Can You Figure Out What This Chart Means? (Plus, Incentives Matter)

[roo_ster]

Can You Figure Out What This Chart Means?
http://www.unz.com/mwhitney/can-you-figure-out-what-this-chart-means/

It means the U.S. economy is in the throes of the lousiest recovery since World War 2.

“But how can that be”, you ask? “After all, hasn’t the Fed kept interest rates at zero for seven years while hosing down the entire financial system with more than $4 trillion?

Yep, they sure have, but their so called monetary stimulus has failed to lift the economy out of the doldrums or produce the robust recovery that they promised. Instead, US gross domestic product, (GDP) has been plodding-along at an abysmal 2.2% since 2009, which is far below the 3.6% average of the prior 60 years. Bottom line: There’s no chance the economy is going to break out of its long-term stagnation unless policymakers dramatically change their approach...

You see, the Fed’s policies HAVE created inflation, just not the kind of inflation that revs up activity. What the Fed has created is asset inflation, soaring stock and bond prices that eventually lead to financial instability and painful periods of adjustment. The S&P has more than doubled since 2009, while the Dow Jones has actually tripled. Stock prices have skyrocketed while Wall Street speculators have made an absolute killing. It’s only working slobs who haven’t benefited from the Fed’s policies because none of the money has trickled down to the real economy where it could do some good. Instead, it’s all locked up in the financial system where its inflated one gigantic bubble after another.

See how the black line lurches skyward with every new round of QE? That’s how the policy works. The rich get richer while working people try to muddle by on fewer hours, shittier wages, pricier health care, and zero retirement savings. Is it any wonder why Bernie Sanders has caught fire?

Now if you look closely at the chart, you’ll see that the Fed stopped pumping money into the system in October 2014, about a year and a half ago. Since that time, stocks have gradually edged higher which suggests that current prices accurately reflect strong underlying fundamentals. But does anyone really believe that?

No, not really. Everyone thinks stocks are in a bubble...

It’s all just froth from zero rates and QE, every bit of it. And there’s no bottom either, that’s why the Fed is so worried, because if the market does a sudden about-face and stocks start to nosedive, there’s no telling where they’ll wind up. We could see the Crash of the Century in matter of weeks. Nobody really knows for sure...

Why have stocks continued to edge higher when the Fed stopped its money-pumping operations back in 2014?

Answer: Stock buybacks...

...CEOs have borrowed heavily from the bond market to buyback their own shares. That’s right, corporate bosses have been piling on the debt to goose their stock prices so they can cream hefty profits in the form of executive compensation.

This is what’s driving the market higher. Not the fake jobs numbers, not the phony housing rebound, and certainly not confidence in Yellen’s lousy recovery. It’s all based on cheap money, financial engineering, and fraud. That’s today’s stock market in a nutshell...

Now take a look at this shocker from Bloomberg:

“Standard and Poor’s 500 Index constituents are poised to repurchase as much as $165 billion of stock this quarter, approaching a record reached in 2007.” (There’s Only One Buyer Keeping S&P 500’s Bull Market Alive, Bloomberg)

...“The sole demand”? You mean the only one buying these crappy stocks is the companies issuing the shares?

That’s right, and you can blame it all on the friendly folks at the Fed. If it wasn’t for the Fed’s zero rates and $4 trillion in QE, this latest suicidal-wave of speculation never would have happened. Let’s face it, if rates were normal, CEOs wouldn’t be able to borrow money to buy their own shares. It would just be too expensive...

So what’s the ultimate objective here, what is the Fed really trying to achieve?...

I would note that I do not consider gov't inflation indices to be honest and to underestimate inflation.

Of course, there is more detail at the linky.

[brimic]

Its been obvious all along to some people that QE has had nothing to do with anything other than stock buybacks and shuffling FRNs to the banksters to stick into the stock bubble. Fed.gov consistently LIED to us about economic and employment figured under obama.
There won't be any need for bailouts when this bubble bursts- the banksters will be pulling out of the market (and pulling the market down with it) before anyone in the middle class who has hundreds of thousands to millions in their IRA/pension/401K can respond.  The middle class is going to take it in the shorts HARD.
Bernie, Trump, Hillary, Cruz..... none of them are going to fix this.

TINVOWOOT

[AJ Dual]

Inflation is also the way the fed.gov pays down the debt. 

God forbid the Fed actually do something like, I dunno... view it's charter and monetary policy to maintain as stable a value of the U$D as possible, and ensure there is no more, or no less money than is required to represent the economy/GDP, and maintain liquidity.

[Firethorn]

I think the problem has been one of a failure of 'supply side' economics, even though it has carefully not been mentioned.

The idea is simple enough.  You have consumers and investors.  All investors are also consumers, about a third of consumers are investors.  About .1% of investors are so heavy on the investment side that their consumer side is insignificant.

Anyways, the Fed lowering interest rates is a subsidization of investors.  The problem is, investors only invest in stuff that promises a return on their money.  Who provides the return?  Generally speaking, consumers.  If the consumers have no money because of stagnant wages, job exportation, illegal immigrants taking them at low wages, etc...  Then there's no place for investors to put the money they're being given, other than inflating what's already there.

This is not always true, but I think it's true in this case.  If the economic problems were that investors didn't have enough money to invest, and that was choking the economy, the symptom would be increasing interest rates as they hoover up any available money to invest, to the point where return + risk factor is less than the interest rate.  The feds have basically reduced this to return being less than the risk factor is the metric.  You can't realistically go lower.

Now, if you free up money for consumers, such as perhaps cutting taxes on people with realistic incomes, they will, on average, spend it.  Because they're buying stuff, that creates demand for goods, which creates investment opportunities.  Keep in mind that it's possible to overdo this, which would be marked with rising interest rates, inflation in consumer goods(as opposed to investment vehicles), etc...

[Scout26]

I think the problem has been one of a failure of 'supply side' economics, even though it has carefully not been mentioned.

The idea is simple enough.  You have consumers and investors.  All investors are also consumers, about a third of consumers are investors.  About .1% of investors are so heavy on the investment side that their consumer side is insignificant.

Anyways, the Fed lowering interest rates is a subsidization of investors.  The problem is, investors only invest in stuff that promises a return on their money.  Who provides the return?  Generally speaking, consumers.  If the consumers have no money because of stagnant wages, job exportation, illegal immigrants taking them at low wages, etc...  Then there's no place for investors to put the money they're being given, other than inflating what's already there.

This is not always true, but I think it's true in this case.  If the economic problems were that investors didn't have enough money to invest, and that was choking the economy, the symptom would be increasing interest rates as they hoover up any available money to invest, to the point where return + risk factor is less than the interest rate.  The feds have basically reduced this to return being less than the risk factor is the metric.  You can't realistically go lower.

Now, if you free up money for consumers, such as perhaps cutting taxes on people with realistic incomes, they will, on average, spend it.  Because they're buying stuff, that creates demand for goods, which creates investment opportunities.  Keep in mind that it's possible to overdo this, which would be marked with rising interest rates, inflation in consumer goods(as opposed to investment vehicles), etc...

And you fail to understand supply side economics, which is reducing  taxes and regulations to reduce the cost(price) of goods, not simply to stimulate investment.   If you lower the US  Corporate tax rate from it's current 35% to say 20%, then the price of goods should fall accordingly.  Which is also why you reduce taxes on individuals, to give people more money to spend.  Q(infinity) has not put money in the pockets of people or corporations to buy and build, in the pockets of Wall Street investors and created a bubble.

[brimic]

And you fail to understand supply side economics, which is reducing  taxes and regulations to reduce the cost(price) of goods, not simply to stimulate investment.   If you lower the US  Corporate tax rate from it's current 35% to say 20%, then the price of goods should fall accordingly.  Which is also why you reduce taxes on individuals, to give people more money to spend.  Q(infinity) has not put money in the pockets of people or corporations to buy and build, in the pockets of Wall Street investors and created a bubble.

The problem with <insert leftist idea fail> keynesian economics is that the right people haven't been in charge.

[RoadKingLarry]

Basically, what it all means is that the republic is good and truly screwed. We are in an unrecoverable death spiral and the only questions that remain to be answered is how soon and how deep the crater will be.
 

[charby]

And you fail to understand supply side economics, which is reducing  taxes and regulations to reduce the cost(price) of goods, not simply to stimulate investment.   If you lower the US  Corporate tax rate from it's current 35% to say 20%, then the price of goods should fall accordingly.  Which is also why you reduce taxes on individuals, to give people more money to spend.  Q(infinity) has not put money in the pockets of people or corporations to buy and build, in the pockets of Wall Street investors and created a bubble.

Worked really well so far huh? Seems that the tax break savings haven't trickled down to the working class, if that wasn't the case, explain the stagnant wages of the last few decades and how the extremely wealthy have gained wealth.

[Scout26]

Worked really well so far huh? Seems that the tax break savings haven't trickled down to the working class, if that wasn't the case, explain the stagnant wages of the last few decades and how the extremely wealthy have gained wealth.

Guess you haven't been paying attention since the 1980's.  Tax rates (to include "corporate" rates*) have gradually been ratcheting up, not down, not to mention hundreds if not hundreds of thousands additional taxes which include things like regulations, which are hidden taxes, by driving up the costs of everything.


* - Corporations don't pay taxes.  Those are merely an additional cost of doing business which is passed on to the consumer in one form or another.  So imagine if say everything you purchased went down in price by 20% (if the .gov reduced the corporate rate to 15%), or look at what Obamacare has done to employment. 

[charby]

Guess you haven't been paying attention since the 1980's.  Tax rates (to include "corporate" rates*) have gradually been ratcheting up, not down, not to mention hundreds if not hundreds of thousands additional taxes which include things like regulations, which are hidden taxes, by driving up the costs of everything.


* - Corporations don't pay taxes.  Those are merely an additional cost of doing business which is passed on to the consumer in one form or another.  So imagine if say everything you purchased went down in price by 20% (if the .gov reduced the corporate rate to 15%), or look at what Obamacare has done to employment. 

Looks like it has gone down on the higher corporate incomes since 1980

http://taxfoundation.org/article/federal-corporate-income-tax-rates-income-years-1909-2012

[brimic]

Looks like it has gone down on the higher corporate incomes since 1980

http://taxfoundation.org/article/federal-corporate-income-tax-rates-income-years-1909-2012

Well of course... the mega corps get the tax breaks they can lobby and bribe for- iirc, GE for example, paid effectively zero taxes a few years ago...
Where your argument fails is that most corporations are small, and they as a group employ the most people.

[charby]

Well of course... the mega corps get the tax breaks they can lobby and bribe for- iirc, GE for example, paid effectively zero taxes a few years ago...
Where your argument fails is that most corporations are small, and they as a group employ the most people.

Well, reduce your profits by paying higher wages to the employees, pay less corporate taxes because the corporation made less money. If you can work your balance sheet correctly, should be paying little to no corporate taxes.

[brimic]

Well, reduce your profits by paying higher wages to the employees, pay less corporate taxes because the corporation made less money. If you can work your balance sheet correctly, should be paying little to no corporate taxes.

More like keep as much money outside of the country as possible (US has one of thehighest corporate tax rates in the world).
Regardless of what people on the left think, you can't tax your way into prosperity.

[roo_ster]

QE (low/zero prime interest rate) stimulation, supply side (cut them taxes) stim, demand side (slather those not earning income with cash) stim, and profligate gov't spending stim all--eventually--face diminishing marginal rates of return.  Based on both external/environmental factors and their intrinsic qualities.

We have seen QE fail, Lo, these last few years in a spectacular fashion.  It might not be re-arranging deck chairs on the Titanic, but it is akin to breaking out the pikes and muskets to repel boarders after being holed by the iceberg.

Supply side has also lost its mojo, both economically and politically.  When Mitt's 47%+ no longer pay meaningful income taxes, promising MOAR TAX KUTZ to those making $250k+/year is not as attractive as the Donor Class might think.  And economically, cutting top end taxes from 40% +/- to ~30% has much less impact than cutting them from 90% or 70% to 25%.  Of course, the GOPe, the Donor Class, and Captains of Industry jock-sniffers keep f***ing that chicken no matter what.  "It worked for Reagan!"  Well, this is not 1980 and Reagan is food for worms.

The War on Poverty and myriad other social spending programs have also shown demand side stim useless as teats on a boar hog at stimulating much of anything beyond riots over the latest basketball shoes.  We have so many in the wagon getting a free ride and so many fewer productive citizens pulling the wagon we are seeing productive citizens go galt to a greater or lesser extent.

Gov't can;t even spend like a drunken sailor and expect to accomplish anything.  Infrastructure projects must wait years/decades for approval by the enviro-lawyerly class of parasites.  Can;t even buy military hardware all that quickly. 

Reducing gov't interference/regulation may show some actual results, but they are dispersed and less amenable to dumb-as-posts journalist examination, even if they were so inclined.

Bottom line: none of that shinola works anymore.  Willingly or otherwise, we will have to come to a reckoning and stop ALL the artificial stim proping up this rotten daub-and-wattle sorry excuse for an economy and get back to basics.  When that happens, expect every social friction to heat up its flash point.

[brimic]

Supply side has also lost its mojo, both economically and politically.  When Mitt's 47%+ no longer pay meaningful income taxes, promising MOAR TAX KUTZ to those making $250k+/year is not as attractive as the Donor Class might think.  And economically, cutting top end taxes from 40% +/- to ~30% has much less impact than cutting them from 90% or 70% to 25%.  Of course, the GOPe, the Donor Class, and Captains of Industry jock-sniffers keep f***ing that chicken no matter what.  "It worked for Reagan!"  Well, this is not 1980 and Reagan is food for worms.

You are pointing out the wrong solution to the wrong problem...
Personal Income Taxes were never necessary until the US decided to go full global empire. We shouldn't be fighting eachother over a few% tax cuts (or as I like to say it- money being stolen from producers under the threat of lethal state violence) for whatever bracket gets them, we should all be holding our politicians' feet to the fire and making them justify EVERY SINGLE PENNY THEY SPEND. Our fed.gov is probably 10% constitutionally required with the rest being detrimental fat. Yes there is going to be an endless line of statists on both the left and right screaming for their piece of the .gov pie, but in reality, they are the problem that eventually precipitates various forms of 'stimulus' in desperate attempts to keep the ship from sinking.

[charby]

More like keep as much money outside of the country as possible (US has one of thehighest corporate tax rates in the world).
Regardless of what people on the left think, you can't tax your way into prosperity.

Actually with the tax shelters and tax havens that corporate tax payers can take advantage has put the effective corporate tax rate around 22% which makes us lower than much of the 1st world.



I would image there are other taxes higher in say Europe that corporations pay, such as property tax or VAT on materials, that makes their total rate higher than the US.

I also doubt that the sub million profits corporations are moving their money overseas.

[roo_ster]

Actually with the tax shelters and tax havens that corporate tax payers can take advantage has put the effective corporate tax rate around 22% which makes us lower than much of the 1st world.

I would image there are other taxes higher in say Europe that corporations pay, such as property tax or VAT on materials, that makes their total rate higher than the US.

I also doubt that the sub million profits corporations are moving their money overseas.

Tax shelters & tax havens are sub-optimal and are signs that business is driven to perverse sub-optimal financial arrangement due to gov't myopia.  Those are the sorts of assets one hopes to free up and get moving/investing when lowering cap gains rates. 

VAT is paid by the end-user in all the VAT regimes I have read about.  And they can even be avoided if the corporation is a multi-national.

Still MOAR SUPPLY SIDE is not going to save us.

[Firethorn]

And you fail to understand supply side economics, which is reducing  taxes and regulations to reduce the cost(price) of goods, not simply to stimulate investment.

Actually, that's not a failure to understand on my part, that's a failure to understand on your part that I was talking specifically about one aspect of subsidization, specifically the fed loan rate. 

Reducing taxes isn't going to help because that's only on 'profits', and all the major corporations already use off-shore tax shelters to reduce that to effectively zero anyways. 

Reducing the cost of doing business by cutting back on choking regulation levels is good, but will generally only have a marginal effect on whether any given investment is profitable or not.

If you lower the US  Corporate tax rate from it's current 35% to say 20%, then the price of goods should fall accordingly.

You do realize that that's a tax on net profit, not gross profit, right?  You're probably looking at those taxes, even for the companies without off-shore tax shelters, running around 2-3% of gross.  You could completely eliminate them and it'd only make about a 1% cost change for consumer goods.

Which is also why you reduce taxes on individuals, to give people more money to spend.  Q(infinity) has not put money in the pockets of people or corporations to buy and build, in the pockets of Wall Street investors and created a bubble.

Yep. 

Still MOAR SUPPLY SIDE is not going to save us.

Which was what I was pointing out.  From what I remember, cutting the employee side of social security for a while, which was a tax cut to the lower income levels, but still for those working, worked extremely well. 

But I still maintain that borrowing money to give it away is a fool's bargain in the long run, so we need to reign the government in to balance that budget, then KEEP reigning it in to pay back the debt, as well as cut taxes on the lower levels of society. 

It used to be that even when there was an income tax in place, only the top 1% had to worry about it anyways.

[Ron]

Tax shelters & tax havens are mostly used by the largest corporations. Mid sized and smaller corporations have fewer options.

What a smaller (small in relation to the multi nationals) corporation does with profits is not always what they want to do due to tax laws. A lot of profits go into employee retirement funds.

So our tax laws actually cause a lot of corporate profits to be funneled into the stock market.

While it is helping the employee's 401k or savings it is not necessarily where the free market would allocate those resources without government tampering or interference.

Of course it is just a coincidence that the big winner, much bigger than the employees is Wall Street.

[MechAg94]

It is amazing how simple economics can get so complicated when people start arguing over the details and get away from the basic functions and principles.

[AJ Dual]

The other issue too is the hidden costs of taxation. When there's loopholes, shelters, exemptions a company can exploit, they're still not "free", there's a significant amount of accounting costs, legal fees etc. that's still wasted time/effort/money that could have been passed along to consumers as savings.

[MechAg94]

It is interesting to think about all the things we do and decisions we make that are based on income taxes (personal and corporate). 

[Ron]

The concept that corporations don't really pay taxes but just pass those costs along to the consumer seems to be hard for the average person to grasp.

[brimic]

The concept that corporations don't really pay taxes but just pass those costs along to the consumer seems to be hard for the average person to grasp.

But some people WANT, no NEED, eebil corporations to 'pay their fair share' so that they can obtain their free *expletive deleted*it from big daddy government.

[MechAg94]

The concept that corporations don't really pay taxes but just pass those costs along to the consumer seems to be hard for the average person to grasp.

Not completely, but the money comes from somewhere.  I recall a quick analysis in college economics where they showed that a change in a corporation's cost was not 100% passed through.  Increasing cost of supply does not allow them to stay at the same point on the demand line or something like that.  The new equilibrium point is different. 

Maybe you should also consider that 100% of a corporation's profits come from the consumer also.