Overall inflation in the US is currently running at about 1.5%, still less than the 2.0% target that the Federal Reserve shoots for. Fairly or not, many equate a decrease in inflation enough to cause deflation, with a recessionary environment or economy. While low inflation is not in and of itself bad, when it gets too low it provides less room to avoid a spiraling effect towards deflation in the event some sort of macroeconomic shock occurs. The problem becomes more complicated as the US economy becomes more dependent on the world economy. True, while slow and plodding, it is generally agreed that the US economy is on the mend. However, the specialized calculus as determined by different economists can sometimes result in confusing results when different estimates of the relevant factors are used in the equation. This is why the stock market has been behaving in a more volatile way recently, with large swings in valuation even within a 1 day period.

More directly, what situation would we be in if inflation dropped a mere 0.5%, due to multiple threats overseas such as a possible slide back into recession by Europe, coupled with a decreasingly inflationary environment in China, the so called “manufacturer to the world”.

It is also unclear, given the different strategies employed by the Fed by multiple attempts to stabilize the economy over the last 6 years, what the Fed can effectively do if called-upon to act once again. Our lives in some ways have never been more complicated, to the extent that the macroeconomic forces impact each of our microeconomic lives.

Many corporations (and all corporations set up under Subchapter S of Chapter 1 of the IRS code) are not taxed.  And for those that are taxed, many pay much lower than the maximum 40% tax rate.  In fact in 2011, the 10 most profitable companies paid an average tax of just 9%

US law disallows taxation of US company profits overseas.  In the 1990’s several US companies moved to tax havens such as Bermuda and the Cayman Islands, a maneuver called “self-inversion”, to reduce their tax burden.  Since 2004, tighter US regulations have done away with this practice.

Since 2004, US companies have looked for other ways to reduce the taxes that they pay, typically with the approval of shareholders.  One of the most popular ways is through a process of “inversion by merger”, whereby for example, a US corporation merges with a corporation which resides in a foreign country that has lower taxes than the US, followed by moving the newly created holding company to the foreign country.  This has been done several times over the past several years, which effectively moves dollars previously taxed and collected by the US to remain in the pockets of the foreign company and it’s shareholders.  The most recent example of an attempted “merger by inversion” in the news is the attempt by US-based drug company Pfizer to buy/merge with UK-based AstraZeneca.

Inversion activity is a symptom of problems in the international tax system that needs to be addressed.  At the very least, vague or nonspecific language in the current regulations such as requiring the company to perform “substantial business activities” in the foreign country, should be clarified in order to create a level playing field and to improve fairness to all countries in international tax reform.  However, the news is not all bad for the US IRS.  For example, there are still instances where it is advantageous for a US-based company to repatriate funds from overseas to the US, such as for reinvestment in the US.  A recent example is the US e-commerce company EBay, which recently said it will bring as much as $9 billion back into the US, which will create an additional $3 billion tax charge.

Interest remains keen in natural gas production from shale reserves in the US.  In fact, as the map above shows (red areas), North America has more assessed basins of shale oil than any other region of the world, leading some to believe that future shale oil and gas production and exports will lead the US to economic prosperity.

As we reported in 2012,” lower natural gas prices are creating a structural economic advantage for the US, and is becoming a new competitive strength for U.S. manufacturers. Companies who purchase energy in Asia pay up to six times as much for natural gas as their counterparts in Texas and Louisiana.  Significantly, low U.S. natural gas prices should encourage an expansion in U.S. natural gas exports, especially once LNG terminals go online starting in 2014 and 2015.”

With the cost of natural gas remaining at a historically very low level, the process of exporting compressed natural gas  is becoming a reality.  For example, in May, 2013 the Obama administration approved a $10 billion facility in Freeport, Texas,  previously a second facility was approved at Sabine Pass in Louisiana, and  a third facility recently obtained conditional approval (Dominion Resources) at Cove Point, Maryland.  Exports are expected to begin in 2017 and 2015 respectively for the approved facilities.  In all, another 18 applications to export gas are being reviewed, indicating that this new business promises to be a very significant growth driver of the US economy.  Indicative of the magnitude of this industry, the approved facilities are each expected to export at least about a billion cubic feet of liquefied natural gas per day.