The Impact of Bubbles – Week 2

Positive Force – The 2017 Tax Law:

It is possible to simplify a complex law to understand its impacts. From that perspective, the new tax law will have a significant positive impact on the American economy. Because of the length of time it takes for any change in economic policy to be reflected in the real world economy, the bulk of the effects of the new tax law will not be seen until the fourth quarter of 2018 (October-December). But our American economy should enter 2019 with a full head of steam.

The initial impact of the 2017 tax law will come from households having higher monthly income that they will spend in the economy on goods and services. The delayed but equally significant impact will come from capital that American companies will bring back from overseas into the United States. Both of these financial stimuli are huge and significant.

Because of the enormous effort being made to confuse the public about them, I want to focus on the reduction in corporate tax that will enable corporations to bring money back into the United States. Some politicians are representing this as a negative when it actually is a huge positive force for our economy.

Various estimates have been made that show a range of the capital held overseas by American corporations as being $500 Billion to $4 Trillion. Those same forecasts have debated as to what portion will come back into the United States. Let us assume for discussion purposes that only $500 Billion comes back into the United States in 2018.

The American economy GDP today is approximately $20 Trillion. Even just $500 Billion coming back into the United States would effectively increase our GDP from $20 Trillion to $20.5 Trillion which is an increase of 2.5%. This is a huge economic positive force.

Unlike misinformation from those opposed to the tax law and the talking heads reading their scripts, it makes no difference how the corporations use that money. They can either build new facilities, hire more people or they can just simply use this money to pay higher dividends and fund stock buy backs.

In any event, the money will flow into the American economy and end up a positive economic force that grows our economy. Since it is flowing into the private arena not the government, there will be a multiplier effect of anywhere from 1.5 to 3.0, so $500 Billion will actually grow to $750 Billion or $1.5 Trillion of economic growth. That is enormous.

It is critical to remember that land is the source of all wealth. Every product that we humans consume originates with land. Not all tracts of land are equal in quality and portfolio management requires every investor to hold some cash for liquidity. But historically, long-term the best investment is land.