I know I wrote this diary once but it is so important because it cuts the legs out from the Republicans when they have people convinced that they are good for the economy. Like every Republican Administration, except for Ike, they SUCK when it comes to the economy.
This diary was hardly recommended the first time around and it got one extra shot from Susan (thanks)but not enough liberals read it. But where are the prolific writers and thinker on Dkod...can they not understand these financial concepts, just like we complain about the MSM? Do they hate thinking about the economy? Do they not realize how important this is to the fondation of the Republican Party. Why didn't they recommend it" Why didn't Bonddad recommend it?
There are a few extra things in those that were not in the first diary and I will mark those ideas with [Updates].
Please read this and recommend it so that all of our side has something to throw at boasting and lying Republicans when they talk about the great Bush economy.
As a basic premise for this essay I want to talk about investments and what affects their prices. There are some major factors and they are safety, available money and yield. Let’s start with yield. Obviously, the higher the yield, the more the investor will pay. For example, Pfizer was selling for $25.98 on July 13, 2007 and the expected dividend for the next 12 month I s $1.20, that gives a pre-tax yield of 4.62%. Under Clinton, that would have been taxed at 39.4 % and the after tax yield would be $2.80. Under George W. Bush it is taxed at only 15% and if sold after holding it for more than 1 year, the capital gain would be taxed at only 15% or an after tax yield of $3.93 or 40% higher.
As a basic premise for this essay I want to talk about investments and what affects their prices. There are some major factors and they are safety, available money and yield. Let’s start with yield. Obviously, the higher the yield, the more the investor will pay. For example, Pfizer was selling for $25.98 on July 13, 2007 and the expected dividend for the next 12 month I s $1.20, that gives a pre-tax yield of 4.62%. Under Clinton, that would have been taxed at 39.4 % and the after tax yield would be $2.80. Under George W. Bush it is taxed at only 15% and if sold after holding it for more than 1 year, the capital gain would be taxed at only 15% or an after tax yield of $3.93 or 40% higher.
So, the investor realizes that he can pay more for that stock and because of the special tax treatment, takes his money out of corporate bonds, which have no special tax rate, and buys stock. Every company’s stock has a 40% higher after tax yield, which means investors will pay more for all stocks, including those on the very visible Dow, S&P500 and the NASDAQ. Keep in mind, nothing got better about these companies to instigate an investor to pay more. The only thing that made him choose to pay more is the special tax treatment.
Now, throw in that there will be extra money lying around from these reduced tax rates, that too will up the prices of everything and it will also affect the Dow, S&P500 and the NASDAQ, with a true increase of the individual companies’ net worth. To the Republicans, the success of the Dow, S&P500 and the NASDAQ, means the success of the economy, but it’s not true.
What do you think happens if the Democrats bring the tax rates back to 39.4%, as they were under Clinton? Each investor will now get less of an after tax yield, so they will pay less causing the Dow, S&P500 and the NASDAQ to plummet downwards, without any lessening of the individual company values, other than stock price. In September 08 I will buy corporate bonds and get out of the market. It would be a good idea that Democrats get this out now so they aren’t blamed for the indexes going down when they take over.
It is so simple that it is sick that nobody has written about this. I can’t believe it took me this long to figure it out.
This "Bush Economy" is one of the worst in history. However, they have disguised their incompetence with tax decreases that are throwing us so deep in debt that we will be paying that interest forever. So, in effect, the minor and temporary increase in the Dow, S&P500 and the NASDAQ will not only go away when the tax laws are changed but the debt created to fund the tax decreases will need to be paid back or we will be paying interest forever. Since we can’t pay it back...you know the rest.
The Bush economy has really gone nowhere. Look at last Friday’s Dow at13,851. So, let’s take off the tax effect of the 15% bracket. $13,851 less 40%=$13,851-$5,540=$8,311. The Dow on the day George W. Bush took office was $10,700. So, where have we gone?
Even if the tax effect was only half of the increase in yield or 20%, you would have a Dow at $11,081 or a piddling 381 points higher after 6 1/2 years with more money to the wealthiest individuals. So we have gone; nowhere but we’ve created trillions more in Debt. It’s voodoo economics again, and we didn’t see it coming. Because of the fluctuations in the indexes, American companies are no better equipped to make money than they were before the tax decreases and when the tax rate for dividends goes back up to 40% under the Democrats, the indexes will go down but who cares? It will also mean we have stopped the bleeding in the race for the highest National Debt, ever.
With regards to unemployment being an economic indicator, you have to realize from where it is coming. I don’t think for a second that our unemployment rate is 4.5%. I’d believe those figures as much as I believed there were weapons of mass destruction, we will be greeted in the streets of Baghdad with flowers and Dick Cheney has integrity and a conscience. With Bush, Cheney and Rove, there is nothing you can believe.
Welcome back to trickle down, to disguise their inability to think and do what is right and necessary. And do not buy the lower cost of capital bullshit because capital under Old Man Bush was as cheap as could be, with interest rates at 2 and 3% and still there was no investment, which ultimately threw him out of office.
Another temporary stimulus is the Defense spending for the War. That also ups the exchanges and when it is over will cause them to go down.
These are very important concepts that we all need to know and I hope this gets recommended and discussed for days and weeks and right up to the election.
[update]
It was said of the first diary that I did not mention the factor of interest rates. When you talk about yield, you talk about it in comparison to interest rates or more likely the "risk free rate" which has as its basis Treasury Securities. Most valuations begin with the risk free rates and based in the amount of increased risk over a given time period, the investment is valued accordingly. There are also marketability discounts, minority discounts, etc. Interest rates have gone up but not dramatically.
It was also said that a portfolio of just Bonds is not balanced. That's correct but I believe that if the Democrats are elected they will get rid of the 15% bracket on dividends and long term capital gains will go back to 28%. That will blow the air out of these inflated stock prices that were artificially pumped up by after tax yield and all the extra money the wealthy were given as tax gifts, in a time of war.
What I should have said more clearly was that before the Democrats get elected, switch over everything to Bonds...everything. Then when tax reform happens or when it becomes inevitable that it will and the market reacts to it, the prices of stocks will drop hard and the prices of Bonds will go up. Once they reach the level that is most correct under a reasonable tax system, then go back and re-buy the better stocks you sold. The market will go down and the bonds will go up, there is no question of that, if there is tax reform.
Finally, there is another level of the pyramid that I forgot about. Once the prices come back to where they should be (down for stocks), investors who bought high will show losses and that becomes a reduction of Gross Income on their tax returns and that money has to be paid back. So, we are sitting with another embedded debt to investors who overpaid for stock in the Bush phony stock market. In a sense that makes the National Debt even worse than we think it is.
If we want to take over the leadership of this country, we need to be very conversant with financial concepts because we have to stop the Republican lies. I cannot believe that Elwood's router diary made the front page on recommendations and this one did not. That shows one very big problem. I don't have the time to write perfect essays. I am just too busy with my work but the ideas in here are just as important as Alberto Gonzales...actually a lot more important.
Read it and recommend it, please.