Tag Archives: Congress

Savers Beware (Continued)

Posted July 14, 2011 by admin. tags:Tags: , , , ,

Written by Nathan White, Paragon’s Chief Investment Officer
Taken from Paragon’s 2Qtr 2011 print newsletter 

Debt Ceiling Debate

As July unfolds, the debt ceiling debate will take center stage. The current fiscal path in unsustainable, and we will someday experience the Greek tragedy now unfolding if we fail to enact any reforms. The main reason why the current recovery has been so sluggish is due to the continued debt overhang. It will act as a drag on the economy until the bad loans and debt are mostly cleared out. The problem with enacting reforms is that it is not politically popular because no one ever wants their benefits cut (that’s why the Greeks are rioting).

The markets always like to be bailed out in the short-term to avoid pain and hard decisions, similar to how we might react with our personal choices. The government is always willing to reinforce this behavior out of political panic and opportunity. The average interest rate on Treasury borrowing is 2.5 percent. If rates were to normalize up from the Fed’s artificial level, it would add hundreds of billions to the annual interest expense putting more pressure on the deficit.

The President’s budget predicts over four percent GDP growth every year for the next three years. These growth figures are so overly optimistic and out of line with general consensus, they are laughable.   Missing these rosy economic projections by even a percentage point with the President’s proposed budget would add trillions to the national debt in just a few short years thereby exacerbating our debt situation.

We are at an interesting crossroads where irony abounds. The healthiest situation for fiscal soundness is to enact reform now before it gets out of hand, but because it is not a problem now and requires some (very mild) short-term pain (i.e., entitlement reforms/cuts) there is not a great will to do so. In the short-term the bond market would like the debt ceiling raised to avoid any disruptions in payments of principal or interest. However, to continue to raise the debt ceiling without any real fiscal reforms will spell disaster for the bond market in the long-term.

Picking Savers’ Pockets

If the government does not like to make outwardly hard decisions, how can they tackle the enormous deficit and debt overhangs? This is where you come in. The government does not need to tax you more outright or cut your benefits – that would be to obvious and politically unfeasible. According to economist Carmen Reinhart of the Peterson Institute for International Economics, the option then becomes what is called financial repression. Financial repression involves keeping nominal (i.e. published or quoted) interest on government bonds lower than inflation. It is basically a form of picking the pockets of savers, and it is already happening.

The Consumer Price Index as of the end of May was running at 3.6 percent. I am sure you are well aware of the rate you get on savings, which is pretty much zero. This means that your cash just sitting around or at the bank is worth 3.6 percent less than a year ago.  This spread directly benefits the government at your expense. It inflates away the value of the debt. This type of action for 10 years could reduce the Debt/GDP level by 30 -40 percent! Voila, it’s like magic! They just stealthily increased your tax burden without you directly noticing. You will feel it over time in the form of a lower standard of living where things just never really seem to get to where they were before.

Although economic growth is slowing, it is still growth, and corporate profits are still very impressive providing support for further equity gains. All Congress and the President have to do is pass real fiscal reform along with the short-term debt ceiling increase, and the markets would smile.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.  

Unusually Uncertain?

Posted July 22, 2010 by admin. tags:Tags: , , , ,
Protest Sign

 Photo By Shutterstock

Written by Dave Young, President of Paragon Wealth Management

Yesterday, Federal Reserve Board Chairman Ben Bernanke said that the outlook for the economy is “unusually uncertain”.

He stressed that the economy was growing at a moderate pace. He mentioned that employment and consumer retirement sentiment were weak.

When he said, “unusually uncertain” the market sold off. What a surprise.

So why is this recovery “unusually uncertain”? What is unusual about it?

I’ve been through a few economic cycles and have never heard the fed chairman use those words.

I don’t know what he was thinking, but I’ll take a guess. After an economic slowdown/meltdown “usually” the economy goes through a normal cycle of recovery. He said this one is “unusually uncertain” indicating it is not “normal”.

What is “unusual” this time?

I believe it is the impact that politics is having on our economy and the markets. Usually politics do not have that big of an effect on the economy. This time is different.

Is it unusual for government to completely overhaul the private sector health care system, which makes up around 17 percent of our economy? Is it even more unusual to do it during such difficult economic times? Maybe it’s unusual to do it when surveys show that most Americans oppose it.

Or maybe it’s embarking on a complete overhaul of the financial system? Maybe it’s that the financial overhaul is based on the theories of senators like Chris Dodd and Barney Frank that have no “real world” financial experience and therefore those living in the “real world” have no confidence in them. Maybe it is because congress passes these monster bills (2500+) pages on a purely partisan basis without reading them.

Why as he said, is unemployment high and why are consumers scared?

If you are a business that needs to make a profit, (unlike a government agency), there are costs and risks involved in hiring new employees. Maybe you aren’t sure how much the new health care regulations are going to cost your company. Possibly you aren’t sure how much of your money you will still have left to pay a new employee with after the upcoming new tax proposals are implemented. Now that unemployment costs go on for 99 weeks, maybe you don’t want to accept that unknown liability you have if you need to lay someone off in the future. Or maybe it’s simply because as a business owner you have a target on your back that says “Need Money? Tax Me!” and you don’t feel comfortable with that.

Why would you hire a new employee?

Why would you take the risk? You wouldn’t. And most employers aren’t. They are making things work with the employees they have. The government tells us every day they are saving us, but they are actually having the opposite effect. They have created incredible uncertainty. That uncertainty translates into high unemployment and low consumer confidence.

Not to worry.

Today congress cleared the way to spend another $33,000,000,000 (that’s billion) of our grandchildren’s money, and extend unemployment benefits once again. This administration seems to be taking the law on unintended consequences to a whole new level. Maybe higher tax rates and permanent government expansion are not the solution after all.

Maybe we’ll have a chance in the voting booth to start repairing this mess in November. Time will tell. 

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

Letter from Congress in reply to a blog post

Posted March 11, 2009 by admin. tags:Tags: , , ,
Letter from Representative Jason Chaffetz

A couple weeks ago we gave Congressman Jason Chaffetz a copy of a blog post that Dave Young wrote for Utah Business Magazine’s blog titled, “Stimulus for Utah?” This was his reply. We thought you might find it interesting. It is also written below to make it easier to read.

Dear Dave,

I agree with the points made in your blog post entitled “Stimulus for Utah? Thank you for giving a copy of the article to my staff during our recent ribbon-cutting ceremony at our Provo office. It is heartening to see citizens with an acute awareness of our current economic problems and dedication to solving those problems.

I assure you that no one is more dedicated than I to getting America back on the right track, economically and otherwise. In order to do that something needed to be done, but I have maintained since its inception that the American Recovery and Reinvestment Act of 2009 was not what we needed. This pork-laden bill may end up only putting us in the worse situation.

Your point about the return on investment for Utahans is particularly adept, as is your observation that this bill is hardly a bipartisan one. Our hope now lies in the American people; we have risen from difficulty in the past despite the oft-obstructing attempts of our too-big government to solve our problems from us. Now that the bill is passed it is my hope that Americans like you and me, can collectively solve our current difficulties and usher America into a more stable, prosperous, and responsible economic future.

Jason Chaffetz
Member of Congress

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Shannon Golladay
shannon at paragonwealth.com

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