They Hate Tax Cuts Because They Lose Power and Money When You Keep More of Your Own Wealth

federal taxes fund wars

Tax Cuts Work

Deficits rise only because governments keep spending too much
July 5, 2018

It happened again. Tax receipts soared in the United States after the recent tax cuts.

Although it will take a while for the full effect of the 2017 tax reform to kick in, U.S. state and local government tax revenue climbed to $350.2 billion in the first quarter of 2018, a rise of 5.8 percent compared with the same time period in 2017. Individual income tax collections had big gains for a second-straight quarter with a 12.8 percent increase to $107.4 billion in 2018’s first quarter.

But the evidence of the positive impact on growth, jobs, and wages of lower corporate taxes has been published in many studies over time. The example of more than 200 cases in 21 countries shows that tax cuts and expenditure reductions are much more effective in boosting growth and prosperity than increasing government spending.

Multiple studies conclude that in more than 170 cases, the impact of tax cuts has been much more positive for growth.

In Denial

However, some commentators continue to deny the positive impact of tax cuts using the argument that deficits rise.

The fallacy that “deficits rise” has nothing to do with tax cuts, but with increases in government spending on top of the tax cuts.

The deficit excuse is very simple. It says taxes should not be cut because governments will spend all revenues, even if these increase, and more. But this excuse is wrong.

The mistake of pointing at deficits as proof that tax cuts don’t work is debunked by looking at the proposals of the same economists that argue against tax cuts. Economist Paul Krugman is one example. He argued against tax cuts in his New York Times article “Time to Borrow” after the Obama administration increased debt by $10 trillion. These demand-side economists defend deficit spending, yet consider tax cuts as negative … because deficits may increase. Only Keynesian economists manage to pull off such mindbending logic.

Deficits need not rise or exist at all if governments spend in line with revenue growth. And the evidence points to rising revenues from lower taxes and higher growth.

Deficit Spending

While analyzing the deficits of the G-20 economies during the past 15 years, we found that more than 80 percent come from higher spending. Even in the 2008–2010 crisis, European government deficits were explained more by the “stimulus” plans and government spending increases than any loss of revenues.

Spain, for example, lost 40 billion euros of tax revenues from the bursting of the real estate bubble but deficits rose by 300 billion euros, driven by stimulus and automatic “stabilizers.” The European Union spent almost 1.5 percent of its GDP on stimuli and increased taxes, sending deficits and debt to GDP to all-time highs.  The United States increased taxes by $1.5 trillion under the Obama administration but the average deficit was 5 percent of GDP. The final tally was a $10 trillion increase in national debt.

During the Obama administration and the massive expansionary monetary policies of three rounds of quantitative easing (QE) and ultra-low interest rates, economic growth on average was only 1.4 percent and 2.1 percent if we exclude the crash year of 2009. That compares to an average of 3.5 percent during the Reagan administration, 3.9 percent during Clinton’s, and 2.1 percent during Bush Jr.’s.

Positive Effects

The evidence of the positive effects of tax cuts on jobs and growth is clear.

The 2018 “Economic Report of the President” shows that tax cuts generated more federal revenues even after adjusting for inflation and population growth.

President John F. Kennedy’s major tax cut, which included chopping the top marginal rate to 70 percent from 91 percent, became law in early 1964. The economy grew at an average 5.5 percent, and unemployment fell to 3.8 percent. In turn, the annual deficit shrank to $1 billion from $7 billion as individual income-tax receipts nearly doubled.

President Ronald Reagan cut the top personal rate from 70 percent all the way down to 28 percent. Between 1982, when the first round of Reagan’s across-the-board tax cuts went into effect, and 1990, when President George H.W. Bush broke his no-new-taxes pledge, individual tax receipts jumped 57 percent to $467 billion.

And even President Bill Clinton’s budget surpluses didn’t materialize until after the president in 1997 signed a GOP tax bill that cut the capital-gains rate to 20 percent from 28 percent. Tax receipts from capital gains soared as capital investment more than tripled. Between 1996 and 2000, “the increase in capital gains revenues accounted for a little over 20 percent of the total increase in federal revenues,” former Treasury official Bruce Bartlett said. For the first time, individual tax receipts hit $1 trillion.

After President George W. Bush in 2003 signed the largest tax cut since Reagan—including dropping the top marginal rate to 35 percent from 39.6 percent—government receipts from individual income taxes rose from $794 billion to a peak of $1.2 trillion in 2007, when the mortgage crisis began—a jump of 47 percent.

Stronger economic growth expanded the tax base and brought in so much revenue that Bush more than halved the deficit over that period.

There are plenty more examples globally. Professor Juan Manuel Lopez-Zafra from CUNEF in Madrid points to a few:

  • Russia introduced a 13 percent flat tax in 2001. Revenues rose 25 percent in 2002, and a further 24 percent and 15 percent in 2003 and 2004 respectively. Revenues rose 80 percent in three years. Russia is a country where government deficit spending is limited and the excuse of deficits does not mask the revenue improvement.
  • In 2012, Hungary implemented a 16 percent flat tax. Tax revenues soared 7.6 percent despite a decline in GDP of 1.6 percent. In its 2016 report, the OECD showed that the key to Hungary’s recovery was its tax system.
  • Ireland cut taxes to corporates to 12.5 percent from 50 percent and reduced the value-added tax, and tax revenues soared 67 percent. Between 2010 and 2017, Ireland’s tax revenues increased 21 percent and thanks to an attractive tax policy, Ireland is one of the few Eurozone countries that left the crisis with growth, lower unemployment and cutting deficits. Because spending did not soar.
  • Spain finally decided to cut taxes in 2015 and in 2016 and tax revenues grew 4.3 percent, more than nominal GDP, a level of increase that accelerated in 2017. Unfortunately, governments took the opportunity to increase expenditure, so deficits remained.
  • UK corporation tax receipts surged to a record high in 2017, up 21 percent rise from 2016 and an all-time high, despite the main rate falling from 30 percent in 2008 to 19 percent. The United Kingdom cut the corporate tax rate and did not lose any revenue. It paid for itself.
  • Corporate tax and marginal income tax have been reduced in the Nordic countries since the 2000s, and revenues have increased well above nominal GDP.

The evidence is clear. Tax cuts boost jobs, growth, and, in most cases, revenues. Those who choose to ignore it tend to do so because of a misguided view that governments need to spend more and that private individuals and companies make too much money.

But there is no public sector without a thriving private sector. Taxes cannot be a burden for growth and job creation because governments decide they want to spend more.

Deficits are no excuse for tax cuts. Deficits need to be addressed by curbing spending. Tax cuts are a necessary tool to keep an ever-expanding bureaucratic system from destroying the economy.

Read More: https://www.theepochtimes.com

Open Borders Libertarians are Globalist Pawns

His idea that a border is the initiation of violence is assuming it’s initiating violence to have defensive protection of your people, resources and interests.

If only we had a Utopian world where everyone sought to share and contribute equally…. but with the welfare state and economic realities like labor availability versus wages, it’s just as easy to see illegal residents as having initiated violence against me, by breaking our laws to unlawfully break our borders and take our resources.

The argument is ridiculous. Do you call locking your door at night an initiation of violence against the people that would illegally enter and take your possessions or rape your wife or daughter?

As a libertarian you still contribute to a greater organization of people that we call our society, and involves government even if you want to call it another name, there is some organization for common defense required in any organization of people. It’s not violence to defend what you have built and the resources you’ve collected.

The people entering our country illegally are not here to share their resources, they’re here to take our resources. That, in itself violates the NAP.

 

Truth: The Economy hasn’t Improved since the Recession

Plantation Economies

Opinion: If the economy is so great, why are 78 million hustling for dimes?

By REX NUTTING June 4, 2018

The Federal Reserve has just published a study that sheds some light on this hidden part of the economy. The Survey of Household Economics and Decisionmaking delves into how people feel about their economic lives and why they make the decisions they do. Surveys like this add shadings that the regular data miss.

The SHED found that about 31% of adults participate in what the Fed called “the gig economy” — work done outside of regular employment structures. That looks huge — about 78 million people. However, most of these people are working five hours a month or less on their side hustles, and the kinds of activities this survey considers to be “gigs” is far broader than what other researchers consider, including selling goods and services online or in real life, or picking up a few hours of babysitting.

Read More: https://www.marketwatch.com/story/if-the-economy-is-so-great-why-are-78-million-hustling-for-dimes-2018-06-01?link=sfmw_tw&ns=prod/accounts-mw

 

The FED’s QE4: printing money out of thin air, $11 billion giveaway to Banksters

Selling out our children’s future one QE at a time.

The-Count-Says-4-QEs

Did The Fed Save Wall Street With A Temporary QE4?

The stock market suffered one of its most drastic falls on February 5, 2018. The price of gold rose but as equities started rebounding after the selloff, gold trended lower.

Gold has enacted a portfolio hedge when markets rapidly swing and the recent pullback was no different. However, something was quite bizarre with regards to the Fed’s balance sheet a week after the market meltdown. Recently published data shows that the Fed’s balance sheet increased by 14.1 billion during the week ending February 14th, 2018.

By the looks of it, the Fed had reverted back to “quantitative easing” by printing money out of thin air by injecting $11 billion into the banking system by purchasing mortgage-backed securities. It’s important to realize, that the cash injected can be leveraged 10x. In other words, the $11 billion injected is $110 billion of leverage for the banks to use for activities such as propping up the stock market.

However, most recently, the Fed’s balance sheet was reduced by $23.2 billion. By the looks of things, the Federal Reserve is serving Wall Street by providing a safety net around volatility.  Which, of course, is driven by this ridiculous “wealth effect” policy that it has tried to achieve and preserve the last decade. It’s no surprise though, central banks are going to be central banks and continue to compound on disastrous and failed policy errors by repeating their old ones.

Read More: http://www.goldtelegraph.com/federal-reserve-save-wall-street-temporary-qe4/

Our National Debt And Government Spending Are A Moral Abomination

Federal Debt

Congress has returned to doing what it loves most: spending money we don’t have. Increased spending in the latest bipartisan budget deal, along with the recent Republican tax cuts, will vastly increase the deficit.

Principled conservatives objected, but were ignored in the scramble to give the American people what they want: more government spending without having to pay for it. Both parties are happy to deliver. With some worthy exceptions, Republicans who had bitterly criticized the “Obama deficits” are now eagerly embracing enormous Trump deficits.

This is sinful, but few people think of government deficits in such terms. This is not due to any reticence about political moralizing per se. Much of our political discourse now consists of dismissing our opponents as moral monsters and declaring “I’m better than you.” Why, in this atmosphere, is deficit spending one of the few issues about which more moralizing might be in order?

There seem to be two main factors behind our disinclination to describe persistent deficit spending—and the massive national debt it produces—as a moral wrong. The first is that the national debt doesn’t seem real to us; it is just numbers somewhere in the ether. Even people who consistently oppose reckless deficit spending tend to treat it abstractly. The second is that both parties are thoroughly guilty of contributing to the problem, so partisans have a strong incentive to be indulgent on the subject.

The National Debt Steals People’s Futures

Nonetheless, this is a moral problem. Our national debt steals from other people’s futures in a way that mere personal debt does not. For instance, if I borrow money, whether for a house, a car, an education, or a shiny new cell phone, I am the one who will have to pay it back or suffer the consequences (harassment by collection agencies, repossession, bankruptcy, and so on). The debt is mine, and so are the consequences if I borrow more than I can repay.

But while the money we’re borrowing as a nation will have to be paid back, those doing so will not be the people who get it. Federal deficit spending is not like going into personal debt. It is like grandma going on a binge with her grandchildren’s credit cards. It is parents signing away their children’s future for some government handouts now.

It is wrong to place our children and grandchildren under enormous debt. It is a sin against them. But we don’t think of deficit spending that way. Parents and grandparents who otherwise work hard to help their children and grandchildren succeed have no compunction about burdening them with endless budget deficits resulting in a crushing national debt.

This is not only because the deficit and debt seem remote in a way that personal credit card bills are not, but also because many people are unaware that the sources of the deficit are some of the federal government’s most popular programs: Social SecurityMedicare and Medicaid, and military spending. Few people want to cut these, and the next largest expense is paying the interest on our nation’s existing debt, which can’t be cut without causing a global financial crisis.

There is no easy solution, though voters enjoy being lied to and told that one exists (if only the other party weren’t obstructing it). As ridiculous as some federally funded programs can be (e.g., Harry Reid’s cowboy poetry), they aren’t the real problem. The deficit cannot be fixed by cutting foreign aid or the National Endowment for the Arts, or by taxing the rich just a bit more. It cannot be fixed by addressing “waste, fraud and abuse.” The real money is spent on the military and middle-class welfare programs.

Yes, Your Favorite Government Programs Are Welfare

And they are welfare programs, even if that appellation makes many beneficiaries uncomfortable. Social Security is a not a retirement account the government maintains for you. It is a transfer program, in which today’s workers are taxed to pay today’s retirees and the disabled. The amount someone pays in is not what he or she will get out, and many people receive far more in benefits than they paid in.

Likewise, Medicare is not a health savings account administered by the government. It is an incredibly expensive welfare program in which those currently working pay for the health care of the elderly and disabled, with lifetime costs for beneficiaries usually far in excess of what they paid into the program.

That these are welfare programs does not mean they should be eliminated. Wealthy societies with strong economies can afford some welfare spending, or even a lot of it. However, honesty about what these programs are and what they are for is necessary if we are to keep from being bankrupted by them. We must face the reality that the typical welfare queen isn’t a black mother in the inner city, but a middle-class white retiree.

Refusing to Pay for This Welfare Is Immoral

If we want generous middle-class benefits, we will need to drastically cut defense spending and raise taxes, including on the middle class. If we are not willing to do that, then we need to reform our entitlement programs to be sustainable. Either way, the sooner we address these problems, the less painful the adjustment will be. The more indebted and dependent our nation is, the more it will hurt when we run out of easy credit.

But right now, politicians (who are well aware of the problems of endless deficits) are terrified of voters punishing them for any changes. Both parties have campaigned on protecting entitlements, and both have attacked the other for attempting reform. Young voters, who will lose the most on our current trajectory, are often disengaged and besotted with adolescent socialist fantasies.

Meanwhile, retirees and near-retirees vote. They aren’t keen on politicians who raise taxes or cut military spending, and they will annihilate any politician who threatens their government checks and health care. The youth are checked out or feeling the Bern, while their elders are selling them down the river.

The electoral math suggests that there will be no reform or restraint except what will eventually be forced on us by the pitiless math of accounting and economics. That will be a painful reckoning. The consequences will be severe, and those who oppose putting our national finances in order are sinning against their children and grandchildren.

Nathanael Blake has a PhD in political theory. He lives in Missouri.

 

Read More: http://thefederalist.com/2018/02/12/national-debt-government-spending-moral-abomination/

Our National Debt And Government Spending Are A Moral Abomination

Federal Reserve Logo

Parents and grandparents who otherwise work hard to help their kids have no compunction about burdening them with endless budget deficits resulting in a crushing national debt.

Congress has returned to doing what it loves most: spending money we don’t have. Increased spending in the latest bipartisan budget deal, along with the recent Republican tax cuts, will vastly increase the deficit.

Principled conservatives objected, but were ignored in the scramble to give the American people what they want: more government spending without having to pay for it. Both parties are happy to deliver. With some worthy exceptions, Republicans who had bitterly criticized the “Obama deficits” are now eagerly embracing enormous Trump deficits.

This is sinful, but few people think of government deficits in such terms. This is not due to any reticence about political moralizing per se. Much of our political discourse now consists of dismissing our opponents as moral monsters and declaring “I’m better than you.” Why, in this atmosphere, is deficit spending one of the few issues about which more moralizing might be in order?

There seem to be two main factors behind our disinclination to describe persistent deficit spending—and the massive national debt it produces—as a moral wrong. The first is that the national debt doesn’t seem real to us; it is just numbers somewhere in the ether. Even people who consistently oppose reckless deficit spending tend to treat it abstractly. The second is that both parties are thoroughly guilty of contributing to the problem, so partisans have a strong incentive to be indulgent on the subject.

The National Debt Steals People’s Futures

Nonetheless, this is a moral problem. Our national debt steals from other people’s futures in a way that mere personal debt does not. For instance, if I borrow money, whether for a house, a car, an education, or a shiny new cell phone, I am the one who will have to pay it back or suffer the consequences (harassment by collection agencies, repossession, bankruptcy, and so on). The debt is mine, and so are the consequences if I borrow more than I can repay.

But while the money we’re borrowing as a nation will have to be paid back, those doing so will not be the people who get it. Federal deficit spending is not like going into personal debt. It is like grandma going on a binge with her grandchildren’s credit cards. It is parents signing away their children’s future for some government handouts now.

It is wrong to place our children and grandchildren under enormous debt. It is a sin against them. But we don’t think of deficit spending that way. Parents and grandparents who otherwise work hard to help their children and grandchildren succeed have no compunction about burdening them with endless budget deficits resulting in a crushing national debt.

This is not only because the deficit and debt seem remote in a way that personal credit card bills are not, but also because many people are unaware that the sources of the deficit are some of the federal government’s most popular programs: Social SecurityMedicare and Medicaid, and military spending. Few people want to cut these, and the next largest expense is paying the interest on our nation’s existing debt, which can’t be cut without causing a global financial crisis.

There is no easy solution, though voters enjoy being lied to and told that one exists (if only the other party weren’t obstructing it). As ridiculous as some federally funded programs can be (e.g., Harry Reid’s cowboy poetry), they aren’t the real problem. The deficit cannot be fixed by cutting foreign aid or the National Endowment for the Arts, or by taxing the rich just a bit more. It cannot be fixed by addressing “waste, fraud and abuse.” The real money is spent on the military and middle-class welfare programs.

Yes, Your Favorite Government Programs Are Welfare

And they are welfare programs, even if that appellation makes many beneficiaries uncomfortable. Social Security is a not a retirement account the government maintains for you. It is a transfer program, in which today’s workers are taxed to pay today’s retirees and the disabled. The amount someone pays in is not what he or she will get out, and many people receive far more in benefits than they paid in.

Likewise, Medicare is not a health savings account administered by the government. It is an incredibly expensive welfare program in which those currently working pay for the health care of the elderly and disabled, with lifetime costs for beneficiaries usually far in excess of what they paid into the program.

That these are welfare programs does not mean they should be eliminated. Wealthy societies with strong economies can afford some welfare spending, or even a lot of it. However, honesty about what these programs are and what they are for is necessary if we are to keep from being bankrupted by them. We must face the reality that the typical welfare queen isn’t a black mother in the inner city, but a middle-class white retiree.

Refusing to Pay for This Welfare Is Immoral

If we want generous middle-class benefits, we will need to drastically cut defense spending and raise taxes, including on the middle class. If we are not willing to do that, then we need to reform our entitlement programs to be sustainable. Either way, the sooner we address these problems, the less painful the adjustment will be. The more indebted and dependent our nation is, the more it will hurt when we run out of easy credit.

But right now, politicians (who are well aware of the problems of endless deficits) are terrified of voters punishing them for any changes. Both parties have campaigned on protecting entitlements, and both have attacked the other for attempting reform. Young voters, who will lose the most on our current trajectory, are often disengaged and besotted with adolescent socialist fantasies.

Meanwhile, retirees and near-retirees vote. They aren’t keen on politicians who raise taxes or cut military spending, and they will annihilate any politician who threatens their government checks and health care. The youth are checked out or feeling the Bern, while their elders are selling them down the river.

The electoral math suggests that there will be no reform or restraint except what will eventually be forced on us by the pitiless math of accounting and economics. That will be a painful reckoning. The consequences will be severe, and those who oppose putting our national finances in order are sinning against their children and grandchildren.

Nathanael Blake has a PhD in political theory. He lives in Missouri.

Why We’re Underestimating American Collapse

Fragmented States of America

The Strange New Pathologies of the World’s First Rich Failed State

When we take a hard look at US collapse, we see a number of social pathologies on the rise. Not just any kind. Not even troubling, worrying, and dangerous ones. But strange and bizarre ones. Unique ones. Singular and gruesomely weird ones I’ve never really seen before, and outside of a dystopia written by Dickens and Orwell, nor have you, and neither has history. They suggest that whatever “numbers” we use to represent decline — shrinking real incomes, inequality, and so on —we are in fact grossly underestimating what pundits call the “human toll”, but which sensible human beings like you and I should simply think of as the overwhelming despair, rage, and anxiety of living in a collapsing society.

Let me give you just five examples of what I’ll call the social pathologies of collapse — strange, weird, and gruesome new diseases, not just ones we don’t usually see in healthy societies, but ones that we have never really seen before in any modern society.

America has had 11 school shootings in the last 23 days. That’s one every other day, more or less. That statistic is alarming enough — but it is just a number. Perspective asks us for comparison. So let me put that another way. America has had 11 school shootings in the last 23 days, which is more than anywhere else in the world, even Afghanistan or Iraq. In fact, the phenomenon of regular school shootings appears to be a unique feature of American collapse — it just doesn’t happen in any other country — and that is what I mean by “social pathologies of collapse”: a new, bizarre, terrible disease striking society.

Why are American kids killing each other? Why doesn’t their society care enough to intervene? Well, probably because those kids have given up on life — and their elders have given up on them. Or maybe you’re right — and it’s not that simple. Still, what do the kids who aren’t killing each other do? Well, a lot of them are busy killing themselves.

So there is of course also an “opioid epidemic”. We use that phrase too casually, but it much more troubling than it appears on first glance. Here is what is really curious about it. In many countries in the world — most of Asia and Africa — one can buy all the opioids one wants from any local pharmacy, without a prescription. You might suppose then that opioid abuse as a mass epidemic would be a global phenomenon. Yet we don’t see opioid epidemics anywhere but America — especially not ones so vicious and widespread they shrink life expectancy. So the “opioid epidemic” — mass self-medication with the hardest of hard drugs — is again a social pathology of collapse: unique to American life. It is not quite captured in the numbers, but only through comparison — and when we see it in global perspective, we get a sense of just how singularly troubled American life really is.

Why would people abuse opioids en masse unlike anywhere else in the world? They must be living genuinely traumatic and desperate lives, in which there is little healthcare, so they have to self-medicate the terror away. But what is so desperate about them? Well, consider another example: the “nomadic retirees”. They live in their cars. They go from place to place, season after season, chasing whatever low-wage work they can find — spring, an Amazon warehouse, Christmas, Walmart.

Now, you might say — “well, poor people have always chased seasonal work!” But that is not really the point: absolute powerlessness and complete indignity is. In no other country I can see do retirees who should have been able to save up enough to live on now living in their cars in order to find work just to go on eating before they die — not even in desperately poor ones, where at least families live together, share resources, and care for one another. This is another pathology of collapse that is unique to America — utter powerlessness to live with dignity. Numbers don’t capture it — but comparisons paint a bleak picture.

How did America’s elderly end up cheated of dignity? After all, even desperately poor countries have “informal social support systems” — otherwise known as families and communities. But in America, there is the catastrophic collapse of social bonds. Extreme capitalism has blown apart American society so totally that people cannot even care for one another as much as they do in places like Pakistan and Nigeria. Social bonds, relationships themselves, have become unaffordable luxuries, more so than even in poor countries: this is yet another social pathology unique to American collapse.

Yet those once poor countries are making great strides. Costa Ricans now have higher life expectancy than Americans — because they have public healthcare. American life expectancy is falling, unlike nearly anywhere else in the world, save the UK — because it doesn’t.

And that is my last pathology: it is one of the soul, not one of the limbs, like the others above. American appear to be quite happy simply watching one another die, in all the ways above. They just don’t appear to be too disturbed, moved, or even affected by the four pathologies above: their kids killing each other, their social bonds collapsing, being powerless to live with dignity,or having to numb the pain of it all away.

If these pathologies happened in any other rich country — even in most poor ones — people would be aghast, shocked, and stunned, and certainly moved to make them not happen. But in America, they are, well, not even resigned. They are indifferent, mostly.

So my last pathology is a predatory society. A predatory society doesn’t just mean oligarchs ripping people off financially. In a truer way, it means people nodding and smiling and going about their everyday business as their neighbours, friends, and colleagues die early deaths in shallow graves. The predator in American society isn’t just its super-rich — but an invisible and insatiable force: the normalization of what in the rest of the world would be seen as shameful, historic, generational moral failures, if not crimes, becoming mere mundane everyday affairs not to be too worried by or troubled about.

read more: https://eand.co/why-were-underestimating-american-collapse-be04d9e55235

Jeremy Grantham Exposes The Corporatocracy: America’s “Run By Those Guys For Their Own Interests”

america the corporatocracy

Have profit margins risen to a permanently higher plateau? Are average Americans better off than they were a generation ago? I had the opportunity to discuss those questions, which are centrally important to investing and economic policy, with Jeremy Grantham a couple of weeks ago.

The discussion took place as part of a larger interview about climate-change investing. Grantham is the co-founder and chief investment strategist of Boston-based Grantham Mayo Van Otterloo (GMO).

It’s been widely reported that over the last 20 years the number of publicly traded companies has decreased by about 50%. The common explanations center on the fact that the number of de-listings, mergers, acquisitions and bankruptcies have outstripped the initial public offerings (IPOs).

But I wanted to know if there was a deeper explanation related to the fact that corporate profit margins are at historical highs. Over the last dozen years, with the exception of the financial crisis, profit margins have been between 9% and 11% of GDP. Prior to that, the last time they were above 9% was in 1951.

The U.S. economy has become more concentrated in the service and technology sectors, which are inherently more profitable than the manufacturing businesses that dominated 50 years ago. Those business, like Amazon, Apple and Google have built incredibly strong, near-monopolistic franchises that should translate to higher margins.

If the market has become dominated with highly profitable, monopolistic franchises, then maybe that is why there are fewer companies and profit markets are no longer “the most mean-reverting series in finance,” as Grantham once claimed.

GMO has looked at this issue extensively. As Grantham noted, “profit margins and return on sales will vary much depending on whether you are in the supermarket business or whether you are in some software company. There is no average to which it moves.”

But that doesn’t necessarily mean that returns for equities will be greater going forward. As Grantham explained, higher margins will attract more capital and reduce the returns relative to other asset classes. “If your capital is returning more in this area than the other area then capital will flow and balance it out,” he said.

Higher margins have been offered as an explanation, by Grantham and others, for why the cyclically adjusted price-earnings (CAPE) ratio is higher than its historical average. But CAPE ratios depend on other factors, such as real interest rates, so margins only tell part of the story.

Grantham said that the monopoly factor has increased margins “a bit.” “Corporate power as exercised through Congress, particularly in the U.S., has clearly increased the total domination of regulatory boards by the industries. Regulations have gone from being concerning to laughable, and totally run by those guys for their own interests,” he said.

Grantham is far more concerned about the societal impacts of unchecked capitalism than he is with its effect on margins. “We are seeing a flowering of corporatism where government is designed to maximize the opportunities of giant influential companies and industries that spend a lot of money lobbying,” he said. “We continue down that primrose path today with yet another cycle of deregulating designed to help corporations.”

Grantham spoke about the “punishing consequences” that tax cuts and deregulation will have on the general public. He said that “maximizing the returns and the share of the pie going to corporations and the superrich is deplorable and has terrible effects on the economy in the long run. The average person in the street doesn’t have the buying power increments that they used to have.”

American prosperity

But is the average American really losing buying power? On this point, Grantham and I disagreed. Whether you go back 10, 20 or 40 years, I contend the standard of living for Americans has increased enormously.

Grantham, however, said that in terms of general well-being and happiness, Americans are worse off.`

“If you do your best to control for everything and measure happiness, this is not a particularly happy country,” Grantham said. “It is not entirely dependent on income by any means, and we have not improved.”

He acknowledged a couple areas where Americans are better off – entertainment, such as high-tech computer games, and medicine, where he said progress in drugs and technology are keeping people alive longer. To those I would add food, in light of the advances in the quality and variety of choices in cuisine, and transportation, considering the speed and safety at which we can travel by car, plane and other means.

But Grantham said that the average worker has not been paid more since 1974 for an hour’s work. “Does he feel more content, or does he feel extremely frustrated by his relative lack of progress compared to others?” he asked, rhetorically. “There is no doubt that he is more frustrated. The suicide rate in that group has gone way up. The drug addiction has gone way up.”

Indeed, he said there are all the indications of a “thoroughly miserable middle America.”

Read More: https://www.advisorperspectives.com/articles/2018/01/08/jeremy-grantham-on-profit-margins-and-american-prosperity

Bitcoin is the AOL of cryptos

Blockchain is the Future, but is Bitcoin the future of cryptocurrencies?

Bitcoin is not dead

The Blockchain Model T Ford

“If I had asked people what they wanted, they would have said faster horses.”

Henry Ford

Crypto-currency is gaining acceptance as a medium of exchange. The list of merchants who now accept bitcoin  includes Subway, Microsoft, Newegg.com, Whole Foods and Bloomberg. The Wall Street Journal noted (12/1/18) that PricewaterhouseCoopers in Hong Kong for the first time accepted payment for services in bitcoin (BTC $15,088 1/8/18). Ripple (XRP $2.41 1/8/18)  has signed up more than 100 banks to test its network. NEO (formerly Antcoin $101.95 1/8/18)  has the full backing of China’s government. The regulatory leader of the United States Federal Reserve  has called for more research into “limited purpose” digital money to help settle interbank transactions.

110 years ago, Ford began manufacturing the Model T, “a car for the great multitude.” Until then, horses were the accepted mode of personal transportation. But when Ford made a dependable, affordable vehicle powered by an internal combustion engine, even cowboys started driving them. Twenty-five years ago, America Online launched AOL Mail, and electronic messaging became available to anyone with a telephone line, computer and modem. “You’ve Got Mail,” announced the arrival of a geographically distant communication, delivered nearly instantaneously (if both sender and receiver were online) without the use of paper or mailman. Ten years ago someone, or some group named Satoshi Nakamoto, wrote the open-source software that most everyone knows as bitcoin (BTC). Talented computer operators became able exchange worth, as if in a barter transaction, without having been introduced or even knowing the names or locations of the parties involved.

Although Model T’s still exist, few are used for transportation, but the quarter-billion automobiles on the road today were produced using Henry Ford’s assembly line process. Everyday communication by email is more customary than by post, but users of AOL Mail are about as common as drivers of Model T’s. Karl Benz developed a gasoline-powered automobile in 1885, but it was Ford’s manufacturing process that put America on wheels. Email via  ARPANET was used by the United States Department of Defense beginning in 1969, but invitations to “Try American Online FREE” in the 1990’s got America to put down its paper and pen and latch onto a mouse.

Ralph Merkle  patented the “hash tree” in 1979, and in 1992, Dave Bayer, Stuart Haber and W. Scott Stornetta incorporated  Merkle trees, which allowed several documents to be collected into one “block.” But it was not until 2008 that Satoshi Nakamoto described the bitcoin as “A purely peer-to-peer version of electronic cash that would allow online payments to be sent directly from one party to another without going through a financial institution.” On May 22nd, 2010 Laszlo Hanyecz  paid 10,000 bitcoin for two Papa John’s pizzas and the age of digital currency had begun.

According to Don and Alex Tapscot, in Blockchain Revolution: “The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.” Bitcoin is a blockchain performing the most primitive of mathematical functions in a highly complex way. Bitcoin counts. What once is counted, cannot be uncounted. Bitcoin has counted more than 500,000 blocks without a break in the chain. The longer the chain, the harder to trace back to the start of its encrypted maze. Its length and strength are trusted more with each additional block. This simplest of arithmetic, repeated every ten minutes for nine years, has been trusted with over $250 billion. The more bitcoin secures, the more it is trusted.

But using blockchain as a currency is as artless as using an iPhone as a paperweight. Blocks in the chain can store any coded information. Bitcoin stores currency transactions, a common function that has been prevalent since the first  shekel was traded for food over two and a half millennia ago. Bitcoin is but a practical but rudimentary demonstration of what blockchain technology is capable. One of bitcoin’s problems which later-created coins attempted to address is the size of its blocks. Its one-megabyte capacity seemed immense when, in its infancy, each block was around eighty kilobytes. Now, because of its popularity, transactions are delayed waiting for the next block to be created as the previous was filled to capacity. The Bitcoin Cash (BCH $2408 1/8/18) “hard fork” in August of last year attempted to address that difficulty with an eight-megabyte capacity that is touted as expandable to thirty-two.

Another problem, which Ethereum (ETH $1362 1/10/18)  addressed with its launch 2014, is bitcoin’s inflexible programming. ETH enabled “smart contracts” with its  Turing complete programming language. Smart contracts allow agreements as well as transactions between anonymous parties without relying on a central authority. Ethereum’s ability to “scale” its programmed blocks to fit the needs of the parties in a transaction recently  became its “Achilles heel.” A recent project called “CryptoKitties” caused a slowdown on the ETH network and dramatically increased the volume of unprocessed transactions. Stakeholders” on the ETH network have not been able to agree on a fix for this problem, just as they could not agree after $50 million was lost in 2016. That led to a hard fork and the creation of ETH while Ethereum Classic (ETC $34.17 1/8/18) continued on the original blockchain.

Possibly the most serious issue crypto-currency miners will eventually face is the  law of diminishing returns because bitcoin and Ethereum both use a  proof of work (PoW) system in order to certify that only one new block is mined every ten minutes. Mining involves decrypting a long string of numbers, like solving a complex problem by attempting as many solutions as possible. Miners receive a transaction fee paid in the currency they have mined. Only those miners with the most computing power have a decent chance of winning the ongoing competitions among miners for the digital reward.

Computers that are able to compete in such a contest cost a great deal, but that is a fixed cost. Miners’ greatest expense is their ongoing need for electricity to accomplish such computational feats. In the United States, the lowest  cost of producing one bitcoin is $3224 in Louisiana. A miner in Hawaii would pay $9483 for that same amount of power. As the cost of producing bitcoin increases with increased competition among miners, so may the potential reward for each new coin decrease. Miners with less computing power may call it quits and leave the mining to those who can better afford the activity. That could eventually lead to a  tragedy of the commons where few miners control the majority of the industry, the supply of bitcoin, and the price.

Singapore-base  QTUM (QTUM $53.27 1/10/18) pursues solutions to the limited capacity of bitcoin, the Ethereum programming uncertainty, and the exorbitant cost of power of both with a hybrid of their key elements. QTUM is a fork off BTC that includes an ETH-like “virtual machine,” but uses an “x86” architecture optimized for mobile platforms. It resembles BTC but also includes an “Abstract Accounting Layer” to provide smart contract functionality. QTUM includes “protective clauses” that function like templates for business contracts and reduce the possibility of infestation by unwanted pests like CryptoKitties. Because Qtum uses an alternative known as proof of stake (PoS) as its method to validate transactions, computing power and cost of electricity are reduced as factors for mining success. A PoS miner may mine only the percentage of each transaction equal to the percentage of the crypto-currency the miner owns. A holder of 1% of all outstanding Qtum is limited to mining 1% of transactions in each new block. Instead of a race to solve a cryptographic puzzle that is usually won by the rider of the fastest digital horse, Qtum’s proof of stake method apportions the winnings among paid participants.

Blockchain is the future of all recordkeeping. Pity the poor middlemen who will be replaced by robots, just as will long-haul truck drivers be supplanted by autonomous 18-wheelers in the twenty-nine US states where theirs is the number one occupation. Title-insurance companies are making preparations to use blockchain for real estate transactions, records of which can now only be viewed by visiting a town clerk’s office. France has said it will allow use of blockchain technology in the issuance of stocks and bonds. Hyperledger, a Linux Foundation project,  seeks to allow multiple interconnected distributed ledger database projects under one umbrella of interoperability. In Estonia, the “digital republic”, a government data platform  called X-Road “links individual servers through end-to-end encrypted pathways.” In the event of another Russian invasion, Estonia’s elected leaders might scatter across the globe but continue running their country from their laptops.

Read More: https://www.zerohedge.com/news/2018-01-10/blockchain-model-t-ford

Median Family Net Worth Under 1989 Level: Debt-to-Money Worst Since 62

A greater share of Americans have more debt than money in the bank than at any point since 1962, according to Deutsche Bank economist Torsten Slok. And, in a note to clients yesterday, Slok said that, despite record stock market wealth and home price levels just shy of housing-bubble highs, Americans are poorer than at any point in nearly a quarter century.

Why it matters: The data suggest that the third-longest economic expansion in history, and the lowest jobless rate in 17 years, has benefited an exceedingly thin slice of the American public.

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Sobering Stats

  1. A greater share of Americans have more debt than money in the bank than at any point since 1962, according to Deutsche Bank economist Torsten Slok.
  2. 30.4% of US families have negative net worth despite the recovery in housing and the stock market.
  3. Median net worth is below where it was in 1989.

But perhaps the most shocking stat of all is that, on an inflation adjusted basis, net worth may be the worst in history.

$78,000 is not worth what it was in 1989, to say the least.

Read More: https://www.axios.com/americans-owe-more-save-less-and-are-poorer-than-in-decades-1515262277-9a755b0c-edd1-4abe-a9e9-1f7d1b632978.html