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It’s Just a Touch of Grey

This is for my friend Wendy who requested that we include The Dead somehow in a blog post – Cheers Wendy! 🙂

Well, today was one of those days. I had a customer in my office who’s been with me a number of years and they commented that they noticed that over the last year my hair had gotten noticeably greyer. As I look back over the past year, I’d say that I’ve earned every one of those grey hairs.

We survived the stock market crash, the oil market crash, the corporate bond market crash, the housing crash, the banking industry implosion (a step beyond a crash), and panic around the globe’s financial markets.

I have been working on my Forecast for 2010 that will be presented tomorrow to our Investment Committee and our Board, then to our clients with their year-end statements in the Investment Commentary section of their report. I might even see if our IT folks can make it a downloadable file on our website – that would save me from emailing it to those that read this blog but are not yet clients – one more thing for the to-do list 🙂

What surprised me is that the conclusions I’ve drawn are so much better than would have imagined going into the process. Don’t get me wrong, I do not believe that we will see the sort of economic growth we have been used to. The chickens have come home to roost, so to speak – all of our years of reckless economic policy (and misplaced consumer financial priorities), the exploding national debt, and the deficits the size of which people cannot comprehend guarantee that growth will be curtailed and taxes will have to go up.

But, our future is not as bleak as many would have you believe. You can use France and Germany during the 90’s and 00’s as models on what we will look like economically, then you can add a measure of improvement to the mix since our demographics are far superior to those in Europe.

The economies in Western Europe are slow growth mature economies with high unemployment, high taxes to pay for a social safety net the population desires, and a reduced emphasis on military activity. This is the scenario that the USA has chosen – it’s not an inherently evil or socialist scenario as many of my friends view it. It is simply the next stage in a maturing democracy.

Unfortunately, this stage exacerbates the dichotomy between the rich and the middle class – it moves more people into the lower middle class socioeconomically and increases the reliance on the social safety net.

Yet, the rich continue to increase their wealth and their share of the national treasure and the barriers to entry to their special club are reinforced by higher income taxes to pay for the social safety net. Here is the key concept that most politicians and the rich don’t want you to know: the rich – and that includes many, many politicians – have already accumulated their wealth. An income tax increase is an immaterial burden on them as they receive a slightly lower net-return on that accumulated wealth.

The real financial burden is on the middle class whose biggest asset is their income stream – and the increased taxes will be one of the things that moves some people downward in their relative position within the middle class and expands the chasm between the middle class and the rich.

Western Europe realized that they could only raise income taxes up to a point before the work disincentives were such a negative to society as to be disruptive to the tenure of the political class. So, they adopted a 15% national sales tax called the VAT (Value Added Tax). My best guess is that we will have our own VAT in a few years, once our national debt gets to the point that we can’t reasonably service it from our income tax revenue stream. Sadly, this impacts the poor more than either the middle class or the rich, but we will likely follow the European model as it has proven to work.

So, I hope this didn’t add to your own greying, but the good news is that economically, coming years will be better than they could have been given the depth of our problems a year ago. The measures adopted by Ben Bernanke and Hank Paulson in the chaotic days of the crisis and continued by Bernanke and Tim Geithner this year have kept us from The Great Depression, Part Deux. And that is definitely a better scenario than we were facing a year ago.

Remember, every silver lining has a touch of grey.

Mark