Posts Tagged Economics

REAL TAX REFORM IS MUCH OVERDUE! BUT, IT SHOULD BE LEFT TO A PROFESSIONAL BIPARTISAN COMMISSION, AND NOT TO POLITICIANS!

Donald Trump boasts that he will reform the Internal Revenue Code.  Our tax code was first codified about 100 years ago, is now some 17,000 pages and still growing; but, not all of our tax statutes have been included yet!  Previous changes and additions had political motivation, based on the ideology of whatever party was in power.  And thus, Tax Reform has truly become a political football; but, without any coherent agenda!

Real reform must be placed in the hands of a totally bipartisan Commission, composed of tax and other financial professionals.  The job at hand, however, could be compared to tearing down an old dilapidated building, and then starting from scratch.  The existing tax code is much too vital to the on-going functioning of our federal government to go on without it!  Therefore, the Tax-Reform Commission needs to be appointed for, let’s say, a ten-year term, and be subject to the oversight of a bipartisan Senate Tax-Reform Select Committee.

Such a Tax-Reform Commission, should be totally staffed and directed by professionals, who are knowledgeable in the functioning of the federal government.   Similarities to the operation of the bipartisan Congressional Budget Office easily come to mind.  The Leadership could be appointed by the (to be formed) Senate Select Committee, with the committee appointing replacement commission members, as needed.

The Commission should be expected to operate over, let’s say, a ten-year period, so as to: focus on the truly long-term nature of its mission, as well as to remove it from the regular political process.  Furthermore, the establishing legislation should include a provision for a subsequent commission to be appointed every several decades.

 

, ,

Leave a comment

IF TRUMP INVOKES QUOTAS AND/OR TARIFFS TO PROTECT THE STEEL AND ALUMINUM INDUSTRIES, AMERICA AND THE WORLD WILL SUFFER!

Trade Protection was a major topic at the recent G-20 Summit, in Hamburg, Germany; along with Climate Change, and Immigration, were the primary concerns addressed by the leaders of the 20 largest economies.  The evils of Protectionism are widely-known, since it was one of the major causes of The Great Depression, in the 1930s.  Donald Trump, however, doesn’t seem to understand History and, for him, it’s just full steam ahead—regardless of the long-term implications!

Quotas and tariffs are generally the two major tools that nations use to overcome price advantages on foreign competitors’ imports.  Since the World Trade Organization was established in 1995, to regulate International Trade; however, the imposition of such protective measures has decreased.  But, most attendees at the G-20 Summit seemed genuinely fearful; because, the world’s largest economy—representing 25% of global GDP—is threatening to use protectionism against foreign steel and aluminum companies. Such actions, however, generally result in similar response from the targeted countries.

Before a country considers its various courses of action, it should analyze exactly why its products’ sales have weakened!  Are the problems incurred industry-wide, or just within one sub-sector?  Or only one company?  Are the products or services effected of some national security importance?  Have the companies impacted maintained industry technological and best practices standards in their production processes?  I seriously doubt that the Trump Regime had gone through such a thorough review process, before threatening quotas and/or tariffs?  That’s just not his style!

The purpose of the WTO is to diffuse any such disagreements, before trade wars erupt. And yes, when one nation fires the first volley, the other side normally retaliates. In many cases, such trade wars may spread, and the contagion might go global, as it did in the build-up to The Great Depression.  Recently, China and the European Union have taken the U. S. to the WTO, regarding these most recent protectionist threats!

Lately, the major American steel and aluminum corporations have been prodding Trump to follow-up on his various threats.  Do problems exist only in the major corporations within the two industries, the so-called “integrateds”, which function throughout the full range of products, or are the smaller, specialty companies having the same problems. These industries are not monoliths—and perhaps some companies are more or less technologically efficient, and up-to-date than others.

If foreign corporations are taking unfair advantage—using child or slave labor, or receiving government subsidies—such cases should be addressed by the WTO.  On the other hand, there are corporations who hide behind the government when they fail to maintain basic competitive standards.  It’s not the role of any government to fight corporate or industry battles, especially when the relevant corporations failed to invest in themselves, in order to enhance profitability!

Government surely should defend businesses and industries, when they are taken advantage of, but it should insure that the true problem(s) are not within the company’s or industry’s own control.  I can recall, back during the Reagan Administration, when quotas were imposed on foreign steel imports.  Subsequently, the domestic producers raised prices, just because they could!

When countries get into a Trade War–with quotas and tariffs flying in both directions–prices often rise in all nations involved.  Higher prices often cause consumer demand to decline, unemployment can ensue, and recession might be the end result–perhaps in all countries involved.  It is difficult for the respective governments take rational corrective action during a trade war, when the next round might be just around the corner!  So, hopefully these recent Protectionist threats are just one of Trump’s latest rants!

NOTE:  Welcome to Tola, in Nigeria!

 

, , ,

Leave a comment

GERMANY BENEFITS FROM THE EURO IN MAINTAINING ITS TRADE SURPLUS!

Each country’s currency usually reflects it relative economic health!  When a nation runs a trade surplus—selling more of its products overseas, than it buys—it is running a trade surplus.  Foreign buyers, as well as overseas investors, convert their funds to the seller’s currency.  That greater demand, due to net foreign exports, increases the demand for the denominated currency, thus making it stronger.  Conversely, when nations run a trade deficit—buying more overseas than selling—its currency will decline in value.

The President of the European Council, Donald Tusk, told Donald Trump, on his recent trip to several summits in Europe, that Germany continually runs a large trade surplus within the European Union, as well as with the U. S.  I believe that the trade problem, in this case, is primarily due to Germany’s membership in the Euro Area, the 19 (of 28) E. U. members, that use the common currency, the Euro.

The reflection of Germany’s economic health is somewhat muddied since it shares the same currency as 18 other nations.  Under normal conditions (a single-country currency), there is a self-regulating mechanism in foreign trade.  Strong currencies create a price  disadvantage for themselves, making their products more expensive than their overseas competitors.  Likewise, weak currencies help expand trade exports; because, the nation’s products are more attractive, when priced in the weaker currency.

The single Euro currency must be valued the same way, however, by foreign-exchange traders, since it is the unit of exchange for all 19 nations.  For Germany, and any other Eurozone members that run a trade surplus, this provides a perfectly legal advantage–the Euro is weaker than if it used the old Deutschmarks.   The advantage, of using the Euro applies to transactions, both within the E. U. and globally.  And the deficit nations must contend with a high-priced currency.

Accordingly, the Euro trades around the mean (roughly, the average) for the various nations in the Euro Area.  This enables Germany to run a larger surplus than it otherwise would.  And likewise, the negative impact of the stronger currency provides a price disadvantage for nations with weaker economies, that run a trade deficit.

In effect, Germany has maintained a low unemployment rate, 3.9% as of April, as compared to Spain at 17.8%, and Greece at 23.2%, by exporting its unemployment.  Besides the great many benefits of membership in the European Union brings, they far outweigh the negatives.  But, after so many years, the Euro Area needs to be changed, so that the E. U. remains relevant.

The convenience of a single currency—in two-thirds of the member nations—seems to be outweighed by the structural trade imbalance that the euro provides.  And, that problem will never be solved as long as there is a common currency!  Whether a Euro member is weak or strong, the common currency will keep them in that same alignment–and this needs to stop!

NOTE:  Germany is merely taking advantage of an edge that is available to it; however, its actions might not be quite in keeping with the spirit of why the E. U. and the Euro Area were established.

 

, ,

Leave a comment

TODAY’S FEDERAL RESERVE RATE HIKE WAS BOTH PRUDENT AND NECESSARY!

Today, the Federal Reserve announced that it was raising the “Fed Funds Rate”, which is the intra-bank lending rate that banks charge one another.  The increase was made after one of the eight yearly Federal Open Market Committee Meetings, which are generally attended by all seven members of the Federal Reserve Board, as well as the twelve regional Federal Reserve Bank Presidents, from around the country.  While still low on a historical basis, the rate has risen by just 0.25%, to a range of 1.00-to-1.25%.

At the two-day meeting, the FOMC reviews many economic statistics, from each of the 12 regions, with an emphasis on Employment and Inflation in each.  Following the meeting, Fed Chairwoman Janet Yellen announced that the labor market continues to improve, and that inflation is expected to soon approach the Fed’s two percent target rate.

Donald Trump has been trying to prod Ms. Yellen not to raise rates again, and several journalists have been reporting that some homeowners have had trouble with the last increase mortgage payment increase.   Many retirees, however, have been clamoring for higher CD rates, since they need the higher income to live on.  Although the Fed doesn’t set mortgage, consumer loan or CD rates, any adjustments to the “Funds Rate” generally do have some impact, across the interest rate spectrum!

Over the past 40 years that I have been involved specifically in the bond market, interest rates had never been anywhere near as low as they are now; that is, until ten years ago!  To an extent, such very low rates had added to The Great Recession (4Q07 to 1Q09), since banks found ways to encourage mortgage re-financing and consumer lending to people who should not have qualified for the loans.  Then, once the money was spent—on real estate and merchandise that they couldn’t afford—all they had left were big, big bills!

But, let’s consider today’s rate hike in terms of the Fed’s Dual Mandate—Maximum Employment and Stables Prices, along with Moderate Long-Term Interest Rates.  The amount of necessary monetary stimulus dwindles as the labor market recovers, and if the rates remain depressed for too long, that could cause the economy to overheat, and inflation to overshoot the two percent target.

When rates are still extremely low, as they currently are, the Fed also has little ammunition to respond to another banking crisis, or a foreign currency crisis, such as occurred during the 1990s, both in Latin America and East Asia.  This is why today’s rate increases makes perfect sense, as is the anticipated one more this year.

As always, the Fed doesn’t act on a rigid schedule regarding changes in monetary policy.  Rather, it is constantly reviewing the updated data, keeping in constant touch with other central banks and considering its options.  Ultimately, the Federal Reserve makes decisions on a meeting-to-meeting basis; however, it can act sooner, when necessary!

, , ,

1 Comment

DURING A MARKET SHIFT, BE SURE TO UNDERSTAND ANY CHANGES THAT YOU MAKE, AND WHY!

Last Friday, the NASDAQ opened down by over three percent, and it remained that way, also closing the day around that amount.  The Technology ETF (Symbol: XLK), which tracks the technology “components” (corporations) within the S & P 500 also remained down by three percent through the close of the day.  Since there weren’t any other market sectors exhibiting similar turbulence, and economic and geopolitical news wasn’t out of the ordinary, I just assumed that the sudden drop was due to some investors taking profits.

On Monday, while the NASDAQ and Tech ETF opened down by over three percent again, both began to recover in the late morning.  Although they still closed down again that day, the momentum had definitely shifted positive.  And, I believe that that was confirmed today, when they both opened up by around one-half percent, and closed at a positive 0.73%

The inter-active chart on the Sector SPDR website displays the performance of all ten industrial sectors, represented within the S & P 500.  You can compare different time-frames, by clicking across the top of the Sector-Tracker Chart.  Until Friday, the Tech Sector had led, or almost led for every time-frame represented; however, the recent two-day drop, pushed it back for one-month or less.  I still remain heavily weighted in Tech, and I regard other investors taking profits as positive for the sector.

Technology represents approximately 22% of the S & P 500, and is roughly 50% larger than the Financials, the next largest sector.  While Amazon might be forcing some retailers to downsize, and alternative energy might be eating into the fossil fuels, I just don’t see that happening to technology.  It has become integral to our vey way of life.  And, as we rely more, and more, on Technology, what could replace it—but newer technology?

, ,

Leave a comment

IS DONALD TRUMP’S “PLAN” TO PRESIDE OVER THE DEMISE OF AMERICAN TECHNOLOGICAL EXCELLENCE, AS WE KNOW IT?

Since January 20th, I have been trying to figure-out just what Donald Trump’s Agenda is. Does he even have a Plan?  Donald seems to have a very limited attention span, and his conceptual capability seems limited to that which he already “knows“ to be true. Unfortunately, he doesn’t seem to realize that many of his actions might have equal, and opposite reactions!   Again, what is his Plan for America?

This morning, a friend pointed-out that Trump is taking credit for Saudi Arabia breaking ties with Qatar, for having relationships with terrorists.  Hmm!  Doesn’t Donald realize that the U. S. has both its Central Command, and its Air Force Central Command Headquarters, located just west of Doha, Qatar?

After Donald Trump held his tongue on his recent visit to Riyadh, and after he kowtowed to King Salman, the Saudi King gave him some sort of award, perhaps for praising the Arabs.   But, doesn’t Trump know Saudi Arabia is the chief exporter of Wahhabism, one of the most extreme forms of Islam, which can also lead to terrorism?  And, doesn’t he know that 15 of the 19 terrorists, who used jetliners as weapons on 9/11, were also Saudi Nationals?

It is quite disturbing that Trump proposes to slash 31% from the State Department Budget. State partially fund programs, which help offset the impact of dire poverty and religious fanaticism–two key factors in civil unrest and the rise in terrorism.  Secretary of Defense James Mattis, when he learned that State would be slashed, said: “I’m going to need more bullets.” Every dollar spent by State reduces the need for several dollars on Defense!

Can we really deny helping the residents of impoverished nations to:  fight malaria and tuberculosis; inoculate peasants against various diseases; provide family planning and prenatal care; empower women. to reduce crimes against them; and provide clean water and sewer systems in rural areas.  There is no reason why America shouldn’t help the Peoples of these regions, when we can!

And today, Secretary of Education, Betsy DeVos, while appearing before a Senate Committee, couldn’t even explain what would become of our nation’s Public School System, which Donald Trump also expects to cut.  Should’t we make the vital investment in Education to prepare the students of today, for the jobs of tomorrow?   And, that should begin with Early Childhood Education; because, that’s where future success starts!

Donald Trump’s opting-out of the Paris Accords didn’t surprise me either, since he has been doing the bidding of the Mega-Billionaires–and not the American People–all along!  They wish to de-regulate all industry; but, the fossil fuels appear to be highest on their list.  And, this is a horrific situation, with the largest economy, and the second-biggest polluter, taking the Cheap and Dirty way out its environmental responsibility!

And when Donald Trump takes his rightful seat, among the “Leaders” of the only two other nations who failed to sign the Paris Accords—Presidents Bashar Assad, of Syria, and Daniel Ortega, of Nicaragua—he will truly be in his element, indeed!  In essence, they will be telling the world to just Fuck-Off!

Traditionally, America has been a bastion of technological innovation, with our combination of:  government funding; venture capital; academic excellence and entrepreneurial expertise.  In years past, this government funded “assembly line”, has led to discoveries, such as:  ENIAC, the first general-purpose computer; TV; the PC; the Internet, mapping of the Human Genome, GPS, etc.  And, such discoveries and innovations spawn new industries—and thousands of high-paying jobs.

Since his Announcement on the Paris Accords, last week, Donald Trump has chosen to Isolate America from the world, at large.  That will impart our commitment to education, as well as our global excellence in science and technology.  What bright student from overseas would want to study, let’s say, Engineering in the U. S., when the most-respected professors are moving overseas, in search of research funding?  As a result, we may very well see a rapid decline at our various technology hubs.  So, is this really Donald Trump’s Plan, to Make America Irrelevant Again?

, , , ,

Leave a comment

WILL DONALD TRUMP AND TREASURY SECRETARY STEVE MNUCHIN PROCLAIM THE NEW 21st CENTURY GLASS-STEAGALL ACT, BUT ONLY METAPHORICALLY?

The Banking Act of 1933, commonly referred to as the Glass-Steagall Act, ushered in various reforms, to assist the Nation’s Recovery from The Great Depression.  “Glass”, which was part of (new) President Franklin D. Roosevelt’s “New Deal”, broke-up the Banking Industry, and created Federal Deposit Insurance.  It was made permanent in 1945.

Prior to “Glass”, companies could engage in both commercial and investment banking, which meant that risky securities actions might jeopardize clients’ deposits, and there wasn’t any deposit insurance either.  In the mid-1980s, however, many of the banking restrictions were lifted, and mostly larger banks transformed themselves into Financial Services Supermarkets.  Also, making “banking” even more precarious: the number of products and financial institutions, has frown considerably since the 1930s.

In October of 2008, President George W. Bush bestowed many billions of dollars on the largest banks, in order to enhance liquidity within the banking system.  Unfortunately, that action was interpreted, by many, as conveying an explicit Federal Government Guarantee of what became to be called the “Too Big to Fail” banks.  That general assumption merely led to an even higher concentration of financial business, on the few, but same, largest—or Too Big to Fail Banks.  Thus, the solution worsened the problem!

Following The Great Recession (4Q07-to-1Q09), President Barack Obama signed the Dodd-Frank Act into Law, in July 2010.  Dodd-Frank reined-in the banks, required required high equity capital standards, and was intended to separate the investment risks from consumer deposits.  The GOP, however, has sought to repeal Dodd-Frank ever since!

Treasury Secretary Steven Mnuchin, who is Donald Trump’s lead-man on banking laws, has been suggesting that he might propose a “21st century version of Glass-Steagall”. Donald Trump has also been saying the same thing!  Today, Senator Elizabeth Warren called Secretary Mnuchin to task, at a Senate Finance Committee Hearing, as linked from CNBC-TV.  She noticed that he had been avoiding the question of whether, or not, the Trump Regime would break-up the banks.

Finally, Secretary Mnuchin realized that he had to answer the question, and his response was still quite convoluted: “it’s a complex issue”; “not a good thing”. and finally “NO!”   He stammered when she asked him how they could be considering a “21st century version of Glass-Steagall—a law which specifically broke-up the banks—with one that would not.” Mr. Mnuchin suggested that he would bring a team from the Treasury Department to brief the Senator’s Staff.

Secretary Mnuchin seemed to be avoiding answers from most of the Senators on the Committee—especially the Democrats—as he offered to provide briefings, similar to those offered Senator Warren, to a number of other Senators.  Surely, the Secretary of the Treasury should be expected to appear before the primary Senate Committee, which regulates his office—and be totally prepared! And it should be obvious to most Americans that, so soon after the 2008 Banking Crisis, that the status of the Banking Laws would be Question Number One, Two and Three!

, , , , ,

Leave a comment