Thursday, April 29, 2021

Biden’s Spending Proposals

I have a minor in Economics, I got it for bureaucratic reasons too convoluted (and boring) to explain here. It doesn’t make me a Warren Buffett or Jamie Dimon, but I taught college-level micro and macro Econ many years ago and understand the basics.

If Joe Biden succeeds in pushing through all of his recently announced multi-trillion dollar spending proposals, at least one of two bad things will happen, maybe both. Either we will all end up paying a lot more federal taxes or we will experience inflation of the sort not seen since Jimmy Carter. If both happen, we can have the infamous “stagflation.”

There are ways to hedge against inflation, holding assets whose value will go up as prices rise rather than holding cash and cash equivalents is a primary one. Hedging against taxes requires more creativity and isn’t always possible. 

An example: I remember ‘shiny’ farms that were described as tax shelters. They built property value for their physician-owners while showing a paper farming loss which was offset against the owners’ earnings as surgeons.

The idea was to eventually sell the farms for a big capital gain which is taxed at a lower rate than regular income. Real farmers trying to make a living off their farms hated the competition.

Later ... According to the Bureau of Labor Statistics, food prices rose 3.9 percent in 2020. Inflation is already underway, and have you noted fuel prices soaring?