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by Al Martin

Obama’s Tax Bomb: Coming Soon to Your Neighborhood

(8-17-09) Obamanomics is an economic recovery plan that, simply put, will raise consumer prices. Meanwhile AP is reporting that “consumer prices have fallen more in the past year than in any 12 month period in nearly six decades.” And therein lies the irony -- how the Obama Regime is able to hide increased consumer prices. Even Joe Six Pack knows this isn’t true. Anyone who goes to a gas pump or a grocery store or purchases tobacco and liquor or any hardware items knows what’s happening to prices. This is very disingenuous, since they’re comparing prices to a year ago -- and not to 2 or 3 months ago. It should be remembered that in the first quarter of 2009, gas prices fell to less than $1.50 a gallon. Now, according to Lundberg this week, the median price at the pump is $2.63 a gallon. So what does Joe Six Pack get out of this?

      Joe Six Pack understands that he’s paying a dollar more per gallon for gasoline than he was 3 months ago. He also understands that the median price of cigarettes in the last 3 months has doubled. He understands that liquor prices have also increased and that certain food prices, especially meat, have once again begun to increase. This is inflation – but not inflationary – and this is how the Obama Regime is able to hide it mathematically from Joe Six Pack.

      Joe watches mainstream media which makes sure that inflation statistics are reported, that CPI (Consumer Price Index) has fallen to a 28-year low – and that a continued decline is expected. Yet the price that he’s actually paying for necessity items continues to increase. Health care costs continue to increase. Pharmaceuticals continue to increase in price. However, they are creating inflation by decreasing purchasing power of Joe Six Pack’s dollar. Statistically they are exerting downward pressure on inflation, even though the prices of these items are rising. How can this be possible? To understand this, you have to understand something about Economics 101 and a little about mathematics.

      For example, let’s say 50% of CPI for sake of argument is comprised of Yellow Widgets, the price of which increases 20% year over year; yet because we are in an economic slowdown, the consumption of Yellow Widgets falls by 25%. Then, although the price of Yellow Widgets is exerting downward pressure on inflation because the total amount of money spent on Yellow Widgets has declined, even though the price has increased. Why? Because the consumption of Yellow Widgets has declined.

      If you say that a Yellow Widget costs a dollar a year ago, it now costs $1.20. Consumption of Yellow Widgets last year when they were selling for a dollar was X. Now 12 months later Yellow Widgets are selling for $1.20 but consumption is no longer X; it’s now X-25%. Therefore even though the price is rising, the consumption is falling proportionately faster than the price is rising. Therefore it is the total expenditure of consumers on Yellow Widgets. So, if 25% fewer Yellow Widgets are being consumed, i.e. bought by consumers and the price has risen 20%, then the total amount of money devoted to the purchase of Yellow Widgets has actually declined.

      The practitioners of Obamanomics are using falling inflation which is not being created by falling prices, but by falling consumption, which is really a mathematical ruse. Because the prices are actually climbing and therefore the purchasing power of Joe Six Pack’s dollar is actually declining – even though inflation is declining tself.

      This isn’t really lying with numbers because statistically this is correct. However it’s hiding the reality because it’s allowing price increases to occur. In other words, if you wanted genuine economic recovery, then at the retail end of the production pipeline, prices are raised. Profits of retailers are increased. Employment increases etc. That’s how you create a recovery – through increased prices. But that’s not what’s happening. In fact as we see every quarter, when all publicly traded companies report their earnings, we see retailer earnings continue to fall because their profit margins are getting squeezed since they have no “pricing power.” The retailers can not pass along price increases to the consumer. Thus the price increase is not an increase in the profit margin of the store that’s selling the Yellow Widgets.

      Why are prices increasing? Because the Obama Regime is pandering to the investment banks and brokerage firms and the financial community because of the power of its lobby. Also the Obama Regime is not changing any of the rules which they promised to change to prevent a handful, relatively speaking, of investment banks and commodity funds to run up prices of raw materials. Endlessly. Far beyond any price that can be supported by supply/demand fundamentals of the underlying item.

      Let’s examine the price of sugar, for example. We have seen a dynamic rally in the new York Board of Trade sugar contract. Thess increases in sugar prices are only now beginning to be passed along to consumers, who will not only see a price increase in a 5-lb. bag of sugar, but also in all products that contain sugar. Sugar is one of the most widely used and price sensitive components next to cereal grains like corn, wheat and soybeans. A lot of people don’t know this, but sugar is very price-sensitive in terms of pushing up food prices.

      The Obama Regime is allowing speculative bubbles to be created – across the board in industrial metals, fungible commodities, foodstuffs, fuels, etc – because they refuse to change the regulations, which they had promised to change, which allowed enormous quantity or volume of contracts to be purchased by individuals or a group of individuals. This very issue is before Barney Frank’s Financial Sub-committee on regulation. Again the Democrats refuse to change rules to place limits that would prevent concentration of ownership or buying commodity futures.

      What are investment banks doing to exert pressure so the rules won’t be changed? They are lobbying so that the rules won’t be changed which were inherited from the Bushonian Regime, thereby reversing a pledge that the Obama Regime made.

      For example, when the Obama Regime first came to power, Fed Chief Ben Bernanke said that he would insist that the maximum leverage that investment banking firms, etc. could use was 12 to 1. This was the so-called pre-Bush “old rule.”

      Remember that it was the wanton use of leverage that caused bubbles in real estate, commodity prices and equity prices to occur which subsequently collapsed and which led to the current economic downturn.

      Bernanke and the Fed have gone back on that and they are now allowing these same firms to use whatever amount of leverage they want. We saw that recently in the earning report of Goldman Sachs, which still owes TARP money to the government. Now Goldman Sachs, even though it is still the beneficiary of public monies, is using 50 to 1 leverage – in order to create speculative bubbles in equity and commodity prices.

      The Obama Regime is allowing the same speculative bubbles to be rebuilt that were first built under the Bushonian Regime by their refusal to change regulations. That refusal is coming from pressure being exerted against Democrats because of the large amount of money that lobbying firms, representing investment banks, the brokerage firms industry, and hedge fund industry, insurance industry and anyone who trades a portfolio gave to Democrats.

      This again is simply “business as usual.” That’s the reason why the Democrats aren’t standing up, even though they could be standing up to this pressure, since even they understand that riding the Obama coat-tails is rapidly becoming a losing proposition.

      But this has to be looked at from Congressional Democrats’ point of view. They are being pressured two ways on this issue. The first pressure is coming from the “trading” industry because of the large amount of money that they gave to Democrats in the 2008 election.

      Secondly pressure is being exerted against them from the White House itself because the Obama Regime, Secretary of Debt Geithner and Helicopter Ben Bernanke secretly do not want the regulations changed because if the regulations were changed the it would cause a second wave of asset price deleveraging to occur so that all the secondary bubbles that the Obama Regime has created in equity and commodity prices would collapse.

      Then we would quickly have that lopsided W recovery where we would slide back down the back half of the W and keep sliding down because the Obama Regime, as we have pointed out in the past, has unwisely decided to use as a cornerstone of quick economic recovery the creation of so-called Secondary Speculative Bubbles. They are secondary because the first set of speculative bubbles were already created between 2005 and 2008. And all those speculative bubbles collapsed.

      Now the Obama Regime is preventing change of regulations to allow enormous leverage to be used, thus ensuring that the very same banks, brokerage firms, insurance firms etc that had to be effectively bailed out by the Obama Regime since it’s come to power will need a second bailout down the line, when the secondary bubbles they are creating are collapsed.

      People have asked me – what about Obama’s Cash for Clunkers program and the health care program? It’s all fluff. They have come up with about 300 different plans and they put them out there to see what sticks, or which of these plans would have any success. The only plan they’ve put out which has had any tangible success in raising consumption (if you are measuring success by increasing consumption) is the Cash for Clunkers program. That’s the reason they came up with another $2 Billion for it right away. And when that $2 Billion’s gone, they’ll come up with another $2 Billion and another $2 Billion and so on.

      Both the Republicans and Democrats understand that this has become the Classic Washington Program, meaning it’s both politically popular and fiscally wasteful. And that is what the American people have always wanted.

      It becomes a question for all traders and investors – how far can these speculative bubbles, created in equity and commodity prices, run? Obviously the Secondary Speculative Bubbles that have been created in everything from the S&P 500 to crude oil to copper to sugar can not be sustained or run up to levels we saw under the Bushonian Regime. Why? Because consumption continues to fall; wages continue to fall; GDP continues to fall despite rosy forecasts. In other words, there isn’t enough new liquidity being generated to get copper back to $4 a pound.

      The only real liquidity that’s being created now in the American economy is the money that the government is printing.

      It is the reason why Ben Bernanke and the Fed don’t want to announce the much vaunted withdrawal program. In other words, when are they going to withdraw “fiscal stimulus”? You notice that the Fed will not say when and they are dragging their feet. They won’t raise interest rates. They’re repeating the same mistake that Greenspan made by keeping interest rates for too low for too long.

      The reason the Fed is doing this, by the way, is because the Fed understands that the only money that the United States economy is generating (called “free-to-float money” or investable capital) is being created by the US Treasury, which is simply printing it. And that liquidity, huge amounts of cheap public money sloshing around in the system, is what is being consumed or used by investment firms and managed funds to propel equity and commodity prices ever higher -- far beyond any sustainable level.

      This is precisely how the First Bubbles were created and ultimately broke under the Bushonian Regime. The Obama Regime is doing exactly the same thing, the result of which will be that when the Second Speculative Bubbles break, once again, the Fed and the Treasury will have to expend another trillion dollars of taxpayer money lost. And beyond that the Fed and the Treasury will have to provide yet another bailout for investment banks and brokerage firms that are going to get busted out when the Second Bubbles break.

      When the Republicans try to defend the creation of the First Speculative Bubble under the Bushonian Regime, they are correct because they claim that at least the First Speculative Bubble was created with “private money,” meaning money from investors and speculators, which were then packaged up into these new derivative products and leverage was used, etc. Ultimately the bubbles unwound and most of the investment firms failed or would have failed were it not for government bailouts. The brokerage industry essentially collapsed. The insurance and pension industries effectively collapsed. But this time, it’s different because ts not private capital that’s at risk. It’s the taxpayers’ money which is being put at risk.

      Joe Six Pack doesn’t understand the risk because he’s shielded from it. Joe says so what if another trillion of taxpayer money disappears. It doesn’t affect me because I didn’t see my taxes go up. Eventually however his taxes do have to go up. So why is the regime already talking about raising taxes on those earning more than $200,000 a year? Then suddenly it’s raising taxes on those earning more than $120,000. Notice how the numbers keep coming down.

      The Obama Regime is talking about this because they understand that what they’re creating is a Tax Bomb that will detonate some time in 2010. Then, if Joe Six Pack who’s earning $50,000 a year thinks he’s immune from tax increases, he’s only kidding himself…

    * AL MARTIN is an independent economic-political analyst with 25 years of experience as a trader on NYMEX, CME, CBOT and CFTC. As a former contributor to the Presidential Council of Economic Advisors, Al Martin is considered to be a source of independent analysis for financially sophisticated and market savvy investors.

After working as a broker on Wall Street, Al Martin was involved in the so-called "Iran Contra" Affair as a fundraiser for the Bush Cabal from the covert side of government aka the US Shadow Government.

His memoir, "The Conspirators: Secrets of an Iran Contra Insider," (http://www.almartinraw.com) provides an unprecedented look at the frauds of the Bush Cabal during the Iran Contra era. His weekly column, "Behind the Scenes in the Beltway," is published weekly on Al Martin Raw.com, which also publishes a bimonthly newsletter called "Whistleblower Gazette."

Al Martin's new website "Insider Intelligence" (http://www.insiderintelligence.com) will provide a long term macro-view of world markets and how they are affected by backroom realpolitik.



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