When citizens expect highertaxesand inflation they will shift from financial assets to tangible assets. One can enjoy jewelry, real estate, antique cars, new furniture, vacations, boats, art and collectibles without having to pay tax on their enjoyment and can feel wealthier as their tangible assets inflate in value tax free (at least tax deferred if they ever actually sell it).
Higher taxes on investment income will surely drive more money into tangible assets. Expectation of higher inflation will increase the diversion. Inflation and taxes are two sides of the same coin; one monetary and one fiscal. Both induce one to work and produce less. Inflation pressures quick consumption and the acquisition of tangible assets to avoid the loss of monetary value.
Financial assets are an investment in the future; tangible assets are an investment in today. Driving money out of investments for future growth into tangible assets hurts economic growth and retards long term thinking, a hallmark of both a civilized society and economic growth.
Not only is the enjoyment from tangible assets not taxed, it is not considered when we measure the equality of income distribution in America. This is why there was a growth in income inequalityafter the Reagan economic revolution, and this is also why it was not a bad thing.
As a result of lower taxes on financial assets and the lowering of inflation under Reagan vast amounts of money flowed out of the tangible assets where they were not counted and into financial assets where they were counted. The financial assets created economic growth and jobs which drove unemployment down from their stagflation highs under Carter.
If Obama and the Congress succeed in raising taxes and igniting inflation we will see a shift back to tangible assets at the expense of a growing economy. He will have succeeded in reducing income inequality and we will all be worse off for it.
There is a lot of “noise” being tossed out by the politicos and their preferred pundits about how the U.S. economy is on the mend. Thus it is important to try and separate fact from fiction about where things really stand.
FICTION: Though sporadic, the U.S. economy will continue to improve.
FACT: The U.S. is headed for a currency crisis.
While having learned to cover their butts by adding some modest modifiers to their generally rosy forecasts, the administration’s shills (Geithner, Bernanke, Summers, et al.) are unified in telling us that the worst is over.
The fact is that the U.S., nay, theworld, is headed for fiat currency crash. Let me push forward some evidence in support of that contention.
In this fiscal year, the U.S.governmentwill run its second trillion-dollar-plus deficit. Concerned about the political heat going into the November elections, the Democrats have been making noise about cleaning up their sloppy spending.
Trouble ahead. Another crash is virtually certain, thanks to Washington‘s $23.7 trillion explosion in debt, the Fed‘s support for the $670 trillion shadow banking system, and Wall Street lobbyists. Atlas reader Jim Q ……….
Maybe I’m wrong here, but banks are getting destroyed at their core businesses. Remember, a banklends out depositors money to borrowers at a profit.
They are however making loads from trading with money they did not have as capital a year ago.
I can’t be the only one who sees this.
Why do you suppose Geithner is now terrified to testify about the money-go-round of a year ago?
And Bernanke insists that it was all because of lax regulation………….
The market is up 50% but where are the corp earnings to justify this?
The market is up and the govt tells us the UR is at 10%.
You believe this? The UR is definitely higher than 10%. Check out Food Stamps requests.
You believe the govt inflation figure .22% month over month? Where do they shop? Makethe money now, but get out soon.
Submitted by cpowell on 05:42PM ET Friday, October 30, 2009. Section: Daily Dispatches
8:35p ET Friday, October 30, 2009
Dear Friend of GATA and Gold:
GATA board member Adrian Douglas, publisher of the Market Force Analysis letter (www.MarketForceAnalysis.com), was interviewed for 11 minutes today by Eric King of King World News. Douglas described how the creation of “imaginary” gold — paper claims to gold that doesn’t exist but is never called for delivery — has prevented the gold price from catching up with inflation in recent years. But, Douglas added, as the fraud increasingly is discovered and people who have purchased “imaginary” gold get suspicious and ask for delivery, the gold price will explode quite without any help from inflation or deflation. You can listen to the interview with Douglas at the King World News Internet site here:
The G-20 finance ministers meet in Scotland on November 6th and 7th, and they will all be bleating about the fall in the dollar. France started this week, and the others will follow. Their currencies are rising in value and they do not like it.
We expect other nations to follow, Mexico and Brazil in imposing a 2% tax on incoming funds and others will print their currencies and buy dollars to reduce the value of their currencies and at the same time buy US Treasuries that are decreasing in value. That will neutralize any benefit from the exercise. In addition, they will all scream for a strong dollar policy. By the time the meeting begins the dollar should be between 71 and 72 on the USDX, the dollar index. The weaker dollar means dollar debt will be cheaper to pay back. The big question is how long will it take for the dollar to fall to 40 to 55?
We are often asked how does today compare with the 1930s in tax revenue and government spending? In 1930-31 tax revenue fell almost 53%. It increased 250% in 1932 and tripled in 1938. Yet, growth during the 30s went nowhere. In spite of an increase of 45% in government spending during those years by 1940 GDP had not returned to the levels of 1930. In 1939 unemployment was still 17.2% and in 1940, 16.4%. This is the same monetary policy being used today that was used during the 1930s. Keynesian monetization that does not work. The only reason the depression did not continue is that FDR arranged another war, otherwise the depression could have continued indefinitely. The debt bubble of the 1920s only lasted seven years. Our present debt bubble actually began in 1978, was purged in 1982-83 and began again in 1986. It was killed in 1989 and resurrected in 1994. The bubble of 2000-2001 was replaced by our current real estate bubble in 2003, which is now in the process of deflating. The privately owned Federal Reserve engineered all this.
One of the advantages of travel is that it gives you time away from the tyranny of the computer to think. (Am I the only one who feels like I am drinking information through a fire hose?) But getting the information is important too, as it gives you something to think about. And I have been thinking a lot lately about deflation.
I get asked at almost every venue where I stop, whether I think we will see inflation, or deflation. And I answer, “Yes.” And I am not trying to be funny. I think the primary forces in the developed world now are deflationary. When asked if I don’t think that the Fed monetizing debt of all kinds won’t eventually be inflationary, I answer, “We better hope so!”
Let’s quickly summarize some of the ideas from the last few months of this letter. Just as water is made up of two parts hydrogen to one part oxygen, so deflation has its own elemental structure.
The first element is Rising Unemployment. There has never been a sustained inflationary period without wage inflation. Wages are basically flat and falling. With 9.8% unemployment, 7% underemployed (temporary), and another 3-4% off the radar screen because they are so discouraged they are not even looking for jobs, and thus are not counted as unemployed (who made up these rules?), it is hard to see how wage inflation is in our near future.
Think about this. Only a few years ago, less than 1 in 16 Americans was unemployed or underemployed. Today it is 1 in 5. That is a staggering, overwhelming statistic. Mind-numbing.
The US Federal Reserve‘s policy of printing money to buy Treasury debt threatens to set off a serious decline of the dollar and compel China to redesign its foreign reserve policy, according to a top member of the Communist hierarchy.
Cheng Siwei, former vice-chairman of the Standing Committee and now head of China’s green energy drive, said Beijing was dismayed by the Fed’s recourse to “credit easing”.
“We hope there will be a change in monetary policy as soon as they have positive growth again,” he said at the Ambrosetti Workshop, a policy gathering on Lake Como.
“If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies,” he said.
China’s reserves are more than – $2 trillion, the world’s largest.
By Ambrose Evans-Pritchard
The Telegraph, London
Sunday, September 6, 2009
CERNOBBIO, Italy -- The US Federal Reserve's policy of printing money to buy Treasury debt threatens to set off a serious decline of the dollar and compel China to redesign its foreign reserve policy, according to a top member of the Communist hierarchy.
Cheng Siwei, former vice-chairman of the Standing Committee and now head of China's green energy drive, said Beijing was dismayed by the Fed's recourse to "credit easing."
"We hope there will be a change in monetary policy as soon as they have positive growth again," he said at the Ambrosetti Workshop, a policy gathering onLake Como. "If they keep printing money to buy bonds, it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies," he said.
China's reserves are more than $2 trillion, the world's largest.
Word is that there is a pretty good chance that TPTB will be able to keep the wheels on through November but that the underlying ‘structural defects’ that lead to the ‘structural dysfunctions’ of 2007/2008 timeframe have become more worrisome.
Case in point. Did you know that a ‘very high percentage’ of the home sales over the past year have been done with the buyer ‘using’ thetax credit as a down payment.
Flippers are a tenacious lot.
Are you aware of the ARM resets uptick in 2010? Cash for Crack Houses … don’t laugh … it juiced car sales just in time but lets see the crater in September-December. And if the government demos the house, it eliminates the back log. The Toll Bros will be rollin’ in the dough.
Of course, Krugman and various other neo-Keynesian wonks see the end game … their calls for a ‘second, bigger stimulus’ will become more frenetic and increasingly loud. When you have but one tool in the tool box … you need something to blame when it fails.
Did you know that under classical Keynesian theory, the economic condition known as ‘stagflation‘ (simultaneous high unemployment and high inflation is impossible, not improbable but impossible). You should read some of the mental gyrations that classical Keynesians go through to explain that one … well they can’t. So neo-Keynesian theory was born.
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