Sunday, January 27, 2008

The "Out of Thin Air" Income Tax Rebate

The government is going to give us 150 billion dollars. Doesn't that sound like the lead-in for a Jay Leno joke? For what it's worth, they didn’t take in enough in taxes to cover the yearly budget. You kind of wonder where it's coming from. I’d love to enlighten everyone, but it's not nice to explain what’s going on and piss people off, all in the same sentence.

The government is going to disperse 125 million checks for $1,200. Its purpose is to stimulate the economy. We jump to the conclusion that the government wants us to buy something to get the economy going. Then it gets carried further with the observation that paying off debts won’t stimulate consumption. So what gives?

I’m stepping out on a limb here; this is pure conjecture on my part. So if you are using this column as investment advice, I express my sympathies to your family. Using speculative conjecture for brains is rather novel, award yourself two points.

Bernanke has lowered inter-bank-transfer-rates to levels not seen in a while. This allows a bank more time in selling assets to raise cash for withdrawals. There is no way the bank gets any free money out of this deal. What they borrow, they have to pay back to the Fed (we are not talking credit card math here).

During the real estate boom people bought a house for 100K and sold it for 200K. The extra 100K went into the banking system money pool. Right now the reverse is going on. You buy for 400k and sell for 200k and the bank chokes. The money supply that the banks and the economy have access to is contracting.

I am suggesting that this 150 billion dollar package is to help the banks. Congress really doesn’t care whether you spend it on a plasma TV or pay off a debt. The goal is to insert money into the banking system by way of your bank account. This cash injection will hopefully increase the money available to jump start the economy and keep the banks solvent.

150 billion dollars is peanuts to pay to avert a major bank collapse. The trouble is, printing the checks. I don’t know how many checks a day the government can print, but logistically, 125 million checks at one million a day is about 4 months of continuous printing. Even if the measure passed Congress tomorrow, I don’t think that the economy has the luxury to wait out four months. This mess started 6 months ago and it seems like it doubles in size every three months.

In Kalifornia, it took 6 years in the 1990’s for housing foreclosures to get to the levels they are today. 150 billion dollars dropped into the money supply has to be inflationary. The loss of buying power is becoming more apparent. More money will be chasing the same amount of goods.

Things have changed since I was a kid. We use to drag our date to the drive-in for a good time, popcorn and all. Now days you can get screwed at any gas station—it just isn’t the same.

Now you know where the money in this future check is coming from, or do you? You get something for nothing--it must be an election year. Congress is buying "The Short Bus" vote.

Copyright 2008 All rights reserved

10 comments:

Anonymous said...

Keep in mind that the average barrel of oil is strictly more expensive to remove from the ground than it used to be. We're crawling over the top of Hubbard's Peak. This makes it more difficult to compare gasoline prices today with gasoline prices yesterday.

Kibitzer 2006 said...

I saw an article the other day (I don't have the link handy) that said the IRS would be responsible for printing the checks. Only trouble, the IRS will be in the middle of processing tax returns (and printing refund checks). Their computers can't handle both at once. If they give the new rebates priority it will hold up refunds, and vice versa. I wonder which is bigger, the average refund or the new rebates? Either way, a whole mess of checks are going to be delayed a long time.

--Kibitzer

SACKERSON said...

They tried something like this in Japan in 1998:

http://findarticles.com/p/articles/mi_qn4158/is_19981108/ai_n14191309

Boom2Bust.com said...

Expanding on what kibitzer 2006 said about the potential for delays, I read the following on USA Today's website on January 23:

"If Congress acts swiftly this time, as leaders of both parties have pledged, the government still will face a timing problem not encountered in the past. The Internal Revenue Service is trying to sort out changes Congress
made last month to the alternative minimum tax and probably won't be able to mail rebates until May or June."

http://www.usatoday.com/money/economy/2008-01-23-economicstimulus_N.htm

Jim in San Marcos said...

Hi Kibitzer

Add to the refund checks, about 10-12 million Social Security checks each month and it looks big.

Jim in San Marcos said...

Hi Sack

I tried the link, but I think it's missing the last part. Could you repost the link?

Jim in San Marcos said...

Hi Boom to Bust

The key words are "If Congress acts swiftly this time"

It's an election year, the Democrats will be dragging their feet.

SACKERSON said...

Hi Jim

I've mislaid that link but these should do:

http://news.bbc.co.uk/1/hi/business/the_economy/212866.stm

http://www.dushkin.com/connectext/econ/ch14/fiscal.mhtml

AR said...

Does anyone know if this "rebate" would be like the last one post 9/11? That one was really just an advance on my refund and reduced it accordingly. Is this going to be the same as last? AR

Jim in San Marcos said...

Hi Sack

Thanks for the link.