Why Fed Rate Hikes Could Derail Trump Economic Bliss

By George Mentz Monday, 11 June 2018 05:03 PM

As a student of wealth management and the economy, I am concerned with typical historical government intervention of the past.

Because the present administration is enacting strong policies in key areas of: trade, taxation, competitiveness, and lending rates, this economy has a chance to stabilize for long-term growth.

Maybe we can learn from the mistakes of the recent past.

It seems that preceding the last few bull markets, the U.S. government embraced efficient government tactics of: lower rates of lending, lower taxes and lower regulations.

During Presidents Reagan and with GHW Bush, things were going well, but it seemed that the government intervened with either more taxes, deregulation, savings and loan problems, higher rates of lending, and more regulatory burdens which slowed the economy down.

Remember that there were low rates of lending before Clinton came into office in 1993 which spurred the investment into jobs, the Internet and other things. There were also low rates of lending after the Internet Bubble Burst in 2000 and later in the first few years of President George W. Bush.

I have often wondered if there exists a "middle way" where taxes and lending were at an ideal level of sustainability and growth which also supports jobs and a robust government.

My point is this, I believe we are living that point right now. Therefore, there must be an optimum point where taxes, lending and regulation are low enough to sustain a growing economy and a country that can be competitive in the global marketplace.

If the Federal Reserve raises rates another quarter percent, it may take the momentum out from our economy if the rates go up 1% or more, it may dismantle the market energy.

As for lending, 30 year fixed mortgage rates just jumped from an approximate average of 4% to 4.5 %. If that number goes any higher, the housing lending market will slow considerably unless the Trump administration can ease some of the Dodd-Frank litmus tests & algorithms used by banks to lend money to the millions of workers whose incomes are not on W-2 pay stubs.

Remember there must be a sweet spot for lending. I would guess that 5% or lower on 30 Year mortgages, and less than 7.5% or lower on margin lending for brokerage accounts.

Still, with rates higher, the cost of running government skyrockets to pay the interest in the debt. Thus, lower Fed rates means more money for running government too. In theory, if President Barack Obama had normal interest rates during his administration, the national debt would be as high as 30 trillion.

As for taxes, the new Trump income tax rates will help the middle class have more disposable income, but any “individual mandate Obama taxes” or higher prices of gas at the pump can rob many Americans and businesses of what little they can save.

The corporate tax and small business tax relief, will create more jobs, more disposable income on the local level and will boost spending.

However, if lending rates for business loans, auto loans and margin lending loans go up, this well create less investing and spending.

The genius of essay writing is when the author can explain something at a third-grade level. Thus, if the U.S. becomes a safe-haven for global business with lower taxes, low sovereign risk, and lower regulations; then, the “American Safe Haven” will attract more customers and businesses that want to live here, hire here, do business here, and be here.

So, is the solution as simple as lower rates, less regulation and lower taxes? Well, if you apply the fair tax, fair lending, and fair regulation logic to Wal-Mart and Amazon, then supply side economics is fact and not theory if you assume that the competition has higher taxes, costs and regulatory burdens like Sears or Borders Books.

Again, the key words are productivity and sustainability. You want workers and businesses to be making money and paying taxes, otherwise the government will have too many unfunded liabilities. Moreover, you want government to be lean and agile to keep up with the times.

My wish here is for the Federal Reserve to take a few years off. I would also want Congress to keep federal taxes low and the president to keep regulations fair.

As we have seen in Europe and Asia, and Arabia, successful businesses and people go to where they will have the best government services, best jobs, lower taxes, and the least regulatory burdens. Keep in mind, there are over 50 other American countries and dependent territories outside of the USA and over 100 nations and 5 billion people in Eurasia who want to keep their money and businesses based in a reasonably safe zone.

Also, when your government has so many hidden taxes, it can destabilize business, spending and investing. For example, if you are in New York or California, you could sell a small business and get stuck with a 8-9% state tax, a 3.8% Obamacare Medicare Tax and another.9% Obamacare surcharge. Thus, there can be extra 13-14% tax on your capital gain income or this may also apply to your regular income. Therefore, from a city, state and federal standpoint, there are still several destabilizing factors which can inhibit the economy and hurt workers and retirees.

In the end, we must have a smart government. If we don’t, you end up with all of the rich people and rich companies moving their money and investments elsewhere. In contrast, if you have strong policies, you can recruit and retain excellent people, jobs, businesses and investment from around the world while mitigating unfair trade.

Let's keep America competitive, efficient and sustainable and maintain strength during peacetime.

George Mentz JD MBA CWM Chartered Wealth Manager ® is a licensed attorney and CEO of GAFM ® global education, which is an ISO 29990 Certified professional development company operating in over 50 nations. Mentz is an award winning author and advisory board member to several companies around the world in education, charities, and crypto currency.

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