October 1, 1992 Why Banks Will Not Lend The current recession shows little sign of ending. How can that be? Interest rates are down and people and businesses want to borrow to expand since they don`t have the capital to further invest in their businesses to do so. The answer is simple, banks don`t want to lend! Why is that? The reason is clear; banks want a 4% point spread on their cost of funds. That is, when they pay you 3% on the money you have deposited with them they need to invest it at 7% to make their 4% spread. Today, they pay 3% on your savings accounts and buy U.S. Treasury notes at 7.4%. This is a risk free investment and they don`t have to hire loan officers to make loans or suffer any borrowers who will default. Their resulting profit goes through the roof, rebuilding the capital they lost in the recent go-go years. Now, is Washington all that displeased with this situation? Rhetoric aside, NO! If banks stopped buying government securities, thereby funding the deficit, interest rates could rise and the economy could do worse than it has! Tick Tax The average U.S. worker works 2 hours 45 minutes each day to pay federal, state, and local taxes, 4 minutes more than in 1991. In the average workday, 1 hour 46 minutes goes for federal taxes and 59 minutes toward state and local. Particular states are: Arkansas 2:29 Taxachusetts 2:45 California 2:49 New Jersey 2:49 Connecticut 3:04 New York 3:09 League of his Own The President ought to be commended for persistence. Again, he has brought up the spectre of capital gains tax cuts as the center of his plan for revitalizing the economy. History has shown that the single best way to revitalize an economy has been to cut taxes, specificly. capital gains taxes. Whether done by Republican or Democrat, JFK or Reagan the result is the same. People, you and I, will invest our money in riskier investments to obtain a potentially greater reward when we are rewarded for our efforts by paying less taxes for having accepted a greater risk than an interest yield. Today, if the capital rates were dropped I would be advising people to buy the stock of good companies. Since capital would be there, companies would issue more stock to pay for capital improvements, for newer and more efficient factories. The cost of money being less to issue stock than to borrow, companies would naturally do this. People would be employed to produce the equipment being bought and to do the new construction. (In New York the brokerage houses would hire people to handle all the new stock issues). The rich (a relative term) have the money. The poor benefit by having jobs. The economy thrives. Does capital gains work? You bet, it did in 1962 and 1982. Will it work? Why won`t it? IRS Releases 1992 Luxury Auto Depreciation Caps The Service has modified the depreciation dollar caps and changed the income addback table for higher priced autos purchased or leased in 1992. Because of the revised figures, the luxury auto is one costing more than $13,700(!) Assuming the auto is used 100% for business the depreciation is- First year $2,760 Second year $4,400 Third year $2,650 Each year thereafter $1,575 Taxpayers who lease their cars are subject to a parallel set of rules. They may fully deduct the business use percentage of their annual lease costs but must add back to income a set dollar amount called the inclusion amount during each of the lease years. For autos with lease terms that start in 1992 the special lease addback rules come into play if the car`s fair market value at the beginning of the lease exceeds $13,700 (!) ($13,400 for 1991). The addback during any year of the lease does not exceed $150 until the FMV of the auto exceeds $20,000. Moreover, the lease addbacks for 1992 are smaller than they were for leases beginning in 1991. The net result is a bigger lease deduction for taxpayers leasing "luxury autos" this year. Don`t Overlook Social Security The costs and benefits under the Social Security Act should be considered in financial and retirement planning. The annual cost of Social Security is expected to rise more than 50% in the next 9 years and the age at which you can begin to draw full retirement benefits will increase to 67. Plan now to avoid paying Social Security and to build your own nest egg. Do not rely on corporate defined benefit plans, since there is a trend by companies to terminate them. The reason-increasing government regulations. In 1981 it cost a small employer $20 more per worker for a defined benefit plan than for a 401(k). It cost a medium size company $2 a head more. By 1989 the cost difference had risen to $150 for a small company and $54 for a larger one. We can help you design your own retirement plan. Mexico The treaty between the U.S., Canada and Mexico will not be ratified or even seriously discussed until after the election. If it is ratified it will be the solidification of the North American continent as the economic hub of the world. If it is not ratified, the business that would have lost jobs to Mexico will still succumb to overseas competition, send their jobs to Mexico or go bankrupt. What is important is it appears that the industrialization and emergence of Mexico over the next thirty to forty years is irreversible. I agree with Michael Milliken that Mexico is the investment opportunity of the century. Talk to your brokers about ways for you and your children to become really rich. If you have any questions about these or other financial matters, please call me. We wish you a safe Halloween and an uneventful Mischief Night.