Posts Tagged Budget

WHEN WILL WE GET AN UPDATE ON THAT INFRASTRUCTURE PLAN THAT DONALD KEEPS SAYING WILL BE THE MOST “HUGELY” GREATEST EVER?

Michael Bloomberg characterized Donald Trump quite accurately, when he referred to him as “A Con (Man)”, at the Democratic National Convention, last July.  Trump’s initial Infrastructure Plan, which he revealed last October, was just another version of Corporate Welfare.  It was a complete scam at the time and, although he keeps touting it in his current rambling monologues, he seems afraid to reveal what changes have been made, if any.

Prior to November’s Election, economist Peter Navarro, who is now a Special Advisor to the President, and Wilbur Ross, Trump’s Secretary of Commerce, had drafted a Plan, which, seeming to explain it, appeared to be intended more to obfuscate by using obtuse numbers and financial illusions.  There seemed to be no attempt to explain it so the average American might understand it.  Their final analysis, released on October 27, 2016, was titled: “The Trump Private Sector Financing Plan”.

The gist of Trump’s Infrastructure Plan, as far as I can see, can be explained from what is cited, in four paragraphs, on Page 4.

1.  “For infrastructure construction to be financeable privately, it needs a revenue stream from which to pay operating costs, the interest and principal on the debt, and the dividends on the equity.”  This quote seems to suggest that only projects, with revenue streams—toll roads, bridges, tunnels, etc.—would be included.  Side road repair, clearing impassible waterways, environmental clean-up, obsolete levies, etc. wouldn’t.

2.   “…we are assuming that, on average, prudent leverage will be about five times equity.  Therefore, financing a trillion dollars of infrastructure would necessitate an equity investment of $167 billion, obviously a daunting sum. That means the private companies, who would cumulatively be buying complete control of the projects, including the long-tam revenue streams, will provide only one-sixth of the equity in the total Capital Structure.  But, it gets even more interesting in Numbers 3 and 4.

3.  “…to reduce the cost of the financing, government would provide a tax credit equal to 82% of the equity amount.  This would lower the cost of financing the project by 18% to 20% for two reasons.”  The true numbers will be revealed in #4.

The Treasury will provide a “Tax-Credit” for the bulk of the corporations’ Equity Capital—their investment exposure.  Keep in mind that, unlike a tax-deduction, which merely provides benefits at the tax-rate, a tax-credit is fully deductible—dollar-for-dollar—from the final taxes payable. Now, see #4.

4.  Now, here’s where it can all come together.  “First, the tax credit reduces the total amount of investor financing by 13.7%, that is, by 82% of [the]16.7%.  The elegance of the tax credit is that the full amount of the equity investment remains as a cushion beneath the debt, but from the investor point of view, 82 percent of the commitment has been returned.”  Plain as mud, huh?  Let me put those numbers into a more-understandable format:

U. S. Treasury sells $1,000 Billion to finance entire Project.

 in Project:  $Taxpayers Debt Exposure833 Billion  —  83.3%

Corporate Equity (financed by Treasury):   $167 Billion — 16.7%

Treasury absorbs Corporate Tax-Credit:       $137 Billion — 13.7%

U. S. Treasury Debt equals Taxpayer Debt:  $970 Billion — 97%

Cumulative Corporate Debt to Treasury:       $30  Billion –3%

In summary, America is literally giving away valuable revenue streams ON MONOPOLIES, perhaps in perpetuity, assumedly without any control about future prices, continued maintenance, and there is nothing mentioned which requires that American workers be used, with regard to re-construction, on-going maintenance, or the long-term operation.  Now, perhaps Donald Trump and Speaker Paul Ryan are making this more digestible; but, I sure would like to see a summary of the particulars before I hear how “hugely” great it will be, or anymore.

And as Donald always says:  “This will be Budget-Neutral.  Just trust me!”

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THURSDAY’S EXCESSIVE SHOW OF FORCE SERVED NO RATIONAL PURPOSE WHATSOEVER!

On Thursday, Donald’s Trump’s (not ours, anymore) Military dropped a GBU-43, a 22,000 pound bomb, on a series of suspected ISIS caves, in the Achin district of Nangarhar Province, Afghanistan.  Various Jihadist groups—such as al-Qaeda, ISIS and the Taliban—have located their training camps in such areas over the years.  Perhaps, Donald feels that he displayed some humane restraint by not going all-out, and using the even larger GBU-77, which weighs 30,000 pounds.

The benefit of this area, near Pakistan, enables the terrorists fighters to cross the border, when they are feel threatened.  And then, they return to their caps, once the danger has passed.  Thursday’s show-of-force serves no purpose–besides enabling the generals to play with their “Toys of War.  Meanwhile, when the Big Show subsides, the residents of those caves will merely find similar accommodations nearby.

Terrorists organizations, and perhaps ISIS more than others, operate as independently controlled cells, located around the world.  Like the Hydra of Greek Mythology, when the head of one is cut-off, the hydra just grows two more.  And in this case, there is no one head or one cell, to begin with.  So, as we found in literally every war since Vietnam, superior firepower can “Win the battles, but lose the War!”

In fact, such outlandish demonstrations generally accomplish little when the assumed audience remains mired in the age of donkeys and mud huts.  And, while Thursday’s absurd detonation will possibly provide ISIS with valuable recruiting propaganda, it is most important to remember that those donkeys can traverse the hills of Afghanistan, while our tanks cannot!   In fact, such demonstrations of firepower do little to enhance our image, or win friends, in the Developing World!

The next Federal Budget hasn’t been finalized; however, the Trump Regime had suggested slashing the State Department and Health and Human Services, while increasing our Defense Budget, which is already as large as those of the next ten countries combined.   Just think how cost-effective it would be to spend that same money, through State and HHS, to:  build hospitals and schools; fight malaria and tuberculosis; and provide clean water and electric power.  In other words, we could get more bang-for-the-buck, and enhance our reputation–by doing Good!

Donald Trump has a reputation for: his ignorance about complex issues; excessive hubris; and surrounding himself with Yes-Men.  Although he boasts about having generals in his Cabinet, I seriously wonder whether he even listens to them!  But, I am still concerned about what this fool might do next!   And now, Mr. Trump has, once again,  raised the issue of a pre-emptive strike on North Korea.  Need I say more?

NOTE:  This video is analogous to Donald Trump’s personal reaction to his BIG BANG!  Once again, he just played through it!

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STAGFLATION: COULD IT OCCUR AGAIN HERE, DURING THE DONALD TRUMP ERA?

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.

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CORPORATE TAX HOLIDAYS JUST DON’T WORK!

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!

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WHAT MIGHT WARS OF THE FUTURE LOOK LIKE?

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?

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THE U. K. DID WHAT WAS NEEDED, BEFORE LEAVING THE EUROPEAN UNION

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!

 

 

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THE “BREXIT” VOTE COULD MAKE OR BREAK GLOBAL FINANCIAL MARKETS!

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/.

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