2021 Tax Planning: Itemized Deductions

Preface: “You can’t tax business. Business doesn’t pay taxes. It collects taxes.” ― Ronald Reagan

2021 Tax Planning: Itemized Deductions 

There are two choices or standard strategies for deductions on your federal income tax return: 1) you can itemize deductions or 2) use the standard deduction. Maximizing these deduction benefits can optimize your taxes because any tax deduction ultimately reduces the amount of your taxable income.

Firstly, the standard tax deduction amount for federal tax filing purposes varies depending on the taxpayers income, age, and mostly your filing status. The amount is also adjusted annually for inflation. Certain taxpayers cannot use the standard deduction: These include I) A married individual filing separately whose spouse itemizes deductions. II) An individual who files a tax return for a period of less than 12 months because of a change in his or her annual accounting period. III) An individual who was a nonresident alien or a dual-status alien during the year. However, nonresident aliens who are married to a U.S. citizen or resident alien at the end of the year and who choose to be treated as U.S. residents for tax purposes can take the standard deduction.

The standard deduction for 2021 rises to $25,100 and increase of $300 from 220. For single and married filing separately taxpayers the standard deduction is $12,550 for 2021, up $150 from 2020. For heads of households the standard deduction is $18,800 for 2021.

The standard tax deduction is automatically available to any taxpayer and adjusted per filing status.

Secondly, Itemized deductions are a Form 1040 Schedule A deductions. This includes amounts paid for state and local income or sales taxes, real estate taxes, personal property taxes, or qualifying mortgage interest. Additionally, you may also include gifts to charity and part of the amount you paid for medical and dental expenses. You would usually benefit by itemizing on your tax filing if you:

          1. Cannot use the standard deduction or the amount you can claim is limited;
          2. Paid Uninsured medical and dental expenses;
          3. Paid substantial interest or taxes on your home or a second home;
          4. Paid Investment Interest;
          5. Paid unreimbursed employee expenses;
          6. Made large charitable contributions to qualified charities.

The higher standard deduction under recent tax reform measures has led to fewer taxpayers itemizing their tax deductions currently and simpler tax filings. However, taxpayers may have an opportunity to itemize this year by keeping these tips in mind:

The deduction that taxpayers can claim for state and local income, sales and property taxes is limited. This deduction is limited to a combined, total deduction of $10,000. It is $5,000 if married filing separately. Any state and local taxes paid above this amount can’t be deducted.The deduction for mortgage interest is also limited to interest paid on a loan secured by the taxpayer’s main home or second home.

For homeowners who choose to refinance, they must use the loan to buy, build, or substantially improve their main home or second home, and the mortgage interest they may deduct is subject to the limits described as following when buying a home.Taxpayers who buy a new home this year can only deduct mortgage interest they pay on a total of $750,000 in qualifying debt for a first and second home ($375,000 if married filing separately).

For existing mortgages, if the loan originated on or before December 15, 2017, taxpayers continue to deduct interest on a total of $1 million in qualifying debt secured by first and second homes.

Many taxpayers often find unused items in good condition they can donate to a qualified charity and receive an itemized deduction benefit on Schedule A. These donations may qualify for a tax deduction. For some taxpayers, checks, credit card, or other money gifts is the preferred donation medium. For any donation whether items or money taxpayers must have proof of all cash and non-cash donations for itemizing.

Driving a personal vehicle while donating services on a trip sponsored by a qualified charity could qualify for a tax break. Itemizers can deduct 14 cents per mile for charitable mileage driven in 2021.

With itemized tax deductions you need to keep receipts on file, and with standard deduction their no extra effort to document the tax deduction. Generally, if itemized tax expenses exceed your standard tax deduction it is a good idea to itemize your taxes.

This year, when tax planning for 2021 be certain to discuss with your tax advisor the tax benefits of either itemizing taxes or stream-lining your 2021 tax filing with a standard deduction.

The Proposed Tax Reform Effects on S-Distributions and Gifts

Preface:“A budget is more than just a series of numbers on a page; it is an embodiment of our values.”
– Barack Obama 

The Proposed Tax Reform Effects on S-Distributions and Gifts

The Department of the Treasury has published the Biden Administration’s proposed plan for raising revenues in 2022 detailing more specifically the tax effects of the new tax reform. In this blog we will highlight two tax items of interest to entrepreneurs and business owners.

SE taxes on S-Corporation Distributions and LLC Distributions

Firstly, the proposed tax reform will revise the tax laws for taxable self-employment earnings. The proposed tax reform would require both materially participating partners who receive guaranteed payments to pay self-employment taxes on their distributive shares of income for pass-through earnings above an AGI of $400,000. S-corporation shareholders while under current tax laws are required to pay a reasonable compensation wage and not taxes for self-employment taxes on distributions.

The tax reform would also subject S-Corporation earnings and distributions beginning in 2022, to the additional income taxes on earnings that would be subject to social security tax as the lesser of (i) the potential social security income, or (ii) the excess over $400,000 of the sum of the potential social security income, wage income subject to FICA under current law, and 92.35 percent of self-employment income subject to social security tax under current law.

This is a possible increase on taxes for business owners including those with an AGI less than $400,000. Of course while not final legislation, this may increase income tax costs for a multitude of small business owners with a pending closure of the social security taxes loophole.

Taxes on Appreciated Gifts

Under the proposed tax reform, a donor or deceased owner of an appreciated asset would realize a capital gain at the time of the transfer. In other words gifts with a built-in gain would tax taxable at transfer.

So for a donor, the amount of the gain realized would be the excess of the asset’s fair market value on the date of the gift over the donor’s basis in that asset. For a decedent, the amount of gain would be the excess of the asset’s fair market value on the decedent’s date of death over the decedent’s basis in that asset. That gain would be taxable income to the decedent on the Federal gift or estate tax return or on a separate capital gains return. Of course assets with gains of $1.0m or greater would be taxed at the 43% rate capital gains rate when including net investment taxes.

The use of capital losses and carry-forwards from transfers at death would be allowed against capital gains income and up to $3,000 of ordinary income on the decedent’s final income tax return, and the tax imposed on gains deemed realized at death would be deductible on the estate tax return of the decedent’s estate.

Interestingly for legacy businesses e.g. say family partnerships or trusts, a gain on unrealized appreciation also would be recognized by a trust, partnership, or other noncorporate entity that is the owner of property if that property has not been the subject of a recognition event within the prior 90 years. The first possible recognition event for any taxpayer under this provision would thus be December 31, 2030. For those graduates looking ahead — New Years Day 2031 has opportunity for valuation experts. A qualifying transfer would be defined under the gift and estate tax provisions and would be valued using the methodologies used for gift or estate tax purposes.

Payment of tax on the appreciation of certain family-owned and -operated businesses would not be due until the interest in the business is sold or the business ceases to be family-owned and operated. Furthermore, the proposal would allow a 15-year fixed-rate payment plan for the tax on appreciated assets transferred at death, other than liquid assets such as publicly traded financial assets and other than businesses for which the deferral election is made.

The Internal Revenue Service (IRS) would be authorized to require security at any time when there is a reasonable need for security to continue this deferral. That security may be provided from any person, and in any form, deemed acceptable by the IRS.

Summary: With IRS proposed changes from qualified valuation features to securitized collateral with legal documents, the proposed tax reforms will likely bring tax compliance factors to the forefront of business planning and strategy in the year ahead.

Target Stores: An Entrepreneurial History Abstract

“Success is making ourselves useful in the world, valuable to society, helping in lifting in the level of humanity, so conducting ourselves that when we go the world will be somewhat better of our having lived the brief span of our lives.”— George DaytonFounder of Target Stores

Target Stores: An Entrepreneurial History Abstract

Credit: Donald J. Sauder, CPA | CVA

A fiery zeal for work and enterprise seemed to be part of George Dayton’s youth. At eleven years of age, he started working in the greenhouse for $0.375 a day. Even in 1868, opportunity abounded for aspiring entrepreneurs. Young George hoped to be a minister someday, but with his dynamic approach was soon assimilated into the business world.

Soon he was found himself working in a lumber yard sales position earning commission and then bought the business at age seventeen. Ambitious George attempted working 48-hour shifts and soon burned out. His father made him sell his lumber yard. In 1878, George began buying farm mortgages venturing into banking presiding over the Bank of Worthington.

Shortly following he was the founder of Minnesota Loan and Investment Company and quickly advancing in social status. In 1890 he built a large home on eight lots for his growing family, living according to his strict religious principles and improving his community with a dedication to the service of others. Serving on the Worthington Board of Education and as a church clerk, elder, and church trustee, George taught Sunday School and hosted church events in his home.

At age thirty, George was donating 40% of his income to his church. When the Westminster Presbyterian Church that George attended burned down in 1895, he purchased the land on the corner of Nicollet Ave and Seventh Street for $165,000. The church needed revenue, and insurance proceeds would not cover the cost of rebuilding.

By 1902 he had formed a partnership and built the six-story Goodfellow Drygoods Company on the real estate. The store sold everything from yard tools to fashionable clothing. The store forbade the sales of alcohol and refused to advertise in papers that promoted liquor. There were also no Sunday sales, and strict Presbyterian rules governed the enterprise. In 1918 George started the Dayton Foundation that he regarded as his greatest accomplishment.

In 1938 George’s son, Nelson assumed leadership of the business. Nelson’s five sons, Donald, Bruce, Wallace, Kenneth, and Douglas, all worked their way up from entry-level positions, and with Nelson’s passing in 1950, each inherited an equal share of the business. Each week the brothers toured the store and met at the Radisson Hotel to discuss strategy. After attending a Cornell University executive leadership class, the brothers agreed to hire an outsider to chair the business. In 1961 the Dayton brothers announced the planned launch of a chain of discount stores in the Minnesota area.

The first Target store opened in 1962 at 1515 West County Road B I Saint Paul, Minnesota. Douglas Dayton presided as store president. Walmart and Kmart also launched their first stores the same year. John Geisse, the outside company vice president, had the right long-term strategy, although it was nearly five years before the Company turned a profit with $60.0M in sales in 1966.  The following year the Dayton brothers took the Dayton Corporation public.

Not without its challenges and a true dedication to serving their communities, nearly 150 years later, the Target Corporation, that began as George Dayton’s early ungoverned business ambitions, thrives with more than 350,000 team member around the globe, all working towards one purpose: To help all families discover the joy of everyday life.

Yuval Noah Harari: Lessons from a Year of Covid

Preface: “Each year the US population spends more money on diets than the amount needed to feed all the hungry people in the rest of the world.”
Yuval Noah Harari

Yuval Noah Harari: Lessons from a Year of Covid

…..In previous eras, when humans faced a plague such as the Black Death, they had no idea what caused it or how it could be stopped. When the 1918 influenza struck, the best scientists in the world couldn’t identify the deadly virus, many of the countermeasures adopted were useless, and attempts to develop an effective vaccine proved futile.

…….The unprecedented scientific and technological successes of 2020 didn’t solve the Covid-19 crisis. They turned the epidemic from a natural calamity into a political dilemma. When the Black Death killed millions, nobody expected much from the kings and emperors. About a third of all English people died during the first wave of the Black Death, but this did not cause King Edward III of England to lose his throne. It was clearly beyond the power of rulers to stop the epidemic, so nobody blamed them for failure.

Yuval Noah Harari: Lessons from a Year of Covid

Professor Yuval Noah Harari is a historian, philosopher, and the bestselling author of Sapiens: A Brief History of Humankind, Homo Deus: A Brief History of Tomorrow, 21 Lessons for the 21st Century, and Sapiens: A Graphic History. His books have sold 27.5 Million copies in 60 languages, and he is considered one of the world’s most influential public intellectuals today.

Born in Israel in 1976, Harari received his PhD from the University of Oxford in 2002, and is currently a lecturer at the Department of History in the Hebrew University of Jerusalem.

Harari originally specialized in world history, medieval history and military history. His current research focuses on macro-historical questions such as: What is the relationship between history and biology? What is the essential difference between Homo sapiens and other animals? Is there justice in history? Does history have a direction? Did people become happier as history unfolded? What ethical questions do science and technology raise in the 21st century?

 

 

The American Families Plan: A Tax Summary

Preface: The American Families Plan is an investment in the nations children and families—helping families cover the basic expenses that so many struggle with now.

The American Families Plan: A Tax Summary

Credit: Donald J. Sauder, CPA | CVA

Given the increasing likelihood of new tax rules and tax reform in coming months from the Biden Administrations’ proposed American Families Plan, this blog is written to provide a general outline of the tax implications.

First, the good news is that there will be no change in income tax expenses for those of us earning less than $400,000. No income tax cost changes whatsoever? Yes – right. Well, that should help reduce concerns initially, and yes, it does get better.

Let’s consider some hypothetical income tax scenarios. Married filing taxpayers jointly earning say a combined $500,000 according to initial Biden Tax Plan Calculators, the cost of income taxes would only increase $3,900. The same scenario at $600,000 and the federal taxes would only increase only $8,500, at a $700,000 AGI and the increase would be $12,000 and at a cool $1.0M of AGI the tax increase would only be $19,800. For those earning $5.0M, the tax increase would be approximately $123,000, and for those making $12.0M, the approximate income tax increase would be roughly $305,000 or a blended rate increase rise of 2.54%. These certainly are not crystal bowl-shattering income tax rate increases indeed.

President Biden proposed tax legislation is to lift millions of children out of poverty with a plan to make it easier to afford child care and expansion of the Child Tax Credit, among other tax revisions.

The Child Tax Credit currently at $2,000 per child would increase to $3,000 for children six years of age and above and $3,600 per child under six years of age. The credit would also be fully refundable, so a family that needs the credit most will benefit. The credit would also be available in regular payments to pay for household expenses as they arise, so the benefits would not require an annual family tax filing. The expanded child tax credit would begin to phase out for those couples earning above $150,000, but couples earning up to $400,000 could still qualify for $2,000 per child.

Also, for those taxpayers filing without children, The American Families Plan includes tax provisions so they will receive an increased earned income tax credit benefits or well-deserved reward for those who work hard every day at modest wages to support their communities.

For capital gains tax provisions, taxpayers will need to earn more than $1.0M to pay more taxes. A recent study shows that the top income earners failed to report on aggregate more than 20% of their earnings and a failure to pay more than $175.0B in income taxes. The American Families Plan would tax all income above $1.0M at the same tax rate of 39.6%, including capital gains on stocks, real estate, or other investment assets.

The above capital gains tax rates provision is one significant tax planning implication relevant to less than 1 of every 100 taxpayers. Secondly, the tax reforms includes ending the practice of “stepping-up” basis for assets passing to heirs in estates for those unrealized gains above $1.0M (or $2.5M per couple [$1.0m per person + $250k exclusion on gains from primary residence]) unless the assets with built-in gains are donated to a qualifying charity.

Although this proposed Biden Administration tax plan is rather pleasantly conventional for the majority of taxpayers, it includes large increases to the IRS operating budget to enforce tax compliance for that those earning above $400,000 and ensure payment of an accurate amount of tax. Recent studies have shown that the top 1% of tax payers failed to pay $197.0 billion annually of taxes in aggregate and failed to report 20% of their annual income. These additional resources for the IRS would focus on large corporations, businesses, estates, and high income earners to raise a planned $700.0B within a decade.

The tax reform bill includes critical exemption relief for family-owned businesses and family-farms that protect family-run business assets transferred to qualifying heirs to nimbly escape this expensive loophole closure tax lasso of taxation directly on estate asset transfers. This tax provision is another real affirmation that President Biden’s American Families Plan is true its name.

Additionally, The American Families Plan is designed to end the IRC 1031 like-kind-exchange tax deferrals on real estate transactions, but only for gains greater than $500,000. Finally, the tax legislation reforms would also require consistent rules for the 3.8% Medicare tax.

President Biden has stayed true to his promise that Americans earning less than $400,000 will not see higher taxes. For those making above that, Smiles, it’s the cost of another toll on the highway of financial successes.

A Primer on Inflationary Business Conditions (Segment VII)

Preface: “Part of courage is simple consistency.” – Peggy Noonan

A Primer on Inflationary Business Conditions (Segment VII)

Rewind in time for a moment to the summer of 2020, when the inflation vs. deflation debate was beginning to gain initial tractions regarding business planning for a post-Covid economy. Many experts were of the firm opinion that while unemployment levels would stay elevated for a time, and hence economic demand weaker, it would give the logistical supply chains a smoother curve back towards normalization. In addition, the deflationary logic included a theory that money printing would provide businesses with the opportunity to survive with lower operating margins and an impetus to quickly get back online with inventory and supply to rebuild the economy, hence driving prices lower = deflation.

The contrary resulting inflationary conditions is likely contingent on the trillions of dollars injected into the marketplace since 2019, and of note more than $3.0T in 2020 alone, as the Federal Reserve has continued to build its balance sheet. Therefore, any macro plan for a business is hinged directly on the Federal Reserve policy of quantitative easing. Why? Because the Federal Reserve’s policy of balance sheet growth via asset purchasing as the buyer of last resort drives the engine of current economic activity and the ebullience of the financial markets.

Correspondingly Wall Street where both the stock market and bond market trends occur, including interest rates measurement, control the majority of real-time consumer sentiment and confidence. In fact, Federal Reserve spokesperson Robert Steven Kaplan has recently remarked that excesses and imbalances in the financial markets, including surging home prices, are imminent dangers to the border economy. What could that lead towards for managing a business during inflationary conditions?

The bottom line is that any perceived or permitted deflating of the growing asset price bubble from a change in Federal Reserve policy could result in financial risks that could emulate the Japanese financial malaise the began in the early 1990s. In that instance, the countries historical asset price bubble deflated quickly along with economic vibrancy. Complicated with among other deflationary factors, including tax hikes, Japan’s economy has yet to recover from the deflationary financial crater even after more than two decades of near-zero interest rates and concerted central bank measures. Further Japanese consumer’s mindsets have now shifted to the viewpoint that prices should stay relatively consistent.

Therefore, any slowing in the current stimulus spending for the Covid-19 Pandemic, along with an approaching expiration of the mortgage foreclosure forbearance, and unemployment compensation, before December of this year, may lead to the clear visibility of the actual economic realities from a Pandemic shutdown.

Continued acceleration in the current inflation rate and the potential implications could elevate worldwide financial concerns or fears since the US dollar is the world’s reserve currency. Although not impossible, perhaps probable is a containment of the current inflation rate, as outlined by the Federal Reserve’s description of inflation price increases as “transitory.” This could result in either a dysfunctional deflating from open ceilings levels to certain degrees with the growing asset bubble (perhaps real estate, stocks, or more problematic bonds) or maybe a financial rodeo of surprises from asset price volatility or perhaps a plan like this Forbes article describes An Egyptian Bailout.

Combine these economic risks with the most giant financial bubble in US history, and the solution seemingly is an economic governance plan capable of navigating Cadillac Mountain driving in reverse at ## MPH.  Hold onto your hat. May they be that good?

A Primer on Inflationary Business Conditions (Segment VI)

Preface: No act of kindness, no matter how small, is ever wasted. -Aesop

A Primer on Inflationary Business Conditions (Segment VI)

Inflation, as described earlier, can be likened to the printing of books. Although often misunderstood, there exists a finite market demand for any product or service. For instance, after, say, eight or nine billion copies of any book, with some avid readers owning ten or fifteen copies, there eventually is a point reached called market saturation.

Market saturation arrives when the volume of a product or service has reached its peak optimization for demand. In other words, the marketplace demand contrasted to the supply capacity is optimized. Examples of market saturation could be five soft pretzels stands in a farmer’s market, or when robotic automation floods a marketplace with manufactured inventory like laptop computers? Perhaps planned to obsolesce of products like textbooks or broader menus for the pretzel stand. Effective marketing plans are most important when a business nears, reaches, or passes these points of market saturation. Why? Because the enterprise needs increasingly unique sales methods to continue to gain (or keep) market share for successful sales channels or to outperform the competition.

Any currency also has a market saturation point for purchasing power. So as there cannot be an end without a beginning, likewise to all beginnings, there is an end. Therefore, any end turns into a new beginning.

Inflation is part of any currency management, but there are two types of problematic and taxing inflation. These are hyperinflation and stagflation, respectively.

It is presumed that hyperinflation, or the increase of prices rising more than fifty-two percent each month, is only a slight concern that typically only occurs jointly with a civil disorder or the financing of sizeable national spending catalysts. Therefore, this probability, while not impossible, is less probable.

Stagflation is another form of inflation that is economic patois for inflationary increases in prices, corresponding with a stagnating economy and high unemployment rates. Stagflation is also a most troublesome form of inflation because incomes and earnings do not grow while simultaneously consumer buying power deteriorates, leading to cashflow budget blockades.

Without infrastructure spending and job retooling programs, escaping a developing stagflation environment for business may continue to be elusive in the United States. If minimum wages do not increase, then with the recent year’s price increases in autos, residential real estate, or food, this economic state of stagflation will be a potential economic reality.

To escape the spiral of demand destruction from gaining root from the lack of economic drivers at work (best exemplified in minimal unemployment benefit payments and an increasing of disincentives to work), this could be an economic era similar to the 1970s when economic growth was slow, and interest rates elevated. That business era was marked with higher commodity prices and rapid descent of consumer and business purchasing power along with stagnating incomes and earnings levels, creating a host of economic challenges. Thanks to Paul Volker and friends with a successful and expertly crafted financial plan, they resolved this problem, including a rocket ship approach to interest rate increases, resulting in decades of relatively contained inflationary variance risks. It is this monetary foundation and expertise that has given us a golden business era. Stagflation concerns and implications were resolved most recently with the Tax Cuts and Jobs Acts.

The above 1970-80s resolutions to stagflation are unlikely and formulated on the contingent possibility that capitalism and industry dynamics prevail vs. an emerging new quasi-social economic order with universal basic incomes say. In that later scenario, we would be indeed on a bay towards entering financial waters that have yet to be entirely mapped, requiring foresight without precedents for successful business planning.

A Primer on Inflationary Business Conditions (Segment V)

Preface: “Time is the greatest commodity” ― Sunday Adelaja

A Primer on Inflationary Business Conditions (Segment V)

A respected appreciation of the foundational importance of planning properly for future capital investments can sometimes only be a distance management consideration for entrepreneurs during inflationary periods. At the onset, inflation results in an optimal economic and business opportunity, with long project backlogs combined perhaps with myopic optimism. What is often too ambiguous when the arrival of inflation is visible, and rightly so, is that it is directly impacting future financial capacity and future costs of capital investments for both individual and business.

When considering the almost forgotten and distant memory of the 2008 economic malaise and Great Recession, some experts say the real cause was an inflated residential housing price. Therefore, a deflated bubble led towards lower costs resulted in a complicated financial short-circuit of sorts leading to an economic recession. For those entrepreneurs who experienced those 2008 business adventures and subsequent recovery processes, it is noteworthy to say that the 2020 continuing Covid-19 induced financial implications will require the best of economic planning and management to avoid similar or more prolonged industry implications.

Yet, the financial world has successfully survived challenging scenario’s for decades. Before the 2008 banking concern, most of us do not remember vividly Arthur Burn’s 1974 reassuring scenario statement, “the entire financial world can breathe more easily, not only in this country but abroad” after the decisively successful action required during the Franklin National banking malfunction. For those unfamiliar with Franklin National, it was one of the world’s largest banks in the early 1970s. The CFO John Sadlik, along with the bank’s management, made critical undercalculations of marginal financing costs. A profuse zeal for top-dog status combined with other incremental principle compromises brought elevated financial fears to the entire global economy.

The solution? Only a $1.75 billion loan from the Federal Reserve to the member bank, along with regulatory assistance, reassured investors and delivered renewed confidence back to the global financial system. A satellite consideration of growing millennial acquisition concern with rising residential interest rates ( certainly not above 4.00%!) should make evident that absent subsidized future interest rates either through government programs or a general disconnects with inflationary market impetus, the financing of future capital investments, albeit new homes, or commercial buildings may have hoisted selling prices from rises in raw materials and perhaps wages.

Therefore, with the probable principal cost increase factors with inflation risks, absent other considerations, what square footage, and subsequent lifestyle, will be variably affordable at potential interest rate ranges? Secondly, what is the solution to maintain a stable managed velocity of money to drive needle RPMs up on the economic engine and prevent a de-ja vu of the 2008 financial malaise?

The prior year’s rapid increases in commodity prices since Q1 of 2020 should provide warranted general concern as to the future affordability or financing cash flows of any necessary capital investments from automobiles for freedom lovers to housing for main street occupants. Additionally look at agriculture prices and it reflection on future food costs. Is 20% a modest assessment of these price and cost increases in the prior 12 months? This does not mention the higher cyclical prices of corresponding future business investments of manufacturing equipment, facility, and infrastructure costs, or the land for such capital expenditures.

The now distant horizon of financing considerations of these future inflated infrastructure prices (equipment, buildings, machinery, land, or transportation assets) are often not front-loaded. Ultimately, in a hypothetical economic future, if the above described inflationary increases lead to runaway or hyperinflation, the deeply furrowed-brow results and societal implications are described well with Tennesse Ernie Ford’s words, “You load sixteen tons, what do you get? Another day older and deeper in debt.”

 

Should you refinance student loans during the coronavirus pandemic?

Should you refinance student loans during the coronavirus pandemic?

It can be a challenge to figure out the best way to manage your student loan in the best of times. During the COVID-19 pandemic, there are even more details to consider than usual.

On one hand, refinancing student loans may save money and help you eliminate debt faster. But taking out a new loan to combine your existing student loans isn’t the right move for every borrower.

Should you refinance student loans during the coronavirus pandemic?

 

A Primer on Inflationary Business Conditions (Segment IV)

Preface: ‘You build a baseball field, and you sit here, and stare at NOTHING? – Quote from the Field of Dreams

A Primer on Inflationary Business Conditions (Segment IV)

Inflation rates year-over-year since 2000 in the US have not exceeded the 2007 high of 4.1% as an estimated peak inflation rate. With this crucial tracking of historical US inflation data, why would there be any more significant or growing concerns regarding immediate or future higher inflation rates than usual inflationary effects to business conditions and corresponding risks? The answer is simply credit.

Considering the wave of upward economic mobility for all economic classes in recent decades from the financial stimulus of increasingly easy and easier credit access, there are increasing bands of comrades excited about the prospects of gain and wealth with investments in real estate, business, stocks, and other assets classes. Picture for a moment life without easy auto loans, home loans, and student loans, etc., combined with higher interest rates for debt service. The antithesis has created the best of the economic tropics sailing conditions for both business ebullience and wealth accumulation. More credit = more money = more buying power = (with the right expectations) more demand = higher prices.

The above is a critical equation because credit is the primary driving reason why more inflation is highly probable in the future. Easy credit can be compared to a successful marketing plan for a great game on a “Field of Dreams.” There will be a great crowd and lots of fun. Correspondingly, the money supply [ say M-1 or M-2] is the food supply for those at the venue. The longer the duration of the “Field of Dreams” series continues, and the larger the crowd and…..the more food will be required—is that why some individuals like to watch a robot’s reaction when given a new $100 bill.

The Feeding of the First Billion [or Trillion] of Credit

Perhaps you borrow ten million dollars from a bank? Considering current bank regulations, a lending bank is only required to hold a small percentage of those dollar funds in reserve to constitute and formalize the loan financing. That is the functional and elemental purpose of fractional credit financing. Just suppose you purchase a farm with the loan, and the seller of the real estate deposits the cash proceeds back in the same bank you obtained the financing from. That bank can fractionally lend additionally on those new reserves too.

Fractional lending practices are best exemplified with the Biblical story where Jesus feeds 5,000 from a story of one young and well-prepared attendee’s lunch that multiplies to provide a meal for more than 5,000 people. It leads to economic and financial miracles, much more, and all is well.

For lack of a better analogy, if a “Field of Dreams” game elongates and crowds prolonged, the food supply will be increasingly vital. Therefore, the money supply foundation, say M-1 and M-2, if it remains perhaps stagnate or deflations, another words a lacks of inflation, will manifest a marked shortage perhaps of proper nutrition at the “Field of Dreams” venue.

With this analogy of why inflation is the necessary decision on the path forward for central bankers to insulate and placate supply demands at the “Field of Dreams” venue, preparing for that possible risk is not irrational or amiss. This is to say that the “transitory” rhetoric from the Federal Reserve persons may not be entirely predictable because the government has a complete financial toolkit including a full set of tax management gismos, not to mention interest rates, stimulus plans, price controls, and alternative mediums of exchange for the good life.

It is essential to clarify that printing the money alone doesn’t create higher prices. Inflation is the increased velocity of the new money as it circulates through the economy. The velocity of money, new and old, is a variable managed on user expectations. These user management expectations include market prices like the S&P 500 or, say, oil prices. Therefore, emerging or accelerating inflation rates, perceptions and risks can be initially concealed with prudent management. Ultimately, as food is purposed for the perceived enjoyment of eating (survival or feast), so most money is purposed for the perceived enjoyment from spending (today or at a time in the future).