THE NEW GILDED AGE (Part 2)
THE NEW GILDED AGE (Part 2)
22nd April, 2020 0
As we conclude the second month of pandemic lockdown, two parallel narratives are developing about the financial rescue.
In one, ordinary people receive aid through programs that are piecemeal, complex, and riddled with conditions; in the other major corporations and given immediate liquidity and relief with little of the ‘trickle-down’ red-tape being applied to small businesses.
The government of the United States decided to initialize the Coronavirus Relief Fund of $350 Billion. But, unfortunately, the fund was extinguished in just two weeks in which the lenders alone received a huge chunk of that fund; that is, they received at least $6 Billion. After witnessing this, many small business owners got outraged as they did not even receive a single penny.
What follows is an in-depth summary of the current state of the COVID Financial Relief strategy, as cultivated from sifting through the assessments of many knowledgeable financial experts. As for imminent realities, here is how the financial relief efforts have shaken out:
A one-time “economic impact payment,” reportedly delayed so recipients could experience the thrilling visual of Donald Trump’s name on the check, might help make a rent payment or two. Unemployment insurance amounts have been raised, so tip and gig workers can now be ineligible for $600 a week more than before. The cost of a coronavirus test might be free, but if you test positive you could up paying $50,000 or more in hospital costs even with insurance.
A law freezing evictions applies to holders of government-backed mortgages only. “Disaster grants” are coming more slowly and in smaller amounts than expected; small businesses were disappointed to learn from the SBA early last week that aid would be limited to $1000 per employee.
Meanwhile, “relief” programs aimed at the top income levels were immediate, staggering in size and scope, and often appeared as grants rather than loans. One of the biggest layouts of the Covid-19 rescue was a political carrying charge that members of congress extracted just to get the larger bailout out the door – a pre-bailout bailout, if you will.
Although the $2 trillion coronavirus rescue was approved unanimously, a set of tax breaks was stuck in by Republicans, in the original version of the CARES Act put forward by Mitch McConnell.
When Donald Trump signed his whopper Tax Cuts and Jobs Act two years ago, the bill contained clauses to offset the loss of revenue that would entail from shaving down the top individual tax rate relatively a little (from 39.6% to 37%) and slashing the corporate tax rate a lot (from 35% all the way down to 21%).
One of those changes limited the amount of losses that could be used to offset taxable income in any given year. Another limited the amount of losses from so-called “pass-through” businesses (i.e. businesses that don’t pay corporate taxes) that wealthy individuals could use to offset taxable income. These provisions particularly impacted real estate developers , hedge fund managers, and other high net worth individuals with volatile revenue profiles. The second provision only affected people making at least $250,000, or couples earning at least $500,000.
As Steve Wamhoff of the Institute on Taxation and Economic Policy points out, the changes on the use of “pass-through” losses only benefit a select group. “It has to be stressed that this exclusively helps wealthy people,” Wamhoff says. “It only has an impact on people already making over $250,000.”
Because the CARES Act was rushed to the floor, members didn’t have all of the information they might have wanted before the vote. After the bill passed, Democratic staffers sent these tax provisions in the CARES Act, sections 2303 and 2304, to the Joint Committee on Taxation, to be scored. They were stunned to learn they would cost $195 billion over ten years.
In other words, what seemed like a run-of-the-mill offhand legislative pork provision ended up dwarfing the airline bailout and other main parts of the bill. “The cost of caring for this small slice of the wealthiest one percent is greater than the CARES Act funded for all hospitals in America,” says Texas Democrat Lloyd Doggett. “It’s greater than CARES provided for all state and local governments.”
The JCT analysis found that 80% of the benefit of the bill went to just 43,000 taxpayers each earning over $1 million a year. The average tax break for those 43,000 individuals was $1.6 million, an interesting number when one considers the loudness of the controversy over $1,200 relief checks for everyone else.
The Wall Street Journal went on to dissect the logic of the bailout (emphasis mine): The Fed may feel all of this is essential to protect the financial system’s plumbing and reduce systemic risk until the virus crisis passes, but make no mistake that the Fed is protecting Wall Street first. The goal seems to be to lift asset prices, as the Fed did after the financial panic, and hope that the wealth effect filters down to the rest of the economy.
The coronavirus rescue is a “trickle-down” plan. Many of the Fed programs don’t appear even secondarily concerned with maintaining employment. The basic idea instead has been to hurl money at “assets,” underscoring the bizarre dualistic nature of this rescue.
If the ordinary person during the crisis dreams of being relieved from market stresses like housing and medical costs, only to receive (at best) one $1200 check, it’s Wall Street actors who are seeing the tyranny of markets fundamentally overthrown, replaced by a giant financial happy face called the Federal Reserve that appears to want to simulate real buying and selling, only with the downside removed.
With America's small and medium businesses suffering from cardiac arrest now that the economy is in an indefinite coma, it is hardly a surprise that the largest US bank, JPMorgan Chase has been inundated with more than 375,000 requests for $40bn of loans under the $350bn small business rescue scheme, a higher number of applications than any other bank.
In an article authored by Egon von Greyerz via goldswitzerland.com, hyperinflation could spread from country to country like COVID-19 and jump from country to country with few being spared. He writes: “The crisis that the world is now encountering has not been caused by the Coronavirus. As I have stressed in many articles recently, CV is just the catalyst, albeit the most vicious one which could have hit the world. The real cause of the Greatest Financial Crisis in history is the Central Banks. They have been pouring fuel on the fire for 50 years by continuously reducing the cost of money until it became free in 2008 when rates were reduced to ZERO. Since then we have also seen negative rates around the world.’
“Negative rates are not just a total paradox but also absolute lunacy. Bankrupt sovereign nations around the world have been issuing debt at no cost or have even been paid for it. The whole purpose of interest is to be paid for the risk of lending money. As governments around the world have issued virtually unlimited debt which will never be repaid, the risk of lending to them has increased exponentially. But instead of much higher rates, to reflect the massive increase in debt plus severely elevated risk, central banks have got away with defying the laws of nature by falsely manipulating rates.
Money is a commodity and the price should be a direct function of risk plus supply and demand. But since we currently have a false financial system with fake money and false markets, there are no real prices. So through constant manipulation and intervention central banks together with a few accomplices can totally rig most markets and prices.”
THE SITUATION IS DESPERATE FOR BUSINESSES AND INDIVIDUALS
Virtually every government in the world is now committing billions and trillions of dollars in attempts to save a collapsing world economy. In many countries, 50% or more of industry is shut. Most service industries are in a total lockdown and so is aviation, transport and most small businesses. Unemployment is approaching rates not seen since the 1930s depression. All businesses need assistance, from major corporations to small firms. The majority of individuals haven’t got savings for more than a couple of weeks living and for the ones who are now becoming unemployed, the situation is desperate.
Many major US corporations need assistance from the government. Very few of these have put aside profits to reserves for a rainy day. Instead management has been too generously rewarded as well as the shareholders. Since 2009, S&P 500 companies have spent $5.4 trillion in share buybacks. Instead of asking government for assistance, management should pay back their bonuses and shareholders who have received major payouts should recapitalize the companies. But this will obviously not happen. Just like in 2006-9, profits are privatized and losses are socialized.
The government has failed to keep its promise so now we should expect unemployment to soar as reality sets in. One of the largest problems facing small companies is they are often underfunded and have difficulty getting financing at reasonable rates. Banks find larger companies much more profitable. The sector of the economy most damaged by the covid-19 shutdown is small business. When this is over America will find many small businesses have been decimated and are not able to reopen. Others will never recover and be forced to close within months. Since small businesses employ over 54 million people in America and their importance in the economy should not be underestimated.
Rest assured government employees and bureaucrats will still continue to get paid but small business, the most productive part of the economy has a knife to its throat. The government slammed expensive legislation through with no idea of the damage they were doing and how it will cause hundreds of thousands of businesses to close their doors forever. Washington has become so attuned to dealing with lobbyist from mega-companies it has lost sight of the fact small is small, and when this comes to business, this means usually under twenty employees, not hundreds.
REALITY STARTS TO SET IN
As investigative reporter Matt Tabbi has also recently written: The government's answer to keeping people employed was to promise small businesses an easy to get, rapid maximum loan amount of two and a half times a company’s average monthly payroll expense over the past 12 months. This loan would turn into a grant and be forgiven if a company did not fire its employees. Sadly, legislators failed to take into consideration that not all small businesses are labor or payroll intense. Some businesses with large or expensive showrooms are getting hammered by rent, others by inventory, or things like taxes, utilities, or even by having to toss products due to spoilage.
The PPP also failed to address the issue of what these employees are going to do while the company has no customers and business barely trickling. In the past, these employees were expected to pursue activities that earned revenue and garnered profits for the business but with no costumers, this is difficult to do. The PPP also ignored the fact that by keeping these employees on the payroll a generous employer is left open to the harsh mandates laid out in the government's previous bill. The hastily drawn up 110-page federal covid-19 economic rescue package, which Trump fully supported dealt a hard blow to small business.
For a small business this is a disaster, the bill requires: Employers with fewer than 500 employees and government employers offer two weeks of paid sick leave through 2020. Those same employers must now provide up to 3 months of paid family and medical leave for people forced to quarantine due to the virus or care for family because of the outbreak.
As expected, this measure, named "Families First Coronavirus Response Act." resulted in millions of workers to suddenly lose their jobs. Ironically, it was held before the voters as proof lawmakers could work together during a crisis. By framing the poorly crafted pork-packed bill this way promoters positioned themselves to demonize those unwilling to support it. Remember, this bill is was in addition to the $8.3 billion emergency spending bill first approved to curb the spread of covid-19.
Where Do We Go From Here? Re-designing America’s Economic System
This is a centrally planned and centrally managed system run by the federal government. Its central aim is to “wage war on poverty” by forcibly taking money from everyone and redistributing it to people in need, such as the elderly and the poor. It is based on massive confiscation of income and wealth by the Internal Revenue Service, in the form of income taxes and payroll taxes.
America’s healthcare system. This too is a centrally planned and centrally managed system run by the federal government. It is based on big, powerful central planning agencies like as the Centers for Disease Controland the FDA, as well as massive socialist programs like Medicare and Medicaid, both of which are responsible for foisting a never-ending healthcare crisis onto the American people consisting of ever-increasing healthcare costs that have bankrupted people or sent them into deep debt.
America’s monetary system. This too is a centrally planned and centrally managed system run by the federal government, specifically the Federal Reserve. From its beginning in 1913, its job has been to print up ever-increasing quantities of paper money to enable the federal government to fund the ever-increasing expenditures of the welfare-warfare state way of life.
Consequences of central planning. How are all these systems working out? Most, if not all, people would agree that they are not working out well at all. Together, they have either bankrupted people through taxes or debts or left millions of people without even enough savings to get them through a couple of months of unemployment.
And guess who is now paying the biggest price for the coronavirus crisis — seniors and the poor. That’s because the FDA, in all its central planning wisdom, prohibited the private sector from producing test kits that would have, without any doubt, significantly reduced the coronavirus infection rate.
How can they lower the infection rate if they don’t know who has the virus, especially since people who have the virus are infecting people for about a week before they show any symptoms? A massive number of cheap testing kits would have enabled people to ferret out quickly and early who was infected, enabling everyone else to continue working.
If you like how all these dysfunctional systems have worked out, are working out, and will continue to work out into the future, just continue supporting their existence. But make no mistake: There is a choice to be made here because there are four systems that are opposite to the four systems under which we are suffering.
We will explore these deeper as this continuing crisis unfolds.
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THE NEW GILDED AGE (Part 2)