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Commentary on The Capital Markets- Category [Federal Government]
2017-05-23 07:00 by Karl Denninger
in Federal Government , 255 references
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He knows folks.

He knows its coming, and yet he's going to take it out of your ass, and he has the entire GOP with him in doing it too.

What's "it"?  The medical cost explosion, which has run about 9% compounded for the last 30 years or so and which shows exactly no sign of slowing down, as I've noted repeatedly.  In fact Obamacare only got one year of flat spending in Medicare and Medicaid.


After which it went right back to where it was.

As I have repeatedly shown by the numbers just taking one condition (Type II diabetes) and changing how we deal with it -- turning it from a drug pusher mentality into one that is managed through changes in what one eats, a change in approach that works for virtually everyone with the condition to a material degree and has a good probability of returning blood sugar to normal without the use of any drugs at all would virtually eliminate the Federal deficit.

That of course ignores what could be done in general were we to simply enforce the same principles and premise that stands at the root of every other commercial transaction in a free market: You must be provided a price and consent to it before goods or services are rendered, and you may not be extorted into buying something you didn't want through discriminatory conduct.

These basic principles are ensconced in law both at the State and Federal levels -- via 15 USC Chapter 1 at the federal level and in both state and federal levels via various consumer protection and unfair trade practices legislation -- none of which has been enforced against anyone in the medical field for some three decades despite standing on the books today with no exemption for firms in said fields.

But..... no.

Instead Trump will propose to take roughly 25% off the Food Stamp program, mostly through requiring able-bodied people to work to receive benefits, and if they don't they get cut off.

He will propose to play with Medicaid, both cutting it directly and shifting it to the states.  Trump is of course well-aware that it's going to blow up the federal budget, so why not throw the hand grenade at the state budgets before it explodes?  Such a nice guy, when he could instead direct his AG to enforce the damn law and collapse cost.

There's a 10% increase in there for the DOD.  Warranted or not it will be trashed by the Democrats, of course.  But it's not the big news, really.

No, the big news in in the other places -- specifically the food stamp proposal and Medicaid.

Of course Trump claims he'll balance the budget in 10 years.  They always do, and always fail.  Even Clinton failed; he claimed it, he claimed success, but he in fact stole from the Social Security fund to make his numbers "balance"; if you stripped that back out he ran a deficit every single year of his Presidency.  He was so successful in running this lie and you lapping it up, by the way, that every President since has run the same scam with their "accounting."

Further, the fact of the matter is that whatever the President sends up is not really a budget at all, since all revenue bills must originate in the House (so says that pesky Constitution.)  It's better to think of it as a Santa Claus wishlist that Timmy sends off dutifully every year around Thanksgiving, and maybe his parents, having intercepted it, give him some what he asked for.


Too bad we won't hold any of the *******s in DC accountable -- especially when Mr. Law and Order won't enforce the damned law first and address the actual problem that is destroying America.


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2017-04-27 09:27 by Karl Denninger
in Federal Government , 413 references
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Let's look at it through the lens, darkly, since we have few details but just "principles":

First, the standard deduction is doubled.  This means $12,000 earned without income tax for a single person and $24,000 for a married couple

Second, as stated all deductions other than mortgage interest and charity are gone.  This is paired with deleting the AMT, which would be nonsensical to keep without the deductions.  Left unsaid is whether municipal bond interest remains untaxed (I'll assume "yes".)

So what disappears?  Plenty.

Many have bleated that "state and local tax deductions" are gone in this plan.  Today you can allegedly deduct your state property taxes, for example.  But this is only worth something to you if you itemize.  That's because if you itemize you do not get the standard deduction at all.  You can choose either to itemize or take the standard deduction (and presumably still will be able to) but until you get into the $100,000+ income range it is almost never to your advantage to itemize.  Therefore, for those in the middle class mortgage interest + property taxes are less than the standard deduction.  This will be doubly true with a doubled standard deduction; ergo, this "going away" will not hurt the middle class person at all, but it will cause those who have big, expensive houses (and the income to pay for them) to lose the deduction on a decent part of their property tax -- which they currently can take.

This is arguably good as it stops rewarding states and local governments for inefficient use of money and ridiculously high property taxes in the first place.  It's not that hard to find places with a $20,000+ annual property tax burden on a $750,000 house at all, which is flat-out nuts.  Many of these places have seen property taxes double or more over the last decade.

But where this plan is going to run into huge problems is in the following classes of deductible expenses which, it appears, are all going away:

  • EITC.  This is a refundable tax credit for both having kids and making a relatively small amount of money and it's huge because it's refundable.  In other words you can get it back even if you owe no tax, which results in the government literally paying you to live.  Good luck killing this one as it is a literal riot-starter in the big cities.  Keeping it blows up the plan instantly.

  • Personal health care expenses.  This is subject to a minimum of 10% of your AGI (in other words you have to spend more than 10% of your adjusted gross income before you can use it, and can only deduct the excess) but for those who run into huge medical expenses it's pretty big.  The number of people who get hammered by this in the middle class is relatively small, but the impact for those who do will be large.

  • Traditional IRAs.  This appears to be gone too.  The Roth will be untouched because ROTH IRAs are paid into with after tax money.  This one I really don't like for the simple reason that there is nothing to prevent the government from reneging on the "promise" not to tax earnings and withdrawals in a ROTH.  They can and probably will break that promise in the future; a "traditional" IRA evades this risk because you pay into it with pre-tax money, but pay taxes when you take the money out -- and thus it is not exposed to the government taxing you twice.

  • What happens to small-business SEPs/SIMPLEs?  If SEP and SIMPLE deductability on pass-throughs disappears (and you must assume it will) that will have a major impact on single-member LLC retirement planning as those plans allow tax deferral of a huge amount of otherwise-earned income.  This would be seriously bad for retirement planning for those with six-figure+ incomes; it is a feature of the current code that I've used and so have millions of other small business owners.  Losing it would be offset by putting the corporate rate on pass-through income (e.g. LLCs.)  The ugly side of such a change is that after-tax accounts get hammered on reinvested dividends (you have to pay taxes in the current time on reinvested funds and thus must withdraw the funds to pay the tax, reducing what you can reinvest) where deferred accounts get to reinvest the entire dividend or distributed amount.

  • It's a MONSTROUS windfall for MLPs.  MLPs are one of the things that today are pretty-badly disadvantaged due to them issuing K1s and the tax treatment of that income to the person who owns them.  This disadvantage will go away at the same time the passthrough provisions work for small business turning their distributions into, effectively, corporate earnings even though they go to you as an individual.  Expect a significant move in the share price of these companies, most of which are pipeline operators and similar, if this provision looks to survive. If you want an actionable gamble ("trade") on the plan as-spoken yesterday this is where you find it but you have to gamble before it becomes apparent that the plan will actually pass since the minute that becomes known in the market the price will step-shift upward on these shares.

  • The repatriation "holiday" on corporate funds will do nothing to help economic output.  Sorry, that's the facts folks.  Trump will get a big fat zero out of this because they money will go to buybacks, which produce nothing.  That's the history on this sort of "holiday" provision and there's utterly no reason to believe it will be different this time.  Money is fungible; you cannot prevent this from happening.  For another example of why this is inevitable look at the so-called "benefit" for education out of state-run lotteries; yes, the funds go there but nothing prevents the state from taking other funds they would have spent on schools and reallocating them -- which they do.

All-in, when you get down to it I think Trump's "proposal" has roughly the odds of passage as a snowball does of survival in Hell for more than a few minutes.  The issue simply that the tax "giveaways" in the current code for lower-income people are really big, especially the EITC, and killing them will mean the "negative tax rate mommies" in the cities will have their effective tax rate go to zero from often as much as -30% which is literally taking candy from a baby.  Do not underestimate this; for many of these tax-farm producing women (and poor families) we're talking about anywhere from $3,000-6,000 a year they literally get paid just for being alive and having pumped out the kids.  Those adult children are likely to react very poorly to this, and I suspect you might even get real, no-nonsense riots and mass civil unrest -- never mind the vomit that will come out of the Democrats when they figure this out (and they will.)

All-in I suspect the reality of this "plan" is that it's DOA before it even left Mnuchin's and Trump's lips, although it will certainly be interesting to see how it gets spun and "negotiated" in the coming months.

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2017-04-26 08:48 by Karl Denninger
in Federal Government , 526 references
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You cannot deficit spend your way to prosperity, nor can you print growth.

You can print money.  Deficit spending is printing money.

You cannot print value.

The premise that you will get 3% growth if you deficit spend is the same premise that Obama ran after 2008.  He and his advisers believed that if the government spent trillions that it did not have that we would see higher economic growth and over the space of a decade or so this would pay for the deficit through increased tax revenues.

It didn't happen.

It didn't happen because it can't happen; it was nothing more than a scheme to "print value", which is always and forever a fraud.

Now Trump and Mnuchin are going to attempt the same thing from the other side of the aisle.

It won't work any better coming from this side than it did coming from the other and what's worse is that it will meaningfully accelerate the wall that we are headed for at 90mph when it comes to Medicare and Medicaid spending.

GDP "growth" in nominal terms can be whatever you wish but in real terms it will be negative within three to four years and when it is along with the Medicare and Medicaid spend going up by another $600 billion a year the government's funding capacity and the economy will both collapse.

Obama was a piker compared against this garbage.

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Why aren't we talking about this?

 DatePublic DebtIntergovernmentalTotal
-09/30/201513,123,847,198,347.81 5,026,770,468,136.52 18,150,617,666,484.33
Purchasing Destruction 1,049,576,318,548.01373,250,728,904.451,422,827,047,452.46

Remember, the actual "public" deficit is the difference in borrowing between the end of the fiscal year and the beginning in debt held by the public.  The total increase in debt, including intergovernmental (mostly Social Security and Medicare) is the actual deficit and is exactly equal, on an arithmetic basis, to the destruction in your personal purchasing power that the government causes (or gain if the government runs a surplus.)

The actual deficit -- that is, the destruction in purchasing power the federal government caused last year, is the percentage of 1.423 trillion .vs. the total GDP of 18.450 trillion or approximately 7.7%.

That's right -- the government intentionally destroyed almost 8% of your paycheck and your savings last year, running a $1.423 trillion dollar budget deficit, which is roughly equal to the worst of the "great recession" when tax revenues went through the floor.

Today there is no such "tax shortfall" excuse. 

The breakdown of exactly where the ugly is coming from will be published next week.  I already know what is in there because I've been following the monthly treasury statements all fiscal year, but wish to report final "as tallied" facts -- and thus will have another post at that time.

Let me be clear: On the arithmetic if we do not stop this now within the next 4-5 years -- that is, within the next Presidential term -- our government will collapse, our economy will collapse, our health care system will collapse and both the stock and housing markets will collapse.  This is not politics, it's arithmetic.  And the worst part of it is that I am utterly certain that the "references" count, along with the "views" count on this article will both be a fraction of the politically-oriented articles I've recently posted.  That the real end of our way of life in America, a threat that is obvious, mathematically certain, not very far in the future and yet avoidable if we act now fails to garner any sort of serious attention is the real outrage folks.

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A bit of the piece I wrote before got my mind going..... I hadn't actually sat down to think about this much (other than when Bill Still was running for the Libertarian ticket), and I bet you haven't either.

But we should.

I'm going to take just our Federal budget and break it down into the following general categories for Fiscal 2013, a year for which we have the Federal Treasury Statement:

Social Security: $870 billion

Medicare and Medicaid (All): $1,113 billion

Children and Families (TANF, Energy, Children and Family Services, Adoption, etc): $50 billion

HUD (Rent, projects, operating funds, etc) + "Community Planning": $45 billion

SNAP/WIC/Etc (Food Stamps & "Free" School Lunches): $109 billion

Veterans Affairs: $143 billion, of which about $52 billion is medically-related.  The rest is (mostly) pensions and readjustment benefits.

Ok, now let's add all this up, with one exception -- Military Pensions.

I get $2,239 billion, or $2.2 trillion dollars, out of a total as spent of $4.058 trillion -- roughly 54%.

Note that the deficit was $680 billion, or one third of that spending.

So let's just take our $2,239 billion and see what we could do with it, assuming we didn't have these programs at all. In other words, let's make a few assumptions:

  • Families in the lowest quintile of income (under $27,794) pay an effective tax rate of zero.  That is, their income (all sources, including benefit checks from the government) is all theirs to spend.

  • Families in the second quintile of income ($49,788) pay few taxes, with an effective rate under 20%. That is, if we remove the taxes the gross amount they'd have to "make" would rise by about $10,000 (what they pay in taxes.)

  • There are an average of 3.12 persons per family.  Since the US population is approximately 330 million, there are approximately 100 million family units ranging from a single person to five (where the bell curve flattens to near-zero) persons.  As these are quintiles this happens to divide out nicely; there are approximately 20 million families in each quintile.

Ok, so we're going to do this instead of the programs we have now:

  • We're going to enforce the Sherman and Clayton Acts vigorously against all in the medical field.  This will result in the cost of medical care plummeting by approximately 80%.  Doubt me?  Go price procedures and drugs in Japan, India and other nations where you can get first world, cash care.  Or, for that matter, price a procedure at The Surgery Center of Oklahoma.

  • We're going to delete all of these programs and benefits outlined above.

  • For the 20 million family units in the second quintile, we're going to give each a tax credit amounting to the 1/5th of the ratable difference between their family income and the $49,788 threshold.  There is an approximately $22,000 range in this quintile so the average household will receive $2,000. That will cost $40 billion a year.
  • For the 40 million family units in the first and second quintile we're going to give each a further refundable tax credit amounting to 100% of the funds necessary to reach the 1st quintile threshold (average for the first quintile is $14,000 @ 20 million people) plus, for those under $40,000, another $5,000.  This will cost (20 million * 14,000) + (35 million * 5,000) or $455 billion more a year.

Note that these two direct refundable tax credit disbursements result in nobody having a family income of less than approximately $32,000 after tax.  We spent $495 billion doing it.

Bluntly: If we do this there are no more poor citizens in America unless you care to argue that a $32,000 household income is "poor."  If you do then I'll preempt your statement by telling you that you're stupid and ought to go find a high building and jump, you ****er.

End of discussion.

We started with $2,239 billion that we whacked out of the budget and have spent $495 billion of that eliminating, on a permanent basis, poverty in America.

We have left $1,744 billion each and every year.  We will not run a deficit ($680 billion) any more, and in fact will run a $400 billion surplus on purpose to start paying down the debt.  We now have $764 billion left each and every year.

That $764 billion is roughly 40% of the remaining federal budget.  We therefore will cut all taxes, income FICA, Medicare, everything -- by 30% so as to bring receipts in line with actual spending.

The result of this is:

  • A balanced Federal Budget right now and, over the space of a few decades, a zeroed Federal debt.
  • I did not touch the military budget, nor any of the other departments.
  • Those who are in the lowest quintile of American life suddenly and permanently have a reasonably middle-class lifestyle.  There is no longer any argument over whether someone will starve irrespective of their economic circumstance, other than by choice.  There are no more poor citizens in America.
  • I have permanently stopped all fiscally-driven inflation, and thus destruction of purchasing power, since there are no longer deficits being run.  In fact we now see purchasing power increases over time of about 2.3% annually.

  • Those who are in the second quintile will see their after tax income effectively rise to their pre-tax income.

  • And everyone, from poor on up, will see a 30% reduction in all federal taxes and fees.

Note that I left a hell of a lot of Socialism in the Federal Government due to handing out money to the lowest two quintiles.  However, I got rid of all of the government waste and corruption at once in social programs by doing it this way, and as a result what has happened is that the people in the lower economic strata got all the money instead of a quarter of it with the various scam artists in and around the government stealing the rest.

I also broke the Medical Monopolies -- everyone can now afford to pay cash for their medical care.

And, I did it while cutting taxes across-the-board by 30% while not only balancing the budget immediately, not in 10 or 20 years in some phantasm of lies and fraud, but also while putting $400 billion a year toward retiring the debt.

We're not short on money in this country, nor on taxation.

We're short on integrity and people who argue otherwise are liars.

Argue with my math; if I missed something or made an error, show me where.

PS: Before the criticism commences, let me point out that I'm well-aware of adverse selection and the arguments that can be raised in support of it, including the fact that were we to do this we might end up with a lot of people in that first quintile by choice!  After all, $32,000 as a guaranteed household income is pretty good for doing nothing!

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