Sunday, September 29, 2013

New Retirement Concepts of Taxation

I figured when I retired, I’d have my home paid off, 300k in the bank and $1,200 in Social Security in monthly income.  Part of my retirement was going to be from my nest egg of 300K.  I had figured that I should be able to get about 8 to 10 percent on my invested savings; figure about $2,000 to $3,000 per month.  I accomplished my goals, but that 300K in the bank now only generates about $400 per month.  So basically, I’m not retiring.  I like my present standard of living and I still have my health.

The government has two ways of taxing; the obvious one, earnings and the not so obvious, savings. There are two basic categories of voters; those with savings and those with none.  If you have nothing, you are only taxed when you earn a paycheck or buy something taxable.  These people have support life-lines like Social Security, food stamps, health care and supplemental SSI---any wonder why they vote Democrat?

Inflation is a despicable invisible tax on savings.  Every "debt ceiling" dollar printed today over time, will make your hard earned savings put away today, worth a lot less in the future.  Notice that if the government wants to borrow money, they have to borrow from people who have money.  That sounds obviously simple, but it escapes most people; if you have nothing, they can’t borrow from you.  Now there is also a third method of taxation that involves controlling the interest rates on bonds.  Bond rates are normally a function of risk.  The more risk, the higher the rate.  But if the government comes in and takes the risk out of the market by guaranteeing the loans and printing as many dollars as necessary to do it, they can keep interest rates extremely low. And no, they are not giving the banksters free money, they are just making good on the bad loans made to Joe Six-pack.  In essence Joe Six-pack borrowed your money in the bank and spent it on a house and now can’t pay it back. All the government did was pay off his non-performing loan and keep the bank from collapsing due to gross incompetence and mismanagement.

By controlling the interest rates in this new fashion, many silver foxes can’t retire because of the lack of generated interest income.  Instead of 30K interest on their nest egg of 300K, they get 5K.  Any way you look at it, the retiree is losing 25K a year.  I think this is why the investment in housing rentals has skyrocketed.  300K invested in the housing market should return more than 5K a year and 24K wouldn’t seem unreasonable.  The only trouble I see with this, the home is not easily convertible to cash if circumstances of old age dictate it (waiting for the market to come back might not be an option).  Notice however, if you give the house to your kids in a trust with the rent payable to you for life, future rest home expenses couldn’t claw back on the principle invested in the home that was given to the kids.

This present administration's new approach to economics and finance, has one problem, the economy is not reacting as anticipated.  Retirees have a lot less money to spend and students have a lot more (As long as they’re students).  There are few high paying jobs, the kids are moving back home and rentals go unrented. New cars are selling at a good clip, nothing down and you pay the sales tax of 10% before you drive out. Try and sell a used car; find someone with $2000 in the bank to purchase one.  People are trading in their old cars because they can’t afford to get them repaired.  Do the math, $1,800 for a new transmission or $800 “drive out” for a new car? Rumor has it you can get a free cell phone when you sign up for food stamps. In the 1930's they didn't have food stamps, they had soup kitchens--but I digress.

So, to tie up the loose ends, what happens next?  The government has taken away my independence by robbing me of the interest I anticipated in retirement.  Of course they will blame it on “Wall Street and the Banksters” who are just as abstract as the name “Uncle Sam”—these imaginary individuals offer us a focal point for our anger and are not people you can grab by the neck and choke some sense into.  In the coming weeks Congress has to face the budget bill, the national debt ceiling and a President with a super-sized ego that refuses any compromise. The President wants to tax the rich; you know, the people like you and me, who saved $100 a month for 40 years.  The neat thing if the government comes to a stop, they can’t spend any more of what they don’t have. And that sounds very weird. Plus, if you think about it, whatever they were spending, really wasn't theirs to spend anyways.

Obama kind of reminds me of the guy rowing a boat as fast as he can. Someone asked him where he was going and he said “I’m not sure, but we are making very good time!”

Monday, September 16, 2013

Will We Stop 1929 From Repeating

Here is a reprint of mine from a few years back, that is still relevant.

The Great Depression was a financial event. There was no war, earthquake or hurricane. The financial system ruptured and just about died. People stood in line to withdraw their saving from the banks. Thousands of banks collapsed. People, worldwide, lost their life savings. It was contended that the runs on the banks are what brought the system down. Upon closer examination, it’s easy to extrapolate the banks eventual demise from the poor economic conditions. The money borrowed could not be paid back by the unemployed. Many people were forced to live off of their savings (if they had any left).

In order to stem bank runs, the government came up with FDIC insurance. The Glass Segal act put this into effect January 1, 1934. This was after the horses escaped and the barn door was locked. If your bank met muster, you qualified for insurance and if it didn’t, you were toast. It didn’t cost the government a dime.

Let’s bracket that date January 1, 1934; either 100% of the population had collectively lost 80 percent of their wealth, or 80 percent of the population lost everything and 20 percent lost nothing. Almost everyone fell somewhere in-between the two categories. There was an obvious destruction of savings that was catastrophic in nature. This money wasn’t destroyed; it had been spent very foolishly over the previous 10 years on consumption. If you paid one million dollars for a dog or a wedding, you got your money’s worth, although I would argue that.

Fast forward to today. Bank deposits worldwide are insured. No one has lost a dime. The last part of the Kondratieff wave has to do with the contraction of the money supply and the repudiation of debt. The US Treasury is expanding the money supply while debtors have no problem walking away from their obligations. The most important thing to realize about the last part Kondratieff cycle is the end result. It destroys the obscenely rich and returns financial systems to a more normal functioning state. Bernanke is trying to preserve the status quo. The Fed is going to print us into prosperity.

Food prices have double this year. It is a little hard to see in some cases, the giant size potato chips bags, now fit in a lunch box. And then there is the specter of deflation. Autos and homes are just not selling.

Even if you have a job, your wages are not increasing, but your cost of living is increasing. So you dip into your savings, which seem to have lost a lot of buying power. Maybe that’s what deflation is all about, you spend until you are broke and then do without.  We can now drive to the poor house in style. It kind of sets your mind at ease, doesn't it?

Wednesday, September 04, 2013

An Inept President Trying Cover Up The Mess At Home

Turning on the news, everyone is talking about bombing Syria for gassing 1500 people.  No American lives were lost and we were not threatened.  If China wanted to gas some people, we wouldn’t budge a whisker.  The real question to ask here, is why we would mobilize the full resources of the United States to strike someone who can’t bother us if we leave them well alone. Their ties to other countries could envelope us in war on a larger scale. PBS news reported today that Russia supplied Syria the chemical weapons.  That should be enough reason to back off.

We have problems in the US that make Syria look like small potatoes.  The city of Detroit has been destroyed and no bombs were dropped.  Our infrastructure is falling apart, our educational system is pathetic, and more young people are killed each year in Chicago than were gassed in Syria.  Nobody called an emergency session of Congress to fix any of that.
The odd issue with Syria is the adrenalin rush of each reporter and Congressman interviewed on the issue.  The seriousness and the importance is stressed ad nausea; its all about votes and selling newspapers.    Our journalists are selling us down a river of no return with the war on Syria because its good copy.  We are going to try to kick some butt. We are going to pick on the smallest kid on the block (that makes us the bully on the block to the Arab world). My question, "Why take any action?"

No boots on the ground, but how do you get control of Weapons of Mass Destruction that have been produced?   Do you ask Al-Qaeda  to load them on a truck and drive them to the nearest United Nations station?  The level of responsibility lies with the provider of the weapons, not the end user.

The Obama administration is using Syria as a magician’s ruse of miss direction.  Focus your attention on Syria forget the real  economic mess at home.  The national debt, quantitative easing, inflation, unemployment and Obamacare are all coming to a head.     We need to get our country moving economically and that is not happening.  How does foreign policy fix the guy without a job?  The part time high school jobs at McDucks are all gone. And guess what, the people that got those jobs, complain that they can't live on those wages.  The high school kids probably wish that the "Whining Hamburger Flippers" would FOAD so they can earn enough to buy a new I-Phone for their senior year.

This mess in Syria could get out of hand very easily.  It takes a great man to back off and only a fool to kick off a war.   The news services are  all aglee  at selling us down a river of no return with the war on Syria--readership will triple. Here is a famous quote from Herman Goering one of Adolf Hitler’s minions from Nazi Germany.

Naturally, the common people don't want war; neither in Russia nor in England nor in America nor, for that matter, in Germany. That is understood. But, after all, it is the leaders of the country who determine the policy and it is always a simple matter to drag the people along, whether it is a democracy or a fascist dictatorship or a Parliament or a Communist dictatorship. ... [V]oice or no voice, the people can always be brought to the bidding of the leaders. That is easy. All you have to do is tell them they are being attacked and denounce the pacifists for lack of patriotism and exposing the country to danger. It works the same way in any country.

I'm not sure how this will turn out, but I think a few Congressmen may read this blog. Lets get our nation working in good form before we try to fix the rest of the world.  Our problems come first, the rest of the world can wait.