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“Our practical choice is not between a tax-cut deficit and budgetary surplus. It is between two kinds of deficits: a chronic deficit of inertia, as the unwanted result of inadequate revenues and a restricted economy; or a temporary deficit of transition, resulting from a tax cut designed to boost the economy, increase tax revenues, and achieve . . . a budget surplus.” John F. Kennedy

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Apr 19 2011

Signs of Destruction

C.M. Phippen

As I’ve tried to better understand the events leading up to the financial crisis of 2007-2008, I’m haunted by a comment made by Charles Gasparino in The Sellout. He stated that as corporate bond prices lost value in the rapidly declining market of June 2007, there was a dramatic “flight to quality of investors selling corporate bonds and snapping up supersafe Treasuries” (Gasparino, p 265), the bonds considered the safest available.

At about the same time, in June of 2007, the rating agencies (Standard and Poor’s, Moody’s) began downgrading mortgage-backed securities, despite the fact that they had been showing signs of deterioration for a year or two prior while still maintaining consistent AAA ratings.

One-and-a-half years earlier, in late 2005, AIG made the decision to no longer insure CDOs underwritten by US financial institutions because of the lax standards in US subprime lending (Gasparino, p 226). At about the same time, Bill Gross of PIMCO was warning about falling housing prices and defaults.

Now let’s jump to 2011. Over the past two years, the Fed has pumped nearly $3 trillion into the economy by purchasing US treasuries (QE1, QE2, and reinvestment of maturing treasuries). This in addition to all those purchased by private investors fleeing toxic CDOs.

In February, Bill Gross of PIMCO, “one of the largest investors in the Treasury market,” announced that he would be selling Treasuries and just one month later, with no holdings of US government debt, began shorting them.

In a major shift, China has begun pouring money into hard assets and away from US government debt.

A former advisor to China’s central bank, Yu Yongding, recently “likened the U.S. Treasury market to a ‘giant Ponzi scheme,’ arguing that Federal Reserve buying of Treasuries has artificially kept bond prices high, but that they would eventually fall to levels which reflected fundamentals of the U.S. economy.”

S&P just lowered the outlook on US debt from stable to negative, signaling the potential eventual loss of the AAA credit rating and “a sign that the ratings agency has doubts about prospects for taking effective action to curb deficits and debt.”

To argue that deficits and debt can be reduced by raising taxes as opposed to cutting spending would be to ignore the realities of history. Regardless of marginal federal tax rates, revenue raised has always remained fairly consistent, at about 18% of GDP. In fact, raising capital gains rates could likely have the opposite effect, as more people have historically sold more assets during lower-rate periods than higher-rate, when taxes collected on gains have historically plummeted. Interestingly, lowering capital gains tax rates in a high-growth business environment has been one of the only ways shown to actually create outliers in this equation – increased percentages of revenue above the 18% norm.

All the while, President Obama’s budget would add $9.5 trillion to the debt from 2011-2021, a near doubling in just 10 years! Just as many of the major players on Wall Street spent the years leading up to their firms’ meltdowns playing golf and entertaining, we seem to have a president equally oblivious to the eventual destruction being sown all around him. While it looks like many of the American people have learned from the mistakes of the past decade and are willing to accept the changes that entails, the lack of foresight and leadership emanating from the capitol is the very essence of Nero fiddling while Rome burns.


Apr 14 2011

The Rich, Taxes, and Government Debt

C.M. Phippen

I recently came across a genuinely bitter, angry liberal who was absolutely convinced that the only way to get us out of our debt mess of $14.26 trillion was simply to tax the rich and large corporations so they pay their “fair share!” (Just curious, but what is it about “large” corporations that makes them inherently evil, while “small” corporations are apparently acceptable. I’m wondering if the disdain also applies to a company that makes huge profits while employing very few people – does it fall into the category of “large” and bad or “small” and still good?) Anyway, it’s about time that the Michael Moore logic of there being enough money in this country to pay off our debt, it just needs to be redistributed to the people who didn’t earn it, needs to be put to rest.

Interestingly enough, Walter Williams discusses the economics of such a strategy in an article today.

Let me lay out the basics:
*If we were to tax every household in the US making over $250,000 a year at a rate of 100% on the amount exceeding that $250,000, we would bring in $1.4 trillion. (Better yet, if we were to take 100% of everything those greedy bastards earn, it would bring in $1.97 trillion – that’s what you get for being more productive than the solid citizen making $249,999!)
*If we were to take the profits of every Fortune 500 company, that would amount to another $400 billion.
*If we were to confiscate the entire net worth of all 400 billionaires in the US (who do they think they are owning businesses, homes, and jewelry anyway? Those things should only be owned by the poor; oh yeah, that home thing for the poor didn’t work out so well . . . ), that would equal $1.3 trillion.

The grand total we will have raised would be $3.67 trillion, which will run our government for a whopping 9 months or so! Now that we have all the money of the rich our debt problem will surely be solved, won’t it? Oh, we still will have a debt of $14.26 trillion and no way to fund anymore government programs because those who know how to run businesses efficiently and productively would have just been forcefully dissuaded from doing so, in the US anyway? Uh oh. Any better suggestions out there?