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I’m talking about commercial loans — which amount to $1.8 trillion on the books of U.S. banks. Think mortgages on office and apartment buildings and shopping malls, and construction, development and industrial loans. Businesses that are losing money tend to fire people, which means they need fewer square feet. Consumers who are out of a job tend to spend less at the mall, which drives retail stores to close up shop. And when millions are in foreclosure, the construction business is likely to slow down.

So it should come as little surprise that these commercial borrowers are having more and more trouble paying back their loans. Specifically, nonperforming assets (NPAs) — loans that borrowers have stopped repaying — are up to 4.48 percent of total loans, from 2.09 percent in 2008. And banks are not setting aside reserves at the 100 percent of those NPAs that analysts like to see. Instead, at one bank — Suntrust (STI) — that ratio has tumbled from 70 percent in 2008 to 53 percent in 2009.

The problem is particularly pronounced among commercial real estate loans that amount to $550 billion. And Suntrust is not alone here: Comerica (CMA)’s NPA/Reserves ratio has fallen to 78 percent from 91 percent in 2008, and Zions (ZION) Reserves/NPA fell to 65 percent in 2009 from 79 percent last year. One bright spot? BB&T (BBT) has a Reserves/NPA ratio of 101 percent.

Commercial real estate loans worth $60 billion have become distressed in 2009. The “good” news is that it looks like this number is and will probably remain below the trillions in bad loans required to trigger another big financial rescue plan.

But we have seen this movie many times before — in the early 1980s, the late 1980s, and the early 2000s. With office vacancy rates rising to 14 percent in Manhattan and 11 percent in Washington in the first quarter — things are not likely to get better soon.

Do we really need to give bankers the power to wreck our economy about once a decade just so we have a “safe” place to deposit our money? Here’s an alternative approach — deposit-only banks.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can’t Order Change: Lessons from Jim McNerney’s Turnaround at Boeing. He has no financial interest in the securities mentioned.

Peter S. Cohan is a leading expert on technology and business.  More information on Peter’s speaking availability can be found at Speakers.com.

Economists, philosophers, and politicians have understood this simple bit of common sense throughout the ages — and so should you. It’s a practical lesson that defies political parties, demagoguery, and dictatorship. It is intuitive, understandable — and provable. Yet it is forgotten in the heat of the moment, and must be relearned by every generation — a very costly lesson: Raising tax rates above a certain level actually reduces tax revenues.

President John F. Kennedy said it clearly on Nov. 20, 1962:

”It is a paradoxical truth that tax rates are too high and tax revenues are too low, and the soundest way to raise the revenues in the long run is to cut the rates now. . . . Cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring a budget surplus.”

Under Kennedy, the top personal tax rate was cut from 91 percent to 70 percent. He didn’t live to see the so-called “Kennedy boom” that followed. But in the four years following the Kennedy tax cuts, federal tax revenues grew at 8.6 percent, four times the rate of the four years preceding the tax cuts.

The idea of collecting more tax revenues from lower tax rates has its roots in antiquity. In the 14th century, the Muslim philosopher Ibn Khaldun wrote in The Muqaddimah:

“It should be known that at the beginning of the dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty, taxation yields a small revenue from large assessments.”

And the great economist, John Maynard Keynes, wrote in 1972 about the British economy:

“Nor should the argument seem strange that taxation may be so high as to defeat its object, and that, given sufficient time to gather the fruits, a reduction of taxation will run a better chance than an increase of balancing the budget.”

By the time the Laffer Curve was popularized by economist Arthur Laffer during the Reagan administration, the commonsense idea that the way to increase tax revenues is to cut tax rates had been demonstrated, but was still decried.

Then, the 1981 Reagan tax cuts (Kemp-Roth) cut marginal tax rates 25 percent across the board, over a three-year period. The top tax rate immediately dropped from 70 percent to 50 percent. Allowing for the delayed impact of the tax cuts, in the four years before 1983, federal tax revenues had fallen at an annual rate of 2.6 percent.

After the tax cuts were fully phased in, federal revenues grew at 2.7 percent per year. And tax revenues derived from the wealthy increased, despite the huge cut in the top tax rate.

History shows that tax cuts produce increased tax revenue and economic growth. History also shows that politicians from both parties produce spending — and deficits.

There’s a double temptation to raising taxes, in spite of the lessons of history. The first is that simple belief — though proven wrong by experience — that raising tax rates will bring in more tax revenue. The second temptation is the belief that raising tax rates on the wealthy will bring more “equality” or “fairness” to the system.

Again, history shows that doesn’t work in practice, though it might sound attractive in theory. People who are smart (or lucky) enough to earn more, tend to be smart enough (or get financial advice) that enables them to change their earning patterns, actually paying less in taxes.

The Beatles famously wrote about the “Taxman” — who said “19 for you, and one for me” — referring to the confiscatory top 95 percent tax rate in Britain at the time. And they left. In 1971 the Rolling Stones left England for France to escape high taxes. When Swedish taxes soared, tennis star Bjorn Borg and Ikea founder Ingvar Kamprad fled the country, taking their money with them.

Don’t think that leaving will be an option in America. In the “Heroes Act” passed a year ago, Congress resolved that anyone voluntarily giving up his or her citizenship will be taxed on all of his assets as if he or she had sold them — paying capital gains on assets that have increased in value, even though they have not been sold.

Americans want to make our system better, not leave it. Providing health care to all is truly a goal worthy of our society. But it can be paid for only through economic growth. Higher taxes have historically destroyed economic growth — and tax revenues. That’s the lesson of history. And that’s The Savage Truth.

Terry Savage is a nationally known expert on personal finance and issues related to investing and financial markets.  She is the nationally syndicated personal finance columnist for the Chicago Sun-Times.  More information about her speaking availability can be found at Speakers.com.

Rachel Ziemba

These days, the TIC data released monthly by the U.S. Treasury, detailing capital flows to and from the U.S., often seems anti-climactic given sharp moves in the FX and treasuries markets. Yet despite the lag, the data released yesterday, which details May purchases, tells a few stories.

Most importantly, it illustrates the fact that in the face of capital inflows to overheating emerging market economies, the central banks of these countries kept buying U.S. dollar assets in May. Q2 was the first quarter of significant reserve accumulation of the last year. Preliminary estimates from RGE Monitor suggest that reserve accumulation was around $180 billion in the quarter (adjusted for valuation); the first significant increase since mid 2008. As in 2008, China accounts for the bulk of the accumulation (around $140 billion).

Despite supra-national reserve currency rhetoric, and given Beijing’s reluctance to have its currency appreciate, there was little choice but to buy dollars. China added $38 billion in U.S. short and long-term treasuries for a net increase of $26 billion in U.S. short and long-term assets. The discrepancy can be explained by China’s reduction in its U.S. dollar deposits and its continued reduction in agency bond holdings.

Foreign investors, however, shunned long-term U.S. assets. The major foreign buyers of U.S. assets went back to the short-end of the curve, buying T-bills and adding other short-term claims. Total purchases of T-bills by foreign official investors amounted to $53.1 billion.

This shift could help explain why long-term treasury yields rose in May. With concerns looming about the U.S. fiscal position and the dollar’s value, perhaps the move to the short-end of the curve is of little surprise.  It also suggests that the U.S. government is again becoming more reliant on bills for financing, as it did toward the end of 2008. This may not be sustainable in the longer-term.

While a decrease in the U.S. current account deficit means that the U.S. might be less reliant on foreign finance as a whole in 2009, the U.S. has become even more reliant on Chinese financing. China has been the largest reported holder of U.S. treasuries for some months now, and as of May China accounts for 20% of total outstanding foreign holdings of U.S. short and long-term U.S. treasuries, nearly equaling the combined holdings of Russia and Japan.

Since last fall, China dramatically scaled up its purchases of the shortest-term, most liquid U.S. assets. Between July 2008 and May 2009, the country purchased $196 billion of treasuries with maturities of less than one year. In part this might reflect a shift during last fall within China’s U.S. dollar portfolio (it also vastly decreased its holdings of US agency bonds, while slightly adding long-term treasuries). But as the chart below shows, China’s purchases of long-term U.S. assets fell sharply over the last year, and continue to fall:

12 month rolling sums of Chinese purchases of U.S. assets

So why short-term assets? Investing in the most liquid assets could keep funds freer for other purchases, including dollar denominated loans to resource countries. In theory, with shorter maturities, China could allow these assets to expire and not re-purchase them. However, in an environment where Chinese growth is re-accelerating, Q2 is unlikely to be the last in which China receives hot money inflows. As a result, expect further dollar purchases. It is little wonder why Chinese officials were worried about dollar holdings this spring, given how many U.S. assets they were buying.

Beyond China

Like China, Brazil also added short-term claims in May, with $12 billion in short-term claims offsetting net sales of $9 billion in treasury bonds. Short-term treasury holdings rose by almost $10 billion. Brazil has also wanted to diversify its reserve holdings.

Gulf oil exporters likewise added to short-term holdings in May, probably because their local liquidity needs exceeded their concerns about the dollar’s valuation. Given lower oil prices, the region’s sovereign wealth funds have fewer new funds at their disposal. That may be changing slightly, but increases in domestic spending and reductions in oil output limit new available funds. Meanwhile, with a shift from the dollar peg off the table as a policy option, reserve diversification is limited, as the need for dollar liquidity and dollar financing remains high.

Based on the reported data, the GCC has a reported dollar portfolio of about $400 billion–including $140 billion in U.S. equities, which hasn’t budged much in the last two years. Between June 2008 and May 2009, GCC holdings of long-term treasuries increased by about $30 billion, to almost $200 billion total, despite a slight decrease in May. Though, holdings of Agency bonds fell by about $10 billion,  in the last year.

The GCC total dollar portfolio is likely to be significantly bigger–over half of the estimated $2 trillion managed by public and private sector GCC investors. The discrepancy can be explained by the GCC’s tendency to buy through intermediaries. It seems likely, however, that the use of local intermediaries has increased, as the flows of U.S. dollar assets from the GCC have been higher in the last year. But again, the currency pegs may constrain the GCC to dollar purchases.

Japan, Russia and Canada, had notable net sales of U.S. assets in May.  Japan’s shrinking current account surplus could reduce its purchases of U.S. assets.

Canada’s sales may reflect a shift away from government bonds to equities outside of the U.S., in the midst of the rally.

Russia’s net sales, mostly of short-term assets, are a bit more puzzling. Russia has been reducing its U.S. dollar assets for some time, but given the inflows Russia received, one would have expected dollar purchases. In fact Russia’s central bank data on its FX interventions suggests that it bought $18 billion in U.S. dollars in the month of May. One possible explanation is that Russia could be adding to offshore dollar deposits–which would not be captured in U.S. data.

Rachel Ziemba is a lead analyst for China, Oil Exporting Economies and Geostrategic Risks at RGE Monitor.  More information on her speaking availability can be found at Speakers.com.