How to Get Your Tax Weekend Back

 
This weekend millions of Americans and/or their accountants are preparing to file income tax returns. Tax day is an annual event as significant as the Fourth of July – though far less fun.
 

Photo: Getty Images
 
 
My friends outside the US – and I have many – observe our ordeal with a combination of amusement and pity. They don’t like taxes either, and often pay far more than we do. But their governments, for the most part, don’t put people through such torture every year. They appear to have found better ways. Why can’t we?
 
Today we’re going to look at who wins and who loses under the new tax law. I think many of you will be surprised.
 
Bearing the Burden
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The bottom 50% earn 11.3% of the adjusted gross income and pay 2.8% of the income taxes. The top 50% have 88.7% of the AGI and pay 97.2% of the taxes. That’s why we call the system “progressive.” By design, it gives those at the bottom a lower rate.
 
In fact, it favors more than just that bottom half. As the chart shows, everyone except the top 5% pays a lower share of the total income taxes than their share of total income. That’s not necessarily true of every taxpayer, since these are averages, but it’s certainly true for most. The top 1%, which we are often told gets wildly favorable treatment, doesn’t look so lucky by this measure. It only received 20.65% of the income but paid almost 40% of the taxes.
 
Let me point out again, this tax structure is not an accident. The tax system is designed to produce this result. The public wants the wealthiest Americans to pay a higher percentage of their income, and they do. Provisions that reduce taxes for the middle and lower classes mean those in the top brackets pay more.
 
Some caveats on this data: It omits payroll taxes, which for those on the lower end are often higher than the income tax. Wealthier people also have more ability to shift income into favorable categories. But in the aggregate, they still pay higher rates on more income than majority of the population does. We have a highly progressive income tax system by any fair definition. The share of tax paid by the top 20% of Americans also changes when social-insurance levies are included. It drops to about 67% of total federal income taxes paid from roughly 87%. (WSJ)
 
The “Tax Cut Act” Increased Taxes for the Rich
 
Changes in the recent tax bill will make the system even more progressive starting this year. You would never know that if you read the media, which seems to think that the tax bill was a panacea for the rich. Wealthy people in high-tax states will certainly have to pay more. But that’s the responsibility of those state governments, some of which seem intent on driving out their best revenue sources.
 
Laura Saunders, writing for the Wall Street Journal, uses analysis from the nonpartisan Tax Policy Center to demonstrate that the very top earners will now pay an even higher percentage of overall taxes. The top 1% go from paying 38% of total income taxes to a little over 43%.
 
 
According to Saunders,
 
The results show how steeply progressive the U.S. income tax remains. For 2018, households in the top 20% will have income of about $150,000 or more and 52% of total income, about the same as in 2017. But they will pay about 87% of income taxes, up from about 84% last year.
 
By contrast, the lower 60% of households, who have income up to about $86,000, receive about 27% of income. As a group, this tier will pay no net federal income tax in 2018 vs. 2% of it last year.
 
After the income tax, the most important revenue raisers are for social insurance, such as Social Security and Medicare. They will provide about 34% of the total tax take this year, according to the Joint Committee on Taxation. Corporate taxes will account for 7% of revenue, down from 9% in 2017. The rest of the total comes from excise taxes, estate and gift taxes, and other sources such as customs duties.
 
Roughly one million households in the top 1% will pay for 43% of income tax, up from 38% in 2017. These filers earn above about $730,000.
 
According to Roberton Williams, an income-tax specialist with the Tax Policy Center, the share of taxes paid by the top 5% will rise despite the fact that people in it were the largest beneficiaries of the overhaul’s tax cut, both in dollars and percentages.
 
Why are income taxes negative for the 77 million households in the bottom two tiers, which earn 13% of income? In recent decades Congress has chosen to funnel benefits for lower earners through the income tax rather than other channels such as federal programs. Some of these, such as the earned-income tax credit for the low-income workers, make cash payments to filers who don’t owe income tax.
 
The tax overhaul further lowered the share of income tax for people in these tiers, in part because it nearly doubled the standard deduction and expanded the tax credit for children under the age of 17.
 
People in the lower tiers do owe other federal taxes, such as for Social Security and Medicare. If these tax payments are included, their share of federal taxes paid turns positive.
 
Losing Your Deductions
 
In order to pay for the tax cuts on corporations and the lower income tiers of the country, the Republican Congress had to scramble to find additional sources of revenue in order for the new tax plan not to increase the deficit more than it did. And they found some of that revenue by taking away deductions. There are literally scores of smaller deductions that you were previously able to itemize that will not be available in 2018, or 2019 at the latest. Let’s look at just some of the bigger ones.
 
1.   Everybody knows that state and local income taxes (SALT) will no longer be completely deductible. You will be allowed to deduct only up to $10,000. That is especially painful for people living in states with high income taxes and/or property taxes. And while Texas and other low-tax states don’t have an income tax, local governments are financed by property taxes that are typically higher than those of a lot of states. There are just six states that don’t have an income tax. The darker blue your state is in the following chart, the higher your total state income taxes are and the more pain you will feel.
 
 
2.   Starting in 2018, homeowners can take a mortgage interest deduction on a loan of up to $750,000, down from the current limit of $1 million. When the median home in California is $480,000, a lot of homeowners are going to have mortgages in excess of $750,000.
 
3.   I am not certain what Congress was thinking, but they took away the deduction for personal disaster losses. Now you can take deductions on personal losses if those losses amount to more than 10% of your income. In the future, you can deduct those losses only if the president declares their cause a national disaster. So you would more than likely be able to deduct losses from a hurricane or earthquake, but if your home were destroyed in a flood not associated with a larger disaster, you would not be able to take a deduction for your loss. The same thing goes for a fire. Or for vandalism. This provision makes me wants to throw the yellow flag for piling pain on top of more pain.
 
4.   Today, if you move more than 50 miles for a new job, you can deduct reasonable moving costs. Starting this year you can’t.
 
5.   Divorces are never fun or easy. They tend to cost a lot of money, on top of the emotional toll they take. Under current law, alimony is deductible by the former spouse making payments and is included as income to the recipient. In the new bill, however, these payments are no longer deductible by the payor. Nor are the payments included in the recipient’s gross income. Instead, the person getting the alimony has to pay taxes at the rate paid by the person paying the alimony. And since it’s usually the man who makes more money and pays the alimony, the woman will get taxed at the man’s tax rate. No matter what her actual income is. Ouch. This provision is effective for divorce and separation agreements signed after Dec. 31, 2018. (CNBC)
 
6.   A Bloomberg article highlights the fact that business deductions for meals may be going away. Yes, corporations get a reduced tax rate, but essentially, the new law says that entertainment expenses are not deductible. Business lunches are entertainment and not deductible.
 
Ah, I remember the days when you could deduct 100% of your meals and entertainment. Yes, I know that during the Reagan years the top rate was 70%.
 
But no one paid that. There were so many loopholes and deductions that my effective rate was much lower than it is today.
 
The problem is, there is a great deal of confusion over what might count as a deductible expense. If an expense is considered entertainment, it is not deductible. If you think that change is not going to make a difference in the revenues of high-end restaurants, you’re not paying attention. I don’t think the change affects Chipotle or McDonald’s much – they’re not exactly business-meal destinations. There are always consequences to tax rules, but I think some of the unintended consequences are going to be more painful than people currently think. Corporate accountants are going to strictly limit the ability of their employees to take their clients out to dinner.
 
7.   The Republican Congress has spent a great deal of its time patting itself on the back over the 20% tax break on pass-through tax corporations. The thought was that they were helping small businesses to keep even with the big players who got most of the corporate tax cuts.
 
Well, not so much. It turns out that a lot of us with pass-through corporations don’t qualify, and if you are a modern business with lots of contract labor instead of actual W-2 employees, you don’t qualify either. Why do doctors not get a tax break but architects do? You would think a restaurant owner would qualify. Not necessarily. If you advertise the best pie or steak in your area, you may lose your tax exemption.
 
Seriously. Who writes these rules? This cute infographic from Bloomberg illustrates part of the problem. No one really knows who qualifies for what.
 
 
8.   Lots of “little” things (unless of course they are your deductions, and then they become big) are no longer deductible. Companies have been able to subsidize commuting and parking expenses and deduct them. No more. And that $20 a month subsidy you got for commuting to work on a bicycle goes away.
 
You can no longer deduct your cost for preparing taxes under the new tax plan, and if you do your own taxes, you can’t deduct the cost for the software.
 
No more deductions for the commissions you pay your agent or your manager or even for your union dues. Hollywood actors and professional athletes are not going to be happy about that first part. If you’re an actor, you no longer get to deduct your audition travel expenses or acting lessons, either.
 
And while the new tax law nearly doubles the standard deduction for married couples and singles, up to $24,000 and $12,000 respectively, you do lose your personal exemptions. Many families with multiple children will feel that loss of exemptions keenly. I can tell you from personal experience that having more than two kids is expensive. But then again, lower-income families get an enhanced child tax credit.
 
And my personal pet peeve: You can’t buy sporting tickets and give them to clients and claim them as a business expense. I don’t imagine that Mark Cuban and Jerry Jones here in Dallas or any other professional team owner will be happy. That change has got to leave a nasty mark on their corporate sales. And it’s not just professional sports. I have a number of friends who are college sports fanatics, and they had ways to make their ticket purchases a charitable deduction or a business expense. And they loved to use the tickets as a business perk. Now that’s gone, gone.
 
Some people were able to itemize their investment management and consulting fees, tax-preparation fees, unreimbursed employee expenses, and certain hobby expenses. Gone as well.
 
To be fair, there are a number of really good portions of this bill. As noted above, the increase in the personal deductions will mean that fewer people on the lower income scale will pay any taxes at all. Also, the lifetime state tax exemption doubled to $11.2 million for individuals and $22 million for married couples.
 
And with that I’m going to stop talking about taxes, even though I could easily write at least three or four times more than I have, and will probably get back to some of the other details later. There are so many. But I have a personal issue that I want to talk about. If you have high blood pressure, you might want to skip this.
 
Immigration Fiasco
 
I am going to go in a different direction for a few paragraphs. Personal privilege. This kind of, sort of comes under the heading of economics. Almost any real economist understands that in order to grow an economy you have to increase productivity and/or increase the number of workers. There is no other magic bullet. If your society is not producing enough children, then you need to be bringing in immigrants if you want to see GDP growth. And for a country built on immigration, you would think we in the US would get that – which is why I don’t understand the whole anti-immigration movement. Yes, we need to control the process, and we need to figure out how to attract better-educated and higher-income workers (as Canada is doing), as well as the service workers who make the world go ’round; but we are not dealing with the issues of immigration and illegal immigrants in a rational manner. This fact was brought home to me in a very personal way this afternoon.
 
Warning: This is going to upset nearly every reader – but you will be upset for different reasons. Some of you will more or less agree with me, and some of you will think I’m dead wrong. But either way, we need to make some decisions in this country.
 
This is a personal story. Mary has been working for me for 16 years, cleaning my house, moving me, and doing so many other things. She has become family (as she has with all of her other clients). She’s been in the country for at least 20 years. She is one of the most honest people I know, often bringing me money that I have somehow put in the wrong pocket or drawer. She came to the US a long time ago on a visa, physically lost her visa and her passport, but stayed anyway and began to work. She is married to a US citizen and has three children, the youngest of whom is 10. She pays her taxes like every good citizen. She has been trying to firm up her immigration status for a very long time, and a lawyer finally arranged for her to go back to Juarez to deal with the consulate there, taking along papers from officials here who told her she could simply apply, ask for “forgiveness,” then come back into the US and get her US citizenship. It was supposed to be easy.
 
She found out today that she was turned down. And now she is stuck in Juarez, not the safest of cities. Some bureaucrat at the consulate in Juarez decided that her (US citizen) 10-year-old son doesn’t need his mother, that her (US citizen) husband can live without his wife, and that this sweet, honest taxpaying lady who has never been a problem to anybody in her life shouldn’t be allowed back into the United States for at least a year. Maybe longer. And then she can ask again. No guarantees.
 
This is America? The land of the free and the home of the brave? Is that the business we are in, separating mothers from their young children? And keeping out the very people we need?
 
I know that a number of people are upset about illegal immigration. I totally agree that we need to get a handle on our immigration rules. And our borders. But we need to recognize that there are families in this country who have been here for decades, the Dreamers among them, who are important contributors to our economy. If for some reason they all left, the GDP of this country would simply collapse. I am talking a Great Depression here. They make that much of a difference. And immigrants have made that much of a difference to the US for the last 250 years. Maybe I’m a little bit more sensitive to the situation here in Texas, but we are absolutely used to Hispanics and immigrants of all flavors working, and we never ask if they are illegal or not.
 
There are darned few US citizens who don’t have immigrants in their family histories. But for whatever reason, each generation of immigrants wanted to keep the next group that came out. They were literally trying to build a wall in California in the 1870s to keep the Chinese out
 
I simply don’t get it. Trump rolled over on the DACA bill, giving the Democrats hundreds of thousands more potential immigrants than they had actually asked for. In doing so he angered a bunch of people in the Republican caucus. And you would have thought the Democrats would be ecstatic. All Trump asked for was a lousy $25 billion to build his wall, a cost that would have been spread out over a number of years. Seems like a reasonable horse trade to me.
 
Now, let me be clear. I think the wall is kind of silly. Will it inconvenience people who are trying to enter the country illegally across our southern border? Absolutely. Do I think that someone who really wants in will not figure out another way? Not a chance. Think Cuba in the ’60s. But $25 billion to settle our most thorny immigration issues? Chump change.
 
A few years ago, in a small, intimate meeting, I really pushed Texas Senator Ted Cruz, who was running for president and touting his anti-immigration line. He knew who I was because we had met before, the first time at his request. We have had long conversations, and honestly, whatever you may think of him, the guy is remarkably brilliant. We have had our disagreements. The host of the dinner put me next to him at the dinner table, and Ted asked me to give him my best shots in the Q&A that would follow the meal. I told him he didn’t want me to do that, but he said, “Bring it on.” Well, I did.
 
After some of the difficult economic questions, which he did pretty well with, I specifically brought up my maid. He gave me glib answers. I was not in the mood to let him go on this one. Okay, I might be a little passionate about it. Every time he tried to dodge the question, I came back and asked, “Senator, do you want to deport my maid?” This went on for some time as I kept interrupting him with this very firm question.
 
When he finally realized I wasn’t going to stop asking in front of a group that he wanted to impress (and get a lot of money from), he said that immigration policy should involve a three-step process. First we should get a handle on who is coming in and control our borders. I totally agree. Second, we should reform the immigration process so that we get more people who are beneficial to the US. I absolutely agree. And then, he said, when those two things are done, “I believe the American people will do the right thing about the illegal immigrants in this country.” Which was basically his admitting that no, he really did not want to deport my maid or any of the other multiple millions of people who are contributing to American society. It was the correct answer, but you basically had to beat him up to get to it, because the issue is so contentious that many of Ted’s constituents around the country just want to say, “Send them back!” By the way, that is not the attitude of his Texas constituency. But you need more than Texas to be elected president.
 
What is it about the American political world today that we can’t have rational compromises?
 
You don’t get everything you want all the time. So work out something in the middle and move on down the road. What we’ve done on immigration is to leave well over a million people (and maybe a lot more) in limbo.
 
America is supposed to be better than this. I am ashamed. It is just another very sad example of how we are broken. Schumer? Pelosi? You should be ashamed. As should all the Republicans who defeated the DACA bills last month in the Senate. Sometimes you have to do what is right for the country. Being worried that you might give Trump a “W” if you compromise is not what I call thinking about the country.
 
The anti-immigration people are simply economically ignorant. We need more immigrants, not fewer.
 
Fort Lauderdale, Chicago, New York, and Raleigh
 
I travel in a few weeks to Fort Lauderdale, then Chicago, then New York and Raleigh for mostly private speaking engagements. I’ve been putting off a trip to New York for too long, and I have too many people I need to see.
 
And finally, just a brief note to those of you who have been asking about the changes that are afoot. I promise that I will let you in on the details very soon. Some of you think I’m building up to a big announcement about the future of this letter; but let me address those questions in one fell swoop: Thoughts from the Frontline is not being put out to pasture! I can promise you that the coming changes are exciting and will benefit both you and me. But rest assured that you will continue to get this letter for free for as long as I can write it.
 
And now it really is time to hit the send button. Have a great week!
 
Your wondering how we will balance the budget analyst,

John Mauldin


Germany is frustrating Emmanuel Macron’s grand ambitions

The reality is that Paris and Berlin are no longer natural allies

Wolfgang Münchau 
The message is clear: German chancellor Angela Merkel (right) is saying no to French president Emmanuel Macron (left) on eurozone reform © AFP



The Franco-German honeymoon has ended. At the beginning of the year, Angela Merkel, German chancellor, and Martin Schulz, the former leader of the Social Democratic party, agreed that Germany would enter into a meaningful dialogue with Emmanuel Macron, the French president, on reform of the eurozone.

As it turned out, the eurozone agenda was a personal project of Mr Schulz’s, not of the SPD. When he was ousted as leader in February, the party lost interest. The grand coalition is once again in power, but now without the only interesting project that would have justified its existence.

Olaf Scholz, the SPD finance minister and the party’s new strongman, is notably cool on the whole idea. On the important issue of a European deposit insurance scheme, he is as sceptical as his predecessor, Wolfgang Schäuble.

The opposition to eurozone reform from inside Ms Merkel’s party, the CDU, and its Bavarian sister party, CSU, is as strong as ever. The CDU/CSU group in the Bundestag rejects all but one of the items on Mr Macron’s reform agenda. They do not want an enlarged European Stability Mechanism, the rescue umbrella, nor a single eurozone budget. And like Mr Scholz they do not want a European deposit insurance scheme until the Italian banks have managed to get rid of most of the bad loans on their balance sheet.

They do not want debt relief for Greece, either. The only reform idea for which there is some lukewarm support is that of a fiscal backstop to the bank resolution fund, something that should have happened a long time ago.

The message is clear: Germany is saying no to Mr Macron on eurozone reform, at least in substance. There may still be some token deal, perhaps a tiny eurozone budget with no macroeconomic significance. To add insult to injury, Ms Merkel also preemptively ruled out German involvement in military action against the Syrian regime.

I wonder how those two unrelated messages from Germany will be received. France is now in exactly the position Marine Le Pen, leader of the far-right National Front, has warned about: in a monetary union in which the voice of France counts for little and a geopolitical situation in which the UK is the more reliable partner.

Mr Macron’s enthusiastic support for European integration contrasts with the unchanged political reality that France and Germany are no longer natural allies. Unlike in France, the pro-European parties in Germany are in retreat. Ms Merkel’s party lost 1m votes to the Free Democrats and the Alternative for Germany, both of which advocate policies that would lead to the destruction of the eurozone. Sixty CDU/CSU MPs voted against the Greek support programme in 2015. If faced with a similar rebellion today, the grand coalition would no longer have a majority.

Does this make eurozone reform impossible? I do not think so. The June deadline for eurozone reforms was chosen because Mr Macron needs something concrete to show before the European elections in May 2019.

As a longstanding advocate of eurozone reform, I am finding myself in the unusual position of favouring a tactical retreat. It would be better to wait for a better moment to push the two issues that really matter, neither of which is on the agenda right now: the creation of a single safe asset, or a eurozone bond; and the legal and political separation of national governments and their banks.

Reformers should exploit the fact that the large and persistent current account surpluses of the northern eurozone countries make them vulnerable to a sudden disruption of trade flows. Only an existential crisis that threatens the very survival of the eurozone has the potential to concentrate minds in the northern eurozone. A very large current account surplus makes you strong in good times, but weak in bad. Now is not the moment to extract concessions from Germany or the Netherlands.

The alternative is wasting scarce political capital on weak reforms. We would also have to accept conditions that might add to financial instability, like Germany’s demand for a semi-automatic debt restructuring or caps on bank holdings of sovereign bonds. If the alternative is a big leap in the wrong direction, standing still would constitute relative progress.


IMF shows poor track record at forecasting recessions

Economic predictions presented as precise numbers are far from that in reality

Valentina Romei and Keith Fray


Blowing hot and cold: The difficulty in getting forecasts right is not unique to the IMF


The IMF is set to release its twice yearly global outlook on Monday, providing economic growth forecasts for almost every country in the world.

However, a closer look at its record on reading the future suggests it is unlikely they will accurately predict even how many economies will expand or contract this year.

The FT looked at the number of countries that the IMF expected to be in recession for every year since 1991 and compared it with the number of economies that turned out to have actually contracted.

Over the last 27 years, the IMF has predicted every October that an average of five economies will contract the following year. In practice, an average of 26 have contracted. This suggests that the six countries that the IMF predict will be in recession for 2018 could rise to as many as 31.

The difficulty in getting forecasts right is not unique to the IMF. “All macroeconomic forecasters are poor at predicting downturns,” David Turner, head of the economics department at the OECD told the FT.

Countries in recession

“Recessions are not rare,” echoed Prakash Loungani, a macro-economist at the IMF. “What is rare is a recession that is forecast in advance.” Despite an increased amount of economic data being available, “the ability to predict downturns remains dismal”, he told the FT.

“Extreme volatility during the global financial crisis complicated economic forecasting” said the OECD. In October 2008, after the collapse of Lehman Brothers, the IMF forecast that seven countries would be in recession in 2009 and it predicted global output would expand by 3 per cent. In reality, world GDP contracted by 0.1 per cent and 91 countries went into recession.

In that October, the IMF predicted an economic expansion for 2009 for both the US and Japan. Instead, the world’s largest economy contracted by nearly three percentage points and Japan’s economy shrank by 5.4 per cent, its worst annual performance since the second world war.Also, the IMF sometimes gets the countries wrong.

Change in World GDP

Greece, for example, is one of the eight countries that the IMF expected to be in recession in 2016, but it is not among the 25 countries that the IMF now considers to have been in recession in that year.

The fact that forecasts are “typically over-optimistic for horizons beyond the current year” is not necessarily the result of economist optimism. They “fail to forecast strong booms, just as they fail to predict recessions,” said Mr Loungani, suggesting that economic forecasts “are too rooted in thinking that things stay close to normal or will revert to normal soon”. Economic models are “not precise and they are based on lots of assumptions that may not turn out to be true, ” said Paul Donovan, the chief economist at UBS Wealth Management.



The problem is not only with models and assumptions, but also with hard data. Economic data are continuously revised, sometimes in a significant way, even in countries with usually reliable data.

In the last 24 years of UK quarterly GDP data, almost every final figure has been different from the initial release, sometimes by one full percentage point.

The US economy expanded by an annualised rate of 3.2 per cent or contracted by 0.7 per cent in the first quarter of 2015 according to different revisions of the same data. Similarly, in Q1 2011 the US economy was revised from registering a strong expansion to a strong contraction.




The IMF’s April outlook is often more accurate. This is because it is easier to get a forecast right for the current year than the following year. The April report is better able to signal a recession for the current year than the October publication, “but one that is much milder than what transpires”, says Mr Loungani, author of several studies.

Economic forecasts should provide “broad trends, not specific numbers” said Mr Donovan, they should assess whether an economy is growing about trend, below or above trend. “Specific forecasts create an illusion of precision,” he added. Having decimal points in forecasts is “purely to prove that economists have a sense of humour” said Mr Donovan.


Blow for blow

A trade war between America and China takes shape

The two countries threaten to descend into a sequence of tit-for-tat retaliations



TALK of tariffs is in danger of developing into cries of trade war. On April 3rd America published a list of some 1,300 Chinese products it proposes to hit with tariffs of 25%. Just a day later China produced its own list, covering 106 categories. “As the Chinese saying goes, it is only polite to reciprocate,” said the Chinese embassy in Washington, DC.

According to the Peterson Institute for International Economics, a think-tank, America’s list covers Chinese products worth $46bn in 2017 (9% of that year’s total goods exports to America; see graphic). China’s covers American goods worth around $50bn in 2017 (38% of exports). The sums were enough to move markets on April 4th, though the S&P 500 index soon made up lost ground.



Both countries’ lists are, for now, no more than threats. Over the next two months America’s list will be open for public consultation (there is no deadline for the tariffs to come into force). China has said that it will wait for America to move. There is still a chance the two sides will choose a deal over a trade war. Although America’s list was drawn up in response to China’s alleged theft of American firms’ intellectual property, Mr Trump regards the trade deficit with China as a separate affront. Tariffs might yet be avoided by China agreeing to buy more American stuff.


But this skirmish follows others. On March 23rd America imposed tariffs on steel and aluminium from some countries, including China. That prompted tariffs covering around $3bn of American exports to China. More retaliation is expected, as the Chinese react to separate American tariffs on solar panels and washing machines.

Historians of trade have an advantage over those who study wars of the military kind. Each side in a trade dispute lays out in detail the products to be affected. That makes it easier to analyse their strategies.

Mr Trump’s tariffs on steel and aluminium turn out to be rather crude. They are an attempt to protect a single industry by blocking foreign competition, guided by a mistaken belief that this will make it stronger. By contrast, China’s retaliation, and the latest American threats over intellectual property, are more sophisticated. Rather than coddling one industry, they are meant to prod a trading partner into changing its behaviour. They are means, not ends.

This week’s American list is designed to hit products benefiting from China’s industrial policy, including its “Made in China 2025” plan to dominate certain strategic sectors. Industrial robots, motors for electric vehicles and semiconductors are all in its sights. (At least 90 products, including aircraft parts and cars, recorded no Chinese exports to America in 2017 and may be intended as a pre-emptive strike.)

That might seem fair in Mr Trump’s eyes. But bureaucrats crafting trade-protection policy face a trade-off between punching the other country and protecting their own consumers. Even before the latest announcement, some offending products had been dropped from America’s list after government analysts identified them as “likely to cause disruptions to the US economy”, or “subject to legal or administrative constraints”. The final choice took account of the availability of substitutes from elsewhere. Analysts at Goldman Sachs, a bank, estimate that of the products proposed for tariffs, only around 20% of America’s imports in 2017 came from China (the share is higher for LEDs, televisions, and printers and copiers).

The element of surprise

Some parts of America’s strategy were unexpected. Minimising disruption to businesses would suggest tariffs on finished goods rather than their inputs. Some companies may not realise that their suppliers are buying from China, so higher costs for intermediate goods could travel along supply chains in unpredictable ways. Pricier parts could make American manufacturers less competitive than foreign rivals. However, although the two biggest tariff lines by value on America’s list were colour-screen televisions and passenger vehicles, consumer products accounted for less than 20% of the affected imports.

What of China? In response to America’s tariffs on steel and aluminium, it placed tariffs on $0.2bn-worth of iron and steel tubes, pipes and hollow profiles, and $1.2bn-worth of aluminium waste. This echoed Canada’s response to the American Smoot-Hawley tariff of 1930, when it raised tariffs on eggs as retaliation for America doing the same. Douglas Irwin of Dartmouth College reports that the number of eggs Canada exported to America fell by 40% between 1929 and 1932. But the number going the other way plunged by 99%. Such tit-for-tat retaliation is intended to demonstrate that trade barriers make industries weaker, not stronger.

The list China published on April 4th is even bolder. It makes no effort to comply with World Trade Organisation rules, and aims at pressure points in America’s democracy, including industries with powerful lobbies, such as aircraft and soyabeans, as well as products from politically sensitive states. Wisconsin is home both to Paul Ryan, the Speaker of the House of Representatives, and a sizeable share of America’s cranberry exporters. Mitch McConnell, the Republican leader of the Senate, represents Kentucky, home to America’s bourbon exporters. Both products are included in China’s $50bn tariff threat.

Such methods have worked before. In 2003, when the European Union threatened to put tariffs on American products, including oranges, in retaliation for George W. Bush’s tariffs on European steel, Mr Bush yielded. (Florida, a crucial swing state, is home to many orange-growers.) Mr Trump’s pronouncements do not suggest he is ready to sue for peace. Nor does he seem aware of the risks of failure.


How Much Longer Can the American Empire Run on Fake Money?

Excerpted from Jay Taylor’s Gold & Energy Stocks Newsletter:


Gold rocketed to nearly $1,365 on Wednesday in New York, which is well above the $1,350 that Michael Oliver suggests is when technical price watchers will finally start to head into the yellow metal and related investments like gold stocks. But alas the banking cartel had other ideas and exercised a 100-tonne “pretend gold” smackdown in the gold paper futures markets starting at about noon that day, just to make sure the greatest competition in the world to the dollar didn’t start to lead to a loss of confidence.

This of course is nothing new. The Gold Anti Trust Action Committee (GATA) has been documenting paper market manipulation of the gold markets now for decades. Isn’t it interesting that more virtual gold trades in one day on the LBMA than is mined in an entire year. Whatever it takes, including endless wars to try to keep the petrodollar alive and trillions of dollars spent on blood and treasury. I truly believe Eisenhower’s fears of the endless power of the Military Industrial Complex are now playing out. It should be eminently clear now that “the President is not really the President of the United States.” That was established by the “Deep State” under Kennedy. If you have doubts about that, you might do well to read “Unlike Trump, Kennedy never bent a knee,” by Jacob G. Hornberger, the founder of The Future of Freedom Foundation and a former trial attorney in Texas.

While another war or two might buy a bit more time for the Anglo-American Empire, it should also be very clear that the U.S. military, like the U.S. budget, is out of control with no one specifically in charge. What it is instead is an amorphous powerful monster that needs more lands to conquer to justify more military spending that in turn will continue to keep massive parasitic bureaucracies ever expanding so that hundreds of thousands of Americans can continue living a splendid lifestyle while Americans who produce things of value find their living standards ever in decline.

If you are not questioning the legitimacy of the war just started this evening by the Neocons who run America you should be. Stop to ask yourself why for a second year in a row the Syrian leader would implement a gas attack on his own people a mere week after Trump said he would pull troops out of Syria, if the result of that would be to have bombs rain down on his country.

Also ask yourself why the U.S. refused to let an impartial country like Norway do an independent investigation into who actually was responsible for the recent gas attack. In fact, like the weapons of mass destruction that dragged us into Iraq, there never has been any proof of last year’s gas attack or this most recent one.

This may very well lead us into a hot war with Russia, a nuclear power. That is unthinkable but then who said the Military Industrial Complex, like a cornered animal being threatened by death, is doing much thinking? As I say, America is an empire that is out of control. Nothing but the hand of God will stop the enormous evil we are inflicting on country after country, rendering nations into death and poverty wherever we go.

Trump couldn’t keep his campaign promises because the President is not the President.

Kennedy tried to be. He never had time to realize he wasn’t the President, but the rest of us should have begun to understand that long ago, rather than quietly accepting the Warren Report, which I think had no more credibility than all other manner of CIA reporting that serves the out-of-control Imperial State monster whose heart resides in Washington.

What does this have to do with the gold markets and gold shares? I would submit to you it has a great deal to do with it. The one currency that would put all nations on an even playing field would be gold. A gold standard would mean the U.S. would have to earn its way to wealth rather than print money to pay for endless wars, death, and destruction. Nixon took us off the international gold standard in 1971 for that very reason, which enabled banks and financial institutions to get rich by impoverishing Americans with debt and job losses funded by bankers who have access to printing-press money. It also made it possible for America to fund endless wars with debt. But to keep the dollar viable, its leading competitor had to be held at bay. Hence smackdowns like the one this past Wednesday.

But the Russians and Chinese and a host of other countries are sick and tired of being told they have to use dollars for trade when doing so helps fund the U.S. that is outright hostile to those nations and seeks their overthrow. Led by the massive wealth gained by China over the years, financial institutions and a currency backed by gold appear to be well underway so that they can compete with the immoral monetary system the U.S. set up on August 15, 1971.

Now this gets directly to the issue of gold. Watch very carefully when in a week or so the first petro yuan contract comes due on the Shanghai Exchange. You know that countries that sell their oil to China will have to get paid in yuan. If they are a bit shaky on accepting yuan, they can hedge against yuan by taking delivery of gold (not paper delivery but real gold) on the Shanghai Gold Exchange, which, unlike the LBMA in London, is an honest, physical gold market. So while American economists with PhD’s in economics thumb their noses at gold as money and worship Keynesian lies that suggest nations can get rich by printing endless amounts of money no matter how far into debt and insolvency that takes them, the Russians (who are largely debt free) and the Chinese (not to mention the Iranians and other nations of Asia) are building up their gold reserves for the day when the U.S. self destructs, financially or otherwise.

As an American I don’t wish for that because when that happens there will be untold pain in our country. But clearly, the stage has been set. The bombing of Damascus by Trump today may be the start of an unfathomable war that he had little chance of avoiding given the obvious control of our government by the Deep State.

I believe we are on the cusp of a major breakout in the price of gold. It is taking more and more paper gold to hold it down and if/when those who buy paper gold, thinking that will protect them as well as the real thing, find out that isn’t true we may see a run on physical gold that could send the yellow metal to prices undreamed of by the most bullish of gold bulls. [Technician Michael Oliver]’s initial target once we get through $1,350 at the end of this month or a month in the near future is $1,700. By that time, it’s hard to imagine that there won’t be quite a number of people trading in their marijuana and cryptocurrencies for gold and gold mining shares.


This Really Is The Everything Bubble: Even Subprime Mortgage Bonds Are Back



All that’s missing is subprime mortgages and we’d have every bubble base covered. Oh wait, those are back too, just under a different name:

Subprime mortgages make a comeback—with a new name and soaring demand 
They were blamed for the biggest financial disaster in a century. Subprime mortgages – home loans to borrowers with sketchy credit who put little to no skin in the game.  
Following the epic housing crash, they disappeared, due to strong, new regulation, and zero demand from investors who were badly burned. Barely a decade later, they’re coming back with a new name — nonprime — and, so far, some new standards. 
California-based Carrington Mortgage Services, a midsized lender, just announced an expansion into the space, offering loans to borrowers, “with less-than-perfect credit.” Carrington will originate and service the loans, but it will also securitize them for sale to investors. 
“We believe there is actually a market today in the secondary market for people who want to buy nonprime loans that have been properly underwritten,” said Rick Sharga, executive vice president of Carrington Mortgage Holdings. “We’re not going back to the bad old days of ninja lending, when people with no jobs, no income, and no assets were getting loans.” 
Sharga said Carrington will manually underwrite each loan, assessing the individual risks. But it will allow its borrowers to have FICO credit scores as low as 500. The current average for agency-backed mortgages is in the mid-700s. Borrowers can take out loans of up to $1.5 million on single-family homes, townhomes and condominiums.  
They can also do cash-out refinances, where borrowers tap extra equity in their homes, up to $500,000. Recent credit events, like a foreclosure, bankruptcy or a history of late payments are aceptable. 
All loans, however, will not be the same for all borrowers. If a borrower is higher risk, a higher down payment will be required, and the interest rate will likely be higher. 
“What we’re talking about is underwriting that goes back to common sense sort of practices. If you have risk, you offset risk somewhere else,” added Sharga, while touting, “We probably are going to have the widest range of products for people with challenging credit in the marketplace.” 

Carrington is not alone in the space. Angel Oak began offering and securitizing nonprime mortgages two years ago and has done six nonprime securitizations so far. It recently finalized its biggest securitization yet — $329 million, comprising 905 mortgages with an average amount of about $363,000. Just more than 80 percent of the loans are nonprime. 
Investors in Angel Oak’s nonprime securitizations are, “a who’s who of Wall Street,” according to company representatives, citing hedge funds and insurance companies. Angel Oak’s securitizations now total $1.3 billion in mortgage debt. 
Angel Oak, along with Caliber Home Loans, have been the main players in the space, securitizing relatively few loans. That is clearly about to change in a big way, as demand is rising. 
“We believe that more competition is positive for the marketplace because there is strong enough demand for the product to support multiple originators,” said Lauren Hedvat, managing director, capital markets at Angel Oak. “Additionally, the more competitors there are, the wider the footprint becomes, which should open the door for more potential borrowers.” 
Big banks are also getting in the game, both investing in the securities and funding the lenders, according to Sharga. 
“It’s large financial institutions. A lot of people with private capital sitting on the sidelines, who are very interested in this market and believe that as long as the risks are managed well, and companies like ours are particularly good at managing credit risk, that it’s a good investment opportunity,” he said.

So today’s subprime mortgages are being written with lots of common sense safeguards. But demand for the resulting bonds is soaring and lots of new players, big and small, are getting into the game.

Wonder what that means for underwriting standards going forward…


Preparing for War

by Jeff Thomas




The statesman who yields to war fever must realize that once the signal is given, he is no longer the master of policy, but the slave of unforeseeable and uncontrollable events.

                                                                                                                    —Winston Churchill


Recently, the US government announced the replacement of its National Security Advisor. The existing military man—a combat veteran Lieutenant General, was replaced by someone who was, amazing though it may seem, more hawkish.

This came as a shock to the world and Americans in particular, as the new advisor, John Bolton, is seen publicly as aggressive at best and a psychopath at worst.

The New York Times recently said, “There are few people more likely than Mr. Bolton is to lead the country into war.”

In other comments, The New York Times has said:

Mr. Bolton, in particular, believes the United States can do what it wants without regard to international law, treaties or the political commitments of previous administrations… He has argued for attacking North Korea… which could set off a horrific war costing tens of thousands of lives… he has called for bombing Iran… He has also maligned the United Nations and other multilateral conventions… Mr. Bolton has largely disdained diplomacy and arms control in favor of military solutions.

Pretty scary stuff.

But then, the president’s cabinet is increasingly about scary stuff. From the beginning, it was loaded up primarily with generals, as well as central bankers. Since that time, the turnover of staff has leaned ever further in the direction of aggressive military men.

In learning of the latest appointment, an American associate complained to me, “Look who they’ve chosen to be in charge of National Security. Don’t they know that this guy is so hawkish that, no matter what the situation, he’ll push the US toward war?”

Well yes, that’s quite so. However, the question suggests that the US government is presently weighing the possibility of a major war. I doubt very much if this is the case.

I’m very much afraid that the logic in the question is, in fact, backwards.

The US made the decision to go to war some time ago. What they’re now doing is lining up the people they’ll need to assure that the wartime advisors are aggressive enough to see it through.

Any cabinet member who actually considers both war and peace to be equally viable must be removed and replaced with someone who’s committed to the decision that’s already been reached.

Another concern amongst Americans is that President Trump has reversed his campaign promise to “work with Putin and other world leaders,” and is now threatening warfare on multiple fronts. An increasing concern amongst Americans is that he must be made to see reason, or he’ll lead the US to war.

Again, I believe that the logic is the wrong way round. Mister Trump is irrelevant. The Deep State—that conglomerate of governmental agencies and corporations that rule the US—have long-since baked war into the cake. The current president will be expected to get into line.

This is evidenced by Mister Trump’s repeated claims in the morning that he intends to work with others, only to announce in the afternoon that he will do the exact opposite. Mister Trump has an exceptionally strong ego and does all he can to maintain his image of being in charge, but time after time, he’s had to reverse his public statements, often within the same day.

This is not the behaviour of a man who is truly in charge.

Looking back half a century, President Eisenhower’s final task in office was reputedly to advise the incoming President Kennedy that the recently formed CIA was rapidly becoming a monster and needed to be dismantled at all costs. Mister Kennedy agreed and attempted to do just that.

His effort did not end well. Since that time, the Deep State has grown far stronger. It remains faceless by design, yet it rules, in toto, from behind the scenes. Its leaders rise from within and are not subject to election or public acceptance. They’re independent of both the party system and the constitutional balance of the three branches of government.

Mister Bolton was not chosen in spite of his belief that the US should be an active aggressor in every instance—he was chosen because of it.

The US is going to war.

Historically, when political leaders decide to go to war, they do three things. First, they build up their military might. They explain this to the people as being “necessary for defense.” They then create a war council—a group of advisors who are not only willing to go to war, but are eager to do so. (This assures, as much as possible, that they will stay the course, often obsessively, when the going gets tough. But this is also the reason why leaders often fight to the bitter end, even when all hope is gone, costing excessive and pointless loss of life... after the writing is already on the wall.)

Finally, they create a justification for invasion. This is normally achieved either with a false-flag act of aggression, or a provoked attack by the intended opponent. It matters little which method is used, as the result is the same—a “justification” for invasion.

This was done by the US to justify the Spanish-American War, both World Wars, Viet Nam, and each of the American invasions into the Middle East.

In the war that is to come, the US is doing all it can to provoke attacks from other countries in both the Middle East and Asia, whilst providing the media with propaganda, claiming that the US is only invading and planning to invade foreign countries for reasons of “defense.”

In essence, the way this works is much like the behaviour of the schoolyard bully. He doesn’t strike his intended victim. He pushes him, again and again, until his victim can no longer tolerate the humiliation of being pushed and strikes back in some small way. This gives the bully the justification to claim that he’s been attacked, and then he follows with an immediate, full-force retaliation.

At present, the US is actively provoking a host of small countries and has already invaded quite a few of them in the last two decades.

The alarming factor in the US aggression is that these countries are all very far away from the US, yet right next door to Russia and China.

As the old saying goes, “The enemy of my enemy is my friend.” Therefore, this shoving match instigated by the US—which is taking place in the backyards of Russia and China—is almost certainly going to ally those two great powers in opposition to the US.

In addition, many other countries in the world have become tired of the ceaseless aggression by the US and have already formed alliances with Russia and/or China. (We cannot yet know to what degree they will take part once a major war breaks out.)

Further, unknown to most Americans, many of its former allies are becoming increasingly disenchanted with US sanctions that threaten their trade with those other powers. When they’re asked to join together in warfare against them, they’re very likely to refuse—or worse, change sides.

The world, if not America, sees the US government as the aggressor… and the war to come is not likely to end well for the US.


Trade Wars in a Winner-Take-All World

Daniel Gros



BRUSSELS – With President Donald Trump’s new trade tariffs, the United States has been transformed from the global multilateral trading system’s leading champion and defender to its nemesis. But it would be very difficult for an erratic politician suddenly to overturn long-established structures and mechanisms, were it not for a more fundamental economic shift.

The first formal manifestation of today’s trade tensions occurred in the steel sector – an “old economy” industry par excellence, one that is plagued, especially in China, by enormous excess capacity.

Excess capacity is a recurrent phenomenon in the steel sector, and has always produced friction. Back in 2002, President George W. Bush’s administration imposed steep tariffs on steel imports, but relented when a World Trade Organization dispute-resolution panel ruled against the US. Although Trump administration trade hawks remember this ruling as a loss, most economists agree that it was ultimately good for the US economy, which does not gain from taxing a major input for many other industries.

In any case, today’s tariffs differ from Bush’s in a crucial way: they specifically target China. Under section 301 of the US Trade Act of 1974 – which empowers the president to act if US industry has been damaged by a foreign government’s unjustified actions – Trump has imposed steep tariffs on some $50 billion worth of Chinese imports. And China has already hit back, introducing steep tariffs on imports of 128 US-made products.

So why is Trump risking a trade war? His administration’s main complaint is that China requires foreign companies to reveal their intellectual property (IP) as a condition of access to the domestic market. And it is true that this requirement can do serious damage to US tech companies – as long as those companies are dominant in their industries.

For a major player in social networks or search engines, for example, the cost of entering a new market is essentially zero. Since the existing software can easily serve many more millions of users, they just need to translate their interface into the local language, meaning that entering a new market mostly means more profits. But if such companies are forced to reveal their IP, their business models are destroyed, as local players can then compete effectively in that market – and potentially in others.

This is not the case for companies operating in competitive industries. For them, producing and selling more abroad costs much more, limiting the marginal profits that can be reaped. In other words, in the more competitive “old” economy, the gains of opening new markets are much smaller. That is why lobbying by potential exporters for better access to markets with high tariffs has usually been muted – hence the lack of resistance to India’s protectionism.

This is changing in the new “winner-take-all” tech economy: with IP-owning winners missing out on massive profits when a big market like China is protected or closed, trade conflicts become more acute. Meanwhile, trade policy becomes focused primarily on re-distributing rents, with employment and consumer interests viewed as secondary. (Under competitive conditions, policymakers place a higher priority on maximizing trade’s potential to boost productivity and create high-quality employment.)

Monopoly rents translate into high market valuations. And, indeed, the new economy giants have a much higher stock-market value than their “old economy” equivalents. The three largest US tech companies are worth over 50 times more than the three largest US steel producers.

The looming trade war promises to be asymmetric. The US – home to all the dominant tech firms – will struggle to find allies against China. After all, in Europe and Japan, IP-owning companies operate mostly in more competitive industries, meaning that China’s demand for that IP will have less of an impact.

Making European support even harder to come by, some European governments are eager to secure their share of rents from US firms. This is the ultimate aim of European efforts to raise taxes on the profits of digital multinationals, though such a tax is unlikely to do the job.

Proponents of that tax argue that profits should be taxed where they are earned, with the implicit argument being that they are earned where the consumers are. But this is an arbitrary criterion. US firms can legitimately claim that their “European” profits are just a return on their IP, which can formally be localized anywhere, preferably in a low-tax jurisdiction. A European tax on these companies is thus unlikely to yield substantial revenues.

In the old competitive economy, trade wars might be easy to win for a country with a large trade deficit. But in the emerging winner-take-all economy, a trade war launched with the goal of forcing the rest of the world to open up, thereby allowing the aggressor’s own winning firms to earn higher rents, is an altogether different proposition.

So the US government is essentially arranging its diplomatic guns behind its Internet giants, while Europe and China are baying for their monopoly profits. This is more destructive than a zero-sum game: it will do serious damage to the global trading system, leaving everyone worse off.


Daniel Gros is Director of the Brussels-based Center for European Policy Studies. He has worked for the International Monetary Fund, and served as an economic adviser to the European Commission, the European Parliament, and the French prime minister and finance minister. He is the editor of Economie Internationale and International Finance.