BLANCO: Tapped Out – The Coming Economic Crisis

We warned you that inflation was coming, that tough economic problems were on the way. At the same time, Pendejoe and his group of experts told you not to worry, this was just transitory, his economic plan was working, and we have the greatest economy ever, so they said.

Coming up on a year later, inflation is still here, it’s growing, and Pendejoe is telling you that it’s everybody else’s fault. It’s Putin, Oil Companies, Trump, January 6th Reichstag protestors, Pandemic. It’s everybody else’s fault except Pendejoe’s. In fact, it’s your fault because you don’t recognize how good the economy is and now Pendejoe and his minions need to tell you how great it is.

Gas prices are crushing the middle class. I’m sure you don’t need me to tell you that. The media finally figured out that it was hurting the middle class. Certainly you will see one of their “tips to save” articles coming out. It will be chock full of information you already know. Kind of like my “tips for staying hydrated during summer” which include, “drink lots of water,” “take an umbrella with you for shade and it could keep you dry when it rains.” My personal favorite, “Use an air conditioner. If you don’t have an air conditioner, get a fan.” Those “tips” come long after people have already figured out how to combat the problem. I suppose I should release my hydration tips right after the 4th of July in keeping with media tradition of being late to the party.

I digress. The point of this article is that I believe we are at peak gas prices and, in fact, may already be on a rapid decline. I know what the experts say, we’ll see $5.50 or higher gas prices still to come. We know experts are never wrong so we must believe them. Still, I’m going to go against the trend and declare that we will see a rapid decrease in gas prices that will continue for a couple of months. And while we all welcome lower gas prices, I don’t think this bodes well for the economy.

Allow me a moment to explain why I am a supply sider or what the Democrats call “trickle-down economics.” You hear the term “tax breaks for the rich” and that is supposed to be what supply side economics is all about. Unfortunately, that’s simply not true. There’s not enough rich people to stimulate the economy by giving them tax cuts. I’m not opposed to including them in the tax breaks, but in order for supply side economics to work, the 60% of society known as the middle class must be the beneficiaries of tax cuts. Their taxes must go down. Most importantly taxes must go down for the producers of goods and services – the “supply side” of the economy – so that they’re incentivized to produce more supply.

And the best way to do that is to make more small businesses, because those are the ones who grow the fastest. And that means you’re targeting the middle, or at least upper middle, class of taxpayers for relief.

By reducing the tax burden on the middle class, they are keeping more of what they earn. This becomes “disposable income” for them since they are already paying the necessities on the current salary sans tax cuts. They start going out to eat more, go to entertainment venues, have family gatherings more often, etc. They spend that extra money and in doing so, increase the demand for various products. Restaurants higher more staff, hours go up, and tips become better. People have more money to spend at events, which creates more events. In short, money flows more freely and people do better economically. There’s more opportunity for people to move out of poverty as the economy does better. As an added bonus, tax revenues actually increase and there is the opportunity for government to get spending under control.

In contrast, when government increases taxes on the middle class, it has the opposite effect. The middle class has less disposable income, therefore the economy contracts. The more government increases taxes on the middle class, the more the economy contracts, and yes, government revenue will actually decrease due to the domino effect.

I could get deeper into Supply-side/Demand-side economics, but if you understand Supply-side, you already get the gist of why I believe gas prices will drop dramatically.

One important thing to understand about economics is that all products have what is called “Elasticity.” The link will give you a better definition, but a short version is, how much a price can fluctuate before demand for that product changes. Some products, the slightest change in price will cause sales to drop off dramatically. Other products, such as gasoline, can sustain price increases while still not affecting sales. However, all products have a price point that if the price exceeds it, sales drop and drop fast.

Gasoline is clearly inelastic. We need it. We need it to go to work, transport goods, travel, etc. The price of gas can change and we will still buy it because it’s vital to our businesses. We can’t make money without it. We are willing to buy gasoline until it is no longer profitable for us to buy gasoline. One advantage that consumers do have over the price of gas is that gasoline evaporates. The evaporation of gasoline is already factored in to the price, but the longer gas  remains unsold, the more it evaporates and the more missed sales. If gas isn’t being sold, the price comes down to a price point that will sell. Evaporation isn’t a huge deal, but it is important for to these companies that they sale the gasoline before the shelf life expires. The longer it takes, the more they lose. In other words, they can’t just sit on gas and gouge consumers. If the supply of gasoline exceeds demand, price comes down to bring demand up.

Gas prices are gouging consumers, and like raising taxes too high, gas is taking too much out of the budgets of the middle class. It’s brutalizing them and they are going to have to cut back on their spending. Add to that food prices are skyrocketing and energy prices are increasing. The necessities in life are working much like a government taking too much money out of people’s pockets. The middle class have seen their disposable income disappear and are having to make cutbacks. They are going to cut some entertainment back. Cutting subscriptions to Netflix, Hulu, and especially cable TV is already happening. More importantly, people will cut back on going out to eat, eat more frugally, or cut it out completely. This means waitstaff will have less labor hours and less tips. Business will scale down which means… less employees spend less money on gas to go to work.

While our entire economy doesn’t rely on waitstaff getting tips, they are still a part of our economy. It would be bad enough if it were just the restaurant industry, but it’s not. The middle class are having to make adjustments in their personal economies. The middle class is making decisions to conserve gas, to buy cheaper clothes, to eat more affordably. The middle class is doing what they need to do to make ends meet. Too much money coming out of the pockets of the middle class and you have a recipe for an economic disaster.

The Atlanta Fed is already predicting zero growth for the 2nd quarter, after a 1.5 percent contraction in GDP in the 1st quarter. That’s a recession. And it’s far from over.

While I believe we are at peak price point for gasoline, in fact, we may be past it and start seeing the sharp decline any day now.  While Pendejoe and the Democrats will be the first in line to take credit for the falling gas prices, this is not the miracle you hoped for. In fact, this is your warning sign. Watch your investments closely, the real economic trouble is right around the corner. Even if I am wrong about this happening now, the middle class is getting tapped out and it’s just a matter of time before the economy contracts.

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