Whether he’s sincere or not remains to be seen, but the implication is that he’s unworried, because in his opinion the opposition party only knows how to criticize and doesn’t have anything constructive to say.

He needs to call Wisconsin Congressman Paul Ryan, ranking member of the Committee on the Budget, and have him over for tea.

Ryan is a representative who appears to take his job — overseeing the federal budget —  seriously. In 2008, he introduced legislation called “A Roadmap for America’s Future.” It died, so he’s reintroducing it this year. It won’t pass, unless the Democrats somehow manage to lose control of the House. It’s just too simple.

It’s also breathtakingly visionary. In one fell swoop, Ryan takes on taxes, health care, Social Security, and the federal deficit, and fixes them all. He puts the government back on the road to solvency, something no other plan comes close to achieving. Most important, he wants to shift our mindset, so we finally recognize that the cure for debt problems is not to pile up more debt.

Income and Other Taxes

Ryan has a nicely targeted sense of humor. For those who can’t bear to part with today’s elephantine tax code, he leaves it in place, and anyone who loves it can still use it. For the rest of us: Single filers would pay 10% on income up to $50,000 ($100,000 for joint filers) and 25% thereafter, with a generous standard deduction and personal exemption ($39,000 for a family of four). That’s it. No loopholes, deductions, credits or exclusions. Fill out the postcard and mail it in.

Additionally, the plan promotes saving by eliminating a whole bunch of other taxes — on interest, dividends and capital gains. It scraps the alternative minimum tax and abolishes the death tax. It replaces the corporate income tax — currently the second highest in the industrialized world — with a business consumption tax of 8.5%, about half the world average, putting American companies and workers in a stronger position to compete in the global economy. And it allows for immediate expensing of new business investment.

Health Care

A refundable tax credit — $2,300 for individuals and $5,700 for families — to purchase coverage (from another state if they so choose) and keep it with them if they move or change jobs. State-based high-risk pools. Supplemental payments to low-income recipients, who can choose their care rather than be consigned to Medicaid.

Medicare

Large-scale, common-sense reforms involving vouchers and medical savings accounts, along with a very gradual rise in eligibility age, designed to preserve the best parts of Medicare while securing its solvency for generations to come.

Social Security

Maintains benefits for current recipients, while making the program permanently solvent by combining a modest adjustment in the growth of initial Social Security benefits for higher income individuals with a gradual, modest increase in the retirement age. Includes a property right, so that your vested Social Security interest does not die with you. Those who own these accounts can pass on assets to their heirs.

Making all this work would require some adjustments, though. Nondefense discretionary spending, for example, would be frozen for ten years at 2009 levels in nominal terms and allowed to grow thereafter by an amount linked to CPI.

There has been immediate criticism from Democrats, mainly centered around cuts to Medicare. And some of the objections could be valid; maybe the plan could be tweaked a little to bring more of the opposition on board. Or maybe they’ll just continue to complain because reducing the size of government doesn’t sit well with them.

But the thing is, even the critics have been forced to admit that the plan would probably work. How do we know? Ryan had the confidence to submit it to the Congressional Budget Office for analysis. As you probably know, the CBO has stated frankly that continuing along the current path leads to unsustainable deficit levels and bankruptcy for the country.

According to CBO projections, debt will spike sharply upward in 2015, rising — relentlessly and unstoppably — to over 700% of GDP in 2080. Of course, the economy will be destroyed and government forced to default long before then.

If Ryan’s Roadmap were adopted, however, the CBO estimates that debt/GDP would peak at 100% in 2043 and “decline thereafter, reaching zero by 2080,” then move into surplus. (For the complete CBO report, go here.)

Yes, all predictions are bound to be flawed. Yes, we must remain skeptical of anything that comes from a politician. And yes, it’d be better for government to shrink more than this proposal envisions. But, especially concerning taxes, it’s a big step in the right direction.

The president is wrong. There is another idea out there, and according to the government’s own budgetary watchdogs, it’s a good one. It “just” necessitates adopting a 75-year time line.

Of course, the odds of Congress looking that far ahead are slim to none, and you know where Slim is. But who knows, if enough Americans beat the drum for Paul Ryan, this country may actually have a future.

Regards,
Doug Hornig, Casey Research
for Whiskey & Gunpowder

March 3, 2010

Paul Ryan Could Save America was originally featured on Whiskey and Gunpowder

Ok, so we get the point. Pundits portrayed this as an opportunity to revive the “Hope and Change” which had mysteriously disappeared. But let’s face facts. All the speeches in the world, no matter how good, or how inspiring, are not going to effect the change that is really needed.

These do-nothings could not even pass the economy-reshaping healthcare bill. What happened there? Did they really want to pass it at all? How could a democratic president, with majorities in both houses of Congress, fail to pass what would have been landmark legislation? A defining moment of the current Presidency and our “dear Aunt Nancy.”

The populace be danged. We have a chance to make history here. Who cares how fired up some know-nothing rednecks might get at town meetings. Here was a chance to do something “for the people” who are obviously too stupid to know how good it would be for them. This is just the kind of power play the Nanny-Statists love! And they had all the “power” to do it. But they let the “moment” slip through their fingers…thank God.

Just as the healthcare plan failed, so is will the presidency. Last week a Wall Street Journal NBC Poll showed that voters held a 61% no confidence view on the president’s plans. Failure. Humiliation. Defeat.

How else can you describe the healthcare flop?

But let’s move on from a review of recent history, to a prediction of the near future.

It has been noted that the president moved from pushing healthcare to creating jobs. Good move, Mr. President. The simple smoke and mirrors approach of Washington Politics…cover a failure with blowing smoke (“Those stinking Republicans thwarted my precious healthcare agenda…”) then shifting the mirrors to reflect what troubles folks most about this economy…jobs.

Several years ago, there was a best selling business book entitled, “Who Moved My Cheese?” I hear they are coming out with a sequel, “What Happened To My Job?” That is going to be enhanced by the Hollywood film blockbuster, “Honey, They Shrunk My Income!”

Now, all tongue in cheek aside (well, at least some tongue in cheek) let’s get to the “issue du jour” on the revamped presidential agenda. Because let’s face it, if the economy doesn’t make a turn for the positive…if there aren’t signs of real success that the media can parlay into a picture of a wise and benevolent administration, we will be looking at the first one term president that the US has had in a very long time.

It has long been a major tenant of this shot drinker at the Whiskey Bar, that the Government does not create jobs. Sure they can give a man a shovel. They can have him dig a hole. They can pay him for that with inflated money. Then they can have him fill in the hole. They can pay him again. And that’s what appears to happen time and again.

The problem with government jobs is generally two-fold. First, we know that they are expensive. Second they are not productive. Thus, the very nature of government work, is to funnel money from the private sector to pay for these jobs, and then to see that little or nothing is produced. Where nothing is produced, nothing is sold. Where nothing is sold, no income is created. Where no income is created, there is a fiscal loss.

But not for the government. They have no bottom line. They have no “mandate” from the masses to produce a profit. The current “mandate” from the electorate has been “Give me a job.” Or “Subsidize my healthcare.” Or, “Give me a cheap mortgage.” Ignoring all the basics of economics…scratch that…ignoring the ONE basic of economics, government is not required by the “masses” to produce a profit.

Sheesh…they haven’t even been required to BREAK EVEN!

Certainly we can see that the speech last week did not highlight this point…Balancing the National Budget. We will just continue to spend our way to prosperity. And nobody will care, just so long as in our spending, we are creating jobs…

The President, in his acknowledgement that government should do something to help “create jobs”, also stated that 70% of all jobs in the US are created by the private sector. To that end, the Admin introduced a tax break for small businesses who hire people this year…$3,000.00. Whoa! “Hey there, Big Spender!”

What kind of economic sense does that make? How in the world is a business going to benefit from a $3,000 tax break, when his cost of hiring a worker is likely in excess of $25,000? It is true, if his business is expanding and he needs to hire workers, this benefit will help him. But no business is just going to go out and hire workers at a $22,000 per annum loss. In short for this to work, we need businesses that are e-x-p-a-n-d-i-n-g. Unfortunately, should Obama be lucky enough to preside over an expanding economy, he won’t be looking to tax cuts, but tax increases. Does the term bass ackwards ring a bell around here?

Nevertheless, the prevailing theory is that “…the government can create circumstances which create jobs”—this was actually stated in the speech last week. And I suppose that this tax incentive is what they deem as creating the circumstances that create jobs. But the truth is, the circumstances for creating jobs already exist on their own.

They exist without government help.

They exist without government subsidy.

They exist without government entitlement.

The work of business is an arena completely outside the sphere of government altogether and has nothing to do with it. Interference by trying to “improve” such circumstances only backfires in the end.

For example, the “Cash for Clunkers” program which was supposed to stimulate sales and keep auto jobs alive here in the US, provided a spike in sales temporarily. It was deemed a Government/Business success. But what is rarely reported is how it nearly destroyed the used car sales business in certain portions of the country. In my own area here in the mid-Atlantic, my car dealer contacts have been forced to close their lots, because they cannot get inventory (since the infinite wisdom of the “C4C” programs’ designers was to destroy the old trade-ins). I have good friends, who have been in the business for years, now being forced to leave their line of work, and go job hunting. Thank you, Barack the Beneficent.

The best thing the government can do for job creation, is to get out of the job creation business entirely. Do not offer tax incentives, just stop taxing altogether. The income tax reaches everyone, so leave it at that! The less the government does to “help” business, the better off every one is.

Just ask our friends in American Samoa. On a remote island in the South Pacific, far west of the Hawaiian Chain, we have attempted to extend our omniscient and all kind influence once again. Here on this happy island, where the average income is just $4,000.00 per year, 80% of the economic activity was provided by two separate tuna canneries.

In their infinite wisdom, Congress decided to “help” the Samoans by instituting the minimum wage policy. Happy Day! They’ll all be rich in no time. And the dirty, filthy, stinking canneries will that have kept these fine people so long in virtual slavery and penury will finally get their come-uppance!

Oh how well this has worked in our own land, sacrificing jobs and creating unemployment! Only the most obstinent and ill informed still maintain that the minimum wage increases the standard of living.

The effect on American Samoa?

One of the tuna canneries has already left, and the remaining one is looking to other shores. Great job, Congress. The average annual income should drop below $1,000.00 per year thanks to your creating better circumstances.

Here is a prime example of what happens when the Nanny-State attempts its improvements. In such a simple economy as you would find on this tiny island, with very few other factors to wrestle with, and no other influences to calculate, the soft glove of the State covers an iron fist. Not content destroying lives on our own shores, we have to spread our infectious foolishness to the destruction of others.

Let the prayer of our Revolutionary Forefathers ascend loud and long from the bar, “Good LORD, deliver us!”

Regards,
Bill Jenkins

February 2, 2010

Government Cannot Create Real Jobs was originally featured on Whiskey and Gunpowder

I propose that “taxes” are money extracted from the people for the purpose of running the government and providing for the common good. As such, it would make sense that to provide the maximum “common good,” the maximum amount of revenue should be generated. (I shall not address how the tax money is ACTUALLY spent, and I shall only consider “income taxes.”)

The obvious question is: “What rate of taxation should be applied in order to achieve maximum revenue?”

A superficial response would be, “The maximum possible.” A little thought will show this to be incorrect. Consider a 100% income tax. Very little revenue would be obtained, since no one would work if all of their income were taken from them in taxes. In like manner, a 0% tax would achieve no revenue since NO tax would be taken. The “revenue curve” looks like an “inverted U,” or perhaps a “bell curve.” Clearly, some percentage “in between” must be the desired number/percentage. I believe no one knows that number — i.e., it is unknown.

Let us consider some “standard” economic assumptions:

1. People work for a salary — as many hours as they wish.
2. People play and receive no economic benefit for doing so.
3. People would rather play than work.

Let us now consider a lawyer who wishes to have a load of firewood. Consider:

1. The lawyer makes $100/hr.
2. The wood costs $100.
3. The tax rate is 90%.
4. The lawyer can cut and split the wood himself in 5 hours.

The lawyer has two choices. He can work and make enough money to purchase the wood, or he can cut the wood himself. In order to purchase the wood, the lawyer must work for 10 hours and make $1,000 in order to pay the taxes of 90% and have $100 left over to purchase the wood. On the other hand, the lawyer can go out and cut the wood himself in 5 hours, and have 5 hours “left over” to “play.” The choice is obvious. At this tax rate, the government receives no tax revenue.

Let us now consider a tax rate of 50%. Under this assumption, the lawyer need work only TWO hours to make $200, pay the taxes of $100, and he will have $100 left over to purchase the wood. The lawyer will have 3 hours “left over” to “play.” The person selling the wood will be paid $100. Under this tax rate, the government will receive $150 in taxes-$100 from the lawyer and $50 from the wood supplier. An additional gain is that the woodsman has an “extra” $50 which he can use to purchase goods and services which will generate an additional $25 in taxes.

For the above example, the “break even” tax rate for the attorney is 80%, where he works 5 hours either way. The “best” tax rate will vary from person to person and task to task, but there IS SOME (UNKNOWN) OVERALL OPTIMUM RATE FOR THE COUNTRY AS A WHOLE.

The above example is an explanation of why LOWERING the tax rate may actually result in MORE revenue — in spite of the ignorant claims that “It makes no sense.” Clearly, it does not HAVE to work as it depends upon where the present tax rate exists on the curve relative to the optimum rate-but it DOES “make sense.” People who claim otherwise are grossly ignorant of economic theory.

Part II: Inflation

Consider a population of people such that each has $1,000. They trade with each other and there are just enough goods and services to survive. At the end of the month, each person ends up with $1,000-and the cycle is repeated. Suppose the government imposes a 50% tax on this population, and removes $500 from each person. What effect would that have on the standard of living of the population? If you think about it, it will have NO impact — all prices will simply be halved. In like manner, doubling the amount of money available to each person will simply double the price of everything. There would be no change in the standard of living.

Let us now consider a situation where only SOME of the population is given $2,000. Clearly, these people are at an advantage in that they can purchase MORE goods and services than their neighbors. In doing so, they drive the price up to where their neighbors will suffer a decreased standard of living. Clearly, when the government infuses money into a certain segment of the economy (stimulus), it benefits that part of the economy. Due to the influx of money, prices in all sectors of the economy rise as those who “benefit” drive prices up as they spend the money.

Consider a “benign” 3% inflation rate. Over a three-year period, the cumulative inflation will be about 10% (with compounding). Intuitively, one would think that one needs a 10% raise over three years to accommodate that inflation. Such is NOT the case-for (at least) two reasons:

1. Unless you receive your raise at the “start” of the inflation cycle, you must tap into your “reserves” as prices rise UNTIL you get your raise. At that time, you are “back to where you started,” but you suffered a decreased standard of living up to that time or an unrecoverable monetary loss. (Of course, if you receive your raise at the START of the cycle, you are “ahead” in some sense. Since the government is “creating” the money it is always at the “start” of the cycle, and thus always benefits.)

2. Due to our tax structure, most people pay about 50% in taxes. (How much of your last raise did you actually see?) Since you pay your bills with after tax dollars, you will need a raise of 20% in order to have 10% left over to pay your bills. This is quite insidious as will be described in Part III.

Part III: Minimum Wage

I do not enjoy “picking on” minimum wage folks, however they are the best example. In trades, businesses, services, etc. management and labor “come together” and “share” the profits. In some cases labor chooses to reduce their “share” because the business is not doing well. Labor would much rather have a job that paid less than have no job. Minimum wage is “different,” as it is imposed by the government regardless of the effect on the business and with no negotiation.

One of my left wing friends once said that he would “Not mind paying a nickel more for a hamburger so that the employee could make $1.00/hr more.” My first thought was, “Why don’t YOU pay TEN cents more and I’ll keep paying what I’m paying now. Why do you think you can speak for me?”

My second thought was, “Let’s look at the numbers.” In order for the person to make $1/hr more, the owner is going to have to pay about $2/hr more due to benefits, social security, medicare, unemployment, disability, leave time, etc. Thus, the employer is going to pay $2/hr more so that the employee can get a raise of $1/hr and realize a raise of $ .50/hr more after taxes.

The next thing that comes to mind is that to simply “break even,” in order to pay that $2/hr, that employee is going to have to sell about 40 hamburgers PER HOUR at 5 cents additional cost per hamburger. Furthermore, for every employee at the cash register, there are (at least) two (and more likely three) employees in back preparing the food. Thus, at a nickel per hamburger more, that store is going to have to sell about 150 hamburgers PER HOUR-if there is only one person at the counter. I suggest this is highly unlikely. It always amazes me how people can pull numbers and “facts” right out of thin air to support what they think is “right,” and then IMPOSE THAT SITUATION UPON OTHERS WITH IMPUNITY AS THEY WILL SUFFER NO ILL EFFECTS REGARDLESS OF THE RESULTS; AND THEY NEVER LOOK BACK TO SEE THE HAVOC AND DEVASTATION THEY HAVE CAUSED. When confronted with the results of their actions, invariably the response is, “Well, you’ve got to break a few eggs to make an omelet.” Funny thing, they are always talking about someone else’s eggs.

Let us consider a more general case. In general, small business must make about 20% profits to survive. The “high” profit is necessary because of the high risk-with something like 80% of the small businesses failing in the first five years. Now, in order to give an employee a $1.00/hr raise, it will cost the employer about $2.00/hr (as stated above). In order to “break even,” the employee must sell an additional $10/hr of goods/services, or about $80/day. (If one assumes a 10% profit margin, then the employee must sell $160 more per day.) Such is unlikely to happen, so the employer must raise prices in order to accommodate the pay raise. He cannot simply raise the prices by the amount of the pay raise because of his increased costs beyond the raise-he must raise prices by (at least) DOUBLE the amount of the pay raise. (Of course, depending upon the business, the employer’s wholesale costs may also rise because of the increase in minimum wage, which may result in greater price increases in order to maintain the profit margin.)

Interestingly enough, while the employer is raising his prices by (at least) TWICE the pay raise, the employee is seeing only HALF the pay raise because of taxes. As the price increases reverberate throughout the economy, it can cause some hardships — on the very people it was designed to help. Because of their “pay raise,” the employees actually “lose ground,” so demand a higher wage-and a new cycle begins.

Consider that typically product costs are 2/3 labor. If a merchant increases his labor costs 20% (10% to the employee, 10% in benefits/taxes), then the price of the product will increase by 2/3 of 20% or about 14%. The employee will receive a 10% raise, of which he will “see” 5% due to taxes. As such, product prices will increase by 14% and the employee’s wages will increase by 5%. This presumes no increase in raw materials costs due to a general minimum wage hike.

It is even more sinister in that because the minimum wage folks get their money “first” in some sense, they believe they are “getting ahead,” but as the effects permeate the economy, they gradually lose ground without realizing it. As previously stated, quite insidious.

Part IV: Conclusion

The careful reader will note that I have placed no “value judgment” upon this situation. I have simply taken what I consider to be “reality” and described it through numbers. What is most interesting is the reaction I get when I state the contents of this paper to left-wingers. It ranges from, “That’s not true,” to “I don’t believe it,” to “You’re a brainwashed neo-con.”

When I attempt to converse with such people, they often scream, shout, and launch personal attacks. They will not (can not?) address the underlying rational discourse. I cannot state that my statements are true — I can state that they have yet to be refuted.

Regards,
Tony De Maio

December 15, 2009

How Do You See on the Left Side of the Classroom? was originally featured on Whiskey and Gunpowder

It’s elastic. And, boy, oh boy, can it stretch. You see, if governments cannot operate under paper money, they can’t inflate the currency. If they can’t inflate the currency, then they can’t spend with reckless abandon. Perhaps you’re asking yourself what rising prices have to do with government spending. And if you haven’t been around this bar much… that’s a very good question. So let me sum it up quickly.

The basic theory of government operation as it is taught in school and propounded by the media is that the government spends money to provide us services that we would be unable to provide ourselves. To pay for those services, they extract from us, you guessed it, TAXES.

STOP! Wait! Don’t you believe it!

The amount of taxes collected here in the United States last year would not have been enough to fund Social Security and Medicare. It’s hard to believe, but true. So where does all the money come from to pay for the infinite number of other expenditures of the federal government?

How do they pay for schools? Not just the aging and dilapidating buildings, but the books, supplies, teachers and the massive bureaucracy? How do they pay for the military… guns, tanks, soldiers, computers, jets, ships, submarines and planes? How do they pay for the Senate, House, Supreme Court, president, Secret Service, CIA, FBI, NSA, NASA, DOJ, DHA, HUD, DHS, ATF, IRS? Not to mention welfare programs of multitudinous varieties, college grants and national parks. How do they pay for all this? By means of two devices about which the man on the street knows little.

The first is through bond and Treasury auctions. We — as in “we the people’ — sell these instruments to people who believe that we are a good risk. Then we pay them to let us borrow their money. Of course, borrowing money costs money… it’s never free. But when a country borrows more than it takes in by taxation, because it is spending more than it takes in by taxation, the result is a growing debt problem, which never gets paid down. So how can the United States, or any country, continue on this cycle of never-ending borrowing? Not to worry, my friend. Because here is where the second device comes into play.

Countries begin paying off their debt with money that they “print.” It is commonly called monetizing the debt. It’s not hard to understand, but they try to make it hard. When you’re stealing from your citizens, it is better if they don’t know it. If you make the example and the problem personal, it all falls into place.

If I had a nearly endless source from which to borrow, some deep-pocketed uncle for instance, I could borrow from him indefinitely, as long as I could pay him back in money that I printed myself. If he did not know the money I gave him was fake, or if he just didn’t care, I could continue that scam in perpetuity. I could borrow millions… billions… TRILLIONS! But let’s not get ahead of ourselves.

Technically, I could only borrow from him until he was out of money. Right? Well, no… not exactly. If he had creditors who would take my fake money as real money, he would never have to stop lending. Until someone held his “wallet to the fire.” That is essentially what is happening. Only it is our Uncle Sam who is doing the borrowing. Then he prints his own money and uses it to pay his bills to his creditors around the world. Up until recently, our creditors had to take it. Because we had the bully power to force it on them. Plus since all the countries in the world were doing the same thing, our funny money was considered the best. That gave it some sort of intrinsic value.

But now there are currencies more valuable than ours. And now we do not have the military firepower to force it on others. Some feel that means that the whole jig is up. If our paper money is refused, then everyone’s paper money will be refused. But just because our government has spent us into trouble and is trying to make it worse with bigger and bigger spending projects from stimulus to healthcare doesn’t mean that the other major economies of the world are ready to throw in the towel. Indeed, if they can hang on, they will, because perhaps they will move into the position of world’s reserve currency and can produce prosperity out of nothing, all while impoverishing their citizens and neighbors.

Thus this will be but another round in dumping the dollar. The other currencies will look out for themselves. And playing those currencies could mean more currency option opportunities for us.

Regards,
Bill Jenkins

December 11, 2009

Government’s Shell Game of Taxing, Borrowing and Monetizing Debt was originally featured on Whiskey and Gunpowder

Lawmakers Propose ‘War Surtax’ to Pay for Troop Increase in Afghanistan

Two top Democrats say they want to impose a new tax on the wealthy to finance any increase in U.S. troops for the Afghanistan war.

Rep. David Obey, D-Wis., chairman of the purse string-controlling House Appropriations Committee, is calling the idea a “war surtax.” He said that just as the federal government is expected to pay for its proposed intervention in the health care sector with new taxes, any escalated involvement in Afghanistan should come with a payment plan.

“If we have to pay for the health care bill, we should pay for the war as well … by having a war surtax,” Obey told ABC News in an interview that aired Monday. “The problem in this country with this issue is that the only people that has to sacrifice are military families and they’ve had to go to the well again and again and again and again, and everybody else is blithely unaffected by the war.”

Readers of my free missive, Casey’s Daily Dispatch, know I’m vehemently opposed to the doomed adventure in Afghanistan. On that front alone, the idea of a war tax is like a shard of glass in my eye.

But it’s even worse than that. It shows just how degraded this country has become — picking the pockets of the productive is now pretty much the only remaining source of funding the administration and its allies can imagine.

Just to be sure we keep this in perspective: At this moment, if you earn more than $250,000 a year (which isn’t what it used to be, given the steady erosion of inflation over the last 30 years), you will pay federal income taxes of about 35%, no estate taxes, and a 15% capital gains tax should the money you put at risk in the market return a profit.

As soon as next year — if the government moves up the expiration of the Bush tax cuts, as I very much expect them to — the top tax bracket will go to 39%. On top of that, the current healthcare legislation will add a 5.4% surcharge. Then, add in the Democrats’ proposed 5% war tax. So straight up we’re talking 49%.

Then there’s a near doubling of capital gains taxes, from 15% to as high as 28%. And, of course, the return of the estate tax.

But that’s just for starters, because everywhere you look states and municipalities are raising taxes and fees, and attorney generals, taking a page out of Caligula’s playbook, are casting about for their next deep-pocketed victim.

At the end of the day, the top tax rate in the U.S., starting as early as next year, will soar way over 50% of income. While further number crunching is required, it is a very safe assumption that top income earners will soon be paying over 65% of their income in taxes.

Which is to say, if you are in a top tax bracket, every penny you earn between January 1 and August 25 will go straight into the coffers of one layer of government or another.

And this while more than 40% of Americans pay no income taxes at all.

This is just another symptom of the single biggest problem now facing the U.S. (and for that matter, the world): the ballooning size and cost of government. And there are no speed bumps in sight.

Even so, endless complaining won’t really do anything other than raise the blood pressure. So, what can we actually do about it? Some ideas:

1. Buy gold. Unless and until there is an angry upwelling of popular discontent at the growing size of government — and it has to be far more substantive than just a few vocal talk radio jocks, or even 100,000 or so people peacefully gathering on the Mall in Washington DC — the government will continue to grow, or even just keep running at current levels, which means the destruction of the dollar. Many tangible assets will do well, but their intrinsic value as money means gold (and silver) will do best.

As I write, gold has again broken to a new, non-inflation-adjusted high. As with all markets, it will fall back now and again, but the trend is very much up.

2. Buy gold shares. The leverage in the high-quality gold shares can boost your returns by a factor of 2X to 10X, and more. Again, there will be setbacks, but shares in the right companies with the right projects will trend higher and higher until the Mania phase kicks in, and then things will get really interesting.

3. Be smart about taxes. Keep an eye on Pelosi’s tax trap — if you have appreciated assets that qualify for long-term capital gains, consider selling them before year-end to lock in the lower capital gains tax. Likewise, if you run a business and you can pull any income into this year, versus next, consider doing so.

4. Diversify globally. Why do it? The short version is that it’s a big world out there, and there are a lot of places that are incredibly beautiful, safe, and unbelievably inexpensive. For many non-U.S. citizens, expatriating means you’ll pay no income tax, but even if you are a U.S. citizen, there are substantial tax benefits in moving offshore. And what you can save in cheaper everyday living allows you to live like royalty, for a fraction of the cost. Which means you can save more.

Personally, I favor Argentina. Some years ago I went on a three-year quest to find paradise on earth, and Argentina was ultimately the hands-down winner.

5. Recognize the bureaucracy for what it is. These are not “public servants” but rather an entrenched interest group that is actively engaged in a systematic effort to look after itself, with no regard for the damage it’s doing to your family finances and to the country.

Now, there are two schools of thought as to how you deal with the bureaucrats. My dear friend and partner, Doug Casey, would tell you to take every opportunity to let the bureaucrats know you hold them in low esteem. For example, by asking airport security personnel how old they were before they realized they wanted to make a career out of pawing through people’s underwear.

The second approach is to accept that the bureaucrats, backed by the voting masses, hold most of the cards at this point. Poking at them with a stick risks unnecessary aggravation and worse. So, keeping a low profile and going about your business is certainly a rational choice.

Of course, there’s no better way of maintaining a low profile than moving to another country where you’ll be welcomed as a visitor and not viewed as a serf.

Is there no hope? One obvious scenario is for the Democrats to lose control of either the House or the Senate come next November’s elections, thereby returning the nation to some form of political gridlock. The best of all worlds, in my view. And the way things are heading, this is now a certainty.

But before you get overly excited about the prospects of a political solution, don’t forget the role the Republicrats have played in bringing the nation to this sorry state over the past several decades. If you’re holding out for an outbreak of capitalism or other signs of fiscal sanity once Republicans regain some modicum of political power, you are delusional. They may package their programs in different-colored paper, but when you rip away the wrappings, you’ll find the same statism and the same promises of a chicken in every pot.

Look after yourself — no one else is going to do it for you.

Regards,
David Galland
Casey Research

December 4, 2009

How the Government Tries to Fleece You and What You Can Do About It: Buy Gold, Diversify was originally featured on Whiskey and Gunpowder

In order for there to be a restaurant at all some entrepreneur has to put his money and vision on the line and open it. He has a thing called “overhead,” which is irreducible on-going expenses whether he has any customers at all or not. The rent, utilities, taxes, staff, laundry, raw ingredients, and so forth are constants. He is harried by assorted inspectors, frequently with conflicting demands.

In order for a meal to be put on the table once Joe Entrepreneur reaches that point the cooks have to prepare it and somebody has to serve it.

The diner has to have both the inclination to eat there and the wherewithal to pay for the meal and tip the waiter.

When government becomes the restaurant the system flies apart in many ways. Governments do not worry about overheads; indeed, it is an essential function of government to grow. The gang in DC has no concept of being able to “afford” the expenses they occasion. Money isn’t real to them. Other people’s money rarely is. They print some more any time they want to knowing that it reduces the value of the dollars we hold. They hire staff which always turns out to be permanent with reckless abandon.

Back in the real world government makes everything more expensive and more difficult. In our example, the minimum wage concept makes labor more expensive for the business owner. He has his choice of taking less profit, reducing staff, not expanding, or cutting quality. All of those will damage his enterprise. For over two decades I have been listening to small business owners say that they had the business to expand, but that between ludicrous restrictions, regulations, and taxes it simply was not worth their while to do so.

Cap and Trade will make energy far more expensive, and do so by design. Does the restaurateur reduce the fourteen ounce Angus strip to ten ounces? Raise prices? Charge for parking? Use frozen french fries instead of hand cut ones from fresh potatoes? It does not matter which unpleasant choice he makes he will be obliged to offer less to customers who are under the same constraints with their work and family expenses. Every time one of them decides that dinner out is an expense he cannot justify the restaurant suffers.

The waiters are damaged by the harm done by government to the owner and the customers, and so is the cook, so is the busboy, and so is the bartender.

The diner, at least, still has the choice of whether or not to patronize the restaurant, although he has to eat somewhere, whether at home or out. This is where we get into taxation policies.

Statists and, indeed, politicians in general, rarely know anything about where money comes from. They seem to think that “made,” “earned,” “produced,” and “printed” all mean the same thing. They really cannot tell the difference between a US savings bond and gold. They think borrowed money is real and does not actually have to be paid back.

They appear to believe that incomes are immutable, that if you make $200,000 this year that you will continue to make at least that much every year until you retire no matter what else changes. They speak blithely of your electrical bill doubling, not seeing that as causing you to spend less elsewhere because you have a ludicrous fondness for heat and light in your home. They even think you should run automobiles on the stuff. Some of them probably even believe that you can charge the ten thousand dollar battery on a Volt with twenty-five cents’ worth of electricity, as advertised.

They think that burger-flippers will always flip burgers, and their lot will improve only if Congress mandates higher wages for them.

Governments understand only fear, force, and how to use the public treasury to buy votes. Congress fails to grasp the very simple fact that everything is interconnected. In one sense it does not matter who, other than those with Pelosi-like incomes, has his or her light bill doubled, the money that will be allocated for electricity can no longer be spent in another area. If Hal’s discretionary income is $500/month and he has to give $167 of that to Brazos Power and Light, one out of every three dollars that he had previously to spend in restaurants, or to have carpets cleaned, or to buy a new fishing rod is gone forever, vanished into the insatiable maw of government. If Susie, the single mom teacher loses a third of her discretionary income, she will have to do without a washing machine, painting her house, or as many school clothes for her child. There is no way, short of a second job, to replace the money which has been stolen by government action, or that stolen by inflation which was caused by printing of fiat money.

I suppose I sound as though I am speaking to a sixth grade civics class, although most kids have allowances or parents who utter the foulest three words in the English language, “We can’t afford…” One wonders if the constantly increasing out of control “budgets” at local, state, and national levels are caused in part by a system that requires great wealth to be elected to public office, and great dependence on funds gathered by those who demand political favors in return. I live near Bryan, a town of 55,000 people. Can someone explain to me why Bryan needs to spend nine million dollars a year? All of it extorted from local property owners?

You may wonder why I am covering anything this basic here on Whiskey & Gunpowder! Surely you Shooters, of all others, understand the basic principles of business, budgets, and von Mises. One would have thought so–right up to the point where the Editor was deluged with letters asserting that pie in the sky “health care” is a “right” and expressing their sentiments in language unbefitting ladies, gentlemen, and civilized debate. If you understand why we cannot have “single payer” health insurance, fine, pass this on to some child who needs to know.

The basic fact is that there is only so much “money” in the world, when we see “money” as a medium of exchange, which it is. I need a better way to induce the cobbler to make me a pair of shoes than offering him twenty dozen eggs he can’t eat before they spoil, although we might agree that I would deliver a dozen a week until the debt was paid. He, in turn, needs cow hide to make shoes, and I have cows, but I don’t want to skin one just to get shoes…at any rate, it worked better when we all exchanged little slugs of silver or gold for each others’ labor and production. The balance gets destroyed when the government creates “fiat” money and expects us to accept their fairy not-gold at the same value as shimmering silver ingots. We won’t do it. We also know that every time more money is cranked out of thin air every dollar we have is worth less because there is no way to differentiate between the dollar we had when there were only ten in the world and that same dollar when suddenly there are a hundred.

The Statists’ theory is that there is no limit to how much money they can “create,” just as there is no limit to how much milk the cow can give. There really are limits to how much moo-juice Bossy will produce, including her heritage, her age, how good her feed is, and whether or not she has had a calf recently. Even cows want a break after being milked for 300 days. It takes nine months to produce another calf and “freshen,” or begin producing more rich, creamy milk.

My darling Charles and I sent Asia, our Segundo, off to pick up a cow and her week old bull calf today. Mathilda, as we have named her, is three-quarters Jersey and a quarter Black Angus, both animals are black, and they will fit in beautifully with the Black Dexters. Mathilda will handle our milk and cream needs for the next three hundred days, more time than it takes for the goats to reproduce (210 days.) The funny part is that the owner didn’t want to milk her so he has been underfeeding her deliberately so that she won’t produce more milk than the calf can drink! How about that, Shooters, when a “simple farmer” in “flyover country” knows that to get less out of the cow you provide less sustenance than she needs. (We gave her a whole bale of first class hay and a big container of clear water for tonight.) Why can’t all those Ivy League economists and lawyers see that when they take too much of our money we produce far less taxes?

There really are practical limits to how many taxes can be extracted from most of us. Particularly in a land where nearly half of the people pay no taxes at all and a lot of them get “earned income credits” for doing one day’s work a year. There is a large class of people that is paid to do one simple chore: vote for the Statists. I suppose it is nice work if one can stomach it. I don’t know, since no government has ever bought my food, shelter, utilities, and medical care. Given my choice I would prefer to be a slum landlord, but the government beat me to it.

There are two points here that the DC gang had better grasp quickly. The first is that no matter how you jigger the figures, jobless people aren’t making money and they aren’t paying taxes on the money they didn’t earn. Just because they aren’t counted officially doesn’t mean that they aren’t out there, as increased robberies, claims for unemployment, and appeals to churches show. Those who are losing more of their income to higher taxes and utility bills are not purchasing as much, which means that the stores they once patronized are no longer making as much money, so they don’t pay as many taxes.

The Statist solution is automatic: “Oh, we’ll just tax the rich!” “Rich” is a relative term but our dear leader defines it at a quarter of a million dollars a year. Their problem is that if they confiscate all of the earnings of every person in America who makes $250,000 a year or more it won’t be more than a drop in the bucket they have to fill to cover their expenditures. It can’t be done. According to the most recent analysis available, 2006, the “richest” ten per cent. paid fifty-five per cent. of all taxes. Statists think that is “fair,” but what they had better start thinking is that pulling that much money out of those who produce jobs, start new businesses, invest in others, or even play the stock market slows everything down. Charity? When you filter money through the government over ninety per cent. of it is spent as salaries and overhead or disappears from graft or theft. Good private charities more than reverse that ratio.

How many families do you suppose there are with incomes of two hundred thousand dollars a year or more? I’ll tell you, since Newsweek kindly told me: 3.4%. That is 34 out of 1000 families, or 340 out of 10,000 families, or 3400 out of 100,000 families, or 34,000 out of a million families. Those are the ones who pay more than half of the taxes. I’m not among them, but I understand the frustration and annoyance such a state of affairs must cause.

The really fun statistic is this one: those 3.4% do 14% of the consumer spending and they are the ones who create and sustain businesses, which is where jobs come from. When the top five per cent. bears the greatest burden of onerous taxes, sooner or later not only does commerce decline but at least some of them ask why they are bothering. That is one of the difficulties with the proposed health “care” legislation, the bizarre proposition that doctors will submit to a 15% pay cut at the government’s whim. No, they won’t. Those who are old enough will retire. Young people who were planning on enrolling in medical school will think of something else to do.

The best solution I can see is to do the John Galt thing. Quit. If you cannot afford to quit your job literally, stop your consumer spending to the greatest extent that you can.

Put the money into commodities for your family’s use or into chunks of silver. Some of you may shake your heads in bewilderment and ask, “Isn’t that consumer spending?” Well…yes, and no. If you spend a hundred dollars taking your family out for pizza and a movie, that money (minus taxes) goes back into the economy to be taxed again and again in every hand that holds it, and you have nothing to show for it beyond a few memories. If you buy a case of MREs (ugh), your money has gone to an individual who will do whatever with it, but you have taken it out of circulation. You are storing value in the form of food that you can eat during the coming Greater Depression. If you wear the clothing you have now and do not visit Macy’s or Dillards, the shock of what you do not spend ripples through the economy. A nice blouse costs a couple of hundred dollars and you may wear it two years. That money goes to pay those who manufactured, shipped, and sold the blouse. If you turn that money into a dozen ounces of silver you have pulled that value out of circulation. You are richer for having “savings” that cannot be lost through devaluation. You have turned the value of your fiat dollars at present into a metal which will preserve it. You have also hit the tax-and-spenders where they live…

A great many stores and firms are going out of business and this trend will gain momentum. You’re smart. You can figure out for yourself which businesses will not make it through a deepening depression and what you should stock now. Only the big, the smart, and the connected will survive, and the myriad choices you have now will be a distant dream perhaps five years from now. Perhaps in less.

Big government turns you into lunch. Most of us cannot afford to be the owner. Our choice is whether to be the waiter, who may lose his job and will surely see his customers and his tips diminish, or to be the diner. It isn’t too late to do the Joseph thing and stock up for the future, and emulating John Galt and Midas Mulligan will shorten the time until the whole rotten system collapses. Too many carpenter ants have been nibbling at the foundations of our financial structure.

John Galt said to withdraw our minds. The current system doesn’t want those and doesn’t want us to use them. Take away what they do want, an endless stream of tax revenues.

Cordially,
Linda Brady Traynham

September 4, 2009

Free Lunches, Money from Nothing and Limits to Government Theft was originally featured on Whiskey and Gunpowder

You see, on my recent trip to Kentucky’s Bourbon Trail, one thing stuck in my mind: TAXES. I was utterly shocked when I heard what the distillery tour guide was saying about a $13.50 per gallon tax on any distilled bourbon. That’s over $700 of taxes per barrel. And that’s before the bourbon even gets to the bottle. For me and you, fellow Whiskey Shooter, there’s another tax when we get to the counter—somewhere around 6%.

So what’s the total bourbon tax?

According to the Kentucky Distillers’ Association, around 53% of the cost of the average-priced bottle goes to local, state, and government taxes.

I guess that’s why the tour guide took the time to tell us about the taxes. That way we wouldn’t be bitter when we paid $30 for a bottle of “corn juice.”

So the tour went on and our group wandered through the rest of the distillery — tasting the freshly distilled 160 proof grain alcohol, feeling the corn mash and playing in the gift shop…

But wait. Isn’t this taxation that same kind that created rebellions?

My tour group, and Americans in general, have been lulled to sleep, as if Uncle Sam slipped us a Mickey. Last I checked, the U.S. isn’t an alcohol supplier. Nor is it a real estate agent. Nor is it a car lot. But it seems like the current administration wants to get its hands on everything.

And the way things are going, who knows what’s next…

The Latest Nickel-and-Dime “Tax”

You gotta give it to ’em: At least Washington came up with an appropriate nickname for its latest cash grenade. It’s called “cash for clunkers,” and last week the House approved the bill — with your money!

It simply amazes me that something this poorly thought up could pass so quickly through the largest legislative body in the U.S. Just think about it: 435 well-paid pairs of eyes took a look at this bill. And a majority OK’d it!

In case you haven’t heard of the latest clunker of a bill, let me give you the rundown…

It’s a $4 billion plan to subsidize sales of new cars with better mpg. Essentially, if you have a car that gets less than 18 miles per gallon and you “upgrade” to a new car that gets at least four more miles per gallon, you’re eligible for at least a $3,500 tax credit.

I love the well-accepted term “tax credit.” Does everyone on the Hill think we’re that easily swayed by bills that contain such positive-sounding phrasing?

Here at the Whiskey Bar, we aren’t that easily fooled. This “tax credit” is a simple euphemism for free money — money that you and I as U.S. taxpayers are providing. Simply put, it’s taking money from our pockets and giving it to new car buyers in an effort to jump-start new car sales.

I don’t know about you, but paying for my neighbor’s car wasn’t on my agenda today.

But let’s dig a little deeper, since we could be footing the bill…

The bill, as it stands, is less likely to be affecting normal car owners — so this is for our SUV/truck-driving neighbor. Because even if you bought a 1990 Chevy Cavalier or Ford Taurus, you’re still probably getting well above 18 mpg.

So obviously, this bill is almost strictly for those non-Peak Oil-thinking, overzealous SUV or truck buyers. These folks have roughly the same restraint and foresight as those who purchased houses that they couldn’t afford.

This bill is almost comical. But frankly, where does the spending stop on Capitol Hill? Combine this with the latest auto bailouts and it’s really starting to look like our nation has turned into a new and used car lot.

Things are getting scary ’round these parts.

Government Spends, You Save…

Those dollars in your pocket aren’t looking as great as they once did. And as I see it, with an overburdened and overspending government, the dollar could be in for a crude awakening.

That’s because one thing is for sure: Over the next few years, the world is going to spin, the U.S. government is going to spend, and all of this will be running on the same fuel: oil.

As I wrote a few months back, the price of gasoline is going to rise. And that mainly stems from the rising price of crude oil.

As you know, the world’s commodities (most notably oil) are priced in U.S. dollars. As the dollar weakens, and as the Earth still spins and demands more energy, the price of oil is going to rise.

In my opinion, over the next three months to five years, oil is going to rocket — even more so than the price of gold. We got a taste of what can happen when oil spiked last year to $147 per barrel. And from my standpoint, it’s inevitably going to be back to those levels, or higher.

My best advice for protecting your hard-earned dollars over the next five years is simply to invest in all facets of the oil industry: oil service companies, oil holding companies, oil technology companies, and the commodity itself (through ETFs or commodity options).

Sure, the Obama administration wants to improve mpg, but one thing is for sure: We’re still going to be burning oil for decades to come — more and more every year. And although we may hit some rough patches for demand, the overall trend line is going to be UP.

By investing in oil, you’ll protect your wealth and profit at the same time.

After all, we all want to be able to afford our next bottle of bourbon.

Stay ahead of the curve,
Matt Insley

June 17, 2009

Taxing to Better Mileage? was originally featured on Whiskey and Gunpowder

This time they’re making war on another weed, one that has been a favorite in America since before the time of Pocahontas.  The Nicotine Nazis are on the rampage and propose to turn tobacco over to the FDA to “regulate.”  The FDA intends to start by mandating the removal of all additives, including menthol, and my girlish laughter is going to dissipate as the smoke does.

Since the sound byte medical types and MSM are convinced that smoking is worse than sex was to Victorians most citizens will doubtless think prohibiting tobacco (the real proposal; regulation by the FDA is merely the first step) is a fine solution that will lower health-care-related costs even though the jihad of the last thirty years has had no effect.  The usual Liberal logic was applied:  you may not smoke, but all diseases are tobacco-caused so either you are ill because of “second hand smoke” or you took a puff behind the woodshed when you were thirteen and forty years later you got cancer because of it.   Smoking has become the easy, automatic answer for cause of death and is probably implicated in cases of suicide and car crashes.

This isn’t about making Linda snarl at the world; we’re interested in the economic effects–which will be catastrophic.  Ten years ago I spent $72/month on my two-pack-a-day habit.  Taxes have been piled on to the point that the carton of cigarettes that cost nine dollars then is well over fifty now.  Think of that as fifty buck lattes or fifty buck movie tickets.

“Sin” taxes are a favorite for revenue and those of us who enjoy a little tot of Irish or a glass or two of (heart healthy) red wine are subject to truly sinful and prejudicial new taxes–at least one raised recently by 537% by Mr. “I’m not going to raise your taxes unless you make a quarter of a million a year.”   We got the usual equal treatment before the law:  all smokers and drinkers are penalized.

Has anyone consulted the Carolinas to see what effect knocking R J Reynolds off the Big Board is going to have?

What about the shareholders there and of P. Lorillard and others?  What about my solicitous neighbors who voted a ten dollar a carton tax last year to procure more “social services” before Mr. Obama added his ten dollar a carton tax to already outrageously punitive fees?  The loss in tax revenue will be enormous and governments don’t understand about reducing spending when income falls.  Adjusted for inflation something like eighty per cent. of our cherished smokes are pure tax revenue, and guess what?  Non-smokers are going to have to “sacrifice” to make up for that loss.

A black market will surely spring up, which may account for the BATF ruling that all purchases of fifty cartons or more must be reported to them!  Even if all taxes are paid.  Seriously.  You have to fill out a form including your license plate number and full personal data.

Travel and tourism…a higher percentage of Europeans and those from the Middle East smoke and I know what my rule is:  if I can’t smoke, I don’t go.  How appreciative are New York, Las Vegas, and Miami going to be when the French and Germans say “non” and “nein?”  Who cares how good the exchange rate is if a monsieur can’t even buy a pack of Galoises or an American brand or smoke within twenty-five feet of a doorway?   Will there be revenuers, so to speak, wandering around the country hunting tobacco patches and sniffing the air?  Why not?  There are some of those jobs Mr. Obama claims he is going to create.  Will foreigners get special dispensations or will customs confiscate their cigarettes for failing to meet US standards?

Attempts to legislate morality and lifestyles always fail and always have nasty consequences.  If there hadn’t been prohibition Joe Kennedy would never have made a fortune running rum and we would have been spared Teddy in the Senate all these years.  Why not ban sugar, which is far worse for you than fat, and ban the substitutes too?  (Because the Stevia producers do not have the lobbies that sugar, Equal, and Splenda do.)  Put enough social engineers to work and we could wind up with everyone in the country loathing everyone else and set new records for assault and battery.

Most of you probably don’t smoke and don’t see what the fuss is about; you even believe my health will improve if I am treated like a toddler.  (Will I live longer if I stop smoking?  No, but it will seem that way.  Mostly, it is my choice, not the government’s.)  My bleeding ox may not move you, but how do you feel about the proposal you be taxed for every mile you drive?  I don’t drive a hundred miles a month, while lots of you drive several thousand.  Will you like having your car fitted with a device that records your mileage (at your own expense) and allows the government to track your every move?  They don’t intend to lower the incredible taxes on gasoline, either.  It will be argued that you deserve it because you are using more than your fair share of the gasoline and doing more than your fair share of wearing out the roads.

You know how it goes, people:  when you don’t protest when it happens to us, they’ll come after your butter, cheese, salt, red meat, Cokes, cell ‘phones, and roofs that are any color other than white.  In times past coffee, tea, and chocolate have all been taxed and chances are that most of you regard one of the three as an invigorating “must have.”  They look like prime targets for revenue-hungry governments once the evil weed is outlawed.

Laissez faire, people, laissez faire.  Let’s all take responsibility for our own choices and pay for our own vices and stop regulating and taxing others for theirs.

Let us hope that wiser–or more rapacious–heads prevail in the latest campaign of the war against tobacco.

Your Fuming,
Linda Brady Traynham

June 10, 2009

P.S.: Now to business.  You could call your broker this morning and sell tobacco short before it occurs to a lot of people that the proposed policy would destroy another large industry and a major source of income.  Even though I expect a fall in tobacco stocks I’m more inclined to think we should hold off until we see what sort of support Dr./Senator C can garner.  There could be some good short-hold bargains to be picked up but your timing will need to be impeccable–and keep a firm eye on your “greed” gene.  Maybe scoop up a handful when the gloom is deepest but promise yourself faithfully that you’ll dump it when you have a modest profit.

I’d have to look at current prices and what tobacco stocks have done for at least the last year, but I’d be feeling pretty antsy when I had a twenty-five per cent. profit, and I’d begin charting volumn and price daily when I was ten per cent. up.  By the time a stock had recovered half it had lost it would take a squad of Marines to keep me from selling.  Nuthin’ wrong with a quick little ten to fifteen per cent., you know, and a lot right about it.

As volatile as the market has been you can lose, get lucky, or make your decisions ahead of time.   I have never lost serious money by selling too soon; I’ve lost it by not having faith in my judgement and buying or by not paying attention and missing a major sell signal.

How about a quick identity check?  I’m a trader, the spiritual descendent of robber barons, and believe in hoisting the Jolly Roger, a quick capture, putting a prize crew on board, and on to the next opportunity.  How many of you think in terms of “investing” “for the long term?”  My bet is that most of you are traders who believe in stashing spare cash in metal or you wouldn’t be here.

Taxing Tobacco was originally featured on Whiskey and Gunpowder

But what’s this?

The City seems to be winding down. All those hot shots in the financial sector aren’t so hot any more. In the space of just ten years, the percentage of GDP generated by the financial sector almost doubled – from 5.5% in 1996 to 10.8% a decade later. But now the whole sector is shrinking…along with bonuses…payrolls…and expense accounts.

And since Britain counted so heavily on the financial high fliers and their money…the whole country seems to have gone into a funk.

Tax revenues are collapsing. Deficits are soaring. The U.K.’s national budget deficit is already at 12%…about even with the United States. But if current trends continue, she’ll soon have the largest deficit in the developed world.

But here comes the bad news. Your editor didn’t mind when investors and speculators lost trillions. He barely noticed when the U.S. government practically nationalized the largest banks, insurance and automobile companies. He hardly blinked when $13 trillion of the nation’s treasure was committed to a foolhardy effort to combat capitalism. But now they are going too far.

In an effort to raise money, the British government is raising your editor’s taxes! Yes…your poor editor pays taxes in several countries. And now the Brits are raising their rates to levels that rival those of the highest tax jurisdictions in the world – Sweden, Norway and the Netherlands.

The trouble with this strategy is that your editor just bought a pair of Argentine boots. And these boots are made for walking. If these news taxes pinch too hard he – and thousands of other people working, vaguely, in the financial sector – is likely to walk right out of here.

But to where? Ah…there’s the rub. All over the world, governments are desperate to get out of the mess they’ve gotten themselves into. Argentina and Ireland just got handouts from the IMF. Other countries are getting in line. Having spent far too much in the past, they now spend more – hoping that spending will miraculously bring about economic growth. We say “miraculously” because there is no other way to explain it. When economic growth results from saving, investing and hard work you can describe it in terms of ’cause and effect.’ But if you ever get economic growth simply by spending money, you can only refer to it as an act of God…or the devil. Black magic, maybe. Voodoo economics.

Hardly a day goes by without some abracadabra or hocus pocus announcement. The feds bail out the banks on Monday. On Tuesday, they take over the auto industry. By Wednesday, they’re passing out money on Wall Street. If any of these tactics result in greater wealth or more output – it will be a miracle.

One question that has so far been avoided by practically all the commentators and well-wishers is this: where’s the money come from? In the popular mind, if you can call it that, the government’s pockets are infinitely deep. Reach down far enough and you will pull up whatever resources you need. But the fact of the matter is a bit different. In time of war, a government can marshal the resources of an entire nation. People believe they must buy war bonds, collect old metal, use rationing coupons, forego salary increases, pay higher taxes, and sign up for the Home Guard. Every back bends to the job; better that than bending to the lash, people say to themselves.

But the war against capitalism is not getting the same level of popular support. People are not buying “war bonds” so the feds can bail out Wall Street or the City. They’re not likely to eat margarine so the bankers can slather real butter on both sides of their bread. And they’re not willing to spend less just so the government can spend more.

So instead of asking the whole population to suffer, the feds – both in Britain and back at home in America – have chosen an easy target…the rich!

In the public mind, ‘rich’ and ‘banker’ are inseparable. Like ‘corrupt’ and ‘politician.’ What’s more, the rich were at the scene of the crime when the financial crisis began. The rich were caught red-handed. It doesn’t matter if the ‘rich’ man earned his money from doing heart operations or selling mortgage-backed bonds. Every rich person is presumed guilty of the crime of the century. “Tax them!” screams the mob. “Tax them! Tax them! Eat them.”

And so, it will come to pass that ‘the rich’ are taxed. The money will be taken from them and given to…well…the rich. But these will be different rich people – bondholders…bankers…insiders…hustlers and anglers.

So what gives? Why is the stock market rallying?

The mood of the market is fairly positive, at least as we hear as much. The last few weeks have produced an upward trend on Wall Street. The press is reporting “early signs of a recovery.”

Of course, the crisis has to end sometime. But it seems much too early to us. Remember, this is a depression, not a recession. It is not a pause in an otherwise-healthy economic model. This time, the model itself is insolvent. Americans cannot continue going further and further into debt in order to provide huge bonuses for Wall Street and employment for China.

It’s over. Fini. Caput.

It will take time to destroy the industries, investments and lifestyles that depended on the old model. And it will take even more time to find new ones.

Corporate earnings this year are expected to come in 35% below last year.

The insiders seem to realize that the game is over. They’re selling into this rally – the highest level of insider selling in two years. We continue to believe that this market intends bloody mayhem…and that it won’t stop until it has killed both the bulls and the bears.

The bulls will be killed in the classic way. A strong rally on Wall Street…or a series of minor ones… will lead them to believe that “the worst is over.” They’ll get back into stocks after a 20% or 30% advance – hoping to recover what they lost last year.

Then, the stock market will make a new dramatic move to the downside. This will probably happen several times…each time leaving bullish investors with more losses. Finally, the bulls will give up. They will sell stocks…driving prices down and dividend yields up. By the time the bottom is reached, former investors will neither know nor care. P/Es will be scarcely more than 5. Dividend yields will rise above 5%. The Dow will sink to 3,000-5,000.

Then, eventually, it will be the bears’ turn. But we’re not there yet.

No, dear reader, the months ahead will be a challenge. The world economy is telling a story no one has ever read before…or at least that no one alive has ever experienced before. Every day we turn the page just to see what happens. We have no idea how the story might develop. It’s all guesswork.

Still, when the final chapter is read out…the moral of the story will probably be familiar to us. It always is.

Regards,
Bill Bonner

May 4, 2009

Whence the Money for Gonverment to Waste? was originally featured on Whiskey and Gunpowder

“Maestro…you hardly look yourself. It looks like twenty years have dropped from your face. It must be liberating not to have to worry about inflation anymore.”

“What’s inflation?”

“Ah yes. About that. Why haven’t we seen it yet? You’ve seen massive fiscal stimulus plans the world over, a huge increase in the monetary base, and lower interest rates. But no inflation. Bond traders don’t seem especially worried either. They are not demanding higher interest rates because they fear future inflation. And gold? Well, it’s plodding along. But shouldn’t it be going much higher as the supply of fiat money explodes?”

“You’re thinking is so old fashioned. It’s true. Or at least it used to be true. In the days when we had a gold standard, it was a great defense against government monetary fraud (that’s what I used to call inflation, before I became a central banker).”

“Oh. What do you mean?”

“If each unit of paper currency in your hand is redeemable for gold, then each holder of paper units has the power to hold the government accountable for its fiscal and monetary policy. If the government prints too much money to pay for its spending programs, unit holders can redeem their paper for gold. This draws down the governments stores of real gold, forcing it to either reduce the supply of paper money, or lose all its gold.”

“Why would it worry about that if it could just print more paper?”

“Because paper is not money. And your trading partners will not accept your paper if it is not backed by either real money or the ability to collect taxes from your people.”

“I’m not sure I follow. Back up a bit for me.”

“Okay. Back when everyone was on a gold standard, before the Great Depression, international accounts were settled in gold. It wasn’t just citizens who could demand gold for their units. Nation states could do it to. Governments who ran up fiscal imbalances would see international holders of their currency redeem those paper units for real gold. This encouraged a kind of competition among nation states, or at least a kind of accountability. If you ran up deficits and borrowed a lot of money, gold flowed out to pay your creditors and to pay for your exports. Your inflationary monetary policy cost you your national inventory of gold and silver.”

“So what happened?”

“My you ask a lot of questions.”

“Hurry up. I think I have to wake up soon.”

“Well, under a gold standard, governments are forced to manage their monetary system for the benefit of their people. You get a stable price level because the value of the money is not fluctuating constantly with changes in the money supply. Governments want to avoid causing a run on their gold supply that would result from fiscal and monetary mismanagement.”
“Why did the world go off the gold standard if it was so good? What changed?”

“Lots of things. For example, with a gold standard, governments and people must live within their means. This is deeply unpopular with politicians, who must bribe populations with bright new shiny things to get elected. Gold makes it harder to bribe your people and win an election.”

“Okay. What else?”

“For whatever reason, perhaps because it is in their nature, governments like to take their people to war. It keeps them distracted from other problems, usually caused by the government. But war is expensive. To pay for a war you must increase taxes or borrow money. If you increase taxes (directly or indirectly) you risk alienating your population and causing a tax revolt (and sending a lot of economic activity underground, out of the view of the tax collectors). So you have to borrow. It’s the only way to greatly expand spending without raising taxes to punitive or socially disruptive levels.”

“Ah. I see. Under a gold standard, you couldn’t borrow excessively without causing a run on your nation’s gold. So…a gold standard was a natural constraint on a nation’s ability to make war.”

“Yes. That doesn’t mean nations didn’t go to war before there was a gold standard. It just means that if you had to pay for your war with real money, it made it an expensive proposition. And if it undermined the value of the currency your citizens held, they were unlikely to support you. In a monarchy or dictatorship, that doesn’t matter so much. But in a democracy, it matters a lot.”

“If what you’re saying is correct, Maestro, then there’d be a clear connection between the creation of fiat money which is not backed by gold at all, and war between nation states.”

“There might be. But you’re still thinking too small.”

“What do you mean?”

“It’s true that most nations suspended the gold standard upon entering World War I. This allowed them to run up ruinous debts to private bankers. They tried reinstating it, but then the Great Depression hit. And more than ever, governments needed the ability to print money to pay for domestic ‘wars’ on poverty and unemployment.”

“Right. And then World War Two-which was partly a consequence of the ruinous debt and reparations Germany could not repay-came along and you saw a huge explosion in government debt, this time mostly through bonds.”

“That’s right. Which brings us back to inflation today. When the government finances exploding debts through the issuance of new bonds, investors typically demand higher interest rates to compensate for the inflation that results from the increase in the money supply. But today, in a kind of conundrum, bond investors are not demanding higher interest rates.”

“Why not?”

“Who knows? For one, they don’t see inflation. They see falling prices that come with a collapse in global demand. But it could be that they fear the worldwide recession more than they fear inflation. The contraction in global trade and national GDPs has investors fleeing for the safety of bonds. This allows governments to print money and expand the monetary base with apparent impunity.”

“Apparent?”

“Yes. Why, there in Australia where you’re sleeping, the government is going to announce a budget in May which may include a $50 billion deficit. This is a country that had a surplus just a short time before.”

“That’s not as bad as my home country. In the U.S., the government is going to run a trillion dollar deficit this year. And it’s told everyone that number will double. But it doesn’t seem to have dented demand for U.S. bonds yet.”

“No, it hasn’t. And that’s because without a gold standard, governments don’t have to compete for capital as fiercely as they used to. They can all sell bonds to investors to finance deficits, provided the deficits aren’t too jaw-dropping and provided they can continue to collect taxes to pay interest on the debt. Plus, they’re colluding with one another to eliminate tax competition among countries, which gives them an even stronger grip on your wealth.”

“I’m with you Maestro. But I don’t see where this is going.”

“Let me show you. Governments can only raise direct taxes (income taxes) so much before it negatively affects the economy (and social cohesion), which in turns lead to falling tax revenues as real economic activity slows. So a sure sign of governments that are getting desperate for revenue is an increase in indirect taxes.”

“You mean like the alcopops tax here in Australia?”

“I’ve never heard of that. But if it’s a tax that the supplier of a good or service passes on to the consumer then yes, that’s exactly what I mean. It’s an efficient way for the government to raise revenue without looking like it’s being grubby, desperate, or just plain greedy. It can also claim the taxes are being raised to discourage socially undesirable behavior, but this is generally just a lie to disguise the need to raise revenues.”

“Ah. I see. You know the alcopops tax is illegal anyway, by the way. The government collected revenue on a tax using a law that hadn’t been properly been passed by the Parliament. How is that possible? What about the Rule of Law?”

“What about it?”

“Never mind. You need to finish your lecture before I wake up. When will inflation result from the large increase in the monetary base?”

“I have no idea, my boy. You see at its core, fiat money greatly accelerates the rate at which scarce resources are depleted. Land, labour, capital, and raw commodities are allocated based on a demand that isn’t sustainable. If you do that long enough-let’s say for the last seventy years or so-you get an entire global economy (and population) that exists because of the increase in credit. That’s the world we live in. And it’s all falling apart with the credit depression you’ve been writing about.”

“Wait a second Maestro. Are you saying that the scope and scale of this economic contraction is a lot greater than anyone expects because the fiat money system itself is failing?”

“You said it. Not me. But it does make sense to say that the last twenty years or so of building national economies around the growth of residential real estate and the finance sector has greatly hastened us to a day of reckoning, as your friend Bill Bonner might say. We will find out if all that investment made by banks is merely ‘temporarily impaired,’ or if it represents an enormous misallocation of our collective resources and has made us poorer for years to come.”

“So what should we do?”

“This is your dream. You decide.”

Regards,
Dan Denning

April 16, 2009

Dreams of the Maestro, Gold and Inflation was originally featured on Whiskey and Gunpowder