Conservative George Will: Another epic economic collapse is coming

what part of "more than ever" you don't understand?

the Trump tax welfare widens the wealthy gap more than ever

eg, Trump tax welfare eliminates the alernative minimum tax on the uber wealthy.

it eliminates tax deduction state and local tax (less tax deduction for the middle class)

effectively, the middle class's tax burden has been increase to finance Trump's tax welfare to the wealthy​

there was no Obama tax hike.

during his second term, he ended the tax cut for those earning > 250K

clearly you don't understand

 

Corporate debt is very high in a time of rising interest rates. Lending isn’t completely different and Trump loosened financial standards/regulations.

Trump admin caused a fiscal stimulus mid to late in the business cycle with the tax cuts which is causing high deficits during strong economic growth. Recession is inevitable but this time we will be further indebted, especially when automatic spending kicks in due to a recession.

 

Valuations are higher than average. Nothing might fundamentally change, but people might be like this company should be 20p/e instead of 22p/e. However when we see the market drop that will cause people to pull out of the market which will cause it to drop even more.

 

don't just make up a convenient claim; if only you could provide supporting details, using such balance sheet analytical metrics as

• solvency ratios,
• liquidity ratios,
• debt/equity ratios
• capital structure ratios

​

 

​

We will see where it ends up but yes it is likely. I was trying to make the point that the wealth gap has been widening for a bit longer than the Trump tax cuts. As an aside I think middle and lower income earners get hurt significantly more by state and local taxes compared to federal taxes.

Taxes increased under Obama, correct? They went back to the levels prior to the Bush tax cuts plus he added the 3.8% tax on investment income. Are we arguing semantics? We can phrase a different way if that makes you more comfortable. I'm just saying that they were higher than when he first took office.

Clearly I don't, but I also recognize that the federal govt doesn't control the economy. The GDP in 2017 was 19.5 trillion which is a significantly larger number than federal govt spending and receipts. I think there needs to be more focus than simply on federal tax and spending policy if we want to address the wealth gap.

 

Debt to cash ratios are not high. They have been basically stable for 8 years and they are still in the conservative territory. Total debt is increasing, but so is cash and profitability. Further the cost of debt is not expensive. There is also nothing inherently wrong with debt. Having too much cash and being too conservative can be viewed as a greater impediment to growth. Also, have you tried to get a loan before the crash, after the crash and right now? I don't know everything Trump did with loosening regulations (they did swing to become a bit Draconian after the crash), but it's still not simply a walk to the bank and getting free cash with no income and tax documents. Remember these banks were also scarred from the collapse and it's not as if they want to have that happen again. For the most part banking is pretty conservative by nature and it's still heavily dominated by the govt since we have this very strange macro-banking structure post-crash.

https://www.spglobal.com/our-insigh...But-Rising-Debt-and-Tax-Reform-Pose-Risk.html

I think this does a good job at breaking down risks. It did make a good point that the top 25 cash holding companies does tend to skew the overall data. I also saw a note that companies are repatriating somewhere around $300b of cash due to the tax law changes.

Here's the quick link https://www.bloomberg.com/view/arti...at-u-s-companies-are-bringing-their-cash-home

We will see how this continues for the entirety of 2018 and beyond.

 

Yeah total valuations aren't cheap and we could be due for a correction from some unknown catalyst, but signs in the medium term (1-2 years) point to no.

 

Did you read your links, they corroborate what I am saying more so, especially your first link.

I’m also not arguing we will have a 2007/2008 financial crisis but we are closer to a major correction than not. The US is in late cycle.

 

Yes I read them. We might be closer to a major correction but as you can see from the data we are still at relatively conservative debt to cash levels, earnings are still strong, and cash is coming back to the US at a fast pace. Further we are still in a rate tightening cycle and it’s hard to expect a major correction to come at this point.

Also, it’s interesting to note from that S&P link that they make a distinction between the top 1% of corporations and the bottom 99% and show disparity between their debt to cash ratios. It would be interesting to see more data on that since we are discussing the wealth gap in the general population and this seems to be happening with large corporations too.

 

The issue of losing money in 08 is whose money was lost. Banks were investing commercial money in risky investment assets. Commercial money in money that should go to commercial lending.

If these rich people today lose their money in the stock market that doesn't translate to a collapse for everyone

 

Im not a voodoo economics advocate. That being said the risk or problem with the tax policy is running the government into bankruptcy.

If a bunch of rich people lose their money in the stock market so what? As long as banks dont put money not meant for risky investments at risk it won't lead to a collapse.

At the end of the day the problem with the Great Depression and the 08 collapse was having to bail out the banks who put depositors money at risk in sub prime real estate.

Bill Clinton helped create that situation when under pressure from the Lewinsky scandal signed off on ending Glass Steagall, the regulations put in place after the Great Depression

 

Financial systems are the same - big banks still are too big to fail. Americans are becoming more leveraged than before - more value in complex instrument and weird derivatives again - there's more money in index funds for instance than there is in stocks. That's a lot of risk. Loose regulatory environment, public debt is going up again. further deregulation on the horizon, trouble in Europe and China, massive consolidation in the mortgage markets concentrate risk, student loans have exceeded auto and others - that's an area for potential collapse. consumer data is being compromised to the point that most American adults have much of their personal info now available to criminals.

No the next collapse won't be with Credit Default Swaps, it will be another type of derivative behind the next collapse.

 

George Will has been somewhat forgotten culturally with the move away from traditional conservative principles by the Republican Party. He is overall an excellent writer and pundit but he has been wrong in the past and inaccurate on some points.

I don’t know if there will be another collapse, I sure as hell hope not because it would likely be devastating and shake consumer and lender confidence long term. Anyone that tells you they know a collapse is/is not coming is simply guessing.

Democrats that are hoping for a collapse are making a huge miscalculation on the impact on the country as a whole.

 

Debt is a problem when the borrower isnt credit worthy. Hence the term "sub prime"

 

Right, but the sections titled " Beware of Debt" and "Improving Profitability Does Not Offset Rising Debt" goes into how much debt was used to finance a lot of stock buybacks, mergers, and acquisitions. A lot of that cash from overseas is going towards stock buybacks, which is helpful in some aspects, but the breadth is somewhat curious given the bull stock market.

I'm not sure what "at this point" means, but it seems pretty impossible to have a recession one this year, but late 2019/2020 is another thing.

Because there's a disparity at what the most credit worthy corporations can borrow at and how levered corporations. I understand why you choose debt to cash but as the article shows a good amount of the cash is in tech sector, which has some very profitable heavy hitters.

 

I work for a large asset manager that has historically been viewed by outsiders as conservative and risk-averse. Our most aggressive economic model puts the probability of a recession in the next 12-18 months at 16%. Our most aggressive rates/fixed income model says 0-3%. No matter how you slice it - macro factors, fixed income markets, equity markets, derivatives markets, etc - a simple recession is unlikely in the near term. And nothing supports the idea that we're about to experience the kind of deleveraging we saw in the Great Recession again any time soon. All of that aside, George Will's argument is bullshit, and his reasoning wouldn't fly in an entry level graduate business course.

 

See, this is where you show how little you know about the subject. No one has any idea what's going to cause the next collapse because it hasn't materialized yet. If you want to sound educated, maybe take a guess by suggesting something like subprime auto loans (still unlikely and very much different from subprime mortgages) or a pension crisis or a student loan crisis.

 

I'm just not worried about total debt levels at this time and I don't see any major impediments to the economy over the medium term (1-2 years). We will have to agree to disagree for now. My mind is always willing to change with the market and economy as different information comes out.

I was meaning at this point in the rate tightening cycle. I agree things could be different by 2020, but that's simply difficult to forecast. Economic forecasts are extremely hard to do and kind of worthless beyond 3 years. It is kind of interesting to go back and look at the old CBO forecasts for govt spending and revenues.

I just picked debt to cash because it was the first thing that popped into my mind and it is a pretty decent metric. As that article stated even if you take out the mega cash rich companies then even the rest are still at conservative levels.

https://www.bloomberg.com/news/arti...and-set-to-lift-u-s-to-best-growth-since-2005

https://www.bloomberg.com/news/arti...n-saving-much-more-than-thought-new-data-show

A couple more articles to consider based on recent data points.

 

I think you are mistaken friend. It wasn't the housing market that caused the last collapse, or even the sub-prime housing market - it was the derivative bets placed on the sub-prime housing market.

If you are saying student loans is going to collapse the economy you are wrong, but derivative bets placed on student loans could. But it is unlikely as it's hard to see banks make trillion dollar bets on auto loans and student loans.

More likely it's going to be something that seems secure but isn't.

 

The housing market bubble, future price assumptions, and loan practices relating to the American housing market were a very major factor in the last economic collapse. I have no idea why you would think this wasn’t one of the prime causes.

Derivative bets didn’t cause the collapse. Derivative bets on very high leverage caused problems. Derivatives aren’t bad, but when they are illiquid and when they based off of fraudulent or sloppy information then they are worthless and then also purchased on leverage in mass quantities then you can have problems.