The dramatic economic decline due to the Covid-19 crisis and the unprecedented recovery spending plans approved by President Trump will drive the fiscal 2020 United States budget deficit to a record $3.8 trillion, or 18.7% of U.S. gross domestic product, according to the Committee for a Responsible Federal Budget (CRFB). According to the same estimates, the fiscal 2021 deficit would reach $2.1 trillion in 2021, and average $1.3 trillion through 2025 as the economy recovers from the impact of the forced shutdowns.
To finance this staggering fiscal effort, the Democratic Party leader, Joe Biden, is announcing a massive tax hike that will neither help the economy nor reduce the deficit.
The solution to the United States budget deficit is not more taxes. Even in the most optimistic receipt scenario, there is no tax hike program that would even start to address the structural deficit, estimated at one trillion dollars a year, even less with the above-mentioned estimates.
More taxes will hurt the recovery, damage the job improvement potential, and reduce investment in the economy. More taxes mean less growth and no deficit improvement.
The Obama administration learnt this lesson quickly, and extended the Bush tax cuts in 2020, adding a new tax cut in 2013. Other United States misguided tax hikes in 2013 did nothing to reduce the debt and kept the economic and job growth below potential.
A wealth tax, often repeated by the most extreme politicians in America, would not only provide exceedingly small revenues for the Treasury, it would generate more negatives than any improvement in tax receipts. There is a reason why almost every European nation has abandoned the wealth tax. The receipts are negligible and the negative impact on investment, attraction of capital and job creation outweigh any revenue increase. The wealth tax revenue relative to GDP in the countries where it exists range between 0.07% in Finland to 0.22% in France. There is no way that a wealth tax would collect 1.4% of GDP as Senator Warren estimated. A wealth tax in the United States would make no visible reduction in the existing deficit, let alone finance the trillions in entitlement spending that Biden has announced.
So, how can the United States reduce the deficit?
US deficit is rising due to excessive spending increases, despite periods of rising tax receipts. The federal government’s revenue went up by 4%, to $3.46 trillion in the 2019 fiscal year, according to the Congressional Budget Office (CBO) report. However, spending went up by more than 8%, to $4.45 trillion.
The rise in 2019 deficit was not due to the “tax cuts”. If anything, the tax cuts helped the economy stay in expansion, creating jobs and increasing receipts at the same time. Corporate income taxes increased by $25 billion (+12%), while individual income and payroll taxes together rose by $107 billion (+4%). Overall, total receipts rose by 4% ($3,462 billion in the fiscal year 2019). Total receipts remained at 16.15% of GDP, which is the long-term trend figure and consistent with an economy that remained in expansion with moderate growth.
The main problem is that total outlays rose by 8% (to $4,446 billion), driven mostly by mandatory expenses in Social Security, Medicare, and Medicaid.
Those that say that the deficit would have been solved eliminating the Trump tax cuts have a problem with mathematics. There is no way in which any form of revenue measure would have covered a $338 billion spending increase.
No serious economist can believe that keeping uncompetitive tax rates well above the average of the OECD would have generated more receipts. Furthermore, no serious economist can believe that eliminating the Trump tax cuts would have generated more than $300 billion of new and additional revenues.
Remember that corporate tax receipts already fell 1% in 2017 and 13% in 2016, before the Trump tax cuts. The operating profit recession was already evident. If anything, reducing the corporate rate helped companies recover, which in turn made total fiscal revenues rise by $13 billion to $3,328 billion in the fiscal year 2018, according to CBO.
The problem of the United States budget is Mandatory Spending.
Mandatory spending was $2 trillion out of a total of $4.45 trillion outlays in fiscal year 2019. This figure is projected to increase to $3.3 trillion. Even if discretionary spending stays flat, total outlays are estimated to increase significantly above any advance in tax revenues.
Printing money has not reduced deficits or debt. The Federal Reserve has increased its balance sheet to record-highs, on its way to $10 trillion, and purchasing Treasuries has only driven governments to continue to spend above budget and the trend of receipts.
Furthermore, if proponents of massive money printing tell us that deficits do not matter and that the United States government should spend all it needs because the Fed will acquire all the debt, then there is no need for higher taxes, is there? In fact, if Modern Monetary Theory (MMT) proponents were right, taxes should be cut, and deficits monetized to drive the recovery.
The problem is that the magic money tree does not exist. Monetary policy is only disguising a structural and dangerous spending problem and this reckless behaviour can only be maintained if the US dollar remains the world reserve currency. Therefore, not only there is a limit to how much can the Fed print, there is also a risk that if governments do not reduce spending, the US may lose its world reserve currency status.
Consequently, the only solution for America to reduce debt is to cut spending and entitlements.
Any politician should understand that it is simply impossible to collect an additional $3 trillion per year over and above the existing receipts. They should also understand that the trust in the US dollar may collapse if deficits continue to balloon.
It is completely impossible to double the receipts of a growth year like 2019 with higher taxes. Higher taxes will only wreck an already weak economy and delay the recovery. It is completely impossible to reduce deficits printing money. Governments will only increase spending if they can monetize it at the expense of real wages and savings.
Believing that the deficit can be reduced by massively hiking taxes is not understanding the US economy and the global situation. It would lead to job destruction, corporate relocation to other countries and lower investment. Believing that the deficit will be reduced printing money is not understanding the perverse incentives of governments.
The proof that the US problem is a spending issue is that even those who propose massive tax hikes are not expecting to meaningfully cut the deficit, even less so reduce the debt, that is why they add massive money printing to their magic solutions. It will not work either. And this reckless policy may destroy the US dollar’s reserve status.
Debt matters, even if interest rates are low. Increasing debt and spending means lower growth and weaker real wages in the future.
GBP/USD extends losses on mixed UK data
UK retail sales improve, PMIs remain in contraction The British pound is in negative territory after two days of losses. In the European session, GBP/USD…
- UK retail sales improve, PMIs remain in contraction
The British pound is in negative territory after two days of losses. In the European session, GBP/USD is trading at 1.2245, down 0.40%. The struggling pound is down 1.1% this week and is trading at its lowest levels since late March.
UK retail sales improve, PMIs mixed
It is a busy day on the data calendar for UK releases. Retail sales rose in August by 0.4% m/m, following a 1.1% decline in July and was just shy of the market consensus of 0.5%. The sharp decline in July was largely due to unusually wet weather. On an annual basis, retail sales fell by 1.4%, compared to -3.1% in July. Consumer spending has been in a nasty rut, as annualized retail sales have now declined for 17 straight months. The silver lining was that the -1.4% drop marked the slowest pace of contraction in the current streak.
The September PMIs were a mixed bag. The Services PMI slowed to 47.2 in September, down from 49.5 in August and missing the consensus estimate of 49.2. This marked a second straight deceleration and the sharpest contraction since January 2021. The Manufacturing PMI increased to 44.2 in September, up from 43.0 in August and above the consensus estimate of 43.0.
The decline in activity in both services and manufacturing points to a UK economy that continues to cool. The Bank of England, which held interest rates on Thursday, will be hoping that the slowdown translates into lower inflation and that it can continue to hold interest rates.
UK consumer confidence remains low, but there was a bit of an improvement in September. The GfK consumer confidence index rose to -21, up from -25 in August and beating the consensus estimate of -27. This was the highest reading since January 2022, but the economy has a long way to go before consumers show optimism about the economic outlook.
- GBP/USD is testing support at 1.2267. The next support level is 1.2156
- There is resistance at 1.2325 and 1.2436
“Go To Hell”: Brave EU Politician Delivers Damning Message To Global Tyrants
"Go To Hell": Brave EU Politician Delivers Damning Message To Global Tyrants
Via The Vigilant Fox,
Member of the European Parliament Christine…
Member of the European Parliament Christine Anderson has been an unyielding opponent to Klaus Schwab’s ‘Great Reset’ Agenda. Known best for her famous smackdown on Justin Trudeau, MEP Anderson has established herself as one of the few politicians left who represent the interests of the European people.
September 13 was no different as MEP Anderson took no prisoners in her latest warning to the globalitarian elite. Before the European Parliament, in a session specifically focused on the COVID-19 response and the World Health Organization, MEP Anderson ended the meeting with a powerful statement.
Here’s what she said, word for word:
‘Go to Hell’: MEP Christine Anderson Delivers Damning Message to the Global Tyrants— The Vigilant Fox ???? (@VigilantFox) September 21, 2023
“If you do not unequivocally stand with the people ... you have no place in any parliament or in any government. You belong behind bars. You may even rot in hell for all I care at this point… pic.twitter.com/4sOVrr9CgC
“We just need to find a way to wake the people up. Because the point is simply this: it comes down to a choice. It’s either freedom, democracy, and the rule of law — or enslavement.
“There is no such thing in between. There is no such thing as a little freedom, a little democracy, a little rule of law, just as there is no such thing as a little enslavement. So that’s the choice. It comes down to – it’s either the globalitarian misanthropists or the people. It comes down to – it’s either us or them. And that’s, I think, what this really is all about.
“Now, when my colleagues and I were elected to this parliament, there was no question about it. We were on the side of the people because the people actually pay us to act in their best interests. That’s our job. And once again, I will say to every single elected representative around the world, to every single member in every elected government around the world, if you do not unequivocally stand with the people and serve in their best interests, act in their best interests, you have no place in any parliament or in any government. You belong behind bars. You may even rot in hell for all I care at this point because that’s exactly what you deserve if you sell out the people.”
MEP Anderson continued. “Now, I would like to make a promise to the people, and I’m pretty sure I can speak or speak on behalf of my colleagues. We will continue to stand with you, the people. We will continue to fight for freedom, democracy, and the rule of law. We will not shut up, and we will not stop going after those despicable globalitarian misanthropists.
“But we would also like to have you make a promise to us. You may have heard it’s all coming back. The first country is already starting [to talk about] mask mandates in Israel. They’re already imposing it. I’ve heard of a few universities in the United States. They’re already bringing it all back. And I would really like for you, the people, to not go along. Simply say no! They want you to wear a mask; say no. They want you to put in another mRNA shot; say no. They want to impose a curfew on you; say no. That’s really all you have to do.
“And it might not be or might sound a little hard, but it’s actually not that hard. Because once you have made it clear to them that you will no longer go along, once you’ve let them know, they cannot scare you anymore. Because as long as you are afraid of what they might do if you don’t comply, they have power over you. Take the power away from them! Simply say no. Once you do that, they don’t have power over you anymore. You will feel so free. Simply say no.
“And considering what we’ve heard today, and considering what we’ve seen in the last three years. Considering what we know they want to implement, heck, you might even be well within your right to tell them to screw themselves and go to hell! That’s where they belong. What will you get out of that? I can tell you. Once you’ve done that, once you’ve told them to just go to hell, they no longer have power over you. You will have an incredible feeling — kind of like a sensation of freedom will swap through your body. I promise you will feel so relieved.
“And this is the state of mind that I would ask all of you to get to. Simply don’t let them grind you down anymore. You are worth it. You are deserving of just standing up for yourselves. And tell them all to go to hell. Thank you very much.”
* * *
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Yen Drops After BOJ Does Nothing and Says Little
Overview: The BOJ’s failure to do anything or
further ideas that an exit of the negative target rate, despite the firm CPI
report helped the dollar…
Overview: The BOJ's failure to do anything or further ideas that an exit of the negative target rate, despite the firm CPI report helped the dollar recover the ground lost yesterday against the yen. The focus has returned to "intervention watch" and the market continues to press for the official pain threshold. Sterling is the weakest of the G10 currencies, off another 0.5% today following the BOE's decision not to hike yesterday. The dollar-bloc currencies enjoy a firmer tone. Emerging market currencies are mostly firmer, including the Chinese yuan.
Reports that Beijing is considering reducing some capital controls helped lift Chinese and Hong Kong equities today. Taiwan and Australian equities also advanced, while the other large bourses headed south. Europe's Stoxx 600 is extending yesterday's 1.3% drop, while US index futures are slightly higher. Yesterday's 1.6% drop in the S&P was the largest drop in six months and it was unable to recover from the gap lower opening. That gap (~4375-4401) has technical significance. European bond yields are narrowly mixed, but UK Gilts continue to rally. The US 10-year Treasury yield is slightly softer near 4.48%. Gold has come back firmer after falling more than 0.5% yesterday (its largest loss in around three weeks) and is near the 200-day moving average ($1925). November WTI has steadied and looks to snap a three-day decline. It is back above $90 a barrel and looks poised to settled higher for the fourth consecutive week.
The Bank of Japan did not change its stance, and Governor Ueda gave little hint that a change in rates is possible before the end of the year, as he did earlier this month. Indeed, he suggested those remarks were intended simply to keep the BOJ options open. The dollar, which had fallen to around JPY147.30 yesterday recovered to back toward the recent highs near JPY148.40. Japanese officials underscored they are prepared to counter excessive fx moves.
Before the BOJ's meeting concluded, Japan reported August CPI figures, which were largely anticipated by the Tokyo CPI previously reported came in a little firmer. The headline rate slipped to 3.2% from 3.3%. The core rates were unchanged. Excluding fresh food, Japan's CPI remained at 3.1% and the measure excluding both fresh food and energy stayed at the cyclical high of 4.3%. Separately, the flash PMI came in softer. The manufacturing PMI eased to 48.6 from 49.6 and the services PMI stands at 53.3, down from 54.3. This saw the composite fall to 51.8 from 52.6. Lastly after buying the most foreign bonds since 2020 in the week ending September 8 (~JPY3.6 trillion or ~$24.5 bln), Japanese investors bought another JPY885.5 bln. Meanwhile, while foreign investors bought JPY438 bln of Japanese bonds, they dumped JPY1.58 trillion of Japanese stocks, most in four years.
Australia's flash PMI showed the service sector grew (50.5 vs. 47.8), while the manufacturing sector slump deepened (48.2 vs. 49.6). Manufacturing new orders were the weakest since May 2020. The composite rose above 50 (to 50.2 from 48.0) for the first time in three months. The central bank meets on October 3 and the market sees practically no chance of a change in rates.
Yesterday, the dollar traded on both sides of Wednesday's range but the close was within the range, which removed much of the technical significance of the outside day. The broad range may be best explained by short covering of the yen ahead of the BOJ meeting. The dollar is trading back above JPY148.00 as the market continues to test the official resolve. The dollar settled near JPY147.85 last week and has only falling in one week since the end of July. The Australian dollar peaked before the FOMC meeting outcome near $0.6510 and found some bids near $0.6385 yesterday. It settled at $0.6415. It is trading with a firmer bias today and is knocking around $0.6440. To help stabilize the technical tone, the Aussie needs to get back above the $0.6465 area. However, the intraday momentum indicators are stretched in the European morning, suggesting some back and filling in early North American activity. Reports suggesting China is considering lifting some capital controls helped the yuan steady today. The greenback has been in about a 35-pip range on either side of CNY7.30. The dollar's reference rate was set at CNY7.1729. The average in Bloomberg's survey was CNY7.3028 and the gap with the fix was the widest yet. Offshore liquidity is being squeezed.
Following the flurry of European central bank meetings yesterday, the preliminary September PMI lost some of its luster. Norway, where we thought there was scope for surprise, turned out to be the least surprising. Sweden hiked but was more cagey about another hike, lifting its policy path by 10 bp. Milquetoast. It announced it would liquidate a quarter of its currency reserves, which was unexpected. The Swiss National Bank stood pat, surprising economists. But the swaps market did not think a hike was the most likely scenario, but the franc sold off hard anyway. The market went into the BOE meeting with an almost 50/50 outlook after the soft August CPI. In a 5-4 vote, where Governor Bailey cast the deciding vote, the BOE stood pat. It cut Q3 GDP forecast to 0.1% from 0.4%. However, it increased the pace of the balance sheet unwind to GBP100 bln in the fiscal year beginning next month from GBP80 bln this fiscal year.
The eurozone flash September PMI was mixed. The manufacturing PMI slipped to 43.4 from 43.5 and the services PMI edged up to 48.4 from 47.9. The composite stands at 47.1, up from 46.7. New orders softened to 44.5 from 44.6, which is the lowest since November 2020. Germany's preliminary readings were poor but better than August. The manufacturing PMI is at 39.8 (from 39.1). The services PMI is at 49.8 (47.3). The composite rose to 46.2 from 44.6, the first uptick since April. France moved in the opposite direction. Its PMI fell. The manufacturing tumbled to 43.6 from 46.0. The services PMI is at 43.6, down from 46.0. The composite now stands at 43.5 compared with 46.0 in August, a new low since late 2020.
The UK reported August retail sales. After falling a revised 1.1% in July (initially -1.2%), UK retail sales rose 0.4% in August, slightly less than the median projection in Bloomberg's survey. The flash PMI was disappointing. While the contraction in manufacturing eased (44.2 from 43.0), the contraction in services deepened (47.2 from 49.5). The composite PMI fell to 46.8 from 48.6, a new three-year low.
After posting an outside down day on Wednesday, the euro extended its decline to almost $1.0615 yesterday, a six-month low, and retested it today. Since the low was recorded, the euro's high has been about $1.0650. The price action, however, is uninspiring and an important low does not seem in place. Sterling was punished for the BOE's failure to deliver a hike, which was roughly 50% discounted. Yesterday's six-month low was near $1.2240 has been taken out today, and a marginal new low closer to $1.2230 has been recorded. Like the euro and yen, sterling recovered into the close of the European session to trade a little above $1.2300. It spent the North American afternoon in about a 10-tick range and settled a couple of hundredths of a cent below $1.23, and today, was sold when it briefly poked above it. Nearby support is seen near $1.22, but the next important target is the $1.2000-$1.2075 area.
US data was mixed yesterday. The Q2 current account deficit was slightly smaller than expected but it was inconsequential. Weekly jobless claims were lower than expected and the four-week average (217k) is the lowest since February. Continuing claims fell to their lowest since January. The September Philadelphia Fed survey was showed a sharp deterioration (to -13.5 from 12.0) and existing home sales fell for the third consecutive month, defying expectations for a small gain, after falling nearly 5.5% in the previous two months. The August index of Leading Economic Indicators continued it uninterrupted decline that goes back to Q1 22. Attention today turns to the preliminary September PMI, where economists expect slightly firmer readings. Still, the market is trying to adjust to the signal by the FOMC sees an economy growing faster than its non-inflationary speed limit, requiring policy to be restrictive for longer. The Fed funds futures strip does not have the first fully discounted in late Q3 24. By comparison, the swaps market has the first ECB cut fully discounted by early Q3.
Canada reports July retail sales today. Somewhat better numbers than June are expected when retail sales rose 0.1%, driven by autos. With them, retail sales fell by 0.8%. The swaps market has almost an 80% chance of another Bank of Canada rate hike by the end of the year. No cut its priced through Q3 24. Inflation for the first half of September will be reported by Mexico today. The bi-weekly reading may accelerate slightly, but the downtrend in the year-over-year rate should continue. The central bank meets next week, but policy is expected to be steady well into next year. The swaps market seems to be pushing the first cut into Q2 24.
The US dollar popped up to almost CAD1.3525 yesterday. The week and month's low were set on Tuesday near CAD1.3380. The greenback's momentum stalled, and it settled slightly below CAD1.3485. It is trading with a heavier bias but is holding above yesterday's low near CAD1.3450. Support now is seen around CAD1.3440, but the US dollar looks set to trade higher in North America today. After briefly dipping below MXN17.00 before the outcome of the FOMC meeting, the dollar reached MXN17.25 yesterday. That is a little shy of the (38.2%) retracement of the leg down from the nearly four-month high set on September 7 around MXN17.7080. The next retracement (50%) is slightly above MXN17.35. It is consolidating in the European morning mostly MXN17.16.
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