Yesterday (Part 2) we documented the vast difference between the Reagan Tax Cut of 1981 and the GOP Tax Bill of 2017—-both as to scale and potential to stimulate supply-side growth of output, investment, jobs and earnings. In a word, the Reagan tax cut averaged 4.0% of GDP over a decade and was predominately focused on supply-side incentives via a 25% marginal rate cut for individuals and a giant business cut. The latter would amount to $300 billion per year at today’s economic scale, and, crucially, was also tightly linked to CapEx via the 10-5-3 depreciation incentive for new plant, equipment and technology purchases. By contrast, the current GOP Tax Cut is just one-tenth the size (o.4% of GDP) of the Reagan cut over the next decade and has virtually no supply-side incentives at all. The individual income tax cuts are temporary and reflect a Keynesian purpose to put “money in the pockets” of workers via, for instance, doubling the standard deduction and child credit. At the same time, the heart of the GOP tax cut is a wholly misguided $1.4 trillion 10-year reduction of the corporate tax rate to 21%. But under the deformed monetary and financial conditions of the present, that will actually just put money in the brokerage accounts of the wealthy and Wall Street speculators.
In Part 1 we revived Senator Howard Baker’s famous description of the giant Reagan Tax Cut of 1981 as a “riverboat gamble”, and that it was. When the “bidding war” with the Dems ended in July 1981, the US Congress had cut the Federal revenue base by 6.2% of GDP in the outyears. At today’s economic scale that would amount to a tax cut of $1.2 trillion per year! *** By contrast, the peak year cut (FY 2019) in the current tax bill is just $280 billion. Nevertheless, we present this chart to demonstrate why today’s GOP “riverboat gamble” is actually far more dangerous than the one back then, and also why it’s capacity to actually stimulate a growth surge in the US economy is not even a pale imitation of the 1981 act.
Bulgaria’s GDP is about $52.4 billion (2016), so it is quite a shock that the Bulgarian Government is sitting on an approximate $3 billion worth of Bitcoins seized in an anti-corruption operation back in May. Putting this into a little more glaring context, Bulgaria is holding 18% of the national debt in bitcoins… Fun fact: today's bitcoin prices have been interesting enough that there was a significant difference in how much Bulgaria had in USD between me writing this story and my editor editing it. — Nikhilesh De (@nikhileshde) December 7, 2017
This post was published at Zero Hedge on Dec 9, 2017.
The stock market rejoices the House passage of the tax ‘reform’ Bill as the Dow shot up 187 points and the S&P 500 spiked up 21. The Nasdaq soared 1.3%, retracing its 3-day decline in one day. The tax bill is nothing more than a massive redirect of money flow from the Treasury Department to Corporate America and billionaires. The middle class will not receive any tax relief from the Bill but it will shoulder the burden of the several trillion dollars extra in Treasury debt that will be required to finance the tax cuts for the wealthy. The tax ‘reform’ will have, at best, no effect on GDP. It will likely be detrimental to real economic output. The Big Money Grab is ‘on’ at the highest levels of of Wall St., DC, Corporate America, the Judiciary and State/local Govt. These people are grabbing from a dying carcass as fast and greedily as possible. The elitists are operating free from any fear of the Rule of Law. That particular nuisance does not apply to ‘them’ – only to ‘us.’ They don’t even try to hide their grand scale theft anymore because the protocol in place to prevent them from doing this is now on their side. This is the section in Atlas Shrugged leading up to the big implosion. ‘When you see that money is flowing to those who deal, not in goods, but in favors – when you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you – when you see corruption being rewarded and honesty becoming a self-sacrifice – you may know that your society is doomed.’ – Atlas Shrugged
The federal government is now 20.4 trillion dollars in debt, and most Americans don’t seem to care that the economic prosperity that we are enjoying today could be completely destroyed by our exploding national debt. Over the past decade, the national debt has been growing at a rate of more than 100 million dollars an hour, and this is a debt that all of us owe. When you break it down, each American citizen’s share of the debt is more than $60,000, and so if you have a family of five your share is more than $300,000. And when you throw in more than 6 trillion dollars of corporate debt and nearly 13 trillion dollars of consumer debt, it is not inaccurate to say that we are facing a crisis of unprecedented magnitude. Debt cannot grow much faster than GDP indefinitely. At some point the bubble bursts, and when it does the pain that the middle class is going to experience is going to be off the charts. Back in 2015, the middle class in the U. S. became a minority of the population for the first time ever. Never before in our history has the middle class accounted for less than 50 percent of the population, and all over the country formerly middle class families are under a great deal of stress as they attempt to make ends meet. The following comes from an absolutely outstanding piece that was just put out by Charles Hugh Smith… If you talk to young people struggling to make ends meet and raise children, or read articles about retirees who can’t afford to retire, you can’t help but detect the fading scent of prosperity. It has steadily been lost to stagnation, under-reported inflation and soaring inequality, a substitution of illusion for reality bolstered by the systemic corruption of authentic measures of prosperity and well-being. In other words, the American-Dream idea that life should get easier and more prosperous as the natural course of progress is still embedded in our collective memory, even though the collective reality has changed. The reality that most of us are facing today is a reality where many are working two or three jobs just to make it from month to month. The reality that most of us are facing today is a reality where debts never seem to get repaid and credit card balances just continue to grow. The reality that most of us are facing today is a reality where we work day after day just to pay the bills, and yet we never seem to get anywhere financially. The truth is that most people out there are deeply struggling. The Washington Post says that the ‘middle class’ encompasses anyone that makes between $35,000 and $122,500 a year, but very few of us are near the top end of that scale…
Answers emerge. Including offshore private accounts. Mexico’s public debt-to-GDP of 50% may seem modest by today’s inflated standards, but when it comes to debt, everything is relative, especially if you don’t enjoy the benefits that come from having a reserve-currency-denominated printing press, and if you borrow in a foreign currency that you don’t control. As the debt load grows, more and more of the States’ financial resources must be used to service it. As El Financiero reports, the cost of servicing Mexico’s debt, despite super-low interest rates globally, has almost doubled in the last five years, and is now higher than it has been at any time since 1990. In fact, according to the Government’s own figures, more state funds will be spent this year on servicing the debt than on all public infrastructure projects put together. Yet as the government scrimps and scrapes in areas that might actually help to boost economic growth, it’s more than happy to dig deep to fill its own pockets. A joint investigation by the news website Animal Politico and the NGO Mexicans Against Corruption and Impunity has revealed that, amidst all the budget cuts, the Pea Nieto Government has been using a complex web of shell companies to make hundreds of millions of dollars of public funds, originally intended for public causes such as combating poverty or financing public education, completely vanish.
This post was published at Wolf Street on Sep 11, 2017.
India’s embattled Prime Minister Narendra Modi faced a double whammy of abuse this week as his nation’s economic growth collapsed to its weakest since Q1 2014 and India’s Central Bank released a report on Modi’s extraordinary “demonitization” plan last year showing that 99 per cent of the high denomination banknotes cancelled last year were deposited or exchanged for new currency, crushing Modi’s lie that his contentious ‘war on cash’ would wipe out huge amounts of so-called ‘black money’. When Modi announced in November that Rs1,000 ($16) and Rs500 notes would no longer be legal tender, he suggested that corrupt officials, businessmen and criminals – popularly believed to hoard large amounts of illicit cash – would be stuck with ‘worthless pieces of paper’. At the time, government officials had suggested that as much as one-third of India’s outstanding currency would be purged from the economy – as the wealthy abandoned or destroyed it, rather than admit to their hoardings – reducing central bank liabilities and creating a government windfall.
This post was published at Zero Hedge on Sep 2, 2017.
Japan’s economy grew by 1% sequentially, and 4% on an annualized basis in Q2, smashing expectations of a 2.5% print and well above the upward revised 1.5% in the first quarter; it was also the the highest quarterly growth since a 5% print in Q2 2015, Japan’s Cabinet Office reported, and the 6th consecutive quarter of expansion for recently embattled Prime Minister Shinzo Abe, who has plunged in the polls following a series of corruption scandals.
This post was published at Zero Hedge on Aug 13, 2017.
Almost exactly ten years ago, on September 12, 2007 Japan’s current prime minister Shinzo Abe resigned less than a year into a tenure dogged by scandals, the suicide of a minister, a raft of resignations and corruption allegations, and a humiliating election drubbing for his Liberal Democratic Party. Never one to shrink away from resposibility, Abe blamed it on crippling diarrhea: Shinzo Abe resigned as Prime Minister, claiming that diarrhea was preventing him from carrying out his duties. The diarrhea was due to ulcerative colitis, a bowel illness caused by ulcers. Abe had suffered from this illness for decades, but after becoming Prime Minister, the stress of his job apparently made the symptoms worse. Apparently it did not prevent him from taking on the job again some five years later, when he was reinserted in the prime ministerial position again, largely as a smokescreen meant to keep the government together as BOJ’s then-new governor Haruhiko Kuroda unleashed the greatest “wealth creation” and bond monetization experiment in the history of Japan, which has culminated with the Japanese central bank owning nearly 100% of Japan’s GDP in Japanese Government Bonds. Unfortunately for Abe, it may be time to buy Imodium again.
This post was published at Zero Hedge on Jul 16, 2017.
I claim no special power here, nor any inside information. This is simply arithmetic coupled with logic. I’ll give you a “decision tree” sort of format with the critical points outlined. Note that if you’re going to mitigate any of what I see coming around the bend you need to do it right damn now, not wait. By the time you get to those critical points it’s too late. For many people it’s already too late, but if you’re not in that batch then you need to make your lifestyle changes today. I am operating on the premise that the rank corruption that I outlined in the Ticker here will not be addressed. It will not be addressed for the same reason the 17th Amendment will be cited as the reason the American political experiment failed when the book on America is finally closed, as that Amendment permanently removed the ability of the States to call a hard-stop on any expansion of Federal Power they did not consent to. That was designed in to our government by the founders and it was removed intentionally by the 17th Amendment. That balance of power can never be restored absent a Revolution because to do so The Senate would have to literally vote themselves out of a job at a supermajority level which they will never do and there is no means to compel them to do so. For the same reason the 30-year trend in Medicare and Medicaid spending will not be stopped. It may be tinkered with around the edges but it won’t be stopped because to stop it without literally throwing people into the street and letting them die you have to break the medical monopolies and in doing so you will inevitably (1) destroy the graft machine that drives a huge part of DC and at least half of the jobs inside the Beltway, along with the asset values they support, (2) create an immediate and deep (15% of GDP, but temporary) recession on purpose which neither Congress or Trump will ever voluntarily initiate as it would cause a guaranteed 70% stock market crash along with the immediate detonation of about 1/3rd of all in-debt corporations in the United States and (3) expose the outrageous theft of trillions of dollars from taxpayers over the last several decades to fund the medical scam machine at all levels.
When former Chinese Politburo member Zhou Yongkang was arrested in 2014 on corruption charges, the scale of his ill-gotten gains was astounding, totalling some $16 billion. When sums that large are involved, most of the assets have to be invested in financial instruments and real estate. But the list of physical currency found in his homes is revealing: 152.7 million Chinese yuan (valued at the time at $24.5 million), 662,000…10,000…55,000 Swiss francs — and US$275 million. The former head of China’s internal security services and one of the 10 most powerful men in China apparently preferred to keep his “petty cash” mainly in U.S. dollars. He’s not alone. China lost around $1 trillion to capital flight in 2015, before clamping down hard at the beginning of 2016. Much of this money leaves China via fake invoicing in Hong Kong, where the local currency is pegged to the U.S. dollar. Illicit outflows are also facilitated by casinos in the Philippines, South Korea, and on remote Pacific islands, all of which operate primarily in dollars. Predictions of the dollar’s demise and eventual replacement by the Chinese yuan, are a staple of global economic punditry, but they have little basis in reality. Of course China has become an important component of the global economy, accounting for more than 15 percent of global gross domestic product. But when Chinese people themselves prefer to hold dollars, there is little chance that the Chinese yuan will ever replace the U.S. dollar as the world’s key currency.
‘Economic Shock & Awe’ turns into ‘Nightmare Without End’ On Tuesday November 8, Narenda Modi, the prime minister of India, the world’s second most populous nation and Asia’s third largest economy, announced in a public address to the nation that India’s two biggest denomination notes, the 1,000 rupee and 500 rupee bills, were now worthless and would have to be replaced with newly designed bills. That was six days ago. Since then all hell has broken loose. Official Motives There are plenty of reasons for the government’s action. Partly it was intended to flush out the cash hoardings of black market operators and stop the rampant corruption permeating all levels of business and government in India. It is also part of the government’s plan to thwart counterfeiters and bring more stashed currency into the banking system. One of the biggest beneficiaries will be the nation’s nascent digital economy. Paytm, India’s largest digital wallet startup, hailed the move. ‘This is the golden age to be a tech entrepreneur in India. Especially a fintech one,’ tweeted Vijay Shekhar Sharma, the company’s founder, whose investors include Alibaba Group Holding Ltd. ‘Keep the money digital.’ The coffers of both the nation’s government and banks are also expected to benefit handsomely. According to some reports, banks’ non-performing loan ratios have already shrunk in recent days as small and mid-sized businesses that had been defaulting on repayments suddenly started rushing to banks to repay the money they owed. As for the government, it hopes to boost its tax revenues from the current anemic level of 17% of GDP to somewhere closer to the OECD average of 34%.
This post was published at Wolf Street on November 15, 2016.
President-elect Trump stated in his victory speech that he intends to make America great again by infrastructure spending. Unfortunately, he is unlikely to have the room for manoeuvre to achieve this ambition as well as his intended tax cuts, because the Government’s finances are already in a perilous state. It is also becoming increasingly likely that the next fiscal year will be characterised by growing price inflation and belated increases in interest rates, against a background of rising raw material prices. That being the case, public finances are not only already fragile, but they are likely to become more so from now on, without any extra spending on infrastructure or fiscal stimulus. So far, most informed commentaries on the prospects for inflation have concentrated on the negative effects of an expansionary monetary policy on the private sector. With the pending appointment of a new President with ideas of his own, this article turns our attention to the effects on government finances. Government outlays are already set to increase, due to price inflation, more than the GDP deflator would suggest. The deflator is always a dumbed-down estimate of price inflation. At the same time, tax receipts will tend to lag behind any uplift from price inflation. Furthermore, the wealth-transfer effect of monetary inflation over a prolonged period reduces the ability of the non-financial private sector to pay the taxes necessary to compensate for the lower purchasing power of an inflating currency. Trump is a businessman. Such people often think that running a country’s economy is merely a scaled-up business project. Not so. Countries can be regarded as not-for-profit organisations, and democratic ones are driven by the consensus of diverse vested interests. The only sustainable approach is to stand back and give individuals the freedom to run their own affairs, and to discretely discourage the business of lobbying. President Calvin Coolidge expressed this best: ‘Perhaps one of the most important accomplishments of my administration has been minding my own business’.
This post was published at GoldMoney on NOVEMBER 10, 2016.
For most people, the economy’s ups and downs are best measured by famous indicators like monthly job reports and quarterly releases of gross domestic product. But students of the arcane took special notice earlier this month when the Bureau of Economic Analysis released some disturbing data that didn’t make anybody’s front page. In August, domestic heavy-truck sales fell 29 percent from the same period of 2015, the weakest month in well over three years. Any drop that dramatic could always be an anomaly, but heavy-truck sales have been slipping for two years. Broad weakness in this category has historically been a reliable hint that a recession is on its way.
China’s smaller banks have never been more reliant on each other for funding, prompting rating companies to warn of contagion risks in any crisis. Wholesale funds, including those raised in the interbank market, accounted for a record 34 percent of small- and medium-sized bank financing as of June 30, compared with 29 percent on Jan. 31 last year, Moody’s Investors Service estimated in an Aug. 29 note that analyzed central bank data. Shanghai Pudong Development Bank Co.’s first-half earnings showed its short-term borrowings and repurchase agreements surged by 75 percent in the past three years, while its consumer deposits rose just 24 percent. Policy makers have sought to sustain an economic recovery by keeping the seven-day repurchase rate at around 2.4 percent for the past year, a level that has encouraged borrowing for investment in property, corporate bonds or risky loans, often packaged as shadow banking products. China’s banking regulator told city banks last week to learn the lesson of the global financial crisis and get back to traditional businesses. CLSA Ltd. estimates total debt may reach 321 percent of gross domestic product in 2020 from 261 percent in the first half. ‘Contagion risks are definitely rising,’ said Liao Qiang, Beijing-based senior director for financial institution ratings at S&P Global Ratings. ‘The pace of the development is concerning. If this isn’t stopped in time, the central bank will lose some control and flexibility of its monetary policy.’
Bad debts in the Chinese banking system are ten times higher than officially admitted, and rescue costs could reach a third of GDP within two years if the authorities let the crisis fester, Fitch Ratings has warned. The agency said the rate of non-performing loans (NPLs) has reached between 15pc and 21pc and is rising fast as the country delays serious reform, relying instead on a fresh burst of credit to put off the day of reckoning. It would cost up to $2.1 trillion to clean up this toxic legacy even if the state acted today, and much of this would inevitably land in the lap of the government. ‘There are already signs of stress that point to NPLs being much higher than official estimates (1.8pc), most obviously the increased frequency with which the banks are writing off or offloading loans,’ it said. The banks have been shuffling losses off their balance sheets through wealth management vehicles or by classifying them as interbank credit, seemingly with the collusion of the regulators. Loans are past 90 days overdue are not always deemed bad debts.
Possibly the defining business trend coming out of the financial crisis has been a ‘startup boom.’ Everyone is building an app or starting their own business it seems. This image, however, may be just an illusion, according to Michelle Meyer, US economist at Bank of America Merrill Lynch. Both the formation of firms (for example, McDonald’s as a whole) and establishments (an individual McDonald’s restaurant), have dropped off precipitously since the financial crisis and remained low. This is important, according to Meyer, because new businesses typically hire faster and produce higher levels of productivity than firms that have been around for a while. Thus the decline in business formation can explain some of the labor market’s postrecession problems, and is at least part of the reason for the steep drop in productivity. Additionally, Meyer says, it can end up affecting the nation’s gross domestic product. Here’s Meyer (emphasis added):
China has failed to curb excesses in its credit system and faces mounting risks of a full-blown banking crisis, according to early warning indicators released by the world’s top financial watchdog. A key gauge of credit vulnerability is now three times over the danger threshold and has continued to deteriorate, despite pledges by Chinese premier Li Keqiang to wean the economy off debt-driven growth before it is too late. The Bank for International Settlements warned in its quarterly report that China’s ‘credit to GDP gap’ has reached 30.1, the highest to date and in a different league altogether from any other major country tracked by the institution. It is also significantly higher than the scores in East Asia’s speculative boom on 1997 or in the US subprime bubble before the Lehman crisis. Studies of earlier banking crises around the world over the last sixty years suggest that any score above ten requires careful monitoring. The credit to GDP gap measures deviations from normal patterns within any one country and therefore strips out cultural differences. It is based on work the US economist Hyman Minsky and has proved to be the best single gauge of banking risk, although the final denouement can often take longer than assumed. Indicators for what would happen to debt service costs if interest rates rose 250 basis points are also well over the safety line.
China Debt Default? To alleviate its debt problem, China should adopt appropriate macro-economic policies encompassing currency depreciation and cutting interest rates to an ultra-low-level within two to three years, believe Nomura analysts. Yang Zhao and team said in their September 14 research piece titled ‘China: Solving the debt problem’ that they believe RMB depreciation will continue and forecast USD/CNH at 7.1 at the end of 2017. China Debt Default – China should join ultra-low interest rate club Also see the Big Short II – hedge funds bet on major fall on yuan Zhao and colleagues highlight two stylized ‘facts’ which haven’t been properly understood: high debt versus low leverage and the ever-rising M2-to-GDP ratio, which has been growing for over three decades, except during 2004 to 2008. The analysts argue that China faces a debt problem, but not a leverage problem. They highlight that while the country’s debt-to-GDP ratio is breathtakingly high, its corporate debt-to-asset ratio is generally low. They attribute the low leverage ratio largely to fast-growing asset values, driven by fixed asset investment and rising property prices.
Victory for Donald Trump in the U. S. presidential election could be a game changer for China’s economy. The candidate’s promise to slap punitive tariffs on Chinese imports would be highly contractionary, deflationary and wipe hundreds of billions off the value of the world’s second-biggest economy, according to new research by Kevin Lai, the Hong Kong-based chief economist for Asia (excluding Japan) at Daiwa Capital Markets. Lai estimates that Trump’s suggestion for a 45 percent tariff on Chinese goods to narrow the trade deficit with America would spark an 87 percent decline in China’s exports to the U. S. – a decline of $420 billion. That would, over time and factoring in multiplier effects, mean a 4.82 percent blow to China’s gross domestic product, or about a half trillion dollars’ worth. It doesn’t even take into account an estimated $426 billion in foreign direct investment repatriation if companies started to withdraw. ‘A loss of GDP or a slowdown in GDP growth of this scale would be staggering,’ Lai wrote in a note entitled ‘What would a Trump presidency mean for China.’ ‘Eventually, Trump and his administration may actually compromise with a watered-down version of tariffs.’