12 Responses to ““Tax Cuts for the Rich””
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Submitted by Gonzalo Lira
JPN ≠ US: Japan Is Not Us
Japan went through an equities and real estate boom during the 1980’s—a boom that was really a bubble. And like all bubbles, it eventually burst in 1990.
Since then, Japan has been lost. Equities have never again reached the heights of 1990, nor have real estate prices. The Japanese government has spent a fabulous amount of money for domestic stimulus, creating the most modern infrastructure on earth—yet it hasn’t helped at all. GDP has been anemic, as the population slowly begins to shrink. Japan is in full-on deflation—in every sense of the word.
Now that the United States has had its own real-estate bubble pricked, a lot of smart people have been selling the idea that the U.S. will experience what Japan has experienced: Persistently sluggish growth. Continued fiscal deficits, carried out by the Federal government in order to prop up aggregate demand by way of various stimulus programs. Slow and painful working out of the debt overhang. All of this happening within a deflationary environment, whereby the dollar—just like the yen in Japan—accrues value, as full-throttle deflation sets in.
In other words, this camp believes America is set to begin its own version of Japan’s Lost Decades.
This camp falls for what I call the “Japan Is Us” fallacy—and they are wrong.
Their rationale is simple—and superficially persuasive: Just like Japan in 1990, the United States went through a bubble in equities and real estate, which eventually popped in 2007–‘08. Since then—just like Japan—the U.S. has been experiencing deflation. Just like Japan, the U.S. now has zombie banks, the so-called “Too Big To Fail”. Just like the Japanese government, the U.S. government is spending-spending-spending, so as to prop up aggregate demand. The Federal Reserve—just like the Bank of Japan—is issuing enormous sums of money in order to prop up aggregate asset price levels—the Fed’s policies are so reminiscent of the BoJ’s money printing that Bernanke & Co. have borrowed the term outright: Quantitative easing.
Everything screams Just Like Japan—right? So according to the “Japan Is Us” camp, 2010 through at least 2015 will be just like Japan between 1990 and 2010: Sluggish growth, stagnation—and most important of all, deflation, deflation, deflation.
But there is one key difference that the Japan Is Us crowd conveniently ignore. They ignore it out of blindness, or incompetence, or—occasionally—out of malice. They ignore this key issue like the elephant in the room that’s gone and got drunk, and is now making a fool of himself: Balance of payments.
Balance of payments (BOP) is the measure of a country’s total exchange with the rest of the world. From the Federal Reserve’s “Fedpoints”:
- The balance of payments is an accounting of a country's international transactions for a particular time period.
- Any transaction that causes money to flow into a country is a credit to its BOP account, and any transaction that causes money to flow out is a debit.
- The BOP includes the current account, which mainly measures the flows of goods and services; the capital account, which consists of capital transfers and the acquisition and disposal of non-produced, non-financial assets; and the financial account, which records investment flows.
(Emphasis added.)
The current account is the key metric: It’s the net balance between imports and exports. In other words, the trade surplus or deficit.
As everyone knows, the U.S. current account has been negative for a long, long time—in fact the last time the current account was in surplus was 1973. Since then, current account deficits have totaled about $7.5 trillion in nominal dollars. (Data is here.)
Japan, meanwhile, has had a current account surplus. I found a nifty chart that neatly summarizes the differences between the two countries:
Current account surplus/deficit per country as percent of world GDP. De Mello/Padoan.
(Original chart by Luis de Mello and Pier Carlo Padoan can be found here.)
To finance this massive current account deficit, the U.S. has sold assets to the rest of the world. The U.S. Federal government has gone into deficit spending on top of this current account deficit—it too has sold assets to cover the fiscal deficit.
So in a net sense, both the U.S. Federal government and the United States as a whole have “sold assets” to the rest of the world, in order to pay for their spending.
What “assets” have been sold to pay for all this spending? Basically, Treasury bonds. And as everyone knows, Treasuries might be called “assets” by the sophisticates, but they are really nothing more complicated than a loan.
In other words, Americans and their government have gone into massive debt with the rest of the world, in order to finance all this spending.
Japan, meanwhile, has been carrying a current account surplus. Therefore, the Japanese government has been borrowing money not from overseas, but from its own citizen’s savings. All of the Japanese government’s stimulus spending has been paid for by the Japanese people.
This is the main difference between the United States and Japan. It should be obvious—and ominous—what this difference means.
The U.S.—unlike Japan—cannot pay back its loans: Because the United States is broke. The Federal government is running deficits of around 10% of GDP. America as a whole has racked up $7.5 trillion in current account deficits over the last 25 years—over 50% of total GDP—with no end in sight.
So the United States—unlike Japan—has been spending what it does not have. The U.S.—unlike Japan—depends on the rest of the world to lend it money to continue on this spending spree. Americans—unlike Japan—do not produce enough to self-finance its government’s stimulus programs.
Therefore—unlike Japan—the United States will eventually be unable to pay the Treasury bonds it has issued. Therefore, as I wrote in A Termite-Riddled House, there will be a collapse in the Treasury bond market. Therefore, as I wrote in How Hyperinflation Will Happen, a panic in Treasuries will mean a run up of commodities—which will bring about the death of the dollar, and hyperinflation in America.
This is why Japan Is NOT Us.
But even if you don’t subscribe to my hyperinflationary scenario—even if you think I’m full of shit on this issue (and plenty of sensible people think I’m full of it to the brim)—it’s obvious that Japan is not like the United States—it’s obvious to anyone who looks at the situation evenhandedly: The contrast in the two countries’ balance of payments is enough to show definitively and unequivocally that they are not the same.
The source of the two countries’ funding is key: One produces its own stimulus from its current account surplus, while the other borrows it from abroad, adding more debt on top of its already existing debt. Therefore, one country’s spending and stimulus programs—Japan’s—are sustainable, while the other’s—America’s—is not. Which means that the mechanisms for this fiscal debt—sovereign bonds—are rock solid in Japan, but lethal in America.
So if it’s so obvious that the two countries’ situations are so different, then who is selling this clearly false notion that Japan Is Us?
Why, people who have a vested interest in this point of view. People who are selling things. Or people who are trying to explain away why they have lost so much money by making the wrong bets.
For instance, money managers. A lot of pseudo-Austrian money managers in particular have been doing the hard sell to their clients, insisting and insisting that the U.S. is experiencing Japan-redux. They have been steering their clients’ money to Treasury bonds—because if you were in Japan in 1990, their sovereign bonds turned out to be the smartest investments in the long run.
But as we have seen, the U.S. is not Japan.
So these money managers who are playing the Japan Is Us trade have either lost their shirt, or are terrified that they are about to. Because everyone knows that U.S. Treasury bonds are overpriced, and that it’s only a matter of time before this Treasury bubble pops.
And when it pops, it will be bad—a lot of people counting on the United States following in the footsteps of Japan won’t just lose a bit: They’ll lose huge. They’ll be wiped out—or maybe they won’t be wiped out, but their clients sure will be.
That’s why so many people keep insisting that Japan Is Us!-Japan Is Us!-Japan Is Us! They are selling their clients on something, or else trying to explain away their underperformance, by sheer force of personality—while ignoring the blindingly obvious fact that the U.S. is not Japan.
One prominent blogger in particular has been going insane, insisting day after day that Japan Is Us, to the point of psychosis—evidence to the contrary be damned. Every day, this blogger—Michael “Mish” Shedlock—bangs on the same old tired drum. Mr. Shedlock is affiliated with Sitka Pacific, whose performance leaves something to be desired. There are, apparently, a number of Sitka Pacific clients quite nervous about the direction of their investments. So it is reasonable to question whether Mr. Shedlock is ranting and raving how the U.S. is following the deflationary spiral that Japan did because he genuinely believes what he is saying, or because he is trying to convince someone—maybe his clients, maybe himself—of something that he knows in his bones might not be true.
What is true is that anyone who has made bets that Japan Is Us will soon find out if they were wise bets, or foolish ones. The Treasury bubble is soon to burst—so we’ll know the fate of the American economy soon enough.
If those bets turn out to be foolish—if it turns out that, indeed, Japan Is Not Us—just keep in mind one final fact: An average person can survive a leap from a third floor window, even a fourth floor window.
But a leap from a fifth floor window or higher? That’s how you get the job done right. You jump from a fifth floor window, and you’ll go splat!—guaranteed.
Full disclosure: I do not manage any money except for my personal stake and my family’s private interests. I do not provide professional investment advice to anyone. I am not affiliated to, nor am a spokesman for any third party investment or financial company. I do not endorse any product, save Head squash raquets, Slazenger squash balls, Montecristo (Cuba) cigars, Cálem vintage port wines, and Durex X-Treme X-Long X-Large X-Tra Comfort condoms.
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12 Responses to ““Tax Cuts for the Rich””
Robert Schwartz Says:
September 15th, 2010 at 8:55 pm
Several reasons why the whole discussion makes me nuts:
First, the idea that extending the tax rates that have been in effect for the past eight years amounts to a tax cut is not even wrong. It is utterly misleading. The correct way to talk about it is whether or not Congress is going to allow a massive tax increase.
Second, the idea that the current rate chart was a “tax cut for the wealthy” when it was put in effect is wrong. The rate charts in Section 1 of the IRC are only one step in the determination of the amount of the check that will be written to the Federal Government. Other calculations, deductions, exemptions, and credits are are also important. For myself, I never had my taxes decrease because of the 2001 changes in the Section 1 rate charts, because I have been paying the alternative minimum tax throughout the entire period.
Further, it is beyond dispute that the net effect of the tax changes in 2001 and 2003 was to increase the portion of income and total taxes paid by the upper income brackets. Collections dropped in the aftermath of the 2001 cuts, but that was mostly due to due the effect of the collapse of the internet bubble on capital gains.
Numbers are here: http://www.cbo.gov/publications/collections/taxdistribution.cfm
Third, the numbers that are thrown around like “it will cost $680 billion to extend the Bush tax cuts” are ludicrous. I acknowledge that under CBO’s methodology it looks like the Government would collect $680 billion more if it raised rates, but what would happen if they sent out invitations to a party and nobody came.
The methodology assumes that the people do not change their behavior because of tax law changes. That is of course nonsense. Furthermore the CBO assumes that the economy will soon resume its historic growth patterns, even in the face of a whopping rate increase. Double nonsense. The IRS won’t collect taxes on interest earned next year, because market rates have gone through the floor. I think my last money market statement showed a rate of 0.01%. Nor will capital gains taxes be paid, investors will still be offsetting losses from 2008 and 2009.
Bottom line is that if nothing is done to stop the rate chart from changing on January 1, the economy is going down for another eight count. Even the higher rates will not increase the revenue from a sick economy.
Fourth, this type of language: “here would this $680 billion go? Nearly all of it would go to the richest 1 percent of Americans …” is offensive. Tax revenues are not the Government’s money, they are the property of the people who earned them, even if they are passive investors who simply failed to waste the earnings. In the dream lands of the academic left, property may be a gift from the state, and what any of us gets to spend may be only by its grace. But the United States was explicitly created by its citizens (We, the people), and that money is ours. The $680 billion wouldn’t go anywhere, it would stay in the pockets of its owners. Of course if it never comes into being … see 3rd above.
Fifth, Jonathan is correct. The incentive effects of a rate hike at the highest level is the only one that counts. No entrepreneur tries to increase his income from $50,000 to $75,000 a year. He wants to get into the highest bracket. The incentive effects are there. If raising revenue were the only issue, it would be better to raise the lower brackets, not the highest one.
Jonathan Says:
September 15th, 2010 at 9:00 pm
Excellent points, thanks.
foxmarks Says:
September 15th, 2010 at 9:01 pm
An important distinction, indeed. “The rich” calls to mind lazy aristocrats and caricatures of cartoon robber barons (Scrooge McDuck). The already-rich are in best position to avoid any tax scheme. The only true tax on “the rich” is a wealth tax.
A related distinction never made is the difference between gross and net income. If somebody operates a partnership with a handful of employees, their gross will almost certainly be above whatever threshold is being discussed. These “rich” are not taking home $250,000/year, they’re selling $250K. Taxes come off the bottom line, not the top.
J.H. Bowden Says:
September 15th, 2010 at 9:52 pm
Scrooge McDuck, sitting on piles of idle money
Idle money? Given this thread is about sharpening language, it is worthwhile to point out that there is literally no such thing as idle money. (And we’re not talking about the velocity of money, or the size of the money supply, or anything like that.)
Generating wealth is not a blind, automatic process. There are plenty of businesses that go bankrupt, just as we all know of millionaire athletes who have lost it all from irrational decision-making. We only stay rich in a capitalist society by doing something someone else wants us to do. A person generating and/or maintaining wealth is either providing a good or service that someone else wants, or is making investments that lead to goods or services that others want. No one hordes piles of cash.
Our error is thinking of the economy as a pie that can be redistributed. Distribution is precisely the problem of socialism, not capitalism. For nothing is distributed in capitalism; everything is exchanged. There are no buyers without sellers. All taxes, like subsidies, create a deadweight loss– they prevent transactions from occurring that otherwise would have taken place. That’s why they harm economic well-being.
Tom Holsinger Says:
September 15th, 2010 at 9:57 pm
My old tax professor told us that, whenever we (law students) see a businessman doing something that doesn’t seem to make sense, it’s probably about taxes.
Likewise when we see politicians doing something that doesn’t seem to make sense, it’s probably about fund-raising.
Here the whole point of politicians raising tax rates on the rich is NOT to increase tax revenue, but to increase the politicians’ cash flow in the form of campaign contributions in exchange for tax breaks.
I.e., nominal tax rates on the rich will be raised so Congress can then sell them tax breaks. Actual tax revenue will go down.
Ric Locke Says:
September 16th, 2010 at 8:54 am
Here we see a major deficiency, perhaps the major deficiency, of the tea parties.
I once saw an illustration of differing attitudes between Britain and the United States. A British worker sees a fatcat going by in a big limousine, and says, “Ah, we’ll soon have you out of that.” An American worker sees a fatcat going by in a big limousine, and says, “Someday I’ll have one of those.”
There are now a substantial and growing number of Americans who have moved from the second group into the first. The reasons for that move are both various and irrelevant at this point. Unless some effort is made to educate Americans and get them back into the constructive attitude rather than the destructive one, no amount of political education will do more than slap fresh paint on a rotting structure.
Regards,
Ric
Paul Milenkovic Says:
September 16th, 2010 at 10:40 am
Probably in an ideal world we would extend the “tax cuts on the rich” (please note the use of irony-quotes) and let the tax cuts on the “middle class” expire. It had been noted in a “static analysis”, that the “tax cuts on the rich” will cost, dunno, 700 billion over the next 10 years whereas the “middle class” tax cuts will cost 4 trillion — someone can correct me if I have this right.
Thus, if you passed tax cuts for the rich, the hit on revenues would be small, but there is a possible gain in terms of incentives for wealth creation. If you let the middle class tax cuts lapse, there would be howls of pain and perhaps a hit on consumer spending, but you would raise much more revenue and probably not have as adverse an affect on wealth creation. You would also “flatten” the tax structure in the bargain as well.
The President’s proposal of extending the tax cuts for everyone-but-the-rich is the worst of both worlds — huge hit on revenue, huge hit on wealth creation. Something in me would like to see this go through, just to see this happen and to be able to gloat, “How’s the President’s economic plan working for you?”, but too many people are in a world of economic hurt to wish for this.
Or maybe not. I telephoned by ultra-left-liberal Representative Tammy Baldwin (D-WI) that I “supported the President’s campaign pledge to extend the tax cuts for everyone, except for the wealthiest Americans, who need to pay their fair share” (I am like the Russian-speaking AWACS operator on the Tom Clancy novel, who almost busted a kidney from not laughing, pulling the chain of a Russian fighter pilot who failed in an attempt to sneak up). This week I got a kind of mush-mouthed letter (dated August 20? Is Congressional mail that slow or was Rep. Baldwin sitting on this trying to make up her mind?) thanking me for my support of President Obama’s plan, blah, blah.
If these guys are going to do anything on taxes, they are going to have to get off their backsides and get to work. If they follow Speaker Pelosi’s plan and just let the tax cuts expire, a whole bunch of middle-class people will feel it immediately in Jan 2011 with increased withholding. Thanks for the pay cut, Nancy! If they do act on extending tax cuts to “the middle class”, a lot of things can happen in Ways and Means Committee, and they may end up extending crucial tax cuts (for the stock market) on stock dividends and the like. If they really keep to the President’s plan on not extending tax cuts “to the rich”, we will run this little experiment on how long the current economic crisis will continue, now, won’t we.
Look people, this thing is a win-win however you look at it.
Yeah, we are going to keep the car keys away from the one’s who put it in the ditch, and we are going to rock that sucker out of that ditch and end up over a cliff . . .
Michael Kennedy Says:
September 16th, 2010 at 11:23 am
Some of the rhetoric in Congress has “the rich” coming in as long as $150,000/ year. Famous Vietnam fighter pilot Tom Harkin says that is too much money.
“Two hundred and fifty thousand dollars? Is that the top 1 percent of Americans, or half a percent? Come on!” said Sen. Tom Harkin (D-Iowa).
Harkin said he would be willing to extend the tax cuts for families earning $150,000 or less annually.
Pretty soon, he will be extending tax cuts only for those who don’t pay income taxes.
Dan from Madison Says:
September 16th, 2010 at 11:24 am
Paul – “Is Congressional mail that slow or was Rep. Baldwin sitting on this trying to make up her mind?”
Speaking as another who has Ms. Baldwin as his rep, I can assure you that there is no making up of her mind on anything – whatever the dems put out she is behind. A true socialist in every sense of the word.
Too bad she beat John Shaprless all those years ago, I honestly don’t see any end in sight for her reign over this area. Sigh.
Andrew_M_Garland Says:
September 16th, 2010 at 3:47 pm
Repealing the 1990 Luxury Tax on Yachts
The US in 1990 carried out a tax-raising experiment, applying luxury taxes to the first sale of expensive cars, private airplanes, and yachts.
The tax on yachts was “only” 10% of the sale over $100,000. As it happened, boat building was concentrated in Maine, and decreased demand cost 200,000 jobs in boat building of all types. Buyers switched to buy their boats in Europe. The revenue increase was tiny, and clearly this was a tax only on the rich.
Bush the senior arranged to repeal those taxes in 1993.
The significance here is that the damage from this specific tax was clearly visible, in a concentrated industry within a few states. The tax was repealed because there was no confusion about its obvious and unintended effects, and there was organized opposition which affected a few key senators.
The Obama tax increases on the rich will have similar effects. Unfortunately, those effects will be diffuse among many types of luxury goods, and much larger. People will be unemployed without knowing why, and recovery will be slowed or stopped.
Paul Milenkovic Says:
September 16th, 2010 at 4:55 pm
“Speaking as another who has Ms. Baldwin as his rep, I can assure you that there is no making up of her mind on anything – whatever the dems put out she is behind. A true socialist in every sense of the word.”
Yes, but the Dems haven’t made up their mind on this. One one hand you have Speaker Pelosi who just wants the tax cuts to expire to tap into the revenue stream, and on the other hand, you have the inconvenient truth that Candidate Obama made extending at least some of the tax cuts a campaign pledge, and recently President Obama gave his voice to reminding us all of where he stands.
So which is, “let those Bush tax cuts expire” or “For . . . those . . . of . . . you . . . making . . . less . . . than . . . (fill in the blank 250K/200K/150K — there has been some squish on that) . . . you . . . will . . . not . . . see . . . your . . . taxes . . . go . . . up . . . one . . . dime!” I am thinking there is a break between the President and the Dems in Congress on this one, otherwise they would have acted months and months ago and perhaps spared the economy all of the agony of the uncertainty this creates.
Yes, Rep. Baldwin is in lock-step with the Dem leadership, but I don’t think these people know whether they want to even make good on Mr. Obama’s promise or not. I thought it was clever politics to call Rep. Baldwin and demand that she get to work shoring up the President’s promise on this one.
See, once tax legislation comes up on the agenda, the “rich” are going to take a haircut, yes, to hold up the anti-rich talk, but the opportunities for sausage-making then present themselves to not wreck the economy by simply letting the tax cuts lapse. If the Dems keep tax cut legislation off the calender, there is no way to cut any deals, and the Dems own the consequence of the big burp in tax rates in the middle of an economic crisis. Oh, that dastardly George W. Bush!
onparkstreet Says:
September 16th, 2010 at 5:35 pm
We should be encouraging such people, not looting their capital to buy votes.
I thought that was SOP around some parts, like, er, Chicagoland?
- Madhu
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Submitted by Gonzalo Lira
JPN ≠ US: Japan Is Not Us
Japan went through an equities and real estate boom during the 1980’s—a boom that was really a bubble. And like all bubbles, it eventually burst in 1990.
Since then, Japan has been lost. Equities have never again reached the heights of 1990, nor have real estate prices. The Japanese government has spent a fabulous amount of money for domestic stimulus, creating the most modern infrastructure on earth—yet it hasn’t helped at all. GDP has been anemic, as the population slowly begins to shrink. Japan is in full-on deflation—in every sense of the word.
Now that the United States has had its own real-estate bubble pricked, a lot of smart people have been selling the idea that the U.S. will experience what Japan has experienced: Persistently sluggish growth. Continued fiscal deficits, carried out by the Federal government in order to prop up aggregate demand by way of various stimulus programs. Slow and painful working out of the debt overhang. All of this happening within a deflationary environment, whereby the dollar—just like the yen in Japan—accrues value, as full-throttle deflation sets in.
In other words, this camp believes America is set to begin its own version of Japan’s Lost Decades.
This camp falls for what I call the “Japan Is Us” fallacy—and they are wrong.
Their rationale is simple—and superficially persuasive: Just like Japan in 1990, the United States went through a bubble in equities and real estate, which eventually popped in 2007–‘08. Since then—just like Japan—the U.S. has been experiencing deflation. Just like Japan, the U.S. now has zombie banks, the so-called “Too Big To Fail”. Just like the Japanese government, the U.S. government is spending-spending-spending, so as to prop up aggregate demand. The Federal Reserve—just like the Bank of Japan—is issuing enormous sums of money in order to prop up aggregate asset price levels—the Fed’s policies are so reminiscent of the BoJ’s money printing that Bernanke & Co. have borrowed the term outright: Quantitative easing.
Everything screams Just Like Japan—right? So according to the “Japan Is Us” camp, 2010 through at least 2015 will be just like Japan between 1990 and 2010: Sluggish growth, stagnation—and most important of all, deflation, deflation, deflation.
But there is one key difference that the Japan Is Us crowd conveniently ignore. They ignore it out of blindness, or incompetence, or—occasionally—out of malice. They ignore this key issue like the elephant in the room that’s gone and got drunk, and is now making a fool of himself: Balance of payments.
Balance of payments (BOP) is the measure of a country’s total exchange with the rest of the world. From the Federal Reserve’s “Fedpoints”:
- The balance of payments is an accounting of a country's international transactions for a particular time period.
- Any transaction that causes money to flow into a country is a credit to its BOP account, and any transaction that causes money to flow out is a debit.
- The BOP includes the current account, which mainly measures the flows of goods and services; the capital account, which consists of capital transfers and the acquisition and disposal of non-produced, non-financial assets; and the financial account, which records investment flows.
(Emphasis added.)
The current account is the key metric: It’s the net balance between imports and exports. In other words, the trade surplus or deficit.
As everyone knows, the U.S. current account has been negative for a long, long time—in fact the last time the current account was in surplus was 1973. Since then, current account deficits have totaled about $7.5 trillion in nominal dollars. (Data is here.)
Japan, meanwhile, has had a current account surplus. I found a nifty chart that neatly summarizes the differences between the two countries:
Current account surplus/deficit per country as percent of world GDP. De Mello/Padoan.
(Original chart by Luis de Mello and Pier Carlo Padoan can be found here.)
To finance this massive current account deficit, the U.S. has sold assets to the rest of the world. The U.S. Federal government has gone into deficit spending on top of this current account deficit—it too has sold assets to cover the fiscal deficit.
So in a net sense, both the U.S. Federal government and the United States as a whole have “sold assets” to the rest of the world, in order to pay for their spending.
What “assets” have been sold to pay for all this spending? Basically, Treasury bonds. And as everyone knows, Treasuries might be called “assets” by the sophisticates, but they are really nothing more complicated than a loan.
In other words, Americans and their government have gone into massive debt with the rest of the world, in order to finance all this spending.
Japan, meanwhile, has been carrying a current account surplus. Therefore, the Japanese government has been borrowing money not from overseas, but from its own citizen’s savings. All of the Japanese government’s stimulus spending has been paid for by the Japanese people.
This is the main difference between the United States and Japan. It should be obvious—and ominous—what this difference means.
The U.S.—unlike Japan—cannot pay back its loans: Because the United States is broke. The Federal government is running deficits of around 10% of GDP. America as a whole has racked up $7.5 trillion in current account deficits over the last 25 years—over 50% of total GDP—with no end in sight.
So the United States—unlike Japan—has been spending what it does not have. The U.S.—unlike Japan—depends on the rest of the world to lend it money to continue on this spending spree. Americans—unlike Japan—do not produce enough to self-finance its government’s stimulus programs.
Therefore—unlike Japan—the United States will eventually be unable to pay the Treasury bonds it has issued. Therefore, as I wrote in A Termite-Riddled House, there will be a collapse in the Treasury bond market. Therefore, as I wrote in How Hyperinflation Will Happen, a panic in Treasuries will mean a run up of commodities—which will bring about the death of the dollar, and hyperinflation in America.
This is why Japan Is NOT Us.
But even if you don’t subscribe to my hyperinflationary scenario—even if you think I’m full of shit on this issue (and plenty of sensible people think I’m full of it to the brim)—it’s obvious that Japan is not like the United States—it’s obvious to anyone who looks at the situation evenhandedly: The contrast in the two countries’ balance of payments is enough to show definitively and unequivocally that they are not the same.
The source of the two countries’ funding is key: One produces its own stimulus from its current account surplus, while the other borrows it from abroad, adding more debt on top of its already existing debt. Therefore, one country’s spending and stimulus programs—Japan’s—are sustainable, while the other’s—America’s—is not. Which means that the mechanisms for this fiscal debt—sovereign bonds—are rock solid in Japan, but lethal in America.
So if it’s so obvious that the two countries’ situations are so different, then who is selling this clearly false notion that Japan Is Us?
Why, people who have a vested interest in this point of view. People who are selling things. Or people who are trying to explain away why they have lost so much money by making the wrong bets.
For instance, money managers. A lot of pseudo-Austrian money managers in particular have been doing the hard sell to their clients, insisting and insisting that the U.S. is experiencing Japan-redux. They have been steering their clients’ money to Treasury bonds—because if you were in Japan in 1990, their sovereign bonds turned out to be the smartest investments in the long run.
But as we have seen, the U.S. is not Japan.
So these money managers who are playing the Japan Is Us trade have either lost their shirt, or are terrified that they are about to. Because everyone knows that U.S. Treasury bonds are overpriced, and that it’s only a matter of time before this Treasury bubble pops.
And when it pops, it will be bad—a lot of people counting on the United States following in the footsteps of Japan won’t just lose a bit: They’ll lose huge. They’ll be wiped out—or maybe they won’t be wiped out, but their clients sure will be.
That’s why so many people keep insisting that Japan Is Us!-Japan Is Us!-Japan Is Us! They are selling their clients on something, or else trying to explain away their underperformance, by sheer force of personality—while ignoring the blindingly obvious fact that the U.S. is not Japan.
One prominent blogger in particular has been going insane, insisting day after day that Japan Is Us, to the point of psychosis—evidence to the contrary be damned. Every day, this blogger—Michael “Mish” Shedlock—bangs on the same old tired drum. Mr. Shedlock is affiliated with Sitka Pacific, whose performance leaves something to be desired. There are, apparently, a number of Sitka Pacific clients quite nervous about the direction of their investments. So it is reasonable to question whether Mr. Shedlock is ranting and raving how the U.S. is following the deflationary spiral that Japan did because he genuinely believes what he is saying, or because he is trying to convince someone—maybe his clients, maybe himself—of something that he knows in his bones might not be true.
What is true is that anyone who has made bets that Japan Is Us will soon find out if they were wise bets, or foolish ones. The Treasury bubble is soon to burst—so we’ll know the fate of the American economy soon enough.
If those bets turn out to be foolish—if it turns out that, indeed, Japan Is Not Us—just keep in mind one final fact: An average person can survive a leap from a third floor window, even a fourth floor window.
But a leap from a fifth floor window or higher? That’s how you get the job done right. You jump from a fifth floor window, and you’ll go splat!—guaranteed.
Full disclosure: I do not manage any money except for my personal stake and my family’s private interests. I do not provide professional investment advice to anyone. I am not affiliated to, nor am a spokesman for any third party investment or financial company. I do not endorse any product, save Head squash raquets, Slazenger squash balls, Montecristo (Cuba) cigars, Cálem vintage port wines, and Durex X-Treme X-Long X-Large X-Tra Comfort condoms.
robert shumake
Small Business <b>News</b>: Social Media and the Entrepreneur
Social media and entrepreneurship represent the perfect partnership in today's small business world. Free and easy to operate social media tools have made it.
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robert shumake
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Social media and entrepreneurship represent the perfect partnership in today's small business world. Free and easy to operate social media tools have made it.
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Robert Schwartz Says:
September 15th, 2010 at 8:55 pm
Several reasons why the whole discussion makes me nuts:
First, the idea that extending the tax rates that have been in effect for the past eight years amounts to a tax cut is not even wrong. It is utterly misleading. The correct way to talk about it is whether or not Congress is going to allow a massive tax increase.
Second, the idea that the current rate chart was a “tax cut for the wealthy” when it was put in effect is wrong. The rate charts in Section 1 of the IRC are only one step in the determination of the amount of the check that will be written to the Federal Government. Other calculations, deductions, exemptions, and credits are are also important. For myself, I never had my taxes decrease because of the 2001 changes in the Section 1 rate charts, because I have been paying the alternative minimum tax throughout the entire period.
Further, it is beyond dispute that the net effect of the tax changes in 2001 and 2003 was to increase the portion of income and total taxes paid by the upper income brackets. Collections dropped in the aftermath of the 2001 cuts, but that was mostly due to due the effect of the collapse of the internet bubble on capital gains.
Numbers are here: http://www.cbo.gov/publications/collections/taxdistribution.cfm
Third, the numbers that are thrown around like “it will cost $680 billion to extend the Bush tax cuts” are ludicrous. I acknowledge that under CBO’s methodology it looks like the Government would collect $680 billion more if it raised rates, but what would happen if they sent out invitations to a party and nobody came.
The methodology assumes that the people do not change their behavior because of tax law changes. That is of course nonsense. Furthermore the CBO assumes that the economy will soon resume its historic growth patterns, even in the face of a whopping rate increase. Double nonsense. The IRS won’t collect taxes on interest earned next year, because market rates have gone through the floor. I think my last money market statement showed a rate of 0.01%. Nor will capital gains taxes be paid, investors will still be offsetting losses from 2008 and 2009.
Bottom line is that if nothing is done to stop the rate chart from changing on January 1, the economy is going down for another eight count. Even the higher rates will not increase the revenue from a sick economy.
Fourth, this type of language: “here would this $680 billion go? Nearly all of it would go to the richest 1 percent of Americans …” is offensive. Tax revenues are not the Government’s money, they are the property of the people who earned them, even if they are passive investors who simply failed to waste the earnings. In the dream lands of the academic left, property may be a gift from the state, and what any of us gets to spend may be only by its grace. But the United States was explicitly created by its citizens (We, the people), and that money is ours. The $680 billion wouldn’t go anywhere, it would stay in the pockets of its owners. Of course if it never comes into being … see 3rd above.
Fifth, Jonathan is correct. The incentive effects of a rate hike at the highest level is the only one that counts. No entrepreneur tries to increase his income from $50,000 to $75,000 a year. He wants to get into the highest bracket. The incentive effects are there. If raising revenue were the only issue, it would be better to raise the lower brackets, not the highest one.
Jonathan Says:
September 15th, 2010 at 9:00 pm
Excellent points, thanks.
foxmarks Says:
September 15th, 2010 at 9:01 pm
An important distinction, indeed. “The rich” calls to mind lazy aristocrats and caricatures of cartoon robber barons (Scrooge McDuck). The already-rich are in best position to avoid any tax scheme. The only true tax on “the rich” is a wealth tax.
A related distinction never made is the difference between gross and net income. If somebody operates a partnership with a handful of employees, their gross will almost certainly be above whatever threshold is being discussed. These “rich” are not taking home $250,000/year, they’re selling $250K. Taxes come off the bottom line, not the top.
J.H. Bowden Says:
September 15th, 2010 at 9:52 pm
Scrooge McDuck, sitting on piles of idle money
Idle money? Given this thread is about sharpening language, it is worthwhile to point out that there is literally no such thing as idle money. (And we’re not talking about the velocity of money, or the size of the money supply, or anything like that.)
Generating wealth is not a blind, automatic process. There are plenty of businesses that go bankrupt, just as we all know of millionaire athletes who have lost it all from irrational decision-making. We only stay rich in a capitalist society by doing something someone else wants us to do. A person generating and/or maintaining wealth is either providing a good or service that someone else wants, or is making investments that lead to goods or services that others want. No one hordes piles of cash.
Our error is thinking of the economy as a pie that can be redistributed. Distribution is precisely the problem of socialism, not capitalism. For nothing is distributed in capitalism; everything is exchanged. There are no buyers without sellers. All taxes, like subsidies, create a deadweight loss– they prevent transactions from occurring that otherwise would have taken place. That’s why they harm economic well-being.
Tom Holsinger Says:
September 15th, 2010 at 9:57 pm
My old tax professor told us that, whenever we (law students) see a businessman doing something that doesn’t seem to make sense, it’s probably about taxes.
Likewise when we see politicians doing something that doesn’t seem to make sense, it’s probably about fund-raising.
Here the whole point of politicians raising tax rates on the rich is NOT to increase tax revenue, but to increase the politicians’ cash flow in the form of campaign contributions in exchange for tax breaks.
I.e., nominal tax rates on the rich will be raised so Congress can then sell them tax breaks. Actual tax revenue will go down.
Ric Locke Says:
September 16th, 2010 at 8:54 am
Here we see a major deficiency, perhaps the major deficiency, of the tea parties.
I once saw an illustration of differing attitudes between Britain and the United States. A British worker sees a fatcat going by in a big limousine, and says, “Ah, we’ll soon have you out of that.” An American worker sees a fatcat going by in a big limousine, and says, “Someday I’ll have one of those.”
There are now a substantial and growing number of Americans who have moved from the second group into the first. The reasons for that move are both various and irrelevant at this point. Unless some effort is made to educate Americans and get them back into the constructive attitude rather than the destructive one, no amount of political education will do more than slap fresh paint on a rotting structure.
Regards,
Ric
Paul Milenkovic Says:
September 16th, 2010 at 10:40 am
Probably in an ideal world we would extend the “tax cuts on the rich” (please note the use of irony-quotes) and let the tax cuts on the “middle class” expire. It had been noted in a “static analysis”, that the “tax cuts on the rich” will cost, dunno, 700 billion over the next 10 years whereas the “middle class” tax cuts will cost 4 trillion — someone can correct me if I have this right.
Thus, if you passed tax cuts for the rich, the hit on revenues would be small, but there is a possible gain in terms of incentives for wealth creation. If you let the middle class tax cuts lapse, there would be howls of pain and perhaps a hit on consumer spending, but you would raise much more revenue and probably not have as adverse an affect on wealth creation. You would also “flatten” the tax structure in the bargain as well.
The President’s proposal of extending the tax cuts for everyone-but-the-rich is the worst of both worlds — huge hit on revenue, huge hit on wealth creation. Something in me would like to see this go through, just to see this happen and to be able to gloat, “How’s the President’s economic plan working for you?”, but too many people are in a world of economic hurt to wish for this.
Or maybe not. I telephoned by ultra-left-liberal Representative Tammy Baldwin (D-WI) that I “supported the President’s campaign pledge to extend the tax cuts for everyone, except for the wealthiest Americans, who need to pay their fair share” (I am like the Russian-speaking AWACS operator on the Tom Clancy novel, who almost busted a kidney from not laughing, pulling the chain of a Russian fighter pilot who failed in an attempt to sneak up). This week I got a kind of mush-mouthed letter (dated August 20? Is Congressional mail that slow or was Rep. Baldwin sitting on this trying to make up her mind?) thanking me for my support of President Obama’s plan, blah, blah.
If these guys are going to do anything on taxes, they are going to have to get off their backsides and get to work. If they follow Speaker Pelosi’s plan and just let the tax cuts expire, a whole bunch of middle-class people will feel it immediately in Jan 2011 with increased withholding. Thanks for the pay cut, Nancy! If they do act on extending tax cuts to “the middle class”, a lot of things can happen in Ways and Means Committee, and they may end up extending crucial tax cuts (for the stock market) on stock dividends and the like. If they really keep to the President’s plan on not extending tax cuts “to the rich”, we will run this little experiment on how long the current economic crisis will continue, now, won’t we.
Look people, this thing is a win-win however you look at it.
Yeah, we are going to keep the car keys away from the one’s who put it in the ditch, and we are going to rock that sucker out of that ditch and end up over a cliff . . .
Michael Kennedy Says:
September 16th, 2010 at 11:23 am
Some of the rhetoric in Congress has “the rich” coming in as long as $150,000/ year. Famous Vietnam fighter pilot Tom Harkin says that is too much money.
“Two hundred and fifty thousand dollars? Is that the top 1 percent of Americans, or half a percent? Come on!” said Sen. Tom Harkin (D-Iowa).
Harkin said he would be willing to extend the tax cuts for families earning $150,000 or less annually.
Pretty soon, he will be extending tax cuts only for those who don’t pay income taxes.
Dan from Madison Says:
September 16th, 2010 at 11:24 am
Paul – “Is Congressional mail that slow or was Rep. Baldwin sitting on this trying to make up her mind?”
Speaking as another who has Ms. Baldwin as his rep, I can assure you that there is no making up of her mind on anything – whatever the dems put out she is behind. A true socialist in every sense of the word.
Too bad she beat John Shaprless all those years ago, I honestly don’t see any end in sight for her reign over this area. Sigh.
Andrew_M_Garland Says:
September 16th, 2010 at 3:47 pm
Repealing the 1990 Luxury Tax on Yachts
The US in 1990 carried out a tax-raising experiment, applying luxury taxes to the first sale of expensive cars, private airplanes, and yachts.
The tax on yachts was “only” 10% of the sale over $100,000. As it happened, boat building was concentrated in Maine, and decreased demand cost 200,000 jobs in boat building of all types. Buyers switched to buy their boats in Europe. The revenue increase was tiny, and clearly this was a tax only on the rich.
Bush the senior arranged to repeal those taxes in 1993.
The significance here is that the damage from this specific tax was clearly visible, in a concentrated industry within a few states. The tax was repealed because there was no confusion about its obvious and unintended effects, and there was organized opposition which affected a few key senators.
The Obama tax increases on the rich will have similar effects. Unfortunately, those effects will be diffuse among many types of luxury goods, and much larger. People will be unemployed without knowing why, and recovery will be slowed or stopped.
Paul Milenkovic Says:
September 16th, 2010 at 4:55 pm
“Speaking as another who has Ms. Baldwin as his rep, I can assure you that there is no making up of her mind on anything – whatever the dems put out she is behind. A true socialist in every sense of the word.”
Yes, but the Dems haven’t made up their mind on this. One one hand you have Speaker Pelosi who just wants the tax cuts to expire to tap into the revenue stream, and on the other hand, you have the inconvenient truth that Candidate Obama made extending at least some of the tax cuts a campaign pledge, and recently President Obama gave his voice to reminding us all of where he stands.
So which is, “let those Bush tax cuts expire” or “For . . . those . . . of . . . you . . . making . . . less . . . than . . . (fill in the blank 250K/200K/150K — there has been some squish on that) . . . you . . . will . . . not . . . see . . . your . . . taxes . . . go . . . up . . . one . . . dime!” I am thinking there is a break between the President and the Dems in Congress on this one, otherwise they would have acted months and months ago and perhaps spared the economy all of the agony of the uncertainty this creates.
Yes, Rep. Baldwin is in lock-step with the Dem leadership, but I don’t think these people know whether they want to even make good on Mr. Obama’s promise or not. I thought it was clever politics to call Rep. Baldwin and demand that she get to work shoring up the President’s promise on this one.
See, once tax legislation comes up on the agenda, the “rich” are going to take a haircut, yes, to hold up the anti-rich talk, but the opportunities for sausage-making then present themselves to not wreck the economy by simply letting the tax cuts lapse. If the Dems keep tax cut legislation off the calender, there is no way to cut any deals, and the Dems own the consequence of the big burp in tax rates in the middle of an economic crisis. Oh, that dastardly George W. Bush!
onparkstreet Says:
September 16th, 2010 at 5:35 pm
We should be encouraging such people, not looting their capital to buy votes.
I thought that was SOP around some parts, like, er, Chicagoland?
- Madhu