Answers to the Short Quiz

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johnkarls
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Answers to the Short Quiz

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SUGGESTED ANSWERS TO THE SHORT QUIZ


Editorial Notes:

The following questions and their answers do NOT reflect conventional wisdom which "All The Devils" does. As demonstrated below, the conventional wisdom is a myth.

A plethora of information is available on this Bulletin Board for our 5/11/2011 meeting which focused on “Debtor Nation: The History of American Red Ink” by Louis Hyman – particularly, (1) Q&A-14 of the Short Quiz and the Short Quiz Reply entitled “Q&A-14 and the Real Cause of the Economic Crash,” (2) the posting entitled “American Jobs DESTRUCTION Act of 2004” and (3) the posting entitled “The Plausibility of John Karls’ Challenge to Conventional Wisdom.” All three are contained in the “Participant Comments” section of this Bulletin Board with regard to our 5/11/2011 meeting.


Question 1

What was the American Jobs Creation (sic) Act of 2004 (aka the American Jobs DESTRUCTION Act of 2004)?

Answer 1

The American Jobs DESTRUCTION Act of 2004 enacted Section 965 of the Internal Revenue Code which --

(A) permitted TRillions of dollars of accumulated profits from out-sourcing American jobs to be paid as dividends from tax-haven subsidiaries to their U.S. parents at a special one-time 5.25% corporate tax rate rather than the normal 35% rate (financial statements filed with the U.S. Securities and Exchange Commission showed that approximately 20 U.S. companies each had more than 100 Billion dollars to dividend and Microsoft alone had a TRillion); and

(B) forced the UNRELATED CHUMP U.S. companies that had NOT exported American jobs to REDUCE U.S. PAYROLL AND U.S.-LOCATED PRODUCTIVE ASSETS during 2005-2007* by TRillions of dollars in order to pay off their short-term loans from the unrelated tax-haven subs so that the tax-haven subs could pay the TRillions of dividends to their U.S. parents which had exported American jobs. The TRillions of dollars were used by the U.S. companies to redeem their own stock, creating a temporary stock market bubble whose peak in 2006 in the Dow-Jones, for example, has never again been approached.

* For an explanation of the 2005-2007 time period involved, please see Answer 7.

Question 2

Did Congress realize that the special 5.25% corporate income tax rate (vs. the normal 35%) that they were enacting for dividends from tax-haven subsidiaries of U.S.-based multi-national companies related to the profits that had accumulated in those subsidiaries for more than a decade FROM EXPORTING AMERICAN JOBS?

Answer 2

If not, they should have!!! After all, the purpose of Congressional hearings is to ascertain facts before action is taken!!!

Question 3

Did Congress think that those tax-haven subs have “mattresses” in which they stuffed the TRillions of profits from exporting American jobs?

Answer 3

Apparently yes!!!

[Unless you are so cynical as to believe that Congress knowingly trashed the American economy in return for “campaign contributions” made on behalf of the U.S.-based multi-national companies that had exported American jobs.]

Question 4

Did the tax-haven subs of the American-job exporters, in fact, have “mattresses”?

Answer 4

Of course not!!!

Question 5

Where had the tax-haven subs of the American-job exporters invested their TRillions?

Answer 5

As a practical matter, they were forced by the Internal Revenue Code to loan the TRillions to unrelated CHUMP American companies that had NOT exported American jobs.

Accordingly, the TRillions were ALREADY invested (ultimately) in “bricks and mortar” in America.

Question 6

Since the tax-haven subs of American-job exporters had effectively been forced to invest their TRillions in the short-term commercial paper of (in other words, make short-term loans to) the unrelated CHUMP American companies that had NOT exported American jobs, what was the impact on the CHUMP American companies of the sudden inability to re-finance their TRillions of short-term commercial-paper borrowings?

Answer 6

They were forced to reduce American payroll and American capital expenditures in order to repay the TRillions of short-term commercial-paper borrowings.

Question 7

Did the TRillions in reduced payrolls and capital expenditures of the CHUMP American companies that had NOT exported American jobs take place between 10/22/2004 and 12/31/2007?

Answer 7

Section 965 was enacted 10/22/2004 and provided that the dividends from the tax-haven subsidiaries had to be made in “cash” before 12/31/2005 (fiscal-year companies had as much as an extra 9 months beyond 12/31/2005 to make their dividends).

Technically the American-jobs exporters could have gambled with dividends between 1/1/2004-10/21/2004 that the legislation would pass but, as a matter of prudence, they would not have done so because something can always go wrong at the last moment with legislation.

Only the cash dividends by the tax-haven subsidiaries of the American job exporters had to be made by 12/31/2005.

The TRillions in reductions of U.S. payrolls and U.S. capital expenditures so that the CHUMP American companies that had not exported jobs would be able to repay their “commercial paper” (aka short-term) loans from the UNRELATED tax-haven companies did NOT have to be made by 12/31/2005 and, as a practical matter, almost undoubtedly could not have been made that quickly.

Accordingly, as a practical matter, the tax-haven creditors almost certainly gave the CHUMP U.S. companies that had NOT exported American jobs a “grace period” of a year or two to scrape up the TRILLIONS OF DOLLARS of cash -- rather than getting a bankruptcy court involved which would only have delayed the whole process.

However, meeting the 12/31/2005 deadline for the “cash” dividends would still have been “child’s play”!!! Such “cash cows” as the tax-haven subsidiaries would have had little trouble in borrowing whatever amount of “cash” was needed to completely clean out their earnings with dividends. In today’s modern economy “cash” almost always takes the form of an “electronic funds transfer” (“ETF”) so the Congressional requirement for an ETF dividend could be satisfied with three circular ETF’s = ETF No. 1 (a “loan” from a lending institution to the tax-haven sub), ETF No. 2 (a “cash” dividend from the tax-haven sub to its U.S. parent which exported American jobs), and ETF No. 3 (a “deposit” by the U.S. parent back to the lending institution). In such circular-cash-flow cases, the original lending institution earns a small differential in the interest rates to cover its cost of setting up its two accounting entries resulting from the two off-setting ETF’s in which it was involved and for policing the gearing of future U.S. parent deposit withdrawals to future tax-haven sub loan repayments.

Obviously the TRillions of reductions in American payrolls and American capital expenditures by the CHUMP American companies that had not exported American jobs reached such a level by 12/31/2007 that Congress panicked in January 2008 as described in Q&A-10.

Question 8

How many TRillions in reduced payrolls and capital expenditures of the CHUMP American companies were required? (In other words, how many TRillions of profits of the tax-haven subs had been loaned to the CHUMP companies?)

Answer 8

$4-5 TRillion.

[Please keep in mind from Answer 1 the facts that can easily be verified from financial statements which were filed with the S.E.C. and which showed approximately 20 U.S. companies each had more than 100 Billion dollars and Microsoft alone had a TRillion.]

Question 9

What did the American-job exporters do with the TRillions that they were suddenly able to extract from their tax-haven subs?

Answer 9

Virtually all of the extra funds, on a “with and without” basis, were used to make extraordinary dividends or redeem stock.

It is true that Sec. 965 of the Internal Revenue Code required the dividends to be “invested in the U.S.” but it was “child’s play” to trace the funds that came from the tax-haven subsidiaries to pay for the normal level of investments that would have been made anyway in the Job-Exporting Companies' U.S. marketing operations, while the normal cash flow that would have been used for such investments was now freed up to make, on a “tracing” basis, the extraordinary dividends and stock redemptions.

In the posting on this Bulletin Board by “Solutions” for our May 2011 meeting entitled “The Plausibility of John Karls’ Challenge to Conventional Wisdom,” there was discussed in detail the issue of what happened to the TRillions that were received by the shareholders as extraordinary dividends or stock redemptions.

The reason for doing so is that it is theoretically possible that the TRillions could have found their way back, probably through commercial banks, as loans to the CHUMP American companies that had not exported American jobs in order to replace their loans from the UNRELATED tax-haven companies. If so, the whole process would have been “a big nothing.”

“Solutions” posited that this would have to be investigated and the data might not even be ascertainable.

In her posting, “Solutions” revealed that she was my daughter, Hilary, and that her double-degree from MIT included an economics major, while my BA in economics before heading off to law school was only from U/Mich.

Yours Truly did not respond. Because a Gentleman never contradicts a Lady, even if the Lady is the Gentleman’s own daughter!!!

However, it would be legitimate for the Gentleman to notice that in general, most (if not all) other MIT economists are notorious for being unable to see the “forest” because they are too busy “counting trees”!!!

Hilary did report my point that the immediate recipients of the TRillions were stock-market investors (predominantly pension funds, university endowment funds, mutual funds and hedge funds) which very seldom change the percentages of different types of assets in which their funds are invested. So, of course, it was no surprise that the $12 TRillion market capitalization of the S&P-500 actually ROSE BY SLIGHTLY MORE THAN 5% between 12/31/2004 and mid-2006 when most of the extraordinary dividends and stock redemptions were taking place.

In simple terms, if one has a “piggy bank” containing $12 and removes $5, one would expect the value of the “piggy bank” to plummet to $7, rather than rise to $12.60.

However, Hilary pointed out that that merely meant that when the institutions re-invested the $5 in the remaining shares of the “piggy bank”, someone else must have sold them the $5 of stock they were buying. And, accordingly, the hunt for the final resting place of the $5 still needed investigation.

What Hilary did not report was that Yours Truly, while conceding that empirical verification would be nice, had made the points -- (1) that, as a practical matter, the TRillions would not find their way back (at least not completely) to the CHUMP American companies that had not exported American jobs unless the TRillions came to rest in commercial banks that then used them to make loans to the CHUMP American companies, and MORE IMPORTANTLY (2) that Alan Greenspan and his successor as Federal Reserve Chairman, Ben Bernanke, were constantly making headlines throughout the economic meltdown with their laments that commercial banks and other lending institutions were NOT making any loans to American companies and that such loans were desperately needed [presumably to minimize the amount of American payroll reductions and American capital-expenditure reductions that were needed by the CHUMP American companies that had not exported American jobs to repay their commercial-paper (aka short-term) loans from the tax haven subsidiaries -- even though Greenspan/Bernanke seemed ignorant of what caused the acute borrowing needs of the CHUMP companies!!!]

And on a “forest” vs. “trees” basis, why would this have been any surprise???

Lending institutions normally make loans only to companies or individuals that the lenders think have the ability to repay the loans. And why, in general, would lending institutions want to make loans to CHUMP American companies which had NOT exported American jobs and many of which, as a result, were at a competitive disadvantage vis-à-vis American companies which had exported American jobs.

But no matter the rationale. The Greenspan/Bernanke laments were real and constant throughout the period.

So, as a practical matter, any study of the empirical data (if available) should merely confirm the reason stated by Greenspan/Bernanke for their laments = American companies desperately needed loans and were not able to obtain them.

Question 10

Following the 10/22/2004 > 12/31/2007 reductions of $4-5 TRillion in American payroll and capital expenditures of the CHUMP American companies that had NOT exported American jobs, did Congress convene in January 2008 in PANIC MODE and, in less than 5 weeks (a Guinness record except for Declarations of War of which there have been none since 1941), enact the first Economic Stimulus Act = a rebate of $300 per person (including minor dependents) of 2007 personal income taxes (maximum $1,200 refund for a joint return with 2 or more minor dependents)?

Answer 10

Yes.

Question 11

Would the 2008-201? economic crash have occurred as a result of the $4-5 TRillion reductions in American payroll and capital expenditures REGARDLESS OF ANY “REAL ESTATE BUBBLE”?

Answer 11

Almost certainly.

This year, American Gross Domestic Product (“GDP” which is the value of everything produced by the American economy) was approximately $14 TRillion.

Accordingly, a mere reduction of $1.4 TRillion in American payroll represents, in general terms, an increase of 10% in the unemployment rate.

And such a reduction during 10/22/2004 - 12/31/2007 would have sent the American economy into a tailspin whether or not there had ever been a “real estate bubble.”

Moreover, the effect of the “real estate bubble” is only thought to have taken place beginning in 2008 when Congress went into “panic mode.”

However, any self-respecting economist would ask her/him-self what would have happened to the American economy following TRillions of reductions in American payroll and capital expenditures, EVEN IF THERE HAD NEVER BEEN MORTGAGES GRANTED FOR MORE THAN 80% OF FAIR MARKET VALUE AND NEVER BEEN MORTGAGES GRANTED TO ANYONE WHO DID NOT HAVE THE ABILITY TO REPAY.

Anyone losing a job because of the TRillions of reduced American payrolls and capital expenditures would suddenly be unable to make mortgage payments!!! And because of the vastness of the contraction in the American economy due to the TRillions of reductions in American payroll and American capital expenditures, there would still have been a tidal wave of foreclosures, even if every mortgage had been sound.

That is why “Yours Truly” has always maintained that the zero-down mortgages and the “liar loan” mortgages made without any evidence of ability to repay were merely “icing on the cake” -- having NOTHING TO DO with the cause of the 2008-201? economic crash and having COMPARATIVELY LITTLE TO DO with the severity of that crash.

But they certainly have been a convenient scapegoat for Greenspan and Congress to use in fooling the American public into believing that they (Greenspan and Congress) were not at fault vis-à-vis the American Jobs DESTRUCTION Act of 2004 -- Congress for failing to investigate the impact of what it was doing and Greenspan for being too ignorant to sound a warning!!!

Question 12

On 10/23/2008, did Federal Reserve Chairman Greenspan testify before Congress that the financial meltdown had been caused by the failure of Congress to regulate “derivatives”? Did he testify that his earlier opposition to such regulation was based on a “flaw” (his term) in his understanding of how the economy operated?

Answer 12

Yes, even though his causation claim was untrue.

And yes, he did claim ignorance of how derivatives work though, of course, they were NOT the real problem.

Question 13

Was Greenspan stupid for believing that the insertion of “swap” in the title of a traditional “plain-vanilla garden-variety” insurance contract for any loss in value of an asset somehow makes the insurance a “derivative”? [After all, a mortgage-backed security is an asset, just like your car or your home or your health or your life. Or a female movie star's legs, for that matter.]

Answer 13

Obviously!!!

Question 14

Was Greenspan stupid for failing to realize that the Fed’s model of the economy assumed that the 1.5 generations of Americans who had come of age since the economy experienced regular economic cycles with a recession every 5 years or so, would not panic just like their more-experienced elders would not have panicked?

Answer 14

It is unknown whether the Fed’s model of the economy was erroneous in this respect because Congress failed to inquire!!!

Question 15

Was Greenspan stupid for failing to realize that the American Jobs DESTRUCTION Act of 2004 had produced $4-5 TRillion of reductions in American payroll and capital expenditures?

Answer 15

Obviously!!!

Question 16

Do both Congress and the Federal Reserve have a “conflict of interest” in admitting that the $4-5 TRillion of reductions in American payroll and capital expenditures would have produced the 2008-201? economic meltdown whether or not there had been a “real estate bubble”?

Answer 16

Obviously!!!

Question 17

Is this "conflict of interest" why Congress and the Federal Reserve have perpetrated the myth that the 2008-201? economic meltdown was caused by the “real estate bubble”?

Answer 17

Probably!!!

Question 18

Did we think at our 5/11/2011 meeting that because of Greenspan's stupidity (please see Question 13-15), New York University should investigate the legality of revoking Greenspan's PhD in Economics?

Answer 18

Yes, if only to preserve NYU’s reputation!!!

Question 19

What do Alan Greenspan and Congress have in common with octopi? [NB: Per the "Ask the Editor" feature of http://www.merriam-webster.com (select "video" from the top menu and scroll down to "octopus"), the "correct" plural of "octopus" in America is "octopi" though "octopuses" is also acceptable for Americans willing to appear "ignorant" while in the U.K., only "octopodes" is correct.]

Answer 19

Like octopi, Alan Greenspan and Congress shoot out a mass of false and misleading material when they don’t want to get caught!!!

How/why else do you think myths are perpetrated???

Question 20

What are Bethany McLean and Joe Nocera?

Answer 20

Accessories after the fact (aka “co perps” of Greenspan and Congress)!!!

Question 21

Are you gullible enough to believe the myth created by Congress, Greenspan, McLean, Nocera, et al.?

Answer 21

The answer to this is personal to the reader.

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