“Real” Fiscal Policy is and has been Non-Existent!

by Victor Sperandeo with the Curmudgeon


In last week’s post Victor wrote that “Fiscal policy was missing in action.”  We expand upon that theme in this article, written by Victor and edited by the Curmudgeon.  Here we go:

The US has depended on Monetary Policy almost exclusively after the deep recession of 2008, in an attempt to get the US economy into a real recovery.  Yet the only real fiscal stimulus was passed by Congress in March 2009- "American Recovery and Reinvestment Act of 2009.

While there were other acts passed into law by Congress since 2009, they’re not what economists would categorize as true "fiscal stimulus."  We review two of those and comment on weak productivity and the absence of any tax cuts to spur economic growth.  We also note that tax cut policies are absent in European countries as well as the US.

US Laws Masquerading as Fiscal Policy:

"The Patient Protection and Affordable Care Act" (ACA) passed in March 2010, while the "Dodd Frank Wall Street and Consumer Protection Act "(Dodd Frank) passed in July 2010.   Each of those new laws were 2000 pages plus bills. That wasn’t enough as there are provisions still being written, especially for Dodd Frank as we’ve previously commented on “Bail-Ins” in Dodd-Frank Title II is Incomplete and Misleading?

Neither of these so called “fiscal policies” had anything to do with creating or stimulating real economic growth.  Instead, they restricted growth through immense regulations and accounting requirements.  The ACA also effected a tax increase and the redistribution of taxes in the form of health care premium prices and very high deductibles before the insurance reimbursements.

These laws passed strictly on a partisan basis, by the party who held overwhelming power in the legislature, and encouraged by the Obama administration.  The ACA was later backed-up by the Supreme Court with Chief Justice John Roberts casting the deciding vote to uphold it.

In my opinion, the ACA and Dodd Frank helped contribute to the 240 year record low GDP growth rate in the US (from 2008 to the present time). In addition, income taxes increased at the end of 2012, as the Bush tax cuts were allowed to expire.

Weak US Productivity Growth Goes Negative:

All this is a key reason productivity is declining consistently into negative territory. The Fed has recently suggested that monetary policy can't do it alone from here, and needs help from fiscal policy. The typical suggestions were similar to what was discussed in the stimulus in 2009. Infrastructure spending, education, and clean energy investments, etc.

Fed Chairwoman Yellen said at Jackson Hole, WY that the Fed finally admits that fiscal policies have been lacking. She said that more productivity growth is needed. Also that "improving our educational system and investing in worker training; promoting capital investment, and research spending and looking for ways to reduce regulatory burdens, WHILE PROTECTING IMPORTANT ECONOMIC, FINANCIAL, AND SOCIAL GOALS." 

-->Yellen clearly suggests to reduce regulation on business!  Congress, are you listening? 

Why Aren’t Tax Cuts Proposed?

Have you noticed that wherever you read about fiscal policy or remedies, you will not see TAX CUTS?  The New World Order (GLOBALIST) leaders appear to get angry when anyone even suggests tax cuts! Two recent foreign government examples of this are the following:

1.  The President of Sweden warned the UK in this incredible statement:

"The U.K. should avoid any drastic steps to cut corporate taxes, or similar measures, as it prepares to start talks on leaving the European Union, Swedish Prime Minister Stefan Loefven said."

2- Germany’s Angela Merkel made this “Mafia like” suggestion towards Italy in an article titled Merkel Tells Renzi He Can’t Bend Euro Rules to Boost Growth. 

“German Chancellor Angela Merkel lauded Italian Premier Matteo Renzi’s economic policy as “courageous,” while signaling that European Union budget rules can’t be bent to help Italy boost growth."  This was due to the desire of Italy’s Matteo Renzi the Prime Minister who on Monday "promised sweeping tax and spending cuts to help boost growth and jobs next year, as the European Commission considers whether to reject his budget plan for reducing debt too slowly."

Comment:  Two Independent sovereign nations were threatened by two leaders of other countries that tax cuts cannot be used to create growth!  The EU leaders act more like a gang than a union to benefit all its countries and people. It is obvious that the ideological agenda of global government comes before what is good for the citizens.  That surely stimulated the UK’s vote to leave the EU (Brexit) and the rise of Donald Trump as the US Republican Party’s Presidential nominee. 

This past week, the EU says Apple owes 14 Billion euros in back taxes from Ireland. Tom Donlan in this week's Barron’s editorial titled: There’s Gold at the End of Ireland’s Rainbow (on-line subscription required):

"With low corporate tax rates, a small country on the periphery of Europe (Ireland) turned itself from an impoverished backwater to a modern nation."

Mr. Donlan suggests: “Other countries should join the Irish side in the battle of tax competition.”  With a 12.5% corporate tax rate, Ireland produced a 26% GDP increase in 2015!! Yes 26% -not a typo.

Ireland also compares very favorably with low tax states in the US. Arthur Laffer & Stephen Moore corroborate that point in an IBD 9/5/16 article titled: The Low-Tax 'Red State' Model is the Way That Economics Thrive. The authors wrote:

“Clinton seeks a classic "blue state" model of economic revival — more government spending, higher tax rates on the rich and increased regulations — while Trump would follow a "red state" course — pretty close to the opposite of Clinton's policies. On this, there's a lot we can learn from the experience of the states over the last few decades.

Red states on average are a magnet for people and incomes, whereas blue states — most notably, New York and California — lose out in the internal migration game.

That said, red states are bleeding blue states dry. There are always exceptions, but, using net tax returns, about 215 tax filings a day leave the nine states with the highest tax rates and arrive in the nine states with zero income-tax rates.”

This is the night and day differences of Blue States policies which involve more government spending, higher tax rates on the rich, and increased regulations-while the Red State course is pretty close to the opposite.

In a book titled The Wealth of States, the same authors along with Rex Sinquefield and Travis Brown, showed that States with low tax rates, less regulation, and the right to work laws have much higher rates of job and income growth.

Expanding Worldwide & US Debt Bomb:

Consider the dangers of the huge worldwide debt that has been built up virtually everywhere.  The US now has a stated federal debt $19,505 trillion (as of 9/2/16) with $10++ trillion "off budget" items not including "unfunded liabilities" of $103 trillion.  Federal Reserve printed $4.5 trillion held in debt, State and City debt of $3.1 Trillion and with the Congressional Budget Office predicting federal debt growing to $29 trillion in 10 years WITHOUT ANY RECESSIONS forecast.

-->This debt is obviously unsustainable and will never be paid.

If there’s an iron rule in economics, it is Stein’s Law (named after Herb, former chairman of the Council of Economic Advisers): “If something cannot go on forever, it will stop.”

This huge debt load is the reason used as an excuse for not having tax cuts. Without tax cuts, and only tax increases or indirect cost increases the average person runs out of money.

The Minsky Moment:

This creates another "named phenomenon -the Minsky Moment.  It is a sudden major collapse of asset values which is part of the credit cycle or business cycle. Such moments occur because long periods of prosperity and increasing value of investments lead to increasing speculation using borrowed money. The spiraling debt incurred in financing speculative investments leads to cash flow problems for investors. The cash generated by their assets no longer is sufficient to pay off the debt they took on to acquire them. Losses on such speculative assets prompt lenders to call in their loans. This is likely to lead to a collapse of asset values. Therefore, the US is in a managed decline death spiral.  Without tax cuts and lower government spending many people will be harmed greatly. I weep for America and her children.

End Quote:

Lysander Spooner was one of America's real individualists, known for going up against the government post office monopoly.  He said some profound words about taxes:                                                  

"If taxation without (individual) consent is robbery, the United States government has never had, has not now, and is never likely to have, a single honest dollar in its treasury. If taxation without consent is not robbery, then any band of robbers have only to declare themselves a government, and all their robberies are legalized."

 Good luck and till next time...

The Curmudgeon


Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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