Month: July 2021

First the bad news: as part of the Senate’s bipartisan infrastructure deal, lawmakers quietly snuck in a provision imposing stricter rules on cryptocurrency investors to collect more taxes to fund a portion of the $550 billion investment into transportation and electricity infrastructure. According to Bloomberg, the provisions would raise an additional $28 billion from cryptocurrency transactions, according to a summary of the plan.

As had been discussed previously, the proposal – now formalized – would impose more rules on crypto brokers to report transactions of digital assets, including virtual currencies, to the IRS, and would also require businesses to report crypto transactions of more than $10,000.

Senator Rob Portman noted that Congress has expressed concerns regarding crypto reporting and taxation requirements for some time: “Everybody’s been talking about the appropriate way to provide more reporting in particular and that leads to better compliance.”

Naturally, this is nothing that crypto investors aren’t already mandated to do by the IRS anyway, as anyone who has filled out a 1040 form knows too well:

But when it comes to politics, even the patently obvious has to be explained, and in this case bitcoin – having long existed in regulatory no man’s land – is now set for its new role, as a “pay for” to fund the bipartisan deal. It’s why the measures was a last-minute additions to the infrastructure deal announced Wednesday after weeks of haggling between Republicans and Democrats over what spending to include in the deal and how to pay for it. Clearly, there was a roughly $30 billion hole, and the Senate decided to plug it with crypto taxes.

But not just crypto taxes: recurring crypto taxes.

And therein lies the rub, because now that the Senate has agreed to use bitcoin as a taxable piggybank to pay for billions in pork, it means that bitcoin isn’t going anywhere, and it certainly won’t be regulated out of existence which has long been one of the biggest existential risks facing the space.

The rest is just bureaucratic details: in May, the Treasury said that additional measures on crypto assets are necessary “to minimize the incentives and opportunity to shift income out of the new information reporting regime.” Cash transactions in excess of $10,000 are already subject to IRS reporting requirements. Meanwhile, as noted above, all bitcoin related income is already subject to ordinary income tax.

In other words, and this is the good news, nothing has actually changed when it comes to the tax treatment of bitcoin but what has changed is that by requiring the taxation of bitcoin as a core anchor of the bipartisan spending bill, we can now forget a worse case scenario that see regulators stomping away the nascent space. If anything, one can argue that in hopes of generating even more taxes in the future, Congress will not only facilitate transactions in cryptos, but will also make it easier for the broader public to generate profits, i.e. taxes.

Authored by Klajdi Bregu via The Mises Institute,

Inflation has been on the rise for the past year and in the last few months it has accelerated. In June 2021, inflation, measured by the Consumer Price Index (CPI), hit the highest level since 2008. By inflation, economists refer to the increase in the general level of prices, which means that prices on average are increasing. The Bureau of Labor and Statistics (BLS) has a basket of goods and services that it tracks and uses to create a measure of the CPI. While inflation is the topic of the day in the news media and everyday conversations, many have not heard about its sneaky cousin, shrinkflation.

The term shrinkflation, is credited to British economist Pippa Malmgren, and refers to the shrinking weight of the products while the price for the package remains the same. This is in effect another form of inflation, since the per unit price of goods increases when products shrink. However, shrinkflation is trickier, since most consumers do not notice it (see here for a few examples of shrinkflation). Shrinkflation is an ongoing process, but we are seeing more of it in the past year, and especially the first half of 2021, as businesses scramble to catch up with increasing costs of production. Shrinkflation is so widespread today that there is a dedicated Reddit page for it.

Many complain about businesses resorting to shrinkflation and regard it as a sneaky way to increase prices. Yet many of the critics do not realize that businesses have no choice but to increase prices. Anyone who is paying attention to prices in the first half of 2021 will know that it is not only the price of consumer goods that it is increasing but also the prices of producer goods. In other words, the inputs used in the production of the goods we consume, including labor, have been getting more expensive. Consequently, businesses in a fight to maintain their profit margins have resorted to increasing prices or shrinking the size or weight of their products.

Normally, the BLS accounts for the weight of the products it tracks, which would allow them to account for shrinkflation, but as the Washington Post reports, the BLS has not been able to do this very well during the pandemic. This means that the current inflation measure, as measured by CPI, is most likely underreporting the extent of current inflation.

What is causing this increase in shrinkflation? Well, since shrinkflation is in fact a form of inflation, the short answer is that the same factors have caused inflation. As you may already be aware, many are blaming shortages and disruptions in the supply chain for the recent increases in inflation, but that hardly explains the whole story.

The two main candidates to blame are the Fed and the government. The Fed has printed tremendous amounts of money, which has led to the doubling of its balance sheet since March 2020. This is in fact what inflation is, and this is the cause of what we normally refer to as inflation, which, to be more accurate, is price inflation. In general, we know that the more money we print, holding all else equal, the more inflation we will get, and that is part of what we are seeing now.

On the other hand, we have had the federal government spend money at record levels for a peacetime period. This also has led to an increase of demand beyond what one would expect in the circumstances we have been in since spring of 2020. For example, retail sales have increased rapidly and have been above trend since late 2020. While some of this can be seen as catching up after the decrease we saw in the second quarter of 2020, it is definitely gone beyond catching up, as is clear from the graph below. Government spending has become a topic of concern even for mainstream economists like Larry Summers, who is now worried about the economy overheating because of it.

Lastly, while the supply chain disruptions are blamed on covid-19, it is the lockdowns instituted by governments, in the US and other countries, that are the main culprit behind these supply chain disruptions. The problem with the lockdowns was that they completely ignored the cost-benefit analysis by arbitrarily determining what constituted an essential business and what did not. As you may well know, one can ignore the laws of economics, but not their consequences, and we are now suffering the consequences of these arbitrary lockdowns.

The million-dollar question today is, How long will this rising inflation and shrinkflation last? The Fed insists that this inflation is transitory, but many, including BlackRock’s CEO, are concerned that this may not be the case. With the inflation data from June, we have some evidence that inflation may be more than transitory. As can be seen from the graph below, the transitory portion of inflation (base effects) was expected to retreat for June (the bar after the dashed line), but CPI advanced beyond the increase in May (reflected in the green portion of the bar added to the predicted June CPI by Oxford Economics).

  (The graph is modified to show the actual CPI change for June, by adding the green portion of the bar.)

Hence, with all the money that the Fed has printed and is continuing to print, and the increased spending by the federal government, we may well end up seeing higher inflation over the next few years. Whether this will happen or not remains to be seen, but one thing is for sure: the shrinking size and weight of the products is here to stay and it will only get worse as inflation pressures continue to worsen.

President Biden has asked Congress to extend an eviction moratorium set to expire on Saturday, saying in a statement that while he would have strongly supported a decision by the CDC to do so, “the Supreme Court has made clear that this option is no longer available.”

“In June, when the CDC extended the eviction moratorium until July 31, the Supreme Court’s ruling stated that “clear and specific congressional authorization (via new legislation) would be necessary…”

.@PressSec says there will not be an extension of the eviction moratorium, despite the spread of the Delta variant, citing SCOTUS: pic.twitter.com/FD5cdXIMF1

— Phil Mattingly (@Phil_Mattingly) July 29, 2021

“For nearly 11 months, the CDC’s eviction moratorium has served as a critical backstop to prevent hard-pressed renters and their families who lost jobs or income due to the COVID-19 pandemic from being evicted for nonpayment of rent,” reads a Thursday statement by the White House. 

“In light of the Supreme Court’s ruling, the President calls on Congress to extend the eviction moratorium to protect such vulnerable renters and their families without delay.“

Last month the Supreme court left the CDC’s moratorium intact in a 5-4 vote, however Justice Brett Brett Kavanaugh joined with the court’s liberal justices in determining that the CDC had exceeded its authority, and would not be able to extend it again unless by an act of Congress.

So – if Biden gets his way and Congress whips out some 11th hour legislation, renters get stimmies and don’t have to pay their landlords, while landlords get nothing and are dying on the vine.

We can’t imagine this ‘plea’ is in good faith – as Biden could have asked Congress to act any time after the Supreme Court hamstrung the executive branch on the issue.

Read the entire statement below:

Dropped in my inbox as I’m mid tweet about the impending eviction crisis: @JoeBiden calling on Congress to extend the eviction moratorium yet again. pic.twitter.com/twWglo1uXr

— Maura Barrett (@MauraBarrettNBC) July 29, 2021

We joked earlier that Thursday would likely be another wild day for China-related newsflow, and so far, we haven’t been wrong.

As political tensions between the White House and Beijing intensify (even as Beijing looks poised to back off its ban on future US IPOs) Politico reported in its “China Watcher” newsletter on Thursday that some lawmakers are demanding that American NBA players sever endorsement contracts with Chinese sportswear firms. Last month, we reported on the first rumblings of potential Congressional action to stave off any “reputational risks” for the players (who are essentially financially beholden to Beijing). President Trump banned imports of cotton from Xinjiang because of human rights abuses, which is regularly used by many o the same companies paying to endorse NBA players.

“Americans can’t and shouldn’t conduct business with companies and players that profit through human slavery,” Rep. Scott Perry (R-Penn.) told POLITICO. “And that includes NBA players — they can’t sign endorsement deals and benefit off slave labor.”

“If they didn’t know [their corporate sponsor] sourced slave labor cotton from Xinjiang, that’s one thing,” Perry said. “But if they do know … they are complicit with slavery.”

Scott Perry isn’t the only lawmaker troubled by the NBA’s links to Xinjiang. There’s growing support among Democrats and Republicans involved with the Congressional-Executive Commission on China for probing players’ relationships with Anta, Li-Ning and Peak. The July 15 passage of the Senate’s Uyghur Forced Labor Prevention Act will likely only lead to more intense scrutiny.

At least 13 current NBA players have deals with the firms, and retired Miami Heat star and Utah Jazz part-owner Dwyane Wade has inked a lifetime endorsement deal with Li-Ning (the deal was inked in 2018).

None of these players responded to Politico’s calls for comment, and it’s not hard to understand why. As one academic put it, NBA players who ink these deals are “on the wrong side of history.”

N. Jeremi Duru, sports law professor at American University’s Washington College of Law, echoes Perry’s sentiment. “Athletes can do well [financially] and do good,” Duru told POLITICO. “Those who do business with entities like [Li-Ning and Anta] will find themselves on the wrong side of history.” Anta and Li-Ning have benefited from a boom in domestic share price and sales increases over the past year after Chinese consumers boycotted rival brands, including Nike and Adidas, for vowing to stop using Xinjiang-sourced cotton for their products.

Despite Congress’s immense power, it can’t simply force the NBA players to give up these deals. Instead, the Congressional-Executive Commission on China is prodding the Office of Foreign Asset Control to add the three sportswear firms to its sanctions list, known as the Specially Designated Nationals list. This would essentially force the NBA players to give up the deals since accepting payment from sponsors would violate sanctions.

Washington is already sensitive to the risks surrounding the NBA after a tweet from then-Rockets GM Daryl Morey expressing support for the pro-democracy movement in Hong Kong caused a full-blown diplomatic and business crisis, as Beijing started barring the broadcast of NBA games in the country, while cancelling a series of exhibition games involving American teams who were already in the country when the incident occurred. Even “Space Jam 2” star Lebron James kowtowed to Beijing by publicly calling Morey’s tweet “misinformed”, infuriating American lawmakers and the Trump Administration.

By Michael Every of Rabobank

A step closer…but towards what?

The Fed came, the Fed saw, and the Fed did what we all knew it was going to do: be extremely dovish. Fed-watcher Philip Marey titled his note ‘Pussyfooting’, in that there was not even advanced notice of any advanced notice towards tapering QE. The Financial Times –which got the US Secretary of Defence’s comments regarding his position on the UK deployment of its two aircraft carriers in the South China Sea massively wrong this week– instead runs with the headline “Fed moves closer to decision on ‘tapering’ massive stimulus”. I contend the only accurate part of that headline is the ‘tapering’ – if one is using the apostrophes in a sarcastic manner. However, there clearly was a “move closer” by the Fed: the question is towards what?

Fed Chair Powell made clear that further “substantial progress” required for tapering is towards maximum employment – not about inflation. That is an enormous de facto shift in its mandate. Imagine if the Covid situation were to get much worse again, hypothetically, and further lockdowns imposed, with further pay-outs for people to stay at home. Against groaning supply chains, we would have high unemployment *and* higher inflation: and the Fed pumping QE in regardless. Perhaps tapering wouldn’t help: but how does QE if yet-higher supply-side inflation becomes even more demand-destructive, and/or finally shifts inflation psychology?

The Fed also introduced a new standing repo facility of $500bn (nowhere near enough if it is ever really needed, but which can and certainly will be increased then) at 0.25%, establishing a RP-RRP corridor alongside the reverse repo rate of 0.05%. That is a technical move but: 1) does look like prep for a future crisis; and 2) I can think of other central banks that have traditionally operated RP-RRP corridors, and with far more political focus on employment than inflation.

Indeed, my long-running Kaleckian thesis is that as globalization made most economies far more alike –initially in a happy way to allude to Tolstoy– this also meant them meeting in the middle in socio-economic structure (“Brazilification”), rather than the bottom rising to the standards of the top; that would mean eventual crisis; and permanent reliance on low-rates and QE; and a mutation in central-banking away from rates and closer to highly-politicised liquidity management; and which ultimately will make each economy unhappy in its own way.

As an example, in the US the only thing that matters apart from the Fed doing nothing is politics. There we have more fiscal stimulus headlines flying around: yes to a bipartisan $1.2 trillion on infrastructure(?); no to $3.5 trillion on everything else(?) We also have the White House proposing a further increase in Made in America spending from the federal government: today will see the domestic content threshold raised to 60% from 55%, and increased in phases to 75% by 2029. (At which point, federal spending may be vastly larger, according to the current budget projections.) This is designed to give supply chains time to adapt – if they have any ability to right now.

Similarly, the Chinese-state crackdown-driven market sell-off has been temporarily calmed by state regulators calling in state-run Chinese banks and having a state word with them. “What this shows is that there isn’t an intention to unilaterally destroy business models and businesses which are fundamentally aligned to the party’s priorities for China’s development”, says one analyst quoted on Bloomberg, and a slew of others agree the best thing to do is just invest where Beijing wants you to. The same kind of argument is being heard in Europe and elsewhere re: Green Transitions, etc.; and, at the micro level, in the UK a government app will reward users who swap junk food for fruit and vegetables – which may or may not launch a British chav-stronomic revolution. Of course, we also have the meta race towards CBDCs, central-bank digital coins, which will necessarily open a Pandora’s Box of financial, economic, and political Panopticons that can cut banks out of the loop entirely if needs be.

Some readers may recall that last year I published a report bewailing that while markets are happy with our central-bankism —“Where is this month’s QE?”— we no longer have an overarching political-economy framework to support why/how we are where we are. In short, there is no agreement on the underlying “-ism” at work. Most people making rational investment decisions in capital markets think this is “capitalism” – and perhaps it is, as the always-worth-reading Branko Milanovic argues. However, allow me to repeat a very basic “-ism” taxonomy: Capitalism is private ownership of capital for private goals; communism is state ownership of capital for state goals; fascism/corporatism is private ownership of capital for state goals. Maybe we need a new one – but that would involve awkward Cantillon Effect questions, and some might not like the answers they are given. In the meantime, QE is billions of global reasons a month not to talk about this.

But do take a moment to ponder the above in-between those you logically spend going short the US Dollar or long the US curve post-Fed, and/or as you follow the investment opportunities regulators tell you to follow “because markets”. Those kind of thoughts tell you what kind of capital markets we will eventually have if the political-economy “moves closer” to being something new while we did not bothering to define anything that is happening beyond end-quarter results.

Yet one also has to understand that if one does ask those questions, one may come to see that the answers vary by geography. Indeed, as Chinese regulators try to calm markets, the Wall Street Journal also reports: “China’s government is planning to introduce new laws in Hong Kong and Macau that could bar foreign entities and individuals in the cities from complying with sanctions against China, according to people familiar with the discussions…The introduction of the law in the two Chinese territories, especially in the financial hub of Hong Kong, could leave many companies and their employees caught in the middle as China and the US clash over the future of the former British colony.” New stringent data laws also kick in in Hong Kong from September 1 as well.

Trying to follow two clashing sets of state regulators offering the mandated way to the best returns under “free-market capitalism” sounds like it might be problematic: but does this ironically mean we get even more QE (and even fewer key questions)?