Inflation’s Toll: Canada Goes ‘Penniless’

Canada’s one cent coin has been slated to be phased out of circulation, next year.

From CBCNews Canada,

The federal budget is guaranteed to leave Canadians penniless — literally.

Among the victims of cutbacks outlined by Finance Minister Jim Flaherty in the government's 2012 federal budget on Thursday is Canada's one-cent coin.

Citing low purchasing power and rising production costs, the government has decided to phase the penny out of existence starting this fall, when the Royal Canadian Mint will stop distributing the one-cent coin to financial institutions.

Over time, that will lead to the penny effectively becoming extinct, although the government noted on Thursday that one-cent coins will always be accepted in cash transactions for as long as people still hold on to them.

The value of the penny has decreased to about 1/20th of its original purchasing power. Indeed, the lowly penny has fallen so far that Ottawa described it as a "burden to the economy" in a pamphlet explaining the change on Thursday.

In part because of rising prices for the metals it's made of, it actually costs 1.6 cents to produce every penny. The government estimates it loses $11 million a year producing and distributing the penny, and that doesn't include the costs and frustrations for businesses and consumers that use them in transactions.

Canada’s penny originally had been 2 cent coin until replaced by the 1/100 penny.

Below exhibits the table which accounts for the historical evolution of the coin’s composition (from Wikipedia.org)

One would note that coin debasement started in 1970s—first through size and/or weight—and then through content in the late 90s. 

The burden hasn’t truly been because of “the costs and frustrations for businesses and consumers”, which has been used as a convenient scapegoat by media and the political agents, but rather from Canada’s inflationist policies.

Gold priced in the Canadian dollar began to appreciate during the late 90s coincidental with the initial overhaul in the composition of the penny’s content. (chart from Gold.org)

Gold’s priced in the loonie surged, during the last decades, has virtually been accompanied by another revamp or decomposition of the coin’s content

Canada’s vanishing penny represents a symptom of the political disease called inflationism via currency debasement.

Quote of the Day: Secession: Divorce American Style

As for states seceding, however, is that really a solution to national disintegration? Tens of millions with Blue State mindsets live in Red State America, and vice versa. While folks in Texas may talk of seceding from the Union, folks in Austin talk of seceding from Texas. 

Yet we should take seriously what is behind this desire to separate and sever ties, for it mirrors what is happening across our civilization. 

The West is decomposing.

British Tories seek to cut ties to the European Union. Scots want to leave Britain. Catalans vote to divorce from Spain, to which they have been wedded since the 15th century. Flemish talk of leaving Walloons behind in Belgium. Northern Europeans are weary of carrying their profligate southern brethren and muse about cutting Greece adrift and letting it float out into the Mediterranean.

And Americans are already seceding from one another – ethnically, culturally, politically. Middle-class folks flee high-tax California, as Third World immigrants, legal and illegal, pour in to partake of the cornucopia of social welfare benefits the Golden Land dispenses.

High-tax states like New York now send tens of thousands of pension checks to Empire State retirees in tax-free Florida. Communities of seniors are rising that look like replicas of the suburbs of the 1950s. People gravitate toward their own kind. Call it divorce, American-style.

This is from author and editor of the American Conservative Patrick J. Buchanan (from LewRockwell.com)

Discovery Process as Antidote to Chaos and Volatility

The prolific author Matthew Ridley at the Wall Street Journal reviews my favorite iconoclast Nassim Nicolas Taleb’s new book Antifragile

Discovery is a trial and error process, what the French molecular biologist François Jacob called bricolage. From the textile machinery of the industrial revolution to the discovery of many pharmaceutical drugs, it was tinkering and evolutionary serendipity we have to thank, not design from first principles. Mr. Taleb systematically demolishes what he cheekily calls the "Soviet-Harvard" notion that birds fly because we lecture them how to—that is to say, that theories of how society works are necessary for society to work. Planning is inherently biased toward delay, complication and inflexibility, which is why companies falter when they get big enough to employ planners.

If trial and error is creative, then we should treat ruined entrepreneurs with the reverence that we reserve for fallen soldiers, Mr. Taleb thinks. The reason that restaurants are competitive is that they are constantly failing. A law that bailed out failing restaurants would result in disastrously dull food. The economic parallel hardly needs spelling out.

The author is a self-taught philosopher steeped in the stories and ideas of ancient Greece (a civilization founded, of course, by traders like Mr. Taleb from Lebanon, as Phoenicia is now known). Anti-intellectual books aren't often adorned by sentences like: "I have been trying to bring alive the ideas of Aenesidemus of Knossos, Antiochus of Laodicea, Menodotus of Nicomedia, Herodotus of Tarsus, and of course Sextus Empiricus." So he takes his discovery—that knowledge and progress are bottom-up phenomena—and derives an abstract theory from it: anti-fragility.

Something that is fragile, like a glass, can survive small shocks but not big ones. Something that is robust, like a rock, can survive both. But robust is only half way along the spectrum. There are things that are anti-fragile, meaning they actually improve when shocked, they feed on volatility. The restaurant sector is such a beast. So is the economy as a whole: It is precisely because of Joseph Schumpeter's "creative destruction" that it innovates, progresses and becomes resilient. The policy implications are clear: Bailouts risk making the economy more fragile.

In short, tolerance of failures, errors and the acceptance of change through risk taking, as well as, learning from and improving on them signifies as an ideal way to deal with uncertainty from which progress springs.

Statist Tax Fantasies Unmasked: Two-Third of UK Millionaires Vanish

Once again, reality has made an abject spectacle of popular statist’s fantasies about “class warfare” or “soak the rich” tax policies where tax rates are seen as having linear effects on tax revenues. 

The axiom “if you tax something, you get less of it” seems to have been proven valid anew.  

In Britain, 2/3 of millionaires swiftly vanished (or in just a year!) in the face of 50% tax rate increase. 

From the Telegraph, (bold mine)

Almost two-thirds of the country’s million-pound earners disappeared from Britain after the introduction of the 50p top rate of tax, figures have disclosed.

In the 2009-10 tax year, more than 16,000 people declared an annual income of more than £1 million to HM Revenue and Customs.

This number fell to just 6,000 after Gordon Brown introduced the new 50p top rate of income tax shortly before the last general election.

The figures have been seized upon by the Conservatives to claim that increasing the highest rate of tax actually led to a loss in revenues for the Government.

It is believed that rich Britons moved abroad or took steps to avoid paying the new levy by reducing their taxable incomes…

Far from raising funds, it actually cost the UK £7 billion in lost tax revenue.

The above account shows that amplified elevation of tax rates equals a considerably smaller tax base and significantly lower tax revenues. Maybe politicians should learn about the Laffer curve or the elasticity of taxable income.

In terms of politics of taxation, the Philippines seems to have a parallel experience: When taxes on gold sales were substantially raised, this prompted for a surge in gold smuggling and a similar collapse in tax revenues.

The same phenomenon will likely beset the local version of the proposed sin taxes, which is being pushed by international agencies as Moody’s and the IMF. 

As side note, is the Philippines in a crisis for them to keep intervening by pushing absurd policies (higher mining taxes, SMS tax etc...) and whetting on the insatiable spending appetites of local politicians for a debt financed consumption driven model of economic development?

Yet the blowback from its legislation will likely boost the informal economy and lubricate further corruption, in the same way sin taxes failed in the UK,

We should learn from the lessons from the unmasking of, or the blatant failures of political magical thinking.

Singapore Central Bank Acknowledges Elevated Risks of Homegrown Bubble

Bubble policies affect people’s behavior and attitudes. In Singapore I recently wrote about how bubbles policies seem to have spurred a populist demand for state welfarism

Last month Singapore’s central bank raised the alarm of a full blown property bubble and took measures to curb such eventuality 

From Yahoo.com

"Eventual correction could be painful to borrowers and destabilise the economy."

The sound of alarm came as Singapore's central bank, the Monetary Authority of Singapore (MAS) announced a new round of measures meant to subdue rising housing prices, including capping loan tenure at 35 years.

MAS said that recent government measures such as the Additional Buyer's Stamp Duty "have had a moderating effect on residential property prices" and that "there is also significant supply of housing that will come onto the market over the next two years" the demand for housing is simply not slowing down.

Apparently, such actions have failed as corporate debt levels continues to rise as debt quality has eroded

From Reuters,

Singapore banks could see loan quality fall sharply should interest rates rise or if the economy worsens as corporate debt levels are high by historical standards, the city-state's central bank warned on Wednesday.

"Corporates are more leveraged today than they were a year ago as low borrowing costs may have prompted some corporates to borrow more than they would have otherwise," the Monetary Authority of Singapore (MAS) said in its annual Financial Stability Review.

Large firms have issued twice the amount of debt in the first nine months of this year compared with the same period last year, while loans to small- and medium-sized enterprises have continued to expand robustly, MAS added…

Singapore interest rates are hovering near all-time lows amid a surge in inflows resulting from quantitative easing by Western central banks.

Household debt levels have also been rising, but at a more moderate pace, from the same article

MAS had a more benign view on household debt levels, noting Singapore's household net wealth stood at four times gross domestic product, an increase of 7.3 percent from a year ago.

Total cash and deposits belonging to households have also continued to exceed aggregate debt, it added.

MAS said government measures since 2009 to pre-empt the formation of a bubble in Singapore's residential market has led to a "noticeable slowdown in the pace of housing loan growth".

Singapore’s authorities are in an apparent state of quandary.

Although one positive development is that Singapore has recently cut taxes on sales of precious metal, which should allow Singapore's residents to seek refuge on them from central bank inflationism.

The bottom line is that the conventional central banking tools under today's US dollar standard continues to fuel rampant speculations (via yield chasing dynamic) at the asset markets, and continues to propel massive malinvestments or the bubble phenomenon across the globe. 

As a side note, another positive development could be that Singaporean political authorities may be (and hopefully remain) more open minded than their developed world counterparts. That's based on the observation made by Professor Bryan Caplan at the econolog,  

A room full of Singaporean civil servants actually asked me a series of earnest questions about anarcho-capitalism. Can you imagine U.S. bureaucrats doing the same? Unlike most observers, I guess, I barely noticed Singaporeans' material egalitarianism. What struck me was their intellectual elitism. Many Americans would be horrified, but I was delighted.

The Secret of Aquinomics: Bubble Economic Policies

In a self-congratulatory claim to the outperformance of the Asia’s 7.1% statistical Philippine economic growth, the administration has even coined “Aquinomics” to such alleged accomplishment.

The Inquirer notes

Finance Secretary Cesar Purisima said confidence in the way the government was being run had encouraged more people to do business in the country.

“The growth rate shows that the economics of good governance, or ‘Aquinomics’ works,” Purisima said in a statement.

But what is exactly the Aquinomics or the recipe to the newfound success?

Robust domestic consumption and higher government spending have helped cushion the economy from the worst of the global slowdown, while manageable inflation has allowed authorities to keep interest rates conducive to growth.

So “Aquinomics” seems all about boosting domestic consumption and higher government spending.

Let us examine both. 

First higher government spending.

The government is slated to spend next year, a record 400 billion pesos (US $ 9.8 billion) or about 4.4% of Philippine GDP (2011)

Think of it this way, if all it takes is for the government to spend in order to boost the economy, then why limit spending? Perhaps the government should spend 100% or more of the economy.

Ah, but the problem is who pays for the spending? This means that the government would have to tax, borrow or inflate its way to fund the spending.

I have no qualms about the progress of the Philippine government’s paring down of public debt. 

But if one would look at where the real “progress” lies, it looks as if Aquino government has done marginal comparable or relative to what had been "accomplished" by the much maligned past administration. 

Government debt to GDP has been trimmed from 71.4% in 2004 to 44% in 2010. This means that the incumbent administration has whittled down debt to 40% or by only 4 percentage points as against 27 percentage points by the past administration.[This is not to defend the past administration, but to show the facts]

Taking away the populist politics or political color from the above statistics, the current administration has simply been piggybacking on the “achievements” of the past administration.  Without the substantial reduction of debt, ‘Aquinomics’ would not have the leeway or leverage it has today to undertake "record" spending programs. 

Of course, part of that supposed financial success by the previous administration has been to increase VAT from 10% to 12% in 2006 which came at the expense of the consumers. 

And there is always the question of how government spending helps. How does government spending translate to increased productivity, if such would only transfer resources from productive to consumption activities which extrapolates to a reduction of revenues to a society (or the crowding out effect)?

As the great classical liberal Jean Baptiste Say known for the eponymous Say’s Law elaborated in A Treatise in Political Economy (p.471)

The privation resulting from taxation, whether voluntary or compulsory, affects the tax-payer in his quality of producer, whenever it operates to curtail his profits; that is to say, his income or revenue; and affects him in his character of consumer, whenever it increases his expenditure, by raising the prices of products.

And, since an increase of expenditure is precisely the same thing as a diminution of revenue, whatever is taken by taxation may be said to be so much deducted from the revenues of the community.

Yes government infrastructure (public works) spending signifies as consumption activities—they are not built for the purposes of generating revenues.

Moreover, there is the dubious assumption that central planners know exactly or with precision, the demands of the marketplace. This is aside from the actual implementation of projects which usually leads to cost overruns or “overcharging”.

And there will always be the concerns over the ethics of political privileges in the distribution of political projects, such as corruption, cronyism and etc…

The other aspect of the Aquinomics is consumption driven economy.

How does the government attain the desired consumption outside government spending and the informal economy (the latter of which I have been saying has been the undeclared key pillar of real economic growth)? 

As I previously pointed out, the Philippines has been the most aggressive in Asia in adapting easy money policies

The result of which is easily one which I have been predicting.  

As I previously wrote,

Thus the environment of low leverage and prolonged stagnation in property values is likely to get a structural facelift from policy inducements, such as suppressed interest rates which are likely to trigger an inflation fuelled boom by generating massive misdirection of resources-or malinvestments.

Of course many would argue on a myriad of tangential or superficial reasons: economic growth, rising middle class, urbanization and etc... But these would mainly signify as mainstream drivels, as media and the experts will seek to rationalize market action on anything that would seem fashionable.

The effects of Aquinomics, from the same Inquirer article,

Among industries, construction posted its highest growth in at least six quarters, jumping 24.3 percent from a year earlier as Metro Manila enjoys the best property boom in two decades

And such boom has been powered by an expansion of credit, as the Oxford Business Group notes, (bold mine)

According to a report released at the end of September by Bangko Sentral ng Pilipinas (BSP), the central bank, lending to the real estate sector hit an all-time high in June. Banks’ exposure to the sector reached P561.6bn ($13.55bn) at the end of the second quarter, up 18.9% on 2011 and 4.4% higher than the end of the first quarter in 2012.

The BSP said the country’s 38 universal and commercial banks accounted for P434bn ($10.47bn), or 77.3%, of overall exposure, while 71 thrift banks accounted for the remaining 22.7%, worth P127.6bn ($3.08bn). Thrift banks are institutions offering basic banking services, focusing on deposits and mortgage financing, which play an important role in the Philippines’ banking system.

The lion’s share of exposure, some 97.3%, or P546.5bn ($13.18bn), consists of real estate loans, with the remaining 2.7% (P1.2bn, $28.94m) accounted for by securities issued by property companies. These segments grew 4.3% and 8.4%, respectively, during the second quarter of 2012.

The P22.3bn ($537.89m) of new loans issued in the second quarter was split between P11.9bn ($287.04m) of residential lending and P10.4bn ($250.85m) in the commercial segment. Investment in real estate securities included P12.1bn ($291.86m) in debt and P3bn ($72.36m) in equity.

This has not only translated to a credit induced bubble in the real economy but likewise in a boom in the stock market led by the property-finance and holding companies (latter has been due to the former two). Financials are intertwined with the property sector where the former, as pointed out above, provides the chief source of financing to the ballooning property boom.

Again validating my prediction, when the property sector has underperformed last year.

The upcoming rebound would not only close the underperformance gap but would also power this sector as one of the best performers.

The Philippine property sector as I earlier predicted will see a boom phase] (again barring any exogenous shocks). Real estate or property booms have traditionally functioned as the centrifugal force from a monetary induced bubble cycle. This has been very evident in China. And likewise became the ground zero for the US mortgage-banking crisis.

Of course, such property boom has been a regional dynamic (ASIA and ASEAN), not limited to the Philippines. Hong Kong has even a parking lot bubble. Grand and elaborate signature projects have hallmarked what seems as a Skyscraper curse in the region

Finally, the credit boom has been giving this administration the political capital facelift it needs for the coming elections. 

Nevertheless credit bubble policies will give an interim economic superficial boost but would come with wretched macroeconomic side effect in the fullness of time.

And as I previously wrote such bubble policies are addictive especially to the incumbent political agents, 

All these talks about curtailing bubbles again represents authorities superficially dealing with symptoms. In reality, they are pretentious actions. They are intended to paint the imagery of the politics of “do something” in the assumption that they “know” or fully comprehend the situation.

Really?

Bubbles serve to bloat statistical economic growth. This gives media mileage and approval ratings for the incumbent authority. They also enrich the political as well as the politically favored economic class whom are usually the first recipients of easy money policies.

So why they should political authorities curb a bubble? Should they kill the goose that lays their golden eggs?

This reminds me of the great dean of the Austrian school economics who warned.

Like the repeated doping of a horse, the boom is kept on its way and ahead of its inevitable comeuppance, by repeated doses of the stimulant of bank credit. It is only when bank credit expansion must finally stop, either because the banks are getting into a shaky condition or because the public begins to balk at the continuing inflation, that retribution finally catches up with the boom. As soon as credit expansion stops, then the piper must be paid, and the inevitable readjustments liquidate the unsound over-investments of the boom, with the reassertion of a greater proportionate emphasis on consumers' goods production.

But all has not been bad news though. 

I do hope that they would indeed adapt real reforms on easing “the cost of doing business” which should have been the primary thrust. Add to this the “tapping of the country’s record foreign reserves to pay its foreign debts”.

But I am troubled to say that both seems more about rhetoric than forthcoming actions. 

Remember massive government spending means more debt or higher taxes or higher consumer prices in the future. And credit upgrades only add to this incentive to borrow rather than to institute real reforms.

All these suggest that the new economic paradigm or "Aquinomics" has been anchored on increasing debt levels whether from government (via public works) or the private sector (via asset price bubbles and malinvestments). 

In my view Aquinomics hardly differs or seems parallel to typical Keynesian bubble policies. 

This chart which exhibits the stages of bubble chart also demonstrates the attendant the bubble mentality.

Guess in what phase of the bubble cycle has the “new paradigm” been associated with?

**economic charts above from tradingeconomics.com

Video: This Land is Mine (The Palestine War History)

Here is an abridged history of Palestine through a magnificent (but gory) video produced by activist Nina Paley (hat tip Lew Rockwell Blog)

The protagonists in the video can be best understood or identified in the diagram above and or from the list of people who partook of the violence shifts in Palestine's history provided by Wikipedia.org

The region has been controlled by numerous different peoples, including Ancient Egyptians, Canaanites, Israelites, Assyrians, Babylonians, Persians, Ancient Greeks, Romans, Byzantines, the Sunni Arab Caliphates, the Shia Fatimid Caliphate, Crusaders, Ayyubids, Mameluks, Ottomans, the British and modern Israelis and Palestinians. Modern archaeologists and historians of the region refer to their field of study as Syro-Palestinian archaeology.

New Currency Reserves: Australian Dollar, Canadian Dollar and Gold

The IMF recently announced that they are considering to classify the Australian dollar and the Canadian dollar as reserve currencies due to “more signs of stability in the fallout of the 2008 financial crisis than the world’s biggest developed economies”

In reality, the international monetary system has already began to factor in such changes even without the IMF’s blessings.

Notes the BCA Research (bold mine)

From about 2% of total reserves in 2009, the allocation to “other currencies” has risen to over 5%. The Canadian and Australian dollars probably account for the vast majority of this increase.

To be sure, the IMF’s announcement is only a recognition of what central banks have been doing. It does not make the Canadian and Australian dollars any more attractive. Nevertheless, the shift into alternative currencies is a trend that is likely to persist. Global FX reserves total over $11 trillion, so a 1% change in currency allocation during the span of a year amounts to more than $100 billion.

A large sum for relatively small economies like Canada and Australia to absorb.

And this is why both Canada and Australia have likewise been experiencing asset bubbles.

The BCA further adds that central bank policies have been prodding on such shifts… (bold mine)

Zero bound short term interest rates, ballooning central bank balance sheets, large fiscal deficits and worrisome government debt levels are forcing investors, in both the public and private sectors, to seek out relatively sound alternatives to the major currencies.

Translation: "sound" currencies emanate from central bankers whom have been relatively less engaged into destroying their currencies.

And that the major beneficiaries, aside from CAD and AUD, according to the BCA, are the Norwegian Krone (NOK) and the Swedish Krona (SEK)

Well, I would add that gold should pass the reserve currency litmus test, as central bankers mostly from emerging markets have began to stack up on gold as (currency) reserves (chart from wikipedia.org). Gold is even being considered as assuming a role in the global banking system's capital standard regulation.

Gold reserves held by central banks have been in a secular decline for about 47 years, this trend appears to have  reversed since the Lehman crisis.

Quote of the Day: Free Trade is for Common Man, Protectionism is a Rip Off

The cause of free trade has always been about the common man. It is about the right of average people to trade with whomever they want. Protectionism, in contrast, is another way for powerful people to extract money from our pockets and reward their political friends with legal favors. In other words, it’s a rip-off.

 This is from Jeffrey A. Tucker at the Laissez Faire Books

Hong Kong’s Parking Lot Bubble

I previously pointed out how Hong Kong’s recently imposed property curbs, which essentially are capital controls, would compound or intensify on the distortions and nasty side-effects from its currency peg on the US dollar.

We seem to be getting more evidence on this

Sovereign Man Chief Investment Strategist Tim Staermose notes of how Hong Kong’s currency peg and property curbs (capital controls) have found a new, if not an additional object of policy induced bubbles: Parking Lots.

In another absurd example of what happens when unrestrained money printing meets idiotic government taxes, the price of parking spaces at a suburban apartment complex some 40 minutes from central Hong Kong is now HK$1.3 million, or approximately US$168,000.

There are two key factors driving this lunacy–

1) the tidal wave of money from across the Pacific as a result of the Federal Reserve’s QE infinity policy; and,

2) the Hong Kong government’s misguided attempts to control the property bubble here.

A few weeks ago, as we reported, the government snuck in 15% stamp duty tax affecting foreign buyers, plus a property tax increase, in hopes of snuffing out property speculation. Yet all they did was send the speculative money flows into things such as parking spaces instead, which are not affected by the tax hikes.

Hong Kong is flush with liquidity. The Hong Kong dollar is pegged to the US dollar at the rate of 7.80 +/- a very narrow band, which means that whenever the US Federal Reserve prints money, the Hong Kong Monetary Authority must also print money in order to keep up.

Interest rates here are effectively zero. And there are consequences to making money available for nothing.

All of the hundreds of billions of new Hong Kong dollars floating around in the system has to end up somewhere, and in recent years, much of it has ended up in Hong Kong’s property market.

Property prices in Hong Kong are the most expensive in the world. Recently a 6,200 square foot apartment sold for $62 million (USD), a mind boggling $10,000 per square foot.

Both the US dollar peg and capital controls through property curbs signify as a fatal cocktail mix to Hong Kong's free market economy. As I previously wrote, 

Inflationism essentially sow the seeds for protectionism through various forms of interventionism as capital controls. On the other hand, protectionism fosters antagonism. Central banking policies, thus, promotes social instability even in what used to be economically free nations.

Now if for every action there is an equal and opposite reaction according to Sir Isaac Newton's third law of motion, then expect that for every (artificially induced) boom, a bust will be the natural reaction. 

That's the nature of the fiat paper money system, promoted and operated by central banks.

Quote of the Day: Why Excessive Taxing of Cigarettes or Anti Tobacco Statutes Fail

the detrimental side effects of prohibition-by-taxation legislation are obvious, while the effectiveness of these polices remain dubious at best. Anti-tobacco policies come about due to misconceptions of the market’s ability to solve social problems (although rent seeking is typically required for prohibitions to be enacted). Bureaucracies established by prohibition are inherently inefficient and unable to discover the knowledge required to solve social problems. Prohibition also suppresses the market’s ability to solve social problems, so that little or no progress is made while prohibitions are in effect. And finally, prohibitions create profit opportunities which add to the problems prohibition is intended to solve (Thornton 83).

As already noted, prohibition is an example of government interventionism, which is in itself the antithesis of a free market. The market allows consumers to decide how to spend their incomes. Anti-tobacco advocates neglect the fact that not all individuals have the same wants and goals in life. Tobacco products have been accepted to be detrimental to human health since the 1960s, yet remain among the most popular goods on any market. This must mean that consumers value the immediate pleasure of a cigarette far more than their long term health.

This is from a study of Dušan Petrovski at the Mises Institute Canada on the Effects of Prohibition by Excessive Taxation or "Sin Taxes" against Tobacco (hat tip Bob Wenzel)

The Goldman Sachs-Central Banking Connection

Ever wonder why policy directions trends have increasingly been skewed towards promoting the interests of the bankers? 

EPJ’s Bob Wenzel writes,

With the appointment of Mark Carney to head the Bank of England, three major central banks will be headed by former Goldman Sachs banksters. Mario Draghi is ECB president, and William Dudley is the head of the Federal Reserve Bank of New York. Both, like Carney, are ex-Goldmanites.

More evidence of Revolving door politics.

Why Warren Buffett Loves to Tax the Rich

In a recent article, Billionaire Warren Buffett proposes, once again, to tax his contemporaries, but this time by imposing a “minimum tax on the wealthy”.

Does Mr. Warren Buffett truly practice what he preaches? Or is he merely a sly and sleek talking famous personality promoting a hidden political agenda?

Well it would seem that despite his progressive “soak-the-rich” class warfare rhetoric, in reality, Mr. Buffett has been averse to taxes.

Mr. Buffett’s flagship, Berkshire Hathaway, still has tax issues with Internal Revenue Services. The company hasn’t even been paying due taxes since 2002.

As the New York Post notes in August of 2011

As Americans for Limited Government President Bill Wilson notes, the company openly admits that it owes back taxes since as long ago as 2002.

“We anticipate that we will resolve all adjustments proposed by the US Internal Revenue Service (“IRS”) for the 2002 through 2004 tax years ... within the next 12 months,” the firm’s annual report says.

It also cites outstanding tax issues for 2005 through 2009.

In November 2011, Berkshire Hathaway subsidiary NetJets also sued the IRS for “mistakenly assessing ticket tax” to recoup $643 million in taxes

So Mr. Buffett hasn’t been pro-tax at all: That’s when taxes applies to his business interests.

And this extends to the way Mr. Buffett and or his company uses tax avoidance maneuvers. Harvard Professor Greg Mankiw exposes them

But on closer examination, one realizes that Mr Buffett never mentions doing anything to eliminate the tax-avoidance strategies that he uses most aggressively.  In particular:

1. His company Berkshire Hathaway never pays a dividend but instead retains all earnings.  So the return on this investment is entirely in the form of capital gains.  By not paying dividends, he saves his investors (including himself) from having to immediately pay income tax on this income.

2. Mr Buffett is a long-term investor, so he rarely sells and realizes a capital gain.  His unrealized capital gains are untaxed.

3. He is giving away much of his wealth to charity.  He gets a deduction at the full market value of the stock he donates, most of which is unrealized (and therefore untaxed) capital gains.

4. When he dies, his heirs will get a stepped-up basis.  The income tax will never collect any revenue from the substantial unrealized capital gains he has been accumulating.

In short, Mr. Buffett proposes taxing everyone else but himself.

Lastly, Mr. Buffett seems to be promoting President Obama’s agenda because he benefits substantially from them.

Mr. Buffet’s Berkshire Hathaway had been a major beneficiary of the Wall Street Bailout

Writes Eric Fry at the Daily Reckoning,

During the depths of the 2008 Credit Crisis and stock market selloff, “Wall Street was of fire,” recalls Peter Schweizer in his expose, Throw Them All Out. “[But] Buffett was running toward the flames…with the expectation that the fire department (that is, the federal government) was right behind him with buckets of bailout money…Indeed, Buffett needed the bailout…Beyond Goldman Sachs, Buffett was heavily invested in several other banks that were at risk and in need of federal cash. He began immediately to campaign for the $700 billion TARP rescue plan that was being hammered together in Washington.”

“As the political debates surrounding the proposed $700 billion Troubled Asset Relief Program (TARP) bailout bill heated up,” recalls blogger, Pat Dollard, “Buffett maintained an appearance of naiveté, an ‘aw shucks’ shtick that deferred to the judgment of politicians. ‘I’m not brave enough to try to influence the Congress,’ Buffett told the New York Times.

“Behind closed doors, however, Buffett had become a shrewd political entrepreneur,” Dollard continues. “The billionaire exerted his considerable political influence in a private conference call with then-Speaker of the House Nancy Pelosi and House Democrats. During the meeting, Buffett strongly urged Democratic members to pass the $700 billion TARP bill to avert what he warned would otherwise be ‘the biggest financial meltdown in American history.’”

“If the bailout went through,” Schweizer correctly observes, “it would be a windfall for Goldman. If it failed, it would be disastrous for Berkshire Hathaway.”

Buffett’s “hard work” paid off.

“In all, Berkshire Hathaway firms received $95 billion in bailout cash from the Troubled Asset Relief Program (TARP). Berkshire held stock in the Wells Fargo, Bank of America, American Express, and Goldman Sachs, which received not only TARP money but also $130 billion in FDIC backing for their debt. All told, TARP-assisted companies constituted a whopping 30% of its entire company disclosed stock portfolio.”

But these billions of dollars represented only the most visible portions of the bailout funds that flowed to Berkshire’s companies. Wells Fargo, for example, received “only” $25 billion of TARP funding, but it also received another $45 billion at the same time from the Federal Reserve’s Term Auction Facility (TAF).

Incredibly, Wells Fargo’s borrowings paled alongside those of Goldman Sachs. Throughout the crisis, Goldman gorged itself at every available government trough. The morally challenged investment bank borrowed only $10 billion from the TARP. But at the same time Goldman was griping about “being forced” to take the $10 billion TARP loan, the company was borrowing tens of billions of dollars more from obscure government lending programs with acronyms like: CPFF, PDCF and TSLF.

And that’s not all!

Amidst much fanfare and self-congratulatory press releases, Goldman repaid its TARP loan in June 2009, but only after securing $25 billion of government capital at a different trough. As we observed in a December 15, 2010 edition of The Daily Reckoning:

On June 17, 2009…thanks to some timely, undisclosed assistance from the Federal Reserve, Goldman repaid its $10 billion TARP loan. But just six days before this announcement, Goldman sold $11 billion of mortgage-backed securities (MBS) to the Fed. In other words, Goldman “repaid” the Treasury by secretly selling illiquid assets to the Fed.

One month later, Goldman’s CEO Lloyd Blankfein beamed, “We are grateful for the government efforts and are pleased that [the monies we repaid] can be used by the government to revitalize the economy, a priority in which we all have a common stake.”

As it turns out, the government continued to “revitalize” that small sliver of the economy known as Goldman Sachs. During the three months following Goldman’s re-payment of its $10 billion TARP loan, the Fed purchased $27 billion of MBS from Goldman. In all, the Fed would purchase more than $100 billion of MBS from Goldman during the 12 months that followed Goldman’s TARP re-payment.

Is it any wonder that Buffett’s $5 billion “investment” in Goldman Sachs succeeded so nicely?

“Later, astonishingly,” recalls Peter Schweizer, “Buffett would publicly complain about the bailouts in his annual letter to Berkshire investors, claiming that government subsidies put Berkshire at a disadvantage…”

And as previously pointed out, Berkshire Hathaway’s Burlington North Santa Fe has also profited from Obama’s energy (oil pipeline) policies.

In essence, Warren Buffett not only has altered or overhauled his winning investing formula from "value investment" to the political entrepreneurship of rent seeking by becoming Obama’s premier crony, he has been using Obama’s policies to quash competitors. It looks as if Mr. Buffett's tax increases have been implicitly designed to attain this.

[As a side note, maybe the Occupy Wall Street movement should consider occupying Berkshire Hathaway too]

It’s sad to see how Mr. Buffett seems to have condescended or has sold his soul to the political demons by veering away from the laudable libertarian principles embraced by his dad, Howard Buffett. Or perhaps Mr. Buffett’s string of investing success may have gotten into his head. 

Howard Buffett’s portrait in Warren Buffett’s office (courtesy of Business Insider’s Tour of Warren Buffett’s office)

Given son Warren’s patent hypocrisy, dad Howard must be rolling in his grave.

Quote of the Day: Golden Handcuffs

When the public had access to gold coins prior to 1914, individuals controlled banking policy. They also controlled government fiscal policy. They could take their coins out of commercial banks if they did not approve of government policy. This is why national governments annul or restrict gold-coin redeemability whenever a major war breaks out. They do not want to face the citizens' veto. 

With the repudiation of any gold-coin standard since 1914, citizens no longer understand the case for a gold-coin currency. They do not understand that widespread gold ownership was the number one restraining factor on the expansion of state power in the economy. The uncoordinated individual decisions of millions of people could overturn any government policy that required central bank inflation to fund it. The politicians resented this. So did the central bankers.

The politicians were under restraints: golden handcuffs. They decided that it was better to turn the money-creation power over to the bankers. The central bankers promised to buy government bonds at low rates: lender of last resort. This made the central bank the counterfeiter of last resort.

This is from author Gary North on the religion of inflationism-central planning versus free markets at the Mises.org.