Will Tax Reform Increase or Limit Liberty?

President Trump and the congressional Republican leadership recently unveiled a tax reform ‘framework.’ The framework has a number of provisions that will lower taxes on middle-class Americans. For example, the framework doubles the standard deduction and increases the child care tax credit. It also eliminates the alternative minimum tax (AMT). Created in the 1960s, the AMT was designed to ensure the ‘wealthy’ did not use ‘loopholes’ to ‘get out of’ paying taxes. Today the AMT is mostly a means to increase taxes on the middle class.
The framework eliminates the ‘death tax,’ thus enabling family-owned small businesses and farms to remain family owned. It also helps the economy by lowering the corporate tax rate to 20 percent, reducing taxes on small businesses. The framework also adopts a territorial tax system, which means US companies would only pay tax on profits earned in the United States.
However, the framework is far from a total victory for liberty. Concerns have been raised that, depending on what income levels are assigned to what tax brackets, the plan could increase taxes on many middle- and lower-income Americans! This is largely due to the framework’s elimination of most tax deductions.
The framework also contains a stealth tax increase imposed via the chained consumer price index (chained CPI). Supporters of chained CPI clam the government is currently overstating inflation. The truth is exactly the opposite: government statistics are manipulated to understate inflation.

This post was published at Ludwig von Mises Institute on October 10, 2017.

The Irony of Stable Inflation

In February 2000, the FOMC quietly switched from the CPI to the PCE Deflator as its standard for inflation measurement. There were various technical reasons for doing so, including the CPI’s employment of a geometric mean basis (which was in 2015 finally altered to a Constant Elasticity of Substitution formula). But it was one phrase that in hindsight did the Fed no favors, as it explicitly cited the expected fruits of the PCE Deflator’s methodology which would ‘avoid some of the upward bias associated with the fixed-weight nature of the CPI.’
I am not a conspiracist by any means, but there are times when you have to shake your head as these economists lack even a modicum of self-awareness. The central bank has been given a legal mandate for price stability, so the average American might wonder why that central bank is allowed to choose the measure most inherently stable (and low). At the very least, it seems like a conflict of interest, one among so many.
In that regard, the last five years have been almost fitting. The PCE Deflator has, as expected, avoided the higher beta tendencies of the CPI and in both directions. For that, it has remained stable, alright, but stable below target no matter what the Fed does with its own balance sheet. I hope the irony is not lost on them, especially as it was oil prices that ‘achieved’ what they could not despite considerable expenditure on their part.

This post was published at Wall Street Examiner on May 1, 2017.

It Was All A Dream – – Japan’s Monetary Fiasco Removes All Doubt

Last Friday the Statistics Bureau of the Japanese Ministry of Internal Affairs and Communication reported some more bad news for Prime Minister Abe and really Bank of Japan chief Kuroda. Month-over-month, the consumer price index was down again, leaving it 0.48% less in June 2016 than June 2015. This was the third consecutive month of increasingly negative year-over-year CPI estimates.
When QQE was first implement back in April 2013, its staff economists guessed that it would take two years to get Japan back to 2% inflation; the standard target for almost all the central banks in the ‘developed’ world. The point of QQE as apart from all prior QE’s, and there had been nine or ten before it depending on your definitions, was that it would be so big, powerful, and sustained that the ‘deflationary mindset’ that had, according to orthodox economists, gripped Japan for decades would be forced to surrender to this new monetary regime. Two years was their conservative forecast.
The Bank of Japan did achieve the first part; the central bank has, as of the latest balance sheet figures for June 2016, quadrupled the level of bank reserves in Japan. The end of month balance in March 2013 was 52.6 trillion, a number that at the outset of prior QE’s was already supposed to be impressive, further meaning that it wasn’t as if BoJ was starting from nothing. More than three years and an acceleration of QQE later, there are now 272.6 trillion of bank reserves in Japan, an increase of 418.2%.

This post was published at David Stockmans Contra Corner by Jeffrey P. Snider ‘ August 3, 2016.

Forget The Fed Model’s High PE/Low Interest Rate Theory – – History And Logic Deny It

A few days ago I examined the relationship between the stock market PE and CPI inflation. The reason was the sudden renewed emphasis on low inflation in the context of trying to justify increasingly outlying earnings multiples in stocks. Earnings fell sharply in 2015, but prices really didn’t; there was, at most, only more volatility spread across sideways trading (even including recent record highs). EPS haven’t as yet recovered and there are growing signs that risks to the earnings recovery have only increased, not decreased. By simple math, then, stocks are trading on very shaky ground at already high multiples and greater uncertainty that it will all be corrected naturally by the any-day-now thriving economy; leaving prices as the more likely motivated method for convergence.
Inflation is but one of the inappropriate attempts to justify high PE’s; as one reader pointed out (thanks to RUI), there is also the interest rate comparison to the stock earnings yield. The inverse of the PE is the EP ratio, which is supposed to be a relative comparison of stocks to bonds. The current PE ratio, according to Robert Shiller’s data, is an alarming 23.7 as of the latest earnings, which are for December 2015. Since earnings haven’t improved much at all since then, while prices are somewhat higher, the valuation imbalance has likely grown worse over the interim.
But if you flip the ratio around, the so-called earnings yield is a ‘healthy’ 4.21%. Compared to a 10-year UST yield around 2% at the time, and now much less, the EP theory would imply that stocks are not at all overvalued in comparison to UST’s. You might even go so far as to suggest stocks have a lot of room for even more multiple expansion.
This theory was popular during the dot-com bubble, and much less so after it. It had been around for some time, but Alan Greenspan testified to Congress in February 1997 that:

This post was published at David Stockmans Contra Corner on July 21, 2016.

The Proof Is In From Japan – – QE Is An Absolute Failure

Nominal disposable income in Japan fell 4.4% year-over-year in May 2016. In what can only be a sign of the times being far too familiar in Japanese, realdisposable income was thus slightly better at ‘only’ -3.9%. For all the hundreds of trillions in new Japanese bank reserves provided by so many QE’s I have lost count, ‘real’ in Japan means better than nominal since the CPI is negative yet again. For the month of May, the overall CPI was -0.38% less than May 2015; excluding imputed rent, the CPI was -0.48% below the same month a year earlier.
On the economic side, household spending fell in the latest update. Like DPI, nominal spending declined year-over-year by 1.6% while real household spending contracted by ‘only’ 1.1%. In the 28 months since January 2014, real household spending has astoundingly fallen in 24 of them. Since the start of QQE in April 2013, spending in real terms is down more than 6%, while real current income is 5% lower. At this point, the fact that QQE didn’t work is a blessing since Japanese households can really bear no more of the monetary genius-ness.

This post was published at David Stockmans Contra Corner by Jeffrey P. Snider ‘ July 7, 2016.

Bubble News From The Nosebleed Section

For months the talking heads had been saying that the economy is resilient owing to the ‘strong’ monthly jobs numbers. But this morning one of Bubblevision’s usual suspects pivoted to the reverse. The May jobs barf-bag can be safely ignored, he advised, because a bunch of other stuff is ‘strong’ including industrial production, autos and today’s retail sales report for May.
Let’s see. May retail sales were actually up just 2.5% over prior year, and that was down from the prior three month average, which was up by 2.8% from the comparable 2015 period. That looks more like deceleration than rebound, and most definitely not evidence that consumers are fixing to shop until the drop at any time soon.
Besides, with inflation in the 1.5%-2.0% zone – -or even higher by our more accurate Flyover CPI – – what’s so strong about real spending growth of less than 1%?
Likewise, there is nothing which spells a steaming rebound in the industrial production data. The overall index is down nearly 4% from last summer’s peak, while mining and oil production are down 12%. Even consumer goods production is flat, and still nearly 10% lower than its pre-crisis level.

This post was published at David Stockmans Contra Corner by David Stockman ‘ June 14, 2016.

Losing Ground In Flyover America – – Wanting For Work, Buried In Debt, Part 4

The flyover zones of America are wanting for work and buried in debt. That’s the legacy of three decades of Washington/Wall Street Bubble Finance. The latter has exported jobs, crushed the purchasing power of main street wages and showered the bicoastal elites with the windfalls of financialization.
The graph below depicts the main street side of this great societal swindle at work. There are currently 126 million prime working age persons in the US between 25 and 54 years of age. That’s up from 121 million at the beginning of 2000.
Yet even as this business cycle is rolling over, the 77.1 million employed full-time from that pool is still 1.2 million below its turn of the century level and accounts for only 61% of the population. On top of that, average real hourly wages have fallen by 7% (based on the Flyover CPI), as well.
It might be wondered, therefore, as to how real consumption expenditures rose by $3.1 trillion or 38% during the same 16-year period?
The short answer is transfer payments and debt, and those troublesome realities go right to the economic blind spots of our Keynesian monetary suzerains. These paint-by-the-numbers economic plumbers care only about the great aggregates of spending and whether or not the bathtub of so-called ‘full employment GDP’ is being filled to the brim.
As a consequence, the ideas of quality, sustainability, efficiency, discipline, prudence or, for that matter, even economic justice and equity, never enter the narrative. It matters not a wit whether the considerable expansion of PCE depicted above originated in disability checks, second mortgages, car loans at 120% loan-to-value – -or even if it was deposited by a passing comet.
What counts is the incremental gains in GDP compared to last quarter and proxies for demand such as job counts and housing starts versus prior month. And when the business cycle eventually ends, there is always a scape-goat to blame, such as an oil price shock or Wall Street meltdown.
By contrast, no Fed head ever asked whether real PCE growth of nearly two-fifths during a period when the number of prime-age full-time workers went down and real wage rates dropped was healthy or sustainable.

This post was published at David Stockmans Contra Corner on June 1, 2016.

Losing Ground In Flyover America, Part 2

There has never been a more destructive central banking policy than the Fed’s current maniacal quest to stimulate more inflation and more debt. That’s what is killing real wages and economic vitality in flyover America – -even as it showers prodigious windfalls of unearned wealth on Wall Street and the bicoastal elites who draft on the nation’s vastly inflated finances.
In fact, the combination of pumping-up inflation toward 2% and hammering-down interest rates to the so-called zero bound is economically lethal. The former destroys the purchasing power of main street wages while the latter strip mines capital from business and channels it into Wall Street financial engineering and the inflation of stock prices.
In the case of the 2% inflation target, even if it was good for the general economy, which it most assuredly is not, it’s a horrible curse on flyover America. That’s because its nominal pay levels are set on the margin by labor costs in the export factories of China and the EM and the service sector outsourcing shops in India and its imitators.
Accordingly, wage earners actually need zero or even negative CPI’s to maximize the value of pay envelopes constrained by global competition. Indeed, in a world where the global labor market is deflating wage levels, the last thing main street needs is a central bank fanatically seeking to pump up the cost of living.
So why do the geniuses domiciled in the Eccles Building not see something that obvious?
The short answer is they are trapped in a 50-year old intellectual time warp that presumes that the US economy is more or less a closed system. Call it the Keynesian bathtub theory of macroeconomics and you have succinctly described the primitive architecture of the thing.

This post was published at David Stockmans Contra Corner by David Stockman – May 26, 2016.

Why Flyover America Is Sinking: The Four Horseman Of Inflation – – -Food, Rent, Medical, Energy

It may come as no surprise that in the aftermath of an epic single-family housing boom and subsequent bust, millions of more people have been renting – without much new multifamily housing supply until recently.
This situation has let to strong gains for apartment REITs and an astonishing ability for property owners to raise rents.
Now a research paper by Rob Arnott and Lillian Wu of Research Affiliates in Newport Beach, Calif. asks why the CPI doesn’t reflect the inflation that is apparent in places where people spend their money.
Arnott and Wu argue that the four biggest expenditures for most people – rent, food, energy, and health care – have been rising. Since 1995, rents have been rising at 2.7% clip, energy at a 3.9%, food at 2.6%, and health care at 3.6%. Notably, these four expenses account for 60% of the aggregate of people’s budgets, 80% of middle-class budgets, and 90% of the budgets of the working poor.

This post was published at David Stockmans Contra Corner on May 23, 2016.

The Inflation Targeting Scam And Why It Guarantees The Mother Of Financial Meltdowns

The estimable Martin Feldstein put the wood to the Fed in a recent op ed and in so doing hit the nail directly on the head. He essentially called foul ball on the whole inflation targeting regime and the magic 2.00% goalpost in part due to the measuring stick challenge.
A fundamental problem with an explicit inflation target is the difficulty of knowing if it has been hit.
That problem is plainly evident in the chart below. You could very easily make the argument that goods prices are beyond the Fed’s reach because they are set in the world markets and by the marginal cost of labor in China and the EM.
Therefore the more domestically driven CPI index for services such as housing, medical care, education, transportation, recreation etc. is the more relevant yard stick. Alas, if there is something magic about 2.00%, why then, mission accomplished!

This post was published at David Stockmans Contra Corner by David Stockman ‘ May 19, 2016.

Janet Yellen: Monetary Arsonist – – – Armed, Dangerous And Lost

Simple Janet should have the decency to resign. The Fed’s craven decision last week to punt on interest rate normalization is not merely a reminder that she is clueless and gutless; we already knew that much.
Given the overwhelming facts on the ground – – 4.9% unemployment, 2.3% core CPI and a 23.7X PE multiple on the S&P 500 – -her decision to ‘pause’ after 87 months of ZIRP actually proves she is a blindfolded monetary arsonist – -armed, dangerous and lost.
That’s right. In the midst of vastly inflated and combustible financial markets, the all-powerful Fed is being led by a Keynesian school marm stumbling around in an explosives vest. She apparently has no idea that a 38 bps money market rate is not a pump toggle on some giant bathtub of GDP; it’s an ignition fuse that is fueling the greatest speculative mania in modern history.
Janet and her posse of pettifoggers don’t even have the ‘Humphrey-Hawkins made me do it’ excuse any longer. The truth is, there is nothing in the act that says they must hit 2.00% inflation to the second decimal point or anything else more specific than ‘stable prices’. Nor is there any quantitative target for full employment, let alone something like 4.85% – – since we apparently are not there at 4.90%.

This post was published at David Stockmans Contra Corner by David Stockman ‘ March 21, 2016.

Yellen’s March Madness

That was….surreal. It kind of says everything you need to know about yesterday’s statement and SEP that the first question Yellen answered yesterday was ‘does the Fed have a credibility problem?’ Her incoherent reply to that query, as well as further attempts to defend the indefensible, represented one of the worst performances that Macro Man can recall seeing since Brazil’s implosion in that World Cup semifinal a couple of years ago. In that vein, let’s look at some ‘highlights’ of the press conference through the prism of football chants:
On the heels of higher than expected core PCE inflation and a fresh high in core CPI released yesterday, the Fed leave its 2016 core PCE forecast unchanged and marks down its 2017 forecast:

Despite recent upside surprises in core inflation and a nascent bounce in commodities, the Fed median dot drops 0.50% in 2016 and 2017. At this juncture it seems clear that the only purpose of the dots is to be marked lower.

This post was published at David Stockmans Contra Corner on March 18, 2016.

Inflation Targeting – The Central Bankers Engine Of Serial Financial Crises

BEIJING – Fixated on inflation targeting in a world without inflation, central banks have lost their way. With benchmark interest rates stuck at the dreaded zero bound, monetary policy has been transformed from an agent of price stability into an engine of financial instability. A new approach is desperately needed.
The US Federal Reserve exemplifies this policy dilemma. After the Federal Open Market Committee decided in September to defer yet again the start of its long-awaited normalization of monetary policy, its inflation doves are openly campaigning for another delay.
For the inflation-targeting purists, the argument seems impeccable. The headline consumer-price index (CPI) is near zero, and ‘core’ or underlying inflation – the Fed’s favorite indicator – remains significantly below the seemingly sacrosanct 2% target. With a long-anemic recovery looking shaky again, the doves contend that there is no reason to rush ahead with interest-rate hikes.
Of course, there is more to it than that. Because monetary policy operates with lags, central banks must avoid fixating on the here and now, and instead use imperfect forecasts to anticipate the future effects of their decisions. In the Fed’s case, the presumption that the US will soon approach full employment has caused the so-called dual mandate to collapse into one target: getting inflation back to 2%.
Here, the Fed is making a fatal mistake, as it relies heavily on a timeworn inflation-forecasting methodology that filters out the ‘special factors’ driving the often volatile prices of goods like food and energy. The logic is that the price fluctuations will eventually subside, and headline price indicators will converge on the core rate of inflation.

This post was published at David Stockmans Contra Corner on October 29, 2015.

Crazy Train: Rents Skyrocket While Core Inflation Remains Nonexistent (Fed Can’t Generate Inflation)

All aboard the central bank crazy train!
The Consumer Price Index (CPI) fell 0.2% in September. The Fed continues to fail to generate ‘inflation.’
But the real crazy train is housing where rents are skyrocketing at 3.09% YoY, the Case-Shiller 20 home price index is rising at 4.96% YoY, while CORE CPI YoY is only rising at 1.3% YoY.

This post was published at David Stockmans Contra Corner by Anthony B. Sanders ‘ October 15, 2015.

Inflation Targeting Unmasked – – -The August CPI Crushed The Case For ZIRP

Well, that was timely. The August CPI came in at -0.1% and is up a mere 0.2% over the past year. So Janet Yellen can now say, look ma, no inflation!
Once again, therefore, the Fed has an excuse to keep shoveling free money into the casino. If Stanley Fischer insists that more evidence is needed that consumer inflation is progressing toward its intended 2% destination, and Bill Dudley persuades Yellen & Co. that financial conditions have already ‘tightened’ by 25 basis points, as measured by Goldman’s spurious Financial Conditions Index (GSFCI), we will get the 81st month of ZIRP; and with it a short-lived relief rally, not the Wall Street hissy fit that is long overdue and eventually unavoidable.
Alas, we will also get a vivid demonstration that main street America is being put in harm’s way by the posse of cowards, dissemblers and academic fanatics who run the world’s most powerful central bank. The evidence is right below in the summary table from this morning’s BLS inflation report.

This post was published at David Stockmans Contra Corner by David Stockman ‘ September 17, 2015.

Inflation Targeting Unmasked – – -Today’s CPI Crushed The Case For ZIRP

Well, that was timely. The August CPI came in at -0.1% and is up a mere 0.2% over the past year. So Janet Yellen can now say, look ma, no inflation!
Once again, therefore, the Fed has an excuse to keep shoveling free money into the casino. If Stanley Fischer insists that more evidence is needed that consumer inflation is progressing toward its intended 2% destination, and Bill Dudley persuades Yellen & Co. that financial conditions have already ‘tightened’ by 25 basis points, as measured by Goldman’s spurious Financial Conditions Index (GSFCI), we will get the 81st month of ZIRP; and with it a short-lived relief rally, not the Wall Street hissy fit that is long overdue and eventually unavoidable.
Alas, we will also get a vivid demonstration that main street America is being put in harm’s way by the posse of cowards, dissemblers and academic fanatics who run the world’s most powerful central bank. The evidence is right below in the summary table from this morning’s BLS inflation report.

This post was published at David Stockmans Contra Corner on September 17, 2015.

4/9/15: Russian Inflation: Forget CPI, Look at Bribes Pricing

On a ‘light’ Friday night note, a cheering report of inflation found somewhere (not in the ECB land, alas). Per Interfax report (link here) average bribe extended in Russia rose almost 3-fold to over RUB600,000 in Ruble terms. Between September 1, 2014 and August 31, 2015, according to the independent report prepared by anti-corruption organisation “Clean Hands”, rose to RUB613,700 or USD9,440. A year ago, average bribe extended in Russia stood at RUB218,400 or USD5,600.
That’s USD inflation of 40.7% y/y or more than 2.5 times the rate of CPI in Russia.

This post was published at True Economics on September 4, 2015.

Fed Is Not Just Behind The Curve, It’s Driving The Bus Over The Cliff

So the Fed didn’t raise rates again. And the timing of the rate increase will be data dependent. Ho hum.
There’s just one little problem. The inflation measures the Fed watches really don’t measure inflation. The Fed won’t see what its cronies in the government and economic establishment refuse to measure, which is that we’ve already long since passed the Fed’s 2% inflation target.
Every 3 months the US Census Bureau releases the results of its quarterly housing survey. We now know that rents rose by 6.2% year over year in the second quarter. But the fictitious number that the BLS uses to account for housing costs in the CPI, called Owner’s Equivalent Rent (OER), is only up by 2.9% year over year. The difference of 3.3% is known by the technical term: fudge factor. In this case, the BLS is undercounting the housing component of CPI by more than half.
Owner’s equivalent rent and actual renter’s rent account for 31% of the total weight of the CPI. Multiplying the weighting of this component by the 3.3% fudge factor cuts a full 1% off the headline CPI and 1.3% off core CPI. If rent were counted accurately, headline CPI would be 2.2%, year over year, not 1.2%. Core CPI (excluding food and energy) would be 3.1%, not 1.8%.
Since Core has lately been stronger than the headline number, the Fed has naturally shifted its focus away from Core. But it doesn’t matter. The Fed is behind the curve. Way behind.

This post was published at Wall Street Examiner by Lee Adler ‘ July 29, 2015.

Today’s CPI Lesson: The Fed’s 2% Inflation Target Is Completely Stupid

The madness of the Fed’s pending 81 month run of zero interest rates comes down to an inflation subterfuge that has no logical or empirical grounding in real world economics. Essentially, the Keynesians who currently inhabit the Eccles Building have turned all of central banking’s anti-inflation history on its head, saying, instead, that there is not enough of it to create optimum economic growth and wealth; and, besides, the CPI is running below the 2% target – so prolonging the free money gravy train can’t do much harm.
Every part of that proposition is dead wrong. To wit, free money does immense harm by fueling rampant carry trade speculation; there is zero evidence that 2% inflation results in any more growth than 1% or even 0% inflation; and, as an empirical matter, there is plenty of inflation in the US economy and has been during the entire past 15 years of rampant money printing designed to stimulate more growth.
Still, real final sales in the US economy have grown at only a 1.8% rate since the year 2000, or by just half of the 3.5% rate recorded for the prior 46 years. But that downshift is not in any way attributable to inflation missing the allegedly optimum 2% target. In fact, during the last 15 years the CPI has increased at an average rate of exactly 2.18%.
So where’s the beef or rather the allegedly missing beef? Well, the monetary high priests hold that the PCE deflator, not the CPI, is the correct measure of inflation because it takes better account of changing consumer preferences or weighting shifts in the market basket of what people buy. That is, it captures their shifting to chicken, tuna or spam when they can’t afford steak.

This post was published at David Stockmans Contra Corner by David Stockman ‘ May 22, 2015.

It’s A Hill Street Blues Financial World – – -Be Careful, Its Dangerous Out There

We heard from several central banks in the last few days, and what they had to say was just one more reminder that we are in a Hill Street Blues financial world. So, hey, let’s be careful out there – -and then some!
The Fed’s policy statement Wednesday, for example, was mainly just another trite economic weather report which could have been written after watching CNBC with the sound turned off. But the statement did hint that maybe 78 months of ZIRP won’t be enough, after all. Having stripped out all calendar references relative to the timing of its upcoming monetary body slam, whereupon Wall Street gamblers will be be charged the apparently usurious sum of 25 bps for their poker chips, it hinted at another reason for delaying the dreaded day:
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress – both realized and expected – toward its objectives of maximum employment and 2 percent inflation.
That’s right. If they don’t see enough inflation soon, they will keep Wall Street rampaging at the zero bound even beyond June. It is no longer worth mentioning that there is not a shred of evidence that the US economy would grow faster at a 2.0% CPI inflation rate versus the actual rate of 1.0% recorded over the last three years.
Stated differently, exactly how is it that the tiny dip in the CPI owning to cheaper gasoline during the second half of 2014 once again delayed the promised nirvana of ‘escape velocity’ for the fifth year running? Indeed, the very same Keynesian economists who insisted that the oil price collapse would cause consumer spending to surge are now urging the Fed to delay raising rates because inflation is too low and the US economy has once again stalled-out.

This post was published at David Stockmans Contra Corner on May 3, 2015.