The widely believed boiling frog theory says if put a frog in boiling water it will jump out but if you slowly raise the temperature it will stay in until it dies.

The theory is wrong, frogs will not stay in water to be slowly boiled to death.

Nonetheless, the boil them slowly idea lingers on in many forms. For example, Rep. Kevin Brady Floats 5-Year Phase-In of Border Adjustment Tax.

The top House Republican tax legislator floated a five-year phase-in to his controversial “border adjustment” idea on Tuesday in a bid to blunt mounting opposition to the concept.

The phase-in offered by Rep. Kevin Brady (R., Texas) is a response to critics who worry about the disruption that border adjustment could cause for companies, supply chains and consumers. It is a sign that Mr. Brady continues to press ahead with border adjustment and refine details of that plan rather than drop the proposal as some Republicans are urging.

“This reflects really the input we’ve gotten, the feedback we’ve gotten,” Mr. Brady, the chairman of the House Ways and Means Committee, said at the annual meeting of The Wall Street Journal’s CFO Network. “A very gradual five-year phase in really resolves the major challenges.”

Mr. Brady also said his plan would include targeted rules for the financial services, insurance, communications and digital-services industries.

“It’s hard to determine where…the border begins in the cloud,” he said.

Boiling Frog Theory Meets Border Adjustment Tax

Brady proposes taking the BAT and boiling it slowly over five years. Supposedly, this will give the frogs enough time to see they aren’t being boiled.

The frogs of the world (importers like WalMart, Macy’s, Best Buy, and retailers in general) are just as opposed to being slowly boiled to death as they are to an immediate immersion.

The vultures (the exporters and multinational corporations) are in favor of hot water. It’s not that they want to dine on frogs specifically, rather, they simply do not give a damn about dead frogs if there is a benefit to them, consequences to the consumer be damned.

Batty Ideas

What Brady, House Speaker Paul Ryan, and President Trump seek to fix is the US trade deficit with the rest of the world.

However, the idea that raising taxes on importers for the explicit benefit of exporter will raise $1 trillion dollars is lunacy. It will do no such thing.

  1. For starters, the idea is against WTO agreements. Trump may not care, but it is crazy to believe other nations will not retaliate.
  2. Second, raising the price of imports will make already troubled retailers worse off. Store expansion will slow, if not reverse. Property values at malls will plunge.
  3. Third, consumers get ripped off. Forcing higher prices on consumers for the select benefit of Google, Oracle, Eli Lilly, etc, is just plain stupid.
  4. Fourth, Brady, by his own admission, has no idea what to do about financial services, insurance, communications and digital-services industries. As Brady accurately stated “It’s hard to determine where…the border begins in the cloud.” Why should we even try?
  5. Artificial distortions, no matter how slowly boiled, will not raise tax revenue, nor will piles of regulation fix trade imbalances.

Origin of the Trade Deficit Problem

 

trade-imbalance

The seeds of trade imbalances were sewn on August 15, 1971 when Nixon closed the gold window, eliminating the ability of foreign nations to demand gold for dollars at a fixed exchange rate.

Total Credit Market Debt Owed

tcmdo-2017-02-04

Following Nixon’s closing the gold window, credit soared out of sight to the benefit of the banks, CEOs, the already wealthy, and the politically connected.

 

“Our Currency but Your Problem”

At that time, Nixon’s Treasury Secretary John Connally famously told a group of European finance ministers worried about the export of American inflation that the  “dollar is our currency, but your problem.”

Balance of trade issues, soaring debt, declining real wages, and the demise of the US middle class are now our problem.

Scapegoating

  • Trump blames Mexico and China.
  • Larry Summers blames “Secular Stagnation”.
  • Ben Bernanke blames a “Savings Glut”.

Scapegoating Mexico and China helped get Trump elected. Scapegoating also allows the Fed, central banks, and governments to blame anything and everything but lack of a gold standard.

 

Fixing the Problem

Trade deficit issues cannot be fixed by BATs, by vultures, by interest rates, or by tariffs.

The way to fix the problem is to get rid of the Fed, have a free market in money (the market would select gold), and have free markets in general.

For discussion, please see Hugo Salinas Price and Michael Pettis on the Trade Imbalance Dilemma; Gold’s Honest Discipline Revisited

Savings Glut Stagnation Nonsense

The Fed, ECB, Larry Summers, Paul Krugman, Donald Trump, and economists in general, cannot figure out the problem.

Bernanke, proposes a “savings glut”, and Larry Summers proposes “secular stagnation”.

My challenge to the Secular Stagnation Theory of Summers has gone unanswered.

Mike “Mish” Shedlock