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Donald Trump has a plan for dealing with the stock market bubble. Make it bigger.

Before the election candidate Trump blasted Federal Reserve chairman Janet Yellen for keeping interest rates too low for too long to keep the economy humming along while Obama was still in office. The president elect accused Yellen of being politically motivated suggesting that the Fed’s policies had put the country at risk of another stock market Crash like 2008.

“If rates go up, you’re going to see something that’s not pretty,” Trump told Fox News in an interview in September. “It’s all a big bubble.”

Yellen of course denied Trump’s claims saying, “We do not discuss politics at our meetings, and we do not take politics into account in our decisions.”

As we shall see later in this article, Yellen was lying about the political role the Fed plays in setting policy, in fact, last week’s FOMC statement clearly establishes the Fed as basically a political institution that implements an agenda that serves a very small group of powerful constituents, the 1 percent. If serving the interests of one group over all of the others is not politics, than what is it?

The problem we have with Trump is not his critique of the market or the Fed. The problem is his remedy which can be sussed out by reviewing his economic plan. Trump wants to slash personal and corporate taxes in order to put more money into the economy to increase business investment, boost hiring, and rev up growth. Regrettably, his tax plan achieves none of these.

First of all, slashing taxes for the wealthy does not boost growth. We know that. It doesn’t work. Period. Check out this blurb from an article on CNBC:

“A study from the Congressional Research Service — the non-partisan research office for Congress — shows that “there is little evidence over the past 65 years that tax cuts for the highest earners are associated with savings, investment or productivity growth.”

In fact, the study found that higher tax rates for the wealthy are statistically associated with higher levels of growth…

The CRS study looked at tax rates and economic growth since 1945. The top tax rate in 1945 was above 90 percent, and fell to 70 percent in the 1960s and to a low of 28 percent in 1986.
The top current rate is 35 percent. The tax rate for capital gains was 25 percent in the 1940s and 1950s, then went up to 35 percent in the 1970s, before coming down to 15 percent today — the lowest rate in more than 65 years.

Lowering these rates for the wealthy, the study found, isn’t aligned with significant improvement in any of the areas it examined…

There is one part of the economy, however, that is changed by tax cuts for the rich: inequality….

The share of total income going to the top 0.1 percent hovered around 4 percent during the 1950s, 1960s and 1970s, then rose to 12 percent by the mid-2000s. During this period, the average tax rate paid by the 0.1 percent fell from more than 40 percent to below 25 percent.” (Study: Tax Cuts for the Rich Don’t Spur Growth, CNBC)

Trump’s tax plan will increase inequality by making the rich richer. He wants to reduce the top tax rate from 39.6% to 33% which means that people “making \$3.7 million or more in a year, would receive \$1 million in annual tax savings.” (USA Today) The plan is bad for the economy, bad for the deficits and bad for working people who will see more aggressive attacks on Social Security to make up for the losses in revenue.

Second, the huge tax break Trump intends to award to the tax dodging corporations that stash their money overseas will not be used to fire up growth or invest in future business ventures, but to issue more dividends to shareholders or increase stock buybacks that pump up stock prices. There’s a great article at the Intercept website that sums it up perfectly. Here’s a short excerpt:

“The official line from U.S.-based multinational corporations is that if they get a huge tax break, they’ll bring home the trillions of dollars in profits they’ve stashed overseas and use it to hire tons of Americans.

But now that Donald Trump’s election means it might really happen, corporate executives are telling Wall Street analysts what they’ll actually use that money for: enriching their shareholders and buying other companies.

The Intercept’s examination of dozens of earnings calls and investor conference talks since Trump won the presidential election finds that many executives are telling analysts at large banks that they are eager to take the money to increase dividends and stock buybacks as well as snap up competitors. They demonstrate considerably less if any enthusiasm for going on a domestic hiring spree…

“The wealthy are going to create tremendous jobs. They’re going to expand their companies,” Trump asserted during the first presidential debate. “They’re going to bring \$2.5 trillion back from overseas, … to be put to use on the inner cities and lots of other things, and it would be beautiful.” During the third debate he promised that “We’re going to start hiring people, we’re going to bring the \$2.5 trillion that’s offshore back into the country. We are going to start the engine rolling again.” (Corporations Prepare to Gorge on Tax Cuts Trump Claims Will Create Jobs, Jon Schwartz, The Intercept)

Trump knows his so called “tax holiday” scam is a bunch of baloney. Why would companies expand their operations, hire more workers, and generate more product when consumer demand is still in the crapper seven years after the Great Recession?

They’re not going to do that. They’re going to do exactly what their shareholders expect them to do, pursue those areas of investment that promise the best possible return. In this case that means stock buybacks, the financial engineering swindle that’s going to add another \$2 trillion to equities valuations and send Trump’s “bubble” to the moon.

The people who believe that Trump is going to defend the “little guy” against the special interests, corporate lobbyists and elitist oligarchy who run this country are going to be pretty disappointed. Behind his widely-ballyhooed public relations campaign aimed at convincing his backers that he’s determined to keep the jobs in the US, Trump is working all the levers to ensure the big money keeps flowing in the same direction it has been for the last 30 years. Upwards.

As for Yellen, last week’s FOMC statement made it crystal clear that if Trump makes any attempt to veer from the predatory, neoliberal course she’s charted, he will be quickly slapped down with higher interest rates. Check out her comments from the post-statement press conference:

“We’re operating under a cloud of uncertainty at the moment … Some participants noted that if the labor market appeared to be tightening significantly more than expected, it might become necessary to adjust the Committee’s communications about the expected path of the federal funds rate, consistent with the possibility that a less gradual pace of increases would become appropriate.”

In other words, if wages finally manage to break-free from their seven years of flatlining stagnation due to an unforeseen surge in growth, the Fed will immediately extinguish that improvement by raising rates and reducing the level of economic activity. Yellen’s statement simply confirms the Fed’s anti-worker bias.

Which is why we say the Fed is basically a political institution.

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at [email protected].

(Republished from Counterpunch by permission of author or representative)
• Category: Economics • Tags: Donald Trump, Federal Reserve, Wall Street 
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  1. nsa says:

    About 50% of American households pay no federal income taxes at all. So obviously this freeloading half of society will not benefit from any reduction in federal income tax rates. They already pay 0%! Some even pay a negative income tax i.e. they get cash back by simply filing for the EITC.

  2. Is that Jon Schwartz or Jon Schwarz? It’s probably Schwarz. I like that guy a lot, I really do. A Tiny Revolution used to be my favorite blog.

    However, I don’t necessarily see a contradiction between “enriching their shareholders and buying other companies” and “going on a domestic hiring spree”. Money injected into economy (brought in from abroad, in this case) is supposed to – one way or another – create economic activity that may result in domestic hiring. He appears to be planning both monetary and fiscal stimulus (infrastructure projects); the standard Keynesian shit.

    Which is why we say the Fed is basically a political institution.


  3. Apparently Larry Summers has exactly the same criticism as you, Mike. Strange bedfellow, eh?

    Here’s one response:

    Summers went further, “The reality is that cash that is brought home will be used to pay dividends, to buy back shares, to engage in mergers and acquisitions, to rearrange the financial chessboard, not to invest in large amounts of new capital. It is a chimera to suppose that there will be large increases in capital investment as a consequence of that repatriation.”

    First of all, paying dividends and buying back shares will put money DIRECTLY into the hands of investors who will redistribute the funds. Summers tries to “stimulate” by handing banks billions with no strings attached in hopes that they will lend the money to people who want to borrow. Then he wants to impose negative interest rates to punish people for not spending or investing.

  4. Anonymous • Disclaimer says:

    I am someone who supported Trump when he was a candidate. And I also support the idea of abolishing both the income tax and the corporate tax. But I am supremely dissapointed with Trump filling his staff with Goldman types who will obviously rig the economy in their favor.

    Read the above link and see how Trump’s tax plan will affect you. People making 112-190k will get a tax hike while most super rich people will see their taxes go down a lot. My taxes will actually go up under Trump. Why should I pay 33% in taxes while corporations (multinationals) pay 10-15%? I support 0 income and corporate tax rates, but why should I get a tax hike when corporations see their taxes drop?

    If anything that should be reversed.

    • Replies: @nsa
  5. nsa says:

    Assume you do not own a business from your comments. C-corps pay 35% and then dispense the profits as dividends to shareholders who are then taxed at a minimum of 15%. So C-Corp profits are presently taxed at 50% overall….more if you include state income tax. Not high enough for you? Prefer 100% maybe? Of interest to small business owners is the treatment of pass-through entities like S-corps and LLCs….presently profits are taxed only at the shareholder level at the marginal personal tax rate. All of this nonsense is madness…..if you are sane, you want successful profitable businesses (large and small) as they create productive private sector jobs. The vile envious lefties especially dislike small business owners, the last independent group in the former republic….. preferring the parasitic bloated public sector and its mendicants (at least half the population).

    • Replies: @Anonymous
    , @Seamus Padraig
  6. Anonymous • Disclaimer says:

    Like I said. I prefer a 0 tax rate for both workers and corporations.

    But that Corporate tax you quote would be cut to 10-15% under Trump.

    This is a good thing, but Trump is also raising taxes on people making over 112k including small business owners who pass through their income through an S-Corp which is exactly what I do.

    So Trump’s plan shifts the burden onto small business owners too.

    Huge corporations never pay that 50% tax rate by the way. They always push their profits overseas into tax shelters and pay even less than the 10-15% corporate tax rate that Trump is proposing.

    • Replies: @nsa
    , @anon
  7. Although I don’t support financial rigging for the benefit of CEO and senior officer stock options, isn’t it at least possible that, given the present level of technology, that there simply aren’t any investments to be made that are justified by the return? If a business cannot make investments that will give shareholders a return greater than that they would receive by investing in a “market basket” of equities (adjusted for risk), shouldn’t the board of directors just pay the free cash to the shareholders and let them do with it as they please? (This might not justify share buybacks, however). I sometimes just wonder if we’re at a technology/organizational plateau.

  8. Anonymous [AKA "Deadbeat"] says:

    What Mike Whitney seems to be ignorant about is that income taxes does not go to pay for infrastructure or any government program. The money is fronted by the Federal Reserve through the purchase of Treasury bonds. Income taxes are used to pay the debt. Thus cutting income taxes does not reduce “revenue” since the government has no revenue. It has appropriation and the government could use its own notes rather than Federal Reserve note to pay for all of its goods and services.

    Keynesian economics is all about funding the government goods and services through debt. What Whitney wants is to keep the government in debt and have the “rich” pay for servicing the debt.

  9. nsa says:

    The Trumpster plan is to pass through all S-corp and LLC profits tax free and then tax them at the shareholder level at a flat 15% instead of the shareholder’s tax bracket……essentially the tax on your S-corp profits will more than halve (your present 33% bracket down to 15%). But there is a larger question involved here: why is small business ownership in the USA now at a all time 200 year low and continuing to decrease? The problem is not the torts of C-corps and the 1% as promoted by the vile lefties…..but rather the parasitic half of the population living off the taxpayer. In this rural small town area, the holy grail is to get on SSI disability (bad lower back) and pick up a medicinal pot prescription (stay high all day on the taxpayer’s nickel). An MD who qualifies patients who apply for SSI disability told me the actual fraud rate is about 70%……..

  10. MarkinLA says:

    In fact, the study found that higher tax rates for the wealthy are statistically associated with higher levels of growth…

    Nobody thinks Reagan’s trickle down was worthless more than me but ridiculous “studies” like this can never prove anything. Yes, taxes were high, but nobody paid them as there were tons of deductions – many of questionable value such as big deductions for being in a race horse syndicate.

    A lot of what happens in the economy has absolutely nothing to do with the tax codes. In fact, most of what happens has nothing to do with the tax code. What changes to the tax codes tend to do is distort the economy like when UPS got that sweet break so they would buy all new trucks and everybody who incorporated their business started driving Hummers and Escalades because they were getting them practically for free while some poor working slob was paying through the nose for his Geo Metro. The high taxes neither stopped or encouraged the single most important invention in the last 50 years – the PC to become available.

    Yes tax cuts are giveaways to the rich but don’t pretend raising their taxes is about growing the economy.

    • Agree: Mao Cheng Ji
  11. anon • Disclaimer says:

    That is why the Congress plan is better. Corporations can’t deduct if they are overseas. They get a payroll deduction. Lastly, there is a higher tax on imports than exports This will rise prices for Joe Blow, but some sort of credit could be done. It lowers the effective corporate tax to 20 percent like you have in Europe.

  12. @nsa

    C-corps pay 35% and then dispense the profits as dividends to shareholders who are then taxed at a minimum of 15%. So C-Corp profits are presently taxed at 50% overall …

    Actually, that would an effective tax rate of 44.75%, not 50%. And besides, in exchange for the corporate income tax, corporations enjoy limited liability. Do you?

    • Replies: @nsa
  13. Trump wants a massive tax reduction for the multibillionaires and mulitibillionaires+full speed ahead with nonwhite legal immibrants+fracking+an overall increase in paving America over+minimal environmental regulations=economic and demographic dispossession of The Historic Native Born White American Majority which really took of during the era of Reaganomics.

  14. Taxes are slavery.

    The rest is just details.

    Corporations suck because they are allowed by government, pampered by government, protected by government and they are designed to socialize risk while concentrating wealth in the hands of a few. Hence you have the Geo Metro drivers and other wage slaves paying for the Hummers and Escalades of the pin stripe suit set and other parasites. By design, and in more ways than one.

    It’s ll based on government sanctioned extortion. Welfare and SS disability fraud? Small potatoes. Laughably small.

    So, not only are taxes slavery, but the system stinks from the top down and always has.

  15. If you are not a big net taxpayer shouldn’t you feel some moral qualms about deciding (by your voting power) how much to take from other people to pay for government outlays? What might a morally uncompromised elder of the tribe decide was a proper contribution for those with money (or fungible assets) to pay?

    Start with treating some tax as payment for services which is hard to argue as unfair. True, it is a slight problem that poor people more than the rich are likely to benefit from police protection against violence an home invasions. Still, a rich man’s body and life are worth more if you ask rich and poor what they would pay for surgery or bodyguards so a greater contribution by the rich to protecting themselves from crime and ill health is justified.

    Next consider what may be regarded as more or less universal cultural attitudes to extravagance rather than modest use of resources and restraint in consumption. That leads to heavy emphasis on consumption taxes including major use of one not currently used at all, viz. a personal consumption tax. Thus reduce or maintain the top marginal rate of income tax to say 35 per cent and at some fairly high level of income add a 7.5 per cent tax on personal consumption with another 7.5 per cent added at a higher level still. The deemed taxable consumption would be income minus health, education and charitable expenditures and net investment for the year so the young professionals trying to buy a house and start a family would be protected compared to prosperous people with grown up children. It would, more than incidentally, reduce the dysgenic effects of current tax systems in the developed world.

  16. Pandos says:

    Reformed alternative minimum tax. Old one scrapped. New alternative minimum tax = 1% on personal assets in excess of say \$50 million.

  17. More than anything else, this piece reminds me of that story of the blind men and the elephant. This guy thinks we have a ‘stock bubble’ and a terrible problem with the gap between rich and poor. We don’t. If stocks are overvalued relative to their balance sheets, then it’s a symptom not a cause.

    That’s one way to define “a bubble”. A large amount of debt supported by very little cash flow. In his example the debt in question would be leverage applied to portfolios containing stocks. But that’s small potatoes. The bigger problem is that we have a much larger bubble in Treasury Debt, and a federal budget plan that won’t ever come close to generating the cash flow necessary to cover it all.

    Stocks will rise and fall, sometimes by more than you would like. But I’ve studied market bubbles for nearly three decades, and what’s happening at the moment simply doesn’t meet the criteria. There is no impending information cascade is stocks. There are no investors demonstrating the swap of private information for public. There is no shortening duration of average investment horizon. It just isn’t happening. but it is happening in Treasuries.

    This is a first rate bit of slightly outside the box analysis that I think is very persuasive:

    And here are some expanded thoughts on it:

  18. @jacques sheete

    Jacques Steele

    You are conceptually mixing things up that should be neatly separated.

    There have to be taxes…but tax system must be fair…taxation should be based upon income.

    And let’s get something out of the way. The multibillionaires billi0ns wouldn’t be possible if the little people weren’t doing the work to make America a safe…stable…orderly…clean society. This is just another way of saying that the billions \$\$\$ don’t really belong to them-especially to the extent that billionaire Class use their billions to reduce The Historic Native Born White American Working Class to disposable…degraded Serfs….

    F Libertarianism!!!

    • Replies: @jacques sheete
  19. utu says:

    “the Fed will immediately extinguish that improvement by raising rates and reducing the level of economic activity”

    Paul Volcker, who was brought in against the wishes of Carter, did exactly this. Inflation=high wages for the owners and the bankers. So they waged the war against the inflation. Reagan helped to dismantle trade unions so there would be no opposition to the new neoliberal world order. The only trade unions Reagan liked were in Poland. Bush and Clinton’s NAFTA was the coup de grâce .

    • Replies: @MarkinLA
  20. No one controls the stock market.

    When interest rates topped in 1981, total outstanding debt was a small fraction of now. For 35 years Congress was freed from the burden of extracting taxes directly in order to fund spending.

    For 35 years, as rates relentlessly fell, holding debt was a money-maker. Capital gains on debt soared. Why tax when your borrowing (debt issued) makes bondholders even happier?

    I do find it fascinating that now, with interest rates finally beginning a long-awaited reversal from down to up, policy makers are attempting to double-down on a trend that is already past.

    This is the clearest example I can find of a long trend becoming so embedded in people’s expectations that they can no longer even grasp the tiniest hint of reality.

    Several times since 1995 there were signs that this mania could finally end, but each of those times there was some sort of renewal of the willingness to engage in fantasy. We are again in a condition where the trend in total debt value can finally reverse. Will it?

    Oh, I think so.

    While sub-markets (stocks, commodities, metals, etc.) can rise or fall as their internal states vacillate, the real market that matters is the Debt Ocean. Even the tiny increases in interest rates occurring since fall of 2015 (T-bills) and summer of 2016 (longer-dated debt) have destroyed a whole lot of capital value, and that value was a huge part of the “wealth” that dances like cherry plums in people’s imaginations.

    Sad to say, I think Trump is shafted. He seems likely to be “in charge” when this 35-50 year deviation into insanity finally comes to an end, and when reality washes in waves across a world drowning in IOU’s whose value is set to collapse, he will be blamed.

    This is how these things go.

    • Replies: @Tom from RFNJ
  21. D.C.

    No one controls the stock market?…Market Makers….Dark Pools….High Frequency Trading front running….It’s called meta-level structuring and control of the stock….commodity…currency…markets…random walks reside within this universe…..

    • Replies: @dc.sunsets
  22. nsa says:
    @Seamus Padraig

    You ask about the “corporate shield”…… concepts are always malleable, depending on the relative strength of the parties involved. The C-corp shield can be penetrated…..gross malfeasance can make the corporate officers involved personally liable, both criminally and civilly. S-corps and LLCs in theory provide some legal protection, but in practice very little as the owners are usually small business types with relatively little influence and modest assets. The “corporate shield” is very similar to “patent protection”………you better have the resources and time to back it up, usually involving very expensive litigation in a federal court.

  23. utu says:

    ” if Trump makes any attempt to veer from the predatory, neoliberal course she’s charted, he will be quickly slapped down with higher interest rates”

    LBJ got physical with the Chairman of the FED when he did not want to lower interest rates.

    • Replies: @CanSpeccy
  24. @War for Blair Mountain

    No one controls the stock market?…Market Makers….Dark Pools….High Frequency Trading front running….It’s called meta-level structuring and control of the stock….commodity…currency…markets…random walks reside within this universe…..

    Potent Directors Fallacy.

    In my view, you’re confusing the results with the cause. It’s nothing more than mass psychology that pushed prices to where they are for any market, and it will be nothing more than mass psychology that causes the deflationary collapse now baked in by the largest credit bubble in history.

    • Agree: utu
  25. @dc.sunsets

    I am refering to the normal states-regimes-flows of the stock market. However, it is now known that bubbles-collapses do occur on very small time scales…time scales that are quite literally owned by the Hedge Funds. Now, mathematically speaking…it is not known whether or not if what is happening at microscopic time frames interacts with macroscopic stock market phenomena such as bubbles and crashes. This is the reason why I reject your claim of being guilty of a logical fallacy…your charge presumes a level of understanding of the stock market that does not exist. And therein lies the danger of Hedge Funds and Mega-Financial Institutions. I hope we are not talking past each other…

    • Replies: @dc.sunsets
  26. CanSpeccy says: • Website

    The higher the Fed raises rates, (assuming the Fed has the power to do as it pleases, rather than simply providing the Administration cover for whatever the Administration requires) the greater Trump’s freedom to promote stimulative measures — infrastructure spending, beginning with The Wall, then on to Hyperloops that leapfrog high speed rail, as adopted at such great expense in China and Europe, plus massive urban renewal, beginning in Detroit, home town of Ben Carson the new Secretary for Housing and Urban Development.

  27. @War for Blair Mountain

    There have to be taxes…but tax system must be fair…taxation should be based upon income.

    Enjoy your chains.

  28. utu says:
    @jacques sheete

    It turned out that you are just another confused libertarians. So sad, because occasionally you had sensible comments on other topics.

    • Replies: @jacques sheete
  29. @jacques sheete

    Enjoy your imaginary world!!!

    If you could propose an alternative model of economic organization+cutting edge technologies(perhaps nanotechnology?) that would bring your fantasy world into existence….I would be delighted to hear it.

    But you comment does have the merit raising deep questions about economic organization, and the morality and “spirituality” of extreme wealth concentration in the hands of a few.

    I write these comments as someone who is an enthusiast for the abolition of the property tax…

    • Replies: @dc.sunsets
  30. Agent76 says:

    Jan 9, 2017 The FED’s Own Indicator Is Signalling A Recession

    Italy’s unemployment rises once again as youth unemployment surges.Obama created 9 million part time jobs as 14 million people aren’t counted. Consumer credit spending soared this holiday season because most don’t have the funds to spend. The debt surge has created this fake recovery, it looks great in the beginning but later on everything collapses. GM does assemble cars in Mexico and sell them here in the US, it turns out Trump was telling the truth and GM lied. Fed labor market condition indicates we are now in a recession.

  31. mcohen says:

    did you ….come on now tell the truth….. did you

    did you buy toys because rates were low or did you buy stuff that makes money like plant and equipment and property

    because the tax man will get his cut
    the bank will take a cut
    and the share market will cut the losers from the herd

    • Replies: @jacques sheete
  32. @utu


    You must be confused. It’s too bad because occasionally you had sensible comments on other topics.

    FYI, libertarians are generally only half-assed anarchists. However, in time, they usually mature.

  33. MarkinLA says:

    Since the Fed Chairman is appointed by the President, how was this against Carter’s wishes. In addition, the previous one Miller didn’t last the full term and had to voluntarily remove himself he could not be fired once appointed.

    In short, the evidence does not support anything other than Carter maneuvering to put Volcker in.

    The majority of the people wanted an end to the inflation. Working stiffs were getting squeezed by salaries moving up and a tax code that did not adjust for inflation. I remember getting raises at my not very significant 20K a year salary and losing 60% of it to federal and state taxes because I had no deductions. In fact, it forced me to make one of the worst financial decisions of my life – buying a house I really couldn’t afford in a less than ideal neighborhood. The first 3 years I lived there I didn’t have two nickels to rub together after making all the payments and the place never appreciated like the places I could have afforded 3 years later during the mini real estate swoon we had.

    • Replies: @utu
  34. @mcohen

    did you buy toys because rates were low

    I paid cash.

    or did you buy stuff that makes money like plant and equipment and property

    That’s not buying; it’s investing. Paid cash there too.

    Debt sucks as bad as taxes do.

    Wage slavery, debt slavery, tax slavery. That shit’z fer slaves.

    • Replies: @utu
  35. utu says:

    I think we have been through it before. You are a sleepwalker and I have no power to wake you up. Sleep well and keep dreaming.

  36. utu says:
    @jacques sheete

    So you are an anarchist? Let’s have a talk when you grow up.

  37. Let’s have a talk when you grow up.

    D’ya think it’ll do any good? Why?

    Say, yer real name wouldn’t be Don, would it? 🙂

  38. @dc.sunsets

    Obviously you and I see the same thing, and I agree with most of your reasoning. But I don’t think he’s “quite dead yet”. Over the last 20 years, more and more of the debt has been concentrated into the hands of better informed investors (for good and ill) so it might be possible to keep things together a while longer than you expect.

    I don’t disagree that we’re all walking the razor’s edge, with a notoriously volatile personality at the helm. I’m not saying it’s a piece of cake and there are simple solutions. But there are powerful forces with real influence in the markets that all have a vested interest in keeping things from falling apart even if they don’t like the man in charge. There are obvious negative consequences to this, but one potential positive is that the horses will be slightly less likely to spook.

    We’d need to do everything right. Increased growth, radically reduced expenditures, incremental social adjustment to accommodate a higher tax, lower benefit environment. Is it easy? Not a chance. Is it impossible? Close maybe, but in my opinion not totally.

    • Replies: @dc.sunsets
  39. @War for Blair Mountain

    I hope we are not talking past each other…

    You’re almost certainly correct. We’re working from different playbooks.

    My view is that markets are entirely a function of mass psychology driven by waves of social mood that originate in the parts of the brain that govern herding behavior, the emotional urge to fit into the crowd and such. I am a follower of Robert Prechter’s Socionomic hypothesis.

    From this view, there are no outside observers. Hedge fund managers, FOMC members, politicians and financial professionals are all in the same matrix as everyone else. As I see it, when social mood waxes optimistic, people bid up the prices of assets and choose people for managerial positions who favor the upside. This also explains why it is often near tops when people are maximally optimistic (bullish) and where the greatest seeds of trend reversal are planted.

    In my opinion, we’ve lived through the largest, longest social mood mania in recorded history. It resulted in the largest credit bubble in history and embedded a system of expectations so deep that we don’t even notice its operation any more. People now are conditioned to believe that no matter how far markets fall, they will come roaring back.

    Paradoxically, this is exactly the essential precondition to a market collapse of epic proportion. Markets decline until every owner who was inclined to sell has done so. This is the point of capitulation, the point where investors/speculators throw in the towel in exhaustion and disgust.

    People have been taught by the last 17 years that only fools capitulate. Now that this sentiment has been ground into everyone’s DNA, we are set up for the return trip of a “normal” bear market.

    In Elliott Wave terms, 5th waves of previous bull markets are generally retraced in the naturally occurring bear market that follows. By almost every conceivable consideration, the rally in assets since 1974/1982 was a fifth wave. This suggests that markets should retrace most of, if not all that territory, which would require a collapse above 95%.

    Sounds impossible? This stuff happens over and over in history, and the essential preconditions are 1) the aforementioned imprint that it can’t happen and 2) a credit bubble. We have both. All I await is the arrival of the denouement and the revelation of the exact path it takes, knowing that our monetary and political authorities will pyramid their errors all the way down, just as did FDR’s Administration during the the 1930’s (only likely worse this time.)

    While I assume the monetary PTB will mount one bailout after another, and attempt every trick to profit from every swing in the market, I believe that 1) they’ll all fail and 2) most of them will eventually be wiped out by the tsunami. After all, those who benefited most by the credit bubble are the same people who have the most to lose from its collapse. Very, very few will side-step the downward wave.

    I have a blood relative who was one of the “masters of the universe” in the late 1920’s. Family lore holds that he saw the trouble coming by summer of 1929 and got out, avoiding the October crash. What many people don’t realize is that stocks mostly recovered from Oct. to April, 1930. Like many, my ancestor breathed a sigh of relief and re-established his positions, only to ride the 90% collapse from 1930-1932. In many cases, entire portfolios were wiped entirely out, because typical investors held shares of firms like Cord who went bankrupt, a condition disguised by looking simply at the DJIA during that period.

    Of course, I could be wrong. No one knows the future.

  40. @War for Blair Mountain

    I write these comments as someone who is an enthusiast for the abolition of the property tax…

    I get the impression that we get the kind of taxes that can be most easily sold to (and rationalized by) the proles.

    As I see it, taxes will exist as long as one man tries to live at the expense of his neighbors….i.e., forever. It is the kind of taxation (and the invasiveness) that has much to do with the invasiveness of the political system and the health of the economic system.

    Property taxes are a terrifying way to simply rob people of their past product. Income taxes (esp. progressive taxes) are a way to place a brake on innovation. Each enjoys its own peculiar nastiness, and the kind of tax one favors seems to depend a great deal on ones own peculiar circumstances.

    I suspect that our political system, addicted as it is to spending far beyond levels people would consent to if taxed directly (debt-enabled spending is a tax disguised as wealth creation, a particularly insidious method), will become unimaginably avaricious during the period when it can no longer borrow to spend but before everyone readjusts to a tiny fraction of political wealth redistribution.

    I think they’ll try to rob anyone with visible wealth.

  41. @Tom from RFNJ

    Tom from RFNJ, I write from the perspective of someone who has waited 22 years for the bubble to burst.

    Given that I believe the process is governed endogenously (a product of the spontaneous organization of complexity), I think we collectively encounter periods when the trend is “in flux,” where conditions can exit that “node” in the same direction as they entered it (trend continuation) or in a reversal (trend change.)

    I believe we entered nodes in 1995, 1998, 2000, 2007 and are possibly near one now. Probabilistically speaking, Mr. Market flipped heads every one of those times in the past. Can Mr. Market flip heads again? As unimaginable as it seems to me, the answer is of course yes.

    The further things go, however, the more “energy” required by people to collectively rationalize away their rational mind’s worries. The debt overhang now, including unpayable pension promises not to mention the still rapidly expanding bankruptcy-certain of Medicare/Medicaid, is not just “the elephant in the room,” it’s a roaring Tyrannosaur, 10 meters tall and hungry.

    It is like sipping a cup of coffee while reading the paper, sitting in a cafe in Pompeii while Mount Vesuvius smokes and earthquakes cause the liquid to slosh out of the cup. “Gee, I see the latest iPhone isn’t selling as well as forecast,” you think to yourself, while you settle more comfortably in your seat.

    The herd will do what the herd will do. It will remain complacent, ignoring all the occasional expressions of “Doom Awaits, Repent! Ye Sinners” while the animals go about, cropping grass, or it will panic and stampede over a nearby cliff, dragging everyone (even those who knew what was coming) along with them.

    We’re all locked into this ride, whether we like it or not, and it’s like riding the roller coaster at Space Mountain in total darkness. We have no idea if, after a long-long-long rise, the rise will just keep going up more, or if there’s a precipitous drop dead ahead. What we do know, is that the ride doesn’t end in Lunar Orbit.

    • Replies: @Tom from RFNJ
  42. @dc.sunsets

    Well bubbles all have signs which point to their ‘crisis moment’, however imprecisely. Investors widely ignoring private “I should be selling” knowledge in exchange for public “everyone is buying” knowledge. The shortening of investor holding period beyond what is ‘rational’ given their cost of information for a new trade. An upswing in the presence of comparatively low information investors. Much of this doesn’t show up in public data, but insiders have limited visibility to it.

    For Treasuries, I would think there are behavioral signs from market participants that will give a window into this. When long duration players like Insurance companies and corporate Treasuries all start behaving similar to short duration players like Hedge Funds, sound the alarm. My most recent conversations indicate that this isn’t the case right now, and there is a huge vested interest in preventing the circumstances that would make that appealing.

    This overstates it, but right now the Treasury Market is backed in part, by the full faith and credit of an American bullet, fired from the end of an American Army, M16. The ‘global stability’ that ensures (local conflicts notwithstanding) goes a very long way. In a sense the Treasury says to investors “You’re getting your money back because we said so” and few want to argue about it.

    But if the mortgage crisis taught the trading community anything it’s that knowing there is a bubble, and knowing the bubble is about to break are two very different things.

    • Replies: @dc.sunsets
  43. @Tom from RFNJ

    I disagree. The Treasury market is backed by the presumption that Uncle Sam can confiscate anything and everything in his purview. Ironically, this means that when the time comes that trust in treasuries collapses, so too will the value of what supposedly backs them. This is not linear-model predictable.

    I simply don’t believe that insiders will be any better poised to anticipate the conflagration than is anyone else. The real question remains: When almost all “money” is credit, where do you cash out TO, when it’s time to sell? Are pros and novices alike all trapped on this ship because they perceive that there is literally no alternative?

    When the final Act of this tragicomedy arrives, selling stocks or real estate in order to hold a bank deposit (or debt of any kind) will be like switching berths in steerage on the Titanic. A credit bubble (the mass psychology of it, that is) is all that holds up the nominal values of bonds, stocks, real estate, gold, silver, oil, gas, agricultural commodities, bauxite, you-name-it.

    Wealth, if it’s to exist, must take a form. What form is that, if everyone is selling everything?

    [I have my own answer to this, which is why I believe we’re all engaged in the largest game of Chicken ever imagined.]

  44. Prognosticators of the future should keep in mind that the government runs the table of the only game in town for the mass of people in most developed countries. There are people who are prepared and preparing to be self sustaining, but they are not numerous enough to affect the course of the future as long as population levels remain near where they are.

    Any “crash” or bubble bursting will only be a reason for the government to assert more power. Not because of “power hungry” people, although they exist, but because of the abyss that awaits if things spin out of control. The people will demand that the government “do something” if the economy stumbles.

    Modern Monetary Theory (MMT) holds that “money” is something that the government issues to foster economic activity, said activity then forms the basis for social order and the sustenance of the population. Like it or not, this is, de facto, how the world is functioning today. This is why Democrat politicians say that “stimulus” should be given to the indigent as they spend the money the fastest, ergo the most “bang for the buck”.

    A normal end to a credit cycle would result in bankruptcies and defaults with a rebalancing of books, but the largest liabilities in the developed world today are obligations of the socialized governments to their dependent populations. Because wholesale default on those obligations means civil war, the end of the cycle will be avoided until all other options are exhausted. The last option before civil war is for a faction to take over and balance the books by assigning winners and losers by fiat.

    Eventually, the books must be balanced, but since there is a “great deal of ruin in a nation”, it may be a long time before that point is reached.

    “Losers” will be a liability to Leviathan. Once that is recognized things will get interesting.

    • Replies: @dc.sunsets
  45. annamaria says:

    Businesses need single payer healthcare system.
    Obama’s ugly legacy includes also the complete disdain for the electorate wishes re universal healthcare; the “constitutional lawyer” showed up again and again that he was a gifted liar:

  46. @another fred

    The “solution” to excess credit being issued is that it is defaulted upon.

    Given that in a fiat money system, debt is money, this is the same as monetary destruction.

    The only interesting thing about this is, Who loses the most? In a system of unimaginably vast cross-linked debts such as exists today, every real underlying asset is leveraged to collateralize many times its value in obligations.

    A balancing of the books will be simply to determine who, at the end owns the asset.

    That this will be done dishonestly is a given. But when every aspect of society is in on the con, and every man is both a robber and a victim, it will be fascinating to see who ends up with the short end of the stick (assuming of course that the proles will be ground underfoot.)

    • Replies: @another fred
  47. @dc.sunsets

    A balancing of the books will be simply to determine who, at the end owns the asset.

    There will also be questions as to what constitutes an asset.

    There are shut down factories and buildings all over the nation that are being held on the books as “assets” while they actually have negative value. There are acres of abandoned houses and lots in Detroit available for a pittance, but no one wants them. Would you want to own a generating plant or water system if you were required to deliver utilities to customers who cannot pay?

    In the past people were an asset to a nation if they either produced taxable products or were willing to serve in an army. Today we pretend they are an asset if they “consume”.

    Many of the assets in this country are only “assets” as long as the emperor is pretended to be clothed.

    Ultimately, I believe the “solution” is going to involve a lot of dead people.

    • Replies: @Miro23
  48. Anonymous • Disclaimer says:

    End the Fed, and all other central banks. Allow free use of any currency. And corporations will cease to exist. Won’t be enough funny money to support them on the scale they need to exist.

    • Replies: @dc.sunsets
  49. @Anonymous

    Central banking arises when people embrace the possibility of living beyond their means.

    A host of detailed rationalizations for them arose, and adding a few more ingredients (e.g., fiat money) and we endured the largest credit/debt bubble ever, constructing entire industries to toil in the imaginary factories of its illusions.

    It WILL end, sooner or later. There’s plenty of evidence it may be ending now, as interest rates went to the zero bound and for 6-15 months have risen, breaking some trend lines along the way and indicating that this may finally be a new trend.

    By the end of the contraction, central banking will be thoroughly discredited. That may take awhile, though.

  50. Miro23 says:
    @another fred

    There will also be questions as to what constitutes an asset.

    There are shut down factories and buildings all over the nation that are being held on the books as “assets” while they actually have negative value. There are acres of abandoned houses and lots in Detroit available for a pittance, but no one wants them. Would you want to own a generating plant or water system if you were required to deliver utilities to customers who cannot pay?

    You could say that an asset is something that somebody wants – like prime property in a desirable location, hard currency or a cash producing business.

    And the value of the asset seems to depend on how the debt is removed.

    If it is paid down (austerity) then the borrowers lose and the lenders gain [The borrower gets the house but at a high cost in payments plus it may be declining in value in an “austerity” environment].

    If it is devalued (inflation) then lenders lose and the borrowers gain [The borrower gets the house and has the advantage of paying for it in devalued dollars. Also his lender (the bank) may be going bankrupt which is not really his concern. ] Under hyperinflation the borrower gets the house almost free but it’s likely to be a chaotic situation.

  51. Taxes are fine, as long as they’re spent on public services: education, medical care, transportation, pensions, etc. The problem is, in the US most of it is spent on the military and wars, plus, as a consequence, on things like domestic surveillance, security, incarceration, etc. Oh well…

  52. Weaver says:

    Trump will cut business taxes thus enticing investment into the US.

    We need investment and improved productivity. Trump knows this.

    Trump needs to become more of a trade protectionist to encourage domestic investment. Currently it’s profitable to build outside the US, then sell to the US.

    The strategy is twofold: 1. We want to make the US the best destination for global investment. 2. We want to reduce unskilled immigration.

    The argument for bringing in quality/skilled immigrants is they relieve labour bottlenecks and will improve the market wages of those who most need it.

    Also, we’d be better off bursting the bubble already, imo. The US needs an economic reset.

    Arguments against trade protections for a large society such as the US tend to be libertarian cult hysteria.

    As PCR has said, trickle down economics works, it has just been trickling overseas to Asia due to our bad trade policy. This isn’t to say laissez faire is always best but that enticing investment into the US as Trump wishes to do is the right strategy.

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