I showed the graph on consumption… its rise is very steady. The real marginal consumption comes from business in the form of “capital” investment. It is capital investments which trigger incremental spending and governments try to tease them with low interest rates to spend on future production. The initial Trump tax cuts did result in a flurry of investments but recent Democratic promises to reverse them has businesses reconsidering further investments. So it is both borrowing rates and long term costs of operation including taxes that impact investment spending.

I don’t think the Federal government fully appreciates the impact of a service economy on “capital investment”. Working in health care, I always took advantage of these government stimulus programs, but I quickly ran out of things to buy. Since what I sold was knowledge and labor, there were only so many PCs,desks, and other capital investments that made sense. Instead low interest rates supported acquisitions (which really just moves the ownership structure around unless the recipients of the acquired company spend the money instead of investing it elsewhere). I tend to reinvest when my stock is bought out as part of an acquisition.

Consumer spending does increase, but its very gradual over time and rises as incomes rise. But if consumers got a sudden hit of cash through a government stimulus program recent studies have shown that unlike in the past they now often use the money to reduce debt and not increase consumption. Consumers have become more sophisticated and distinguish between one time government triggered windfalls and cash flow. I think that explains the steady nature of the consumer spending graph in the last email.

When it comes to the wealthy, think cash not “income” (forget the word income exists for the wealthy). Especially, when you talk about access to overseas wealth, there are ways to repatriate cash without paying tax. For example, I go to an international bank and borrow say $20 million a year in the US to fund my lifestyle. I keep a $1 billion dollars in their Singapore Branch in an overseas trust, I pay a small fee for borrowing my own money, say one half of one percent compared to the US tax rate of over 30%. In the meantime, I have use of the money in the US. Ever wonder why Apply borrows to pay its dividend when it has over $100 billion in cash?

Another hat trick for individuals in the past was taking out credit cards overseas (the Feds caught on to this one and put a kabosh on it). The idea was you bought things with your foreign VISA and paid the card of with your foreign income. New tricks are constantly springing up.

Other techniques mirroring the accumulating of foreign assets especially in a trust and borrowing against them for your cash needs in the US are constantly spring up. When you die all is forgiven from the income tax perspective as the money was held in a Trust and so you never really “owned” it. Many wealthy have control over their wealth these days, but they don’t “own” it.

I always find the chart below helpful. As you know since the 1950s tax rates have gone from as high as 90% on marginal income to as low as 28% under Reagan, but for all that noise, the “effective tax rate” is pretty stable. The wealthy are willing to pay taxes to a point. But they target how much they are willing to pay and use tax managers to avoid paying more. When you realize for the wealthy paying taxes is almost a “voluntary” thing and not something you can compel, it becomes more understandable.

So taxing income of the wealthy sounds neat. It does not work very well… I know even when my income was just under $1 million a year (I had several very good years before my “bad” heart forced me into retirement), I paid the same effective tax rate when marginal rates were much lower. At low marginal tax rates I deployed all of my capital (unearned income sources) into fully taxable investments, when marginal taxes went up I invested in municipal bonds, long term capital gains oriented stocks, and real estate. So its is very hard to tax income on the wealthy especially unearned income. Wages are so much easier and more straight forward, though even that is changing.

So to your question, why are corporations sitting on so much cash. Keep in mind, its not in the US and they don’t want to pay US income taxes. The link below shows how little US cash they really have. They are accumulating it not for investing in the US but for acquisitions, international expansion, or using the famous Apple trick of offsetting US borrowing at super low rates with international deposits at the same rate. Again cash flow. Avoid the tax, get the money.

https://www.bloomberg.com/graphics/2017-overseas-profits/

Apple for example has $100 billion in cash, why not just pay off a large chunk of their debt (just under $100 billion)? Because doing so forces them to bring the money into the US, since it is US debt at very low rates. It cost more to pay the income tax on the foreign cash, then the marginal interest rate they pay on the US debt. On the other hand, without all that “cash”, their borrowing rates would go up and so you should see that cash and much of the debt as just “bulking” up the balance sheet to avoid taxes, while accessing the cash.

What is true is these methods are only effective for the wealthy and corporations.

I did say demand for capital is high among small business and consumers. Go talk to your local banker and local small business owners. Most local small business owners are finding it hard to borrow on “cash flow” and even hard money lending is at 6–12% depending on the underlying assets and indication of demand. I do some limited hard money lending at 8% to people I know who have great cash flow (small business operators). Is that cheap in your book?

Banking regulations put in after the Great Recession limit how much capital banks can lend to certain borrowers without impairing their capital ratios. More and more banks are not “lenders” but fee driven entities, that generate mortgage loans and auto loans that they sell… Ask your local bank if they do “portfolio” mortgage loans… my local state bank does (none of the national banks do)… The terms 45% down and 1% above the Federal conforming rates, so around 5% today about normal based on the history of rates in this country. But it leaves very little room to get a leveraged return on real estate. So we have not bought any property in three years instead as noted above I have turned to some limited hard money lending.

So while the Fed and foreign governments are flooding their markets with liquidity, that liquidity (see US reserve balance sheet) is not really available to small business and consumers. Instead it largely benefits large corporations by allowing them to do neat maneuvers with their balance sheets… when the game ends, corporations will be forced to repatriate some of their overseas cash to pay down their domestic debt. But can the government afford to “end the game” as they are the largest debtors.

Are Federal low rates really “supply/demand” driven by main street or are they complicated interest rate management techniques being deployed by governments to keep down the cost of money to the largest borrowers in the world… themselves…

Also keep in mind total US debt (private and public) is 365% of GDP (see chart at bottom). So again demand for debt is quite healthy if you look at the graph below. And it is showing in consumer interest rates as you predicted…

“At the same time, credit card interest rates have never been higher. The average card interest rate is currently 17.41 percent, according to CreditCards.com’s latest report. That’s up from 16.15 percent one year earlier and 15.22 percent two years ago.”

But more importantly, if you stimulate GDP growth with debt spending, then you simply pull forward future demand. If you stimulate GDP growth by redistributing income then you are sucking capital out of the system depressing future productivity improvements, since it is no longer available for investment.

Real GDP growth is not based on redistributing income, but based on productivity growth (capital investments) and population growth (nature).

And this is the flaw in your logic. When you liquidate wealth or depress future investment by redistributing income, you get a short term pop in GDP, but a long term drop in GDP growth rates. As population growth rates slow, we will need greater increases in productivity to increase GDP, so to some extent all those robots, automation, and AI will be needed to maintain an increase in GDP and standards of living. The real question is how to manage change in a world where the rate of change is accelerating?

But getting back to your second thesis… since I don’t believe we can afford to spend what you are proposing on education, maybe we need to develop better methods for people to engage in self learning. I have no mechanical skill whatsoever, but watching a YouTube video (including rewind it at least 100 times), I learned out to take out, take apart, clean, and re-assemble a lawn tractor’s carburetor. I also learned how to re wire the light switches in my home without electrocuting myself. So perhaps we could achieve the goal of greater education by investing more time in early education teaching “self learning”.