[Ed. Note: To see exactly what this former Reagan insider has to say about Trump and specifically what he believes must be done, David Stockman is sending out a copy of his book Trumped! A Nation on the Brink of Ruin… And How to Bring It Back out to any American willing to listen. To learn how to get your free copy CLICK HERE.]
Janet Yellen insists that she would serve out her full term (until January 2018) and has rather cheekily lectured Congress about the dangers of political interference with the central bank.
Oh, my.
Before December — after the election — the Fed spent the past year sitting hard on interest rates for no plausible reason whatsoever. The main reason was to perpetuate the stock market bubble and thereby ensure the election of Hillary Clinton and a perpetuation of the current Wall Street/Washington regime.
To his credit, Donald Trump called her out on this blatant political meddling during the campaign, calling it “shameful” and designed to keep the stock averages levitated through November 8th.
He was exactly right. Yet notwithstanding his shocking victory, Yellen has the temerity of a pot calling the kettle black. Her Keynesian-statist party has been rebuked by the American public, but the terminally grating school marm who occupies the big chair in the Eccles Building petulantly insists that her right to rule has not been diminished by an iota.
Moreover, this wasn’t just more of the self-serving oratory about the purportedly sacrosanct “independence” of the Fed that we had come to expect from Yellen and her predecessors. To the contrary, it was a shot across-the-bow of the then president-elect, current president.
It amounted to saying that the election was immaterial to the arrogant monetary mandarins who run the nation’s central bank, and that in any event, the Fed had nothing to do with the crushing economic failures that brought a majority of the voters to the Trump column in 85% of the counties in Flyover America.
Oh, yes it did.
In the great scheme of things the destruction of honest price discovery in the financial markets and the transformation of corporate America’s C-suites into dens of financial engineering and stock pumping is exactly what has caused American capitalism to slide toward the ditch.
Indeed, the Fed’s massive money pumping and financial repression has been many times more harmful than excessive taxation, regulation and all the other government intrusions into the free market that have long been with us.
That’s because insanely low interest rates triggered a mad scramble for yield among bond managers, who in turn have spent the last 7 years bidding up the price of corporate bonds and other debt.
But artificially cheap capital did not generate an investment boom on main street per the Keynesian catechism. The geniuses in the Eccles Building did not reckon with the fact that when you falsify some financial asset prices, like the yield on bonds, you create a chain reaction of additional distortions, falsifications and malinvestments.
The stock market is so egregiously over-valued — probably 50% or more — that it has become an agent of capitalist destruction, rather than an efficient forum for raising and allocating equity capital.
Needless to say, the so-called conservative economists advising Trump — and the Congressional GOP, as well — miss this point entirely. Reading from their Adam Smith 101 — without noticing that free central bank money ruins free markets and destroys their rules.
The massive financial engineering it’s created is a hideous deformation of central bank driven Bubble Finance. It represents the highest and best use of mis-priced debt, not the allocation of capital which would have occurred on the free market.
In that context, so-called conservative economists also keep yapping about tax rates being too high — and that is true in the abstract because by definition all taxes are too high.
But on the immediate issue of why business investment and good job creation have stalled out in corporate America — it’s not because the IRS has sucked them dry. In fact, the General Accounting Office (GAO) studied the tax returns of all large U.S. companies in depth for 2008 through 2012 and found that 20% of large profitable companies paid no US corporate income tax at all.
Moreover, profitable large U.S. companies as a whole paid only 14% of their pretax income in U.S. corporate income taxes. That’s not even close to the 35% statutory rate or even the 22% effective rate often cited by tax experts. But that latter rate includes foreign, state and local taxes, which wouldn’t change even if the U.S. statutory rate were dropped to zero.
Don’t get me wrong here. The entire U.S. corporate income tax is a stupid, inefficient and essentially uncollectable relic of an earlier age. After all, in today’s world of instantly mobile capital, technology, product and service sourcing and even plant and warehouse facilities — which can be rented or contracted out anywhere on the planet on short notice — the tax man will never keep up.
The corporate income tax generated just $300 billion in FY2016 or 1.6% of GDP — compared to 8-9% back in the heyday of the 1950s where it might have made marginal sense. But today, it’s just an accountants, lawyers and consultants full employment act. And that’s to say nothing of the Wall Street bonanza stemming from all of these “inversion” and other tax jurisdiction hopping deals which have zero economic merit.
So sharply reducing to 15% — or even eliminating entirely — the corporate income tax is a wonderful idea because it will reduce the deadweight cost of today’s vast corporate infrastructure of tax compliance/dodging. And in time, the freed-up resources — including recycled tax lawyers — will contribute to enhanced productivity and growth of the U.S. economy.
But in the near-term this type of tax reduction alone will not contribute much to reviving corporate investment in productive assets, growth and jobs. The real job killers in American business today are the CEOs, CFOs and other top executives who occupy the C-suites.
Yet here’s the thing.
They are creatures of the incentive system and the capital(mis)-pricing environment which is controlled lock, stock and barrel by the Fed. So as long as the current crop of Keynesian coddlers of the stock market remain in charge, there will be no investment boom to make America great again.
Instead, lower corporate taxes will go into stock buybacks and other forms of financial engineering designed to goose stock prices and the value of C-suite stock options. Likewise, the ballyhooed “tax holiday” designed to bring an alleged $2 trillion of off-shore corporate cash back to the U.S. — will also result in more stock buybacks, dividends and deals just like it did in 2004.
In short, there are no tax or regulatory policy initiatives that can restart growth until the stock market crashes and is purged entirely of the toxic regime of free money driven speculation that has turned it into a rank casino.
So for the incipient Trump administration to leave Janet Yellen, and her insufferable Keynesian colleague, Vice Chairman Stanley Fischer, in power would be the height of folly. The effect would be to keep this giant Wall Street bubble levitated just long enough for its inexorable collapse to be blamed on Donald Trump.
As I’ve been saying, the time to lance the boil is now!
Then president-elect Trump should have demanded that their resignations be on his desk on January 20th. That simple but decisive command would have caused an immediate, thundering collapse of the lunatic bubbles now hovering over Wall Street.
But that’s exactly the point, and is consistent with the way Ronald Reagan played it back in 1981. If Trump is exceptionally good at anything, it’s in creating political piñatas that can then be whacked over and over.
He could have laid the political blame for the necessary purge of the casino squarely on the doorstep of the Obama White House. And while he was at it he should have slammed good and hard the posse of elitist monetary central planners at the Fed who have pumped up bubble after bubble — even as they have drained capital, investment, growth, jobs and purchasing power out of the main street economy.
That’s how Trump could have started draining the swamp. He didn’t do it.
Regards,
David Stockman
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