In the first two essays I covered the current situation and the recent moves that will bring the house down. In this third section on the economic crisis that is coming, I cover the foundation upon which our economic crisis has been built. These are the policies that have robbed the American tax payer of its economic future.
In the beginning…
In 1944, the US Dollar replaced the British Pound Sterling as the world’s default currency. But the structure of that replacement required certain steps taken that we did not take. With each policy decision that our well intentioned political leaders have introduced, we have made things worse, and worse, and worse. It is time to pay for our sins. This is nothing short of fiscal atonement.
The root causes of today
There are multiple reasons for the disaster that an economic crisis unfolding. For sure, the Chinese equities markets will collapse the house. Obama Administration decisions have destroyed our ability to survive a crisis unscathed. But all of this could have been avoided had there not been a series of self-serving policies implemented by previous Presidents and Congressional leaders since 1944 and especially since the global economy converted to a fiat monetary system in 1971.
Essentially, by decoupling the US dollar from a fixed commodity such as gold US politicians, beginning with Nixon, were able to manipulate the currency through macroeconomic policy. This helps the big boys. Of course, you the “little guy” would not know how bad those policies are to the overall vitality of the US economy. Why? “Free Stuff”… With each fiscal manipulation, politicians have hidden the impact with “free stuff,” or stuff that supposedly benefited the common citizen.
NOTE TO AMERICANS: THE LITTLE GUY ALWAYS PAYS THE TAB!
Here are the five manipulative policies that have devastated the American economy and American competitiveness.
Debt and Borrowing Rates: The US debt has grown to such a size that interest on the debt itself is growing at a rate that will surpass revenues collected in the form of taxes. Think of it like this: if you had a credit card that was maxed out and every dime you made and paid went toward paying just the interest payments on your credit card – you never touch the principal. This is an unsustainable trend that will undoubtedly sink the value of the US currency without utilizing manipulative monetary policies to create inflationary reductions in the value of debt, but by manipulating monetary valuations we risk hurting other sectors of the economy.
- Theoretical basis: Karl Marx and Maynard Keynes (kind of)
- Who it helps: Supposedly all of us since debt is directly affiliated with Government spending, apparently for things that Americans need, like health coverage and a strong military;
- How it hurts: eventually you have to pay the tab and the only ones who will pay are the American people – through taxes.
- Which Party is to blame: Both, but mostly Democrats who advocate more spending as a fix to economic woes.
- Risk: An interest rate trap. The Government cannot pay off the debt and eventually its interest payments overrun its tax receipts (we are there now), requiring the Government to borrow more to make its payments. As it borrows more, its bond ratings and credit worthiness drop, raising the costs of borrowing and increasing the rate of interest. With each subsequent interest rate there is an increase in the costs of borrowing compound upon one another making the debt an impossibly high amount to manage and ultimately leading to a national default.
Fed Quantitative Easing (QE): The Federal Reserve Bank (Fed) is purposely seeking ways to inject inflation through monetary manipulation, i.e., artificial inflation vs real inflation (real is the net effect of supply and demand when demand outweighs supply). They have done this three times since Obama became President. This is a play on the concept of supply and demand –but with dollars. Essentially, if dollars are in demand (through borrowing) than increasing the monetary supply decreases the value of the currency, making goods purchased by means of debt today cheaper tomorrow. If I borrow $1 today to buy an item, the amount I borrowed yesterday will be comparatively lower because the value of a dollar in an inflationary environment will be lower than it was when I first borrowed the dollar. Think of it like a house: in 1970, buying a house for $6500 was a lot of money; in 2015 that house sells for $250,000. Supposedly, QE lowers the overall value of the current national debt, the debt of all Americans, and the debt of large institutions/corporations relative to the value of the dollar and revenues in the future. The other supposed effect of a weaker currency is the export competitiveness of the United States. The assumption is that a weaker dollar will make US manufactured goods cheaper relative to those manufactured in more costly fiscal environments (e.g., German car manufactures making cars in Euros vs American cars made with the cheaper dollar).
- Theoretical Basis: Primarily Milton Friedman
- Who it helps: Stock brokers, without question because large corporations rely on debt to sustain their future revenues. These large corporations need to borrow and the cheaper that debt becomes, the better for them. The other group helped, supposedly, is the US taxpayer, since a weakened currency helps reduce the net value of the National Debt.
- How it hurts: Ugh! First, the assumption that a weakened currency helps US export manufacturers is silly because all commodities are dollar denominated. Thus, unless we intend to compete with China in low-tech manufacturing (e.g., making tee-shirts), we are actually hurt by a weakened dollar because it costs more dollars to make the things that our real export competitors, the Europeans, can buy with less Euros. Commodities have an inverse relationship with the dollar. The dollar goes down, commodity costs go up and vice versa. Reagan, GH Bush, and Clinton’s economic team understood this; GW Bush and Obama did/do not. Additionally, the policy is designed to stimulate borrowing. If deflationary challenges emerge, i.e., reverse inflation (debt is a higher value tomorrow than today), than those holding debt simply cannot pay their bills because they will not be able to keep up with principle payments, let alone interest payments on higher principle amounts. Finally, small and medium sized businesses without debt options are hurt the absolute most because the carry accounts for the services or goods they provide to large corporations cost more by the time they get paid on those goods relative to the money they finally receive at some point of time in the future. In other words, Main Street businesses are paid less for the goods that they buy from Wall Street backed corporations.
- Which Party is to blame: Both – unequivocally, but the Fed is the primary driver of this flawed attempt to soften the blow to the economy when it is in a down turn (as experienced from 2000 – 2003 and post 2008). The Democrats most recently, with a wink and a nod from the RNC.
- Risk: Deflation, a Liquidity Trap, and a Massive Depression. There is a level to how low the Fed can bring the US dollar before it eventually (A) completely crashes [Weimar Republic style] or (B) rebounds uncontrollably. The latter is more likely because there are no competitors to the dollar in a dollar denominated world. Unlike the Weimar Republic, the German Deutschmark of 1920s Germany was not a dominant currency; the Pound Sterling and to a lesser extent, the US Dollar were. The Euro, the only other truly global currency, is unstable and thus not truly a competitor to US dollar domination. Consequently, even the slightest uptick in value can lead to an uncontrollable dollar bubble that would crush debt holders. An interest rate hike, even a nominal one, would achieve this effect. When the dollar reverses course, those holding debt – the Government, Corporations, and taxpayers alike – will all find themselves paying more tomorrow for that which they borrowed today. This is akin to the house purchased in 2001 for $400,000 valued at $250,000 today. Getting out of the house is nearly impossible. Now compound that problem by $20 trillion.
Fed Interest Rate Policy: in an attempt to boost the economy, the Federal Reserve has kept interest rates at extraordinarily low levels. This had a two-fold affect. First, it lowers the rate of borrowing for debt heavy corporations and a debt laden US population. In essence, this makes borrowing cheaper, thus freeing cash ostensibly for the purpose of either (a) paying down the principle faster and/or (b) freeing cash to spend on things other than debt (e.g., purchasing consumer goods, investing in R&D, etc). The second effect is more complex: it weakens the value of the US dollar. Lower interest rates, especially when coupled with quantitative easing (i.e., increasing the supply of money), generates artificially manufactured inflation by lowering the value of the US dollar relative to other globally traded currencies. This supposedly (A) increases export competitiveness and (B) decreases the long term value of the national debt [theory: $17 trillion in debt today will seem like pennies in twenty years… thirty years… etc]. Finally, it also reduces the costs of holding debt through institutions external to the US Government, the largest such institution being the Fed itself. Remember, the Fed is NOT a US Government entity. It is the primary bank of the United States and it either buys bonds or sells cash to the US Government in its time of need. But it is an independent bank.
- Theoretical Basis: Primarily Milton Friedman
- Who it helps: Stock brokers because primarily large corporations rely on debt to sustain their future revenues. These corporations need to borrow and the cheaper that is, the better for them. The other group, supposedly, is the US taxpayer, since a weakened currency helps reduce the net value of the National Debt. The other notion is that commoners – like you and I – will cash out our home equity loans due to lower interest rates and buy “stuff” from Wall Street backed companies, like Lowes and Best Buy.
- How it hurts: Like QE, it stimulates borrowing and supposedly reduces debt while lowering the overall value of the currency. What it also does is hurt bond holders who may be faced with either (a) higher yields as credit worthiness drops, thus taking away potential lenders when the money is really needed, (b) placing companies at risk of unsustainable interest payments when deflationary pressures finally emerge, and/or (c) both. The other effect, as discussed, is that it hurts US dollar values. There is another problem however: borrowing valuations. This game is very much like the US Government stating that it will borrow from itself and pay itself an interest rate for the amount it took from the piggy bank, BUT there are other institutions that hold that debt, too, namely the Chinese Government. Keeping interest rates too low eventually recreates scenarios within which slightly higher risks seem like better options for investors and they turn elsewhere for higher interest rates. If that happens, you lose the buyers of US debt needed to sustain that debt. A spiral begins…
- Which Party is to blame: Both – unequivocally
- Risk: Deflation, a Liquidity Trap, and a Massive Depression. Same issues as with QE. Essentially, we are doubling down on the pain.
Well-Intentioned Public Policies: The net effect of multiple policies predominantly designed to help the poor, but also to stimulate growth, have had almost the exact opposite effect. These policies are always well intentioned. Feeding the poor, educating the working class, and providing safety nets to the unemployed are some of the examples. Other programs are designed to stimulate business growth, such as tax breaks for multinationals and subsidies for large scale agricultural yields. However, most often these plans do not follow sound economic policies and they create loses from sectors of the economy that are not “helped” by such policies.
- Theoretical Basis: almost every philosopher from Aristotle to James Buchanan; Thomas More to Mikhail Bakunin… Although Keynes plays the dominant role in US political-economic policies, these policies typically follow religious and social guidance versus economic and mathematical facts.
- Who it helps: The poor, who are often touted as being the beneficiaries of government largess. It also helps the wealthiest because often their lobbyists can dictate policy through persuasion. Thus, when you wonder why a woman with a WIC card is allowed to buy Coca-Cola or Lays Potato Chips, you can thank the wealthy lobbyists who turn to their Democratic Party allies and say, “Poor people should be allowed to buy soda and goodies with their subsidies…” Why? Because those same wealthy lobbyists want to ensure Coke sales stay high. Add to this mix certain lobbyists that represent groups like Archer Daniels Midland (makers of high fructose corn syrup) or the National Potato Council – the chief salesmen of French fries – and you get subsidies for foods that yield no nutritional value to the poor that are supposed to receive assistance, but line the pockets of off-shore corporations at the expense of the Middle Class.
- How it hurts: The middle class ALWAYS pay the tab. Always! Others include small and medium sized businesses. They are neither capable of affording the policies supposedly designed to help the poor nor capable of keeping up with the hurdles necessary to enjoy the benefits of policy guidance from large corporations.
- Which Party is to blame: Both – unequivocally. The Democrats are by far the worst because they see the need for Government Intervention as part of an overall collectivist and equalizing force for good. But Republicans share some blame as they have tried to stimulate chosen economic sectors to supposedly stimulate growth.
- Risk: eventually, through policy manipulation, you create a two-tier economic class structure – rich and poor, only. You wipe out the middle class as each new policy stratifies society into competing groups: beneficiary [rich and poor] or the other payer [working and middle classes; small and medium sized businesses].
An Antiquated Progressive Tax Code and falling tax revenues relative to the true revenue potential of the United States: The tax code is pathetically out of sync with reality. Nearly 50% pay no taxes, but they think they do because weekly income taxes coupled with social safety net deductions (Social Security, Medicare) reduce the net value of their pay check. Yet, actual taxes return to them in the form of tax returns. Essentially, the government borrows from the working poor today (payroll taxes) to pay for its governing capacity yesterday (debt). The other 50% can be broken into two categories: the middle class and the top 15%. The progressive tax code is designed to get the wealthiest to pay more, but they do not. That is because the progressive tax code is predicated on income earned through wages not capital gains. The top 15% earn the bulk of their money through capital gains and consequently have the means to shelter those gains through a variety of investment vehicles both in the United States and overseas. That leaves only 35% of the population paying the tab for the poorest 50% and the wealthiest 15%. Let me give you an example of how this pays out:I do not think I have to go any further into the stupidity of the progressive income tax. It is outdated. A more rational and sustainable model would be a tax on consumption, such as a national sales tax, and allow all Americans to buy what they want. If you buy a Ferrari (Warren) you pay a 10% tax on a $500,000 car; if you a buy a F250 (Sam) you pay 10% tax on a $50,000 car. You catch everyone.
|Sam Jones, Owner of an Auto Repair Shop – his hands get dirty through hard work, so he is not cool.
Sam has a successful foreign car repair shop in a good neighborhood. He works really hard, reinvests in his shop, and makes $450,000 as an LLC – which is taxed like personal income.
Sam will pay approximately 38% to the Federal Government via taxes. $450,000 x .38 = $171,000 in taxes.
Democrats say this is fair because Sam benefited off of the economy so he must pay for it.
Republicans say this is unfair because Sam is a hard worker and should keep more of his money.
Sam pays his taxes and he does not have time to worry about public policy. He still has $279,000 (minus any city, county, and state taxes he may owe). Of course, Sam also has to use this money to reinvest in his business next year as well – including payroll for his employees or expensive hydraulic repairs.
Sam shows up to work every morning at 6A. Very uncool.
|Warren “Mullet,” Wealthy Old White Man, Friend of Will Farrell and Barak Obama – so he’s cool.
Warren makes $1,000,000 in 2015; $100,000 through income and $900,000 through Capital Gains.
Warren will pay approximately 33% on his smaller “salary” and 15% on his Capital Gains. [$100,000 x .33]+[$900,000 x .15] = $168,000 in taxes.
Democrats say this is unfair because Warren does not pay his fair share, but they continue to stay wedded to the progressive income tax while maintaining the need for lower capital gains necessary to keep investors in the markets who can continue to “invest” in the economy. So nothing is done.
Republicans say this is fair because Warren invests and therefore, should reap a reward from his risk taking behavior of a lower tax.
Warren walks away with $832,000. Obviously, since both parties favor Warren, he contributes to both parties, but especially the Democrats because the progressive income tax really helps him the most. He also does not worry about city, county, and state taxes because most of his income is made on investments that do not factor into those tax equations.
Jon Stewart kisses him in effigy. Obama proclaims, “SEE! Warren agrees with my policies…” So cool.
Why it will never change? Because the American Government needs to borrow from the working classes each week, through their payroll taxes, to fund its growth. If you go to work, we need your money to pay for yesterday’s mistakes.
Collectivists will further state that a national sales tax will hurt the poor the most because they proportionally buy more goods. This is a silly argument. First, we can make reasonable provisions to accommodate the poor (e.g., no tax on clothing that costs $20 per item, no tax on food, etc). But arguing that we risk hurting them by penalizing the poor for buying things like $200 Air Jordans, as advocated by Nancy Pelosi, is pathetic. We should be encouraging the working poor toward allocating that $200 toward a home or a retirement fund, not a pair of sneakers. Second, the fact that they buy more goods is due to their relative size compared to the wealthy. There are more poor people. But ten poor people can buy ten automobiles at $12,000 apiece and not equal the cumulative cost of one Porsche purchased by one wealthy individual. Thus, scale is important to weigh. In a national sales tax scheme, it is not the quantity of goods purchased, but the quality (value) of the goods that dictate tax yields.
- Theoretical Basis: primarily Keynes, but also Marx.
- Who it helps: The poor, who do not pay any taxes, and the wealthy who pay proportionally smaller taxes. Noting that the wealthy typically do not make an income via a paycheck, i.e., “income,” the progressive income tax does not catch them.
- How it hurts: The working and middle classes as well as small and medium sized businesses. The working classes have their incomes reduced through the year as the government borrows from them. At the end of the year, the working class will get that money back (mostly) in the form of a tax rebate. While the rebate seems cool, the devalued dollar should require the IRS to pay you an interest rate for borrowing YOUR money. After all, they would charge an interest rate if you failed to pay your taxes. The middle classes that get caught in the cross fire are those white collared professionals that make too much to get a rebate, but make too little to enjoy the benefits of the wealthy alternative forms of tax free income. They get screwed all around. Finally, small and medium sized businesses are often taxed like individuals. If the small company “makes a lot of money” it has to pay taxes on those revenues while larger corporations can keep their money off-shore and avoid the same responsibilities.
- Which Party is to blame: the Democrats! They love the progressive income tax. While Republicans continue to argue for new forms of taxation, the Democrats block them in every way.
- Risk: the progressive income tax is predicated on the idea of redistributive wealth. That is a tenant of socialism. The problem with socialism is that you eventually run out of other people’s money. The middle classes and small businesses cannot keep paying everyone else’s tab.
The cumulative result of these five factors is the creation of a fiscal structure incapable of sustaining a true economic crisis. While policy makers are patting themselves on the back for avoiding another Great Depression in 2008/2009, the reality is that they only postponed one. Like a rubber band, the longer you stretch it out you risk either snapping the band or shooting it with greater violence and force. Either way, both are bad.
Weak leaders for decades have given more and more to anyone capable of buying a favorable policy or anyone capable of delivering votes en masse.
Meanwhile, we the American Taxpayer, are lining the pockets of so many except ourselves.
In the next essay I will cover the convergence of all these factors as they weigh upon the US economy.