Saturday, March 01, 2008

Tar and Feathers, an Inflation Fix?

Paulson just said that the government is not going to bail out the speculators in the housing bubble. That’s good news, isn’t it? They have finally realized how big the mess is - - - too big to fix. They didn’t quite say that, now did they?

The price of gas went up 9 cents today. I paid $3.33 a gallon this afternoon. If I had bought it in the morning it was only $3.24. I guess that will teach me. Buy on the way to work, not on the way home.

The commodities market has gone through the roof. Wheat which use to trade at $3 per bushel, is now at $25 per bushel. Platinum is at $2,000, gold is approaching $1,000. A tear down house in the LA ghetto may well be worth 500k by next year. That would imply a minimum wage here in Kalifornia around 35 dollars per hour. The increase in income would generate the tax money the state needs and the homeowner would no longer be upside down.

It’s neat how inflation can solve our present problems. Mom and Dad are now going to want to live in your spare bedroom. Their monthly Social Security checks might cover groceries. Growing old could be "The New Adventure Nightmare of a Lifetime" (coming soon to a theater near you).

God bless Congress, they’re going to save baseball from steroids! Maybe if we tarred and feathered one or two of those pompous asses, they’d catch on to what they should be doing. They need to cut spending drastically. There is no free lunch. Just ask any fisherman, it's refered to as bait.

Copyright 2008 All rights reserved

26 comments:

SACKERSON said...

Petrol here in the UK is around £1.05 per litre - I think that makes it about $8 per US gallon?

Jim in San Marcos said...

Hi Sack

The UK and Europe tax the hell out of gas. Back in 2005 we were paying $2 a gallon where UK and Europe were paying $7 per gallon.

$8 per gallon is still a hell of a hit on your wallet.

Of course we don't have a nice mass transit system like you do. Henry Ford believed that everyone should drive their own car.

SACKERSON said...

I bet he had a chauffeur.

Anonymous said...

sack...

"£1.05 per litre"... what is the average daily income for those who own and drive a car?

Tom

SACKERSON said...

Average UK *household* income, before taxes and benefits, is about £30,000 per year (say $60,000).

Overall TOTAL cost of UK motoring illustrated here:

http://www.theaa.com/allaboutcars/advice/advice_rcosts_petrol_table.jsp

... given average non-business mileage 12,500 * 40 pence or so per mile, makes around £5,000 a year. Say about US$10,000 per year.

Jim in San Marcos said...

Hi Sack

That's a lot of tax. Just out of curiosity, how much income tax is there on the £30,000?

Anonymous said...

Jim

The gold bugs are saying in a round about way (and sometimes in a not so round about way) that a monetary collapse could happen here in the US. The other side of the coin are people (usually stock traders) who say that the gold bugs have been saying this "forever", and that they basically do not pay any heed to it. I have to admit that with the dollar hitting new lows here lately that I'm starting to wonder if the gold bugs might be on to something this time. Do you have any thoughts on this subject?

SACKERSON said...

It's complex - deliberately so from the government's point of view, I suspect. If all the £30k is earned by one person and he/she is not in a company or private pension scheme, you have £5,224.70 income tax, £2,728 employEE Natiuonal Insurance, plus the "secret tax": £3,174.40 employER National Insurance. So the fund to pay a salary of £30k is actually £33,174.40 (the employer NI doesn't do the employer any good, does it?).

Total deductions = £11,127.10, which is 33.54% of the £33,174.40 cost of hiring the employee.

Net employee income is therefore £22,047.30. If we assume the employee can't claim car use against tax and we accept the total costs of motoring as previously stated (say £5,000), then the car uses 22.7% of take-home pay! How would that compare with the US?

My car use is closer to £3,000, but I drive an old and maddeningly unreliable Fiat (FIAT = Fix It Again Tomorrow).

You'll note that National Insurance actually grabs more than income tax. In fact, when you include employer's NI costs, an extra £100 in pay would translate into £112.80, and the combined income tax & NI grab would work out at 40.6% (£45.80 / £112.80). I tell people that basic rate (22%)taxpayers are actually higher rate (40%) taxpayers.

What with taxes, cars and mortgages, no wonder we're running to stand still.

Jim in San Marcos said...

Hi Anon 9:30

Gold is a lot like owning a home. Neither one pays a dividend and there is the cost of ownership. Say you pay off your 100K home. The interest on that 100K you forgo in a year is your rent payment.

The price of gold is somewhere around one weeks wages. If gold stays at $1,000 then it suggests that wages might have to rise considerably. If interest rates were to jump to 20% a lot of money would stop chasing gold and you could see a drop in the yellow metal like we now have in the housing market.

I don't expect to see our currency go into hyperinflation, but I also didn't expect to see gas at $4 per gallon.

The real sleeping giant here is interest rates. Once there is a shortage of bank funds, rates have to rise. It's going to happen once these retirement funds get marked to market.

As I have suggested 10% of your nest egg in gold is not a bad thing, I just wouldn't pay this high a price for it. If you are making 52K at McDucks flipping hamburgers a year, then the present price of gold is a fair exchange.

The biggest indication of getting a good price, is buy it when no one wants it. I got laughed at for years over my gold "investment."

Jim in San Marcos said...

Hi Sack

I think I can safely say we only pay half of what you do in taxes.

But our average income is quite a bit less than yours $48,000. We don't have socialized medicine yet, thank god!

Thank you for your research.

SACKERSON said...

Jim, the £30k was household income, average wage outside London is more like £20k. Given higher prices here also, US citizens are above us in purchasing power parity terms - see here: http://en.wikipedia.org/wiki/Per_capita_income

- only 3 Arab oil states, a tax haven and oil-rich Norway are ahead of you!

Anonymous said...

Thanks Jim
What you have written actually makes sense.
Anon 9:30

Jim in San Marcos said...

Hi Sack

No argument there, I was just amazed at the tax percentage you pay in the UK. Its at least double of what we pay here.

Take care

SACKERSON said...

Could it be that America's prosperity is partly due to lower taxation? I had thought your tax-to-GDP ration was similar to ours, but actually it seems ours is 37% and yours 26.8%, according to Wikipedia here:

http://en.wikipedia.org/wiki/List_of_countries_by_tax_revenue_as_percentage_of_GDP

By the way, Americans do tend to use the term "socialised medicine" as though our NHS were a Commie plot. I don't think that's quite fair!

But maybe our respective net wealth should be assessed in the light of some more complex calculation, e.g. a package of taxes, State benefits and private healthcare provision.

Anonymous said...

Jim said:
"Maybe if we tarred and feathered one or two of those pompous asses, they’d catch on to what they should be doing."

Maybe what we should start on is tarring-and-feathering the Pres and Vice-Pres FIRST. It's their lies and the Iraq War ($3 trillion and climbing) that got us in this fiscal hole to begin with.

The war is lost; the only reason it's still on is that no-one really wants to clean up after this mess.

As for the comment about "social health care", right now we're paying more GDP on our health care than any other modern country. Do you think that's a fair distribution of funds?

Either way, we pay now for universal healthcare, or we pay later in a hodge-podge of denied health claims, rising prices for medicine and services, more bankruptcies for financially burdened families with sudden health costs, and more of the nation unable to get insured.

Regardless, we pay.

Anonymous said...

Yawn

This anti war stuff is getting tiring. You do realize that alot of the money spent on the war has helped our manufacturing base?

Jim in San Marcos said...

Hi Anon 5:19

Let’s examine a few things the amount spent on the war did not go to Iraq it was spent on jobs in the United States. This is money that stimulated the economy (as pointed out by Anon 2:06)

Major Powers through out history either project power or have power projected on them. The Middle East is where our oil comes from. The US is projecting power over there. If the Arabs want to take their toys and go home, they know we will come and get them. We will control the region to secure our access to oil. Keeping the Middle East in a state of flux is in our best interest.

As for who is responsible for what is happening in this country, it is the Congress. A two thirds vote in both houses makes the President redundant.

The major issue here is one you indirectly touched on; the assumption that we can have everything we want. One person wants better roads another wants health care, another wants better education. It’s like the family budget; the money is just not there for everything we want. Congress does not play by the rules. They spend like a homeowner with a Home Equity Line of Credit. It can’t go on forever. The piper will present his bill. The problem is the dead beat Congress can’t pay the bill. The neat thing about a two party system, they can blame each other for the mess, the voter is none the wiser.

Thanks for your comments

Anonymous said...

Sounds like a problem only Ron Paul can fix.

Brian said...

The main brake on the hyperinflation scenario is wages.

I am leaving my job as a project manager in commercial real estate in Southern California to return to engineering. I spent months looking for a job and finally found a mid-level engineering/management position for 75K/yr which isn't too far from home. To get that 75K/yr, I had to negotiate like hell (took two months of offer and counter-offer). This is about $10K/ less than I was making in commercial RE, and about $25K/yr below my highest paid job (though there is room for advancement).

I also know that many of the unemployed realtors and mortgage brokers have been forced to take jobs which pay much less than what they were making before. How can prices hyper-inflate if people can't afford to purchase the product at these higher prices. It's the buyer that sets the price, not the seller.

Jim in San Marcos said...

Hi Brian

I'm not so sure. Inflation is the result of government printing money instead of taxing more. As more people get laid off, less taxes are paid. The governments fixed costs don't go down. Roll the presses (they're printing checks, it's cheaper).

Right now we are in a deflationary spiral. Paulson is printing money (ie 150 billion rebate). Notice that no new products have been created. No one built a car or assembled a TV to get the check. The same amount of goods are available for sale, but there is more money chasing the available goods.

Everyone is scared to death of losing their job. The world in general is dumping money into US banks driving down interest rates. Common sense suggests that interest rates ought to be around 10-12% and they aren't. It appears like there is very low demand for loans of any type and/or an unwillingness of banks to loan money.

I agree the buyer will set prices, and in real estate, there are no buyers.

As for the issue of hyperinflation, it is down the road a bit. When FDR was elected president, there was maybe 5% of the tax base that was transfer payments. So when he took out a "loan" to pull us out of the depression, the money was "kind of there." Now today with 60% of all government expenditures as transfer payments (ie SS, SSI, Medicare) there isn't as much water in the well to draw from.

You hear the phrase that Social Security will go broke. Well not really, Congress will print the checks and you get to spend them. It's at that point you realize what hyperinflation is; your monthly retirement check will pay for this weeks groceries.

So to make things clear, at present we are in for deflation. As the baby bloomers retire we may get into the realm of hyperinflation. Especially if we get the "free" health care" program.

Let's face it, Congress will give us the moon to get re elected and make our kids pay for it. Consider it a tragic lesson in reality.

SACKERSON said...

Implicit in the comments above, and I agree, is that we will get both inflation in prices, and a wage deflation (i.e. a failure to keep up with prices). In short, we will have less disposable income.

SACKERSON said...

PS: Except, of course, house prices - see my latest!

Brian said...

Jim,

I'm no economist, but I have been trying to follow the creation and distribution of money by the government.

Clearly, based on the job numbers reported today, the only sector which added significant jobs in January was the government. This would fit with your assertion that the government is "printing" money - in this case through the creation of unnecessary positions in government.

This avenue for distribution of $ into the system is beginning to unravel here in California. Our local school district is looking to eliminate 16 administrative positions and to close three grade schools with low enrollment to meet next year's budget. Cities and counties are laying off planning staff. Child Protective Services canceled a contract to build a new building to house their staff in my area as budget cuts have eliminated the funds which were to pay for the building and expand their staff.

Regarding the $150 billion economic stimulus package, I understand that this is inflationary, but I have also heard these payments are debited against next year's tax returns (for those who are still have jobs). I believe that this is a one-shot sort of fix which will not be available in the future.

If the government actually begins printing checks to cover unfunded liabilities, this will quickly bring about the collapse of the government. Are they really that insane? I hope (naively, I guess) not.

Anonymous said...

The next question is how to avoid these kinds of problems in the future....

My suggestion for a solution to the problem is two fold: First, create tighter regulations of the financial markets, for instance by putting limits on which types of creative financial instruments it should be legal to trade in. The final goal should be a financial market with higher visibility. That is, it should be easier to track the flow of money in the system, and thus also to spot potential problems sooner.

Secondly, I believe democracy should be decentralized more than it is today. That is, less power should be situated centrally, and more power should be situated locally. The goal of this is to stimulate local activity, and to give people a reason to fight and to be responsible. Too much centralizing leads to alientation, and a situation where people don’t take responsibility, except for themselves and their own fortune... Which again leads to less community building, and ultimately loss and decay for the whole country.

So, tighter regulations of the financial markets, and a (much) less top heavy administration. That is my answer for how to put things back on track....

Jim in San Marcos said...

Hi Brian
The 150 billion the Federal Government is putting out is just ink and paper. When you skip to State governments they can't do that. Thats why Schwartzie has a few problems. Todays post reflects on some school cuts here in California that are coming up.

I sure hope that the Government doesn't print itself out of this mess.

Jim in San Marcos said...

Hi Anon 1:20

In the 1930's our Congress effectively locked the barn door after the fact. It couldn't happen again. The trouble now, is that the Congress over the last 40 years unlocked the barn door. "We are adults and don't need all of these childish restrictions." Yea right!

What you suggest should work, the trouble is, by the time Congress got their hands on it, you wouldn't reconize it.

If the Democrats wanted to move to New York City, the Republicans would want to move to San Francisco. Where would we end up? In St Louis. Compromise the great Camel builder.