Ed Lambert: Capital gains vs operating profits

He notices a relationship between operating profits and corporate savings. When corporations reduce investment in the future and run off of operating profits then we get a contraction.

Here I have unadjusted federal tax income (blue) and federal interest expenses (red). Federal interest expenses have become volatile over time, it becomes hard to keep the budget stable.  Part of interest expense rise  is taxable income variation getting worse at the end of the cycle; and the Fed is generally raising interest rates.

So the Fed is generally pumping, up to a point, making capital appreciation a larger drive of federal taxes than ordinary income, capital appreciation being much more unpredictable. This same action increases the short term debt required by everyone to cover over the year.  The curve flattens as short term borrowing increase and we contract.