Is the United States Sitting On Top of An Unexploded Bomb?

Comment by Jim Campbell

March 20th, 2020

Time will tell, I choose not to be concerned about it.

Yes Scarlett we may be sitting on top of an unexploded bomb.

I’m not certain that the federal government does much of anything well.

Their greatest claim to fame is taxing us and stripping our freedoms guaranteed to us by the United States Constitution.

Image result for images, congress closed

The House and the Senate must take it’s on advice, go back to your home or state and self-quarantine.

Remember, we continue to elect these crooks and miscreants in to office, we have our selves to blame.

March 20, 2020 by Dan Mitchell

There will be many lessons that we hopefully learn from the current crisis, most notably that it’s foolish to give so much regulatory power to sloth-like bureaucracies such as the FDA and CDC.

Today, I want to focus on a longer-run lesson, which is how tax policy (a bias for debt over equity) and monetary policy (artificially low-interest rates) encourage excessive private debt.

Are current debt levels excessive?

Let’s look at some excerpts from a column in the Washington Post, which was written by David Lynch last November – before coronavirus started wreaking havoc with the economy.

Little more than a decade after consumers binged on inexpensive mortgages that helped bring on a global financial crisis, a new debt surge — this time by major corporations — threatens to unleash fresh turmoil. A decade of historically low interest rates has allowed companies to sell record amounts of bonds to investors, sending total U.S. corporate debt to nearly $10 trillion… Some of America’s best-known companies…have splurged on borrowed cash. This year, the weakest firms have accounted for most of the growth and are increasingly using debt for “financial risk-taking,”…

“We are sitting on the top of an unexploded bomb, and we really don’t know what will trigger the explosion,” said Emre Tiftik, a debt specialist at the Institute of International Finance, an industry association. …

The root cause of the debt boom is the decision by the Federal Reserve and other key central banks to cut interest rates to zero in the wake of the financial crisis and to hold them at historic lows for years.

Needless to say, Emre Tiftik didn’t know last November what would “trigger the explosion.”

Now we have coronavirus, and George Melloan explained a few days ago in the Wall Street Journal that the “unexploded bomb” has detonated.

The Covid-19 pandemic…will do further damage to the global economy…

The danger is heightened by the heavy load of debt American corporations have piled up as they have taken advantage of low-cost borrowing.

Cheap credit brought on the heavy overload of corporate debt.

The Federal Reserve has responded to the virus by—what else?—making credit even cheaper, cutting its fed funds lending rate all the way to 0%-0.25% on Sunday.

Rate cuts in response to crises are programmed into the Fed’s software.

There is no compelling evidence that they are a solution or even a remedy. …the low-interest rates of the past decade have ballooned all forms of debt: government, consumer, corporate.

Corporate debt, the most worrisome type at the moment, stands at about $10 trillion and has made a steady climb to 47% of gross domestic product, a record level.

But even cheap borrowing and securitized debt obligations have to be paid back. It becomes harder to make payments when a global health crisis is killing sales and your company is bleeding red ink. …the increased political bias toward easy money remains a problem.

The Federal Reserve Act of 1913 was political from the day Woodrow Wilson signed it. It has gotten more political ever since, increasingly becoming an instrument for robbing the poor—savers and pensioners—and giving to often profligate borrowers.

Melloan’s final points deserve emphasis. There are good reasons to reconsider the Federal Reserve, and we definitely should be angry about the perverse redistribution enabled by Fed policies.

But let’s keep our focus on the topic of government-encouraged debt and how it contributes to economic instability.

It’s not just an issue of bad monetary policy. We also have a tax code that encourages companies to disproportionately utilize debt.

But the 2017 tax bill addressed that flaw, as Reihan Salam explained two years ago in an article for National Review.

One of the TCJA’s good points…limits that the legislation places on corporate interest deductibility, which…could change the way companies in the United States do business and make the U.S. economy more stable. …

By stipulating that companies cannot use the interest deduction to reduce their earnings by more than 30 percent, the law made taking on debt somewhat less attractive compared to seeking financing by offering equity to investors. …equity is more flexible in times of crisis than debt, which means that problems are less likely to spiral out of control.

That’s the good news (along with the lower corporate rate and restriction on the deductibility of state and local taxes).

The bad news is that the 2017 law only partially addressed the bias for debt over equity. Companies still have a tax-driven incentive to prefer borrowing.

Here’s the Tax Foundation’s depiction of how the pre-TCJA system worked, which I’ve altered to show how the new system operates.

I’ll close with the observation that there’s nothing necessarily wrong with private debt. Families borrow to buy homes, for instance, and companies borrow for reasons such as financing research and building factories.

But debt only makes sense if it’s based on market-driven factors (i.e., will borrowing enable future benefits and will there be enough cash to make payments). And that includes planning for what happens if there’s a recession and income falls.

Unfortunately, government intervention has distorted market signals and the result is excessive debt. And now the economic damage of the coronavirus will be even higher because more companies will become insolvent.

P.S. Even the International Monetary Fund is on the correct side about the downsides of tax-driven debt.

P.P.S. In addition to eliminating the bias for debt over equity, it also would be a very good idea to get rid of the bias for current consumption over future consumption (i.e., double taxation).

About JCscuba

I am firmly devoted to bringing you the truth and the stories that the mainstream media ignores. This site covers politics with a fiscally conservative, deplores Sharia driven Islam, and uses lots of humor to spiceup your day. Together we can restore our constitutional republic to what the founding fathers envisioned and fight back against the progressive movement. Obama nearly destroyed our country economically, militarily coupled with his racism he set us further on the march to becoming a Socialist State. Now it's up to President Trump to restore America to prominence. Republicans who refuse to go along with most of his agenda RINOs must be forced to walk the plank, they are RINOs and little else. Please subscribe at the top right and pass this along to your friends, Thank's I'm J.C. and I run the circus
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4 Responses to Is the United States Sitting On Top of An Unexploded Bomb?

  1. nootkabear says:

    “Remember, we continue to elect these crooks and miscreants in to office, we have our selves to blame.”? That’s a crock! All they years I have been voting has shown me that the we have to choose between bad and baddest, with Obama being the baddest yet. How the hell that man ever got elected, I will never know. But one thing for sure, the people that didn’t want his as president, didn’t go around boo-hooing and throwing fits, hurt other people. Life went on.
    Then Obama gave the tax investigators weapons. WTF was that? The fast and Furious with Eric Holder saying that they just need to brainwash Americans into not wanting guns, while Holder and Obama were giving guns to really bad people hoping they could get a bunch of Americans killed, and they could tighten gun laws.

    No, we don’t even have a chance when it comes to voting. Just like in GA where we elect the state’s judges. That’s fine and good, but if no one worth a damn runs against the judges already there, you keep the same damned judges, that take bribes, and threaten good lawyers that if they don’t back down on a case, they’ll never work in the state again.

    Corruption is rampant.

    ELKINS v. UNITED STATES, 364 U.S. 206 (1960) 364 U.S. 206?? No. 126.
    Argued March 28-29, 1960.   Decided June 27, 1960.
    “In a government of laws,” said Mr. Justice Brandeis, “existence of the government will be imperiled if it fails to observe the law scrupulously. Our Government is the potent, the omnipresent teacher. For good or for ill, it teaches the whole people by its example. Crime is contagious. If the Government becomes a lawbreaker, it breeds contempt for law; it invites every man to become a law unto himself; it invites anarchy.” 277 U.S., at 485 . (Dissenting opinion.)

    Like

  2. nootkabear says:

    The bottom paragraph is what I use for signature of all my email. I read the case many years ago. The old justices had so much class, and some of their rulings were almost flowery. If you can think of a judge’s ruling as flowery.

    I just read the above the refresh my memory of exactly what I had said. Hard to believe that I had so many type-o’s. You can see when I get mad about something. Corruption gets my ire up. So tired of it.

    And yes, yes, yes, please do use it, I have taken to it, and Brandeis was a very smart man, he knew what would happen. The later justices just quit caring I guess.
    What can one expect when the prisons are for profit – corporate run.

    Like

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