Economics

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Cash Rich Big Business

You’re too busy to notice, so let me draw your attention to an interesting fact: the cash pile that corporate America is sitting on grew by 10% last year. It is now $1,450 billion. An all time record. This is according to Moody’s the big rating service.

And you thought these were hard times!

Corporate America is awash with cash. It just doesn’t want to invest it. Nor, apparently, does it want to pay more in wages. So it just adds to its pile and whistles. Well not quite. It whines about how hard times are and that the government ought to be cutting taxes and giving handouts to encourage investment.

Small business and average families struggle on in this tepid economy. The big boys are just fine.

Oh. And one more wrinkle to think about: much of that cash pile is sitting in offshore tax havens to avoid US corporate taxation. So not only are those companies not paying better wages or investing here at home, they’re not paying taxes either.

What’s that old saying?

One rule for …

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Oh, Those Crazy Mega-Banks

Oh dear. I managed to avoid talking about banks for quite a while. It seems time to revisit our favorite villains. They’re up to no good again.

The problem with banking, as someone far wiser than I once said, is that banks are more dangerous than standing armies. I guess he must have said that back before the contemporary American infatuation with all things military. But the point remains the same.

Banks are dangerous. Really and truly dangerous. And the bigger they get the more dangerous they get. Comparing a mega-bank like Citibank with our local three branch small bank is ludicrous. They may look and sound similar, but they are in different universes. It’s like comparing a bee-bee gun to a nuclear bomb. They both can go pop. But one can do an awful lot more harm.

So much so that our regulators are scared stiff of regulating them.

You probably missed it, but one of our regulators recently admitted that his agency was afraid of enforcing the law against a big bank because of the mess it could make of the economy were it even rumored to fail, let alone actually fail. This attitude effectively moves the mega-banks outside the law. They used to be too big to fail. Now they are too big to prosecute. Don’t you wish you could be outside the law? You could trash entire economies and then bitch about being inconvenienced by those bad economies. Heck you could even get yourself bailed out whilst you foreclose on the poor people you sold rotten loans to. You would become truly blameless. For everything. You could even brag publicly, as Jamie Dimon CEO of JP Morgan Chase did, that your bank does really well in recessions.

No wonder banks cause so many recessions. They profit from them.

Not that Dimon is very good. He managed to lose a pot load of money for his shareholders in a great scam scheme risk avoidance strategy known affectionately as the ‘London Whale’. The ‘Whale’ bit being a reference to the extent of the losses the brilliant yahoos involved managed to accumulate. Not that, mind you, any of the senior executives knew about those losses. Heavens forfend! Not once were the people who earn gazillion dollar bonuses for being the epicenter of all things good involved in such plans. Oh dear heaven no. The poor dears were just as surprised as you or I when the losses started oozing from every pore of the beast they purportedly manage. Never mind. Their bonuses and stellar reputations remain intact. Safe too are the yahoos.

No. The only idiots in the episode of the ‘Whale’ are you and I who steadfastly underwrite JP Morgan Chase and its peers, tolerate it excesses, allow it to roll over its regulators, and generally muck around with our economy.

And: Yes we do underwrite the mega-banks.

They benefit from being too big to fail, prosecute, and stop. Because of this their creditors, who are the devil incarnate when they deal with your or me, become cream puffs and hand over money at ever cheaper rates to the mega-banks. You see, because bank stupidity goes unpunished – we bail them out and set them on their way every time – their creditors could care less about silly schemes like the ‘Whale’. Those losses just don’t matter. The taxpayers will step in and pay up.

Why?

Because if a mega-bank goes down, the economy goes down with it. In another context it would be called hostage taking. In banking it’s called being regulated. With the definition of regulated being that you can get away with anything.

It was not always thus. And for small banks it still isn’t thus. Small banks get closed down all the time. When they fail, the regulators think nothing of stepping in, taking over, and selling off the profit making bits to other, usually larger, banks. It goes on all the time. I know. I helped buy a few. So small bank creditors are a lot more careful and charge a lot more for their money.

So the big banks – the really dangerous ones – get all the breaks. The little ones get none.

And the bigger you get, the more breaks you get. Eventually you can even rise to lawless status. The only thing you have to fear – apart from not having enough space to accommodate your bonus – is those pesky anti-trust laws. But in post-Reagan America we don’t use those laws. Indeed we encourage bigness.

So it is both refreshing and curious to see a small, but determined, band in Congress beginning to beat the ‘break up the banks drum’.

Yes. Please. Break up the banks.

And if you think this is academic think, if you will, for a moment about poor Cyprus.

Cyprus is one of those unfortunate small places that allowed its banks to outgrow its economy. Cypriot bank assets are about 800% of the island’s GDP. Its banks had become a favorite offshore location for Russian ‘hot’ money. The Cypriot economy has been destabilized in recent years, it is shrinking and needs Euro Zone help.

This is another one of those paradoxes. Euro Zone help is the same as applying the leeches. If the first leech doesn’t work – it never does – then they apply more. In this case the leech takes the form of a one time tax on savings accounts. Your savings account, were you a Cypriot bank customer, is about to get zapped by as much as 10%. So whereas your retirement nest egg was $10,000, it could now be as little as $9,000. All because of hot money and unregulated international capital flows.

So Cyprus is going the way of Iceland and Ireland before it. All because its banks swam in the shark infested waters of global capital flows. I am sure it won’t be long before we read stern messages about how the sudden rise in poverty and unemployment within the island’s citizenry is a small and necessary price to pay for stabilizing the banking system.  Oh. And you may hear homilies from sundry German bankers about then need for fiscal discipline as if Cyprus had lax budgets. It didn’t. It was a model of fiscal rectitude.

Nope. It was just bad at regulating its banks.

Like us.

The danger of us following in Greek or Spanish footsteps comes not from our debt or our deficit. It comes from our unwillingness to confront the mega-banks.

Our biggest banks are a clear and present danger. They represent a threat to national security.

That ought to get everyone’s attention.

Let’s stomp on the mega-banks. Let’s break them up.

 

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Game Over

Let the new game begin!

You may have missed this weekend’s news. Here is the short version: the Republican party does not think there is a fiscal crisis. No. Not at all. What crisis there is resides well off in the future. So all those panics, fiscal cliffs, sequester debates, and assorted other dire emergencies of the last two years were not, I repeat not, about the deficit or the national debt. No. Not at all.

So said Speaker Boehner on television this weekend. As did Paul Ryan, he of the many emergency, deficit reducing budgets.

Ummm.

What do we make of this?

Well there’s no surprise. The Republicans have never been truly worried about either the debt or the deficit. Those issues were simply useful totems to rally public opinion around. Ever since Reagan, the GOP has been the less fiscally correct of the two major parties. It has indulged in both peacetime and wartime debt accumulation and, for all its anti-big government rhetoric, has acted to bulk up government spending – George W Bush’s extraordinary giveaway to the pharmaceutical industry on behalf of Medicare being the most recent example. Indeed a goodly percentage in the run up of government spending in recent decades has been the result of policies advocated by supposedly small government republican presidents. The facts are clear: the Republicans at the Federal level are not fiscally conservative. Remember Dick Cheney and his comment about deficits being of no concern?

Something has changed.

Now the truth is public. It isn’t debt reduction that drives the Republicans. It is government itself. They are getting perilously close to announcing what we all knew: yes, they really do want to get rid of Social Security, Medicare, and Medicaid. They want to abolish all forms of government insurance coverage of the elderly and the sick. they’d love to get rid of all of it except the military, which miraculously doesn’t count as government spending in GOP minds. So different is it that latest Ryan plan actually piles on more defense spending as it slashes everything else. You can never have enough generals it seems, but there always schools, roads, and hospitals to close.

The Republican problem is, of course, that being too public about this aim is not a very good electoral message. Voters love those programs. Hence the dissembling over the last few decades. Yet, as the GOP became more and more right wing, its purists became more emboldened. They became less and less inclined to hide their real intentions. They fought furiously all efforts to extend government insurance and insisted at every turn that it was those social programs that represented a dire threat to our fiscal health, not unfunded wars. Thus the incessant call to cut those programs. Thus the persistent resistance to fund them. Thus the torrent of alternatives from privatization to the current favorite of vouchers. While all the battles were fought under the rubric of deficit reduction, the real goal was to eliminate the safety net.

At last the lying is over. Now the battle is out in the open. And voters have a clear choice.

This is not about debt or deficits. Those issues can be dealt with in time and with the return to healthy economic growth. No. The next phase of war – over the federal budget – is about whether we keep the safety net, or whether we get rid of it.

In that context, here’s a quick question for all of you.

Would you prefer the government to guarantee your retirement and health care, as it now does, or would you like to rely on Wall Street? You know Wall Street, don’t you? The epicenter of the recent fiscal crisis. The home of those wonderfully socially aware mega-banks and those mega-bonuses. Just think: those CEO bonuses are coming straight from your retirement account. How nice of you to contribute. And what do you get in return? Risk. Lots of risk.

Having successfully made your private sector pensions riskier, they now want to get rid of the less risky part too. But at least you’d be free of the dead hand of government. And the banks would rake in fantastic fees.

What could be better than that?

You poorer. The banks richer. Sounds like a plan. No?

Well, it may not be your plan. But it is the Republican’s plan.

 

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Retail Sales

A quick note:

Retail sales rose quite strongly last month despite higher payroll taxes. Overall sales grew 1.1% in February, the biggest increase for five months. Much of that was accounted for by higher gasoline prices – sales of gas rose 5.0% because the average cost of gasoline rose 12% per gallon – but other sectors saw gains as well.

Excluding gasoline, other retail sales rose a decent, but not great, 0.6%. Growth was a mixed bag. Auto sales grew 1.1%; Internet and mail-order sales grew 1.6%; home improvement stores saw 1.1% growth; and supermarkets notched a 0.8% gain. On the downside: home furnishing stores had a 1.6% decline; sporting goods stores a 0.9% decline; while bars and restaurants saw sales go down 0.7%.

It is difficult to predict what sales will do over the next few months. Wages are not growing, savings are getting tapped out, and that payroll tax increase is biting hard, especially in lower income groups, so continued growth will be tough to maintain.

Last month’s data has hints of this.

The drop at restaurants and department stores suggests that lower income households shifted their buying to cheaper sources and began to tighten their belts because the payroll tax increase represents a much larger decrease in disposable income that it does at higher income levels. Conversely stronger auto sales and the pick up in home renovation seems to suggest that higher income families are still able and prepared to spend. This dichotomy is likely to continue as Congressional efforts to increase inequality by lowering worker and small business disposable incomes whilst pandering to upper income and big business interests divides the economy ever more.

Yes. I meant that.

Inequality is a deliberate outcome of policy. It is not an accident.

We are busy creating a class based society along old fashioned European lines. Get used to it.

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Deficit Realities: No Cuts Needed

It seems like the entire economic discussion is now about the Federal deficit and what we ought to do about it. You all know my position by now: nothing. The deficit is going to melt away, or at least back to manageable proportions. So there is no need to do anything. Really.

But, in the interests of science, and to give you some context, I ought to pass along to you some facts and figures. That way you can keep score for yourselves at home.

Since Obama arrived in the White House the accumulated deficits have been approximately $5,100 billion. That’s a lot by any standards. To put that in perspective: accumulated GDP has been $59,231 billion dollars. So the deficit has been about 9% of GDP throughout.

Deficits are always large during an economic downturn because tax revenues plunge as wages and profits take a hit. This was the mother of all recessions and so of the $5,100 a substantial part is due, not to policy – Obama being a closet socialist trying to take over the entire economy –  but to the downturn itself. This is the bit we can expect to go away through time as the economy recovers and tax revenues get back to normal. A rough estimate produces about $1,500 as this effect. This is about $375 a year or 30% of the deficit. So if we do nothing, we can expect the deficit to shrink by that much.

Then there’s all the short term and one time spending enacted to shore the economy up during the crisis. This includes the stimulus and things like the bank bail outs. These add up to about $1,600 over the last four years or about $400 billion a year. Obviously these are also going to go away, indeed the stimulus is already down to a trivial level.

Then there’s the Bush wars. Don’t forget about them. They weren’t paid for by extra taxes, they were paid for by borrowing and thus added to the deficit. Over the past four years their cost has been about $720 billion or $180 per year. One of these days those costs will go away, even though, for now, they still linger on.

And then there’s the impact of the Bush tax cuts. Even after the recent tax hike for high end wage earners there is still a huge drag on the budget from those cuts. To the tune of about $1,400 over the last four years. That’s $350 a year.

Now let’s add this all up.

The annual deficit since 2009 – the four years of Obama’s administration so far – has been approximately $1,275 billion. Makes your head spin, right?

Take away the effects of the crisis itself or $375 billon a year. Take away one time crisis related costs that will go away or another $400 billion a year. What do we get? A deficit of around $500 billion a year.

End those wars and that reduces us further. To around $320 a year.

Now.

In 2012 GDP, unadjusted for inflation, was about $15,700 billion. So this adjusted deficit of $320 billion is just about 2% of GDP. Compare that with the average of 4.23% during the Reagan administration. Yes, I know. Reagan had to deal with a recession too. So let’s be fair. Let’s add back to the Obama score that part of the deficit due to the downturn itself and to the stimulus. That means we have to add back about 3% of GDP making the average Obama deficit around 5% compared with Reagan’s 4.23%. Not a big difference. Especially when we take into account to the enormity of the recent recession.

So if we do nothing at all we can expect the deficit to shrink back to below the average we saw during the Reagan years when, as you no doubt recall, Dick Cheney famously said that deficits don’t matter. If that is so, the future Obama deficits will matter less.

Or ought to.

But the Republicans don’t seem to agree. While they loved those Reagan deficits, voted for them, and embraced them wholeheartedly. The Obama deficits, which are around the same totals and have the same impact, are, apparently a threat to the very soul of America.

Odd that.

Somewhere along the road to today Republicans had an epiphany. They saw the balanced budget light. And did a total U-turn. Whereas once deficits were the work of God, now they are the work of Satan. And like all born again folks their fanaticism for their new cause is extreme.

Well. Almost.

You see, I don’t think for one moment that the likes of Paul Ryan actually worry about deficits  as deficits. They just adore the war spending after all. No. They only ever object to deficits when their cause is social spending. Then all hell breaks loose and Republicans are beside themselves with angry fiscal rectitude. In the GOP’s eyes we cannot afford deficits when the spending is on the poor, only when it is on war. Social spending, bad. Military spending, good. Since both are government sending we can’t quite make out what Republicans think of that. Perhaps they’re just confused.

Anyway. The point of all this is to give you some context. Our deficits, labeled as a cause of crisis and imminent disaster by the media and right wingers, are under control. They need no action. The arithmetic says so. You saw it with your own eyes.

Oh. wait.

There’s that last bit. The Bush tax cuts. Let’s see. We had whittled the ongoing deficit down to around $320 billion a year by subtracting all the odds and ends associated with the recession and the Bush wars. The Bush tax cuts add about $350 billion a year to the deficit. Huh? $320 billion minus $350 billion  is … roll the drums … a surplus of $30 billion a year.

Yes. You see without the impact of the extraordinarily reckless George W Bush, our ongoing deficit wouldn’t be there at all. We’d have a surplus. Small, but definitely a surplus.

Eat your heart out Paul Ryan. We have a better budget plan than you do. All we have to do is eradicate the impact of Bush  and his Republican friends on history and we are all square.

Too bad we didn’t think of that at the time. Well some of us did. But I won’t brag about that.

 

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