A note from a friend

My mailbox this morning brought the following note from a friend who actually reads all this stuff:

"I'm very concerned about the debt we're acquiring. I've heard that someone (Forbes maybe?) suggested a "wealth tax" to help alleviate our debt. Have you heard of that?

We seem to be in a weird place right now. On the one hand, the stock market is sky high. On the other, the Looney is worth the same as the dollar. What gives?"

So I spent a few minutes trying to figure out what a good answer might be to both questions. Here's what I came up with:

I hadn't heard of the "Wealth Tax" ... though I suspect if we closed the loopholes for the wealthy in the current tax code (originally written as a progressive tax) ... at least placing a similar burden on their income as the burden you and I shoulder, we'd do alright. To some (the wealthy, I'm sure), placing the wealthy on the same tax footing as the rest of us would, in effect, be a "Wealth Tax" ... but it sounds to me more like framing the issue. Calling something a "Wealth Tax" does not necessarily make the underlying mechanism a bad thing ... it just makes it sound bad. Sort of like framing an issue in terms of "Tax and Spend" when a more factual representation of it would be "Pay and you go".

My read on the strong market / weak dollar issue, and I'm shooting from the hip here, is the stock market is an artificial and, at best, secondary gauge of the health of the economy overall. That is to say, pointing to the ever upward stock prices as being a sure sign that we have a strong economy is misleading. I think that for the simple reason that there are trillions of dollars tied up in 401K and IRA programs that have automatic deposits. That means every month there are literally billions of dollars flowing into the market looking for something to buy. The companies that manage those 401Ks and IRAs cannot simply sit on the money. They must, by law, invest the money in something - they must BUY some instrument - either stocks (equity) or bonds (debt) that will, in theory, yield a positive returns on the investment. . With all those "new" dollars flowing into the market looking for something to buy, prices have to go up overall - regardless of the fundamental, intrinsic value of the stocks overall.

The weak dollar is an indication that internationally, other countries are less and less interested in loaning us money (buying our bonds/debt). Probably a better gauge of where we stand with the economy than the stock market.

If stock (equity) prices go up on the domestic market while owning our debt is less and less attractive on the international market ... perhaps the increases in equity prices are a better indicator of the effects of inflation than the Fed is letting on? You HAVE to ask yourself, if the economy is doing so well, how come no one wants to hold our markers?

Like the housing market, which is currently in a state of utter collapse (remember, I'm trying to sell a house here so I'm pretty zoned in on what's happening in that segment of the economy), easy credit had the effect of inflating the prices of homes above and beyond their intrinsic value. The easy credit that allowed lenders to make sub-prime and Alt-A loans resulted from the so-called "fiscally responsible" factions that favored less and less government regulation. Keep in mind that government regulation exists primarily to protect the citizen from the abuses of corporations. (Keep in mind that Teddy Roosevelt was a conservative Republican who's legacy was "Trust Busting" - reining in corporate monopolies because the corporate agenda of sheer profit (that's the only reason corporations exist) often runs contrary to the common good of the citizenry.) The easy, almost totally unregulated, credit allowed people to buy houses they probably had no right to buy based on their financial means ... but everything was just fine as long as the Ponzi Scheme was working in the short term. The problem is that if the underlying value is not there in the investment, eventually (long term), the house of cards is doomed to fall and the last suckers to buy in get screwed big time.

Lest you think I'm totally anti-corporation, let me say that corporations have a right to make a profit. That they make a profit is a good thing and it should be encouraged. However, they should not be allowed to make a profit at the expense of the citizenry - and that's where government comes in. Government is supposed to be the representative of the people - doing the will of the people collectively, and doing collectively for the people what the people cannot do for themselves individually. It's mandate is supposed to be to protect the people from all enemies both foreign (that's why we have armies and navies) and domestic (that's why government regulation).