The Market Ticker
Commentary on The Capital Markets- Category [Federal Government]

There has been much strum and furor over the proliferation of "tax inversion" strategies undertaken by corporations in the last few months.

Broadly, a tax inversion is a transaction where a US and foreign corporation "merge", with the US corporation taking a loan from the foreign unit.  This effectively shifts the income to the foreign nation since interest is tax deductible in the United States (and taxable as income in the other country), but since the firms are in fact one (the foreign one having merged with the US one) the result is to preference where taxes are paid.

The screaming coming from Jackoff Lew of Treasury on these is amusing but not surprising, nor is the fact that the complaints from the government are at their core dishonest.

The real problem is a fundamental distortion that the United States government adopted a long time ago on purpose to preference uneconomic actions for the purpose of goosing systemic leverage. 

As I have repeatedly pointed out over the last seven-plus years the fundamental economic outcomes we experience can be viewed through the lens of a few charts quite succinctly -- and accurately.

First, total systemic debt from all sources:

Note the rise in this debt -- from about $5 trillion in 1980 to nearly $60 trillion today, while GDP went from $2.8 trillion to ~$17 trillion.

In other words, debt increased about 13x over 30 years while GDP increased 6x.

Since all money in modern systems is in fact debt this means that purchasing power, adjusted for economic output, fell by 50%.  This tells you on an irrefutable basis that roughly half of all the debt taken on during that period was uneconomic -- that is, absent some sort of distortion or stupidity by the person doing so, it wouldn't have happened.

What has our government done?  It has taken on a huge amount of uneconomic debt itself -- there is $12.57 trillion worth outstanding now (not including intergovernmental debt such as Social Security and Medicare) as opposed to $660 billion in 1980, an expansion of 52.5 times, or 4x that of the economy as a whole!

This is the direct cause of the destruction of the middle and lower class income in this country as it is a direct devaluation of purchasing power, intentionally undertaken.  It is not The Fed that did this, it is Congress and the Executive!

And how do we know this is the result?  Because we can easily look at the delta in GDP and that in debt:

Since every dollar of debt taken on is immediately spent to find the actual GDP produced absent this uneconomic activity you must subtract the delta in debt back out of the gross GDP delta.  When you do so you find that we've been digging a bigger and bigger hole on essentially continual basis since 1980!

Then, to add to the insult of the Federal Government's own conduct they have also provided incentives for others to also engage in uneconomic transactions through the tax code by allowing the expensing of interest against revenues!

That's nuts; the only reason to borrow is when the expected benefit of doing so (e.g. by expanding your plant, equipment and personnel) exceeds the cost of the money including the interest.  By making the interest top-line deductible you remove the return on investment consideration entirely from the calculation!

Well Jackoff Lew and Maobama, what the hell do you expect people people to do when you diddle the damned tax code so as to provide incentives for uneconomic behavior, whether that be through a "mortgage interest" deduction or one for corporate spending funded by debt?

There is nothing illegal or wrong about a company or person who structures their finances around the intentional acts that the government provides incentives for!

If you want to stop "inversions" then remove interest as a deduction, top-line or otherwise, across the board from the tax code.  If someone is going to borrow, no matter whether it is a person or business, they should only do so if the economic benefits of the transaction, including the interest expenses, exceed the costs.

Of course if this change was to be made then the entire pyramid of pulled-forward asset prices and consumption would instantly collapse, as would the so-called "GDP" funded by this stupidity.  That is, of course, the argument against doing so.

The problem with that argument is that as I have also repeatedly pointed out due to the nature of compounding you must borrow at an exponentially-increasing rate to keep up said uneconomic transaction streams over time, and there is no such thing as an exponentially-increasing series that can continue indefinitely on a planet of finite size and mass.

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