Radio Show Notes: US GDP/ H Harvey and No Tax Reform


Thursday, August 31, 2017 // Written by Enzio von Pfeil
Many think that US growth momentum is rising; we think that it is losing steam at the margin. Hurricane Harvey's economic effects are like those of Hurricane Katrina, and Trump won't prevail with his tax reforms. 


  1. US GDP sharp revision upwards – we can also discuss the impact of Hurricane Harvey
    • US GDP’s sharp upward revision
      • Consumption, non-residential fixed investment revised up, with corporate pre-tax earnings rising by a healthy 7% over the year
      • This indicates that our Economic Clock® keeps ticking away nicely: stronger monetary growth begets an excess demand for goods, particularly in Americans’ spending on wireless phone services, used cars and energy
    • But expect growth to start losing some of its momentum:
      • The Fed very well could use this strong upward growth revision as a rationalisation for raising interest rates at its next meeting `19th – 20th September, right in line with what the Economic Clock® tells us. 
        • This precautionary move might come despite that conclusion from second quarter’s GDP that the Fed’s preferred price index rose at an un-revised 0.9%, matching the weakest gain since 2010. We can thank globalisation and technology for  this inflation-free growth…
      • Also, expect Hurricane Harvey to exert a major dampening effect on the overall economy.

 

  1. Impact of Hurricane Harvey        
      • This is just like a traffic jam, things slow temporarily only to resume their course later on
        • Parallels are Hurricane Katrina in New Orleans, and
        • World War II rebuilding of Europe
      • What is the Texan and Lousianan economy’s  “traffic jams” consist of for now?
        • No private investment
        • No public investment
        • No private consumption
        • No exports or imports on account of clogged roads
        • A huge build-up of inventories
        • Lots of government expenditure, esp in the social arena of having to feed/ rescue the poor victims
      • However, watch this economic traffic jam get unstuck with  vengeance once reconstruction begins!
        • The biggest beneficiaries will be
          • Private investment, aka reconstruction of homes
          • Public investment: rebuilding infrastructure like roads, bridges, utilities facilities (energy, sanitation)
          • Private consumption: lots of shopping to replace home furnishings, clothes and the like
          • Resumption of oil exports
          • Reduction in inventories, which got stuck in the mud of the flood

 

  1. US tax reform – Donald Trump has set out his requirements in a speech
    • His four principles for tax reform
      • A KISS tax code
        • He simply cannot get rid of all the loopholes; vested interests are alive and kicking in America’s “moneyocracy”
      • Lowering the tax rate
        • He is trying to emulate what my friend, Arthur Laffer, set out to do with supply-side economics  the 1980s: reduce taxes and thus leave more money in the pockets of consumers to spend with, and in the pockets of corporates to invest with
        • But most experts reckon that he can cut the corporate tax rate only to 25% - not to his cherished 15%
        • I doubt that this war – monger even has the wriggle room to cut personal and corporate tax rates: Trump is picking fights in    
          • Asia,
          • Latin America
          • Russia (the Ukraine)
      • Tax relief for middle class families
        • But this won’t lead to higher spending: households have to save more than ever for their pensions, esp. in light of – in effect – zero interest rates on deposits
      • Repatriating trillions of dollars parked by corporates overseas
        • The market myth is that America’s multinationals have a total of  USD 1 trillion stashed-away overseas
        • Triple that number per year and you are in the ball park!
          • In my last book, Trade Myths, I analyse the HUGE influence of  America’s very successful  multinationals on her visible trade balance.
          • Backed by statisticians from America’s marvellous Bureau of Economic Analysis, I calculate at America’s successful multinationals generate annual trade surpluses  of over  at least USD 2.7 trillion per year!
          • America’s multinationals keep these monies abroad in order to avoid US tax  AND in order to invest overseas.
      • But I doubt that the very Congress - which Trump has antagonised  - suddenly will co-operate...

 

 

  1. Markets including USD which is on worst monthly losing streak in 14 years
    • The dollar
      • All reserve currencies weaken. So with Sterling and the dollar
      • The dollar has been sliding since kick-off back in the early seventies, when major currencies began floating,
        • In  1973, the Japanese had to spend 400 yen for a dollar, whilst
        • In 1973, the Swiss had to spend four Swiss francs in order to buy a dollar
        • now, the Japanese need spend only about 100 yen a dollar, and the
        • Swiss need spend only about 1 Swiss Franc in order to buy a dollar
      • Currently, the dollar has been felled by Trump’s terrible leadership
    • US stocks are subdued because of
      • The negative short term economic impact of Hurricane Harvey,
      • Sexier markets elsewhere, e.g. Europe, Japan and  Hong Kong,
      • Worries about the antics of North Korea’s Kim vs America’s Trump, and
    • US bond yields keep tanking very much because government bonds are seen to  be a safe haven in times of heightening war tensions with N Korea.

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