FOOL ON THE HILL
An Investment Opinion
Trump's Modest Proposal Bill Mann (TMF Otter)
December 1, 1999
In case you missed it, the 2000 presidential race is already well underway. For all of the credit politicians give themselves (or blame they give others) for our collective financial condition, I am convinced that the best thing politicians ever do for the economy is to keep their paws off of it.
President Clinton and Al Gore, for example, have taken to boasting about how their economic initiatives have created over 20,000,000 new jobs during their tenure. Well maybe those jobs have been created, but I don't recall hearing of any politicians sitting in on the corporate strategy meetings of Sun Microsystems (Nasdaq: SUNW) Amazon (Nasdaq: AMZN), or any other of the great success stories of the 1990s.
I'm afraid that the politicians (not just the two I mentioned above, I picked on them because they are in the cockpit at this moment) have an institutional delusion about their participation in a healthy economy. Congress did not cause the ultimate success of Silicon Valley, the Research Triangle Park, or the 128 Corridor -- private enterprise did, using its own risk capital to do so.
In this election season, however, one candidate's economic plan is entirely over the top in terms of that singular political mixture of populist rhetoric and economic fantasy.
The candidate of whom I speak is David Gardner's old foil Donald J. Trump, who is seeking the Reform Party's nomination for president. His proposal is quite simple: he wants to retire the U.S. government's debt by charging a one-time 14.75% net worth tax to every American individual and trust worth $10 million or more. With the money raised from this, Trump proposes to pay off the federal debt (currently at some $5 trillion dollars), and use the interest to do things like fund the social security trust, give a middle class tax cut, and repeal the inheritance tax.
You can read the entire proposal at the Donald J. Trump for President website.
For the 99.9% of us who are worth less than $10 million, this sounds like a pretty good deal, right? I pay nothing, the federal debt gets retired, I get a tax cut, no inheritance tax, and the rich get to pay their fair share.
What we actually have on our hands is a man who is playing populist, counting on the majority of us to believe that the rich can and should pay. Trump is proposing a soaking of the super-rich and thinks he can get away with it because he happens to be a member of that class.
This plan would be a complete disaster for the American, and possibly world, economy. It would remove an enormous amount of liquidity from the economy, roil equity and debt markets, upset the income streams of millions of Americans, and destabilize the U.S. dollar. None of these things should be thought of as good.
Remove liquidity? I thought you said we would be paying down the debt. Wouldn't that ADD liquidity?
No, it wouldn't. Here's why.
First, it's not like those who would be liable for this tax would just write a check. People do not tend to keep such a large portion of money in their checking account. They'd have to sell assets to make this burden -- assets such as stocks, bonds, real estate, etc. Bill Gates, for example, would be taxed in excess of $14 billion dollars, and would be forced to put a huge amount of Microsoft (Nasdaq: MSFT) stock on the market in order to do so, as would other Microsoft multi-millionaires.
What do you think would happen to the price of Microsoft as this stock suddenly floods the market?
And you Microsoft haters out there shouldn't get too giddy over the prospect. Intel (Nasdaq: INTC), Berkshire Hathaway (NYSE: BRK.A), Amazon, eBay (Nasdaq: EBAY), Sun Microsystems, Qualcomm (Nasdaq: QCOM), Disney (NYSE: DIS), Citigroup (NYSE: C), and hundreds of other companies, with their legions of paper millionaires and billionaires, would be subject to the same pressure of their largest individual shareholders having to liquidate billions of dollars of stock.
I'm no technical analyst, but if there would ever be a situation where I could describe the market as "oversold," this would be it.
But if the effect ended with the tremendous sales pressure in the equity capital markets we would come out OK. The next problem I have with this plan is simple -- it is a question of who holds all of this federal debt. In other words, to whom would the government pay down the debt? Is there some bank out there that lends trillions of dollars to the government?
Yes. It's called the First National Bank of You.
Do you or someone in your family hold U.S. Treasuries, savings bonds, or government backed securities? Then you (or they) are a lender to the federal government. Are you clamoring to be repaid? Probably not, since your bond is a guaranteed stream of income or a fixed level asset appreciation vehicle.
I personally am not a big fan of fixed income securities, but I know a bunch of people who are. What happens when the government forcibly pays all of them back and does not allow them to purchase additional government bonds? Where is Aunt Reba going to put her money? How is our economy going to be helped by sending the Government of Japan (the largest holder of U.S. Treasuries) hundreds of billions of dollars in cash that they cannot safely redeploy in any kind of rapid timeframe? How on earth would we be able to predict the effect on the dollar-yen and dollar-euro exchange rates when the level of liquidity is tipped so rapidly away from the United States? We could not. And anyone who tells you otherwise is probably running for office.
I don't have the answer to the above questions, but looking at Trump's plan, he doesn't have it either, and that makes me nervous.
There is an economic concept known as "crowding out" that describes the effect upon private enterprise of governments taking too large a role in the economy. Trump's economic plan seeks to counteract the crowding out caused by the debt so that the economy can reap the benefits of not having to make debt-servicing payments. The trouble is those payments go right back into the economy, not to some extra-territorial lender of last resort.
Trump's plan is focusing on the result of deficit spending by the government, while the actual danger to the economic performance of the country does not come from the debt, but from the spending itself. Killing off the debt is like paying off a mortgage early -- an admirable thing to want to do, but something that should not be done in all circumstances. Any financial advisor can show how an accelerated payoff of a mortgage that results in financial duress would be ill advised.
Trump should be reminded that the national economy works the same way, but is infinitely more complex. This plan would put him up against the one law that is absolute and incontrovertible: the Law of Unintended Consequences.
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