Posts Tagged Budget
Stagflation is the coincidence of high inflation during a recession, and it has only happened once in the U. S., during the 1970s. There was a mild recession in 1972, and although the Fed and the Treasury had each provided stimulus, President Richard Nixon wanted to boost the economy, to enhance his re-election chances. But, when Nixon took matters into his own hands, he just made the situation worse—much worse!
President Nixon implemented wage and price controls and, simultaneously, took the
U. S. Dollar off the Gold Standard. Initially, the dollar surged in global markets; however, when Great Britain tried to exchange $3 billion, in dollars for gold, the dollar plummeted. As the global markets abandoned the dollar, the price of gold skyrocketed from $30 per ounce, to $120.
During a normal recession, as the economy slows, and unemployment rises, inflation is generally weak. In such cases, the Fed would flood the economy with cash, to stimulate the economy, and thus promote consumer spending and hiring. In a stagflation situation, however, stimulus measures intended to enhance employment, would just make the inflation problem even worse. And, that just leads to a sure case of: “Damned if you do, and dammed if you don’t!”
Businesses couldn’t pass the higher prices on to customers due to the price controls. So, the only alternative businessmen had, rather than to raise prices, was to cut its expenses by laying-off workers. But, that only made the recession worse. But, prices kept rising, even though they couldn’t be passed on. Demand also increased as people thought prices might rise even more in the future.
Paul Volcker, as Chairman of the Fed, finally solved the stagflation problem.
He raised the “Fed Funds” (short-term intra-bank lending) rate by two full percent in one day in 1981, up to 20%, and that slammed the breaks on the economy. Incidentally, the higher interest rates also strengthened the dollar, which helped alleviate inflation.
Now, I’m not predicting a return of stagnation to the U. S. economy; but, with Donald Trump’s bull in the china shop mentality, and his apparent ignorance of the issues; I can only wonder. He has also handicapped himself by appointing mostly inexperienced ideologues with which to fill-out his Regime. As I have been following the financial markets, and monitoring his attempt to micromanage the various industries, I sure have my doubts about positive economic outcomes ever becoming reality.
I would prefer raising an awfully scary issue, and being wrong; rather than not have suggested such an abnormal situation at all. In 2008, as America went through The Great Recession, we were extremely lucky to have had such a smooth transition, from the Bush Financial Team to the Obama Team. All experienced pros, who worked well together, took the political heat and did what was best for America. I’m surely not expecting any such thing from the Donald Trump Regime!
NOTE: If you use a financial professional in your investing, ask her or him what they think the chances of stagflation might be. Chances are, they have never even heard of the term.
Once again, during last night’s (so-called) “Debate”, Donald Trump suggested a Corporate Tax Holiday, as the best way to tap into untaxed corporate dollars held overseas. Yes, that money could be brought back to the U.S, after paying a minimal tax, and added to the government coffers. But, do Tax Holidays really work in practice?
This is an oft-repeated Republican Mantra—a so-called “Win-Win”—both for the companies and the country. But, remember that the government can, in no way, mandate how corporations use their after-tax funds. Such holidays can be good for corporations, but not necessarily for the Nation.
The last Corporate Holiday brought back hundreds of billions of dollars, for which the corporations paid a tax rate of just 5.25%. Now, let’s assume that, if $1 trillion were repatriated, that would result in a mere $52.5 billion addition to the U.S. Treasury, or just 1.4% of the total 2015 U.S. Government Expenditures of $3.7 trillion. The corporations, for the most part, in 2005, did not expand their businesses or increase hiring; rather, they paid dividends to shareholders, re-purchased shares of their own stock and paid executive bonuses.
The Joint Committee on Taxation is a nonpartisan committee of the U. S. Congress. In previous studies, it had reported that, in the short-run (perhaps a couple of years), tax revenue increase following a Holiday; but, then they drop-off. In 2014, Mr. Thomas Barthold, the JCT Chief of Staff, wrote that: “A second repatriation holiday may be interpreted by firms as a signal that such holidays will become a regular part of the tax system, thereby increasing the incentives to retain earnings overseas,”
Lastly, let’s think of the many middle-class workers who feel that they have been left behind in the Economic Recovery, which began after 2008. They pay a Federal Income Tax rate of 15%-to-25%, and their wages are not even rising in-line with inflation, let alone them even getting a leg-up. So, while Corporate America may get a substantial Tax Holiday, from time-to-time, such events are grossly unfair to the ordinary taxpayer!
Much of the political rhetoric spewed against Islamic State currently seems mostly based on the racist anti-Muslim agenda of certain politicians. The strategic planners in our Defense Department place ISIS toward the bottom of our potential National Security risks. Russia and China, by far, are at the very top of the Pentagon’s List of Risks.
Surely, terrorism will always be a risk in any peaceful country. It always has been, and always will! An advantage that we, in America, have is that our anti-terrorism activities are coordinated through one governmental entity, the FBI, as compared to 30 national defense entities across Europe. Also, the Muslim Community here is somewhat better assimilated. Again, terrorist attacks, by groups such as ISIS, are at the bottom of our Defense Department list of priorities.
The planning for Future Wars is coordinated by Deputy Secretary of Defense, Bob Work. The so-called “Third Offset Strategy”, is fully-integrated with the knowledge and cooperation of our allies. The First Offset (or Advantage) Strategy was initiated by President Dwight D. Eisenhower, in the 1950s, and it used nuclear power to compensate for the Soviet Union’s manpower advantage. At the height of the Cold War (1970s and 80s), the Second Offset Strategy emphasized: long-range, precision-guided weapons: stealth aircraft; and new intelligence, surveillance and reconnaissance capabilities.
Currently, as our list of potential adversaries has increased, the Third Offset Strategy has classified our anticipated sources of danger as follows: Russia and China are the very highest priority; then Iran (an exporter of terrorism) and North Korea (only because Kim Jong-Un is unstable and has primitive nuclear weapons); and various rogue states and non-government organizations, such as ISIS, are at the bottom. Although they all pose dangers to America and our allies, it always are makes sense to prioritize risks.
Over the past fifteen years, as the U. S. military was distracted, fighting two wars, and depleting its Defense Budget, Russia and China were able to narrow the gap with our technological superiority. Both have grown their budgets substantially, increased their technology development programs, and they were able to observe both what our military did well, and notice its weaknesses. Also, their cyber-intel warriors were able to hack into our computers, and steal technology—saving themselves time and money.
The T-O Strategy will include more coordination with our NATO Allies, as well as encourage them to increase their own defense budgets to the agreed-upon two percent of their respective GDPs. In the future, research will be mostly carried-out in a combination of academic and commercial labs, rather than in government facilities. Future weapon development will be developed and funded similar to how Boeing and SpaceX have taken on the mission of re-supplying the International Space Station with the rocket systems, which they funded and developed.
Besides traditional battlefields, look for: greater use of miniature air, land and sea-based drones; continued stealth technology; ships with lower manpower requirements; advanced manufacturing, to include robotics and 3-D systems; and guided bomb and missile systems. Future wars will also make greater use of cyber-technology, not only in hacking to gain intelligence, but in jamming, providing false intelligence or even, planting viruses to incapacitate enemy systems. As in our daily lives, the advantages of digital technology can harm us when they become inoperable or malfunction.
Traditionally, the U. S. has had the unquestioned quickest and most comprehensive system of technology management, from development to useful application. That requires: a combination of government-funding, as necessary; a rational regulatory environment; and the coordination of academia and corporate management. It seems like Academia and Industry will be ready to go; but, the question is: Will Congress?
On Thursday, the Bank of England, the British central bank, announced that it was confronting the economic weakness that leaving the E. U. would probably cause. It projects that its economy will not grow at all in the second half of this year, and that it will probably not grow in 2017 or 2018 either. Accordingly, it is initiating a multi-pronged Stimulus Package, along with the Exchequer, the British treasury, to confront any potential recession before it arises.
Besides being the first rate cut since 2009, this one is particularly noteworthy for its wide-ranging approach: lower base-lending rates, increasing the money circulating throughout the economy and government spending by the Exchequer. The government spending is vital to partially offset the fall-off in purchases by consumers and businesses. This package might not prevent a recession; however, by confronting it early on, with a full-scale approach, this action should help reduce the impact—both in its depth and its duration.
If this is successful, the E. U. should take note. Apparently, due to jawboning by Germany—Europe’s economic locomotive—Austerity, is the primary financial strategy used, while government spending is discouraged. Germany’s Finance Minister, Wolfgang Schnauble, appears to believe in a more conservative policy; but, avoiding government spending in all cases, merely contracts the economy, when the goal should be to expand it.
After the BOE announcement on Thursday, stock prices soared on the London Stock Exchange, and that carried over somewhat to global exchanges. Prior to the Brexit referendum last June, there were a number of economists who had also project6ed significant economic weakness in the U. K. if it were to leave the E. U. Investors today, who are wallowing in the post-Brexit vote rally should pay some attention to the U. K.’s moves this week. There is a reason that the Government is taking these extraordinary measures. Also, consider the abnormally low global interest rate environment.
NOTE: Keep in mind that there is a reason why the U. K. is taking such fiscal and monetary measures, and why global bond yields are so very low. It’s called a weak global economy!
Many market participants seem to be quite cavalier about the potential impact if the United Kingdom votes to leave the European Union. The polls have been quite whimsical, with the “Leave” faction marginally ahead one day, and “Remain” leading the next. But the ramifications will truly be felt, not just on the Continent, but Worldwide.
The average Briton seems to be more focused on the emotional side of the issue: taking Britain back; removing the burdensome yoke of Brussels or reasserting its own Independence. Reputable economists, however—at the IMF, the London School of Economics, etc—have projected a potentially large decline in Gross Domestic Product, ranging from 2.2% to 9.5% for years to come, if Brexit wins. But those projections are falling on deaf ears. Considering that the UK GDP had only grown by 0.4% this past quarter, down from 0.6% in 4Q15, a decline of even 2.2% would be catastrophic!
Mid-afternoon today, I noticed a topic on CNBC, arguably America’s primary financial news network, with the title: “How to ‘Brexit’-proof your portfolio”. But, it’s just not that simple! Whether you invest mostly on the DAX, NYSE, NIKKEI, BOVESPA, global markets are very closely aligned. And that goes for foreign exchange and commodities, as well. The contagion will surely spread, just as it did eight years ago.
Back in 2008, there was literally nowhere to hide! We all felt the impact of those ”toxic assets”—sub-prime mortgages, credit default swaps, undercapitalized banks, etc. And we saw that the linkage was much more intricate than just among the banks. Leave vote would cause world trade to decline as global economies weaken. The pain would be felt everywhere!
The economies of countries that live on the export of commodities and low-end manufacturing, such as Brazil and China, would probably contract even further than they already have. Stronger economies, like the U.S, would find that their industrial exports would become more expensive, due to the stronger Dollar..
Unfortunately, monetary policy might be of a source of only minimal relief, since many countries have intra-bank lending rates that are already near zero percent, and some even below it. So, there would be little that central banks might do. The buy-buying (“qualitative easing”) might only work somewhat in countries that have deep. liquid debt markets.
In fact, the only hope for jump-starting some economies would be an infusion of Fiscal Stimulus, which is decifict-spending on the part of the respective National Treasuries. Most European countries have avoided Stimulus, insisting on Austerity, which is the opposite–contracting the economy. The UK certainly falls into the Austerity category; however, with a touch of Stimulus.
Thus, the Brits might be taking their hatred out on Brussels, whereas that should be directed at the conservative fiscal politics of the Tory Government. But, as Prime Minister David Cameron wrote in an Op-Ed on Sunday: If U. K. does vote to leave the E. U, it cannot go back?
NOTE: My prior post on the Brexit, dated June 10, is linked as follows for additional perspective: https://thetruthoncommonsense.com/2016/06/10/perhaps-the-brits-are-playing-with-fire-by-considering-a-brexit/.
No matter the policy—the economy, health care, foreign policy, etc.—there is no rational thought included in Donald Trump/s Positions. Sure, Donald Trump basks in the glow of being a successful businessman and a TV star; however, that’s all hype! Even so, what has that got to do with running the largest, and most diverse “Company” on earth? And even on economic issues, he appears to be lost. But, let’s look at some of his main positions; but you better look fast—before his views change!
Trump is best known for his “Wall”: the one intended to keep Mexicans out of our country. That idea fails to address the 11 million undocumented (mostly) Mexicans who have lived here for generations, and most have jobs and pay taxes. And by the way, the largest “Illegal” immigrant group, currently entering the U. S, are the Chinese. They just fly in with Visas, and fail to return home.
With regard to global trade, Donald Trump would slap tariffs on imports from China and Mexico, and perhaps other countries. That could cause them to reciprocate. In fact, such Trade Wars were a major cause of The Great Depression, in the 1930s.
Considering Trump’s Health Care position, it’s the biggest boneheaded idea of all, to: “…repeal Obamacare…No person should be required to buy insurance unless he or she wants to.” Trump then goes on to suggest privatizing health insurance; which will lead the nation back to our pre-Obamacare situation: millions of uninsured Americans. Remember: insurance only works when you have it. It’ll be too late if you wait until you need it.
The current problems with the Veterans Administration have been going on for decades, and the bureaucracy has survived numerous Administrations. Congressional funding hasn’t kept-up with the greater number of returning veterans, and they are living longer. Improved health care in war zones, which is generally much closer, enhances the survival rate. That means that a larger proportion of the sick and wounded will need to be treated Stateside—and in VA hospitals.
Donald Trump touts the standard Conservative mantra for tax reform. He suggests cutting taxes for the middle class, but he goes on to generously include the wealthy. Trump notes that his ideas will be budget-neutral; however, if you cut taxes, the result will either be: an increase in the National Debt or a decrease in social services, or both.
When he advocates for Second Amendment Rights, Trump’s ideas are out of the standard NRA (National Rifle Association) Playbook. He suggests that that right (to own guns) belongs to all law-abiding Americans. So, how do we insure that they are, in fact, “Law-abiding,” if we do not have background checks? And what about requiring weapons training? Lastly, don’t the people who chose not to own a gun, also have a fundamental right to “…life, liberty and the pursuit of happiness”?
The Democratic Party has been calling for Immigration Reform for years and, when President Obama tired of waiting for Congress, he issued several Executive Orders to, at least, make some progress. Of course, that resulted in the obstructionist GOP-majority Congress claiming that he was overreaching Executive Authority. I seriously question whether the GOP wishes to reform Immigration Laws or, perhaps, they wish to maintain the “Illegal Immigrant” bogeyman to prolong the support of their political base.
When you consider how Donald Trump operates, he surely doesn’t appear to have any real policies—just many of the tired old “solutions” that the Republicans have been incubating for years and years. They’re all there. Reforms of: Immigration,:Trade; Taxes; Health Care; Second Amendment Rights; Taxes; Veterans Administration, Problems etc. But there isn’t any follow-through.
When considering the vast array of policies that his Administration must deal with, a President needs to have a multitude of well-qualified expert Advisors in the various fields. To date, Donald Trump, perhaps given his world-class ego, has never mentioned any credible advisors. Two questions, however, still remain: would Trump actually listen to someone else’s advice? And who in their right mind would dare to take-on that task?
To paraphrase the Latin: Voter Beware!
NOTE: If you wish to review the “TRUMP. Make America Great Again” web site, be my guest. The link is as follows: https://www.donaldjtrump.com.
Living within your means sounds reasonable enough. Families do it, state and local governments are constitutionally required to, and corporations do too. Long-term needs—a new house, capital infrastructure projects, or plant and equipment—can easily be financed through debt, which would be repaid over the useful life of what was financed. So, why not the Federal Government?
Quite frequently, however, national governments are often confronted with large financial needs—natural disasters, lasting recessions, widespread pandemics, wars, etc—which must be addressed, even though they were not budgeted for. And, as we saw during the recent financial crisis (4Q07-1Q09), the Government needed to pump money into infrastructure as well as state coffers. If the Administration did not act, the results would have been even more catastrophic.
Our Federal Government has an advantage in that it controls both fiscal (budgetary) and monetary (the money supply) policy. Fiscal policy enables the Government to adjust tax brackets (with Congress’ approval), manage the Federal Budget and arrange for emergency funding. Monetary policy is the set of tools by which the Federal Reserve (our central bank) manages interest rates, thus causing the economy to accelerate or slow-down,
For the most part, the Obama Administration has done a reasonably good job in managing the Economy since he entered Office, on January 20, 2009. During mid-October of 2008, President George W, Bush said that America was staring down into a financial abyss. And six weeks after Obama’s Inauguration, the economy started to recover: the stock and bond market began to solidify; the Gross Domestic Product consistently reported positive quarters; and Unemployment began a long-term decline
According to the IMF, the U. S. is the only major economy that has continued to rise since The Great Recession, although not as quickly as we would like. During this period, the Administration has reduced the Federal Deficit, as well as the Federal Debt. It’s important to note that much of these accomplishments were made without sufficient assistance from the Republican—or Opposition—Party.
Generally, a National Governments should consider raising taxes and building a surplus when the Economy is strong, and lower taxes and even engage in deficit spending when the Economy is weak. Unfortunately, sometimes political ideology interferes with proven economic methods and common sense.