Tuesday, December 27, 2011

Common Sense Revolves Around Our Perception of the World

Conclusions are not necessarily right when everything is taken into consideration. Take the premise that warm water freezes faster than cold water. If you put two ice cube trays in the freezer, one with warm water and the other with cold water, they will both freeze at the same time. Conclusion: Warm water freezes faster than cold water. In reality, the warm water keeps the cold water from freezing until they are at the same temperature.

Now if we step forward to this tax the rich concept. Proponents state that lowering the tax rate of the rich from 90% to 20% did nothing economically to stimulate the economy. So let’s raise the rates back up to what they were and increase government revenues. The thing that needs to be examined, the rich will invest or not invest depending on the tax code laws. If taxes are 90% here, invest somewhere else.

If you examine the graph below, there is really no correlation between the high tax rates for the rich in the early 1950’s compared to present returns. The graph is flat. The rate of taxation on the rich appears to have had little effect on total taxes collected. You’d expect a dramatic drop in collections when rates were dropped.

The “ad-v” refers to ad-valorem taxes; these are real estate taxes and sales tax.

Notice the red area of the graph. This represents social insurance. Figure that the new health care provision should at least double the red values. This will increase our taxes by 25%. This won’t be a tax on the rich; it will be a tax on the poor who skip health insurance because they can’t afford it without reducing their standard of living. Of course the employer pays half of that tax doesn’t he??? If you have ever worked on a commission basis, you’ll discover that you pay both sides. It isn’t hard to figure what this new tax will cost $2,000 to $5,000 per employee. Figure more than you presently pay for private insurance.

The real problem lies in the fact that Congress may believe that raising taxes during these harsh times is a real solution. Common sense suggests this should increase taxes collected. In reality, the net result will be little change in revenue. It’s a little like that house you bought that everyone told you would never drop in value. Well it has dropped quite a bit and the property taxes on your home have dropped also. Unemployed people pay fewer taxes. So at this point raising taxes further restricts taxpayer consumption (a reduced standard of living) and Government revenues drop even further.

The Democrats want to increase taxes on the rich and the Republicans are dead set against it; the only real people it will affect are sports players and movie stars. The Republicans ought to let the Democrats win this one and let them go for it, see if the dollars roll in. It’s just political posturing on both sides.

What can we look forward to in 2012? A lot of belt tightening! A lot of political squabbling and finger pointing. An election is coming up, is Obama destined to be our Herbert Hoover? Will health care pass a Supreme Court review? Will the Euro survive? Can we increase the national debt one trillion dollars a year forever. Will civil war triumph over democracy in the Middle East? Could several States in the coming year need a Federal government bailout? I don’t mean to be pessimistic, but once we get all of this under our belt, it may be up instead of down from there.

None of our problems have been solved, they have only been ameliorated (to make more tolerable). What will happen in the coming year is veiled in uncertainty. But even so, here is wishing every reader Seasons Greetings and the hope for a successful and Happy New Year.


Anonymous said...

A successful and happy new year?

Hmmm... how could that ever be with everything that you just named.

We are being held hostage on a runaway train headed for disaster. There is no place to escape to. It can only end when the train crashes and is destroyed and the survivor build a new method of transportation (hopefully by learning from history).

Sackerson said...

Well, how DO you get all the stolen money back? Or is it, I give in, Vampire Squid, you win?

It's now becoming clear - though Charles Hugh Smith pointed it out 5.75 years ago - that it's not those darn Orientals who took it; they've slaved away for chump change while America's upper crust recycled the other 80% through their brass plate companies in the Caribbean.


I guess it goes on until it suddenly can't possibly go on any longer.

Anonymous said...

I don't need much water and food to survive every day. It won't be difficult to maintain a warm, dry place to sleep. Don't want a lot of possessions anyway. I've always dreamed about being able to spend most of my time reading and playing my guitar.

Come to think of it... I'm ready for the collapse.

Anonymous said...

Those Americans with the large nuts: big, beautifully furnished homes;;; big gas guzzling SUVs;;; kids to raise;;; expensive vacations;;; eating out in restaurants;;; the cost of maintaining all of their stuff;;; running the AC or the heat at full blast all the time;;; spendthrift shopping habits;;; etc etc will really feel the pain. But there are many who won't feel that much pain because they are used to a spartan lifestyle already or don't mind having one (like anon 5:27). I'd take it a little further 5:27 -- to take care of my food, water and warm dry place to sleep I'd want a small free and clear diesel RV so I can get around (easier to earn money and mobility just makes you that much more flexible and gives you more options);;; a gun and ammo for protection;;; a laptop;;; some gold and silver and cash;;; some clothes;;; and I'm ready to survive and even thrive in the dark times ahead.

Anonymous said...

When the crash comes, please let me know when you drive through town with your RV loaded with food, gold, silver, and cash. :)

Jim in San Marcos said...

Hi Anon 8:56

Your money can go up in smoke, but your assets can't. Buy your survival tools now while your money is worth something.

Spending all of your present cash on assets could be equally as foolish. Will you be able to earn enough money under a new system to pay the taxes on the property you own? If you have renters, figure a loss of three months rent.

The rich with all of their toys will go bankrupt trying to pay the taxes under a new system with no income and their cash saving gone.

Diversity in investments, can help you survive this mess. Everyone is in T-bills, silver and gold, so avoid them.

At the least, try to have a Happy New Year :>)

Jim in San Marcos said...

Hi Sack

Welcome from across the pond. Thank you for the link. Charles has some good points there (he is in my link list under "Of Two Minds"). I've commented on it too, with the new pay raises over there from $54 to $62 per week assembling cell phones. Its a real sweat shop over there. Every computer product sold in our country has a "Made in China" stamp on it.

I think that you are right in assuming that this will be sudden when it happens. Its a little like super heating water in a microwave. Stick a spoon in it and it explodes in your face.

The main point is, some of us are preparing for it, each in our own way. I've noticed the disclaimer on your blog that you are out of the market.

Here's hoping that we've made some of the right decisions to help us survive this financial meltdown.

Anonymous said...


I'm confused as to what you think the financial future will be:

-- massive inflation
-- banks closing with total loss of funds
-- tripling of taxes

Or something else (please describe).

Please help.....your comments are frightening!

Anonymous said...

All of the above and more.

Anonymous said...


Also,you say to buy survival tools now. Can you provide examples?

Jim in San Marcos said...

Hi Anon 11:01

With the present interest rate paid by the banks, and the possibility of our savings turning worthless, survival tools could be a brand new car, that won't need repair. Replace the leaky water heater, repair the roof. If you rent buy a home or a rental in an area where prices are reasonable (California isn't one of them). A home is the equivalent of 150 oz of gold and right now gold is a lousy buy. The trouble with property is that it is very easy to tax. If your kid is going to college, don't use student loans, borrow from your 401 K or savings. There are some good deals on toys out there now like sail boats and airplanes. There are stocks out there paying 6% dividends like Mattel.

Money in the bank pays no interest, invest in items that will be valued in dollars if our currency goes up in smoke. A piece of a company or a physical asset will retain value.

Buy what others are selling to raise cash, you usually get a very good deal.

Thats just a start, and only target less than half of your savings, diversity never hurt anyone.

Jim in San Marcos said...

Hi Anon 4:12

Massive inflation is waiting in the wings.

Tax rates will not triple, they are already at 33%. A hundred percent tax is beyond reason. The government can raise taxes as high as they want, people just won't pay.

The future has to be massive inflation, the government has borrowed all of our money and spent it. They need to borrow more just to balance the budget. For the individual, there is no incentive to save at these interest rates for a rainy day and put money in the bank, so the government is going to run out of funds to borrow.

Anonymous said...

We're in a deflation Jim. None of Bernanke's trillions have done anything, because the debt and deleveraging is too great of a force. Domestic and global debt is huge. There will be no inflation of significance until a lot more of the debt has been paid off or destroyed and the velocity of money starts to get some traction. We could be in a deflationary stage for another 2, 3, 5 or who knows how many years more.

Jim in San Marcos said...

Hi Anon 12:55

I don't see deflation anywhere. My pay has stayed the same and everything that I consume on a weekly or monthly basis has doubled in price over the last 4 years.

My Sons college tuition went up 23% last year alone.

I hope your not measuring deflation using the housing market or the cost of imported electronics as a Gauge.

Bernie Madoff's depositors were non the wiser about their money until they were told it didn't exist anymore.

The idea that our money is safe in the bank and the US government can write checks forever, can't last. This Ponzi scheme is running out of new money.

I can guess that we can agree to disagree on this. Time will tell.

Anonymous said...

It's deflation to me. We just have had the normal inflation of 2-4% over these years. If there was high inflation your pay would've risen. The price increases are due to scarity of energy, emerging countries demanding more energy, and speculators using the cheap money in the commodity and stock market. The costs of energy rising makes everything else go up in price. It's energy scarcity (peak oil, etc.) and climate conditions changing which is hurting the crops and growing seasons of many areas on the planet. Inflation would have stock valuations soaring and bond interest returns booming.

Jim in San Marcos said...

HI Anon 8:04

My pay didn't rise because there were people willing to fill my slot for a lot less money that were unemployed.

There is no scarcity of energy, our country is exporting gasoline for the first time in 50 years, consumption is down.

The riots in the Middle East are over the doubling of food costs, there is no shortage, wages have not kept up with inflation.

Interest rates are down because the Federal government is printing dollars and buying all Treasury's presented for redemption in the secondary market at par. Risk has been taken out of the market artificially.

As for the stock market, its the only game left in town and I can't figure out why it isn't going up, but I don't see inflation or deflation being a player there. the real key is interest rates and they suck. There is no long term reward for saving money. Spend it if you have it. That has to be inflationary.

Here are 10 items that have doubled in price in the last 4 years: gasoline, hamburger, chicken,cigarettes,cheese, bread, movie tickets, cable, telephone, and utilities.

Here are items that have tripled in price in the last 4 years; Dental charges, potato chips, steak,Tapioca pudding (I like tapioca pudding),Prescription drugs, shampoo, coffee, razor blades and ice cream to name a few.

I'm all ears and willing to be proved wrong. What have you seen getting cheaper?

Tyrone said...

We just have had the normal inflation of 2-4% over these years.

Is that by the governments "modified formula". Here is John Williams' calculation of inflation using the same method the government used prior to 1990 and the method use prior to 1980:
Alternate Inflation Charts

I guess if the government doesn't like answer, they just change the equation.

Jim in San Marcos said...

Hi Tyrone

Thanks for the link. The CPI from the 1980's is more informative than the current CPI.

Just to show you how things can be even more skewed, a lot of prescription drugs are no longer prescription drugs. They are now over the counter so insurance doesn't cover them anymore.

Kind of makes you wonder what's next?

Anonymous said...

Just wanted to thank you for your
outstanding work over the years.
Sometimes it may seem to be a voice in the wilderness, but you do have an appreciative audience.
Please keep up the good work in 2012, and may you enjoy good health and prosperity.

Anonymous said...

Look at these trends. In my opinion, the USA is in the beginning of the crash phase of the SPIN CRASH and BURN cycle.


Anonymous said...

I think that Jim and many others misunderstand inflation. It isn't based on prices;;; CREDIT is what it is all about;;; the credit bubble of 40 years has peaked and can not go any further;;; the bubble has been pricked and it is now leaking (the deleveraging and defaulting is starting);;; Bernanke's attempts with QE 1 and 2 have been total failures and none of his stimulus has mattered (and it won't matter that 6 central banks got together to put more USD liquidity into the EU because the DEBT is killing them with much more force;;; currency is only 5-6% of the US money supply;;; it's all credit;;; there are trillions and trillions of dollar value that has to be paid off or wiped away;;; it will never be able to be paid back and inflation will be the tool used to default on the debt;;; but that is up the road;;; right now we have to go through DEFLATION;;; prices of meat and potato chips are not a reflection of our trend, which happens to be DEFLATION. Listen to Gary Shilling


Anonymous said...

If you are willing to read it, here is a great article that explains why it is CREDIT not prices that you should be concerned about:


It would be disastrous to prepare for inflation if you are going into deflation and vice versa.

Anonymous said...


I think you would enjoy reading the following


The author posts once a year. Informative and entertaining

Jim in San Marcos said...

Hi Anon 1:12

Your argument might hold water if the American dollars was linked to gold and the government couldn't print dollars. So far, every creditor has been made whole so no one has suffered a loss. the person who sold Joe Six pack a million dollar home got paid in cash. Joe walked away from the home and the Federal Reserve printed dollars to cover the bank depositors losses. The taxpayer is on the hook for about 7 to 10 trillion dollars that he knows nothing about. Government has taken the risk out of the market and the interest rates reflect it. If you want to see what the cost is for real risk, go borrow money on a credit card.

Our Congress is taxing us one dollar and spending two dollars. The National Debt is now 15 trillion and climbing 1.5 trillion a year and this isn't one of our better tax years.

If I was printing money like crazy, I'd want it to be known that I was trying to prevent deflation. Otherwise people would lose faith in the currency and be coverting dollars to gold and silver.

The deflation of the 1930's was real, people lost 90% of their savings. This time around, we suffered the same actual loss, but dollars were printed to cover it up. As long as everyone sits tight and leaves their funds in the bank, everything appears to be ok. You can print all the money you want, but you can't print product. There is where the shortage lies.

IMHO The worlds financial system is in a melt down, the only way our government can escape it is to print its way out or default on its debt.

Jim in San Marcos said...

Hi Anon 6:55

Thank you for the compliment. It's the closest thing to a paycheck that I get. It means a lot to me.

Take care.

Jim in San Marcos said...

Hi Anon 7:31

Thank you for the link. There is a lot of reading material there to surf through

Anonymous said...

I'm responding to you Jim. Yes, I know printing is the only way out. All I'm saying is that it is a deflationary climate now and it will be awhile before the printing will be able to push us into high inflation. A fiat currency/printing press regime will always print and print and print until they go extinct. That is confirmed by economic history.

Crash, burn and phoenix rises from the flames. That is what we have to look forward to.

Jim in San Marcos said...

Hi Anon 4:40

I guess it doesn't really matter whose driving the bus when we go over the cliff.

I forgot to thank you for the links your provided. Thank you.

I've pointed out many times in the past that the government has changed the investment rules many times to suit its own whims. I tend to feel more comfortable in the long run favoring inflation. Buying what other people don't want, is in a way, taking advantage of "local deflation."

Thank you for your input and have a Happy New Year.