Post New

"
This has now changed as federal interest costs approach 4% of GDP. That means financing costs are now growing faster than the economy, which is also the tax base the federal government can tax. Would commercial lenders be so accommodating to a household or business like this? Probably not."



https://mail.yahoo.com/d/folders/1/messages/3567

Try this, https://images.mauldineconomics.com/uploads/pdf/TF...

Try this, https://images.mauldineconomics.com/uploads/pdf/TF...

A good and thoughtful read, as usual.

I would quibble with this particular write-up only in degree: I think that all the things he talks about as risks and unsustainable trajectories are true, but I think they can go on for very much longer than he seems to.

For example, one of his key points is that interest costs are currently rising faster than the economy is growing, and that can't go on forever. Though entirely true, I am not sure it is necessarily timely or perhaps even salient. It could go on like that for ages, and even small changes to the underlying dynamic would change the outcome a great deal in a Micawber-like way. It's a real worry, like the steel barrier on the side of the highway, but you may not hit it even if you're steering towards it at the moment, and even if you did the point of contact might be a very long way down the road. Just ponder how many years, decades, it has been since the Japanese bond market blew through the milestones of "unsustainable", "imminent danger", and "implosion any day now".

It's not that I think the US debt trajectory is sustainable. The idea is just that any economy has thousands of things going on all the time that would cause catastrophe if they kept going on the same way indefinitely. But things change. It's very hard to pick the few that are the most imminent dangers, but this actually might not be one of them.

The main solution is actually pretty simple, since so many other countries have already done it. The US has 19th century taxation system poorly suited to the level of spending comparable to a modern Western European economy. The US needs a national value-added tax, the proven method of getting the most feathers from the goose with the least amount of hissing. And the smallest number of economic distortions. I guess that falls under the Juncker rule though: "We all know what to do, but we don’t know how to get re-elected once we have done it.".

Canada had federal deficits in the range of 8% of GDP in the mid 1980s (not even considering the provincial level deficits), and it was "obvious" that catastrophe was imminent because the path was unsustainable. But sure enough, it was a surplus within about a decade, thanks mainly to the introduction of (yup) a national value added tax (replacing the prior hidden and narrow manufacturer's tax). And yup, the Conservative government that introduced it and got the finances in order was tossed out because the tax was so reviled. Their opponents and replacements were elected largely on a platform of repealing it, and they created a study group to look at what could be done, or at least what lipstick could be added to the pig, which was quietly buried because repealing a really good policy ultimately wasn't found to be feasible. In the end, they just redesigned the form to make it look simpler for a company to file. (I was doing consulting work for Revenue Canada's goods and services tax department at the time and watched this unfold with amusement, though from well beyond the mud-splatter zone)

Jim

That’s quite interesting re: Canada. You might be able to do something similar in the US and it might actually be politically palatable dare I say even popular?

Start with premise: 48% of US taxpayers presently have a Federal tax liability of $0. But polling on replacing the income tax—like national sales tax, VAT, etc show pretty strong support. I know, crazy, right? IOW, millions of Americans don’t really know the great deal they HAVE. And like the idea of replacing their $0 bill with something else. That’s the opportunity!

Find that approximate income cut off where Americans go from $0 tax to maybe a few hundred bucks liability and say all family incomes below whatever that is (families under $65k, singles under $37k or whatever it is) pay no income tax. You institute a national 5% sales tax exclusive of grocery food and clothing under $100–as a populist effort to DITCH the INCOME TAX for MOST AMERICANS.

I think this would be palatable on the basis the 48% don’t know they’re getting a present free ride. I know what you’re saying: preying on the ignorant.

How did we get lotteries, scratch tickets, DraftKings,
Registered Investment Advisors, Money markets with 42 bass point expense ratios? Similar thinking. All successful revenue raising schemes.

Yeah, except Americans aren't stupid. We've been through this type of thing before.

A VAT would not replace the income tax. We know darn good and well that the VAT would would be in addition to the income tax.

They'd probably say "The income tax will be a flat 2%, and only on the highest incomes." Then each year it would creep up and the income floor would creep down.

Just like it did with the original income tax.

Then there is the complication that each state has its own income tax. Every state is different, including a few which have no income tax at all.

Coordinating federal VAT w/o income tax and 50 states income tax would be a nightmare of complication. Or maybe they'd propose federal VAT and 50 state VATs. Riiiiight.

<<A VAT would not replace the income tax. We know darn good and well that the VAT would would be in addition to the income tax.>>

Totally share that concern (and others you raise) which is why you do a national sales tax (groceries & sub $100 clothing exempt)…in return for ELIMINATION of the INCOME tax for half the country with zero income tax increase for everyone else.


That brings us, I think, to $500 Billion to $1 Trillion/year in net new revenues annually. Now you can rationally at least discuss a permanent path to deficits equal to GDP growth or less…something Buffett has said should be sustainable. Problem is the longer we drag our feet the larger the debt interest compounds: huge expenditures for ZERO benefit.

Or just wait til this path of annual multi Trillion deficits just blows up the bond market. Not a question of if but when. Do we just say “let’s hope it’s later not sooner?”. We’re WAY WAY beyond the point where REVENUE HIKES are optional. I hate it—you hate it—it’s reality. Fiscal conservative here.

Start with premise: 48% of US taxpayers presently have a Federal tax liability of $0. But polling on replacing the income tax—like national sales tax, VAT, etc show pretty strong support. I know, crazy, right?

If I wanted to make it popular, I'd do it this way:
Set a fairly high value added tax rate. Maybe not as high as Denmark's 25%, but 20% seems to work most places.
Take maybe a quarter of the revenue, and send it out to everybody on a per capita basis, on a super easy opt-in basis. (opt in because I suspect a lot of thoughtful richer-than-median people could easily be dissuaded from asking for theirs). So, round numbers, the amount you pay on this tax is a percentage of what you buy minus a constant. If you don't buy very much, as with a substantial fraction of the population, you get a net gain. For those who think it might be too much, some of it could add funding to earned income tax credits, one of the very bright spots in US tax policy.

The reason isn't just to make it popular, of course--it's to make sure that it doesn't hit lower income households disproportionately. Adding a brand new tax burden to those folks wouldn't be very nice.

Also, having a big "refund" tier is the best bulwark against the inevitable endless lobbying for exemptions. The tax should, as far as practicable, be applied on *everything*, including necessities. (there is a lobby for everything, and everything is therefore a necessity). You get massive tax fiddling and wasted economic effort at every artificial boundary you introduce. Is this food or a snack?

As an aside, the best way to hand out the money would be debit cards tied to "everybody gets one" accounts at the central bank, recharged monthly from afar. This has the advantage that in times of crisis, helicopter money could be sent out on a day's notice.

Jim

...in return for elimination of the income tax ...

This would make economists very happy. Taxing consumption makes a lot more sense than taxing income, since it encourages saving over consumption.

Two comments on that:
There is a big generational fairness issue to be addressed. Older folks have already paid the income tax on the money they have saved, then they'd pay the replacement tax again as they spend it. The change could be phased in over time to minimize this problem.

Interestingly, it's not unlike the tax system in Monaco. No income tax, high consumption taxes. It works fine, and there is no income tax paperwork, a benefit that it's hard to over emphasize. There is also a corporate income tax, a flat 25% of profits for international firms. Zero for local firms like restaurants and bakeries.

Jim

why you do a national sales tax (groceries & sub $100 clothing exempt)…in return for ELIMINATION of the INCOME tax

It took a constitutional amendment to institute the federal income tax. It would require another one to do a federal sales tax. Good luck with that---it will never happen.



That brings us, I think, to $500 Billion to $1 Trillion/year in net new revenues annually. Now you can rationally at least discuss a permanent path to deficits

The problem has never been revenue as long as I have been alive.
The problem has always been that the goverment spends too much. Every time there has been a change that increased revenue, Congress make new spending that is more than the new revenue.



Or just wait til this path of annual multi Trillion deficits just blows up the bond market.

That's a problem that my kids & grandkids will face. I will be dead before it blows up. Which it WILL eventually blow up.

If you haven't noticed, the federal government wants one thing and the US citizens want a different thing. The gov't gets what they want and ignore what we want.

I will be dead before it blows up.

An underappreciated disadvantage of falling fraction of the rich world's population having kids : )

Jim
(another evolutionary dead end)

The debt and deficit need to be addressed. It's possible the party could continue for a long time, but the longer it goes on, the greater the risk grows that certain shock events could lead to loss of faith in the US dollar and an exodus, and the consequences of that are too dire to ignore. I don't think that's a fire we as a country want to be playing with.

Tax hikes are needed to address the situation, but I'm always surprised how rarely spending cuts come up as part of the solution in discussions like these. Admittedly, a large chunk of the federal budget is hard to make a dent in politically, like the entitlement programs. But given how the government is immune from competition, insulated from forced leaning down in hard times, and largely lacks performance incentives, there has to be a tremendous amount of fat and inefficiency ripe for cutting.

Most people who've had experience with the federal government probably have stories to share of rife inefficiency and poor performance. Reportedly only 1 in 5000 people are fired each year for performance issues. Some agencies like the state department with over 28,000 employees boast a record of having fired only 6 people for poor performance since 1984. An agency of 28,000 with 6 firings in 40 years - think about that...

I'd love to see a complete overhaul of the federal compensation system with a focus on performance incentives. I'd love to see aggressive yearly cost reduction targets established for every federal department with bonuses tied to achieving them. Incentivize management for improving productivity and increasing efficiency (e.g., doing more with less people). That alone won't solve the deficit problem, but it'd make a dent in it, and a dramatic step up in government efficiency can lead to many other benefits beyond just cost reduction.

The debt and deficit need to be addressed. It's possible the party could continue for a long time, but the longer it goes on, the greater the risk grows that certain shock events could lead to loss of faith in the US dollar and an exodus, and the consequences of that are too dire to ignore. I don't think that's a fire we as a country want to be playing with.

Tax hikes are needed to address the situation, but I'm always surprised how rarely spending cuts come up as part of the solution in discussions like these.

Oh, you sweet summer child.
Don't feel too bad, it took me from 1970 to 2008 to get the wool completely dropped from my eyes.

"The Purpose Of A System Is What It Does, Not What It Claims To Do" - Stafford Beer
https://en.wikipedia.org/wiki/The_purpose_of_a_sys...

Consider the possibility that the purpose of this system to to enrichen, with money and power, a cohort who runs things behind the curtain.

I hate being so cynical, it was much more comforting in my previous innocence.

The debt and deficit need to be addressed. It's possible the party could continue for a long time, but the longer it goes on, the greater the risk grows that certain shock events could lead to loss of faith in the US dollar and an exodus, and the consequences of that are too dire to ignore. I don't think that's a fire we as a country want to be playing with.

Consider the black swan. In this case two black swans:

First - The world is entering a period of massive productivity gains. Like nothing we've ever seen before. The masses will be placated with cheap consumer products, fast food and free lottery tickets. Free love and nickel beer for all.

Second - The government is being separated from the money supply. You can't spend what you don't have and can't print. In the last year, Bitcoin has seen a dramatic shift in regulatory certainty and institutional adoption. (See ETFs, Hong Kong, Argentina, Larry Fink, Trump/Kennedy etc.) BTC is the cure for inflation and overspending. It's happening all over the world.


Maybe the future will be bright after all.
---------------------------

Would it be too presumptuous of me to thank hclasvegas for his lonely rec in advance? Thx hc. You're the only one that gets me.

" Would it be too presumptuous of me to thank hclasvegas for his lonely rec in advance? Thx hc. You're the only one that gets me."

Hi bud, don't associate with me bro, I'm the idiot who was pounding the table in 2007 for Buffett to split the Bs 50 for 1, and to authorize and begin buybacks at, material discounts to IV ! You know how questioning Buffett plays in brkville. BTW, Obviously Bill Gates broke Buffett's heart, but the enablers here will and deniers here never get it. Take care .

" BTW, Obviously Bill Gates broke Buffett's heart, but the enablers here will and deniers here never get it. Take care ."

but the enablers and deniers here will never get it ! Can you edit and correct your own post yet ?

Second - The government is being separated from the money supply. You can't spend what you don't have and can't print. In the last year, Bitcoin has seen a dramatic shift in regulatory certainty and institutional adoption. (See ETFs, Hong Kong, Argentina, Larry Fink, Trump/Kennedy etc.) BTC is the cure for inflation and overspending. It's happening all over the world.

Since this thread is already marked O/T...

Except that institutional adoption isn't happening. Sure, you can buy a Bitcoin ETF which allows you to speculate on the price on a nice, centralized platform without the hassle of using blockchain, but it is still basically impossible to do a peer-to-peer transaction with Bitcoin. It is way too slow and expensive for small transactions, and the slow speed and volatility make it unusable for big transactions. Sure, there are third-party aps, but now 1) the transaction is no longer decentralized (which is the entire point of Bitcoin, right?), and 2) all the aps do is turn your Bitcoin into filthy fiat money so the merchant will accept it. For a small fee, of course.

Before you can say "Lightning Network" the LN still doesn't work very well, and has high friction for adoption. Evidence for adoption will be when we see goods and services priced in Bitcoin. When will that start happening? Even Bitcoin conferences don't list prices in Bitcoin and don't accept peer-to-peer transactions. Even the maxis don't seem to want to use Bitcoin for payments.

There is an old saying "your margin is my opportunity." Visa's margins are crazy. I'd have to look it up to be sure, but it is something like 45-50%. Figuring out a better payment system would be the key to the bank. Yet here we are 15 years in and no one is using Bitcoin for payments. It can't be a cure for overspending if there is no Bitcoin spending.



I

Except that institutional adoption isn't happening.

It costs a little over a dollar to make a transfer on the network. Not good for coffee but it's obvious that'll be solved. 8.3T was moved on the network in 2023. Bigger than Visa? Fastest ETF ramp ever ... by a lot. Two of three presidential candidates are pro BTC.

Over time, more and more people will see the advantages of having a currency that nobody can just print. The relative value of the dollar will keep going down as people switch out of it.

Consider what the debasement of the USD has cost BRK the last few years. 30% of 150B (cash position) is 45B. Add in the taxable gains on assets that were just inflation and not an actual gain. 20% of 100B? Another 25B. Maybe 70B in value transferred from the owners of BRK to the USG? If it was a one-time thing it'd be different, but around the world governments are printing away.

Maybe it won't happen. But maybe it will. If it does, it makes it very painful for a govt to spend more than they take in in taxes. Easy to see the benefit of a mechanism that limits a politician's ability to spend our money.

Consider what the debasement of the USD has cost BRK the last few years. 30% of 150B (cash position) is 45B.

You don't think the Chairman keeps that $150B in a shoebox under the bed, do you? It is mostly in short term treasuries, which currently earn about 5%.

FWIW, Bitcoin has lost about 12% of its value in less than a month. That's hyperinflation territory. And before you say "zoom out" Bitcoin has had periods of both hyperinflation and hyperdeflation. Everyone is worried about 5% annual inflation. Bitcoin can inflate or deflate by 5% in a day. You can't run a business if you can't reliably estimate the future value of your cash. The volatility makes it a non-starter.

Is your understanding that federal level national VAT a complement or a replacement for the income tax?

Not exactly as Congress had the ability to impose income taxes and did prior to the 16th Amendment.

https://www.archives.gov/milestone-documents/16th-...

Is your understanding that federal level national VAT a complement or a replacement for the income tax?

Most countries have both, so that would be my assumption. Monaco is an outlier in that respect, along with about 16 other places that are pretty small. I mention it only in the context of showing that you can collect a remarkable amount of money with a VAT without breaking an economy.

The point is that if you're going to have a country that spends X% of GDP each year - decent services, military, whatever - then you really ought to have a tax system of collecting approximately X% without causing massive distortions and breaking things around the edge cases. The current US tax system doesn't manage this. History seems to show that value added taxes meet that test, at least in fairly prosperous places. It might not work in Congo.

Some folks in the US are of the "starve the beast" persuasion, and would not like the idea--they think there is more than enough spending to cut and that tax collection is therefore sufficient. Personally I find the suggested cut lists less than convincing and the motives more about their own tax bills, but opinions differ. Thus if I were emperor briefly, I'd do this as a compromise: the national sales tax is set each two years at a rate that collects enough money in the next year to cover 95% of the average annual deficit of the previous 3-5 years. If spending cuts work and are sufficient to basically wipe out the deficits, then no national sales tax--they should be happy. If deficits get to be a problem, the sales tax rule automatically makes the problem go away in the manner that hurts things the least. Once the bookkeeping is set up to collect and remit a sales tax, which is admittedly a pain, an occasional change in rates at year end is surprisingly simple to handle.

One side effect is that something like a "temporary" cut to income tax rates or some other big and unfunded populist give-away would show up pretty rapidly as very visible rises in the sales tax rate. It might be good for people to notice that there is no such thing as a free lunch, and politicians would see them noticing. Kicking the can down the road wouldn't work as well as it currently does.

Jim

SYKESIX

I just want to comment that it's a pleasure to recommend your posts on Bitcoin.

Well thought out, easy to understand, make sense. Educates those of us less well informed.



Tex

Subject: Re: o/t, debtors and creditors,
SYKESIX

I just want to comment that it's a pleasure to recommend your posts on Bitcoin.

Well thought out, easy to understand, make sense. Educates those of us less well informed.



Tex

They are the same arguments that have been made while BTC has gone from $1 to $60,000. If a coin tossed comes up heads 15 times in a row, you can account for it by randomness ... but it's better to check the coin.

The world can go on for years, decades or centuries with little change. Now is not one of those times. The financial system (money) is just another technology. Our current system has many flaws. People (the market) will find better alternatives. Ask yourself one question: Will the world be satisfied using the USD as the dominant medium of exchange if we continue to debase it and better, faster cheaper alternatives become available?

Like I said in an earlier post, I think our future is very bright, just not the Dollar's.

Will the world be satisfied using the USD as the dominant medium of exchange if we continue to debase it and better, faster cheaper alternatives become available?

Reserve currencies have been debased before and survived that, as long as it's gradual. And that it has been: rather to my surprise, one US dollar still buys are remarkable fraction of what it would have bought decades ago. The prices of some things have risen a lot, but the broad monetary buying power has held up pretty well.

The better reason to believe there is a finite lifespan to the dollar's dominance is this: most international trade is denominated in the currency of the buyer, or of the bigger economy if it's a big imbalance in size. Reserve currency weightings are based largely on trade weightings. All in all, it's a game of "follow the money". The Chinese economy is bigger than that of the US in constant price terms, and getting bigger, and they will be the buyer of a larger and larger fraction of global goods. If at any point they stop doing things to make the RMB unusable, that would be a natural direction of travel.

Jim

“ The Chinese economy is bigger than that of the US in constant price terms, and getting bigger, and they will be the buyer of a larger and larger fraction of global goods.”

Did you factor in the rapid decline of the Chinese population that is baked in? Just math at this point with such low birth rates for a very one time.

The tax should, as far as practicable, be applied on *everything*, including necessities. (there is a lobby for everything, and everything is therefore a necessity). You get massive tax fiddling and wasted economic effort at every artificial boundary you introduce. Is this food or a snack?

Yeah, this. The debates in the UK over what goods should be free from VAT are endless, and the list keeps expanding, creating all sorts of crazy complications and confusion. Biscuit or cake? Hot food or cold? Eating in or taking out, etc etc? Ridiculous. Just charge it on everything. KISS.

If income/wealth are too unequal (probably true in the UK) find some other ways to even things up a bit.

SA

"Did you factor in the rapid decline of the Chinese population that is baked in?"
--------------------
By many estimates , China's population will decrease by approximately 400 million to less than 1 billion in the next 50 to 60 years.

This from , UN World Population Prospects (2022)

"China’s birth rate has fallen the fastest in recent years among the countries highlighted here. The country registered 7.6 annual births per 1,000 people in 2021, compared to 24.4 in 1990 and 41.0 in 1950."

and a nice graphic to show various country comparisons,

https://www.visualcapitalist.com/charted-declining...

"This trend suggests that China could face challenges similar to those faced by Japan, which has a vast senior population and significant economic and social implications."

ciao

Did you factor in the rapid decline of the Chinese population that is baked in? Just math at this point with such low birth rates for a very one time.

I doubt it's that relevant, provided that income per capita continues rising faster than in the west for a while yet. Which seems pretty likely, given the low base. For a place with slowly growing typical real income per capita like the US, the demographic effect is a more important part of the calculation of the total GDP trajectory.

I doubt there are any forecasts of the US economy once again becoming larger than the Chinese one at constant prices this century. There are quite a few people in China, and (to overgeneralize) they do not have a reputation of not wanting to get ahead. Of course the future is uncertain. Chinese real GDP per capita was about a third lower in 1850 than it was in 950. And revolutions do tend to set things back, for example, and they're possible anywhere.

Jim

I just want to comment that it's a pleasure to recommend your posts on Bitcoin.

Well thought out, easy to understand, make sense. Educates those of us less well informed.

Thanks for the kind words, I'm really happy you got some value out of it.

I got interested in Bitcoin for the same reasons as everyone else. But when you peel back the onion, there's just not much there.

Man... I finally got around to reading that John Mauldin article linked in this thread. So disappointing. I feel like I just read a high school student's economics paper based on what their Father rants about at the dinner table. So many contradictions. So many blind spots. I don't even know where to start so I won't - but if you read that article and thought, "this guy really knows what he is talking about," don't quit there.

I was reading John Mauldin before the 2008/2009 meltdown and he was wrong about everything. He was also pitching a fund of funds with insane fees and costs. After that, I decided that any time spent reading his thoughts was time completely wasted.

I also came across Mauldin years ago, followed him for a while, and gave up. For me he is in the same general basket as Hussman and Grantham. There are people for whom the stock market, if not the economy as a whole, must be a kind of morality play. I find this unconvincing.

Baltassar

I also came across Mauldin years ago, followed him for a while, and gave up. For me he is in the same general basket as Hussman and Grantham. There are people for whom the stock market, if not the economy as a whole, must be a kind of morality play.

Though I don't swallow their prognostcations without a chaser, I can find usually something useful in their commentaries. Besides, reading something bearish from time to time is like eating fibre: not intrinsically pleasant, not a good match to your tastes, but probably good for you in the long run if not taken to excess.

The thing that bugs me most about Mr Hussman is that he's 61 and the photo on his web site makes him look 28. It bugs me if he's using an old photo, and bugs me even more if he has that much hair at 61.

Jim

I can find usually something useful in their commentaries...

A random example of a useful nugget, I like this recent chart from Mr Hussman (despite his hair). A great one-glance illustration of the recent US profitability expansion.
https://www.hussmanfunds.com/wp-content/uploads/co...

Real corporate value added has continued more or less along the same old long run trend, as have real sales, but real earnings have represented a varying fraction of those two. Net profits have risen faster than sales or GVA lately as interest and taxes have become smaller relative to the value-added pie. This rise in net margins is mostly because interest rates and tax rates have simply been lower--that's the only gap between the red and blue lines on the graph.

Jim

Net profits have risen faster than sales or GVA lately as interest and taxes have become smaller relative to the value-added pie.

Net profits have risen much more previously in the periods 1960 to 1965,1985 to 1997, and 2002 to 2007 than the recent rise. There is so much variation in net profits compared to revenue it appears to be more than variation in tax rates and interest rates.

Aussi

Net profits have risen much more previously in the periods 1960 to 1965,1985 to 1997, and 2002 to 2007 than the recent rise. There is so much variation in net profits compared to revenue it appears to be more than variation in tax rates and interest rates.

Sure. Profits (net margins) go up and down, both with the business cycle (predictably) and on longer time frames (completely unpredictably as far as I can tell). Quite a few things go into that function.

But bear in mind that on that particular graph, the only difference between the red EBIT line and blue profit line is interest and taxes, by construction. The variation in the size of the gap between the lines is nothing but variation in interest and tax. You're right that there are a few other things going on affecting net profit margins at the margin (sorry), but clearly those two alone are big enough to make a huge difference and to be worth pondering deeply.

To me the interesting thing is not how fast profits have risen, but how far they have risen: the red line has got closer to the blue line than it has in about 75 years. Obviously the scales are different, but I presume that at some point net margins will top out and profits will grow no faster than sales, which is of course the normal (and necessary) situation over the long haul.

Recent US profitability is wonderful, and as a capitalist I celebrate it, but I would not want to be someone estimating optimistic company values (future earnings trajectories) based on the continuation of the post-millennium trend of net margin expansion. Given where we sit in the historical range at the moment (red and blue unusually close), I would think extrapolation based on sales (real GDP growth) estimates would be the sensible starting assumption for any firm, then add or subtract based on your solid evidence of how unusually good or bad the firm's prospects are. Remembering that there will of necessity be as much below-average growth as above-average growth in the economy; they can't all be above average. If aggregate earnings growth is going to slow down a lot, as seems mathematically inevitable, one has to wonder what multiples the market will assign to that slower average growth in profits.

As a PS, Mr Hussman follows the graph with a comment I have no way of checking. He has pretty good data sources, so I don't particularly doubt him, but the second part is somewhat surprising to me:
"The impact of tax reductions on corporate profit margins was nearly complete by the early 1980’s. Yes, statutory tax rates have declined further since then, but tax payments as a share of corporate revenues haven’t changed much in 40 years. That leaves declining interest costs from 1980 to the present as the clear driver of profit margin expansion in recent decades."
i.e., the recent narrowing gap between EBIT and E has been mostly due to I, not T.

Jim

What I've gotten out of this thread was the "Juncker Rule" (or "Curse"), referenced by mungofitch.

I'd never heard of it before, so I tracked down the reference:

""We all know what to do, but we don’t know how to get re-elected once we have done it."
- Jean-Claude Juncker, Prime Minister of Luxembourg and President of the Eurogroup.
The Economist (2007), "The Quest for Prosperity", March 15th."

It goes in the Quotations file. Thanks, Jim!

--sutton

"We all know what to do, but we don’t know how to get re-elected once we have done it."
- Jean-Claude Juncker, Prime Minister of Luxembourg and President of the Eurogroup.
The Economist (2007), "The Quest for Prosperity", March 15th."


This Juncker Rule encapsulates well the thinking of many politicians in supposedly democratic countries on both sides of the Atlantic, who 'know' what to do (expand the size of the state, spend huge sums fighting global warming, have high levels of immigration, control what people are allowed to say, etc.) but are frustrated that their electorate doesn't share their enlightened views. And then of course they are shocked when those same churlish voters decide to turf them out in favour of people that promise to do what the electors actually want.

dtb

The thing that bugs me most about Mr Hussman is that he's 61 and the photo on his web site makes him look 28.

It bugs me if he's using an old photo, and bugs me even more if he has that much hair at 61.

The latter - bugs me even more - is the right answer.

Below is a link to an hour long interview from a few days ago. As everyone knows, his investment performance hasn't been great. Nevertheless, he is thought provoking, does seemingly thorough research, writes very well and is blessed with youthful looks!

Click below to check how much hair he has or him explaining his latest thoughts verbally or both!

https://www.youtube.com/watch?v=E8J2UVa0qOU

Below is a link to an hour long interview from a few days ago. As everyone knows, his investment performance hasn't been great. Nevertheless, he is thought provoking, does seemingly thorough research, writes very well and is blessed with youthful looks!

That's the thing about Hussman. He doesn't come across as a crackpot. He always seems very reasonable and nuanced. He brings up good points. He's just spectacularly bad at investing.

That's the thing about Hussman. He doesn't come across as a crackpot. He always seems very reasonable and nuanced. He brings up good points. He's just spectacularly bad at investing.

Well, unless you are investing with him, which I don't think any of us are, his investing performance doesn't matter to us.

However, the essence of what he is saying is just simple arithmetic which anyone can easily replicate.

Using latest available May 24 CPI of 314.069:
sp500 real sales at 2000 yearend = 1355
sp500 real sales at 2023 yearend = 1925

This translates to 1.54% real sales growth over 23 years and also is in line with the very long term historical average for real sales growth.

We can now fairly reliably estimate that 10 years from now, at 2033 yearend, real sales will be 2243. Where will the index be? That's tricky because it depends on the profit margin and multiple. Assuming a 10% profit margin and multiple of 18 gives us sp500 at (2243/10)*18 = 4038 real.

Starting from today's all time high close of 5567 and assuming a 2% dividend, which currently is only 1.25%, gives us a real return of -1.16% over the next 10 years. Since inflation will definitely be well above 1.16%, we can expect a positive albeit small nominal return even buying today at 5567. Since it's essentially a zero real return and it won't happen in a straight line, Hussman calls it a long and interesting trip to nowhere. Depending on what the profit margin and multiple actually end up being, the actual return will obviously change accordingly.

Seems to me, buying the index even at today's lofty prices, may still more or less keep up with inflation for a 10 year holding period. Those dollar cost averaging may get a chance to buy at lower prices along the way thus improving returns.

"I would think extrapolation based on sales (real GDP growth) estimates would be the sensible starting assumption for any firm, then add or subtract based on your solid evidence of how unusually good or bad the firm's prospects are."

I agree that a sensible starting point for extrapolation of earnings could be sales and in turn real GDP growth. The right starting point for sales I believe should actually be slightly lower than real GDP growth, because GDP growth depends on (among other things) capital formation, some of which will happen outside of existing enterprise in which you are measuring growth of sales.

I also believe that there are some important caveats to this general rule. I happen to believe that some part of margin expansion can be more sticky than other parts.

If I build on the paper by mr. Hussman and break down the margin further into its component parts it could look like this:

1. EIBT margins: "like for like" (i.e. assuming same industries)
2. EBIT margins: industry substitution
3. Net margins: interest cost
4. Net margins: tax

Starting from below, 3 and 4 in my view are probably more likely than not to put downward pressure on margins going forward, for all the reasons already mentioned.

On (1) like for like EBIT margins, I believe these are also up over the last couple of decades (sorry I dont' have numbers on hand). There have been many reasons mentioned as why these EBIT margins are up, including government stimulus effects. Whatever the reason, I would probably conclude these should be mean reverting (remember we are talking margins within same industries) and put downward pressure on index margins going forward.

Its only the last part in this breakdown - industry substitution (2) - where i believe the margin COULD be more sticky. If you take out of the index a low margin business and replace it with a high margin business, this will increase the index margin.

Why do I believe this part of margin expansion COULD be more sticky? Simple explanation is that different industries have different margins with the difference being sustained over long periods of time. The more elaborate reason is that I don't believe the economic gods that regulate profitability care so much about margins as they do about returns on capital.

To determine if the high margins in these new businesses are sustainable, it is not enough to look at margins in isolation but we have to look at returns. These are also high - yes - and then we get into the discussion of what denominator to use when calculating returns, accounting capital, true invested capital, replacement capital. Doing the actual adjustments is above my paygrade but I would guess that at least for the last denominator in that list, returns wouldn't look so spectacular anymore.

I am not predicting margins one way or another, just offering my opinion as to the various components of margin expansion and that industry substitution is real, and this part of margin expansion is likely more sticky than others.

1. EIBT margins: "like for like" (i.e. assuming same industries)
2. EBIT margins: industry substitution
3. Net margins: interest cost
4. Net margins: tax
...
Its only the last part in this breakdown - industry substitution (2) - where i believe the margin COULD be more sticky.

It's certainly a factor. There seems to be quite strong disagreement among observers as to how large an effect it is. Even among thoughtful and statistically well informed ones.

On the one hand, Mr Hussman's chart where the ONLY difference between the red and blue lines is interest and tax makes a pretty compelling case that the widely fluctuating gap between the two is, well, interest and tax. It may not explain everything, but you can see the "tax and interest" gap narrowing a huge amount, and there is no other factor at work. There is also another 2022 study by the Fed, showing that 1/3 of all US profit growth in the prior 20 years was driven by falling tax and interest expenses.
https://www.federalreserve.gov/econres/notes/feds-...

On the other hand, a weirdly bullish note from GMO in mid 2020 says that the changing mix of companies is the single biggest factor. Particularly surprising as their reputation has become that of permabears.
Why We Are Not Worried About Elevated Profit Margins
(you don't have to register at their site, just search on the title and you'll see a PDF result).
Among other things, they note that there are two separate "change of mix" effects: low margin companies no longer in the index being replaced by higher margin new entrants, and faster-than-index growth of some large high margin businesses.

Personally I am no more likely to invest in the largest company in the index than in the 500th largest, so I tend to track the median number rather than the aggregate. This means the issue of how lasting the super-high margins are for a few super-big firms is not my prime concern, as it would be (definitely should be) for a cap weight index investor. The aggregate is dominated by a few large firms that one can't come up with a sense of cycle or direction any better than you can come up with a prediction of those few firms, so I stick to the average and median metrics. Pretty much by definition, there aren't very many firms that are atypical.

Jim

As an example of the very simple <cough> VAT rules in the UK, see:
https://x.com/RowanMMcDade/status/1810642246766661...

"As an example of the very simple <cough> VAT rules in the UK, see:
https://x.com/RowanMMcDade/status/1810642246766661..."

Those examples are actually pretty simple when it comes to tax rules. They actually demonstrate how simple VAT taxes are compared to other types of taxes. Take income taxes, there are tomes written defining what income is.

Reality is messy so trying to come up with a tax system to fund the government is always going to be complicated, especially at the margins of strange or unique cases. VAT is far simpler than many other systems.

VAT is immensely and unneedfully complicated compared to a simple sales tax like US states & cities have.

The benefit (to the government) is that the VAT is invisible to the end purchaser, so they don't really realize that they are paying a HUGE tax.

This tripped up some Aussie friends who were visiting us in the US. They grumbled that when they went to purchase a $9.00 item the cashier told them they had to pay $9.54.

They had to have sales tax explained to them.
That tax was readily visible.


Whereas the same item would have been priced at $11 with VAT, but the 25% tax was buried in the price and thus hidden from view.

There is no Federal sales tax, only state & local sales tax. If the US implemented a VAT, either the states & cities would be cut out and get no tax, or (most likely) people would be paying 25% VAT and 6%-10% sales tax.

To the extent that the government followed the US Constitution (ha!) it would require a new Amendment to allow a Federal VAT. That will never happen.

Non-US Citizens have a hard time grasping the US government structure. Most (all?) other countries the central government is the all-powerful one and the local ones have not much power.
The US is *really* what it says: a set of sovereign states, united. The states are jealous of their sovereignty, and there is no way that three-fourths of the States would ratify such an amendment.

The benefit (to the government) is that the VAT is invisible to the end purchaser, so they don't really realize that they are paying a HUGE tax.


In Canada the VAT (called GST) is added on after the purchase price - not hidden.

The biggest benefit of a VAT at the federal level would be to broaden the tax base. There are a LOT of residents who don't pay any federal income taxes. A simple 5% tax would generate huge amounts of revenue which could be used to simplify income taxes and even reduce budget deficits if so desired (unlikely). Combined with an Asset tax and you get a much more fair tax system IMO.


tecmo
...

There is no Federal sales tax, only state & local sales tax. If the US implemented a VAT, either the states & cities would be cut out and get no tax, or (most likely) people would be paying 25% VAT and 6%-10% sales tax.

It probably wouldn't have to be anywhere near 25% at the national level. Total US retail sales are what, about 7.3 trillion? A small percentage is a big number.

Canada's national rate is 5%, plus whatever number a given province chooses to ask to be added on for them--the smart provinces folded their provincial sales tax units and just take a share of the combined total collected in their borders, known as HST "harmonized sales tax". So, for example, it's 13% in Ontario, made up of 5 for the feds and 8 for the province. The sum of the two ranges from 5% to 15% depending on the location. Since some provinces are curmudgeonly, they refused to unify their sales tax with the national one, so they do it separately. Total waste of effort, solely for the purpose of provincial legislators to believe themselves to be important, but what can you do.

By analogy, US states could just piggyback on the same tax collection system at whatever rate they wanted, without consumers or companies having to make two calculations and remittances.

The US is *really* what it says: a set of sovereign states, united.

Canada too, though that's not nearly as well known. In some ways it is more extreme in Canada than in the US> It is explicitly unconstitutional for the national government to pass a law in a governmental function which is an area of provincial responsibility. Like the US, they've had to use hacks like offering federal money for that activity conditional on the province following some rules (the underpinning of national health care), but they can't legislate anything in a long list of ares including health, transport...and among other things, direct taxation. This is why one historically saw quirks like it being prohibited to purchase liquor in one province and consume it another, or even brew beer in one province and sell it in another, or having an architect's or engineer's licenses recognized in only one province. Or having to register securities for sale in every province individually, something a US state seems generally happy to leave to the SEC. As a friend once noted, it's rather like an economy the size of Texas with 11 governments. But in the real world, the hacks and workarounds mostly work, in both countries. I'm pretty sure it wouldn't require a constitutional amendment in the US, it would merely require something seemingly even less likely: legislators interested in the day job of governance. (not that I'm saying US representatives are anywhere near the worst or even atypical in this regard--it's not an isolated problem)

Jim

The benefit (to the government) is that the VAT is invisible to the end purchaser, so they don't really realize that they are paying a HUGE tax.

....

In Canada the VAT (called GST) is added on after the purchase price - not hidden.


We pay huge taxes to the government because they spend huge amounts of money, because that is what we elect them to do. I would be the first to applaud if governments decided that many of these often wasteful government expenses were eliminated, but as long as we have democracies and voters like to get things from the government, we need to pay for them somehow.

Here in Canada, the GST is indeed added on after the purchase price, and, in many provinces, an additional provincial tax is tacked on as well. This means the $50 item ends up costing something like $57.49 (after adding 5% for federal tax and 9.5% here in Quebec). I much prefer the European system where you pay round numbers for things, with the tax 'hidden' inside the ticket price, like all the other costs that are hidden inside that price.

If the idea is that those extra lines on the receipt are a useful political reminder of the fact that there is a sales tax, I beg to differ - Europeans are smart enough to know that sales taxes exist. I would prefer their system where what you see is what you pay.

dtb

It probably wouldn't have to be anywhere near 25% at the national level. Total US retail sales are what, about 7.3 trillion? A small percentage is a big number.


Oh, it woujld start small. And then grow like Social Security did. And like the Federal income tax did. Both of these started small, and then incrementally grew. How to boil a frog.
Google: UK VAT started at 10% and is now 20%.

I saw how it works twice in my lifetime.
"We need a x% tax surcharge to pay for this storm damage. It's not a tax increase because it's just temporary."
(Later): "The new tax rate will be X% more. This is not a tax increase because it's the same as you've been paying for the last few years."





I'm pretty sure it wouldn't require a constitutional amendment in the US

No, it wouldn't. That's why I said "Ha!"

It would be a previously invisible & unknown part of the Constitution, found in the shadows of a penumbra. Like Wickard v. Filburn "Congress can regulate any activity that has a substantial economic effect on interstate commerce."
Or the previously unknown rights of abortion and gay marriage. It was there all along, it's just that nobody noticed it.

A D- average first year law student could do it in his sleep.

Anybody who reads history knows how it all eventually ends.


But none of this matters here, because nothing we say here has any effect on what the governments will do.
I guess we get into these discussions because there's not a whole lot new to say about Berkshire Hathaway. 'sokay, boring growth is good. ;-)

There is no Federal sales tax, only state & local sales tax.

But there is Federal excise tax which has a very similar result to sales tax (money sent to government).

Gasoline is taxed at federal, state and local levels in the U.S. As of January 2024, federal taxes on gasoline amount to $0.184 per gallon (which includes an excise tax of 18.3 cents per gallon and a storage tank fee of 0.1 cents per gallon).

The difference between excise tax and sales tax is that1234:
Excise tax is a specific tax on certain goods, such as luxury items or those with health concerns, while sales tax is a general tax on most goods and services.
Excise tax is often included in the product's price, while sales tax is added at the point of sale.
Excise tax is paid by the manufacturer, while sales tax is borne by the end consumer.
Excise tax is levied on accessible value, while sales tax is based on sale price.

The only real difference between Australia's GST (Goods and Sales Tax) and the US sales tax is that in Australia, the price shown includes the tax. Similar to the US gasoline excise and sales tax. I doubt they had to be explained about sales tax, but why it is not included in the advertised price. I was told it is not included so that the consumer can readily see how much they are paying in tax.

Australians also grumble about tipping which is not included in the bill!

Aussi.

"No, it wouldn't. That's why I said "Ha!"

It would be a previously invisible & unknown part of the Constitution, found in the shadows of a penumbra. Like Wickard v. Filburn "Congress can regulate any activity that has a substantial economic effect on interstate commerce."
Or the previously unknown rights of abortion and gay marriage. It was there all along, it's just that nobody noticed it.

A D- average first year law student could do it in his sleep.

Anybody who reads history knows how it all eventually ends."

I think you have a fundamental misunderstanding of how the Constitution was written and intended to work by the founders.

Oh, it would start small. And then grow like Social Security did. And like the Federal income tax did. Both of these started small, and then incrementally grew. How to boil a frog.
Google: UK VAT started at 10% and is now 20%.

It's easy to be cynical. It could rise. But FWIW, in Canada it started at 7% and is now 5%.
(this was a very cynical political ploy to cut it, but on the other hand, the fact that the country could afford to cut it was largely because the finances had already been put in order...by the very same tax)

But also, don't forget that increasing it might in fact be the right thing to do, not cynicism. Sales taxes have huge advantages as a method of collecting necessary funds relative to almost any other approach, and the biggest problem with switching towards them from an income system are the generational effects which would be best addressed by starting low and gradually raising them. Just because one specific tax is rising doesn't mean that aggregate spending is rising, or needs to rise. (indeed, given the US deficit, some rising taxes without increased spending is definitely in order soonish)

Mr Buffett made a nice point once. The US government should pick a level of spending (as share of GDP) that you like and is closest to the consensus, then just make sure you're collecting an amount of tax over the future that is within a moderate distance of that, say no more than 3% less. The reasoning isn't hard to grasp. This says nothing about what the appropriate level of government spending should be, and the way that you collect the tax doesn't change that target level of spending. Amount and method are different things. A sensible person would pick the taxation method that collects that amount most easily: least economic distortions, least damage to a particular group, least penalty on those who are broke, fewest opportunities for large scale avoidance, lowest aggregate collection and enforcement costs, and so forth. There is no perfect tax, but in rich countries the empirical evidence is that a national value added tax comes very close.

It is truly remarkable how well value added taxes work, when serious money needs to be collected. The fact that some countries jacked it to 25% (and 27% in Hungary) and didn't explode is to me very remarkable proof that it meets Colbert's maxim: (Jean-Baptiste, not Stephen)
“the act of taxation consists in so plucking the goose as to procure the largest quantity of feathers with the least possible amount of squealing.”
It's not a proof that the rate WILL get raised that far.

Jim

“…it meets Colbert's maxim: (Jean-Baptiste, not Stephen)”

Since you brought it up, this is one of my favorites of the other fella & we all need more of this type of medicine nowadays:

"I would say laughter is the best medicine. But it's more than that. It's an entire regime of antibiotics and steroids. Laughter brings the swelling down on our national psyche and then applies an antibiotic cream. You gotta keep it away from your eyes." - Stephen Colbert

"Oh, it would start small. And then grow like Social Security did. And like the Federal income tax did. Both of these started small, and then incrementally grew. How to boil a frog.
Google: UK VAT started at 10% and is now 20%."

Prior to VAT there was already a Purchase Tax which immediately before being replaced with VAT in 1973 had rates of 13, 22, 36 and 55%. This was down from 66% about a decade before and 100% during the second world war.

From what I remember from the 1980's onwards there was a conscious effort to try to switch taxes away from income and onto consumption by successive Conservative governments in the UK.

Oh, it would start small. And then grow like Social Security did. And like the Federal income tax did. Both of these started small, and then incrementally grew. How to boil a frog.

Just tangentially, did you know that that whole "boil a frog by heating the water up gradually" thing is just wrong? https://en.wikipedia.org/wiki/Boiling_frog#:~:text....

If it is wrong, is that ironic? I'm not sure because American's don't understand irony.

R:)

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