News What is wrong with the US economy? Part 2

[mheslep]

Hmmmm. Total value of the Mortgage industry... 7 to 14 trillion.
Total value of the Credit Default Swaps (FY2007 only)... 45 trillion.

Naww! The mortgage crisis was only the spark. The real fire is in the rest of the credit market.

CT- As I tried to point out before, the Time article you pulled this from is flawed, at least:
1) The mortgage numbers are for the US only; the credit derivative numbers from the http://www.isda.org/statistics/recent.html#2007end" are for the global market, the entire planet.
2) The derivative numbers above are transactions, not value. That is, if a $1 CDS is traded ten times in a year, ISDA brokers report that as $10 worth of transactions. This makes sense for the brokers, as they make their money by taking a piece of every trade, thus market volume is their figure of interest. Similarly, if one counted the number of times a mortgage was sold and resold, the mortgage transaction figure would be far higher than $7-14T. Or, look at the total market activity of all of the total derivatives market which includes currency trades, interest rate contracts, CDS and others: $596T/2007. That is 10x the GDP of the entire world (http://en.wikipedia.org/wiki/World_Economic_Outlook" ).

You may find the 'Gross market value' of CDSs useful: $2T/ 2007(again, worldwide) which is the value of the securities on the books on a given day.
OTC derivatives market activityin the second half of 2007
http://www.bis.org/publ/otc_hy0805.pdf?noframes=1, page 5 for GMV definition, data page 7.

 

[edward]

I've pointed this out before and now others are. You are misunderstanding what a "trade deficit" is. Having a trade deficit does not mean that that balance is borrowed money.

It might as well be because we will have to borrow to pay it. Ironically we will have to borrow from the same country that we owe most of the trade deficit to.

 

[mheslep]

It sounds like you are insinuating that everyone who bought a home in the last three years did it for speculative purposes.

Not at all. I think most people had an eye towards the appreciation of their home, or were only in part speculators if you like. But fortunately the majority of US mortgages are solid, taken out by people intending to make longterm use of their homes. A lesser fraction were pure house flipping, nothing down balloon mortgage maniacs, enabled by the unscrupulous Countrywides, and they in turn enabled by Fannie/Freddie. Unfortunately, the damage done by the lesser fraction in the financial sector is intense.

 

[edward]

CT- As I tried to point out before, the Time article you pulled this from is flawed, at least:
1) The mortgage numbers are for the US only; the credit derivative numbers from the http://www.isda.org/statistics/recent.html#2007end" are for the global market, the entire planet.
2) The derivative numbers above are transactions, not value. That is, if a $1 CDS is traded ten times in a year, ISDA brokers report that as $10 worth of transactions. This makes sense for the brokers, as they make their money by taking a piece of every trade, thus market volume is their figure of interest. Similarly, if one counted the number of times a mortgage was sold and resold, the mortgage transaction figure would be far higher than $7-14T. Or, look at the total market activity of all of the total derivatives market which includes currency trades, interest rate contracts, CDS and others: $596T/2007. That is 10x the GDP of the entire world (http://en.wikipedia.org/wiki/World_Economic_Outlook" )

Then again:

While the media criticized AIG for its reckless spending, the nation's largest insurer has been brought to its knees not by swanky retreats but by its exposure to massive liabilities through its participation in credit-default swap (CDS) market during the past five years. This arcane credit derivative market originated in the 1990's as a way of hedging risks in the bond markets, but since the year 2000 it has expanded from $900 billion in value to $64 trillion. Yes, that's trillion with a "T". For reference, the nation's entire annual economic output is estimated to be about $14.3 trillion. How could a market grow so quickly? The most crucial factors were the total lack of regulation and the potential to speculate on the value of assets held by someone else.

http://media.www.hlrecord.org/media/storage/paper609/news/2008/10/09/News/All-Hands.On.Deck.As.Global.Economic.Crisis.Intensifies-3478761.shtml


Global market? We are a big part of that right? Do the exact figures on the CDS scene even matter now that we know that they are what lured investors until they took the economy down?

 

[Art]

I've pointed this out before and now others are. You are misunderstanding what a "trade deficit" is. Having a trade deficit does not mean that that balance is borrowed money.

You say these things over and over: start researching it and prove it to us. Hopefully, you'll read enough to learn you misunderstand the issue.

I think you are misunderstanding what Astronuc was saying. The US gov't gets the money to run the country from tax payers. The difference between what the gov't receives in tax revenues, and what it spends, creates the national debt. The shortfall is made up by borrowing money from other countries.

The trade deficit is caused by the people, who are not paying enough tax to fund the gov't spending programs, instead spending much of that 'unpaid tax' on imports particularly from China. So it is quite reasonable to simplify these transactions and say the US gov't is borrowing money from China so US citizens can buy Chinese goods.

Given the current state of the US equity markets the US is on course for another big headache from their trade deficit. The theory of trade deficits is that the dollars going out come back into the country in the form of investments and so essentially the excess expenditure is paid for by selling off assets. This is fine if those assets are increasing in value as the nett percentage remaining in US ownership isn't particularly adversely affected but with share prices tumbling it means those dollars coming home to roost will buy a much bigger slice of America's assets and thus a bigger slice of the revenue streams generated by those assets. That is of course if foreign investors still want to buy them at all and if not then the US is in deep trouble as it's currency will become worthless, at which point you have no choice but to become a nett exporter to get the foreign currency you need to purchase essential imports. I'm not suggesting this last scenario is imminent but there are plenty of reasons to start worrying about it.

 

[Astronuc]

The US Treasury does not borrow money because of the trade deficit.

The Treasury borrows the money to finance the deficit/debt of the government. They have to borrow funds from foreign sources because the US sources don't have the cash.

Where do US financial instutions get there cash - from foreign sovereign funds.

How many $trillions have moved off-shore in the last two decades? Tyco (incorporated in Massachusetts, moved HQ to Hamilton, Bermuda) and Halliburton (moved from Houston to Dubai, UAE) have moved themselves off-shore. They and other US corporations and private individuals have been moving their money out of the US to off-shore banks. They don't pay taxes and the simply turn around and loan the money back to the US economy - corporations and government.

A good chunk of the funds for the War on Terror goes 'offshore'!

The chronic flow of capital out of the US is part of the current problem.

The US is the world's largest debtor nation.

Consumerism is as American as cherry pie. Plasma TVs, iPods, granite countertops: you name it, we’ll buy it. To finance the national pastime, Americans have been borrowing from abroad on an increasingly stunning scale. In 2006, the infusion of foreign cash required to close the gap between American incomes and consumption reached nearly 7 percent of gross domestic product (GDP), leaving the United States with a deficit in its current account (an annual measure of capital flows to and from the rest of the world) of more than $850 billion. In other words, the quantity of goods and services that Americans consumed last year in excess of what we produced was close to the entire annual output of Brazil. “Brazil is the tenth largest economy on the planet,” points out Laura Alfaro, an associate professor of business administration who teaches a class on the current account deficit at Harvard Business School (HBS). “That is what the U.S. is eating up every year—a Brazil or a Mexico.”

Whether this practice is sustainable—and if not, how it might end—are questions that divide scholars and investors alike. We have borrowed so much from abroad—between half a trillion and a trillion dollars a year for the past six or seven years—that in 2006, our investment balance with the rest of the world (what we pay foreign investors on their U.S. assets versus their payments to us on our investments abroad, historically nearly equal) tipped to became an outflow for the first time in more than 50 years. We are a debtor nation swiftly heading deeper into debt.
. . . .

Trouble struck Mexico in 1995, Thailand, Malaysia, and other countries in 1997, and Argentina in 2001, after those countries borrowed vast sums in the international marketplace. Argentina before the crash had been a model developing nation and a darling of the IMF, closely following the fund’s economic prescription for integration into the global system of finance and trade. But even the IMF could not save the country from the destabilizing effects of international capital flows. When global investors realized that Argentina’s debt load was unsustainable, they sold their assets, called in their loans, and exited the country. Overnight the Argentine peso plummeted in value against the dollar, the currency in which debt had been issued, and staggering obligations suddenly became unpayable. Argentines who had financed their mortgages in dollars lost their homes. There was a run on the banks, and the government imposed a limit on cash withdrawals. In a country abounding with wheatfields and cattle ranches, starving people began raiding garbage bags in wealthy neighborhoods.

Ref - http://harvardmagazine.com/2007/07/debtor-nation.html

Debtor Nation (April 22, 2004)
http://www.thenation.com/doc/20040510/greider

The backstory for this election year lacks the urgency of war or of defeating George W. Bush but focuses on a most fateful question: When will this hemorrhaging debtor nation be compelled to pull back from profligate consumption and resign its role as "buyer of last resort" for the global economy? The smart money assumes such a momentous reckoning probably won't occur in time to disrupt Bush's re-election campaign, but it may well become the dominating crisis in the next presidential term, whoever is elected. At that point, the United States will lose its aura of unilateral superiority, and globalization will be forced to undergo wrenching change. The American economy, in other words, is in much deeper trouble than most people realize.

The facts are not secret. Despite ebbs and surges, the gap between US exports and imports has been steadily widening across three decades. The trade deficits of the early 1970s (due mainly to soaring oil prices) were trivial in size, but Americans were shocked in 1978 when the deficit hit $30 billion (TV sets and some cars were now made in Japan). During the 1980s, the trade deficit expanded enormously, as Washington's strong- dollar policy crippled US manufacturers and companies moved jobs and production offshore in swelling volume. After a recession and dollar devaluation, the gap shrank briefly, but soon began expanding again.
. . . .
Last year [2003] it [trade deficit] set another new record: $489 billion.
. . . .

Looks like in 2008, the trade deficit will exceed $700 billion.

US Trade Deficits
Year $Billion
2003 . 494.81
2004 . 617.31
2005 . 723.69
2006 . 765.27
2007 . 708.55
2008 . 473.90

In the last 3.66 years, the US has accrued $2.67 trillion deficit, and in the last 5.67 years the accrued deficit is nearly $3.8 trillion. That money then is either loaned to the US or finances other economies that compete with the US. Some of it also finances al-Qaida.

http://www.census.gov/foreign-trade/statistics/historical/index.html

 

[mheslep]

I think you are misunderstanding what Astronuc was saying. The US gov't gets the money to run the country from tax payers. The difference between what the gov't receives in tax revenues, and what it spends, creates the national debt. The shortfall is made up by borrowing money from other countries.

The trade deficit is caused by the people, who are not paying enough tax to fund the gov't spending programs, instead spending much of that cash on imports. So it is quite reasonable to say the US gov't is borrowing money from China so US citizens can buy Chinese goods.

A coherent argument. Coherent, but over drawn:

...the trade deficit is simply a mirror reflection of the larger macroeconomic reality that investment in the United States exceeds domestic savings. If we want to change the U.S. trade deficit we must change the rate at which Americans save and invest.

http://www.cato.org/testimony/ct-dg061198.html
Also note that a trade surplus is not necessarily a good thing either.

...Frankly, we would have more reason to worry if the U.S. were running a trade surplus. In Mexico in 1995 and more recently in South Korea and other East Asian countries, trade balances flipped overnight from deficit to surplus because of plunging domestic demand and the flight of foreign capital. In Japan today, a soaring trade surplus has been accompanied by record high unemployment. It's no coincidence that America's smallest trade deficit in recent years occurred in 1991--in the trough of our last recession.

 

[Art]

http://www.cato.org/testimony/ct-dg061198.html
Also note that a trade surplus is not necessarily a good thing either.

As I pointed out in the second paragraph of my post how you arrive at a trade surplus is kind of important.

If it's through the fact nobody will sell to you any more because your currency is worthless then it is obviously not a good way to get there but on balance a healthy trade surplus is better than running a deficit because it means you are accumulating capital and not leaking it.

One proviso peculiar to the US is the impact of the petro dollar. This allows the US to run a limited trade deficit as if greenbacks end up in someone else's foreign reserve fund and never come home then that means you have managed to exchange cheap pieces of paper for hard goods and services. However the recent fall in the price of oil and the move by some big oil producers to other currencies bodes ill for the US economy.

 

[mheslep]

The US trade deficit is currently declining:
http://www.epi.org/images/intlpic20080214figa600.gif
Because:

The improvement in the deficit was explained, in part, by continued rapid growth of U.S. exports, which increased a record $176.1 billion (12.2%) in 2007, as shown in the Figure A. A slowdown in import growth to 5.9% ($129.2 billion) also played a key role. The slowdown in import growth in 2007 reflects softening in consumer spending in the overall economy. Both the import slowdown and export growth were probably driven in part by the depreciation of the dollar in recent years.

http://www.epi.org/content.cfm/indicators_intlpict_20080215

 

[quadraphonics]

I think you are misunderstanding what Astronuc was saying. The US gov't gets the money to run the country from tax payers. The difference between what the gov't receives in tax revenues, and what it spends, creates the national debt. The shortfall is made up by borrowing money from other countries.

Not necessarily. The shortfall is made up by borrowing, sure, but that doesn't imply that only foreign countries do the lending. The debt in question is largely sold on an open market, and so can be bought by any private or public entities, foreign or domestic. Currently, only about 25% of the national debt is held by foreign entities, and only about 2/3 of that is held by foreign governments. The foreign-owned portion has been increasing in recent years, but is still a long way from accounting for a majority of the debt. Also, more than half of the national debt is actually owned by other parts of the Federal Government, such as the Federal Reserve.

So it is quite reasonable to simplify these transactions and say the US gov't is borrowing money from China so US citizens can buy Chinese goods.

It would be equally correct to say that China is loaning the US money so that they can sell goods to Americans. Neither statement is particularly enlightening, however, absent a holistic understanding of the bilateral relationship between the two, which affects not only foreign debt holdings but also interest rates, inflation and currency strength. For example, part of the reason that China has been buying so much US debt is that they must do this to support the dollar, or there would be no trade surplus to flood them with dollars in the first place. This extra demand for government paper drives down the interest rates required to finance government spending (and everything else) and leads to faster consumption-led growth, and meanwhile the access to cheap Chinese products keeps inflation in check.

Also, note that the returns on T-Bills have, over the period where China has been accumulating them, been close to, or even below, inflation in the dollar, and far below the inflation in the particular imports that China requires (oil and grain). Given this, it would be even more correct to say "China gives the US money to buy Chinese products."

 

[Art]

Not necessarily. The shortfall is made up by borrowing, sure, but that doesn't imply that only foreign countries do the lending. The debt in question is largely sold on an open market, and so can be bought by any private or public entities, foreign or domestic. Currently, only about 25% of the national debt is held by foreign entities, and only about 2/3 of that is held by foreign governments. The foreign-owned portion has been increasing in recent years, but is still a long way from accounting for a majority of the debt. Also, more than half of the national debt is actually owned by other parts of the Federal Government, such as the Federal Reserve.
It would be equally correct to say that China is loaning the US money so that they can sell goods to Americans. Neither statement is particularly enlightening, however, absent a holistic understanding of the bilateral relationship between the two, which affects not only foreign debt holdings but also interest rates, inflation and currency strength. For example, part of the reason that China has been buying so much US debt is that they must do this to support the dollar, or there would be no trade surplus to flood them with dollars in the first place. This extra demand for government paper drives down the interest rates required to finance government spending (and everything else) and leads to faster consumption-led growth, and meanwhile the access to cheap Chinese products keeps inflation in check.

Also, note that the returns on T-Bills have, over the period where China has been accumulating them, been close to, or even below, inflation in the dollar, and far below the inflation in the particular imports that China requires (oil and grain). Given this, it would be even more correct to say "China gives the US money to buy Chinese products."

Absolutely. Both Japan and China have ran vendor finance programs for years. However self-evidently this model is unsustainable in the long run and in fact China and Japan have both cut back severely on their 'vendor finance programs' as they have become worried about the future value of the dollar debt they hold. Bear in mind the same worries will also affect US lenders who may decide buying Euro debt is a safer bet than buying US debt.

You can also throw in the OPEC countries. They too have been buying up US debt through London to bolster the US dollar as they will take a massive hit too if the dollar plummets but again they too are busy working on their exit strategy.

The biggest buyers last time I looked were the Caribbean Islands and as it is pretty obvious it is not their gov'ts buying the debt one wonders who is masking their purchases through this channel? There is even some suggestions that the US gov't itself is buying it's own debt to sustain confidence in the dollar.

 

[mheslep]

...Currently, only about 25% of the national debt is held by foreign entities, and only about 2/3 of that is held by foreign governments. The foreign-owned portion has been increasing in recent years, but is still a long way from accounting for a majority of the debt. ...

True, but since the share of US debt held by other governments is increasing, this means that foreign entities are currently buying more than half of any given Treasury bond offerings.
www.treasurydirect.gov/govt/reports/pd/feddebt/feddebt_ann2007.pdf

 

[Astronuc]

Stocks got slammed, but was it a `crash'?
http://news.yahoo.com/s/ap/20081010/ap_on_re_us/meltdown_crash_or_not

Some news organizations and investors are hesitating to use the word to describe Wall Street's terrifying sell-off.

A crash is commonly defined as a 20 percent decline in a single day or several days. The drop over the seven days ending Thursday lopped 20.9 percent off the Dow Jones industrial average, which would qualify as a crash. On Friday, the Dow fell again, bringing the cumulative loss to 22 percent.

"This quick, this amount, in these few days, obviously is a crash," said Howard Silverblatt, senior index analyst at Standard & Poor's. "The crash deals with the speed as well as the intensity of it."

CNBC host Dylan Ratigan was among those uttering the word on Thursday, calling the decline "a cascading crash." The Wall Street Journal, the most influential publication in the financial world, hedged somewhat on Friday's front page, saying the scary drop over the past several days "amounts to a slow-motion crash."

But not everyone was prepared to go that far.

The Associated Press did not use the word "crash," referring to Thursday as a "runaway train of a sell-off."
. . . .
While The New York Times' news columns called Thursday's trading a "rout" in which "panicky investors dumped stocks en masse" in a "stomach-churning 90 minutes" at the end of trading, the paper carefully avoided the word "crash," saying the 20.8 percent decline over six trading days "is similar to the drop in the Dow on Black Monday, Oct. 19, 1987." (And that, of course, is a day most people refer to as a crash.)

. . . .

Maybe it's more like a muli-car pileup on the interstate in reduced visibility conditions.

But there is great buying opportunities for some.

It will be interesting to see what happens on Monday. We're almost one week shy of the 21st anniversary of Black Monday, Oct. 19, 1987. Hopefully we'll start to see a recovery, but some are predicting lower levels for the stock markets.

 

[Astronuc]

It's not just the US economy -

Ireland's economy ends long winning run
http://news.yahoo.com/s/ap/20081011/ap_on_re_eu/eu_ireland_death_of_a_tiger

. . . .
Tens of thousands of Irish face a financial white-knuckle ride because Europe's longest-running winning streak — the vaunted Celtic Tiger economy — has come to an inglorious end. Last month, Ireland became the first country in the 15-nation euro zone to fall into recession, and economists predict that a familiar era of closing factories and net emigration could return.

"We face stark choices. If we do not make the right ones, it will have catastrophic consequences," Prime Minister Brian Cowen said at a dinner of the country's top businessmen last week as his government authorized an emergency plan to insure the nation's banks against collapse.

The speed of the reversal has stunned Ireland top to bottom. And denial is giving way to desperation.

"We've had this corpse on the kitchen table for a while, and it's just today we've decided that it's actually dead," said Eddie Hobbs, Ireland's ubiquitous investment guru.
. . . .
From 1994 to 2007, Ireland was one of Europe's brightest stars. Its gross domestic product expanded at nearly triple the European average. Unemployment fell from 15 percent to below 4 percent, and a centuries-old tradition of emigration was turned upside down.

About 1,000 foreign companies, more than half of them American, arrived or expanded in this English-speaking outpost on the EU's western edge. The companies largely sought to exploit a 12.5 percent rate of business tax, the lowest within the euro zone, and took heart from the arrival of peace in the neighboring British territory of Northern Ireland.
. . . .
The bank-heavy Irish Stock Exchange has shed nearly three-fourths of its value since April 2007. As Dublin bankers' ability to borrow internationally dried up, the government responded with a world-first guarantee for all deposits and borrowings of Irish-owned banks — a liability so big it represents $130,000 per man, woman and child.
. . . .

The global economy is also showing signs of weakness.

 

[mheslep]

It's not just the US economy -

Ireland's economy ends long winning run
[URL]http://news.yahoo.com/s/ap/20081011/ap_on_re_eu/eu_ireland_death_of_a_tiger[/url[/QUOTE]
Especially note in that article a major reason why Ireland boomed for so long:

About 1,000 foreign companies, more than half of them American, arrived or expanded in this English-speaking outpost on the EU's western edge. The companies largely sought to exploit a 12.5 percent rate of business tax, the lowest within the euro zone, and took heart from the arrival of peace in the neighboring British territory of Northern Ireland.

And the US top corporate rate is 35% (with 3-5% surtaxes on top of that in some cases), one of the highest in the world. Astronuc - up thread somewhere you exclaimed about numerous US firms moving off shore. Here is one major reason why. Senator Obama correctly noted in the last debate that the US corporate law is full of loop holes, though I'd say loop holes are an irresistible temptation for lawmakers when the rate is high. Senator McCain has proposed lowering this rate to 25%, Sen. Obama will close the loop holes, raise taxes further on some firms (oil/gas), cut taxes for alt energy firms.
http://www.usatoday.com/money/perfi/taxes/2008-03-20-corporate-tax-offshoring_N.htm
http://www.taxpolicycenter.org/UploadedPDF/411693_CandidateTaxPlans.pdf

 

[Astronuc]

Especially note in that article a major reason why Ireland boomed for so long:
And the US top corporate rate is 35% (with 3-5% surtaxes on top of that in some cases), one of the highest in the world. Astronuc - up thread somewhere you exclaimed about numerous US firms moving off shore. Here is one major reason why. Senator Obama correctly noted in the last debate that the US corporate law is full of loop holes, though I'd say loop holes are an irresistible temptation for lawmakers when the rate is high. Senator McCain has proposed lowering this rate to 25%, Sen. Obama will close the loop holes, raise taxes further on some firms (oil/gas), cut taxes for alt energy firms.
http://www.usatoday.com/money/perfi/taxes/2008-03-20-corporate-tax-offshoring_N.htm
http://www.taxpolicycenter.org/UploadedPDF/411693_CandidateTaxPlans.pdf

Actually, about 2/3's of corporations in the US do not pay taxes! If the government cuts taxes (along the lines of McCain's proposal) then they better cut all budgets across the board - by 20%.

Here are two interesting perspectives from Paul Krugman - who has been vindicated by the recent collapse in the US economy.

http://www.charlierose.com/shows/2003/09/15/2/a-conversation-with-paul-krugman-of-the-new-york-times
http://www.charlierose.com/shows/2007/12/26/1/a-conversation-with-paul-krugman

Krugman warned that the US economy was headed for a cliff - and that just happened.

Also - Private sector loans, not Fannie or Freddie, triggered crisis
By David Goldstein and Kevin G. Hall | McClatchy Newspapers
http://www.mcclatchydc.com/homepage/story/53802.html

WASHINGTON — As the economy worsens and Election Day approaches, a conservative campaign that blames the global financial crisis on a government push to make housing more affordable to lower-class Americans has taken off on talk radio and e-mail.

Commentators say that's what triggered the stock market meltdown and the freeze on credit. They've specifically targeted the mortgage finance giants Fannie Mae and Freddie Mac, which the federal government seized on Sept. 6, contending that lending to poor and minority Americans caused Fannie's and Freddie's financial problems.

Federal housing data reveal that the charges aren't true, and that the private sector, not the government or government-backed companies, was behind the soaring subprime lending at the core of the crisis.

Subprime lending offered high-cost loans to the weakest borrowers during the housing boom that lasted from 2001 to 2007. Subprime lending was at its height vrom 2004 to 2006.

Federal Reserve Board data show that:

_ More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.

_ Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.

_ Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law [CRA] that's being lambasted by conservative critics.

The "turmoil in financial markets clearly was triggered by a dramatic weakening of underwriting standards for U.S. subprime mortgages, beginning in late 2004 and extending into 2007," the President's Working Group on Financial Markets reported Friday.

Most Companies in US Avoid Federal Income Taxes
http://abcnews.go.com/Business/wireStory?id=5561455

Two-thirds of U.S. corporations paid no federal income taxes between 1998 and 2005, according to a new report from Congress.

The study by the Government Accountability Office, expected to be released Tuesday, said about 68 percent of foreign companies doing business in the U.S. avoided corporate taxes over the same period.

Collectively, the companies reported trillions of dollars in sales, according to GAO's estimate.

"It's shameful that so many corporations make big profits and pay nothing to support our country," said Sen. Byron Dorgan, D-N.D., who asked for the GAO study with Sen. Carl Levin, D-Mich.

An outside tax expert, Chris Edwards of the libertarian Cato Institute in Washington, said increasing numbers of limited liability corporations and so-called "S" corporations pay taxes under individual tax codes.
. . . .
More than 38,000 foreign corporations had no tax liability in 2005 and 1.2 million U.S. companies paid no income tax, the GAO said. Combined, the companies had $2.5 trillion in sales. About 25 percent of the U.S. corporations not paying corporate taxes were considered large corporations, meaning they had at least $250 million in assets or $50 million in receipts.
. . . .

And now the Irish economy has tanked.

It seems cutting taxes has not brought about the prosperity forecasted by Bush and the conservatives at Heritage Foundation or American Enterprise Institute. I don't think that was the intent. Reducing taxes and then borrowing the money to support social programs has undermined those programs and the US economy - and that appears to be very deliberate!

Most likely the money coming from the Caribbean Islands to finance US markets and government is money from US citizens who moved their millions or billions offshore in the 80's and 90's. Back in the late-90's. there was an article about one moderate-sized financial company that had improperly/illegally transferred $3.5 billion offshore. (I need to find that article) That was likely the tip of the iceberg - because there are lots of private investment/financial boutiques that have apparently quietly moved money out of the US (so no taxes paid) and then the money is loaned back to the US markets and Treasury. Pretty neat way to undermine an economy - and pretty intentional. I never understood why there was no investigation on the part of the state or federal AG. That's one more symptom that needs to be investigated in the new administration.

Taxes do have to be raised, debt reduced, and government expenditures reduced - or the system will collapse entirely. Loopholes need to be closed.

 

[CaptainQuasar]

And now the Irish economy has tanked.

Forgive me for wanting to tell a joke about the rising price of gold and leprechauns.

⚛​

 

[mheslep]

...Also - Private sector loans, not Fannie or Freddie, triggered crisis
By David Goldstein and Kevin G. Hall | McClatchy Newspapers
http://www.mcclatchydc.com/homepage/story/53802.html

The authors from the McClatchy 'Truth to Power'(their logo) Newspapers are largely mistaken. From that article:

"I don't remember a clarion call that said Fannie and Freddie are a disaster. Loaning to minorities and risky folks is a disaster," said Neil Cavuto of Fox News.

Neil and the McClatchy authors should get out more. As I've posted before:

Greenspan noted, "We have found no reasonable basis for that [GSE]portfolio above very minimum needs." He then proposed "a $100 billion, $200 billion--whatever the number might turn out to be--limit on the size of the aggregate portfolios of those institutions--and the reason I say that is there are certain purposes which I can see in the holding of mortgages which might be helpful in a number of different areas. But $900 billion for Fannie and somewhat less, obviously, for Freddie, I don't see the purpose of it."

Greenspan then articulated his reasons for limiting the GSEs' portfolios: "If [Fannie and Freddie] continue to grow, continue to have the low capital that they have, continue to engage in the dynamic hedging of their portfolios, which they need to do for interest rate risk aversion, they potentially create ever-growing potential systemic risk down the road." He added, "Enabling these institutions to increase in size--and they will, once the crisis, in their judgment, passes--we are placing the total financial system of the future at a substantial risk."

"A second element of the controversy surrounding the GSE portfolios arises from the fact that they are not only large but also potentially subject to significant volatility and financial risk (including credit risk, interest-rate risk, and prepayment risk) and operational risk. Many observers, including the Federal Reserve Board, have expressed concern about the potential danger that these portfolios may pose to the broader financial system; that is, the GSE portfolios may be a source of systemic risk (Greenspan, 2005a). Systemic risk is the risk that disruptions occurring in one firm or financial market may spread to other parts of the financial system, with possibly serious implications for the performance of the broader economy."

and this one is simply false; I've posted the contrary facts before:

...And at the height of the housing boom in 2005 and 2006, Republicans and their party's standard bearer, President Bush, didn't criticize any sort of lending...

And now the Irish economy has tanked.

Relevance? They also drink a lot of Guinness and grew a lot of potatoes.

It seems cutting taxes has not brought about the prosperity forecasted by Bush and the conservatives at Heritage Foundation or American Enterprise Institute

or http://en.wikipedia.org/wiki/Revenue_Act_of_1964" , or ...

 

[russ_watters]

US Trade Deficits
Year $Billion
2003 . 494.81
2004 . 617.31
2005 . 723.69
2006 . 765.27
2007 . 708.55
2008 . 473.90

In the last 3.66 years, the US has accrued $2.67 trillion deficit, and in the last 5.67 years the accrued deficit is nearly $3.8 trillion. That money then is either loaned to the US or finances other economies that compete with the US. Some of it also finances al-Qaida.

http://www.census.gov/foreign-trade/statistics/historical/index.html

Jeez, Astronuc. You keep saying it, but that doesn't make it true. The trade deficit is not any more borrowed than any other money in the economy. Do some friggin research on what the "trade deficit" is if you don't believe us!

Astronuc, seriously - this is a very simple economic principle that you have vastly wrong. You're right that the US borrows a lot of money, but that and the trade deficit are not related.

Here's the wiki on the balance of trade for you to ignore again: http://en.wikipedia.org/wiki/Trade_deficit

You may notice, Astronuc, that none of the links you used to support your position about the trade deficit being tied to the national debt mention the trade deficit.

 

[Art]

Then close those loop holes as both candidates have called for. What about your comment up thread on US companies moving out, followed by the article describing the Irish boom derived from drawing many of them there?

That's not actually what happened. The American companies in Ireland are only subsidiaries. There purpose is to satisfy the demand of European customers and so to save on freight and leadtimes it makes sense for these factories to be placed in a European country. For example one of the biggest single employers is Dell who also have several factories in the US and also in other world geographic markets each supplying only within their area of operation.

I cannot think of a single American company which has actually uprooted and moved to Ireland.

 

[Art]

Jeez, Astronuc. You keep saying it, but that doesn't make it true. The trade deficit is not any more borrowed than any other money in the economy. Do some friggin research on what the "trade deficit" is if you don't believe us!

Astronuc, seriously - this is a very simple economic principle that you have vastly wrong. You're right that the US borrows a lot of money, but that and the trade deficit are not related.

Here's the wiki on the balance of trade for you to ignore again: http://en.wikipedia.org/wiki/Trade_deficit

You may notice, Astronuc, that none of the links you used to support your position about the trade deficit being tied to the national debt mention the trade deficit.

Russ this has been explained to you several times now. If you can't understand the explanations offered here perhaps you should ask somebody at home to explain it to you though it's really quite simple.

 

[jal]

Was the housing market zero-sum?
Was the stock market zero-sum?
Were the transactions cost properly allocated before the financial institutes bundled these subprimes and sold them to others financial institutes?
Are the market corrections due to rebalancing and reflecting the accumulated transactions costs? (Every 5 – 7 years)
=======
http://en.wikipedia.org/wiki/Zero-sum
Economics
Many economic situations are not zero-sum, since valuable goods and services can be created, destroyed, or badly allocated, and any of these will create a net gain or loss. Assuming the counterparties are acting rationally, any commercial exchange is a non-zero-sum activity, because each party must consider the goods s/he is receiving as being at least fractionally more valuable to him/her than the goods he/she is delivering. Economic exchanges must benefit both parties enough above the zero-sum such that each party can overcome his or her transaction costs.
========
Have you all noticed that in the prospectus of a fund they always include a chart that shows … If you had invested $10,000 10 years ago … here is what you would have made
Heheh … Wait for the next set of charts and see if they end up being zero-sum.
Ask yourself where did all the money go? Did it go into transactions costs?
Hehe … My financials advisers were living pretty good on their commissions.
========

 

[OmCheeto]

If you can't understand the explanations offered here perhaps you should ask somebody at home to explain it to you though it's really quite simple.

Or do some independent research and analysis! That's what I do.

I was interested in some of Astro's quoted numbers the other day and came up with a somewhat right wing conclusion.

Astronuc

Most Companies in US Avoid Federal Income Taxes
http://abcnews.go.com/Business/wireStory?id=5561455
1.2 million U.S. companies paid no income tax, the GAO said. Combined, the companies had $2.5 trillion in sales.

I did the math and saw that the average sales for these companies was about $2,000,000.
Now those are sales, and not profits, so the taxable income is lower.

Add to that the following:

About 25 percent of the U.S. corporations not paying corporate taxes were considered large corporations, meaning they had at least $250 million in assets or $50 million in receipts.

This tells me that 75% of the tax evaders had annual profits of much less than $1,000,000.

On to part 3 of my analysis: S Corporations

yes, I got it from wiki...
In general, S Corporations do not pay any income taxes. Instead, the corporation's income or losses are divided among and passed through to its shareholders. The shareholders must then report the income or loss on their own individual income tax returns.

Say you have some mythical friends who run a small successful business. Figure they have about $400,000 in profits a year. Bill owns the company and pays himself $50,000/yr, his wife the accountant $50,000/yr, his son the general manager $30,000/yr, and his employees the balance. So after payroll, the companies profits are zero, and Bill and his wife have tax rates of ~18%.

The corporate tax rate is 35%.

35%? or 18%? You choose.

But who in their right mind would not do what Bill and his family did?
Do we really want close that loophole?
Bill and his family are the US economy!
Not some market traders playing stock vegas.

I'd never thought I'd ever say a loophole was a good thing, but after researching it, this one should stay put.

 

[Astronuc]

Jeez, Astronuc. You keep saying it, but that doesn't make it true. The trade deficit is not any more borrowed than any other money in the economy. Do some friggin research on what the "trade deficit" is if you don't believe us!

Astronuc, seriously - this is a very simple economic principle that you have vastly wrong. You're right that the US borrows a lot of money, but that and the trade deficit are not related.

Here's the wiki on the balance of trade for you to ignore again: http://en.wikipedia.org/wiki/Trade_deficit

You may notice, Astronuc, that none of the links you used to support your position about the trade deficit being tied to the national debt mention the trade deficit.

I did not tie the trade deficit to the national debt. They are not directly related in the sense that one is the cause of the other, but they are related in the sense that they are both symptoms of a fundamentally unsound economy, i.e. they are two examples of what is 'wrong with the economy'. They are also related because part of the capital the leaves the US gets turned around an is 'loaned' back to the US to finance the government debt and commercial debt - and that just means more capital in the form of interest leaving the US.

The US is buying from the rest of world and then borrowing (taking credit). That is ultimately unstable.

I've been doing the research, which is why I've been saying the fundamentals are not strongl and I seem to remember mentioning that the economy could crash - which it just did. So have a lot of others like Paul Krugman, who mentioned in 2003 that the US economy is going off a cliff - which it just did.

Here's a good example of additional things that are wrong with the economy.
http://60minutes.yahoo.com/segment/197/credit_default_swaps

Only about 6% of mortgages are bad. Most of those did not come from Fannie Mae and Freddie Mac. Instead - 84% of bad mortgages originated at private institutions, only one of which was affected by CRA.

Wall Street (Bearn Stearns, Lehman Brothers, AIG, Citigroup, and apparently many others) compounded the problem by issue Credit Default Swaps, which are a kind of insurance (actually they are bets), which were used to cover (induce/entice) other financial institutions to buy the securities backed (collateralized) by the sub-prime mortgages. Now why were they called 'swaps' instead of 'insurance'. Well because swaps are not regulated and insurance is. Insurance requires that adequate capital be maintained to cover potential bad debt or defaults. By using swaps, the various companies did not have to retain sufficient cash/capital to cover the sub-prime mortgages. And the rest is history.

The unregulated markets on Wall Street took a reckless gamble (Jim Grant, the very conservative editor of Grant's Interest Rate Observer calls this 'criminal negligence') and lost big time, thus causing the recent seizing of the credit markets and collapse in the stock markets.

The government bailout is not necessarily a good idea since it simply transfers the bad debt from Wall Street to the government (taxpayers). But how will that debt be paid off? If it is not, and the government debt continues to increase, then it will crash. The higher the debt goes, the greater (more damaging) the crash.


And more or what's wrong:

I'm in luck. David Walker was on Bill Maher last night.

0NM5Q5VDpnA[/youtube][/QUOTE] Th..., according to David Walker. And he's right.

 

[jal]

If you know how to extract info from Federal District Court filings then this should be a gold mine.
http://dockets.justia.com/search?q=LEHMAN+BROTHERS+INC.
Maybe someone knows how the system works.
Who will be first in line to get their money? (I assume from the $850 B rescue fund.)

 

[Astronuc]

If you know how to extract info from Federal District Court filings then this should be a gold mine.
http://dockets.justia.com/search?q=LEHMAN+BROTHERS+INC.
Maybe someone knows how the system works.
Who will be first in line to get their money? (I assume from the $850 B rescue fund.)

Wow! That's a long list against Lehman Bros. Even before they filed for bankruptcy, folks and institutions were lining up lawsuits. I think creditors are first, then bond holders, the preferred stock holders, then those holding common stock. Probably nothing will be left for stock holders.

 

[Astronuc]

Global loss of confidence - Economic Uncertainty Spreads
http://www.nytimes.com/2008/10/11/business/worldbusiness/11ripple.html
By KEITH BRADSHER and CARTER DOUGHERTY

October 11, 2008 - In Korea, exporters are suddenly struggling.

In India, industrial growth has slowed drastically.

In Sweden, Volvo is cutting thousands of jobs.

In Japan, which thought it was immune to the market chaos, a credit squeeze seems to be forcing small companies into bankruptcy.

Around the world, fears of recession have fed a stock market panic, as worries about toxic assets spread from the financial sector to the credit markets and now to the broader economy.

Companies from Germany to Asia are hoarding cash because credit markets are tight. The sheer uncertainty of it all is upending plans for businesses to expand. Consumers have pulled back, just as they received some relief from high oil prices.

Even creditworthy companies cannot get money in Europe. And across Asia, export growth has slowed to a crawl or started declining in real terms — and that was before American retailers announced steep sales declines on Wednesday.

The United States, once the engine of the global economy, is ailing and in no position to inspire confidence, much less point the way around or out of recession. Americans are seen as both the root of the problem, and powerless to solve it.

But no government effort has been able to stanch the bleeding — even the unprecedented coordination of central banks on three continents, which only generates more fear.

The liquidity provided by the European Central Bank seems to be going through a revolving door. After releasing billions of euros into the market, the bank took in a record 102.8 billion euros on Sept. 30 and 64.4 billion euros on Thursday for banks. Instead of lending their spare cash to each other or the rest of the economy, banks have parked it with the central bank at extraordinarily low interest rates.

“No sane banker with good contacts and clients would do this,” Erik Nielsen, chief Europe economist at Goldman Sachs in London, said. “It would be a huge arbitrage profit if they wanted to lend, but they don’t.”
. . . .

The best thing foreign funds can do is pull out of the US - and force the US government from behaving irresponsibly.

As the Economy Sinks, So Do Odds of a Tax Cut (Thursday October 9, 6:15 pm ET)
http://biz.yahoo.com/usnews/081009/09_as_the_economy_sinks_so_do_odds_of_a_tax_cut.htm

One of the riskiest financial moves you make this year could be listening to the presidential candidates--and banking on a tax cut after the November elections.

John McCain and Barack Obama both promise that widespread tax cuts will be one major way they'll revive the economy and help lift consumers' sagging spirits. They differ, of course, on who should enjoy the largesse. McCain wants to cut estate and corporate income taxes, and extend broad-based tax cuts that were enacted earlier this decade. Obama agrees about extending some of those Bush era tax cuts, while offering lots of other relief to people earning less than $250,000 and raising taxes on the wealthy.

. . . .

Reflecting on last week -

Wall Street's 8 brutal days
http://www.washingtonpost.com/wp-dyn/content/article/2007/03/07/AR2007030702502_pf.html
Dow plunges 2,400 points, or 22%, as panicked investors run for the exits.

NEW YORK (CNNMoney.com) -- The Dow ended its worst week ever Friday and capped a staggering eight-session selloff that has seen the blue-chip index fall 2,400 points.

Investors could be in for another rough ride as Citigroup (C, Fortune 500) and Merrill Lynch (MER, Fortune 500) are on tap to report results this week, giving another glimpse into just how deep their losses continue to be. And a slew of economic reports are also due out, including readings on consumer spending and housing.

Much of the Dow's loss occurred over the most recent sessions as the global credit market crisis intensfied. In fact, last week the Dow fell just over 1,874 points, or 18%. The index has lost nearly 22% over the last eight sessions, as panicked investors ditched stocks across the board.

That panic also gripped the global markets, which have seen some brutal selloffs of their own.
. . .

 

[jal]

You might enjoy reading the following blog. It a daily play by play (with comments) of what is happening.
http://theautomaticearth.blogspot.com/2008/10/debt-rattle-october-12-2008-money-is-no.html
Debt Rattle, October 12 2008: Money is no object

 

[Astronuc]

You might enjoy reading the following blog. It a daily play by play (with comments) of what is happening.
http://theautomaticearth.blogspot.com/2008/10/debt-rattle-october-12-2008-money-is-no.html
Debt Rattle, October 12 2008: Money is no object

Form that blog - "Tomorrow is a holiday in North America, and Europe, especially England, may suspend trading. Yeah, that’s a great way to boost confidence." I'd forgotten that tomorrow is a holiday in the US. I have to work.

I wonder if EU/UK will suspend trading. Under normal circumstances, that might help calm the markets. On the other hand, with the global scale and bad news - it might cause further panic so Tuesday will be another bad day - especially if the Asian markets continue down. I imagine that the European governments and markets will watch the Asian markets - and if Asia recovers a little, then perhaps Europe markets will open. If Asia falls, then EU markets may not open. It'll be interesting to see what will happen.

One of my colleagues pointed out that a lot of people could take capital gains losses so this years tax returns will be substantially reduced - which means significant increase in deficit unless government programs are cut.

 

[jal]

Wow! That's a long list against Lehman Bros. Even before they filed for bankruptcy, folks and institutions were lining up lawsuits. I think creditors are first, then bond holders, the preferred stock holders, then those holding common stock. Probably nothing will be left for stock holders.

I don't know what kind of financial arrangements that they had done.
I think that they would want to be considered as depositors since the US will have to guarrantee all deposits.