BALTIMORE – Have we been too cynical?
Yesterday, the House passed its big tax-cut bill. The Dow popped up 187 points on the news. A reporter asked us later: “Will the Dow go to 40,000?”
Assuming a tax bill comes through the Senate and out of committee in more or less the same shape, it will be a bonanza for your editor.
We are one of the people who will benefit most (relatively speaking). Most of our income is “pass-through” money from an S corporation… and we need protection from estate taxes.
Thank you, Donald Trump and Paul Ryan!
In addition to helping us, Republican sponsors say it will increase growth rates and jobs.
Hmmm… How will it do that?
Stimulus, of course. The bill will reduce federal tax revenues by $1.4 trillion over the next 10 years, says The Wall Street Journal. And the Tax Foundation says it will cut the feds’ income by $1.08 trillion. Meanwhile, the Penn Wharton Budget Model predicts that it will add $6.9 trillion to U.S. government debt by 2040.
All of these cuts… and increased debt… are expected to stimulate the U.S. economy. Steve Mnuchin, formerly a Goldman insider in Manhattan, and more recently a movie producer, says these tax cuts will cause the economy to grow at a sustained 3% rate… and increase federal tax revenues by $2 trillion. Everybody comes out ahead.
Do you believe that, dear reader?
We hope not; it is nonsense.
The feds are parasites; what counts is how much blood they suck. This new tax scheme doesn’t reduce government spending by one penny.
Ultimately, the money they spend has to come from the productive economy; there’s nowhere else to get it.
Here’s our simplified guide to tax reform:
The poor have no money.
The middle class has no lobbyists.
The rich have no desire to pay more.
But why should giving the rich more money stimulate output? Are they having trouble making ends meet? Do they lack capital?
According to a new report by Credit Suisse, the richest 1% of the world’s population already controls half of its total wealth. They have plenty of spending money; giving them more is not going to appreciably increase consumption. And if they need more money, they can borrow at the lowest rates in history.
We’ve heard of no business in recent American history that failed… or failed to expand… because it lacked capital. On the other hand, thousands of businesses are failing because they lack customers.
Which brings us to the rest of the population – the part that isn’t rich… and has no lobbyists… the part that must earn and consume to make an economy run.
Return of Subprime
U.S. household debt hit a record of $13 trillion last quarter.
Here are some details from financial commentator Wolf Richter:
Mortgage debt surged 4.2% year-over-year, to $9.19 trillion, still shy of the all-time record of $10 trillion in 2008 before it all collapsed.
Student loans surged by 6.25% year-over-year to a record of $1.36 trillion.
Credit card debt surged 8% to $810 billion.
“Other” [debt] surged 5.4% to $390 billion.
And auto loans surged 6.1% to a record $1.21 trillion.
All of these credit cards will come tumbling down in the next financial earthquake, but the $1.21 trillion auto-loan market seems particularly wobbly. Wolf continues:
Of all auto loans outstanding, 2.4% were 90+ days (“seriously”) delinquent, up from 2.3% in the prior quarter. But delinquencies are concentrated in the subprime segment and all hell is breaking loose there.
[N]ot all subprime loans are cut from the same cloth. The 90+ day delinquency rate for subprime auto loans originated by banks dropped after the Financial Crisis and has since remained fairly steady. In Q3, it was 4.4%, down from 7.1% at the peak of the Financial Crisis. So, the subprime auto-loan fiasco is not going to topple the banks.
In contrast, the 90+ day delinquency rate for loans originated by auto finance companies has been soaring since 2013. In Q3 2017, it hit 9.7%.
This 9.7% is the highest delinquency rate since Q1 of 2010. And it first hit that rate on the way up during the Great Recession in Q3 2008, during the Lehman moment. A year later, it peaked at 10.9%.
Will easing taxes on businesses and rich people help these subprime borrowers make their payments?
Will it help students – who were lured into debt by the feds – pay their loans?
Will it lighten the load from credit cards?
Well, it could… if the feds’ “stimulus theory” was correct.
Since 2009, the Fed has added $3.6 trillion of stimulus money into the economy by way of its QE programs and U.S. government debt doubled.
It produced the weakest recovery ever… the worst jobless rate since the Great Depression… and an economy so limp and unappealing that even life expectancies are falling.
Since 2000, central banks worldwide have added $20 trillion to the global economy… lowering interest rates to absurd levels… and boosting world debt to $225 trillion, approximately three times world GDP. World GDP growth rates have fallen.
In 1981, President Reagan passed a tax-cut program far more ambitious and aggressive than the House Republicans’ version.
Colleague David Stockman, who was Reagan’s budget director at the time, says it gave the economy 10 times more stimulus.
There was a spurt of growth… then GDP growth rates trended lower for the next three decades. They are still falling.
We doubt the present initiatives will do anything to stop that trend. Instead, they will speed it up.
MARKET INSIGHT: BITCOIN CLIMBS HIGHER
By Chris Lowe, Editor at Large, Bonner & Partners
Bitcoin is poised to smash through the $8,000 mark.
It’s now up 683% from its January 1 price of $998.
The world’s first cryptocurrency has added $41 billion to its market value in the past six days alone.
– Chris Lowe
Has the Amazon Effect Been Exaggerated?
Amazon’s e-commerce business has been expanding rapidly. It’s been putting traditional brick-and-mortar retailers in dire straits. But impressive earnings from some of America’s big-box stores show that traditional retailers are fighting back.
Exchange-traded funds (ETFs) have been a popular investment vehicle in 2017. Inflows to ETFs have almost hit $400 billion since January 1. And thanks to three new rules that are about to take effect, ETFs will become even easier to invest in.
How to Spot a 100-Bagger
A “100-bagger” is a stock that returns $100 for every $1 invested. One of Bill’s top analysts, Chris Mayer, shows how you can spot these biggest winners.
Below, readers consider what will happen when the robots take over…
Hilarious. We’re too stupid to be out-thought by machines. Turing was ironically correct with his "Imitation Game." We can’t be fooled by thoughtful consistency!
– Tea C.
I think your essay “When the Robots Take Over” contains some of your best advice. Everyone, just chill out. Don’t let fear distract you from what is important – love your families (and tell them so every day); find something (no matter how small) each day, that makes you glad to be alive to have seen it or felt it or experienced it; and never lose sight of the fact (no matter what beliefs you may hold) that today, and this instant, is the only time you have, so treat it like the precious gift that it is.
– Steve R.
Meanwhile, discussion turns to legal marijuana:
One of your editors, Nick Giambruno, wrote that states like Illinois might consider legalizing marijuana as a way to raise taxes and get out of the pension crisis they are currently in.
If legalizing the sale of marijuana is a great source of raising taxes for the state pension funds, can you imagine what the result would be if the states legalized and taxed the sale of all drugs such as cocaine, heroin, opium, etc.?
Instead of leaving this huge business to run illegally in the hands of the drug dealers, the states could take control. They would really start making big money, and at the same time, take all the business away from the drug cartels while saving millions of dollars every year on enforcement.
– Camilo Q.
You say the states should legalize marijuana for tax reasons? Right! Just make all our compatriots dopey zombies, then the taxes will dry out if no one can do any decent work anymore to earn his living.
Who will then pay the taxes to support all those socialist handout recipients? That’s just on the surface. But what about our human values and ethics, our culture and intellect? Going up in smoke?
– Gerhard G.