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Proposed Bank Account Monitoring and Supply Chain Solutions
You may have seen headlines recently about the IRS monitoring transactions in your bank account. Well we have received quite a few questions regarding this recent proposal so today we will be discussing the specifics of what is included and how it might affect you. We will also be covering some potential resolutions to the kinks in the supply chain that many of you are likely experiencing. Let’s start off with the very hot topic of the IRS Reporting Package regarding bank’s reporting thresholds proposed by the Biden Administration as well as Senate and House Democrats.
Early on, when the $3.5 trillion dollar reconciliation package was originally proposed, one of the suggestions to pay for it was to beef up the IRS’s ability to collect taxes. There was a claim that many people were avoiding taxes and if the IRS had more resources then it could help cover what we call the “Tax Gap.” As this idea was unpacked, the proposal included a $600 annual threshold, over which banks would be required to report transactions to the IRS. That means that if you had more than $600 coming into your bank account over a one year period then that information would be shared with the IRS. This raised concerns from banking associations and consumer privacy groups. According to Reuters, this past week, the Senate Finance Committee chairman, Senator Ron Wyden, proposed raising the annual aggregate reporting limit to $10,000 a year. The update proposal would also seek to exclude W-2 wage income by excluding certain direct deposits from being reported. If you have a paycheck hitting your bank account, then that would not be reported but any other deposits coming into your account or any other transactions coming in over $10,000 aggregate would be reported to the IRS. Also excluded from this proposal would be those receiving benefits through Federal programs such as social security, disability benefits, and things of that nature. Senator Ron Wyden believes this will empower the IRS to raise “hundreds of billions of dollars” catching those who evade taxes. There is certainly some concern among bankers about the technical infrastructure to carry out these reporting requirements. Doing this on every customer in the bank is a tall order, so you are going to continue to see bankers pressing against this bill. Certain consumers will also see this as a breach of privacy. Now remember, this all theoretical at this point and has not been passed into law. It is still under discussion by both houses, at this time.
Should this cause you to run out and take all of your money out of the bank? NO… and here’s why: Since the FDIC was chartered not a single depositor has lost money within the insured FDIC limits. This means that banks remain one of the safest places to store your money. When you withdraw a large amount of cash, you are taking on the responsibility of protecting your money and that comes with a great deal of risk. One of those risks is someone breaking into your home. Another more likely event according to law enforcement is a family member knowing where your cash stash is stored and stealing it. You could misplace it, or even if you buried it in your backyard you could forget where you put it. Regardless of the fate of this particular proposal, banks remain the sturdiest and most liquid places to keep and transfer your money. Am I just saying that because I’m a banker? I hope not. I really believe the modern banking system is the 8th wonder of the world and its presence facilitates the flow of capital unlike any invention in history. Being able to utilize someone’s deposits and redirect them into the economy by loaning those funds to others is truly a modern marvel. If you think that’s an overstatement, take a look at any undeveloped country’s economy and you may change your mind. It’s difficult to do business and hold capital in a safe way in those parts of the world.
Let’s move on to our second topic – potential resolutions to kinks in the supply chain. Have you been affected by the challenges in the supply chain? Maybe you ordered something and was told it would take 6 weeks, or even 12 weeks, for that item to come in. Is there any one culprit? No. There are challenges throughout the supply chain. It begins with manufacturing. We can’t seem to find enough people to make enough stuff to meet the demand that is out there. That demand has been increased because of incredible amount of cash that is flowing throughout the system. Even if you were able to find enough people to make enough stuff, you still have to find a way to get it delivered, which brings us to the next obstacle. Ports are backed up around the world. If you look at California in particular, there are boats waiting to be unloaded. If you were able to unload everything off the boats, you still don’t have enough trucks or enough drivers to get them to their ultimate distribution points. This brings up another log jam in the supply chain. There aren’t enough people to staff the retail outlets where these good are sold. And yet, in spite of the shortage of people working, there are still 8.3 million people who are unemployed in this country. This is a real mismatch that has some economists scratching their head leading some to consider whether stagflation is on the horizon. Stagflation is an economic condition in which prices are rising, but unemployment remains stubbornly high and growth is slow. This was the condition that persisted in much of the world in the 1970’s.
Although stagflation is certainly a possibility, I think a more likely outcome is slowing growth and a slowing of inflation. Growth cannot remain off the charts as it has been. It is already slowing from the sugar high of Covid stimulus that was pumped into the system. At banks all over the country there are more deposits than banks know what to do with. People have a higher savings rate right now leaving them with more money to do more things with. As the world puts Covid behind us, or figures out how to live with endemic Covid, the supply chain will slowly begin to repair itself. Economic incentive pushes new entrants into markets to help relieve capacity restraints. If prices are high, then others will be encouraged to enter the market. This will eventually lead to an easing or price increases and eventually a leveling off of prices. That being said, it is certainly possible that because the Covid recession was the shortest in history, the Covid recovery might be shorter than other historic recoveries. So looking beyond 2023 right now is incredibly murky, because we don’t know how high interest rates can rise right now before it puts the economy at risk of recession. Right now in the fed funds futures market there is an assumption that the Fed will begin tightening sometime next year raising short term interest rates. But if growth slows, however, that may be pushed back to 2023 tp start raising rates. That is my best guess based on what we know today, that the prime rate will begin to increase at the beginning of 2023.
What can you do to respond to this uncertainty? I continue to believe that one of the best things to do in an uncertain environment is to reduce your debt exposure. Reducing debt lowers your overall risk so that you are in very nimble position, whether inflations persists, stagflation enters the picture, or even if the economy finds a nice pace of steady growth. I think we can all agree that the greatest amount of growth in response to everything reopening is behind us and that any future growth will be at a much slower pace. Why not reduce your risk going into the next recession? We know that one is coming whether it is 2 years or 10 years from now, but you can be better prepared leading into it.
Have you ever heard of a bank that encourages you to pay down your debt? We’re not your ordinary bank. We try and take a holistic look at our clients’ financial goals and help you get to where you want to go. If you are getting ready to buy or build a home, or need to borrow money for your small business. We can show you how to do all these things well. Start your financial conversation today…If you’ve enjoyed our podcast, we’d love for you to subscribe and share with your friends on social media. Until next time… God Bless.
– President Chad P. Wilson, CFP
Today’s episode of “Money Matters” was written and recorded by President Chad P. Wilson of McKenzie Banking Company / Foundation Bank on October 26, 2021. This episode does not constitute financial advice. Please consult a financial professional to discuss your specific needs. MBC/Foundation Bank is an Equal Housing Lender, Member FDIC.