comments on posting for Bill Gross's Misguided Diagnosis Of America's Economic Problems | LinkedIn

Bill Gross's Misguided Diagnosis Of America's Economic Problems | LinkedIn

There was an interesting article (which I'd be unable to reference) a few months back in something like Barrons about how the effect of bad fiscal policies slowly saps the strength of an economy.

Likewise, I recall that at the end of the 1970's and with the epiphany of the 1980's in the US, it was determined that the 'stagnation' of the 70's was due to government taking too big a share of GDP (with the correct number roughly 19%) - i.e. growth.

We all know the share today, which is much higher.

Based on the above slow-sapping argument, we are clearly seeing the results of too-big-government in Europe.

So, I'd go back to my previous postulation that one has to look at the bottom line net to the individual (again, low corporate taxes - e.g. in much of Europe (below individual rates) may help large companies but they are totally counter-productive to entrepreneurism).

Thus, the trenchant question would appear to be whether or not the distortion of financial modeling, created by Fed and Central Bank policies is a major contributor to the lack of investment and the creation of job opportunities.

I would assume an econometric analysis would only reflect input variables and that would be a selective task, leading to selective output.

Sitting here in Europe, I know I wouldn't consider investing in or starting up any type of traditional business - service or sales. The only business I'd look at, as we are seeing in the US, are those businesses which are game-changers.

Not everyone can participate in such businesses - either through natural skill or training. However, there is always a need for a plumber, electrician, etc. (Note in Europe the impact of a 23% VAT on services.)

So again, if money is the life blood of an economy; and, if some people save (retirees) and others borrow (young people) - all traditional business school stuff; then, if interest rates are below the traditional norms, there is a distortion.

Supply and demand would suggest that if there is excess supply, then demand should pick-up with lower prices (i.e. for money). This isn't really happening - except in the US in housing and probably car loans.

I know if I did an SME business plan with an IRR based on higher individual tax rates (assume the entity doesn't incorporate), then I'd need a greater gross margin (EBITA) than otherwise with these high personal income tax rates.

A higher gross margin suggests that there has to be an abnormal constraint on supply in order to permit this higher margin. Again, think fewer businesses.

As a banker, one perceives (even if one doesn't fully understand the underlying logic) and one toughens ones lending standards. This is what apparently is going on (Bloomberg comments this weekend on banking).

So a bank has to compensate for risks that are engendered by poorly structured for growth fiscal policies. Etc.    

I think of Bernanke's low rate policies as having two key negatives: (1) they encourage government spending and borrowing; (2) like a car stuck on ice with an inexperienced driver flooding the engine with gas to get the car moving - one first needs to remove the fiscal policy ice and snow.

How this all turns out, longer term, one doesn't know.

However, it is interesting to postulate and observe how change is accelerating and many things get old before their previously expected obsolescence. Thus, in economies (including the US but particularly in much of Europe) where the grease for change and growth - read growth oriented fiscal and regulatory and tax policies - are missing or weak, we see vast youth unemployment.

Youth should be working in new businesses and changed businesses - and, those are not being created, at least to the degree necessary.

In the US, something somewhat similar is happening in that the knowledge-based part of the economy is growing and replacing the less-skilled, more labor intensive (read: employment) part of the economy (think retail).

Etc.

Big Brother Meets Big Data - Barrons.com

Big Brother Meets Big Data - Barrons.com

John C wrote: "|Ben Bernanchio's legacy will be higher prices for food, fuel and medical costs and who knows what other unintended consequences."

response: 

Something one can also ponder is whether Laffer's view of the cause and effects of the 30's depression might not also be what we are seeing now:

i.e. for many people there aren't jobs. New tech creates new and replacement jobs; and, as it becomes more expensive to high workers (e.g. Obamacare) or the income from doing business is reduced (e.g. Bill Gross's trenchant article on the effects of low rates on banking and lending - cost sizable numbers of direct jobs in banking and finance and reduced business lending) -

 (Bill Gross Explores the Downside of Ultra-Low Rates
By WILLIAM H. GROSS | MORE ARTICLES BY AUTHOR
The PIMCO founder wonders whether the Fed's policy of "zero-bound" interest rates has become as much a problem as a solution for the economy.)
http://online.barrons.com/article/SB50001424052748703578204578525100112860398.html?mod=djembdr_h#articleTabs_article%3D0

- it might be conceivable that we will be fighting an ongoing sense of deflation as more and more have to do with less; and, as more of what's left gets taken by government for redistribution. That is surely what the case seems to be like in much of Europe, where taxes go up, the economy contracts and contracts faster than any cutbacks in government.

Where Are the "Best and Brightest?" - Barrons.com

Where Are the "Best and Brightest?" - Barrons.com

This article seems sadly like looking at only a few trees in the forest - i.e. there are broad pressures in US tax law to keep large numbers of jobs outside of the US - especially for multi-national companies.

Obama's new high personal income tax rates are the bane evident in Europe - i.e. when small businesses start, the income likely comes to and accrues to an individual entrepreneur not a corporation.

Thus, to build more small tech businesses (not just a few high flyers), maximum personal income tax rates and corporate rates need to come down - a lot. (In Europe, for example, corporate rates may be in the 20% range but personal tax rates are in the 40-50% range. Exceptions include countries in Eastern Europe where personal rates can be capped in the 15% range.)

Another aspect of misplaced policies with unintended consequences is highlighted by Bill Gross in the following: http://online.barrons.com/article/SB50001424052748703578204578525100112860398.html?mod=djembdr_h#articleTabs_article%3D0

In both cases, current policies work against job creation. Reading latest job creation data points to lower paid and part-time jobs - partly resulting from Obamacare.

Austerity Principles, or How to Save an Economy in Crisis - Bloomberg

Austerity Principles, or How to Save an Economy in Crisis - Bloomberg

Such a sadly remiss article:

Missing are:

Supply / Demand Distortions - i.e. with 20-23% VAT, demand is strongly curtailed - read: fewer jobs in the supply side.

Tax and regulatory policies that discourage, inhibit and make it impossible to invest and earn a positive net return (see Art Laffer, etc.).

Clearly there is something politically incorrect from a socialist perspective in hitting at the things that expand working people's opportunities for a better life and the net incentives to private capital.

Until the above are addressed - and they seem not to be in terms of European policy - a rebound will come only with difficulty.

Barrons has also recently published some very insightful comments by Bill Gross on how low interest rates are in fact job destroyers as part of distorting normal financial markets.

http://online.barrons.com/article/SB50001424052748703578204578525100112860398.html?mod=djembdr_h#articleTabs_article%3D0