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A flawed assumption

All the talk in political and monetary circles is about the GOP efforts at tax reform.  At this time, it is not possible to know the final form the bill will take.  The Senate has its version, the House has its version.  Compromises will have to be made, and there will be some serious horse trading.

Limiting or eliminating interest on home and auto loans is being considered.  State and local taxes (SALT) may be limited or eliminated.  Reducing charitable deductions are even being discussed.  Standard deductions are expected to be doubled.  Tax brackets will be reduced from eight to four, maybe five.  All this is labeled “simplification” by proponents.

Many pundits are saying no tax reform this year, a few are saying no tax reform even in 2018. Remember, the GOP failed to repeal Obamacare after seven years of promising to do so.

Regardless of which deductions stay and which go, many constituents will be unhappy.  Why upset voters when the next election is less than a year away?

Here is the serious flaw on which the bills are based: the CBO (Congressional Budget Office) is projecting that the economy will grow for the next ten years will average 1.9%.  Never mind that the economy hasn’t grown at 3% in a single calendar year since 2005.  Never mind that an expansionary period of 207 months (2009 through 2027) would be twice in length of any expansionary period ever.  The boom-bust cycle has not been eliminated.

Further, it is over the next ten years that Social Security will face bankruptcy as demographics now stand.  According to Pew Research, 10,000 Americans reach age 65 daily and will that will continue for the next 19 years.

Congress is accepting that the bill that will finally become legislation will result in a $1.5 trillion deficit over the next ten years.  And, this is on top of an $11 trillion deficit that is built into non-discretionary spending.

By 2027, the CBO sees the national debt at $33 trillion.  Going by historical precidents, the deficit will be much larger than projected, which will mean a national debt in 2027 much greater than $33 trillion.  Trump still wants to increase military spending, build a wall (not presently funded), take care of veterans (appropirately so), rebuild the infrastructure, and, of course, there will be more national disasters such as Hurricanes Harvey, Irma and Maria that will add to future federal deficits.

There remains great uncertainty about the tax bill.  David Stockman says it’s likely to be a gift to the super wealthy, a burden to middle income taxpayers.  If so, I expect much turmoil in the financial markets when the  final bill is passed, which should be positive for gold and silver, negative for the stock market.

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