Bill permanently extends the Bush tax cuts for most Americans.  In other words, the low tax rates that we’ve all enjoyed since President Bush introduced and Congress passed in 2001, will continue to be in force permanently.  Individuals who make less than $400,000 will be taxed at those rates (top ordinary income tax rate of 35%, 15% capital gains and dividend tax).

2. Raises taxes on the wealthy

For individuals who make $400,000 or more and families who make $450,000 or more, their taxes will go up.  The Bush tax rates were not extended to these individuals and families and so their top tax rate is 39.6%, capital gains and dividends taxed at 20%.  Please also note that beginning in 2013, there is an additional tax imposed on investment income thanks to the health care bill.  For families who make $250,000 or more, they will have to pay an additional 3.8% tax on capital gains, ordinary income, dividends, royalties and interest on amounts above the $250,000 threshold.  So for some unlucky (but wealthy) few–their ordinary income tax rate could be almost 44% and 23.8% tax on capital gains and dividend income.

3. Limits to deductions and personal exemptions are back

In addition, taxes get even more complicated for higher income Americans–even for those who make less than $400,000–because the legislation brings back 2 tax provisions that were frozen by the 2001 Bush legislation.  The personal exemption provision (PEP) reduces or eliminates the benefit of the personal exemption for high income earners, and the Pease provision, which limits and greatly reduces the ability of high earners to make certain deductions. These provisions will apply to individuals who make $250,000 or more and families who earn $300,000 or more a year.

4.  Sets estate tax and exemption

The bill also addresses and makes permanent the estate tax rate and estate tax exemption, another set of taxes that were in flux over the past 10-12 years because of their temporary status.  The estate tax is the amount of tax that a decedent’s (dead person) estate must pay on the value of the assets of the decedent, minus the estate exemption.  The new legislation  permanently set the estate tax (as well as the gift and generation skipping transfer taxes) at 40% and thereafter adjusted for inflation.  The estate exemption–or the amount of a decedent’s estate exempt from tax– remains at $5 million (for couples it is a cool $10 million).  This means that for wealthy families, they can continue to shelter up to $5 million of the estate from tax and then pay a 40% tax on the remainder.

5. Extends middle class incentives

The bill also extends several middle class tax credits and incentives for education and families.  It extends for 5 years the American Opportunity Tax Credit, the Child Tax Credit and the Earned Income Credit.

6. Extends the AMT patch

It also makes permanent the AMT patch (which is an alternative tax provisions intended to make sure that the wealthy pay their fair share in taxes but because it was never adjusted for inflation when it was created, it has slowly been creeping into the middle class).  The legislation allows for the AMT to be adjusted for inflation going forward.

7.  The legislation also extends unemployment benefits for workers who would have otherwise run out of benefits this year.

8.  Many pro-business, renewable energy and “green” tax credits are also extended.

9.  Payroll tax holiday

The Bill did NOT extend the payroll tax holiday.  This was instituted two years ago by the Tax Bill of 2010 and basically gave a tax break to every working American.  During normal tax years, every worker must pay 6.2% Social Security tax on  income.  The 2010 Tax Bill cut this tax by 2%, saving Americans about $10-20 in taxes per paycheck.  The recent legislation did not extend this tax holiday so this year every worker is back to paying the full 6.2% of tax on up to $113,000 of their income, or an additional $2274 in taxes annually.

What’s NOT in the Bill:

The Bill did not cover any significant budget cuts, entitlement reform, any meaningful deficit reform or corporate tax reform.  Many if not all of these issues will be addressed shortly, however, as Congress gets ready for its next major rumble when the government hits the debt ceiling in March.  It’s very likely that the Republicans will demand concessions, spending cuts and changes to entitlement during the coming debt ceiling debate.  The tension builds….

Cocktails On the Edge of the Fiscal Cliff

So we are fully in the midst of the presidential debates, and that means the elections are just around the corner.  If you caught the first debate on October 3, you may have noticed a more spirited Romney than usual and a more subdued Obama.  October 11 will feature the Vice Presidential candidates hashing out the issues.  Then two more presidential debates will follow, on October 16 and the 22nd.

But even as we root for our favorite candidate, it can sometimes be challenging to keep up with the lingo. One phrase in particular that has become popular not only with the candidates but with analysts, pundits, economists and the media is “the fiscal cliff,” used to describe a series of possible tax increases that may push the US towards another recession.  Let’s break it down.

What Is The Fiscal Cliff?

This is a phrase used to characterize the mixture of tax increases and spending cuts that are scheduled to occur after December 31, 2012.  In general, the fiscal cliff refers to 3 dilemmas: whether to keep tax rates low or allow current tax laws to expire;  whether Congress will/can do anything about the deep mandatory spending cuts to be instituted in 2013; and whether Congress will extend the payroll tax holiday and other tax incentives set to expire after December 31, 2012

I like this cliff more than the fiscal cliff.

Did you fall asleep yet?  If so, WAKE UP!  THIS IS IMPORTANT!!! 

The Bush Tax Cuts

Let’s go back in time to 2001: After the tech bubble burst and post-9/11, we were in the midst of a recession. To encourage consumer spending and boost the economy, President Bush initiated legislation that lowered tax rates on income and investments.  The legislation also affected estate planning, lowering the tax rates on estates, gift tax and generation skipping transfer taxes, and increasing the exemptions.  There were also some personal exemptions and deductions thrown in.

However, these laws were set to expire at the end of 2010 (meaning that on January 1, 2011,  tax rates would go back up to the 2001 rates).  In 2010, President Obama wanted to let the tax cuts expire (and thus increase taxes) only on the wealthy, but he was persuaded by his advisors to extend the tax cuts for everyone at least until the economy starts to recover.  Thus, the Tax Bill of 2010 was passed, extending the Bush tax cuts and keeping tax rates low–but only for two years

So here we are in October 2012 and this means we are coming to another tax deadline– and fast.   If no legislation is passed to extend the tax cuts for another year or to make them permanent–tax rates will go up on everyone on January 1, 2013, just 2 1/2 short months away.

Of course, controversy is brimming between the parties on whether to extend the tax cuts, make them permanent, let them expire on January 1 or only let them expire on the wealthy (as President Obama wants).  Romney wants to go a step further and lower tax rates across the board by 20%.

The candidates

[For those families lucky enough to make $250,000 a year, there will be additional taxes on investment income and salary income imposed in 2013, thanks to the Affordable Care Act (the health care act passed in 2009).  An additional tax of 3.8% will be added to your investment tax for any investment income over $250,000; and you’ll pay an additional 0.9% tax on your income over the $250,000 threshold.  Kinda makes you miss the good lo’ days working at Dairy Queen, huh?]

BUT THAT’S NOT ALL….

The Budget Control Act and The Sequester

The fiscal cliff also  refers to the automatic spending cuts resulting from the debt ceiling debacle that occurred last year.  Bear with me….

Back in the summer of 2011 when some of us were playing bocce ball on the beach, Congress was at work trying to deal with the debt ceiling.   Unlike the deficit, which is, in general, the amount of money the US government needs to borrow to make ends meet during its fiscal year, the debt is an accumulation of all US annual deficits.  It’s like racking up credit card debt and letting it accumulate year after year without paying it all off.

Reaching the debt ceiling is like reaching your limit on your credit card-to increase the limit you have to call your credit card company and prove your credit-worthiness for the company to extend more credit to you. When it comes to the debt ceiling–or the maximum level the debt can reach– Congress has to pass legislation to raise the ceiling so the government can continue borrowing.  Usually it’s the President’s job to go before Congress and explain why the ceiling must be lifted.

In past years, Congress raised the debt ceiling without controversy.  Last year, however, when President Obama went before Congress to ask for the ceiling to be raised, it was MAJOR DRAMA.  At that point, we were still in the midst of a sluggish recovery, the unemployment rate was still over 9%, the housing market was still a mess and the government had already passed several spending packages over the past few years that had caused the deficit to reach past $1 trillion, the highest its been since World War II.  It was a hard sell for President Obama to make to a very divided Congress to increase the debt limit.  On the other hand, failure to raise the ceiling could have resulted in serious consequences to our economy: services would have been drastically cut and the country’s credit rating would have been lowered (which it was anyways by S & P).

It’s a bird! It’s a plane! It’s the Supercommittee!

To deal with the issue, Congress put together a “Supercommittee” whose primary job was to deal with the growing deficit and find ways to raise revenue ( increase taxes) and identify areas to cut spending (curtail government spending).  They passed the Budget Control Act that summer, allowing the debt ceiling to be raised, and making general pronouncements about future measures to curb the deficit (to be decided after the bill was passed).  They also added a “sequester” in case both sides couldn’t agree to a series of spending cuts and tax increases.  The sequester is a package of automatic spending cuts that would be  enforced if the parties were unable to come to an agreement on how to curb the debt.

The cuts included in the sequester are pretty hard-core; lawmakers put them in there with the intention of scaring the committee into action and forcing them to make the tough decisions on reducing the deficit.  The sequester includes major cuts to the defense budget, along with cuts to social services, education and health care, among others.  When the Budget Control Act was passed, many in Washington were confident that the committee could come to an agreement, however grudgingly, that the rights cuts would be made, and that the sequester would not need to be enforced. 

But here we are today and GUESS WHAT? Neither party was able to come to an agreement on how to curb the budget, cut spending and raise revenue.  This means that come 2013, there may be some major changes made to our military and defense, education and other services we’ve come to expect.

Taxes, Your Holiday Is Over!

Even better than a tax holiday!

WE’RE AT THE HOME STRETCH.  I’LL MAKE THIS ONE SHORT AND SWEET!

The third and last major component of the fiscal cliff are the additional tax extensions for the middle class expiring after 2012.  When the Tax Bill of 2010 was passed, it included a provision that reduced the Social Security taxes that we have to pay by 2%–AKA the tax holiday.  This pans out to keeping about $20 in your pocket on a weekly basis if you make $50,000 a year.  Congress decided to kick this into the Bill as a way to keep more money in the pockets of Americans and encouraging us to spend more.  Of course, $20 a week in savings is barely enough for a family of four to dine at Chez McDonald’s, but that was exactly the purpose. Many of us unknowingly used that $20 on gas, beer, diapers, etc.

The Tax Bill also extended tax savings that middle class families have enjoyed over the years, increasing tax savings for families with children, providing education subsidies, and eliminating the AMT on the middle class.  All of these provisions, along with the tax holiday and tax cuts on income and investments are set to expire after midnight on December 31, 2012.

So taken together, it looks like–if nothing is done to change this–we are headed for major tax increases in 2013. Some analysts claim that if all of these tax incentives expire and the tax rates go back up, the average family will see a tax increase of $1700.  Under normal circumstances, a tax increase is a big fat buzzkill.  But in a sluggish economy, with slow growth, a fluctuating market, a stubbornly high unemployment rate and rampant uncertainty, many economists agree that an increase in taxes could push the shaky economy off the cliff– and back into the trenches of a recession.

On the other hand, with a sky-high deficit (last year the government borrowed about $1.3 trillion), an expanding middle class and entitlement programs like Medicare and Social Security on an unsustainable path, many argue that tax hikes are inevitable and necessary.

Either way you slice it, we are on a tough economic path and the road to recovery will be painful.  Let’s keep these issues in mind as we watch the debates and head towards the elections.

“Too Big To Fail”-Watch and Discuss

If you’ve been busy conducting an anthropological study of the indigenous tribes living in the jungles of Brazil with no access to your Iphone since 2008, you’ve probably missed the near-collapse of the US financial system that plunged the world into a financial crisis.  Well, don’t worry!  There’s a great film out there that offers an in-depth look into the few weeks that US government leaders, global heads of state and CEOs of major financial institutions were scrambling to keep the ceiling from caving in on all of us!

“Too Big To Fail,” a bestselling book written by Andrew Ross Sorkin (who is now a CNBC commentator) was later turned into a film that garnered multiple Emmy nominations.  Here’s what the illustrious IMDB has to say about the film:

“A close look behind the scenes, between late March and mid-October, 2008: we follow Richard Fuld’s benighted attempt to save Lehman Brothers; conversations among Hank Paulson (the Secretary of the Treasury), Ben Bernanke (chair of the Federal Reserve), and Tim Geithner (president of the New York Fed) as they seek a private solution for Lehman’s; and, back-channel negotiations among Paulson, Warren Buffet, investment bankers, a British regulator, and members of Congress as almost all work to save the U.S. economy. By the end, with the no-strings bailout arranged, modest confidence restored on Wall Street, and a meltdown averted, Paulson wonders if banks will lend. Written by <jhailey@hotmail.com> ”

Exciting, right?  And these events actually HAPPENED!  You can’t make this stuff up!

Money Moxie is hosting a Film Viewing Salon on Tuesday September 25–we’ll watch the film and then discuss the implications of the events of that crazy weekend in September 2008 when Lehman went down and Merrill Lynch was saved.  Attendees will leave with a better understanding of the roles of the Fed Reserve Chairman, the Treasury Secretary and other financial officials, the events that sparked the financial crash and how the government bailouts helped or hindered the recovery.  We might even discuss whether there’s a need for more financial reform in light of the crash.

Wine, beer and popcorn will be provided-$25.  Sign up here: http://fallsalonseriestix.eventbrite.com/

Food For Thought

It’s been a heck of a summer.  While I’ve enjoyed the sun, beach, bike rides and cooling watermelon-mint-feta salads, I am pretty ready for the fall.  I know this is crazy talk, especially living in the northeast where the winter is long and mean, but honestly I don’t think I can take more of this heat.  I feel like I’ve been sweating for two months straight!  My summer wardrobe consists of the same 3 dresses from Target because they are breezy and cool, and I’m on a first-name basis with my air conditioner (I call him Boris the Russian).

The dog dayz of summer.

The summer has been especially rough for farmers in the US Midwest, and their troubles go far beyond the rage I feel when I get a breath of sun-scorched, urine-soaked sidewalk, or when I feel the drizzle of leaking air conditioners from above.

This summer, the midwest has been experiencing the worst drought in at least 50 years.  The lack of rain and high temperatures have destroyed acres of farmland and crops, and have caused farmers to abandon sun-scorched crops and land, and sent them scurrying for alternative sources of feed.

Why should we care? The summer drought affects us as consumers in various ways.  The major crops affected are corn, soybean, wheat, and sugar among others.  The threat to corn crops is especially alarming as corn is used both as food and fuel.  The corn crops are not the same as the sweet corn that we eat, but are more used to feed livestock.  Corn is also mixed with ethanol to create “green” clean energy alternatives.

Lunchtime!

As a result, analysts are predicting that food prices will go up in the next year.  Since corn, wheat, soybeans, sugar and other crops are traded as commodities, the shortage of crops and continued threat is reflected in commodity prices, demand is up and this will certainly continue to affect the market and the global economy.  The shortage will also affect food manufacturers that rely on these crops for their products. Keep in mind that food shortages result in higher food costs not just in the country where the shortage  exists but also to its trading partners globally.  The 2007-2008 food shortage in the US and Europe caused upheaval and even riots in over 30 countries around the globe.

Since manufacturers have established that they will pass the higher feed prices onto consumers, expect to see the cost of food increase by the fall.  Here are some ways the drought is expected to affect consumers:

– As meat and poultry supplies decline, the US Department of Agriculture is predicting that meat prices–in beef, chicken, pork and other livestock–will increase in the next few months and continue into 2013.

– The price of milk and dairy products is also expected to increase by fall.

Dairy cow mug shot

– Expect to see price increases in processed and packaged foods in about 10-12 months.

– We should not see a significant increase in cost of wheat products as wheat crops in the midwest are normally harvested in spring and so avoided the summer drought, and the crops in the Northern Plains have so far not been affected by the drought.

If you want more insight into this, check out the US Department of Agriculture website on this topic. http://www.ers.usda.gov/newsroom/us-drought-2012-farm-and-food-impacts.aspx