Monday, May 22, 2017

Markets are over estimating what Trump's tax plans will do



Watch the above video for the full video

Wednesday, May 17, 2017

Could Jeff Sessions be on the FBI ?


With purge of Comey the cover-up of Russia investigation will be complete as they will choose a stooge like Sessions for FBI job. Stinks!


Monday, May 8, 2017

Some risks are hard to calculate


With Emmanuel Macron’s defeat of the right-wing populist Marine Le Pen in the French presidential election, the European Union and the euro have dodged a bullet. But geopolitical risks are continuing to proliferate. The populist backlash against globalization in the West will not be stilled by Macron’s victory, and could still lead to protectionism, trade wars, and sharp restrictions to migration. If the forces of disintegration take hold, the United Kingdom’s withdrawal from the EU could eventually lead to a breakup of the EU – Macron or no Macron.

At the same time, Russia has maintained its aggressive behavior in the Baltics, the Balkans, Ukraine, and Syria. The Middle East still contains multiple near-failed states, such as Iraq, Yemen, Libya, and Lebanon. And the Sunni-Shia proxy wars between Saudi Arabia and Iran show no sign of ending.

In Asia, US or North Korean brinkmanship could precipitate a military conflict on the Korean Peninsula. And China is continuing to engage in – and in some cases escalating – its territorial disputes with regional neighbors.

Despite these geopolitical risks, global financial markets have reached new heights. So it is worth asking if investors are underestimating the potential for one or more of these conflicts to trigger a more serious crisis, and what it would take to shock them out of their complacency if they are.

There are many explanations for why markets may be ignoring geopolitical risks. For starters, even with much of the Middle East burning, there have been no oil-supply shocks or embargos, and the shale-gas revolution in the United States has increased the supply of low-cost energy. During previous Middle East conflicts – such as the 1973 Yom Kippur War, Iran’s Islamic Revolution in 1979, and Iraq’s invasion of Kuwait in 1990 – oil-supply shocks caused global stagflation and sharp stock-market corrections.

A second explanation is that investors are extrapolating from previous shocks, such as the attacks of September 11, 2001, when policymakers saved the day by backstopping the economy and financial markets with strong monetary and fiscal policy easing. These policies turned post-shock market corrections into buying opportunities, because the fall in asset prices was reversed in a matter of days or weeks.

Third, the countries that actually have experienced localized asset-market shocks – such as Russia and Ukraine after Russia’s annexation of Crimea and incursion into Eastern Ukraine in 2014 – are not large enough economically to affect US or global financial markets. Similarly, even as the UK pursues a “hard Brexit,” it still only accounts for around 2% of global GDP.

A fourth explanation is that the world has so far been spared from the tail risks associated with today’s geopolitical conflagrations. There has not yet been a direct military conflict between any major powers, nor have the EU or eurozone collapsed. US President Donald Trump’s more radical, populist policies have been partly contained. And China’s economy has not yet suffered from a hard landing, which would create sociopolitical instability.

Moreover, markets have trouble pricing such “black swan” events: “unknown unknowns” that are unlikely, but extremely costly. For example, the market couldn’t have predicted 9/11. And even if investors think that another major terrorist attack will come, they cannot know when.



A confrontation between the US and North Korea could also turn into a black swan event, but this is a possibility that markets have happily ignored. One reason is that, notwithstanding Trump’s bluster, the US has very few realistic military options: North Korea could use conventional weapons to wipe out Seoul and its surroundings, where almost half of South Korea’s population lives, were the US to strike. Investors may be assuming that even if a limited military exchange occurred, it would not escalate into a full-fledged war, and policy loosening could soften the blow on the economy and financial markets. In this scenario, as with 9/11, the initial market correction would end up being a buying opportunity.

But there are other possible scenarios, some of which could turn out to be black swans. Given the risks associated with direct military action, the US is now alleged to be using cyber weapons to eliminate the North Korean nuclear threat against the US mainland. This may explain why so many of North Korea’s missile tests have failed in recent months. But how will North Korea react to being militarily decapitated?


One answer is that it could launch a cyber attack of its own. North Korea’s cyber-warfare capabilities are considered to be just a notch below those of Russia and China, and the world got an early glimpse of them in 2014 when it hacked into Sony Pictures. A major North Korean cyber attack could disable or destroy parts of the US’s critical infrastructure, and cause massive economic and financial damage. That remains a risk even if the US can sabotage North Korea’s entire industrial system and infrastructure.

Or, faced with disruption of its missile program and regime, North Korea could go low-tech, by sending a ship with a dirty bomb into the ports of Los Angeles or New York. An attack of this kind would most likely be very hard to monitor or stop.

So, while investors may be right to discount the risk of a conventional military conflict between the US and North Korea, they also may be underestimating the threat of a true black swan event, such as a disruptive cyberwar between the two countries or a dirty bomb attack against the US.

Would an escalation on the Korean Peninsula be an opportunity to “buy the dip,” or would it mark the beginning of a massive market meltdown? It is well known that markets can price the “risks” associated with a normal distribution of events that can be statistically estimated and measured. But they have more trouble grappling with “Knightian uncertainty”: risk that cannot be calculated in probabilistic terms. 

via projectsyndicate

Wednesday, April 12, 2017

Border Adjustment Tax in USA will not happen



The decision to strike Syria has a bit of 'Wag the Dog' element according to Dr Nouriel Roubini. 

For the US to say NATO is obsolete is not constructive. The US is treating its allies in Europe and Asia less well. That's destabilizing Europe.

Watch the video above for full interview

Tuesday, April 11, 2017

Republicans think supply-side trickle down policies are great


US President Donald Trump’s first major legislative goal – to “repeal and replace” the 2010 Affordable Care Act (“Obamacare”) – has already imploded, owing to Trump and congressional Republicans’ naiveté about the complexities of health-care reform. Their attempt to replace an imperfect but popular law with a pseudo-reform that would deprive more than 24 million Americans of basic health care was bound to fail – or sink Republican members of Congress in the 2018 mid-term elections if it had passed.

Now, Trump and congressional Republicans are pursuing tax reform – starting with corporate taxes and then moving on to personal income taxes – as if this will be any easier. It won’t be, not least because the Republicans’ initial proposals would add trillions of dollars to budget deficits, and funnel over 99% of the benefits to the top 1% of the income distribution.

A plan offered by Republicans in the US House of Representatives to reduce the corporate-tax rate from 35% to 15%, and to make up for the lost revenues with a border adjustment tax, is dead on arrival. The BAT does not have enough support even among Republicans, and it would violate World Trade Organization rules. The Republicans’ proposed tax cuts would create a $2 trillion revenue shortfall over the next decade, and they cannot plug that hole with revenue savings from their health-care reform plan or with the $1.2 trillion that could have been expected from a BAT.

The Republicans must now choose between passing their tax cuts (and adding $2 trillion to the public debt) and pursuing a much more modest reform. The first scenario is unlikely for three reasons. First, fiscally conservative congressional Republicans will object to a reckless increase in the public debt. Second, congressional budget rules require any tax cut that is not fully financed by other revenues or spending cuts to expire within ten years, so the Republicans’ plan would have only a limited positive impact on the economy.

And, third, if tax cuts and increased military and infrastructure spending push up deficits and the public debt, interest rates will have to rise. This would hinder interest-sensitive spending, such as on housing, and lead to a surge in the US dollar, which could destroy millions of jobs, hitting Trump’s key constituency – white working-class voters – the hardest.

Moreover, if Republicans blow up the debt, markets’ response could crash the US economy. Owing to this risk, Republicans will have to finance any tax cuts with new revenues, rather than with debt. As a result, their roaring tax-reform lion will most likely be reduced to a squeaking mouse.

Even cutting the corporate tax rate from 35% to 30% would be difficult. Republicans would have to broaden the tax base by forcing entire sectors – such as pharmaceuticals and technology – that currently pay little in taxes to start paying more. And to get the corporate-tax rate below 30%, Republicans would have to impose a large minimum tax on these firms’ foreign profits. This would mark a departure from the current system, in which trillions of dollars in foreign profits remain untaxed unless they are repatriated.

During the presidential campaign, Trump proposed a one-time 10% repatriation-tax “holiday” to encourage American companies to bring their foreign profits back to the United States. But this would deliver only $150-200 billion in new revenues – less than 10% of the $2 trillion fiscal shortfall implied by the Republicans’ plan. In any case, revenues from a repatriation tax should be used to finance infrastructure spending or the creation of an infrastructure bank.
Some congressional Republicans who already know that the BAT is a non-starter are now proposing that the corporate income tax be replaced with a value-added tax that is legal under WTO rules. But this option isn’t likely to go anywhere, either. Republicans themselves have always strongly opposed a VAT, and there is even an anti-VAT Republican caucus in Congress.

The traditional Republican view holds that such an “efficient” tax would be too easy to increase over time, making it harder to “starve the beast” of “wasteful” government spending. Republicans point to Europe and other parts of the world where a VAT rate started low and gradually increased to double-digit levels, exceeding 20% in many countries.

Democrats, too, have historically opposed a VAT, because it is a highly regressive form of taxation. And while it could be made less regressive by excluding or discounting food and other basic goods, that would only make it less appealing to Republicans. Given this bipartisan opposition, the VAT – like the BAT – is already dead in the water.

It will be even harder to reform personal income taxes. Initial proposals by Trump and the Republican leadership would have cost $5-9 trillion over the next decade, and 75% of the benefits would have gone to the top 1% – a politically suicidal idea. Now, after abandoning their initial plan, Republicans claim they want a revenue-neutral tax cut that includes no reductions for the top 1% of earners.

But that, too, looks like mission impossible. Implementing revenue-neutral tax cuts for almost all income brackets means that Republicans would have to phase out many exemptions and broaden the tax base in ways that are politically untenable. For example, if Republicans eliminated the mortgage-interest deduction for homeowners, the US housing market would crash.

Ultimately, the only sensible way to provide tax relief to middle- and lower-income workers is to raise taxes on the rich. This is a socially progressive populist idea that a pseudo-populist plutocrat like Trump will never accept. So, it looks like Republicans will continue to delude themselves that supply-side, trickle-down tax policies work, in spite of the overwhelming weight of evidence to the contrary.

Monday, March 27, 2017

Donald Trump Border Adjustment Tax

The United States may be about to implement a border adjustment tax. The Republican Party, now in control of the legislative and executive branches, views a BAT – which would effectively subsidize US exporters, by giving them tax breaks, while penalizing US companies that import goods – as an important element of corporate-tax reform. They claim that it would improve the US trade balance, while boosting domestic production, investment, and employment. They are wrong.

The truth is that the Republicans’ plan is highly problematic. Along with other proposed reforms, the BAT would turn the US corporate income tax into a tax on corporate cash flow (with border adjustment), implying far-reaching consequences for US companies’ competitiveness and profitability.

Some sectors or firms – especially those that rely heavily on imports, such as US retailers – would face sharp increases in their tax liabilities; in some cases, these increases would be even greater than their pre-tax profits. Meanwhile, sectors or firms that export, like those in manufacturing, would enjoy significant reductions in their tax burden. This divergence seems both unwarranted and unfair.

The BAT would have other distributional implications, too. Studies indicate that it may hit consumers among the bottom 10% of income earners hardest. Yet it has been promoted as a way to offset the corporate-tax cuts that Republicans are also pushing – cuts that would ultimately benefit those at the top of the income distribution.

Making matters worse, the BAT would not actually protect US firms from foreign competition. Economic theory suggests that, in principle, a BAT could push up the value of the dollar by as much as the tax, thereby nullifying its effects on the relative competitiveness of imports and exports.

Moreover, the balance-sheet effects of dollar appreciation would be large. Because most foreign assets held by US investors are denominated in a foreign currency, the value of those assets could be reduced by several trillion dollars, in total. Meanwhile, the highly indebted emerging economies would face ballooning dollar liabilities, which could cause financial distress and even crises.

Even if the US dollar appreciated less than the BAT, the pass-through from the tax on imports to domestic prices would imply a temporary but persistent rise in the inflation rate. Some studies suggest that, in the BAT’s first year, the new tax could push up US inflation by 1%, or even more. The US Federal Reserve may respond to such an increase by hiking its policy rate, a move that would ultimately lead to a rise in long-term interest rates and place further upward pressure on the dollar’s exchange rate.

Yet another problem with the BAT is that it would create massive disruptions in the global supply chains that the US corporate sector has built over the last few decades. By undermining companies’ capacity to maximize the efficiency of labor and capital allocation – the driving motivation behind offshoring – the BAT would produce large welfare costs for the US and the global economy.

The final major problem with the BAT is that it violates World Trade Organization rules, which allow border adjustment only on indirect taxation, such as value-added tax, not on direct taxes, like those levied on corporate income. Given this, the WTO would probably rule the BAT illegal. In that case, the US could face retaliatory measures worth up to $400 billion per year if it didn’t repeal the tax. That would deal a serious blow to US and global GDP growth.

So how likely is the US to enact the BAT? The proposal has the support of the Republican majority in the House of Representatives, but a number of Senate Republicans are likely to vote against it. Democrats in both houses of Congress are likely to vote against the entire proposed corporate-tax reform, including the BAT.

The executive branch is also split on the issue, with President Donald Trump’s more protectionist advisers supporting it and his more internationalist counselors opposing it. Trump himself has sent mixed signals.

Disagreement over the BAT extends to business as well, with firms that export more than they import supporting it, and vice versa. As for the general public, low- and middle-income households should oppose the BAT, which would drive up prices of the now-cheap imported goods that these groups currently consume, though Trump’s blue-collar constituents, particularly those who work in manufacturing, may support the measure.

Ultimately, the case for the BAT is relatively weak – far weaker than the case against it. While this may be enough to ensure that it doesn’t pass, there are strong protectionist forces in the US government pushing hard for it and similar policies. Even if the BAT is rejected, the risk of a damaging global trade war triggered by the Trump administration will continue to loom large.