Watch out ahead - falling tax revenues
Some basic facts about our Federal Budget
1. Cash paid out: In FY2007, the US Federal Budget was $2.7T. (It's $3T for the current fiscal year)
2. Cash brought in: tax receipts were $2.5T
3. That $200B deficit was added to the $9.34T debt that is currently in place and which costs $280B in annual interest to fund.
About $2T of the tax receipts (80%) comes from individuals: income taxes, Social security, FICA. Another $400B comes from corporate taxes.
Currently, the budget expectations are for a moderate $45B drop in corporate tax receipts in 2008.
That sound slight. The tax payments by C, LEH, MER, JPM, & GS were $25B, and that will be closer to $0 in 2008. Add up all the banks and the shortfall has to be much higher. Then add in corporate earnings slowdowns and it's hard to see anything less than a $200B reduction.
Now add in shortfalls in personal income tax and social security. Millions more unemployed is billions in less tax receipts. The government is forecasting a $50B increase for 2008.
Again, not likely. At least $100B less, especially when capital gains taxes are factored in (not much capital gains in a Bear market).
Add in the $300B that Congress wants to throw at the housing mess, and I conclude that we will see a massive shortfall next fiscal year.
In essence, a$600B~$1T shortfall. That can not be hidden from the markets and is disruptive. It also limits the amount of leeway the government has to promote a stimulus package.
I think we'll see more taxes - on corporations (too bad shareholders) and on individuals (sorry wealthy folks, higher capital gains taxes).
I also think we'll see states like california trying to tax internet purchases.
I don't think we'll see reductions in entitlements. Not only because Congress is weak and unable. But there isn't enough discretionary budget to cut: the total discretionary budget is $1T+.
It makes gold and short positions look that much more attractive.
1. Cash paid out: In FY2007, the US Federal Budget was $2.7T. (It's $3T for the current fiscal year)
2. Cash brought in: tax receipts were $2.5T
3. That $200B deficit was added to the $9.34T debt that is currently in place and which costs $280B in annual interest to fund.
About $2T of the tax receipts (80%) comes from individuals: income taxes, Social security, FICA. Another $400B comes from corporate taxes.
Currently, the budget expectations are for a moderate $45B drop in corporate tax receipts in 2008.
That sound slight. The tax payments by C, LEH, MER, JPM, & GS were $25B, and that will be closer to $0 in 2008. Add up all the banks and the shortfall has to be much higher. Then add in corporate earnings slowdowns and it's hard to see anything less than a $200B reduction.
Now add in shortfalls in personal income tax and social security. Millions more unemployed is billions in less tax receipts. The government is forecasting a $50B increase for 2008.
Again, not likely. At least $100B less, especially when capital gains taxes are factored in (not much capital gains in a Bear market).
Add in the $300B that Congress wants to throw at the housing mess, and I conclude that we will see a massive shortfall next fiscal year.
In essence, a$600B~$1T shortfall. That can not be hidden from the markets and is disruptive. It also limits the amount of leeway the government has to promote a stimulus package.
I think we'll see more taxes - on corporations (too bad shareholders) and on individuals (sorry wealthy folks, higher capital gains taxes).
I also think we'll see states like california trying to tax internet purchases.
I don't think we'll see reductions in entitlements. Not only because Congress is weak and unable. But there isn't enough discretionary budget to cut: the total discretionary budget is $1T+.
It makes gold and short positions look that much more attractive.
posted by Andrew at
9:07 PM
4 Comments:
projected deficit would probably weaken the US dollar. If as you say "gold and short positions look more attractive", then what would stop oil prices from raising?
perhaps USO is a better investment than DUG?
I am wondering if they will "pull a Volcker"
Under Reagan, inflation was out of control, and so was the deficit. They pushed up interest rates to get inflation under control. It led to a recession but then things improved.
Higher rates also make the dollar more attractive.
I think the Fed believes that it has kept the financial system from imploding. Now they can worry about other things. Like inflation and a weak dollar.
Why go with DUG (aka short oil)?
First, the dollar is not weakening anymore. Oil prices are definitely tied to a weak dollar, but not as much as one might think. The dollar has only dropped ~14% in value since last year, but oil is up ~100%. And it has stopped falling for almost 3 months.
Second, speculation will end. Partly because of pressure by the Fed and stock market overseers.
But mainly because this is driven by a supply shortage and Chinese demand. Chinese demand will level off during the Olympics in 6 weeks (forced reduction in car use in Beijing). Meanwhile extra supply is hitting the market and demand is slowing and supplies taken off the market (like the 200K bpd in the North Sea) will return. Add to that that the Summertime demand slows in ~5 weeks anyway. All of these factors point to more not less available supply.
Then I see the technical side of DUG. It has had higher lows. It has had massive volume. It has risen when oil prices have risen.
I take this to mean that the bets are moving to the other side of the table.
In essence, the odds of oil going down are higher than the odds of oil staying up this high for much longer.
If they "pull a Volcker" then whatever financial sector is left will tank. US today is not the same as US of 1980's. Over 20% of US GDP today is financial sector. I think that EU will definitely raise rates on 07/03. This will put a lot of pressure on Fed.
Sumanta
The ECB raised rates and the Euro dropped 2%!!! Gold also dropped.
Flight to the dollar?
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