Senator Lugar’s Loss Hints at Higher Taxes and Deflation
In conservative Indiana the incumbent Senator Richard Lugar was defeated in the primary today by a Tea Party Republican, state Treasurer Richard Mourdock. This gives the Democrats a chance to get this Senate seat which would increase the chances of no repeal of the tax increase scheduled in 2013. A tax increase during a time of high unemployment is a classic way to create deflationary economy. In less than eight months new Federal taxes will create 5% drag on the economy during a time when the population adjusted “real” rate of job creation is zero and the GDP growth rate on a warm weather adjusted basis is probably 1%, which is below the 2% “stall” speed. This means the economy will stall out into a recession. Since stock markets often anticipate events ahead of time then the crash may come months before January.
Of course if the Tea Party candidate wins the November election then there will be more budget deadlocks in Congress with the threat of Treasury default, which can hurt financial markets. And if the Tea Party actually did take full control of Congress they would have a massive austerity program that would not help to create jobs, although in the long run cutting government expenses, assuming taxes were also cut in tandem, could help the economy.
I wrote an article “Romney victory won’t fix stock market.”
Investors should seek independent financial advice.