Trump Tax Plan Greatest Gift Establishment Ever Got

The following article by David Haggith was published on The Great Recession Blog:

As soon as President Trump put his Goldman boys, Gary Cohn and Steven Mnuchin, in charge of his tax plan, I knew Trump’s tax plan would never fulfill his and his henchmen’s promises of helping the middle class and of not giving additional tax breaks to the rich. The Trump Tax plan, as it now exists, proves those conjoined promises to be the greatest lie Trump ever told.

After two decades with Goldman Sachs, Munchkin (as he shall hereinafter be known for he lives on the Goldman-bricked road) bought his own bank, IndyMac. He renamed it OneWest and turned it into a mega repo machine in 2009, whirring out hyuuge amounts of crash cash during the Great Recession. His revamped bank set a speed record for putting homeowners out on the street, foreclosing one home every thirty seconds. A vice president of OneWest even admitted in court she shortened her signature so that she could spend less than thirty seconds processing each foreclosure. As a result of this rush to foreclose, the court found the bank had frequently mishandled documents because it did not even read many of them before foreclosing.

Munchkin’s grim reaper of a bank closed its greedy grip on a whopping 35,000 homes during the Great Recession. The bank was even so unscrupulous as to instruct homeowners to stop making payments, ostensibly because it was going to modify the loans, but in reality in order to purify its argument for repossession. (For more on the Munchkin’s greed, read “U.S. Treasury Becomes a Laughing Stock.”)

Cohn, meanwhile, was president and COO of Goldman Sachs during the years when the Goldman squid monstrously raped its own clients by encouraging them to make investments that it bet its own money against. Cohn claimed in his own testimony that never happened, and his defense consisted of arguing that his company lost money during the Great Recession, so this couldn’t be true … as if a complex company with many areas of business couldn’t lose money overall during a crisis while making money in one area of business where it bet against its own advice to its clients. (See WSJ: “Gary Cohn Testimony: Goldman Didn’t Bet Against Clients.”

The senate subcommittee Cohn was speaking to on the matter disagreed in its own conclusion:

 

“Investment banks such as Goldman Sachs were not simply market-makers, they were self-interested promoters of risky and complicated financial schemes that helped trigger the crisis. They bundled toxic mortgages into complex financial instruments, got the credit rating agencies to label them as AAA securities, and sold them to investors, magnifying and spreading risk throughout the financial system, and all too often betting against the instruments they sold and profiting at the expense of their clients.” (The Independent: “Goldman ‘bet against securities it sold to clients"”)

 

The SEC ultimately fined Goldman half a billion dollars for its dishonesty, and Goldman conceded to its dishonesty. (See “Goldman Sachs and The ABACUS Deal.”)

By placing these financial weasels in full charge of creating his tax plan, Trump proved to my satisfaction that he never intended to serve the middle class. Some people, however, did not accept my claims putting the worst swamp creatures in charge of his signature campaign pledge did not prove Trump would prove to be a Trojan horse for the establishment. Now that we have seen both Senate and House versions of the plan, however, the proof is in the pudding (the sloppy mess that envelops Trump’s tax plan).

The Trump tax plan, in either of its current conceptions, will be the worst thing that ever happened to America, even though it will certainly boost stocks, and I’ll tell you why below. Still, many will refuse to see the truth and will be addled in their evaluations down the road by the fact that the plan did kick the stock market into even higher gear.

 

Trump tax plan is a loophole haven for the richest of the rich

 

One of the biggest promises of tax reform was that it would, in Trump parlance, hyuugelysimplify the tax code by eliminating loopholes. This loophole elimination would make sure that any reduction in the upper tax bracket for the rich did not create additional tax savings for the top one percent so that, this time around, tax revision would benefit the middle class.

Contrary to the Goldman boys’ promises, both the senate and house versions of the Trump tax plan create the most massive tax cuts the rich have ever received because they leave most of the loopholes in place. Even President Reagan’s tax designer, David Stockman, calls the Trump tax plan “a wish list of … Wall Street.” Why wouldn’t it be when it was designed by Wall Street moguls whose snaky mouths revealed a forked tongue at their corner whenever they smiled and promised their plans would not include tax cuts for the rich?

This tax plan, in either incarnation, is the Christmas Wish Book for Wall Street, and it is built on total economic denial about the rampant deficits it will create as far as the eye can see.

The biggest loophole of all, the one loved by hedge-fund managers, lawyers and stock brokers, is left firmly in place. The House bill preserves for its wealthiest cronies on Wall Street the carried-interest tax loophole for private-equity managers, venture capitalists, hedge-fund managers and certain real estate investors … like Trump. Trump and Cohn specifically stated they were committed to ending this special provision that helps hedge-fund managers, but this grand loophole they bedeviled during the campaign is still there. (So, watch carefully to see how loudly they argue for its removal now that we can all see it remains firmly in place.)

 

The plan, as it stands in the Senate, allows “pass-through” businesses …. to deduct 22 percent of their income before paying taxes, up to a certain limit. In the House, it allows those pass-throughs to pay taxes at a special low rate. The pool of pass-through businesses includes any number of cookie shops and bodegas and corner stores, but also law firms, hedge funds, consulting firms, real-estate development companies, investment partnerships, and lobbying businesses. An estimated 70 percent of the benefits for such pass-through firms go to the top 1 percent of income earners—meaning this benefit is more about helping rich families than it is about helping small local businesses.

 

Moreover, such changes to the way pass-through businesses are taxed complicate the code and create a preferential category for rich individuals to try to work their income into…. The new provisions have “the potential to become the single greatest inducement to tax arbitrage ever enacted by a single Congress,” the tax expert Daniel Shaviro of New York University Law School has written, also saying that they “might end up being the single worst structural change in the history of the U.S. federal income tax.” (The Atlantic)

 

“After I saw that tax bill, I lost hope with the drain the swamp concept,” Gundlach said. “The swamp keeps getting bigger.” (NewsMax)

 

Swamp wins all in this plan. In either of its currently approved forms, the Trump tax plan trumps the middle class for decades to come!

 

Capital gains tax cuts preserved in Trump tax plan

 

If President Trump’s tax plan was intended to help the middle class, the first thing it would do is finally end the one tax provision that has created the biggest income disparity in history between the top ten percent of tax payers and all the rest of us. It would eliminate the special capital-gains tax break that has built real-estate bubbles and stock bubbles but done nothing to create jobs for the middle class in spite of endless promises that it will — promises that are now believed by blue-collar Republicans at the level of religious dogma.

While the new plans offer no additional capital-gains tax reduction for the rich, they keep this now sacred loophole locked in place. Republicans and Democrats wouldn’t dare talk about further reductions in this area because that would risk putting this special rate that has served the one percent so well at risk by putting it back into the discussion. Best to be happy with the massive gains the rich have already secured in this area and focus on opening entirely new areas of gains for the rich rather than to bring this up for discussion again.

I’m bringing it up precisely because they don’t.

Recently I’ve listened to Rush Limbaugh (because I listen to broadcasters on all sides) repeat and re-repreat his oft’ told lie that the rich are already taxed more than the middle class because the rich — say the top twenty percent — pay more in income tax than the entire eighty percent beneath them. It’s a lie in the form of a half truth. Rush and others like him fully know this; but you will never hear them tell the remainder of the truth. The lie turns on your natural assumption when you hear the truth that 20% of the people are paying 80% of the income taxes — that the rich are clearly doing the lion’s share of the pulling.

Limbaugh and other establishment shills make it sound like the rich are incredibly generous but that only works because the real truth is so incredible — so obscene — that it never occurs to people. The untold half of this truth is that this 20% are making more than 80% of all the income in the US. So, if they were even paying an equal share, they would be paying more than eighty percent of all the income taxes in the US. (Limbaugh even as the audacity to rebrand himself as being anti-establishment as he repeats this old canard and supports Trump.)

Here’s the catch with the special capital-gains tax rate that has been enshrined in the tax code for decades: the rich do not make most of their money off of salaries! They make it off of their stock options in the companies they manage and other stock investments, and off of trading bonds and buying and selling real estate, football teams and art. All of the profit from those activities is taxed as capital gains, and if you hold those investments for longer than a year, income from those investments is all taxed at a rate that is insanely lower than the middle class income tax rates! The rich pay only 15%! (Only the top one percenters pay the slightly higher cap-gains tax rate of 20%, which is till lower than the tax rates paid on ordinary income by most of the middle class.)

Tell me that the privileged capital gains tax rate is not a tax savings that is almost exclusively for the richest of the very rich! Believe it not, 56% of the benefit of privileged lower tax rates on capital gains goes to the top 0.1% of the US population! Yes, you heard that right: not the top ten percent, not the top one percent, but just one-tenth of the top one percent receive 56% of ALL the tax savings realized by the nation’s preferred lower tax rate on capital gains!

That’s why this privileged loophole isn’t being talked about by anyone. It’s already the single-largest reason the rich pay far less than their fair share in taxes, and it is the single-greatest reason for the wealth disparity that has grown so wide in the US since the Reagan years. The form of money making that the rich use gets taxed at a much lower rate than your form of money making. That’s the dirty little secret that hides in plain sight.

The fact that the richest people do not make their money off of wages and salaries explains why Donald Trump could not care less about getting paid a salary to be president. His willingness to forego a presidential salary was pure showboating because even a presidential salary is chump change compared to how much money the Donald will make from becoming president if his new tax cuts become law (and how much he already saves by this preferential rate on his gains from real-estate investments which is new tax plan preserves for him and his kind). What Trump’s tax plan does is continue to enshrine for years to come the disproportionately beneficial tax treatment the rich already receive for their primary source of income.

Yet, the middle class majority happily allows the rich this filthy special privilege on their kind of income. They are beguiled by the current top income-tax rate of 39.6%, which is nothing but smoke and mirrors, to believe the rich are paying higher taxes. In truth, the rich rarely even pay that higher rate on their ordinary income due to loopholes, but ordinary income is by far the SMALLEST source of their personal income. That high tax rate is simply there to complete the illusion so the middle masses will continue to believe the rich are already doing more than their fair share. It enables Rush and others to say, “Look, the Rich are already paying more than their fair share.”

The establishment Republican’s argument for this privileged from of income in the tax code has always been that a lower cap-gains tax rate creates jobs. Really? Do you suppose that people getting capital-gains tax breaks are spending their savings building new factories, as Ronald Reagan promised they would when he first trotted out voodoo economics?

Of course, they are not. Why on earth would they? They use the money to buy more stock in companies that already exist, bidding up the stock market because that is the low-hanging fruit. Why would anyone build a factory in the US or any other kind of business that creates jobs with their tax savings when the deferred profit from that factory would all have to be taxed as ordinary income? Why would you try to reinvest your tax savings in a area where your next profits will be taxed at a much higher rate? That’s insane. Why wouldn’t you, instead, invest in more stocks where the future gains on your re-investment will all be taxed at the preferred cap-gains tax rate you just enjoyed? The concept that the rich would ever invest in new factories is ludicrous just from a simple tax principle.

Show me the thousands of new factories created across America since we started down this road under Reagan. Show me how the middle class has seen its income grow. Show me how much middle-class benefits have grown during our decades of lower capital-gains tax rates. Show me how the continuance of these low rates kept us out of economic crashes in the intervening years by providing sustained economic growth from Reagan to now. (A privileged rate has been in play that long, but we’ve had plenty of busts during that time.) Show how in any manner the middle class is better off today — more robust — because of this huge tax gift to the so-called “job creators.”

Even if you assume the rich are too dumb to reinvest the money they save back into stocks where they can continue to benefit from a much lower tax rate, why would they invest in building new factories with all the liabilities and legal and political obstacles involved in building a factory? Why would you take on the huge risk of a new venture when you can just invest in a going concern? It’s ludicrous to think that is where this tax savings goes.

So, why on earth do blue-collar Republicans continue to believe it is only fair to give the richest of all Americans a MUCH LOWER tax rate on the largest portion of their income than the middle class pays? (I put it in caps and underline it to scream it out because for decades people keep believing the nonsense that the rich establishment feeds them, and Democrats really do nothing to stop it because they serve the same establishment.)

Why? Because of the pure fantasy that someday they will be there. When their ship finally comes in, they don’t want it taxed away. It’s a lottery mentality. As in any lottery or casino, the jackpot almost never comes, but it hits just often enough to keep the fantasy afloat.

Follow the money. Where has the tax savings really gone? It was used to bid up the price of ball teams, to bid up the stock market, to bid up the real-estate market, to buy bigger yachts and more lavish mansions and bigger car collections and art collections. That’s why most of those things have appreciated extravagantly while the middle class has shrunk.

The savings are thoroughly locked up in assets that will be passed along (mostly untaxed) to the wealthiest of children, who will either piss it all away or, in rare cases, continue to build up daddy’s dynasty … not by creating jobs, just by hoarding more assets.

Disgustingly, there is one exception to the Republicans’ choice not to tangle with capital-gains tax breaks under the new Trump tax plan. In the one area of capital gains that helps the average person the most — the elimination of all capital-gains tax on the first $250,000 in gains on the sale of one’s personal residence ($500k per couple) — Republicans want to make that exemption harder for the average person to get. They are now raising the number of years one must have resided in their personal residence from two years to five. It must have bothered members of congress to see that this tax exemption helped the average person disproportionately compared to the rich for whom the first $250,000 would be a small part of their total gains on the sale of their mansions. They also want to remove the tax loss you can claim if your house burns to the ground.

 

Trump tax plan completely eliminates the estate tax

 

Trump and his good ol’ Goldman boys score a victory that inures purely to the top one percent with this one, which means the beneficiaries include Trump. This gift goes only to the rich because the federal inheritance tax already includes an exemption for the first $5.49 million of any estate PER HEIR. (i.e., an $11 million exemption per married couple, even though — with the exception of the deepest backwoods swampy parts of the south — only one person in any couple is an actual heir by blood.

The estate tax has already been whittled down by Bush and others over the years to where only 0.2% of the estates in the US ever pay any estate/inheritance tax. In it’s already reduced form, the estate tax is a tax that only hits the dynasties of the wealthiest of all Americans, but the effective tax (already much lower than it used to be) can range as high as 40% of the estate. (Because of the massive exclusion, no estate ever pays anything near the rate of 50% that you hear people talk about.) The average windfall for the top 0.2% from the elimination of this tax will be about $3 million PER HEIR. For the crème de la crème, however, the tax savings is $20 million per heir and higher.

Those who love to feed the rich on a silver spoon call this a “death tax,” even though no one who dies in America pays this tax. It is only the very richest of wealthy heirs who continue living who pay this tax on the gift they receive from daddy’s dynasty.

Now you can see why Donald Trump, in his eighties, is willing to work the presidency for just $1 per year. When you are the Donald’s age and have so much time and ego tied up in establishing vast real-estate holdings, your greatest concern is preserving the empire you have worked your life to build and that displays your ego, especially when your name is written all over it. Handing down the dynasty into which you were born and which you further developed is your last great ego accomplishment, and the complete repeal of the estate tax will assure that all of the Donald’s wealthy children inherit the entire empire unbroken, completely tax free.

Trump’s nemesis, The New York Times, calculates this revision in the tax code will save Trump’s heirs over a billion dollars, making this one reform the greatest Christmas gift the Donald could give those who will remain as an extension of his ego when he passes on. This tax savings clearly does nothing to create jobs. It merely assures that the family mansions remain occupied by the progeny of the Great One.

The original idea of the estate tax was to plow these tycoon estates back into the common ground so they don’t keep building up as ever-expanding empires for generations to come. Those who feel sorry for the top 1% should be in favor of this tax break. This one serves only to make sure the families of the banksters of Wall Street keep their ill-gotten gains. At best for all the rest, it may assure we retain a handful of jobs as gardeners, butlers, and maids to warm their milk and tie their ties.

If you believe the nonsense that repeal of the estate tax will save some family farms, ranches and small businesses, forget it. Only about 80 small businesses and family farms in the entire United States would pay any estate tax in 2017 under current law, and most of those would pay very little because of the large exemption. It is estimated that those 80 farms and businesses that get taxed as estates in any year pay less than 6% of the estate’s value in inheritance tax.

Some will say that it is unfair to go after the rich, but consider how many of them are banksters who made their wealth in unscrupulous manner and who were bailed out by you when they broke their banks. This tax is a final way to claw back those unscrupulous gains after you’ve allowed the banksters to enjoy them to the end of their lives. If fact, I think it is a fairly safe bet that most of the 1% have only climbed to that rarified height by employing some fairly unscrupulous tactics. (Not all; just most. Call me jaded.)

If the Donald really cared about the middle class, he’d eliminate of the manifold loopholes (such as grantor retained annuity trusts) that the rich use to dodge estate taxes altogether. Most large estates would have sufficient liquid assets to cover the tax, and existing law allows payments to be made at little interest over a period of fifteen years. (Remember, that estates often have large sources of income they can use to make these payments without having to sell off assets.)

Of course, the assets of major estates like the Donald’s — whether tied up in buildings or stocks or art — is wealth that has appreciated during the many years those assets were held, which means the rich have not paid any capital-gains tax on that added wealth before passing the gain down to their children. It is entirely untaxed wealth accumulation (if there is no estate tax) that gets passed along and continues to build tax free until the asset is finally sold.

That is one of the big reasons estate tax was created in 1916 — to stop this pass through of completely untaxed gains by people like the Rockerfellers and Vanderbilts, who owned vast amounts of stock in their own corporations. Wouldn’t it be ghastly if the top one percent of rich kids had to work for their money, instead of just inherit it all tax-free after it has gained in value for decades?

Given the minuscule number of people who will benefit from this Trump revision, you might think elimination of the estate tax does not amount to enough government revenue being lost to even be worth contemplating. But think again: current estate taxes, reduced as they already are, provide enough revenue each year to fund the entire Food and Drug Administration and the Centers for Disease and Prevention and the EPA. O.K. so you’re one who hates the EPA. No problem, just substitute in the National Parks Service or some branch of government that you somewhat like.

You start talking about a billion dollars here and a billion dollars there, and pretty soon you’re talking about real money.

 

Trump tax plan cuts corporate income tax from 35% to 20%

 

I’m not opposed to eliminating corporate income tax on the basis that it is double taxation. (First, you tax the profits of the corporation as a corporation. Then you distribute the remainder of those profits to the stockholders and tax them again as personal income.) I also see that corporations are job-producing economic giants, so I can see an argument that says, “Let’s not suck all the fuel out of our economic engines. Tax it when it only when becomes personal income.”

HOWEVER, and it is a BIG “however” that must be writ large, that is not what will happen with this huge corporate tax cut. If Trump and his sly Goldman boys wanted to do that, their corporate tax cuts would come with restrictions that make certain the money is used for job creation. The problem I have with this huge new tax break is that it comes with no such provisions.

Here is what will really happen with almost all of that money, and we know if for a fact because of years of experience: stockholders have established a clear pattern in this country of making themselves rich through stock buybacks, which do nothing whatsoever to grow the business or to create jobs. That is what will happen with nearly all of these tax savings. Now that central banks are promising to suck money out of the system, which has fueled stock buybacks up to the present, the Trump Rescue team is coming in with a HYUUGE new source of money.

Corporate boards will spend their newfound tax savings either buying up other corporations and consolidating (which always kills jobs; it never creates jobs) or spend it on stock buybacks and dividends to shareholders. Here again, the top ten percent of the population benefit disproportionately over the rest of the populace.

Stock buybacks do two things simultaneously that directly benefit the rich board members who who are the ones who vote to do the buybacks: 1) they reduce the supply of shares on the market, bringing up the value of each remaining share; 2) they create a huge buyer (the corporation) that is more than willing to buy the board members’ own stocks at any escalating price in order to keep pushing the price up.

The Dom Perignon corks will be popping all over Wall Street if this one becomes law as it is the biggest boost the establishment has seen since capital-gains tax breaks were introduced. It’s a whole new realm for growth in income disparity.

Now, if Trump ever intended to help the middle class or Cohn and Munchkin ever intended to live up to their promises that there would be no tax cuts for the rich, then this tax cut would come with the clear restriction that no company benefiting from the lower corporate tax rate could engage in stock buybacks or use it to boost dividends. I’ll bet you haven’t heard ANY talk about that, and you never will because it was always Trump’s, Cohn’s, and Munchkin’s intention to give the greatest tax break in history to the supremely rich and cover it by saying, “This is to help businesses build jobs.” No, if you wanted it to build jobs, you’d put provisions in the tax code that require all of this tax benefit to be spent doing exactly that! Then it would actually juice the overall economy and not just the stock market. Not there!

Ask yourself one question: Why would an American board of stockholders, infamously known as they are for focusing on short-term quarterly gains, choose to reinvest billions of dollars saved on corporate taxes into creating new US factories with all of the regulations, liabilities, employment issues, construction issues, etc. that are involved in such expansion when they can just buy back the company’s stocks, making their own shares worth 20% more every year with no effort and no liability and no wait for a return on investment?

There will be NO jobs created from this kind of corporate tax cut unless it comes with restrictions, which it won’t because job creation has never been the real concern. What willbe created, if some form of the Trump tax plan passes both houses, is more inflation in the speculation-driven stock market … and about a trillion dollars (some say much more) of additional federal debt to pay for this gift to the rich so they can continue to play in their casinos a little longer before the tops come down.

You now know that Republicans only talk like deficit hawks when they know they’re not the party that will be in charge of actually passing a budget. This year, when they finally control all branches of government, fiscal spending was higher than in any year in the history of the US government, other than 2009 when the stops were first pulled out to try to end the financial crisis. The deficit from their profligate spending this year was well over half a trillion dollars, and that was with the second-highest income-tax revenue in the history of the United States, which will be greatly reduced if some version of this plan makes it through both houses.

Surprise, surprise, Republicans are not truly deficit hawks at all! Their debt concerns were pure fraud. It was easy to sound like they cared about fiscal responsibility when they knew Democrats would be the ones deciding the budget. The Republican budget recently passed didn’t curb any of this spending, and the projected revenue increases of the present tax plans are based on dreams that were already disproven in the Reagan era, when even Reagan’s tax man has admitted the administration had to scramble to quickly raise taxes back up some because of the yawning debt that immediately opened up when revenue failed to grow due to tax cuts to the extent the administration had promised. These cuts go far beyond those, so the damage will be worse.

You might wonder how Republicans are managing to pass these huge deficits through the Senate while avoiding the filibuster. The answer is, they are scheduling all the individual tax breaks that bust the budget to end in 2025. In fact, people making less than $75,000 a year will see a tax increase by 2027. That allows tax revenue to go back up just as the new tax plan becomes ten years old, meeting the “reconciliation” process says there can be no filibuster unless a bill creates a greater deficit ten years down the road.

While there will still be massive deficits after 2027, even with the end of the middle-class tax breaks, the Republican choice to run a massive deficit this past year has enabled them to establish an easy deficit threshold to come back down to. While the individual tax breaks that slightly help the middle class end quickly, the corporate tax breaks and capital-gains breaks that primarily help the rich will continue forever.

 

Middle class bears the burdens of breaks for the rich under Trump’s tax plan

 

The middle class pays for these tax-breaks to the rich by having their mortgage interest deduction capped, as well as their property tax deduction and their deductions for state and local taxes. These caps or eliminations hit the fabulously wealthy, too, but the wealthy get all the new benefits to far more than compensate while the middle class does not.

A study by Congress’s nonpartisan Joint Committee on Taxation says the senate plan will raise taxes for 13.8 million moderate-income American households making between 75,000 a year and 200,000. After 2023, 22% of Americans will pay more in taxes (and none of those will be in the one-percent class).

While the Trump tax plan throws a little candy in the form of tax breaks for the middle class initially to smooth its passage, you get trumped bigly in the end.

Even with all this boost for the establishment, Trump was not satisfied with the tax benefits for the rich and asked that even the smoke-screen 39.6% top income-tax rate be brought down to 35%. Even the window dressing rate apparently appeared too hard on the rich.

Trump is such a good snake-oil salesman that he has actually managed to con the middle class into cheering him with slogans at rallies as he shafts them and their children to enrich himself and his children in the years to come. His legacy will be that his kids are much richer than they are now, and yours are not. Cheer him all you want, but that’s where this ends up.

Kept entirely out of the tax discussion are payroll taxes, such as Social Security and Medicare where the rich pay much less as a percentage of their total income because those taxes have low caps on them and do not apply at all to capital gains. The rich pay nothing on any income above a certain level.

Democrat or Republican politicians prefer not to talk about that. What they talk about, instead, is the need to someday cut the amount you are entitled to. (You are entitledbecause they promised when they took your money they would give it back to you as retirement, so it is YOUR money they have been holding in trust. You’re entitled to it, because they took it from you with a promise to give it back later.) Instead, of cutting back on what the middle class is entitled to (since it was all their money taken in trust), they should talk about removing the tax caps that protect the rich in order to end the entitlement problem. They won’t.

If Trump and Republicans wanted real tax reform, they would eliminate income tax entirely and replace it with a value-added tax (or better yet, a simple sales tax on the end consumer), which would allow them to end the tyranny of the IRS by cutting the agency’s size by 90%, as sales tax is such an easy tax to monitor and collect. THAT would be true reform. Instead, their much ballyhooed reforms still leave us with the most complicated tax system in the world!

 

If these tax plans are reconciled and approved in something near their current shape, there will be a lot of merry moguls this Christmas.

Moody"s To State & Local Governments - Prepare For Climate Change Or Lose Access To Cheap Credit

The 2017 Atlantic hurricane season, which officially began on June 1 and ends today, featured the highest number of major hurricanes since the 2005 season and was only the second time that two Category 5 hurricanes made landfall. However, it was by far the costliest hurricane season on record, with a preliminary total of $368.7 billion in damages, more than twice the cost in 2005. Nearly all of the damage resulted from the season’s three major hurricanes, Harvey, Irma and Maria. Yesterday, nine scientists writing in PLOS ONE estimated that almost 14,000 DINAA archaeological sites (Digital Index of North American Archaeology) on the Atlantic and Gulf Coasts in the US could be lost by 2100 as seas rise due to climate change.

In these circumstances, it’s not surprising that the rating agencies are looking to incorporate risks from climate change, e.g. rising seas and major storms, into the credit ratings of public sector borrowers with coastal communities. Business Insurance magazine quotes from Moody’s report.

“Climate shocks or extreme weather events have sharp, immediate and observable impacts on an issuer’s infrastructure, economy and revenue base, and environment,” the New York-based ratings agency said in its report published Tuesday. “As such, we factor these impacts into our analysis of an issuer"s economy, fiscal position and capital infrastructure, as well as management’s ability to marshal resources and implement strategies to drive recovery. The interplay between an issuer"s exposure to climate shocks and its resilience to this vulnerability is an increasingly important part of our credit analysis and one that will take on even greater significance as climate change continues.”

Moody’s acknowledges that there is likely to be some adaptation on the part of state and local governments in the form of mitigation strategies to lessen the impact. Nonetheless, the rating agency is serving a warning, as Bloomberg notes.

“Coastal communities from Maine to California have been put on notice from one of the top credit rating agencies: Start preparing for climate change or risk losing access to cheap credit. In a report to its clients Tuesday, Moody’s Investors Service Inc. explained how it incorporates climate change into its credit ratings for state and local bonds. If cities and states don’t deal with risks from surging seas or intense storms, they are at greater risk of default.

"What we want people to realize is: If you’re exposed, we know that. We’re going to ask questions about what you’re doing to mitigate that exposure," Lenny Jones, a managing director at Moody’s, said in a phone interview. "That’s taken into your credit ratings."

In its report, Moody’s lists six indicators it uses "to assess the exposure and overall susceptibility of U.S. states to the physical effects of climate change." They include the share of economic activity that comes from coastal areas, hurricane and extreme-weather damage as a share of the economy, and the share of homes in a flood plain. Based on those overall risks, Texas, Florida, Georgia and Mississippi are among the states most at risk from climate change. Moody’s didn’t identify which cities or municipalities were most exposed.

Why the sudden focus on climate change from ratings agencies, like Moody’s. Because, as is almost always the case, they only react after the event. In May 2017, Bloomberg reported that when Ocean County (there’s a clue in the name) issued $31m of bonds in 2016, neither Moody’s nor S&P asked any questions about the impact of climate change on its finances. As Bloomberg highlights.

Few parts of the U.S. are as exposed to the threats from climate change as Ocean County, New Jersey. It was here in Seaside Heights that Hurricane Sandy flooded an oceanfront amusement park, leaving an inundated roller coaster as an iconic image of rising sea levels. Scientists say more floods and stronger hurricanes are likely as the planet warms.

It becomes apparent that Moody’s focus on climate change has little to do with being pro-active, rather it’s a response to pressure from investors who, no doubt, remember what happened to many AAA-rated sub-prime mortgage bonds not too many years ago. Indeed, when asked, Moody’s was not ale to recall an example where the credit rating of a city or state had been downgraded for failing to address climate change. Bloomberg continues.

If repeated storms and floods are likely to send property values -- and tax revenue -- sinking while spending on sea walls, storm drains or flood-resistant buildings goes up, investors say bond buyers should be warned.

Jones said Tuesday that the company had been pressured by investors to be more transparent about how it incorporates climate change into the ratings process. Some praised the move, while also urging it to go further.

What are investors’ views on this issue? Bloomberg provides some feedback.

"This kind of publication shoots for municipalities to think harder about disclosure," Adam Stern, a senior vice president at Breckinridge Capital Advisors in Boston, said in an interview. "The action would start to happen when and if you start seeing downgrades."

Eric Glass, a fixed-income portfolio manager at Alliance Bernstein, said real transparency required having a separate category or score for climate risk, rather than mixing it in with other factors like economic diversity and fiscal strength. Still, the new analysis is "certainly a step in the right direction," Glass said by email.

Public administrators are doubtful that anything will change until Moody’s and other ratings agencies show they mean business with actual downgrades.

Others worried that Moody’s is being too optimistic about cities’ desire to adapt to the risks associated with climate change. Shalini Vajjhala, a former Obama administration official who consults with cities on preparing for climate change, says that won’t happen on a large scale until cities start facing consequences for failing to act -- in this case, a ratings downgrade.

"Investors and governments alike are looking for clear market signals to pursue, and perhaps even more importantly, to defend investments in major adaptation and resilience projects to their constituents and taxpayers," Vajjhala, who now runs Re:Focus Partners, said in an email. "Outside of the rating agencies, it is not obvious who else could send a meaningful market-wide signal."

Unfortunately, our suspicion is that, for now, Moody’s focus on climate change risk is driven by the need to be seen saying the right things. We hope the agency “will walk the walk”, rather than merely “talk the talk”, with some downgrades. That would undoubtedly create a response from state and local governments.
 

Moody"s Boosts Modi: India Gets First Sovereign Credit Upgrade Since 2004

Moody’s upgrade to India’s credit rating comes as a much-needed boost for India’s Prime Minister, Narendra Modi, who has been criticised for the fallout from the goods and services tax (GST) and demonetisation reforms. Indeed, Moody’s argued that Modi’s reforms will help to stabilize India’s rising debt levels. According to Reuters.

Moody"s Investors Service upgraded its ratings on India"s sovereign bonds for the first time in nearly 14 years on Friday, saying continued progress on economic and institutional reform will boost the country"s growth potential. The agency said it was lifting India"s rating to Baa2 from Baa3 and changed its rating outlook to stable from positive as risks to India"s credit profile were broadly balanced. Moody"s upgrade, its first since January 2004, moves India"s rating to the second lowest level of investment grade. The upgrade is a shot in the arm for Prime Minister Narendra Modi"s government and the reforms it has pushed through, and it comes just weeks after the World Bank moved India up 30 places in its annual ease of doing business rankings.

Moody"s believes that Modi’s reforms have reduced the risk of a sharp increase in India’s debt, even in potential negative scenarios. On the GST reform, which converted India"s 29 states into a single customs union, the rating agency expects it to boost productivity by removing barriers to inter-state trade. In addition, the recent $32 billion recapitalisation of state banks and the reform of the bankruptcy code are beginning to address India’s sovereign credit profile.

"While the capital injection will modestly increase the government"s debt burden in the near term, it should enable banks to move forward with the resolution of NPLs."

Following the upgrade, India’s S&P BSE Sensex Index rose 1.1%, with metals, property and banks the strongest performers. The Sensex has risen 25% so far in 2017, while the banks sector is 42% higher. Retail investors have piled into financial assets and the banking system has been awash with funds since Modi unexpectedly banned high denomination bank notes last November.

As Reuters notes, the Indian government had been unsuccessful at persuading Moody’s to upgrade the rating in 2016.

Last year, India lobbied hard with Moody"s for an upgrade, but failed. The agency raised doubts about the country"s debt levels and fragile banks, and declined to budge despite the government"s criticism of their rating methodology. The government cheered the upgrade on Friday with Economic Affairs Secretary S. Garg telling reporters the rating upgrade was a recognition of economic reforms undertaken over three years.

The Rupee and Indian bonds also rallied on the Moody’s announcement – although some debt traders expressed scepticism that the rally was sustainable.

"It seems like Santa Claus has already opened his bag of goodies," said Lakshmi Iyer, head of fixed income at Kotak Mutual Fund said. "The move is overall positive for bonds which were caught in a negative spiral. This is a structural positive which would lead to easing in yields across tenors," she said. 

 

The benchmark 10-year bond yield was down 10 basis points at 6.96 percent, the rupee was trading stronger at 64.76 per dollar versus the previous close of 65.3250. "We have been expecting it for a long time and this was long overdue and is very positive for the market. Looks like sentiments are going to become positive," said Sunil Sharma, chief investment officer with Sanctum Wealth Management. However, debt traders said the rally was unlikely to last beyond a few days as the coming heavy bond supply and hawkish inflation outlook were unlikely to change soon.

 

"Who has the guts to continue buying in this market?" said a bond trader at a private bank.

India has basked in its status as the world’s fastest growing major economy and Moody’s forecasts suggests that it will continue to outpace China’s roughly 6.5% growth, but only marginally. In the fiscal year to March 2018, Moody’s expects the Indian economy to grow at 6.7% versus last year’s 7.1%. From Reuters.

Moody"s noted that while a number of key reforms remain at the design phase, it believes those already implemented will advance the government"s objective of improving the business climate, enhancing productivity and stimulating investment. “Longer term, India"s growth potential is significantly higher than most other Baa-rated sovereigns," said Moody"s.

Bloomberg published some initial reactions from portfolio managers and analysts.

Luke Spajic (head of portfolio management for emerging Asia at Pacific Asset Management Co. in Singapore)

• “The upgrade came sooner than expected. India has undertaken some tough but necessary reforms like demonetization and the GST, the benefits of which are yet to be fully calculated”


• “India is on the right long-term path with capital markets -- in both debt and equity -- pricing in potential improvements in investment quality”

Lin Jing Leong (investment manager, Asia fixed income, at Aberdeen Standard Investments in Singapore)

• “The upgrade has been long time coming” given Modi’s reform ambitions. “This is not a surprise -- we do believe all the rating agencies have been behind the curve somewhat”


• Initial Indian market reaction is likely to be knee-jerk, but we still expect dollar-India credit spreads, onshore India bonds and the rupee to continue outperforming the broader Asia and emerging-market bloc.

Navneet Munot (chief investment officer at SBI Funds Management Pvt. in Mumbai)

• This will boost global investors’ confidence in India, but factors like world monetary policy shifts and company earnings will also be key to foreign inflows.


• Investors like us who have long positions on India always expected an upgrade.


• The firm has been boosting equity holdings in Indian corporate lenders, industrial and telecommunications companies.

Nischal Maheshwari (head of institutional equities at Edelweiss Securities Ltd. in Mumbai)

• Equity markets have already given a thumbs up to the news”.


• It will lead to a reduction in borrowing costs, which is a major improvement.


• “For foreign investors in equity, it doesn’t change much as their concerns around high stock valuations remain. However, their commitment to the country is in place and the upgrade will only help reiterate their position”.

Shameek Ray (head of debt capital markets at ICICI Securities Primary Dealership in Mumbai)

• Foreign investors won’t be able to take full advantage of the positive sentiment from the upgrade as quotas for them to buy into rupee-denominated government and corporate debt are full, Ray says.


• “Whenever these quotas open up there will be keen interest to take India exposure,” but in the meantime Indian companies will get more access to offshore markets.


• “We could see them pricing dollar or Masala bonds at tighter levels”.

Ken Hu (chief investment officer for Asia-Pacific fixed income at Invesco Hong Kong Ltd.)

• The upgrade confirms Invesco’s positive view on India’s structural economic reforms.


• “With more political capital, Modi and his party are able to launch more difficult but more impactful structural reforms. The positive feedback loop will continue to lead to more credit rating upgrades of India in future”.

Chakri Lokapriya (managing director at TCG Asset Management in Mumbai)

• The upgrade is “very positive for banks, infrastructure and cyclical sectors”.


• “Banks will benefit strongly as their credit costs come down leading to a reduction in interest costs for infrastructure and manufacturing companies”.

Ashley Perrott (head of pan-Asian fixed income at UBS Asset Management in Singapore)

• The upgrade is a bit of a surprise, so the market is likely to see some initial bond-spread tightening.


• “But raising one notch does not make much difference from a fundamental perspective”.

Avinash Thakur (managing director of debt capital markets at Barclays Plc in Hong Kong)

• “The upgrade should help issuers from India as they are no longer on the cusp of investment grade”.


• “It makes a big difference to investors and we will see more dollar bond supply from India”.

"Google & Facebook Are 1984" - Tax Them "Til They Bleed

Authored by Raul Ilargi Meijer via The Automatic Earth blog,

An entire library of articles about Big Tech is coming out these days, and I find that much of it is written so well, and the ideas in them so well expressed, that I have little to add. Except, I think I may have the solution to the problems many people see. But I also have a concern that I don’t see addressed, and that may well prevent that solution from being adopted. If so, we’re very far away from any solution at all. And that’s seriously bad news.

Let’s start with a general -even ‘light’- critique of social media by Claire Wardle and Hossein Derakhshan for the Guardian:

How Did The News Go ‘Fake’? When The Media Went Social

Social media force us to live our lives in public, positioned centre-stage in our very own daily performances. Erving Goffman, the American sociologist, articulated the idea of “life as theatre” in his 1956 book The Presentation of Self in Everyday Life, and while the book was published more than half a century ago, the concept is even more relevant today. It is increasingly difficult to live a private life, in terms not just of keeping our personal data away from governments or corporations, but also of keeping our movements, interests and, most worryingly, information consumption habits from the wider world.

 

The social networks are engineered so that we are constantly assessing others – and being assessed ourselves. In fact our “selves” are scattered across different platforms, and our decisions, which are public or semi-public performances, are driven by our desire to make a good impression on our audiences, imagined and actual. We grudgingly accept these public performances when it comes to our travels, shopping, dating, and dining. We know the deal. The online tools that we use are free in return for us giving up our data, and we understand that they need us to publicly share our lifestyle decisions to encourage people in our network to join, connect and purchase.

 

But, critically, the same forces have impacted the way we consume news and information. Before our media became “social”, only our closest family or friends knew what we read or watched, and if we wanted to keep our guilty pleasures secret, we could. Now, for those of us who consume news via the social networks, what we “like” and what we follow is visible to many [..] Consumption of the news has become a performance that can’t be solely about seeking information or even entertainment. What we choose to “like” or follow is part of our identity, an indication of our social class and status, and most frequently our political persuasion.

That sets the scene. People sell their lives, their souls, to join a network that then sells these lives -and souls- to the highest bidder, for a profit the people themselves get nothing of. This is not some far-fetched idea. As noted further down, in terms of scale, Facebook is a present day Christianity. And these concerns are not only coming from ‘concerned citizens’, some of the early participants are speaking out as well. Like Facebook co-founder Sean Parker:

Facebook: God Only Knows What It’s Doing To Our Children’s Brains

Sean Parker, the founding president of Facebook, gave me a candid insider’s look at how social networks purposely hook and potentially hurt our brains. Be smart: Parker’s I-was-there account provides priceless perspective in the rising debate about the power and effects of the social networks, which now have scale and reach unknown in human history. [..]

 

“When Facebook was getting going, I had these people who would come up to me and they would say, ‘I’m not on social media.’ And I would say, ‘OK. You know, you will be.’ And then they would say, ‘No, no, no. I value my real-life interactions. I value the moment. I value presence. I value intimacy.’ And I would say, … ‘We’ll get you eventually."”

 

“I don’t know if I really understood the consequences of what I was saying, because [of] the unintended consequences of a network when it grows to a billion or 2 billion people and … it literally changes your relationship with society, with each other … It probably interferes with productivity in weird ways. God only knows what it’s doing to our children’s brains.”

 

“The thought process that went into building these applications, Facebook being the first of them, … was all about: ‘How do we consume as much of your time and conscious attention as possible?"” “And that means that we need to sort of give you a little dopamine hit every once in a while, because someone liked or commented on a photo or a post or whatever. And that’s going to get you to contribute more content, and that’s going to get you … more likes and comments.”

 

“It’s a social-validation feedback loop … exactly the kind of thing that a hacker like myself would come up with, because you’re exploiting a vulnerability in human psychology.” “The inventors, creators — it’s me, it’s Mark [Zuckerberg], it’s Kevin Systrom on Instagram, it’s all of these people — understood this consciously. And we did it anyway.”

Early stage investor in Facebook, Roger McNamee, also has some words to add along the same lines as Parker. They make it sound like they’re Frankenstein and Facebook is their monster.

How Facebook and Google Threaten Public Health – and Democracy

The term “addiction” is no exaggeration. The average consumer checks his or her smartphone 150 times a day, making more than 2,000 swipes and touches. The applications they use most frequently are owned by Facebook and Alphabet, and the usage of those products is still increasing. In terms of scale, Facebook and YouTube are similar to Christianity and Islam respectively. More than 2 billion people use Facebook every month, 1.3 billion check in every day. More than 1.5 billion people use YouTube. Other services owned by these companies also have user populations of 1 billion or more.

 

Facebook and Alphabet are huge because users are willing to trade privacy and openness for “convenient and free.” Content creators resisted at first, but user demand forced them to surrender control and profits to Facebook and Alphabet. The sad truth is that Facebook and Alphabet have behaved irresponsibly in the pursuit of massive profits. They have consciously combined persuasive techniques developed by propagandists and the gambling industry with technology in ways that threaten public health and democracy.

 

The issue, however, is not social networking or search. It is advertising business models. Let me explain. From the earliest days of tabloid newspapers, publishers realized the power of exploiting human emotions. To win a battle for attention, publishers must give users “what they want,” content that appeals to emotions, rather than intellect. Substance cannot compete with sensation, which must be amplified constantly, lest consumers get distracted and move on. “If it bleeds, it leads” has guided editorial choices for more than 150 years, but has only become a threat to society in the past decade, since the introduction of smartphones.

Media delivery platforms like newspapers, television, books, and even computers are persuasive, but people only engage with them for a few hours each day and every person receives the same content. Today’s battle for attention is not a fair fight. Every competitor exploits the same techniques, but Facebook and Alphabet have prohibitive advantages: personalization and smartphones. Unlike older media, Facebook and Alphabet know essentially everything about their users, tracking them everywhere they go on the web and often beyond.

 

By making every experience free and easy, Facebook and Alphabet became gatekeepers on the internet, giving them levels of control and profitability previously unknown in media. They exploit data to customize each user’s experience and siphon profits from content creators. Thanks to smartphones, the battle for attention now takes place on a single platform that is available every waking moment. Competitors to Facebook and Alphabet do not have a prayer.

 

Facebook and Alphabet monetize content through advertising that is targeted more precisely than has ever been possible before. The platforms create “filter bubbles” around each user, confirming pre-existing beliefs and often creating the illusion that everyone shares the same views. Platforms do this because it is profitable. The downside of filter bubbles is that beliefs become more rigid and extreme. Users are less open to new ideas and even to facts.

 

Of the millions of pieces of content that Facebook can show each user at a given time, they choose the handful most likely to maximize profits. If it were not for the advertising business model, Facebook might choose content that informs, inspires, or enriches users. Instead, the user experience on Facebook is dominated by appeals to fear and anger. This would be bad enough, but reality is worse.

And in a Daily Mail article, McNamee’s ideas are taken a mile or so further. Goebbels, Bernays, fear, anger, personalization, civility.

Early Facebook Investor Compares The Social Network To Nazi Propaganda

Facebook officials have been compared to the Nazi propaganda chief Joseph Goebbels by a former investor. Roger McNamee also likened the company’s methods to those of Edward Bernays, the ‘father of public’ relations who promoted smoking for women. Mr McNamee, who made a fortune backing the social network in its infancy, has spoken out about his concern about the techniques the tech giants use to engage users and advertisers. [..] the former investor said everyone was now ‘in one degree or another addicted’ to the site while he feared the platform was causing people to swap real relationships for phoney ones.

 

And he likened the techniques of the company to Mr Bernays and Hitler’s public relations minister. ‘In order to maintain your attention they have taken all the techniques of Edward Bernays and Joseph Goebbels, and all of the other people from the world of persuasion, and all the big ad agencies, and they’ve mapped it onto an all day product with highly personalised information in order to addict you,’ Mr McNamee told The Telegraph. Mr McNamee said Facebook was creating a culture of ‘fear and anger’. ‘We have lowered the civil discourse, people have become less civil to each other..’

 

He said the tech giant had ‘weaponised’ the First Amendment to ‘essentially absolve themselves of responsibility’. He added: ‘I say this as somebody who was there at the beginning.’ Mr McNamee’s comments come as a further blow to Facebook as just last month former employee Justin Rosenstein spoke out about his concerns. Mr Rosenstein, the Facebook engineer who built a prototype of the network’s ‘like’ button, called the creation the ‘bright dings of pseudo-pleasure’. He said he was forced to limit his own use of the social network because he was worried about the impact it had on him.

As for the economic, not the societal or personal, effects of social media, Yanis Varoufakis had this to say a few weeks ago:

Capitalism Is Ending Because It Has Made Itself Obsolete – Varoufakis

Former Greek finance minister Yanis Varoufakis has claimed capitalism is coming to an end because it is making itself obsolete. The former economics professor told an audience at University College London that the rise of giant technology corporations and artificial intelligence will cause the current economic system to undermine itself. Mr Varoufakis said companies such as Google and Facebook, for the first time ever, are having their capital bought and produced by consumers.

 

“Firstly the technologies were funded by some government grant; secondly every time you search for something on Google, you contribute to Google’s capital,” he said. “And who gets the returns from capital? Google, not you. “So now there is no doubt capital is being socially produced, and the returns are being privatised. This with artificial intelligence is going to be the end of capitalism.”

Ergo, as people sell their lives and their souls to Facebook and Alphabet, they sell their economies along with them.

That’s what that means. And you were just checking what your friends were doing. Or, that’s what you thought you were doing.

The solution to all these pains is, likely unintentionally, provided by Umair Haque’s critique of economics. It’s interesting to see how the topics ‘blend’, ‘intertwine’.

How Economics Failed the Economy

When, in the 1930s, the great economist Simon Kuznets created GDP, he deliberately left two industries out of this then novel, revolutionary idea of a national income : finance and advertising. [..] Kuznets logic was simple, and it was not mere opinion, but analytical fact: finance and advertising don’t create new value, they only allocate, or distribute existing value in the same way that a loan to buy a television isn’t the television, or an ad for healthcare isn’t healthcare. They are only means to goods, not goods themselves. Now we come to two tragedies of history.

 

What happened next is that Congress laughed, as Congresses do, ignored Kuznets, and included advertising and finance anyways for political reasons -after all, bigger, to the politicians mind, has always been better, and therefore, a bigger national income must have been better. Right? Let’s think about it. Today, something very curious has taken place.

 

If we do what Kuznets originally suggested, and subtract finance and advertising from GDP, what does that picture -a picture of the economy as it actually is reveal? Well, since the lion’s share of growth, more than 50% every year, comes from finance and advertising -whether via Facebook or Google or Wall St and hedge funds and so on- we would immediately see that the economic growth that the US has chased so desperately, so furiously, never actually existed at all.

 

Growth itself has only been an illusion, a trick of numbers, generated by including what should have been left out in the first place. If we subtracted allocative industries from GDP, we’d see that economic growth is in fact below population growth, and has been for a very long time now, probably since the 1980s and in that way, the US economy has been stagnant, which is (surprise) what everyday life feels like. Feels like.

 

Economic indicators do not anymore tell us a realistic, worthwhile, and accurate story about the truth of the economy, and they never did -only, for a while, the trick convinced us that reality wasn’t. Today, that trick is over, and economies grow , but people’s lives, their well-being, incomes, and wealth, do not, and that, of course, is why extremism is sweeping the globe. Perhaps now you begin to see why the two have grown divorced from one another: economics failed the economy.

 

Now let us go one step, then two steps, further. Finance and advertising are no longer merely allocative industries today. They are now extractive industries. That is, they internalize value from society, and shift costs onto society, all the while creating no value themselves.

 

The story is easiest to understand via Facebook’s example: it makes its users sadder, lonelier, and unhappier, and also corrodes democracy in spectacular and catastrophic ways. There is not a single upside of any kind that is discernible -and yet, all the above is counted as a benefit, not a cost, in national income, so the economy can thus grow, even while a society of miserable people are being manipulated by foreign actors into destroying their own democracy. Pretty neat, huh?

 

It was BECAUSE finance and advertising were counted as creative, productive, when they were only allocative, distributive that they soon became extractive. After all, if we had said from the beginning that these industries do not count, perhaps they would not have needed to maximize profits (or for VCs to pour money into them, and so on) endlessly to count more. But we didn’t.

 

And so soon, they had no choice but to become extractive: chasing more and more profits, to juice up the illusion of growth, and soon enough, these industries began to eat the economy whole, because of course, as Kuznets observed, they allocate everything else in the economy, and therefore, they control it.

 

Thus, the truly creative, productive, life-giving parts of the economy shrank in relative, and even in absolute terms, as they were taken apart, strip-mined, and consumed in order to feed the predatory parts of the economy, which do not expand human potential. The economy did eat itself, just as Marx had supposed – only the reason was not something inherent in it, but a choice, a mistake, a tragedy.

 

[..] Life is not flourishing, growing, or developing in a single way that I or even you can readily identify or name. And yet, the economy appears to be growing, because purely allocative and distributive enterprises like Uber, Facebook, credit rating agencies, endless nameless hedge funds, shady personal info brokers, and so on, which fail to contribute positively to human life in any discernible way whatsoever, are all counted as beneficial. Do you see the absurdity of it?

 

[..] It’s not a coincidence that the good has failed to grow, nor is it an act of the gods. It was a choice. A simple cause-effect relationship, of a society tricking itself into desperately pretending it was growing, versus truly growing. Remember not subtracting finance and advertising from GDP, to create the illusion of growth? Had America not done that, then perhaps it might have had to work hard to find ways to genuinely, authentically, meaningfully grow, instead of taken the easy way out, only to end up stagnating today, and unable to really even figure out why yet.

Industries that are not productive, but instead only extract money from society, need to be taxed so heavily they have trouble surviving. If that doesn’t happen, your economy will never thrive, or even survive. The whole service economy fata morgana must be thrown as far away as we can throw it. Economies must produce real, tangible things, or they die.

For the finance industry this means: tax the sh*t out of any transactions they engage in. Want to make money on complex derivatives? We’ll take 75+%. Upfront. And no, you can’t take your company overseas. Don’t even try.

For Uber and Airbnb it means pay taxes up the wazoo, either as a company or as individual home slash car owners. Uber and Airbnb take huge amounts of money out of local economies, societies, communities, which is nonsense, unnecessary and detrimental. Every city can set up its own local car- or home rental schemes. Their profits should stay within the community, and be invested in it.

For Google and Facebook as the world’s new major -only?!- ad agencies: Tax the heebies out of them or forbid them from running any ads at all. Why? Because they extract enormous amounts of productive capital from society. Capital they, as Varoufakis says, do not even themselves create.

YOU are creating the capital, and YOU then must pay for access to the capital created.

Yeah, it feels like you can just hook up and look at what your friends are doing, but the price extracted from you, your friends, and your community is so high you would never volunteer to pay for it if you had any idea.

The one thing that I don’t see anyone address, and that might prevent these pretty straightforward ”tax-them-til they-bleed!” answers to the threat of New Big Tech, is that Facebook, Alphabet et al have built a very strong relationship with various intelligence communities. And then you have Goebbels and Bernays in the service of the CIA.

As Google, Facebook and the CIA are ever more entwined, these companies become so important to what ‘the spooks’ consider the interests of the nation that they will become mutually protective. And once CIA headquarters in Langley, VA, aka the aptly named “George Bush Center for Intelligence”, openly as well as secretly protects you, you’re pretty much set for life. A long life.

Next up: they’ll be taking over entire economies, societies. This is happening as we speak. I know, you were thinking it was ‘the Russians’ with a few as yet unproven bucks in Facebook ads that were threatening US and European democracies. Well, you’re really going to have to think again.

The world has never seen such technologies. It has never seen such intensity, depth of, or such dependence on, information. We are simply not prepared for any of this. But we need to learn fast, or become patsies and slaves in a full blown 1984 style piece of absurd theater. Our politicians are AWOL and MIA for all of it, they have no idea what to say or think, they don’t understand what Google or bitcoin or Uber really mean.

In the meantime, we know one thing we can do, and we can justify doing it through the concept of non-productive and extractive industries. That is, tax them till they bleed.

That we would hit the finance industry with that as well is a welcome bonus. Long overdue. We need productive economies or we’re done. And Facebook and Alphabet -and Goldman Sachs- don’t produce d*ck all.

When you think about it, the only growth that’s left in the US economy is that of companies spying on American citizens. Well, that and Europeans. China has banned Facebook and Google. Why do you think they have? Because Google and Facebook ARE 1984, that’s why. And if there’s going to be a Big Brother in the Middle Kingdom, it’s not going to be Silicon Valley.

How Economics Failed The Economy

Authored by Umair Haque via Eudaimonia blog,

When, in the 1930s, the great economist Simon Kuznets created GDP, he deliberately left two industries out of this then novel, revolutionary idea of a “national income”: finance and advertising.

Don’t worry, this essay isn’t going to be a jeremiad against them, that would be too easy, and too shallow, but that is where the story of how modern economics failed the economy? - ?and how to understand how to undo it? - ?should begin.

Kuznets’ logic was simple, and it was not mere opinion, but analytical fact: finance and advertising don’t create new value, they only allocate, or distribute existing value? - ?in the same way that a loan to buy a television isn’t the television, or an ad for healthcare isn’t healthcare. They are only means to goods, not goods themselves.

Now we come to two tragedies of history.

What happened next is that Congress laughed, as Congresses do, ignored Kuznets, and included advertising and finance anywaysfor political reasons? - ?after all, bigger, to the politicians’ mind, has always been better, and therefore, a bigger national income must have been better. Right? Let’s think about it.

Today, something very curious has taken place.

If we do what Kuznets originally suggested, and subtract finance and advertising from GDP, what does that picture? - a picture of the economy as it actually is? - ?reveal? Well, since the lion’s share of growth, more than 50% every year, comes from finance and advertising? - whether via Facebook or Google or Wall St and hedge funds and so on? - ?we would immediately see that the economic “growth” that the US has chased so desperately, so furiously, never actually existed at all.

Growth itself has only been an illusion, a trick of numbers, generated by including what should have been left out in the first place. If we subtracted allocative industries from GDP, we’d see that economic growth is in fact below population growth, and has been for a very long time now, probably since the 1980s -  and in that way, the US economy has been stagnant, which is (surprise) what everyday life feels like.

Feels like. Economic indicators do not anymore tell us a realistic, worthwhile, and accurate story about the truth of the economy, and they never did?—?only, for a while, the trick convinced us that reality wasn’t. Today, that trick is over, and economies “grow”, but people’s lives, their well-being, incomes, and wealth, do not, and that, of course, is why extremism is sweeping the globe. Perhaps now you begin to see why the two have grown divorced from one another: economics failed the economy.

Now let us go one step, then two steps, further. Finance and advertising are no longer merely allocative industries today. They are now extractive industries. That is, they internalize value from society, and shift costs onto society, all the while, creating no value themselves. The story is easiest to understand via Facebook’s example: it makes its users sadder, lonelier, and unhappier, and also corrodes democracy in spectacular and catastrophic ways. There is not a single upside of any kind that is discernible? - ?and yet, all the above is counted as a benefit, not a cost, in national income, so the economy can thus grow, even while a society of miserable people are being manipulated by foreign actors into destroying their own democracy. Pretty neat, huh?

It was because finance and advertising were counted as creative, productive, when they were only allocative, distributive that they soon became extractive. After all, if we had said from the beginning that these industries do not count, perhaps they would not have needed to maximize profits (or for VCs to pour money into them, and so on) endlessly to count more. But we didn’t. And so soon, they had no choice but to become extractive: chasing more and more profits, to juice up the illusion of growth, and soon enough, these industries began to eat the economy whole, because of course, as Kuznets observed, they allocate everything else in the economy, and therefore, they control it. Thus, the truly creative, productive, life-giving parts of the economy shrank in relative, and even in absolute terms, as they were taken apart, strip-mined, and consumed in order to feed the predatory parts of the economy, which do not expand human potential. The economy did eat itself, just as Marx had supposed? - ?only the reason was not something inherent in it, but a choice, a mistake, a tragedy.

Again, that is just a story? - ?so let us extract the key principle, which is the main mistake, the way in which economics failed the economy. Economics? - ?let me be careful here, and say American economics? - ?made the grave mistake of supposing that whatever could be traded should be traded, and then counted as a benefit, always, to the economy. But that is patently foolish. You and I can buy guns, and while guns might help a few people hunt for food, mostly, they only help people kill. One only has to take a cursory glance at America’s off-the-charts murder rates and killing sprees. And so the net cost of guns is life itself. What can be traded isn’t always what should be traded, and even less so should what should be traded be counted only and always as a pure benefit to the economy.

I have said that the US is, ironically, the new Soviet Union, its precise mirror image. Here you see what I mean in the purest and truest way. In the Soviet Union, trade of any kind was strictly forbidden, because it was seen to always be a bad, a liability, and therefore, only the government should allocate goods. American economics made precisely the mirror image of the same mistake: trade was alwaysassumed to always be a good, in nearly every possible circumstance and case (except those against which moral crusades were launched, like sex and drugs), and was and is always counted as a benefit, even when it shouldn’t be, just as in my tiny examples of finance and advertising (and therefore, only markets can allocate resources to society’s benefit).

Do you see how both are precise mirror images of one another? Here we have two forms of exactly the same kind of extremism: one assumes that trade is always bad, the other, that it is always good, but both assume, and assume similarly totalist positions. And in that way, economics went Soviet, and so now the West is trapped in an ideological bubble, just like the Soviet Union, caught fast like a helpless fly in a web of dead theories that fail utterly to explain its own decline and stagnation, and so mystified pundits and theorists prattle on, but nothing much seems to change, or even to be understood any better than it was last year, or the year before that, even though each year the toll of those very failures mounts and mounts.

Yet the truth is simply this. Reality, like life, is messier, subtler, more complicated than saying a thing is all good or all bad. To say that a thing is always good or bad is to commit the same error: to suppose that there is no room for negotiation, for investigation, for innovation, for this difficult project that we call society to need to be, to evolve, or to grow, at all. Society can only really exist when the boundaries of what is good and bad must constantly be renegotiated, rediscovered, reimagined, and understood anew. In precisely that way, the good in society grows, and the bad, perhaps, if not shrinks, then at least doesn’t grow along with the good. And that is how prosperity truly happens.

The good is only, to the limited extent that we can see it, for human are always blind, whether life is flourishing, growing, and developing, or not. Yet life expectancy is falling, people don’t expect the next generation to do better, there are regular mass killings, and so forth, in America. Life is not flourishing, growing, or developing in a single way that I or even you can readily identify or name. And yet, the economy appears to be growing, because purely allocative and distributive enterprises like Uber, Facebook, credit rating agencies, endless nameless hedge funds, shady personal info brokers, and so on, which fail to contribute positively to human life in any discernible way whatsoever, are all counted as beneficial. Do you see the absurdity of it?

And so. It’s not a coincidence that the good has failed to grow, nor is it an act of the gods. It was a choice. A simple cause-effect relationship, of a society tricking itself into desperately pretending it was growing, versus truly growing. Remember not subtracting finance and advertising from GDP, to create the illusion of growth? Had America not done that, then perhaps it might have had to work hard to find ways to genuinely, authentically, meaningfully grow, instead of taken the easy way out, only to end up stagnating today, and unable to really even figure out why yet.

And yet, perhaps, you and I can learn from that very mistake. In the societies, economics, corporations, cities, towns that we build tomorrow, we must learn to consider the good in more sophisticated, subtle, and most important of all, more authentic ways than we did yesterday. Economics failed the economy by telling us that everything that could be traded should be traded, since trade is always beneficial to humankind, even though even a child can see that people are fleeced and hoodwinked into buying every kind of foolish device, from guns to immortality potions, every day since time itself began. They are really buying the same thing: a salve for the desperation of lives that have gone nowhere.

If we really wish to help them, the answer is not simply assuming the problem away, as both the Soviet Union and then America, ironically, following in the footsteps of its mortal enemy, did, by saying any kind of human activity is all bad, or all good - for then we have done nothing more than pretended to solve a problem, which is the most foolish blindness of all. Problems that we have pretended to solve will only have the freest license of all to grow, just as advertising and finance, by being imagined to be productive when they were only allocative, soon turned extractive, being given free rein when they should have been if not reined in, then at least set to pasture. To genuinely stretch, become, develop, and grow is the same for economies as it is for lives as it is for societies, too: doing the difficult work of reckoning imperfectly with the good, and the bad, that dwell together, somehow, in each and every human heart.

China Issues First Dollar Bond Since 2004, Bails Out Corporate Liquidity

Despite downgrades from the rating agencies, China is issuing its first sovereign dollar bond issues in 13 years on an unrated basis (what do the agencies know anyway) and at tight spreads to US Treasuries. The 5 and 10-year issues come just over a month since S&P cut the nation’s rating one level to A+ on 21 September 2017. Moody’s had already cut to single A.

Bloomberg reports that China began marketing its first sovereign dollar bonds since 2004 following a week when Chinese leaders in Beijing outlined a greater role for the nation on the world stage. The Ministry of Finance is offering $1 billion of five-year notes at a spread of 30 to 40 basis points over Treasuries, and the same amount of 10-year debt at a premium of 40 to 50 basis points, according to people familiar with the offering, who aren’t authorized to speak publicly…China is offering the bonds unrated, in a break with traditional practice by sovereigns in the region when they sell dollar notes. S&P Global Ratings last month followed Moody’s Investors Service in cutting China’s sovereign rating, citing soaring debt and increased economic and financial risks. The debt sale is one of the most eagerly anticipated in Asia this year…

The sovereign itself has been a rare issuer in foreign currencies and has only ever sold the equivalent of about $11 billion of such notes, according to data compiled by Bloomberg.

The order books exceeds 22 billion dollars, according to Bloomberg.

The lack of a formal rating on the Ministry of Finance of the People’s Republic of China’s dual-tranche U.S. dollar bond offering isn’t impeding the sale as the order books are reported to exceed $22 billion at initial price guidance as the books move to Europe…

 

Key comparable bonds include Japan Bank for International Cooperation’s $1.25 billion 2.875% due July 2027 which was quoted around T +43 basis points, State of Israel’s $1 billion 2.875% due March 2026 which was quoted around T +41 basis points and Germany’s KFW’s $2 billion 2% due May 2025 which was quoted around T +4 basis points…

 

China’s first sovereign dollar bond offering since 2004 is being lead managed by Bank of China, Bank of Communications, Agricultural Bank of China, China Construction Bank, CICC, Citigroup, Deutsche Bank, HSBC, ICBC and Standard Chartered Bank

The scarcity of similar Chinese bonds was a factor having a positive impact on spreads as one analyst told Bloomberg.

“We believe that pricing will ultimately settle on the tight end of initial price guidance,” said Todd Schubert, head of fixed-income research at Bank of Singapore Ltd., citing strong demand for emerging market bonds, and the scarcity value of a Chinese sovereign bond.

 

The announced guidance “is in line with our expectation,” he said. BNP Paribas SA said this week the five-year and 10-year bonds may price at 30 basis points and 40 basis points respectively over Treasuries. The 10-year note is set to price at a spread lower than South Korea’s bond of the same tenor. South Korea, rated two levels higher than China, sold a 10-year bond at a spread of 55 basis points in January, and it was about 74 basis points on Thursday.

Cynicism regarding the modus operandi of the Chinese authorities might have played a role too – this from Reuters.

The MoF has previously manipulated offshore bond sales by force-feeding them to compliant Chinese banks. This simulates demand without market substance. This time around, however, the securities may attract more foreign interest: as the mainland economy has recovered, foreign anxiety has genuinely eased.

Reuters emphasises the favourable (but incorrect in our opinion) repricing of Chinese risk and China’s motivation for the dollar bond issue.

Beijing’s dollar bonds show how Chinese risk has been repriced. The country is selling $2 billion of five-and 10-year sovereign dollar bonds, the first such issue since 2004. Despite recent downgrades by global rating agencies, these are likely to yield just 30 to 50 basis points above U.S. Treasury bonds. Local banks can guarantee demand if needed, but there is also a genuine reassessment of China risk underway. China does not need the money, but the borrowing serves multiple purposes. It helps stabilize cross-border capital flows, refills hard-currency reserves, and makes it easier for companies to refinance in dollars, since there will now be benchmark issues to price against. It is also a rebuke to the credit rating agencies, showing China can brush aside their warnings.

Indeed, the anticipation that China’s sovereign issue would “price tight” helped push spreads on state-owned corporate debt lower.

Despite investors falling over themselves to get hold of these Chinese sovereigns, we have sympathy for Reuters’ warning about dollar lending to China’s over-leveraged corporate sector.

Even so, this is an unrated issue by a country infamous for credit-fueled growth, weak rule of law, and selective respect for international norms.

It’s one thing to lend money to the Chinese government, but this will serve as a benchmark for pricing debt sales by other Chinese borrowers, some of them far more opaque.

Too late.

If the Treasury General Account on the Fed’s balance sheet is replenished to late 2016 levels and the Fed begins to taper, bank reserves will be extinguished and dollar liquidity is going to tighten significantly in the coming months - as we explained here.

With about $10 trillion of offshore dollar debt – with maybe a $1-2 trillion belonging to China -  this will make it more difficult for EM banks to roll dollar funding. China’s dollar borrowing by its corporate sector has been on a tear - with Bloomberg reporting record dollar-bond issuance of $144 billion by Chinese companies so far in 2017.

Finally, Bloomberg provided feedback on the Chinese sovereign bonds from analysts and investors.

AllianceBernstein (Brad Gibson) - If you look at CDS, the market has already priced in that China is a stronger credit than Korea. I suspect China could issue a $2 billion bond at any given spread to U.S. Treasuries. There will be strong Asian support for this bond as it is the first China sovereign dollar issue since 2004. Ultimately, China’s ability to service a $2 billion bond is unquestionable.

 

ANZ (Owen Gallimore) - We see the technical driven fair value as T5+20 (2.2% yield) and T10+25 (2.7%), a relatively flat 15bp Z-spread curve, with our expectation of non-Chinese demand for this ‘collector’s item’ in primary and onshore ‘policy’ demand in secondary. These levels would be moderately tighter than the similarly-rated Chile and Israel but more befitting China’s status in the world and proven policy firepower

 

Bank of Singapore (Todd Schubert) - The announced IPT is in line with our expectation. Given the still strong bid for Emerging Market bonds, the scarcity value of a Chinese sovereign bond and the favorable capital treatment from the HKMA, we believe that pricing will ultimately settle on the tight end of initial price guidance.

 

Columbia Threadneedle (Clifford Lau) - A lot of expectations and enthusiasm are built into this offering, so there’s been tightening of spreads going into the deal. We have taken some positions in the quasi-sovereign area, and would certainly consider participating in the new USD bonds offering, partly because it’s a rare and small deal.

 

Pimco (Luke Spajic) - Coming straight after the 19th Party Congress, the timing of issuance was spot on. The upbeat tone of the congress will be mirrored in the demand for bonds. Though the deal size is relatively modest, the symbolic nature of this issuance will give state owned enterprises, and banks, a marker for valuation. Over time, we would like to see a full sovereign curve be established with longer maturities. Demand will outstrip supply by significant multiple, so pricing is going to be at the tighter end. No surprise there.

 

JPMorgan Private Bank (Anne Zhang) The 10 year is in line with the comps released. In context, 5 year appears generous, however, I’d expect final pricing to be tighter from IPT. The market has built up the hype in the last week with very high expectation of very tight spread.

 

Nomura (Nicholas Yap) - Given the relatively small deal size (just USD2bn in total) and the fact that it will likely be well anchored by domestic financial institutions, China essentially possesses the ability to print the new bonds wherever it wants, and estimating fair value (FV) is arguably more of an academic exercise, one that we will nevertheless attempt to undertake! Comparing with suitable Asian and global sovereign peers, Nomura estimates fair value for the new China 5Y/10Y at around 25bp/35bp over Treasuries