Bond Investing: Bonds, Tax Cuts, and the Price of Inaction

The White House is finally coming clean…

They’re now projecting a $2 trillion deficit over the next 10 years above the previous $7 trillion estimate. That’s $9 trillion on top of $11.7 trillion deficit.

Naturally, they do it in late August and “leak” the news on a Friday evening.

Now it’s official. The Associated Press reports White House, Congress projects record deficit:

Figures released by the White House foresee a cumulative $9 trillion deficit from 2010-2019, $2 trillion more than the administration estimated in May, congressional budget analysts put the 10-year figure at a lower $7.14 trillion.

Either way you look at, it’s terrible.

The reason for the difference is:

The CBO projection is based on an assumption that all the tax cuts put into place in the administration of former President George W. Bush will expire on schedule by 2011 as dictated by current law. President Barack Obama's budget baseline, however, hews to his proposal to keep the tax cuts in place for families earning less than $250,000 a year.

Basically, the White House is saying recession or not, tax hikes are coming – get ready.

All I can say is Japanese-style stagflation…here we come.

Successful investors should start getting prepared.

Higher tax rates mean less economic growth and lower revenues. It also means greater deficits and more social spending on all those “safety nets” and the pensions and benefits for government workers who run them.

This is how downward spirals begin. The spirals always end badly. High inflation, high interest rates, and no growth.

That’s why a few days ago I recommended to readers of my premium investment newsletter, Prudent Investing, the time to take action is now. Not because interest rates have bottomed out or inflation is only a few weeks away. The time to move is now because most investors are focused elsewhere and the price of inaction – which will be realized in a few years – will be very, very high.