Bill Bonner – Bill Bonner’s Diary (United States) –
BALTIMORE – Have we been too cynical?
Yesterday, the House passed its big tax-cut bill. The Dow popped up 187 points on the news. A reporter asked us later: “Will the Dow go to 40,000?”
Assuming a tax bill comes through the Senate and out of committee in more or less the same shape, it will be a bonanza for your editor.
We are one of the people who will benefit most (relatively speaking). Most of our income is “pass-through” money from an S corporation… and we need protection from estate taxes.
Thank you, Donald Trump and Paul Ryan!
In addition to helping us, Republican sponsors say it will increase growth rates and jobs.
Hmmm… How will it do that?
Stimulus, of course. The bill will reduce federal tax revenues by $1.4 trillion over the next 10 years, says The Wall Street Journal. And the Tax Foundation says it will cut the feds’ income by $1.08 trillion. Meanwhile, the Penn Wharton Budget Model predicts that it will add $6.9 trillion to U.S. government debt by 2040.
All of these cuts… and increased debt… are expected to stimulate the U.S. economy. Steve Mnuchin, formerly a Goldman insider in Manhattan, and more recently a movie producer, says these tax cuts will cause the economy to grow at a sustained 3% rate… and increase federal tax revenues by $2 trillion. Every comes out a.
Do you believe that, dear reader?
We hope not; it is nonsense.
The feds are parasites; what counts is how much blood they suck. This new tax scheme doesn’t reduce government spending by one penny.
Ultimately, the money they spend has to come from the productive economy; there’s nowhere else to get it.
Here’s our simplified guide to tax reform:
- The poor have no money.
- The middle class has no lobbyists.
- The rich have no desire to pay more.
But why should giving the rich more money stimulate output? Are they having trouble making ends meet? Do they lack capital?
According to a new report by Credit Suisse, the richest 1% of the world’s population already controls half of its total wealth. They have plenty of spending money; giving them more is not going to appreciably increase consumption. And if they need more money, they can borrow at the lowest rates in history.
We’ve heard of no business in recent American history that failed… or failed to expand… because it lacked capital. On the other hand, thousands of businesses are failing because they lack customers.
Which brings us to the rest of the population – the part that isn’t rich… and has no lobbyists… the part that must earn and consume to make an economy run.
Return of Subprime
U.S. household debt hit a record of $13 trillion last quarter.
Here are some details from financial commentator Wolf Richter:
- Mortgage debt surged 4.2% year-over-year, to $9.19 trillion, still shy of the all-time record of $10 trillion in 2008 before it all collapsed.
- Student loans surged by 6.25% year-over-year to a record of $1.36 trillion.
- Credit card debt surged 8% to $810 billion.
- “Other” [debt] surged 5.4% to $390 billion.
- And auto loans surged 6.1% to a record $1.21 trillion.
All of these credit cards will come tumbling down in the next financial earthquake, but the $1.21 trillion auto-loan market seems particularly wobbly. Wolf continues:
Of all auto loans outstanding, 2.4% were 90 days (“seriously”) delinquent, up from 2.3% in the prior quarter. But delinquencies are concentrated in the subprime segment and all hell is breaking loose there.
[N]ot all subprime loans are cut from the same cloth. The 90 day delinquency rate for subprime auto loans originated by banks dropped after the Financial Crisis and has since remained fairly steady. In Q3, it was 4.4%, down from 7.1% at the peak of the Financial Crisis. So, the subprime auto-loan fiasco is not going to topple the banks.In contrast, the 90 day delinquency rate for loans originated by auto finance companies has been soaring since 2013. In Q3 2017, it hit 9.7%.
This 9.7% is the highest delinquency rate since Q1 of 2010. And it first hit that rate on the way up during the Great Recession in Q3 2008, during the Lehman moment. A year later, it peaked at 10.9%.
Will easing taxes on businesses and rich people help these subprime borrowers make their payments?
Will it help students – who were lured into debt by the feds – pay their loans?
Will it lighten the load from credit cards?
Well, it could… if the feds’ “stimulus theory” was correct.
Since 2009, the Fed has added $3.6 trillion of stimulus money into the economy by way of its QE programs and U.S. government debt doubled.
It produced the weakest recovery ever… the worst jobless rate since the Great Depression… and an economy so limp and unappealing that even life expectancies are falling.
Since 2000, central banks worldwide have added $20 trillion to the global economy… lowering interest rates to absurd levels… and boosting world debt to $225 trillion, approximately three times world GDP. World GDP growth rates have fallen.
In 1981, President Reagan passed a tax-cut program far more ambitious and aggressive than the House Republicans’ version.
Colleague David Stockman, who was Reagan’s budget director at the time, says it gave the economy 10 times more stimulus.
There was a spurt of growth… then GDP growth rates trended lower for the next three decades. They are still falling.
We doubt the present initiatives will do anything to stop that trend. Instead, they will speed it up.