Econ Category #6: Federal Finance
“The idea that taxpayers owe it to you to pay for what you want suggests that much of today’s education fails to instill reality, and instead panders to a self-centered sense of entitlement to what other people have earned”
– Thomas Sowell
Howdy, gang! The NFL Draft was held recently and it kind of just occurred to me how teams continually go into “rebuilding” mode… even the really good teams. The Draft is the unofficial start of the new season in the NFL, where every team gets to assess their strengths and weaknesses then try to fill any voids they may have by selecting new players. This happens every year! Tabula Rasa. Everyone starts over.
I can’t help but see the similarities with the way we should go about our trading/investing. Yes, there are some glaring and obvious differences, but as a metaphor, it seems to fit. Regardless of how successful (or unsuccessful) we have been in our recent trading decisions, we essentially get to start over every day! If we hold on to the past as a leading indicator for the future then we’re setting ourselves up for some pretty big surprises. With trading/investing, the past is not necessarily prologue! So, in the spirit of the NFL, let’s dust off the previous trades we’ve made…learn from them…and move on. It really doesn’t matter if our previous trades were positive or negative because the NEXT trade we make isn’t tied to it. The only thing that may be directly tied to our previous trades is the emotion that we bring along. Placing that NEXT trade is tantamount to a General Manager deciding on which player to draft (follow along with me on this) for his NFL franchise because if he makes that decision based on the emotion of the previous season or the incessant demands of the lunatic fans then the odds dramatically increase that the decision will be a poor one. Face the day; assess your needs; make the call. Rinse and repeat. Tabula Rasa!
Sometimes, hearing things in a different way can help solidify understanding. It isn’t always “sunshine and lollipops” as you already know and sometimes we just need the bare essentials…as brutal as it may seem. My intellectual hero, Thomas Sowell, has a knack for saying things that I already know (or at least pretend to know), but he does it in a way that makes me feel like I’m learning something new. Such is the mindset that I try to possess when sitting down to write something new for “Know Good Things”. I don’t pretend to have new and groundbreaking information that the masses have not yet had access to. A lot of what I’m trying to accomplish with this blog is tied to the notion that my readers probably already have a basic understanding of economics, but could use a little bit of help in regards to clarity and how to actually utilize the information in an effort to become more successful in the markets. The previous five topics of this blog have been my personal efforts to accomplish that. We’ve created seven economic categories in which all economic reports fall into and we’ve already covered five of them. In case you’re just beginning to read this blog, the categories covered so far included: Output (income/spending), Employment (wages), Production (business activity), Prices (inflation), and Money (credit). This week’s economic category is centered on the finances of the federal government.
It’s no secret that the U.S. government has a spending problem. We have a balance sheet that, quite frankly, is humanly impossibly to truly comprehend because there’s really no way for any of us to fully understand just how big ONE TRILLION is…let alone ten trillion or twenty trillion (FYI…the current federal deficit is nearly $22 trillion)! The spending isn’t changing anytime soon, either. We have created a system of federal debt that is impossible to liquidate by any reasonable means and we’re pretty dependent upon external entities (other countries, for example) to lend us money/credit (usually by purchasing our bonds). We are easily the world’s largest debtor nation by sheer numbers, but the good thing is that we’re also the world’s largest economy. Since other countries depend on our consumption, it’s not likely that we’ll be forced to tighten our belts anytime soon. Inflation (and the potential dismissal of the US Dollar as the world’s reserve currency) is our biggest economic foe going forward.
The types of reports that we’ll focus on for this category include:
- Federal Receipts (Revenue) — issued annually
- Federal Outlays (Expenses) — issued annually
- Federal Debt — issued annually
For the more astute armchair economist, you’re probably noticing that the reports I listed for this category are issued annually instead of monthly (which is much more common). While it’s certainly something that can be tracked on a monthly basis, the details of these reports are so enormous that they’re usually not paid much attention to. The annual reports of the federal government are sufficient for the purposes of this particular category.
The types of “reports” that get much more fanfare (as far as this category is concerned) are the laws that are debated and passed by our legislative/executive branch. Tax income is one of the predominant forms of receipts for the government (individual income tax, payroll tax, and corporate tax) and we just recently saw something that doesn’t happen very often in America: taxes were legislatively decreased across the board! Probably the biggest component of the recent tax reform was the reduction in our corporate tax rate, which (according to most intellectually honest economists) should lead to much more domestic business activity. When business activity increases then tax revenues follow. The math isn’t hard to follow, either…but it all depends on an overall expansion of the economy. When the government lowers the tax burden (especially in the form of corporate taxes) they are essentially betting on the people! By enticing businesses and individuals to increase their respective economic output by making it cheaper to do so the effect is seen through an increase in annual tax receipts (revenue). Information on federal receipts can be found on www.whitehouse.gov where they are always posted. It’s probably not the type of report that you need to read through in its entirety, but it does have some interesting information that makes it surprisingly interesting…at times.
Governments generally try to stimulate the economy during times of recession (ref: Keynesian economic policy, which I wrote about in one of the first few installments of Know Good Things) and they do this by increasing spending without raising taxes. This is a very “Keynesian” way to go about stimulating the economy and is practiced (and abused) by nearly every industrialized nation on earth. By doing this, it causes both government spending and government debt to rise during times of recession, which is dangerous, but largely done because of the expectation that recessions eventually come to an end. It’s during times of prolonged growth that we typically see governments raise taxes and (attempt to) decrease spending. The only problem with this idealistic approach is that governments tend to have a very, very, very difficult time decreasing their expenditures. Take a look at our nation’s unfunded liabilities if you’re in need of something truly mind-numbing. Every now and then, I like to take a look at the “debt clock”, which can be found at: www.usdebtclock.org .
For those keeping track of the type of classifications that are affixed to the information found in this category, any of the federal finance reports are COINCIDENT and COUNTERCYCLICAL.
This category isn’t very similar to the previous categories because there really aren’t any of the monthly macro reports that we’re used to. It is worthwhile, however, to stay current with our nation’s tax policy because even just the debate of changing things tends to have a pretty immediate impact on the markets. We’ll never be a nation that ends up taking in more than it spends. Heck, we’ll never even be a nation that takes in the same amount as it spends! Not in my lifetime, anyways. As long as we’re consuming and have the means to consume then our economic future remains rather bright.
Have a great week, my brothers and sisters!
Be good. Do good. Know good.