The Coming Economic Crisis
By S.I. Wells
With the drop of the Times Square Ball to ring-in the New Year of 2019, the world will be in a very different place than where it will be at the beginning of 2018. Even without exogenous geopolitical events, financial black swans and meteors from outer space, the Republican tax reform act of 2017 will have profoundly changed the economic landscape in the US, and in so doing, changed the personal lives of people and the health of many businesses.
I will now regale you with some bold predictions that exclude a war with North Korea, China, Russia or just about anyone. If those happen, just adjust the following value predictions down by 10-25%. And, expect the US government will be short of cash to pay for the war(s) and will issue War Bonds like it did during World War II.
I make these predictions solely based on the “social experiment” that the Republican Congress and President Trump engineered with their new tax reform act without so much as a stress test or advice except from self-serving lobbyists:
1. Because of the cap on home mortgage interest deductions combined with the $10,000 limit on SALT (state and local taxes), the value of homes across the country will, on average, be worth at least 15% less than they were on December 31, 2017;
2. Because the second home (read vacation home) mortgage interest deduction was eliminated by the 2017 tax reform act (except for any unused portion of your $750,000 mortgage cap from your primary residence), the value of vacation homes across the country will fall in value by at least 30%;
3. Because the tax reform act eliminates the “entertainment” deductions that have been a backbone of business for over 50 years, high-end restaurants, like fancy steakhouses that depended on the “company” picking up the tab, will be under intense stress and, in fact, many will be forced to close;
4. Without the “entertainment” deductions, many golf clubs, tennis clubs and private social clubs will be forced to significantly reduce their facilities due to falling membership, and golf club and golf ball manufacturers will suffer mightily;
5. With the “entertainment” deductions gone, many sporting venues, ballparks, football stadiums, etc., will see skyboxes go unsold and attendance be reduced by as much as 30%;
6. Businesses will save their tax reductions, spend where the tax code encourages, i.e., the immediate100% deduction for equipment and vehicles, force their workforces into low cost digital and virtual meetings, acquire their competitors and reduce staff overhead, buyback their own stock, payoff their outstanding debt and stagnate wages because the economy will be contracting and robots will be quickly replacing workers. Buy a robot (non-union, no vacation time, no maternity leave, no bonus pay, no HR sexual assault issues) and write off the entire cost in the first year.
The Republican Congress and President Trump have indeed done a massive rewrite on the tax code in the US. Instead of draining the swamp, by the time December 31, 2018 rolls around, the annals of history will have recorded that this was the greatest transfer of wealth from the poor and middle classes to the wealthiest Americans. Tomorrow’s few extra dollars workers will find in their weekly paychecks will be a mirage of smoke and mirrors designed to disguise a wealth grab not seen since the robber barons of the 19th century. The net effect, however, will be to weaken the US treasury, expand the national debt, drive up interest rates and put America on its back foot financially.
Bottom line: I hope I have it 100% wrong and the economy booms, people are safe and secure in their homes, peace reigns around the world, steakhouses will prosper and there is good will for all. If I am right, however, then follow the tried and true exhortation of the US government during the Eisenhower years: Duck and Cover (and form a Sub-S corporation or an LLC).
I’ll check back with you in about a year to see the results. Let me know what you think as time goes by via Twitter: @staythirsty2015.
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