Information Update #2: When is a Tax Not a Tax?

When Is A Tax Not A Tax?

# 002 March 9, 2009

The Asian Development Bank has estimated that the recent economic downturn (or recession, or depression, just pick a euphemism) has caused a loss worldwide of $50 Trillion! In light of the fact that the last estimate of the worlds wealth was $100 Trillion, the earth has lost half its’ value. Good thing it can’t be foreclosed…

The point that needs to be understood is that the real wealth of the world still exists. What we’ve lost is the whimsical financial evaluations. Your car is still a car. It hasn’t lost its ability to be a good car as a result of the devaluation of world wealth. What we’ve lost is the speculative value of investments. Economists (Austrian) have stated for years the “bubble” economy had to end… well it has certainly ended.

As a frame of reference, the stock market has lost about 43 years of gain…. It is now at the value when The Beatles and the Beach Boys were at the top of the charts…

The great “red” hope (according to the most recent headlines) is that China will pull the world economy out of recession. I have to ask, how does an economy htat almost completely relies on exports going to pull the world out of recession? Here is how China can pull the world out of recession. Start a war with Russia. If you read the back pages of the newspapers and do a little internet research, you will find they are already sinking each other’s ships and fighting border skirmishes.

Check these links:
http://online.wsj.com/article/SB123518043029338361.html
http://english.sina.com/china/p/2008/1013/191492.html

I can assure you, if Russia and China end up at war with each other, we will take a side and the recession (as in WWII) will be over. Things that make you say hmmmm. Personally, I’ll take the recession any day!

Europe does not have the resources or the economic strength to weather a prolonged downturn intact. Eastern Europe has borrowed over $1.7 Trillion from Western European banks. The interest payments this year are over $400 billion. In the past Eastern Europe could roll the debt over (you know, refinance). I don’t think that’s going to happen this year. Sixty percent of Polish mortgages are in Swiss Francs – borrowed in Euros and Swiss francs. The Polish currency – zlotys are worth about ½ of Euros and Francs. You think you have it bad with your house payment? If you are a Polish mortgage holder, your house payment has doubled. Ouch.

The doomsayers have claimed that the American financial system will collapse as a result of our finaincial problems. They say that no other country is going to trust our financial instruments. Oh, nay nay… I say – exactly the opposite. The true financial condition of Europe is so bad that the U.S. it the only safe haven for investors money! Even in our weakened financial state our debt is the most desirable asset available.

For years Americans spent far more than they made. We rest of the world mocked us for being spendthrifts, but they sold us more and more goods (on credit). The more we bought, the more dollars they had. So they lent the dollars back to the U.S. This gave Americans more money to spend. Now, we’ve stopped spending and the factories of the world are shutting down. Their factories shut down, their banks get in trouble, their stocks fall. Money is not safe in their countries banks. Where do they put it? In the safest, most stable country in the world… Good old USA! Even at interest rates below 3% the world is willing to buy our debt. We are still the safe haven.

You have to remember, this is the world’s longest lasting government, largest economy and still the most stable (politically) country in the world.

Warren Buffett (the world’s smartest investor) has said the economy has “fallen off a cliff”. World stocks are continuing to fall:

http://www.bloomberg.com/apps/news?pid=20601087&sid=acmiX_sr8yuc&refer=home

In other interesting news, two scholars at George Mason University have published a detailed report on degrees of freedom, state by state. You can read it here:

http://www.statepolicyindex.com/wp-content/uploads/2009/02/freedom-in-the-50-states-an-index-of-personal-and-economic-freedom-by-ruger-and-sorens.pdf

It has some very interesting points and information about different types of freedom and liberty.

This is an interesting article from John Mauldin’s Newsletter. I excerpted part for you, but you can click on the link for the entire newsletter:

http://www.frontlinethoughts.com/pdf/mwo022709.pdf

A Few Thoughts on Taxes and Budgets

This week saw President Obama give us a budget with a projected deficit of $1.75 trillion dollars, and a massive tax increase on the “wealthy.” But hidden in the details was an even larger tax increase on everyone. Obama wants to create a cap-and-trade program for carbon emissions.

This is expected to generate $79 billion in 2012, $237 billion by 2014, and grow to $646 billion by 2019. These will be payments by energy (primarily utility) companies to the government.

That will cause utilities to have to raise the prices they charge customers for energy. Such a level of taxation is eventually 4-5% of total US GDP. That is not small potatoes. And since the wealthy do not use all that much more power than the rest of us, it will affect the lower incomes disproportionately. It will take money out of consumers’ pockets and transfer it to the government. You can call it cap-and-trade, but it is a tax. And a huge one. Anything that will take 4% of GDP away from consumer spending is not business friendly. And by driving the cost of energy up, it will drive high-energy-using businesses away from the US to developing countries where energy is cheaper. It will make it even harder for people to save money and drive up costs for the elderly and retired. But it will make the environmental lobby happy.

Further, Obama’s accounting magicians assume that the US economy is going to grow by 1.2% this year and 3.2% next year and at a blistering 4% pace after that. Since that is not likely to happen, the deficits will be far worse than projected. Since large taxpayers can see the tax increase coming, it is likely that they will shift behavior, and tax revenues will be less than projected.

Several analysts have noted that you could tax 100% of the income of the “wealthy” and still not balance this budget. While the bottom 95% may not see their taxes rise this year, you can bet they will see them rise in the future. While the US can run multi-trillion-dollar deficits for a few years, it cannot run them for long without serious consequences for interest rates and inflation. And when our entitlement program problems hit in the middle of the next decade? You can count on higher taxes.

My question, “when is a tax not a tax?”

My answer, “never”.I thought you might just want to know

With regards,
Allen

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