Govt deficit vs corporate profits

The deficit is partially due to less taxes collected since Bush era. I did not look carefully how much of the military spending boosts also the corporate profits, but I would like to know whether the trillion dollar deficit benefits the corporate earnings greatly or not. I forgot the latest sum, but US generates about one and a half trillion dollars or so in corporate profits by running a trillion dollars or so in public deficit. This is probably not the right way of stating it, but obviously if you think of the whole system as a black box, this is what's going on... So now, US may be actually able to pay its creditors and yet freeze many important govt functions for a few days and get through the issues about the debt ceiling. However, not only it will become harder and harder to sustain the govt for the short term without new debt, but also it will be increasingly difficult to keep spending and raising the debt ceiling about a trillion dollars every year. So, I think the current "political" crisis must be once again a natural extension of a looming financial crisis. The corporate profits should be effected once US govt has to manage its deficit. OTOH, any defaulting like behavior or recklessness by the politicians here may pressure the Treasury rates higher rather quicker and cause unnecessary volatility. In my opinion, this entire parody reveals something very important, US govt has approached its limits of how much they can continue to spend and not really make that money back. This will have to be priced better into US Treasuries eventually. Fed's idea is to fix the situation numerically by running an inflationary monetary policy, but Fed may have to buy much more of govt debt to keep the rates lower and it is against their mandate too. As vaguely defined as it may be, I guess Fed doesn't want to be the largest holder of US Treasuries either. So, I still think this situation may act as a catalyst for the rates to go higher and pressure the corporate borrowing and earnings... In general, I thought of a slow roll over, but QE is over and the rates may go higher as well in the absence of excessive Fed liquidity. I think the volatility will continue even if the markets try again the 2011 valuations (1380 zone) and become overvalued (above 1400). Eventually though, the cut in spending and perhaps a slow increase in taxes are all coming, but perhaps not as bad as a rupture in the US Treasury bonds as the rating agencies threaten to cut them. In conclusion, "borrow, spend and don't bother to collect" since Bush era may be forced to become "cut and tax to balance" faster than US govt wants to reform at the moment whether they do it today or next week or in a few months as the trend of unsustainability has become plain and obvious due to the political parody. As I said, US Treasuries will have to price these even though the state of the economy is fragile, but US Treasuries were actually used to absorb the pain of the financial crisis earlier and up until now, the govt had to run a deficit to boost the corporate earnings. There was very little return to economy and govt on those Treasuries used so far, if any. So, the market forces may act to balance itself without waiting for much longer... Fed will be most likely to respond by buying a sell off in Treasuries initially and other than a jolt down early next week, it may cause some sort of upside surge again into summer, until USD ACCELERATES LOWER and Treasuries really start dumping again, then the short term rates will have to go higher whether the equities can take it or not. I am not sure how much more Fed can intervene to buy the govt bonds either, but it should be less than QE2 and I think the market would price it by then... Some loud thinking...

Edited by arbman, 24 July 2011 - 11:49 AM.

deficit is partially due to less taxes collected

Beware of static accounting practices. You will not see clearly.
Would the economy have had different results with different taxes, thus increasing or decreasing government revenues?
It is obvious.
If not, raise taxes 100% and solve the debt issue tomorrow.

Would you make the same choices on what money to put in to growth or investment or dividend producing stocks if the tax laws had been different?
Of course not. Like everyone else, you're going to adjust.
All future revenue projections are speculative.
All 'what if the tax had been this' past revenue scoring is speculative.

Roger, all I am saying here is that the parody revealed that the current situation is very unsustainable, the Treasuries will have to price this sooner or later, even if Fed decides to intervene, their powers are getting exhausted, but probably there will be a relief rally or something after this parody concludes and it is likely to be a top as the trend of USD as a result of excessive debt must force Treasuries lower eventually and I do not think the equities have the strength to push higher with higher costs in borrowing. USD balance may be with the lower equities and somewhat stable Treasuries...

I'm very confused with treasuries. Rates "should" be higher but have been artificially held down by "them". Who knows long can it last? It seems like Japan tried it and lost a decade.

They are trying to grow out of the debt and when it doesn't work, they print and yes, it is mysterious how the rates remain so low, but it is also a function of profit growth. We also know the inflation is underreported though and it is not just happening in US, it is a global sin...

Beware of static accounting practices. You will not see clearly.
Would the economy have had different results with different taxes, thus increasing or decreasing government revenues?
It is obvious.
If not, raise taxes 100% and solve the debt issue tomorrow.

It is amazing how many people do not realize that! They simply ignore history!!
They ignore the historical fact that Reagan dropped tax rates from 70% (?) to 28%
and the tax revenues collected by US treasury doubled over his 8 years. According
to static accounting practices that is impossible!!!

Contrary to wide public belief, the govt needs neither taxes nor debt to spend. Taxes serve to (1) force the population to use a sovereign's currency and (2) provide a means to destroy money supply as a disinflation tool. Debt is issue as (1) a means to control interest rates and (2) as a service to those wanting to save for future spending. The federal deficit is exactly equal to all non-federal government savings - that is not an opinion, that is an accounting identity on the Fed's ledger. Reduce the Federal deficit and you reduce all non-federal government savings in dollars. Nearly all economic recessions and all economic depressions are proceeded by a significant decrease in the federal deficit (private savings). All recoveries take place with an expanding federal deficit (private savings). A substantial decrease in the federal deficit with a corresponding decrease in bond supply will result in savers bidding up those instruments that remain resulting in a decrease in interest rates. Savers will also seek wealth maintenance through more risky instruments including gold speculation; many, however, will hold to the cash. Fear of federal deficits is a fear of an over-extended money supply and government expenditure which is a fear of inflation. A fear that is far overstated for such inflation is not attainable without first passing "Go" (i.e. robust economy) and "collecting $500 (full employment) which would greatly diminish the federal deficit due to increase revenues; remaining inflation worries would be handily dealt with by the mechanisms of money supply destruction (see "taxes" above) and interest rate management (see "debt " above). Our monetary "problems" are an illusion based on ignorance. Many understand that we are no longer on the gold standard, but they do not understand that much of our policy thinking (e.g., the federal government finances are like that of a household or a business) and governing processes (e.g. debt ceiling) of today still assume that we are. However, it is that illusion that creates the gyrations in the markets (that can be very profitable) until the dust settles down to reality - a reality that will still prove incomprehensible to the vast majority, and not for intellectual reasons but for emotional ones.

Beware of static accounting practices. You will not see clearly.
Would the economy have had different results with different taxes, thus increasing or decreasing government revenues?
It is obvious.
If not, raise taxes 100% and solve the debt issue tomorrow.

It is amazing how many people do not realize that! They simply ignore history!!
They ignore the historical fact that Reagan dropped tax rates from 70% (?) to 28%
and the tax revenues collected by US treasury doubled over his 8 years. According
to static accounting practices that is impossible!!!

What is more amazing is that people do not realize that under Reagan the federal deficit increased substantially just prior to and during the boom. The substantial reductions in federal deficits in the last two years of his Administration carried over to Bush 1 and proceeded the recession that led to a 1-term Presidency.

If history is any guide, a substantial reduction in the federal deficit being contemplated today will lead to.....

As I said, confusion is not a result of intellectual, but rather emotional, capacity to grasp.

Salsa, your hypothesis about the "Go" stage is not true, there are external factors. For example, if US produces something for the deficit, it can come out more expensive than the foreign competition, so the margins may continue to erode. It means the product never really sells. Similarly, the govt projects may fail to produce economic profits, every one of them may bury you in debt for no positive equity (after debt) in return. You then end up with worthless currency and at the risk of default. If the economic recovery for trillions injected fails due to the speculative bets bailed out without any real return to the economy and hence increasing taxes, do not blame that to the govt's taking control of its deficit. The govt has the higher view about whether the deficits they are running is really coming back to them as more taxes or not, you would have no excuse to run a deficit otherwise. There is no such utopia as printing your way to prosperity, if I have not misunderstand your comments... Recent example: US sold out of its position in GM and Chrysler for $1.6B loss, and got 5.1B back. So, this loss is very real. The monetary base got expanded for 5.1+1.6 = 6.6B and then you got back 5.1B because the value got destroyed and you got no positive equity in return. So, you cannot expand the deficits infinitely for infinite growth. You still have to make a smart investment and measure the tax return on deficits. HOWEVER, I generally agree with you that the govt incentives and growth in the money supply would stimulate the economy, but the govt must watch out for the speculative bubbles that may form, those are internal efficiencies of such a financial system and fail to generate positive equity (or prosperity) in return.

Edited by arbman, 24 July 2011 - 05:26 PM.

Salsabob, Revenues and spending are separate issues. You forgot to state that spending tripled during Reagan's 8 year reign which is why national debt increased. My point was simply against static accounting which assumes that revenues are directly proportional to tax changes. Less tax = Less revenues, which is not always true as history clearly shows during Reagan 1980-1988. Also by reducing tax rates millions of new jobs were created. Actually I am a firm believer in the so called Laffer curve, which states that revenues are optimized at a certain tax level. Go above that tax rate and revenues actually will decrease!

Edited by pdx5, 24 July 2011 - 07:57 PM.