After a 4th large client postponed their large SharePoint project last week pending Congressional action on extending the Bush tax cuts, I am beginning to sense a trend. Could Congress’s failure to extend the tax cuts cause additional slowing of the economy? After reading James Rickards Currency Wars (Read a review by Forbes magazine here), I am concerned this tax break vote will impact the economy and directly effect my business. Rickards talks about how going off the gold standard has destabilized currencies and economies. Even more interesting is his assertion that historically, everytime a government has raised taxes, economies have slowed down and visa-versa. Rickards explores economic history in depth, basing his arguments on past currency wars such as the one after WW1 between several European countries and the U.S., and why currency wars are a lose-lose situation.
In short, Rickards’s main argument is that countries around the world are devaluing their currencies in order to boost their exports (domestically produced goods and services will be cheaper for foreigners) thereby increasing their GDP. However, such actions will frequently be met by mutual currency devaluation by other countries or by some protectionist policy such as tariffs. Therefore, countries will gain a temporary advantage until other countries retaliate, the end result of which will be: inflation brought on from currency devaluation, protectionism and the halt of free trade, thus – wealth destruction. And in a worst case scenario, an outright military conflict. (Another good question: Is the US going the way of Japan? Perpetual high debt? Japan carries a huge debt load).
Rickards also talks about the last great boom during the Reagan years. He attributes that boom to the lowering of taxes, despite the inflation that went along with it. He insists that raising taxes ALWAYS leads to economic decline and lower taxes to growth. What he does not address is that along with growth we get inflation. As was mentioned above, I found Rickards’s thesis to be well argued and backed with plenty of historical facts. An engaging book, especially his two scenarios as the only possible results. Either we continue raising taxes and end up in a catastrophic economic war (or military war) that makes the credit collapse look mild by comparison, or we (and other nations) return to the gold/silver standard, and see the dollar rise form the ashes to a new golden era of growth. A fascinating read and very exciting, even if I do not agree with everything he posits as the ONLY possible results.
Several knowledgeable people have written predictions that I think are more grounded in reality such as Prof. Lawrence White, of George Mason University, in his excellent Making the Transition to a New Gold Standard as published in freebanking.org. Also check out the similar analysis so well explained in gold standard advocate Lewis E. Lehrman’s 2011 The True Gold Standard. Still, Rickards makes some intriguing points that are hard to dismiss completely as they are well researched and very plausible.
But back to how the tax cut extension effects my business. If companies are indeed holding back funds for potential tax increases and postponing or cancelling growth, then should I plan on lean business pickings for the foreseeable future? January through March were boom months as companies quickly moved ahead with projects that had finally been approved after the same kind of waiting game by financial officers and executives to be sure they had enough cash on hand for potential taxes and/or another economic slow down. There is no questioning that companies have been building up their cash positions to be better prepared for slowdowns than they were when the credit crisis hit in 2008. That crises took many by surprise and they were forced to trim staff which further exacerbated the rapid growth in unemployment numbers that have haunted the current administration (though we know economic climate is often a result of the previous president’s policies).
Still, there is some light at the end of the tunnel as 5 potential clients have moved ahead with large projects, so I won’t be checking into the local homeless shelter anytime soon and I can probably keep my 2 employees, though I won’t be hiring the 2 new ones I was hoping to add this year. Are you listening economists and Mr Obama? My hiring or laying off employees is very probably directly tied to this tax cut extension. You want more jobs, you have to lower taxes to give companies more funds to hire employees and grow with new projects. Here’s hoping Mr Rickards is offbase about the black and white scenario he paints for the world’s economic future.