Monday, December 25, 2017

The Great American Fiscal Rape (aka The Looting of the U.S. credit line)


The Great American Fiscal Rape (aka The Looting of the U.S. credit line)

When people find that they can vote themselves money that will herald the end of the republic.

- Unknown

Come then, tell me, dear friend, how tyranny arises. That it is an outgrowth of democracy is fairly plain.
    Yes, plain.
Is it, then, in a sense, in the same way in which democracy arises out of oligarchy that tyranny arises from democracy?
    How is that?
The good that they proposed to themselves and that was the cause of the establishment of oligarchy - it was wealth, was it not?
    Yes.
Well, then, the insatiate lust for wealth and the neglect of everything else for the sake of money-making were the cause of its undoing.
    True, he said.


By J.M. Hamilton (12-25-2017)

Holiday Greetings & Salutations from San Antonio, Texas.

As a student of economics, history, and politics - one of the great concerns expressed about democracies and republics - that I have encountered -  is that they are prone to collapse, when the public learns that they can vote themselves government money.  That is to say, the 99% learn they can reach into the government till and take out far more than the government receives in tax revenue.

Republicans have often proclaimed themselves to be the guardians of fiscal virtue, and advocates of fiscal sanity. It is Republicans who often claim that that it was FDR's New Deal policies, and the Great Society policies of the 60s and 70s, that would bankrupt this nation. 

How ironic then that it is not the Dems and liberals who threaten the nation's fiscal health, nor the 99%, but the Republican Party - and the Oligarchy that owns the Republican Party - that threatens: the nation; our Republic; and United States' national security.  

How is the United States threatened?  

The Republican Party has done this by trashing the fiscal health of the nation, via tax cuts for the exceptionally wealthy; launching wars w/out end; and by providing unpaid for welfare for U.S. multinationals.  In other words, it is not the 99% that we have to worry about looting the nation, but the Republican Party and their owners, the Oligarchy.

The most recent example is Trump's tax cuts, which he signed into law last week.

These tax cuts are unpaid for - and mostly accrue to an elite few (more than 82% of the GOP tax cuts will be directed to the top 1% by 2027, once middle class cuts are phased out) - and are expected to add anywhere between a trillion to two trillion to the annual deficit. In short, the Republican Party is borrowing from the nation's credit line - and against this nation's exorbitant privilege, our global fiat currency - to pay for tax cuts that will disproportionately accrue to multinationals and the wealthy.  

Note: Dems used to get a bad rap, per Republicans, for being tax and spend liberals; but far more insidious than tax and spend liberals are borrow and spend Republicans.

(And Republican tax policy is little more than Keynesian policy in reverse.  Lord Keynes, during a recession, would advocate government expenditure to spur the economy and close the economic gap, so as to make up for the temporary deficiency in private sector spending.  

What the Republicans have done is reverse engineer fiscal stimulus by looting the nation's credit line, and handing out fiscal stimulus - in the form of unsustainable tax cuts - for: heirs & heiresses; multinationals; and the exceptionally wealthy.  The result is a highly ineffective form of government stimulus - it is a bastardized form of Keynesian stimulus called trickle down economics. Instead of tapping into the government credit line and providing jobs for the 99% and spurring aggregate demand; the GOP has tapped into the government credit line to provide tax cuts for the billionaires, in the hopes that a few crumbs will trickle down to the 99% and spur demand.)

How do we know that Republican tax stimulus will break the bank, that is rape the nation's credit line (and it's not entitlements that are causing the fiscal problem)?


Consider the following:

The period of massive tax reductions, particularly for the wealthy, started w/ President Reagan in the 80s to the present day;

During the last 37 years, from Reagan forward, every single year has produced a fiscal deficit, but for three to four years, late in the Clinton presidency;

During the last 37 years, the national debt has exploded, so that the debt to GDP ratio has climbed from under 50% to over 100%, in the present day;

To further emphasize the point, when POTUS Clinton handed POTUS Bush a legacy of unheard of fiscal surpluses, it wasn't so-called welfare spending or entitlements that caused the deficits to reappear, but Bush's (W) tax cuts for the rich and the initiation of two wars, post 9-11.



President Donald Trump reportedly told friends at his swanky Mar-a-Lago resort "You all just got a lot richer," hours after signing the GOP's massive tax bill.  Business Insider


Republican like to say high taxes are a threat to the economy, but the GOP also likes to cite the Eisenhower years as the halcyon days of GOP achievement, and the great American economy.  It was under Eisenhower, however, that the top tax rate was approximately 90%, and the capital gains rate was higher than it is today.  And yet the economy produced annual GDP growth that often exceeded 3 to 4% annually. Today's GDP is bogged down and constrained by an unsustainable national debt (caused, in no small amount, by GOP fiscal mismanagement).

In short, higher tax rates in the 50s were not deleterious to the U.S. economy; nor is entitlement spending a threat to the U.S economy today (albeit it certainly would have been helpful had FICA revenue been allowed to accrue in a trust fund and collect interest income or investment revenue, instead of being spent by politicians to meet current Federal expenditures and pork-barrel projects).


But rather, it is borrow and spend Republicans that threaten the fiscal heath of the nation, the nation's credit line, and our national security.  Their irresponsible borrow and spend tax policies line an elite few's pockets, while threatening the nation's fiat currency, the dollar.

For how long will nation states want to hold dollars, or purchase the nation's debt, when they figure out America will never have the means of repaying its national debt, except by printing money in a glorified Ponzi scheme?

After 37 years, one would think the GOP would know better, and they probably do.  One would either have to be fatuous or nescient, or insane, to believe that tax cuts for the rich will spur the economy in the face of ever mounting hard evidence and facts.

Today's GOP doesn't even attempt to use logic anymore.  Instead, they rely upon the apathy and nescience of their aging voter base, and have stated this latest round of unsustainable tax cuts is direct payback to their plutocratic donors/owners.  Which is obvious, because not only are the GOP tax cuts unsustainable, they are unfair.  Multinationals see more than a dozen points shaved off there corporate tax rates, permanently, while most Americans will be lucky to see a couple of points removed from their bracket, temporarily.  

Moreover, what little relief the middle class did receive is likely to evaporate before a wall of GOP imposed: austerity; entitlement cuts; and higher health insurance premiums (as a result of Republican efforts to gut the ACA).

Today's GOP is no longer the party of Lincoln; but rather, Republicans more closely resemble organized crime, & private equity, who bust out victims and corporations by maxing out their credit lines and liquidating businesses for personal gain.

Except instead of busting out individuals, sole proprietors, and corporations - like organized crime & private equity - the GOP is raping the nation, by maxing out the U.S.' credit line.  

Did I call the ruling class an Oligarchy?  Kleptocracy is more like it.

Copyright JM Hamilton Publishing 2017

P.S. One way for future voters, and generations, to right the wrongs of this latest GOP instigated theft is to close a vast directory of loopholes available to the idle rich, multinationals, and the billionaire class. And institute a corporate minimum tax based upon EBITA, so as to cut out the gaming of tax payments that often takes place, via financial engineering.  And finally, eliminate hedge fund's & private equity's carried interest loophole

Remember: A fool and their credit line are often parted.


Saturday, December 9, 2017

Crypto

Crypto


Oh, I have slipped the surly bonds of earth, And danced the skies on laughter-silvered wing…

-       John Maggee, Jr.


When I find I’m wrong, I change my mind. What do you do?

-       Lord Keynes

By J.M. Hamilton (12-10-2017)


Cue the Telemann.  Pop the blanc de blanc... add OJ to fight off this wretched cold.

Okay, let's go.

The fear hit about 90 days ago.  Since this blog's founding in 2010, I've done at least two pieces, per annum, on the most powerful branch in the Federal government, the phantom branch.  At least twice a year, JMH has written about the most powerful person on the planet, The Chairperson of the Federal Reserve.

But not this year.  What could possibly be written that hadn't already been covered?

And then it happened, as these things often do... a rocket ship burning straight through the earth's atmosphere and possibly, slipping the "surly bonds of earth."  

High Flight, indeed.  Cryptocurrency.  Bitcoin.  Fool's gold or salvation for the world?

It depends on who you listen or talk to.  And clearly the jury is still out… mania like qualities shroud the cyber-currency, presently, which make it ripe for abuse and the short sale.  Exchanges, and some banks, are signing on to various trades concerning cryptocurrency, and in the U.S., bitcoin futures trading begins Sunday. 

One thing is clear, many within the academic & financial establishment, as well as, central banks & government loathe bitcoin.  Which alone makes it worth writing about.

It began the year at less than $1,000 - per unit, and last Thursday this juggernaut crashed through $17,000.  Bitcoin has a market cap, presently, that exceeds the net worth/market cap of billionaires, Goldman $achs, and the GDP of many nation states.  Like all fiat currencies, its worth is perceived, that is to say, faith based.  Bitcoin could just as easily be made of seashells, linen, or polymers & tallow. Instead, bitcoin exists in the cyber realm.


Which means - given its current notoriety, and as with all thing economic & financial - Bitcoin has always been highly political and its about to become even more so. 

Some nation states - like China - have already banned its citizens from trading in cryptocurrencies.

While watching my favorite news show last week, Bloomberg Surveillance, there were two exceptionally bright/well educated men on the program, in as many days:  one, Mr. Folkerts -Landau, who described the abuse central banks have heaped upon asset prices, markets, nation states and their citizens & economies (via overextension of highly accommodative monetary policy); and a second guest, Mr. William Buiter, who lashed out at Bitcoin with great fury.  

Intentional or not, an excellent pairing.  

Mr. Folkerts-Landau and Mr. Buiter were - no pun intended - arguing from opposite sides of the same coin, and neatly captured the heart of the debate before us.



Whether you're an anarchist, fiscal conservative, liberal, libertarian, Marxist, or merely a citizen, who happens to care about the value of the currency they are holding and its sustainability (trust me, given world debt levels, we should all care)... there's something very exciting about a currency that is completely autonomous and free of the misuse - all too often - loaded upon fiat currencies by there governments.  (As interesting as the cryptocurrency is, the blockchain technology utilized to track and provide a ledger for bitcoin ownership and trades is an equally interesting story.  Blockchain applications span other industries and potential uses.)

There is also something rebellious and revolutionary about cyber-currency that also tracks with the populist revolt seen, now, throughout Western democracies.  Revolts where citizens have become quite explicit that they have had enough of plutocratically controlled, and owned, center-left and center-right political parties.  And just as mainstream political parties have become captured and owned by a cadre of billionaires and multinationals, so too have central banks.  Look around the globe and central banks are often run by banksters and Goldman $achs alums.  Mark Carney, head of the BOE, Goldman alum; Mario Draghi, head of the ECB, Goldman alum.  And Mr. Trump's new appointment to Chair the Fed, Mr. Powell, comes from private equity (predatory capitalism defined).

Cyber-currency, arguably, is a revolt against these central bank institutions, the Wall Street men who control them, and the repercussions of a decade of hyper-accommodative monetary policies, as well as, the 2007-2008 crash itself (spawned in part, by central bank policies).  JMH is not saying that all present owners of bitcoin are bomb throwers and revolutionaries (many are undoubtedly, in it for the speculative gain); but I am saying that the founding of cryptocurrencies was a natural blowback against central bank policies, corrupt world governments, and the oligarchy's monetary policy capture.

Bitcoin --- if its pool of liquidity & worth continue to grow; if it is legitimized by world governments; and if ultimately, cryptocurrency is accepted as a form of currency by commercial establishments --- could upend commercial banking models, central banks, and central bank monetary policy.  Longer term, highly abused global fiat currencies could, potentially, fall.

Hence the reaction from many w/in the economics and financial establishment.  Most of the objections to cryptocurrencies are as follows: they are used to fund criminals and criminal enterprise; cryptocurrency is used to evade taxation; it can be used to fund terrorism; and it's associated with money laundering & illegal capital mobility.  Cryptocurrency could also, possibly, be used as an end around OFAC economic sanctions.

To which JMH responds: yes, but every fiat currency around the globe – particularly, in the form of cash - is used for similar criminal enterprise and illicit endeavors.  For starters, 90% of all U.S. cash in circulation possesses cocaine traces.



Future coin of the realm?


And what exactly have central banks done for the 99% that makes citizens continue to want to utilize our current currencies, central banks, and monetary policies (?):

The Federal Reserve papered over the 2007-2008 financial crisis, bailed out Wall Street banks, and a financial oligarchy that brought chaos and ruin to the global economy.  And we are still feeling the effects of the crash to this very day.

Central banks printed trillions out of thin air, allegedly, in order to give banking institutions and governments an opportunity to reform; and yet, this money - often provided at little or no interest & often with no strings attached - was often used to prop up zombie banking institutions (see Southern Europe, particularly Italy).  On Wall Street, arguably, a capital strike occurred, as the loan to deposit ratio slipped. 

What gratitude.

In the U.S., as a result of Federal Reserve policies, Wall Street banking institutions grew larger, more concentrated, and their control & ownership of assets - and Western governments - only grew more powerful.

Was this free money - provided by central banks - used to ease the burden of ordinary citizens and kick-start the economy?  Write down loans, restructure mortgages, forgive student debt.... all of which would have had a simulative impact upon the economy... not a chance.

Equally nefarious, central banks suppressed interest rates and bought up huge amounts of toxic assets/debt, highly speculative instruments, and in some instances, corporate debt and stocks (see the ECB & EU). Mom & pop, savers, retirees were robbed.  While robber barons and captains of industry used cheap debt - sponsored by central bank policies- to leverage up corporate balance sheets, engage in financial engineering, evade taxation, and pay themselves fat bonuses & dividends.

And they call bitcoin a facilitator of criminal enterprise.  Really?

Post crisis and thanks to central bank policies, record amounts of M&A and industry consolidation ensued, w/ its attendant layoffs and pink-slips.  And we wonder why - despite the fiction of super low unemployment - labor force participation remains exceptionally low.

Perhaps as insidious as all the above, central bank policies - by financing federal debt at record low yields (German bunds nominal & real yields are negative) - have allowed politicians to exploit the United State's "exorbitant privilege" to finance tax cuts for the wealthy, finance war w/out end, and pay for all manner of corporate welfare on the backs of future generations.

Libertarians & Liberals: Sick of the deep state/the surveillance state, the US empire, wars w/out end, and US war crimes.... thank the Federal Reserve, which provides a credit card for all this, so that the national debt now exceeds 20 trillion dollars.  

Notice however, the Federal Reserve credit card does not extend to entitlement spending (Social Security, Medicare, Medicaid, and the ACA), which POTUS Trump promised not to touch, and in the case of the ACA, actually pledged to enhance... and now, the GOP controlled Congress is getting ready to take a chainsaw to entitlements to finance tax cuts for billionaires, multinationals, and heirs & heiresses.

Our fiat currency also gives the U.S. unprecedented power over nation states... if a Latin American country defaults on their debt, they are likely to end up in a U.S. courtroom, their sovereignty stripped, and paying U.S. vulture capitalist exorbitant sums (in essence, pay up, or we'll crush your economy, and cut your nation out of capital markets).



This is what central banks do and its wrong.  And now, we know some of the economics and politics behind cryptocurrency.  Cryptocurrency is an agent of change; cryptocurrency has the potential to be a great disrupter of banks and central banks (and a trickle down monetary policy that has left the 99% high & dry).

If a cyber-currency, or cryptocurrencies, takes off, and global governments do not outlaw it or sabotage same (via futures & options/swaps & derivatives, or by co-opting aspects of the cryptocurrency model) - its potential is limitless.  

Need a loan?  Cut out the middle man - the world's greatest welfare queens, Wall Street banks.

The abuse of markets, the citizenry, the criminality & venality surrounding unlimited war... would likely, be significantly curtailed as governments are forced to live w/in their means.  

Asset prices and markets juiced by dovish central bank policy: gone.

Why?  Because the citizenry would, likely, dump the dollar – or nation state currencies - in exchange for unmanipulated cryptocurrency. 

Multinationals would gladly accept a universal cryptocurrency.  The elimination of the cross-currency hedging costs alone would make one world currency appealing.

Political parties with extremist ideologies - advocating trickle down tax policies, unlimited war, and corporate welfare, at the expense of entitlement spending - would, likely, become extinct (such deviant policies, no longer financed by the credit card afforded by government controlled fiat currencies and central banks).

Hmmm.  Cast in that light, cryptocurrency is beginning to sound rather appealing. Less money for war, less money for multinational welfare, less money for tax cuts for the wealthy: democracy and voters would insist upon it.

It would also force world governments to deal with the colossal debt bubble that bank bailouts, central banks, and crony capitalism have fueled.  

If fiat/nation state currencies lose their "exorbitant privilege" - due to a crypto-usurper -  there only, likely, hope at redemption and salvation would be to hit the reset button and write down nation state debt (yet another threat to the global multinational banking model).

To be sure, there are times when monetary policy and stimulus are appropriate, but as Mr. Folkerts-Landau indicated on Bloomberg, such policies have become a massive crutch for the West (and even China).  Monetary policy should not be utilized by politicians to kick the fiscal can – and unsustainable global debt – down the road, indefinitely, for future generations to deal with (so a handful of people, at the top, can become wealthier).

It’s both absurd and morally reprehensible.

Crypto may force, finally, a day of reckoning.  The advent of cryptocurrency is coming at a time that the globe’s citizenry are waking up to the abuses heaped upon them by mainstream political parties, co-opted by the billionaire class and multinationals.  The 99% are less aware of how much this abuse is facilitated by centrals banks, but they're learning.

Finally, bitcoin is still in its infancy - and while cryptocurrency sounds great in theory - the sustainability of the current crypto/blockchain model will, undoubtedly, be tested and retested many times.  Whether bitcoin burns up and implodes upon reentry into the earth's atmosphere - in a speculative binge or a pump & dump scheme (or set up for failure by Wall Street & government) - or becomes highly successful remains to be seen.  

Either way, bitcoin will undoubtedly pave the way for a learning process and possibly, future cyber-currencies.



Copyright JM Hamilton Publishing 2017