Monday, October 20, 2008

Invisible Taxation

Everyone is saving their earnings or paying off debt. People have stopped consuming new product. How do you get people to spend to stimulate the economy? The government can’t very well tax us more. The US taxpayer is stretched out already.

Here is the way it is done. Picture a pecan pie sliced into fifths, 5 pieces, one for each member of the family and one for the government. If the government consumes that piece, it is considered taxation. Just suppose the family members don’t want to eat their share of pie, they want to save it. 4/5ths of the pie is left. Now the government takes one slice of the pie and divides it up into 4 pieces for the family members to eat (a check from the government to spend as you choose). Now there are only 3 pieces of pie left but the family members believe that there are still 4 they trust the government. By giving the family members a piece of a piece of pie, they(the government) got some of the pie eaten.

This is what the government is doing. The pie represents our collective savings. The government can give us a slice of our own pie back to us and this is inflation. We didn’t get anything real; it was already ours. The number of slices left have to be re divided to reflect the amount each person is entitled to.

When the government decides to spend tremendous sums of nonexistent money, they are actually spending our savings by taxing them by way of inflation. People are scared to death that they will lose their savings and are willing to take zero percent interest in T-Bills. In essence, they are being eaten alive by inflation that is now probably close to 25%. Your dollars are safe; your purchasing power is shot.

This dichotomy of printing money and declaring our savings fully intact is kind of like a snake feeding on its tail. There comes a point to where the absurdity of the reality has to set in.

I think that people are starting to wonder if Paulson and Bernanke are incompetent. I believe they are. That won't stop them from doing what they are doing. They are going to write some history at our expense.

Copyright 2008 All rights reserved


Sackerson said...

If not inflation, then presumably more borrowing (plus interest). To be repaid by higher future taxation or selling assets (what does the government have?) or cutting future expenditure so that debts can be paid down.

By what process does inflation work it way into the economy? The US government has set aside a lot of money that isn't currently being called upon by the banks, I believe. Will the damage begin when the banks begin to use it?

Anonymous said...

One way to cure the housing debacle is to "create inflation" in a controlled way. Inflate prices of all goods and services to the point that they rise enough to "equalize" the over priced housing market. The problem is that wages will lag behind the inflation of goods and services. Oh..and savings will deteriorate. But what a great time to get back into the Stock Market.

I love this New Capitalism.

Anonymous said...

Jim, what is your opinion on this...

We know that the Fed and US Treas have decided to destroy the dollar, right? (I'm not sure how long it will be before all of the FED's printed money and future printed money will truly impact on Main Street with the worst devaluation ever known, but it's coming). We know that the national debt in relation to GDP is out the roof and getting worse and worse, right? We know that servicing the debt will soon no longer be sustainable, right? We know that sub-prime, auto loan and credit card defaults is not even an issue... it's the unraveling of derivatives (100 to 200 times larger) which will cave in this country.
Don't you think it really is time to get out of the dollar in total?
Gold and foreign currencies of commodity based countries seems the only place to go. Don't you think that going off shore to safer currencies is the only way to preserve one's purchasing power? (Let's face it, if you liquidate your portfolio and buy some rental properties... what good will that do in 2 years if the dollars you get from rent won't buy you a loaf of bread?) Would appreciate your feedback on this.

Tyrone said...

The problem is that wages will lag behind the inflation of goods and services.

Interesting comment. Lately, I have actually been thinking that wages in some areas need to come down. In the extreme bubble areas, companies were pumping salaries in an attempt (failing attempt) to keep pace with house prices--my belief anyway. If those same areas are experiencing severe price reductions, why not reduce salaries in an attempt to make the USA more competitive. We are going to need jobs.

BTW, I'm in a bubble area and I would have no problem with a wake cut (modest) or wage freezes.

Jim in San Marcos said...

Hi Anon 10:36

Jumping from one currency to another isn't going to do much. Almost every country is printing money.

If we go into hyperinflation, assets like cars and houses will retain their value. You can pay off your house loans with inflated dollars. So a one year rental contract couldn't really burn you bad as a landlord. You would raise the rents accordingly from there.

In the event of a currency collapse like they had in Germany, the house was yours and you could sell it for a good value under the new currency. The only problem, the banks would be non existent. So in order to sell a house, it would be all cash or you become the bank for 20 years and be the note holder.

I don't think it will get that bad, but a home is a good long term inflation hedge.

Thirsty said...

what is this bubble area? i'm so confused

I'm Not POTUS said...


France is already stirring the pot about tax havens (CH). Run away inflation will force fiat printing nations to confiscate and make illegal competing forms of money (gold).

The best hedge is total self reliance. After that depends on the desperation of the invisible hand of inflation. You will be forced to break unjust confiscation laws that punish the prepared. The prepared must be made an example of. The lemmings must be rewarded for their obedience.

Sackerson said...

Hi Jim

Once inflation gets going it'll be Alice in Wonderland, I think. Real wages have to come down in relation to earnings in competitor countries, and house prices have to come down with respect to wages. So whatever the nominal value, I think we in the West shall see a real depreciation in both houses and the stockmarket, plus a real decline in earnings relative to both consumer prices and foreign labour.

dearieme said...

I'm buying sardines.

Jim in San Marcos said...

Hi Sack

I think this will be a two step process. Deflation to settle out and collapse the markets and then inflation. The uncertainty is the time for one to end and the second to begin. It could be a matter of months.

We get a collapse of housing and finance, then a large increase in unemployment. At that point the government transfer programs for unemployment kick in and inflation takes off.

The only real certain thing is that government tax revenues will not be even close to projected for next year. That speaks volumes for inflation.

I agree that wages should drop with a lack of jobs. I do get the feeling that we are missing something here, it doesn't all fit together neatly.

Got any ideas?

Jim in San Marcos said...

Hi Im not Potus

Our government did it in the 1930's. Private ownership of gold was illegal.

Government will confiscate our wealth and punish us for not participating in the orgy of debt. Go figure.

France could be a basket case. before the Euro, they were accused of devaluing their currency every time they changed their underwear.

I don't think that anyone is looking forward with anticipation for what will happen next. The general mood of the population is very serious.

I think your right, look out for yourself and help your neighbor if you can. We are going to need each other to get through this.

Sackerson said...

Jim: "I do get the feeling that we are missing something here, it doesn't all fit together neatly."

I don't see what doesn't fit, except for a comfortable solution. We must avoid war and warmongers, and civil disorder and rabble-rousers. That's after we've lynched the top guys at Goldman Sachs etc, naturally (only kidding! Really! I think due legal process should be observed in all cases.)

And we could be a fair bit poorer materially and still have good lives, if we rediscovered neighbourliness and other human(e) values. In case freedom-loving Americans misunderstand me, I don't mean socialism (which in a voter system depends on the perpetuation of poverty, to the benefit of the ruling socialist oligarchy - as we find in the UK), but the mutual concern that I think Americans would see as traditional civic virtue.

Jim in San Marcos said...

Hi Sack

Here is what I mean, by not fitting.

We have spiraling deflation with increasing job losses. Then we have governments printing money and starting government work programs which cause inflation. The tax base is going to hell and the deficit is climbing to a point to where we might not be able to afford the interest on the debt. Projected retirement and health benefits are increasing to the retiring baby boomer's.

When you look at the big picture, the present course of action doesn't offer a real solution to the whole problem.

Anonymous said...

Jim (and your readers),
If you really want to see where we are and where we are headed, this education does the job. Not for the faint of heart. Definitely worth the 2 hours to watch. I guarantee any watcher will be reoriented and changing their plans for the future.

Sackerson said...

Jim: oh, THAT! Of course it won't work, any more than you can really pull yourself up into the air by your bootstraps. Either the government is in denial, or it's buying time while completing its escape plans. Von Ryan's Express?

Anonymous said...

The other important parts to the jig saw puzzle of what is missing...
we've almost depleted our natural resources and oil is almost gone. We've done nothing over the last 20 years in R&D for energy alternatives that are significant. We've done nothing for the infrastructure of the USA over the last 20 years. We keep falling away from being producers... which is the only way to exchange and survive.
Maybe we can travel to other planets and mine them for ore and oil and coal. If our govtmt doesn't have a fleet of Columbia space craft set up for this... we are in trouble.
Build up infrastructure, get back to manufacturing and production, billions should go into R&D for solar, nuclear, batteries, and other energy sources NOW NOW NOW or it will be too late.

frakrak said...

Jim I’m imagining some historian discovering your blog in fifty years time, archived!

They will probably find that Warren Buffet kept all our hopes and dreams buoyant during this period with his great investment advice for the masses!

Benanke, becomes the richest man in America due to his inventing a printing press that prints dollar bills at a rate of one billion per second. And reducing a “a five thousand word, no responsibility clause” on the greenback (only visible under a scanning electron microscope) to a twinkle in Benjamin Franklin’s eye! He sells this technology to used car dealerships, merchant bankers, and republican lawyers!

Paulson goes under the witness protection program, he moves to Florida to give investment advice to retirees!

And you all thought that this was going to be an unhappy ending!!!

Shankar said...

Jim, you are right. We are missing something, and I am trying to figure that out myself.

On another note, we had inflationary recession in the first half of 2008. Now, we are just getting into deflationary collapse. The next phase, inflationary recession (again) is a few months ago.

What we are missing is probably the blow-up in the treasury market and collapse of US$.

Shankar said...

BTW, as far as the currencies are concerned, CHF and JPY might be good bets. So also any commodity currencies. Some of the Asian currencies too.

Better still, have commodities, rare metals and other hard assets.

Its the paper money that is at risk.

Jim in San Marcos said...

Hi Shankar

Something is missing, and it pretty much means that we need more information and it just isn't there yet.

I doubt that investing in currencies per se is the way to go. Investing in options on currencies could give you a big play or two. Options are risky but they can be played right if you buy out of the money quite a bit.

As for commodities, people could start to sell gold and silver to raise cash to pay bills. That would mean we would see a move opposite of what we expect. Platinum has been the surprise poster child of the year, down 50% just like oil.

Diversity is still the name of the game. Gold, cash, real estate, stocks and bonds. We are going to get burned, but it doesn't have to be all or nothing.

I thought the market would tank today and it didn't. The future is hard to predict.

Jim in San Marcos said...

Hi Frakrak

I think that the "Witness protection plan in Florida," is a euphemism for being fed to an alligator. That could work quite well for Paulson. I could live with that. A fat gator is better than a fat cat any day!

frakrak said...

Thanks Jim for your reply. Must say that if I wasn't suffering from pre-exam insomnia (3 am) wouldn't have posted that.

Believe we are seeing a titanic struggle for the rights to hold the major share of capital in the world today, my hope is that America comes out on top.

And good luck with your prediction re 6000 points, I will personally extend a few weeks grace towards it, but scarily feel it won't be necessary.
regards .....

Anonymous said...

Hi Jim,

From Anon on a California Mountain:

I don't think there is anyway to predict economic futures in our present day. There is too much government interference; too many manipulators; the power elite; the new global economy; and many unexpected and unknown manifestations and reactions hitting us due to all of the fiddling the government has done with our economy over the last century (Fed Reserve, central banks, fractionalized banking, New Deal, off the gold standard, ERISA, etc. etc. etc.).

If the government were a person it would be arrested and sentenced to life in prison for all of its crimes and insanity.

Today we have a contraction of credit, contraction of wages, contraction of unemployment, spiraling deflation, we've been de-industrialized, etc. yet our misguided government leaders are attempting to solve our situation by cutting rates and offering credit ("stimulating" the economy) in order to make consumers borrow and spend?! What sort of idiocy is that? That is what got us into this trouble in the first place. The logic... if someone is drowning you pull them out of the ocean, give them a glass of water and throw them into a swimming pool? If someone is dying of hunger you put them on an austere weight loss program? You take an obese person who is sick due to food related issues and buy them a double bacon burger, fries and a milkshake?

This sort of logic only belongs in a lunatic asylum.

The sad thing is that we the people have made this mess. We are the ones who elected the representatives and legislators who have built and administered this government.

We are the ONLY ones who can change it. When you get down to it, it's not "the government" ... it is you, it is me. We are the cause of it all.

If we American citizens (the building block of our society) aren't educated, free from apathy, constantly alert and continually defending our rights, then the great experiment put here by our founding fathers will be a failed experiment.

This is the only solution... the task at hand. How to educate and get our citizens to be proactive about their country and its future. And secondly to create some real leaders. We don't have any leaders.

We are complacent and atrophied. We've succumbed to the Super Bowl, TV, medication, Haagen Daz, entertainment, fast foods, Disneyland, etc. etc. We've been manipulated through "bread and circuses" (a repeat of the fall of the Roman Empire). Our morality and integrity have been usurped by the negative influences existing in this decaying and degraded society.

We need to snap out of it, roll up our sleeves, get educated, draw on history's lessons, become active in our government, salvage our youth and create real leaders. Otherwise we are doomed.

When we consider the mess we are in, the first and smartest thing we can do is to go and confront the culprit that is responsible for it. And that is done by standing in front of a mirror.

Jim in San Marcos said...

Hi Anon on a California Mountain

I took your comments and put them in today's blog "Time to Take Our Medicine." Thank you for your input.