The Bonus Cup (Apparently) Runneth Over

Comments by David Stockman

Lee Adler is on to something here. He assiduously tracks daily Federal tax collections and is struck by the fact that a winter that was wintery did not crimp the US Treasury's haul----which has been rising at double digit rates in recent weeks. But when you look under the hood, you can see the reverse-Robin Hood machinations of our monetary central planners diligently at work. To wit, income tax withholding was up about 18% on a year/year basis in recent weeks, while withholding for social insurance payroll taxes was up only 4.5%.

The latter tax falls on upwards of 150 million working people and is capped out at about $110,000. The former tax, as we learned from Mitt Romney, is not collected from the bottom 47% owing to tax credits like the EITC, family-based deductions from taxable income or the simple lack thereof. By contrast, the top 10 percent of households paid 71% of Federal income taxes in 2010; and now that Obama put his foot down on the top 2% in last year's tax-cut for everyone else, the upper rung's share currently being pocketed by the US taxman is doubtless even higher.

So, yes, the monetary politburo in the Eccles Building continues to pass out free money to the Wall Street gamblers and carry traders. And it promises to continue to so until mid-2015, meaning there will have elapsed about 80 months of free repo money since ZIRP incepted in late 2008. The truly mammoth gains from the resulting speculative mania will have gone to the hedge fund gamblers and social media company inventors that are riding these waves to flat-out lunatic valuations, but "trickle down" is having its day, too. {adinserter 1}

Already, the value of household financial assets is up about $20 trillion from the 2009 crisis bottom or by 45%. While the top 10 percent own about 80% of these stocks, bonds, deposits, unincorporated businesses and partnerships etc., the care, feeding, churning and conspicuous burning thereof does "trickle down" to lawyers, accountants, the money management infrastructure, tony restaurants, resorts and recreation spots, the luxury goods trade, and also travel planners, estate planners, art collection planners, party planners and all the rest of the helpers. So they are kicking into Uncle Sam's coffers, too.

But this isn't evidence of a broad-based, pre-1987 style GDP recovery---of the kind that is frozen into the time-warp of Keynesian macro-economic models. The post-war Keynesian trick of "stimulating" GDP after a business downturn---which the Fed invariably caused by too much enthusiasm on the way-up----worked because it essentially caused households to ratchet-up their leverage levels. That is, they permanently raised their ratio of total debt to wage and salary income. The latter rose from 80% in the days of William McChesney Martin's sound money rectitude to a peak of 210% at the top of the last bubble in 2007; and the ratio still stands at a towering 180%, not withstanding nearly a trillion dollars of mortgage defaults, other credit write-downs and a smidgeon of genuine "deleveraging".

But the bottom 90% of American households are stuck at "peak debt" and can no longer perform their assigned role as shop-until-you-drop "consumption units" in the great Keynesian scheme of borrowing our way to prosperity---otherwise known as "releasing pent-up demand" (by pushing the household debt ratchet higher). Stated differently, the so-called "credit channel" of monetary policy transmission is busted and can't be revived: The baby boom is way too old to pay down its staggering debts and then start all over again in a new burst of the 1980-2007 style party of a lifetime.

So the only policy transmission channel left for the magic money printers at the FOMC is the "bubble channel"---that is, the one co-located in the canyons of Wall Street where carry traders accumulate ever higher mountains of "financial assets" and then fund them with free cost of goods (ZERO-COGS). The latter, of course, is obtained from the money markets, which the Fed has pegged at zero; and has also virtually guaranteed, upon the sacred honor of the state, that this blissful condition will not change without ample advance notice---at least to those adept at reading its words clouds.

So what Lee has spotted is most likely the Fed's "bubble channel" at work, inflating the price of financial assets to nosebleed heights and generating a considerable wave of "trickle-down" income and bonuses to the next tier of vendors, helpers and care-givers who occupy the upper rungs of what has become "The Great Deformation" of capitalism in America.

By Lee Adler From the Wall Street Examiner

One of the off-the-wall theories that I have espoused lately is that rather than slowing because of the winter weather, the US economy is actually beginning to overheat as it enters the final stages of a free money boom that has benefitted the few at the expense of the many. Most observers with whom I've shared this thought think that I'm nuts, and I agree. But I've been watching the Federal withholding tax collections literally going off the charts for a couple of weeks, and based on that it sure looks to me like the US economy is beginning to go into blowoff mode. Sure, only the 1%, or maybe 10%, are participating, but the people who run this show have gambled that the bottom 90% doesn't matter and they've driven policy accordingly.

Withheld taxes are mostly from employee wages, salaries, commissions, and bonuses. Withholding from other sources like financial backup withholding is typically negligible in the big picture. So this trend should give us a pretty good idea in real time of just how fast the US economy is growing in nominal terms, which includes an unknown inflation component. Lop off about 2% for CPI, and you can even back into a CPI adjusted real growth rate that often gives a good idea of what the subsequently released lagging GDP numbers, and a whole host of other economic data will be.

Are Withholding Taxes Signaling A Crackup Boom? Click to enlarge

Are Withholding Taxes Signaling A Crackup Boom? Click to enlarge

Federal withholding tax collections have been going through the roof in recent weeks. Not only that, but the year over year rate of increase has accelerated from zero to 7.5% in nominal terms since the recession bottomed in 2009. That's amazing considering that the recovery has been under way for five years. The year over year calculations in 2010 were against the extremely weak 2009 numbers. Tax cuts suppressed the growth rate in 2011, but the payroll tax increase restored those cuts in 2013. The 2014 year to year comparison is now against a period when those taxes were fully restored, and still the gains are as strong as in 2010. Something is going on here that no one in the mainstream economic establishment is talking about--acceleration. I guess it's either too early, or too unbelievable, given the conventional wisdom that the growth rate is soft.

I am not an economist (nor a used car salesman). I just observe and report. In nearly 50 years of charting various trends I have observed that a parabolic rise on any chart, whether it be of stock prices, commodities, or house prices, tends to end very badly. Why shouldn't the same be true of economic data? An accelerating rate of increase of any economic series in a nation where population growth is around 1% per year, seems neither normal nor sustainable. Here we have a linear regression showing growth at 7.5%, and a 12 month moving average showing 10%! Ask yourself, who is the source of all these gains? Certainly not the bulk of the American people.

The chart of the S&P 500 which I posted alongside the Industrial Production Index yesterday is in a parabolic curve as it runs away from the growth rate of industrial production. And here we see it in withholding tax collections. In both cases, the benefits are accruing to just a tiny slice of the population as a whole. It is unbalanced and therefore unstable.

Unlike Wall Street and academic economists who pretend to know but don't, I don't profess to know how fast the US economy can expand without going off the rails. This economy is wildly distorted by the endemic speculation that the Fed's free printed money QE spree has enabled, promoted, and encourages. It's an economy that's distorted, top heavy, and out of balance as the vast majority of economic actors--the American people at large--fail to participate in the gains. No matter how slow or fast the growth rate, if the majority is falling farther and farther behind as those at the top grow wealthier, then the "growth" we see in the total numbers is unsustainable. The round robin of wild speculation and excess consumption by the few cannot continue indefinitely if new players are not provided the wherewithal to enter the game.

At the same time, as the lagging economic data releases begin to reflect the faster growth rate that is already occurring, the Fed will be encouraged to tap the brakes, just as it has been doing in recent months, even though the majority are seeing no benefit from the apparent gains. That tapping of the brakes in an unstable, unbalanced system, will lead to its toppling. It doesn't require an outright tightening. It only requires yet another, behind-the-curve, befuddled miscalculation in the Fed's pattern of generational serial blunders in a 100 year trial and error experiment in economic manipulation through monetary policy.

Parabolic rates of increase tend to end in crashes. The history of bubbles shows that they tend to burn out after 5 years or so from the time when they emerge from a stable base of growth or the bottom of a downtrend. The 5 year anniversary of this uptrend in tax collections will come this August. The 5 year anniversary of the current stock market boom is right now.

I track the real time withholding tax data for you every week in the Wall Street Examiner Professional Edition Treasury updates.

David Stockman's Contra Corner is the only place where mainstream delusions and cant about the Warfare State, the Bailout State, Bubble Finance and Beltway Banditry are ripped, refuted and rebuked. Subscribe now to receive David Stockman’s latest posts by email each day as well as his model portfolio, Lee Adler’s Daily Data Dive and David’s personally curated insights and analysis from leading contrarian thinkers.

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