More Non-Inflationary Prosperity
The headline number for first-quarter gross domestic product has been lifted to 3.5 percent from the so-called advance number of 3.1 percent. Meanwhile, core private-sector GDP (consumption plus business investment) has been lowered from 4.4 percent to 4 percent. In both cases the statistical differences are minor and the economic news remains good. While the 2005 economy is not necessarily bursting at the seams, the outlook remains non-inflationary and bullish. President Bush, the Federal Reserve, the business sector, and the American worker all have a hand in this prosperous cycle.
As for the all-important business sector, strong corporate profits, in particular, signal the health of this economy. Profits on an IRS income-tax basis, as reported in the national income accounts, have moved up to 10.9 percent of GDP -- the highest level since 1968. On an after-tax basis the profit share of GDP is at a post-WWII high of 8.1 percent. After adjusting for the on-again/off-again cash-expensing bonus for depreciation, after-tax profits rose 27 percent (non-annualized) in the first quarter and nearly 37 percent over the past year.
Profits are the hinge of business, and business is the backbone of jobs and the economy. With profits rising to record levels, future economic expansion is assured.
Business equipment expenditures (capex) and consumer spending have both cooled somewhat, but they certainly haven’t gone cold. Capex, after rising 18 percent annualized in the second half of 2004, increased only 5.6 percent in the first quarter, below the consensus estimate of 6.9 percent. Business inventories accumulated about $12 billion less than first estimated. And consumer spending increased only 3.6 percent, following an average 4.6 percent growth-rate in last year’s second half.
While the trade gap has narrowed, raising overall GDP growth, there are actually signs of a somewhat slower economic pace inside the basic economy. Wall Street economist Joe LaVorgna points out, however, that first-quarter wages and salaries were revised up by a huge $163 billion, with the measure growing 7.5 percent over the year-ago pace. That explains double-digit federal tax-collection returns: Lower tax-rates have expanded incomes, which are in turn throwing off more revenues. This, of course, is the Laffer-curve effect.
Core inflation is still tame, rising at 1.6 percent over the past year, about the same as the second half of last year and actually slower than in 2002. The gold price, at $418, is consistent with less-than 2 percent underlying inflation. So is the 10-year Treasury yield of 4.09 percent and a yield curve that has flattened to just over 100 basis points.
The Federal Reserve has restrained inflation expectations, and as a result long rates have descended even while short rates have moved higher. That’s a nice piece of work. Along with rising jobs and incomes, low mortgage rates will sustain the strong expansion in housing investment.
Meanwhile, the strengthening dollar, along with softer commodity prices, also suggests a benign outlook for future inflation. It looks like Fed restraining moves have broken the fever of commodity speculation, which probably means real estate prices will begin cooling soon.
The 91-day Treasury bill is currently yielding 2.93 percent on a coupon-equivalent basis. This is below the 3 percent fed funds target rate, and suggests the central bank could hold steady. However, the Fed is likely to raise its target once more by 25 basis points to 3.25 percent. The 10-year Treasury could dip below 4 percent, but at least the yield curve would remain positive. All this suggests a somewhat slower economy in the year ahead, but no real damage and certainly no recession.
Actually, we are looking at non-inflationary prosperity for several more years to come. This is a good stock market scenario where the broad indices still look to be 20 to 25 percent undervalued. In policy terms the Fed has done its job by restraining inflation and President Bush’s supply-side tax cuts have reignited economic growth. The results are unmistakably positive.
As for the all-important business sector, strong corporate profits, in particular, signal the health of this economy. Profits on an IRS income-tax basis, as reported in the national income accounts, have moved up to 10.9 percent of GDP -- the highest level since 1968. On an after-tax basis the profit share of GDP is at a post-WWII high of 8.1 percent. After adjusting for the on-again/off-again cash-expensing bonus for depreciation, after-tax profits rose 27 percent (non-annualized) in the first quarter and nearly 37 percent over the past year.
Profits are the hinge of business, and business is the backbone of jobs and the economy. With profits rising to record levels, future economic expansion is assured.
Business equipment expenditures (capex) and consumer spending have both cooled somewhat, but they certainly haven’t gone cold. Capex, after rising 18 percent annualized in the second half of 2004, increased only 5.6 percent in the first quarter, below the consensus estimate of 6.9 percent. Business inventories accumulated about $12 billion less than first estimated. And consumer spending increased only 3.6 percent, following an average 4.6 percent growth-rate in last year’s second half.
While the trade gap has narrowed, raising overall GDP growth, there are actually signs of a somewhat slower economic pace inside the basic economy. Wall Street economist Joe LaVorgna points out, however, that first-quarter wages and salaries were revised up by a huge $163 billion, with the measure growing 7.5 percent over the year-ago pace. That explains double-digit federal tax-collection returns: Lower tax-rates have expanded incomes, which are in turn throwing off more revenues. This, of course, is the Laffer-curve effect.
Core inflation is still tame, rising at 1.6 percent over the past year, about the same as the second half of last year and actually slower than in 2002. The gold price, at $418, is consistent with less-than 2 percent underlying inflation. So is the 10-year Treasury yield of 4.09 percent and a yield curve that has flattened to just over 100 basis points.
The Federal Reserve has restrained inflation expectations, and as a result long rates have descended even while short rates have moved higher. That’s a nice piece of work. Along with rising jobs and incomes, low mortgage rates will sustain the strong expansion in housing investment.
Meanwhile, the strengthening dollar, along with softer commodity prices, also suggests a benign outlook for future inflation. It looks like Fed restraining moves have broken the fever of commodity speculation, which probably means real estate prices will begin cooling soon.
The 91-day Treasury bill is currently yielding 2.93 percent on a coupon-equivalent basis. This is below the 3 percent fed funds target rate, and suggests the central bank could hold steady. However, the Fed is likely to raise its target once more by 25 basis points to 3.25 percent. The 10-year Treasury could dip below 4 percent, but at least the yield curve would remain positive. All this suggests a somewhat slower economy in the year ahead, but no real damage and certainly no recession.
Actually, we are looking at non-inflationary prosperity for several more years to come. This is a good stock market scenario where the broad indices still look to be 20 to 25 percent undervalued. In policy terms the Fed has done its job by restraining inflation and President Bush’s supply-side tax cuts have reignited economic growth. The results are unmistakably positive.
posted by Money Politic$ at 8:37 PM
184 Comments:
You're absolutely correct, and the last time the Fed went too far I believe inflation at that time as something like 1.9%. Certainly nothing to fret about, but it didn't stop them then, and it won't stop them now.
"Look for one low and away...but be ready for another one in your ear." - Shoeless Joe Jackson to Moonlight Graham in Field of Dreams.
Uncle Jack
Cash is king when the Fed goes too far...
I think not.
http://www.financialsense.com/fsu/editorials/willie/2005/0526.html
this isn't a boom, it's a major bust waiting to happen.
Let me present a counter-vailing argument. The Fed goes to 4% and nobody notices. There is plenty of cash for small-businesses, and it doesn't seem likely that a move to 4% would change that. A 4% fed rate would have very little effect on mortgage rates. Ditto: Credit card rates and auto financing.
You see, we're still talking about 4%. That's not very high. AND, there's a lot of good stuff happening. We survived the oil spike. Now energy prices appear to be moderating. The deficit IS coming down. We are not overtaxed. The world loves our debt, and can't get enough of it. That doesn't seem like it will change. Although there will be some ebb and flow in relation to Trade, world trade is in good shape and commerce is robust. The stock market is reasonably priced ( if not under-priced,) thus unlikely to Crash. The housing market is hot, but a hot housing market cooling down has never, by itself, caused a recession. There's not (once you take out a moderating energy sector and housing) any real inflation to speak of. Wages are growing moderately but steadily.
I don't think 4% will do it. I think we might be good until, oh, 2009. Just a thought.
Think about this. We have just come through the front end of a paradigm shift (internet technology.) Paradigm shifts are dangerous times. They are usually attended by wild Speculation, leading to Stock Market Crashes. Dislocations in the labor market ( leading to longer than usual terms of unemployment as people have to make the transition to new areas of employment) are next. Whole sectors of the economy are rocked as new technologies make old technologies obsolete.
Governments make Gargantuan mistakes. The first impulse is to enact large Social Programs and pass protectionist tariffs. This time the government did not make many of these mistakes. As a result, we got through with only a short recession and a period of slow job growth.
Now, job growth is picking up as people transition into better jobs. The fact that the country was pre-occupied with the War on Terror was probably a positive. Trade is flowing. The new technology is making people much more productive. We're probably looking at a 4.5% unemployment rate in a year or two; and these people will be adding high value from their work.
I think we're in for a quite long period of very prosperous growth. At least I hope so.
(As a result, we got through with only a short recession and a period of slow job growth.)
no, we got massive debt growth and people higly leveraged to a housing bubble. this ain't over yet.
There's not (once you take out a moderating energy sector and housing) any real inflation to speak of. Wages are growing moderately but steadily.
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rufus
i dont know about you. but me and my family eat, gas up our car and pay our energy bills. prices are going up everywhere.
ACTUALLY, IF YOU TAKE OUT EVERYTHING, INFLATION WOULD BE ZERO.
every other central bank in the world recognized there is inflation exvcept ours...the real story is the parabolic rise in the housing sector.
"....The Federal Reserve has restrained inflation expectations, and as a result long rates have descended even while short rates have moved higher. That’s a nice piece of work....."
please , please, please, please ...!
you gotta stop criticizing the Fed and then later say they are doing a good job. Your "flip-flopping " on the performance of the Fed reminds me of a recent bad presidential candidate .
Myabe the Fed sees the forest from the trees a little better than you do ?
My offer still stands.
1 trillion dollar annual deficit during the next recession.
I HOPE WE HAVE A REPUBLICAN PRESIDENT SO HE CAN "EXPLAIN" WHY WE HAVE SUCH HUGE DEFICITS.
KTS - Did you just come up with that number or have you actually got something behind it? Because, if you have just "THUNK IT" then why stop at 1 Trillion and not go for more?
Johnnie; The ECB is still sitting on a 2% rate. What does that tell you about their perception of inflation?
oh yeah and in terms of controlling spending in order to keep the defecit in check.. the pres yeserday decided to write a check for 50M to the new palestinian gov.
My point is you just cant blame Congress and the Dems for defecits. Blame is everywhere.
and just to keep it real -- the 50M is 50 THOUSAND BASIS POINTS more than the 100K that the tiger woods foundation received from the budget that so many of you were upset with .
But Stix we are helping people, making the world a better place.
That explains double-digit federal tax-collection returns: Lower tax-rates have expanded incomes, which are in turn throwing off more revenues. This, of course, is the Laffer-curve effect.
So we have a 3.5% growth in GDP, and Larry attributes this to lower tax rates?
Well GDP last year was $11.735 trillion. The deficit (the real one, including the use of trust fund surpluses) was $605 billion. According to my calcs, that means we ran a deficit of 5.16% of GDP.
Other than interest on our debt that went to foreign countries like China (perhaps not an inconsequential amount), most of that deficit went to buy goods and services in this country. Some was direct government purchases (like supplies for the military) and some was indirect (payrolls, Soc Sec, etc.) that still went into the economy.
So we take on debt at over 5% of GDP, and we get growth of 3.5%. If I get that kind of ROI on my mutual funds, I'd be pretty pissed off.
I'll accept the Laffer Curve explanation the day I see it function without the economic stimulus of new massive debts, but it didn't work under Reagan, and it ain't workin' now.
CMAYE -- you are right ...thats the intent amke the world a better place. Unfortunately, it costs our government cash money--thats why we cant cut taxes every year all the time.
i laugh when the same "wasteful spending " folks called spending on nuclear energy research "wasteful" years ago but now are the same people who suport building nuclear power plants.
its why supply -side tax cuts dont work over the long-term -- government just cannot control spending.
Apparently income was up, consumer spending was down and inflation was tame (so we got more bang for our buck). Well, when there is more income and less spending, normal people call that SAVING. But not the government, their measure of saving went down. When will the folks who decry the lack of savings in this country (Stephen Roach call your office) figure out that the savings rate is understated because Americans do things like invest in stock and bonds and pay down mortgage debt? Fixed income is mostly back from the wilderness after yielding squat since 2001. People are putting more money into yield oriented investments, which is a welcome move away from the overinvestment in real estate. This is process of derisking the economy to a housing pullback.
On another note, Lifelong, you are incoherent on the Laffer effect. Debt doesn't fuel the Laffer effect. Debt (most consumer debt is mortgage debt) REDUCES people's taxable income. How can this create higher tax receipts? The Laffer effect works off of the marginal rate of taxation and it DID work under Reagan and under Kennedy. It is working today under Bush...and in India, Russia, Slovakia, Latvia...and has been the reason Ireland has the highest GDP per capita in Europe.
One day when I have a month or so of spare time (ha! yeah right), I'll sit down with a copy of the federal budget and a red pen, and cut it to conform to Adam Smith's views on government spending. Namely, the only things government should spend money on are national defense, justice, infrastructure, education and the 'dignity of the sovereign' (link here, under the heading "A role for government").
What I suspect you'll find is that the US government does a huge number of unneccessary and expensive things, but this is not by accident. This is the end result of 222 years of politicians and special interest groups looking at our nation's GDP and saying, "I deserve a bigger slice of that pie!"
Call me an idealist, but I truly believe that government doesn't have to be inefficient. It just needs a group of politically isolated accountants holding the purse strings, with strict veto power over fiscal legislature and an affinity for telling people "NO, you may not have any more money".
The reason we have so few accountants in Congress (do we have any at all? I didn't check) is because you can't get elected by telling the average American about balance sheets and income statements. That average voter doesn't care about abstract things like "deficits" or "national debt" or "long term inflation curves". They hear that the government took in X trillion dollars last year, and they want some of that money NOW. I'm not describing a uniquely American trait--check Europe for an example of what happens when those voters get their hands on more of the government pie.
Having said that. . . under our current system, we'll be running on debt for as far as the eye can see. The populace as a whole does not have a notion of national savings; if there's money, someone wants it NOW, and that someone will try to generate political pressure to get it. If it would cause problems down the road, they shrug and say it's Someone Else's Problem. That's what the national debt has become; an SEP that may make your constituents frown, but they want money NOW more than they want you to fix an SEP.
Seriously, could you imagine the uproar that would happen if the government were completely out of debt, and actually had a small bank account with some cash in it? The liberals would go nuts! They'd scream and demand more socialist programs, or they'd point to point to the liberal's "unfortunate disadvantaged group" of the week and demand that we alleviate their suffering.
It may sound silly, but I believe the only thing that's keeping the current crop of Congressional idiots from spending away even more of the GDP is the fact that so many people have recently become concerned about deficits. I think there's a budgetary equilibrim Congress can swing between: at one extreme, they can just break even; on the other, they can run a slight deficit. Anything outside those levels, and they get punished. If they run too large a deficit, people realize it's a problem; but if they actually run a surplus, the special interest groups will start and uproar, saying "Why is Program X sadly underfunded, when we have billions in the bank?!?"
. . . After reading through all that, I realize I've been ranting a bit and lost my train of thought. I guess my fatalistic bottom line is: national debt isn't going anywhere. Deficits aren't going anywhere. You'd need a huge political paradigm shift to get rid of them, and I don't think that's feasible under our current system.
[Core inflation is still tame, rising at 1.6 percent over the past year, about the same as the second half of last year and actually slower than in 2002. The gold price, at $418, is consistent with less-than 2 percent underlying inflation. So is the 10-year Treasury yield of 4.09 percent and a yield curve that has flattened to just over 100 basis points.]
That's a lot of kool-aid.
(I'll accept the Laffer Curve explanation the day I see it function without the economic stimulus of new massive debts, but it didn't work under Reagan, and it ain't workin' now.)
amen.
tim --
you are right ..that is a pretty weak argument.
Why do Liberals hate the United States and are insistant on pushing policies that crimple and demolish countries (Germany, France et al)??? Why does Germany have 10% unemployment? Liberal politics...Why does France's GDP growth near 0%? Liberal politics...
DonNYCUSA said... On another note, Lifelong, you are incoherent on the Laffer effect. Debt doesn't fuel the Laffer effect. Debt (most consumer debt is mortgage debt) REDUCES people's taxable income. How can this create higher tax receipts?
Uh, hello? It's FEDERAL debt, not personal debt (hence the GDP FEDERAL budget deficit numbers). That's $600 billion of new FEDERAL debt.
That new FEDERAL debt went to companies and individuals, and was spent to produce goods and services (the kind of stuff measured by GDP). So companies received MORE money that showed up from MORE new government debt. Since they made more, even though the government went deeper into debt to pay them, they paid more taxes. But the increase in the amount of taxes was nowhere close to the amount of new debt taken on by the government.
Get it?
DonNYCUSA said... The Laffer effect works off of the marginal rate of taxation and it DID work under Reagan and under Kennedy.
Take a look here for the fed funds receipts and surplus/deficit:
http://www.taxpolicycenter.org/TaxFacts/TFDB/TFTemplate.cfm?Docid=201
Under Kennedy, I see annual deficits rising faster than receipts. Under Reagan, '83 was horrible , '84 was good (didn't he raise taxes the year before to pull back on the size of the initial tax cut?), '85-'86 had a bit more deficit than receipts, '87 was a good year (wasn't that right around the bio-tech bubble?), '88 had more deficit than receipts, and '89 was decent. Hardly a stellar record.
And just in case you're one of those people who believe that Clinton's numbers were so good because of Reagan's groundwork, '90-'94 were horrendous. Yet for some reason, after a Bush I tax hike and a Clinton tax hike, the picture improved through the rest of the 90s.
Now before you scream that I want to tax the hell out of everybody, all I'm saying is that over the long haul, taxes and spending must be somewhere close.
Today, we're so far from close that I can't even imagine how to significantly narrow the gap without a tax hike. There just isn't $600 billion of fat in the budget that people are willing to cut. And don't forget to add in the future cost of Iraq (which we're not paying for), a Medicaire plan passed with NO thought of funding, and a Social Security Trust Fund that's nothing but IOUs that will come due.
There is no honest accounting that can show us pulling out of this without a tax hike, Laffer Curve be damned.
Lifelong-
You are still off base when you refer to FEDERAL debt as opposed to consumer debt. The Kennedy tax cuts brought in torrents of tax receipts to the point that the federal gov't ran a $3 billion surplus by the middle of 1965, before the escalation of Vietnam war spending brought us huge deficits.
Reagan's tax cuts (ERTA or Kemp-Roth) began in 1981 and were fully phased in by 1983. Federal revenue went from declining at a rate of 2.6% pre cuts to increasing at a rate of 2.7% post tax cuts. Capital gains receipts were even more impressive. The Reagan era deficits peaked in 1992 after hearty Cold War spending that was most robust in Reagan second term.
The bottom line is that deficit spending does not yield higher tax receipts, but that higher tax receipts yields higher spending capacity for politicians and we all know that it is a sure bet they'll take it. Both Kennedy and Reagan's tax cuts restored the federal revenue flow that eventually led to deficits. Now is no different, GWB has restored the flow of tax receipts and it will be overspent and we will have much larger deficits than we have now in the near future.
Lifelong-
So, the Laffer Curve does work, but we've known this for centuries.
Ibn Khaldun, a 14th century Muslim philosopher, wrote in his work The Muqaddimah: "It should be known that at the beginning of the dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty, taxation yields a small revenue from large assessments."
Have a great day.
only a republican would call a country with no savings and running trillion dollar deficits yearly a prosperous one.
JL; Do you EVER think about what you're typing, BEFORE you type it??
The Kennedy tax cuts brought in torrents of tax receipts to the point that the federal gov't ran a $3 billion surplus by the middle of 1965, before the escalation of Vietnam war spending brought us huge deficits.
First, we only ran a surplus IF you count the trust fund. This is the same dishonest accounting being used today by GW to say that we have a deficit of ONLY $412 billion. So again, no benefit without deficit spending.
When I look at the data (without trust fund surpluses), I see a cumulative rise of $38 billion in revenue in '61 thorugh '66 (with the big Vietnam spending you rightly mention showing up in '67). I also see $36 billion in total deficits during that same time period. That's pretty much a wash, though revenue made out a little better. I'll admit, though, it's better than the current situation, but still not very good ROI, especially since we've been paying interest on the $35 billion ever since. How many billions do those payments add up to? I guess that makes our ROI negative again.
So, the Laffer Curve does work, but we've known this for centuries.
You sound like one of those Atkins people to me. If too many carbs are bad, then virtually no carbs must be great! (Simply replace "carbs" with "taxes".) Just because a 50% tax rate is bad does not make a 5% tax rate good.
How about a 17% flat tax, that should work.
All academics here....repeat after me.
THIS COUNTRY WILL NEVER SUPPORT A FLAT TAX.
PERIOD.
All academics repeat after me;
Toot Squat finally got one right. This country never will support a Flat Tax.
Longtime-
Have you ever seen the Laffer Curve? If you had, you wouldn't have possibly made that Atkins analogy. The curve says nothing of the sort. It very clearly shows that there is a level where taxes are too low and a level where taxes are too high. It is quite common to misconstrue the Laffer Curve because people only ever talk about the top part of the curve. To me that is a result of the fact that taxes are always too high rather than ever being too low, so the the bottom half of the curve is largely irrelevant to people who are governed by politicians.
You absolutely cannot claim that deficit spending simply flows through to tax receipts. It doesn't work that way. We have plenty of counter examples in our history of deficit spending and declining tax receipts. That spending can be shielded from taxable income and/or driven into underground economic activity. People can make choices on whether to transact, when to transact and where to transact. These choices are what determine tax receipts, not how much government spending goes on.
Nice chatting. Everybody enjoy the long weekend.
Just because a 50% tax rate is bad does not make a 5% tax rate good.
Actually, a 5% tax rate would be great, if we could get huge spending cuts passed along with the tax cuts.
Note that the Laffer curve is a function of tax rates and revenue, while defecits are a function of revenue spending. The curve may be working, but the levels of government spending are keeping us in defecits even as revenues rise. Defecits don't indicate a problem with the Laffer curve, it indicates a problem with government spending.
I agree with LFC, the new debt is financing the bloated spending and that needs to stop. (The Social Security surplus also needs to stop funding government spending, which is the point of private accounts, but that's an argument for another post.)
let's not forget the national debt went up 200% under reagan.
(JL; Do you EVER think about what you're typing, BEFORE you type it?? )
so explain how america is properous when it's collectively in debt more than ever in the last 100 years? it's gliding a long only on a massive amount of debt creation.
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look at that, savings goes down and debt goes up! looks like prosperity to...nobody.
http://www.kitco.com/images/commmentary/Wright/Zeal052705A.gif
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If the Chinese currency is allowed to float, then the US economy may actually become even stronger.
A floating Chinese Yuan would decelerate economic growth in China, thereby dampening Chinese demand for oil. Lower Chinese demand for oil will reduce global oil prices considerably. $30 oil, or even $20 oil, is not out of the question.
Such a drop in oil prices would not only accelerate US consumer demand, but it would also boost business profits and capital spending. The result? A significant boost to US GDP growth and to US equities.
Don't look a gift horse in the mouth, when it comes to the Chinese revaluation.
Further on China ...
In the long run, the Chinese economy is also better off with a floating currency. The only way for them to avoid a "tiger-like" deflationary spiral is for them to operate consistently on a floating currency basis.
Indeed, the cause of those deflationary spirals, in my view, was not the floating of the currencies. Rather it was the floating of those currencies AFTER A LONG PERIOD OF ARTIFICIALLY MAINTAINING A FIXED EXCHANGE RATE.
A fixed exchange rate causes imbalances to build, and those imbalances evetually find a way of causing problems. The longer any particular nation operates on a fixed exchange system, the greater those imbalances will be and the greater will be the disruption that inevitably follows.
Therefore, it is in everyone's best interest for China to start operating on a floating currency basis. The markets will alleviate any imbalances that have been built up under the fixed rate exchange policy.
Larry's concerned about the protectionist policies that led to World War 2. He likens them today's policies on China. There may be some similarities, but there are many differences as well.
The geo-political situation in the world is very different today than it was in the 1920's & 1930's. At that time, there weren't any super-powers, and waging global war took considerably more effort than it does today.
In addition, the global economy is far more inter-twined today than it was at that time. The Chinese may not be happy with the short term disruptions caused by a floating currency, but they will still realize that they need to sell to our markets.
Last time I checked, launching a military attack against your key customers was not winning business strategy!
The Bush Administration is correct in taking a hard line on China at this point in time. For too long, they have had an unfair trading advantage based on the fixed exchange rate. Furthermore, they have been robbing us of our intellectual property.
I think that we are looking at one heck of a bull market for the remainder of this Bush Administration.
The pieces are falling into place ...
1. Floating Yuan = Major Drop in Oil Prices = Major Boost to US Consumer Demand & US Capital Spending.
2. Greenspan stops hiking rates & drops the "measured" language, signalling a 2-3 year period of neutral rates. This should occur soon, because yield curve is getting too flat for comfort.
3. These two factors alone will provide a HUGE stimulous to the US economy, but there may also be some "fiscal improvements" that come from this Congress.
In short, put on your Pampalona Pants and get ready to run with the Bulls!!! We are looking at a major bull run over the next 2-3 years. It will be a great period in US economic history, which will also allow the Bushies to go out in style.
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They are clearing some prison space for Tom Delay in Houston.
The recent court decision bodes bad for DeLay.
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Jglex: Loved your thoughts on China. Well thought out, excellently written, and Spot-on. The absolute truth on the "Tigers."
I also agree with your thoughts on the economy and the "Market." I think Greenspan might go a bit farther than you're expecting, but if he stops at 4% or less we'll "Rock and Roll."
I think the "Deficit Hawks" will be mightily surprised by the increased tax collections over the next couple of years. Even the "America Haters" like KTS will have to give up and start talking about something else in another year or so. "KORAN ABUSE MY @$$!!"
In my humble opinion, the valuation gap is more like 35%--not 20-25%. That's based on the 10-year T note yield divided by the earnings yield of the S&P 500. And I say the gap begins to close in Q4, with 2/3 of the action coming from higher stock prices and 1/3 coming from lower bond prices (higher yield).
That's DJIA 12500-13000 for starters. Add on strong earnings gains over the next 3 years and you are looking at an equity bonanza--back up the truck.
For those of you whose glass is half-empty and those of you who are ducking falling pieces of sky (you malaisecrats know who you are), may I suggest a concrete bomb shelter and a 5 year supply of Spam.
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I might also suggest that the investor friendly economic landscape that Larry has so accurately described will not likely get screwed up by AG--he is out in 7 months--his clock hath stoppeth over, he's now working on his last and final ticks.
This also means success at the polls in '06 & '08 for us Repubs.
Life is good.......
jiglex--
give your name and number to larry -so he can put you on his tv program..you can be the chief economic commentator from the respected Talon news.
by the way be sure to call up the premier of china and tell him you want the currency floated --im sure noone has asked him to do that.
Gentlemen...the Laffer Curve says NOTHING about budget deficits. Absolutely N.O.T.H.I.N.G. That's zero, nada, zilch, "0".
The Laffer Curve only addresses the optimal tax rate at which resulting tax receipts are maximized--tax too much and tax receipts go down, tax too little and you forfiet tax receipts. Bottom line--optimal tax rate incentives generate optimal tax receipts.
Deficits are an entirely different matter and include entirely different and unrelated variables--like spending. To state that when tax receipts did "X" and as a result deficits did "Y" brings a new and higher meaning to "apples and oranges." You may as well realte the two to the latest hypothetical du jour regarding global warming.
If this doesn't explain the Laffer Curve, then please get an assist from your local Little League coach. What I saw posted here is simply the intermediate stages of--you know--that mental thing---dementiaphrenzia backasswardness a-la cuckooracha.
http://www.investopedia.com/terms/l/laffercurve.asp
The biggest problem with discussing tax policy (raising and lowering taxes) is the question of "TIME." Common sense tells you that the full ramifications of a significant raising or lowering of the tax rate won't be felt immediately. Indeed, in the case of the lowering of tax rates, it could be "Several" years (at least) before the total results are tabulated.
Of course, there will be an immediate "pop" as people have more money to spend; but that would only be a small percent of the total long-term benefit. However, for that long-term benefit to be realized a lot of things have to happen. Although businesses that are consumer-related start becoming more profitable, immediately; they typically want wait a while, before they start making more investments, to make sure it's not just a temporary phenomenom.
Then, as they become convinced that business has, in reality, reached a higher plateau, they start "PLANNING" for expansion. After a certain amount of time spent planning, they will start to spend. This will typically entail buying Real Estate, Construction, Equipment, telecom, IT, etc. It's only after all this that a lot of the new hiring takes place.
It's also at this stage that the Equipment manufacturers, Construction company, IT, and Telecom companies, etc. start "PLANNING." And here we go again. It all continues to feed through the economy, more people are hired, wages (eventually) start to rise. This complete process could easily take 5 to 10 years.
What usually happens is that somewhere during this process there is a change of tax policy. An election is often an intervening event. This is made even more likely by the fact that it is almost a dead certainty that a significant tax cut WILL lead to less tax revenues for a period of at least 2 or 3 years (maybe more.)
Add to this the fact that even the most ardent supporter of Laffer "Theory" would have to admit that "All" tax cuts do not lead to more revenue. For example, it would be unlikely that cutting the top rate from 39% to 1% would lead to more revenue. Nor does it seem likely that changing the bottom rate from 15% to 13% would raise more money for the government coffers.
The whole thing depends on where you are on the curve; and of course there are a thousand other moving parts in this equation. Maybe, some day, a long, long, time from now a "Genius" Economist will be able to study this in a detached, apolitical way; and make a dispassioned model of how taxes "really" work.
Until then, It looks a lot more like Art than Science. Or as old Justice What's his name said, " I don't know what it is, but I know it when I see it."
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More like Laugher Curve.
Rufus,
How can Greenspan go further than 4%, or even up to 4% for that matter, when the 10 year is at 4.07%.
The yield curve is already too flat for comfort, and it is starting to invert in the short maturities. For example, the 3 month T-Bill, at 2.95%, is currently yielding less than the 3% target Fed Funds rate.
Jlglex; Good Question. Looks like a "Conundrum."
Jlglex; Alan Greenspan is purported to watch the PCE core deflator; however, those people that have tried to chart his actions state that his actions correlate more closely to the raw CPI. I don't think that he thinks there is a chance in Hades that the 10 yr will still be at 4.10% when he gets the Fed Funds to 3.75%.
The problem is he didn't think there was a chance in Hades that we'd be at 4.07%, today. I'm sure AG would give up his first-born and his fortune, if necessary, to guarantee no inflation on Jan 31, 2006. What's a poor Fed-Head to do? I think he goes to 4.0%. I also don't think it makes a difference. Too much other "Good Stuff" going on.
Remember, we might be looking at a pretty flat yield curve, BUT, it's an ungodly LOW, pretty flat yield curve.
Red, Laffer proponents already know that all tax cuts don't lead to tax revenue increases BECAUSE IT IS VERY CLEAR THAT SUCH A REDICULOUS NOTION IS COMPLETELY CONTRARY TO WHAT THE LAFFER CURVE IS ALL ABOUT. According to the LC, which is increasingly supported by a growing body of emperical evidence (including common sense), the further you get away from the OPTIMAL tax rate (which maximizes tax receipts), either too high or too low, your tax receipts will SHRINK. Tax receipts will shrink on either side of the optimal rate. Tax too much and you kill incentives thereby causing tax receipts to decline. Tax too little and you simply forefeit (shrink) tax receipts . Tax just at the right rate (it may take a decade to find the right rate) and you maximize you tax receipts.
Good grief guys...its explained all over the internet!
Red, let's make a bet. I say the yield on the 10-year T note cracks BELOW 4.0% on AG's next 1/4 hike...We a'ready came within a hair a few days back.
That plus continued commodity weakness and gold's swoon will be enough to remove his foot from the brakes. He will not invert the YC on his way out seven months from now.
The point I was trying to make CG is that identifying "point T" (the point at which tax rates are maximized) is made very difficult by the fact that it takes a long time for the full effects of a tax cut (or tax hike) to be realized. Almost, always, some other action will be taken before the final results are seen. This muddies the water as to what was or wasn't attributable to what action.
Make no mistake, I think the Bush Tax Cuts were vitally important, if for no other reason than the Psychological lift they gave the economy. I, also, DO believe that the 39% tax rate was somewhere to the right of "point T." I just don't know how, at this time, to Prove it. As to how far; that would be even more difficult to prove.
We're the party of Faith. I guess we'll just have to "Have Faith."
We may never find the OPTIMAL TAX RATE. By the time you think you are finally there, circumstances (like monetary policy, the cost of capital and the globalization process) will change enough to alter the optimal tax point either higher or lower--it will always be a moving target. But that should not discourage us to try to get there. And at the rate our deficit now appears to be shrinking thanks to a bonanza in tax receipts--in spite of excessive spending--the tax rate optimal point appears to be lower rather than higher.
If you really want a lesson in how affective the tax cuts have been, just check those BODACIOUS all-time record NIPA adjusted corporate profits (these are income tax/IRS numbers that are very clean) that Larry has been talking about--a major source of the booming tax receipts. I'll post a picture.
No Bet, CG. Predicting short-term movements (heck, any movements) of Bond Yields is WAY ABOVE my pay grade. There's way too many moving parts there for my little pea-brain. There are two competing ways here of looking at the universe, and I have no clue which one will win out, tomorrow. BUT:
Here's the way I see, AG. I liken him to a man that just discovered a baby "Rattler" on his back porch. The "common sense" part of the brain tells him that it's not dangerous. He could put it in a sack and take it out into the desert where it can grow up and not hurt anyone.
HOWEVER, that part of the brain that controls "Fight or Flight" responses say KILL THAT LITTLE BUGGER!! It could grow up and kill someone; maybe me or one of mine. I think the common sense part of his brain sees the present inflation and says, "It's a transitory thing, caused by a Huge spike in energy prices, and it will abate as the spike works it's way through the economy.
However, the "Flight or Fight" part of his brain sees the present inflation and says, " I GOTTA KILL THAT THING!!" " It could be dangerous if I let it live and become embedded."
Is he right? Heck, I don't know. I would love to see him stop at 3.75%, or even 3.50%; but, if the econmy is strong ( over 3.00% GDP,) and the CPI is over three percent, I think he'll keep going (yield curve be damned.)
And here's the crux. I believe the GDP will be close to 4.00%, and the headline CPI WILL be over 3.00%. SO, to me, it looks a lot like four or more. I hope I'm wrong as much as you do.
Here is a picture of how lower tax rates can generate a larger profit base from which to obtain larger tax receipts. Today, corporate profits (IRS based NIPA data) are a full 48% higher than at their prior peak in mid-1997. That's $1,326 billion versus $896 billion.
This data should also make it pretty clear why stocks are undervalued versus bonds by some 35%--we got some catching up to do. The last time we saw anthing like today's equity valuation levels was back in 1979-1980.
http://research.stlouisfed.org/fred2/series/CPROFIT/109/10yrs
Tax receipts have begun to skyrocket; just check the slope of that curve in recent quarters--it looks like a rocket launch.
The LAFFER CURVE; working overtime for America!
http://research.stlouisfed.org/fred2/series/FGRECPT/107/10yrs
CG; That is a REALLY INTERESTING piece of data. I think most of us would have assumed (I know I would have) that Corporate Profits probably peaked in 99' or at the earliest 98'. Maybe, even 1q 2000. The idea of Stock Prices Rocketing Higher for almost 3 years as Corporate Profits are declining is really quite extraordinary.
CG; As I stated in an earlier post; I think that's what the deficit-hawk crowd is missing. They don't understand the sheer mega-explosiveness of the American Economy when it gets in gear and running on all cylinders. Our capacity for quantum jumps in Tax Revenues when things come together, is something the likes of which, the world has never seen.
That is one reason I'm a little more sanguine about the Fed than some. We have come through the front end of a Paradigm-shift in productivity. We're now into the early-middle. This period should see steady, accelerating employment growth, and a steady rise in ALL wages. This is going to drive the "HATE AMERICA" crowd crazy. Soon, EVEN THEY won't even be able to deny "plausibly" (they'll still deny it) the "TRUTH."
The deficit numbers next year could shock the "HOLY HADES" out of some Democrats.
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That's precisely why we had the CLINTON MARKET CRASH. Corporate profits were heading south for over 2 years and interest rates were being jacked up. Meanwhile, Pantload was selling America on "the best economy in 150 years." The valuation model that I refer to (the 10 year T yield divided by the forward S&P earnings yield) indicated that in late-1999/early-2000 that stocks were then at an all time record overvaluation to bonds by some 60%!
The very same historically accurate methodology says stocks are at a huge 35% undervaluation today, suggesting a fair value for today's DJIA (with today's 10 year T yield) is over 14000. And as we rebound to normal valuation levels as we always do, just remember that in a bull market its very common for stocks to over-reach by 10-20%. Come September/October, back that truck up, get a bigger glass and leverage until your ass falls off!
Thanks to stronger productivity gains that should average 2.5% or a shade better in the future (at least 0.5-1.0% higher than history), combined with 1% pop. growth, the non-inflatioinary speed limit of our economic growth is now about 3.5%, some 0.5% to 1.0% higher than previously thought. This means lower inflation and interest rates (higher P/E ratios) in the future and booming corporate profits that will generate booming tax receipts that will eat the deficit alive over the next 10 years...Get ready to back that truck up! Its coming.
This brings me to the "Main" reason I'm not as worried about the Fed as some people are. Usually, a tightening yield curve is the result of the Fed raising short-term rates to a high level (6% or more) to choke off inflation, pop a "Bubble," or "what-ever."
This results in Small businesses being priced out of the Credit Market. In this instance the Fed would be raising interest rates to a level that is still commensurate with small businesses being willing and ABLE to borrow. Worthwhile expansions will still be made. Employment will continue to grow.
Again, I wish the Fed would stop at 3.25 or 3.50 and look around for a month or two; but I don't think it will be a Killer if they don't.
Wow, more crooks bite the dust...They just cleaned house at Amerindo Partners. Alberto Vilar, with personal wealth at nearly a $ billion, arrested for stealing client money and his partner and co-founder, Gary Tanaka, now in a London jail without bail--stealing from Amerindo clients and buying race horses. Vilar welched on several multi-million charity gifts as well--he never delivered the bread.
Hey Gary, you should have stuck to fly fishing! I always thought you were a phony sonofabitch. MIT and London School of Economics, now you are making liscense plates for the Brits! BBWWAAAAAAAAAAAAAAAAA!
Disposable income is the first sign of prosperity. From where does this come when crude oil continues to soar above $50? As long as this keeps up, I don't expect that anybody will be backing up the truck anytime soon. What is it that has caused your delusion? Was it the MTBE in your drinking water or the pollution in the air that you breathe?
Crooks is Crooks! Now let me give you a "Good News" story about our "Economy." Both of my children are working (that's really good news, by itself) at jobs that DID NOT EXIST 5 yrs ago, in an Industry (internet-related) that DID NOT EXIST 5 years ago.
They are sending my daughter back to college to learn to operate a machine that DID NOT EXIST 1 yr ago. The Company DONATED the machine (a printer) to the college, in order for the college to train operators for the Company to hire.
That is, in a nut-shell, where our economy is today. All that stuff that happened back in the late nineties really was a Revolution. It's just that revolutions are messy things. Eggs get Broken. Whole industries Die. Others are BORN. And Productivity goes through the Roof. But it takes TIME.
The same thing happened ( to a somewhat lesser extent) in the Late Eighties with the PC/Software explosion. It was several years before that worked it's way through the economy. These things are getting Closer and Closer together. It's almost like waves of the same Tsunami washing across the beach. It makes for "interesting times, if not unexciting economics." Keep the Faith!
Mark my words, the next revolution to occur will be in energy. Alternative fuels, hybrid engines, ethanol fuel cells, and more nuclear power will be the next craze. Wait and see!
INDIANAPOLIS 500
A little educational time-out for Larry's "One Trick Pony," the Farmer: Personal income increased 0.7% in April and personal consumption advanced 0.6%. The core PCE defaltor rose 0.1% in April. Over the past 6 months, current personal income advanced at an 8.0% annual rate, wages and salaries advanced at a 7.9% annual rate and Personal Consumption Expenditures surged at a 7.0% annual rate. And energy as a percent of DPI is 35% lower than 25 years ago.
Either the Farmer is backing up his truck to the glass-half-full position with his favorite, and only, product early in the A.M. or they simply don't get any info out at the ranch. See ya at the soup kitchen, Joe, the one next to your nuclear power plant....meanwhile the rest of America enjoys all time record prosperity!
From where does this come when crude oil continues to soar above $50?
I'd hardly call $51/bbl "soaring". And if you look at a graph of the past year's oil prices, you'll see that it's been trending down for the past month or so.
What is it that has caused your delusion? Was it the MTBE in your drinking water or the pollution in the air that you breathe?
It probably came from realizing that oil isn't as big a factor in the American economy as it used to be. I don't have the numbers to back it up right now, but I bet the people who are actually hurt by rising gas prices, i.e. the marginal consumers with low enough incomes to feel it, don't have enough buying power to drive demand.
I know Farmer Joe is a big advocate of ethanol (actually, that seems to be the only thing he advocates on this board), but the question must now be asked. If the current price of crude is actually a result of a speculation bubble, and it continues trending downwards, how long will the already-subsidized ethanol industry remain economically feasible?
Mark my words, the next revolution to occur will be in energy. Alternative fuels, hybrid engines, ethanol fuel cells, and more nuclear power will be the next craze.
Well, I hope you're right, but I wouldn't bet a dime on it. I'm still with Steven Den Beste on this one, the next big energy breakthrough isn't imminent (here, here, here on ethanol specifically, and a general roundup here). And as long as nuclear power suffers from the "not in my back yard" syndrome, we won't be seeing more of that either. Heck, we can't even get wind turbines set up without environmentalists trying to shut it down.
I think we're right at an equilibrium of utilization of new technologies and old, and quite frankly I don't see anything on the horizon that's going to push that balance to either end.
Red, you are correct on how the world turns. Last year, Dave Milpas of Bear Stearns authored a report on how higher paying, "new economy" professional/white collar jobs in finance, marketing, technology, medicine, law, engineerins, science, etc. are rapidly replacing lower paying "old economy" jobs at the plant, shop, mill, mine, foundry and factory. This report is a year old and I bet the "replacement factor" has accelerated--just look at those surging income and consumption numbers.
"Future Shock" has arrived and is rapidly growing. Today, America's net worth is at an all-time record $50 trillion; thanks to better jobs that didn't exist 5 or 10 years ago. Just wait until the market really starts to kick in.
CG; You be right, my friend. The World ain't seen nuttin yet.
Unbeliever; Your friend (Debeste, is it?) is a good writer, obviously sharp as a tack, and (like many egg-heads) can't see the forest for the trees. He would be very comfortable in a command economy. They depend on "Big" solutions. This problem will be solved the free-market way; with thousands of small solutions.
He's also, a bit of a know-i