Tuesday, November 20, 2012

Taxation Discourages Savings

    No where are laws and legislation a stronger form of social engineering then when it involves the economy and taxation. Tax incentives and the fuzzy math that surrounds our complicated tax system often clouds the issues. Its often not how much money is spent but rather how the money is spent that determines the value of an investment. One obvious place this plays out is in savings, by taxing interest of a simple savings account the government makes the act a far less compelling investment.

    America’s lack of savings is repeatedly pointed to as a problem, yet laws, that tax  interest  make small savings accounts a non-starter when coupled with the factors of  inflation and bank fees. For a long time  I’ve promoted a program that makes the first Two Hundred Dollars of interest from a savings account non-taxable as a way to encourage savings.  At a four percent interest rate it would allow for the interest on a five thousand dollar savings account not to be taxed, currently rates are paying a much lower rate.

    This change would create a more positive savings environment for those most likely to need a safety net from job layoffs, auto repairs, illness, and other misfortunes.  Cost to the Federal Government if the holder of such an account were in the twenty percent tax bracket would be Forty Dollars per year.  This is far less costly than the assistance programs we must put in effect to help when bad things happen to those with no buffer or savings and their financial house then collapses.

    Considering all the complex tax laws and legislation Congress enacts this would be one of the simplest to write and enact.  This is an easy to implement alternative to complex schemes like former President Bush’s Social Security Reform and ownership society plans.  That plan and many others would create huge administrative problems further adding to Governments growth and intrusion into our lives. Something that encourages middle and lower income Americans to save should be built into and tax reform legislation put forth.

Footnote;  The special breaks and deduction that make up Americas tax code are massively confusing. Most people are totally ignorant of tax law and  have no idea what they are talking about when they express an opinion on what policy changes should be made,or how they will effect the economy. More on the subject of taxation below,

Sunday, November 18, 2012

What Is Something Worth?

The value of "something" is not an issue to take lightly. Value is not a constant and can be derived from several factors such as supply and demand or utility value, things can spoil or become obsolete making where you invest very important. Value is not as constant as many people think or always destined to rise. I have discovered that when you start buying things at ten cents on the dollar your money begins to go a long way. This is a lesson many people may soon learn, or maybe not.

To buy things at deep discount it helps to have money or the equivalent, it also helps to be able to move quickly. Years ago a business venture took me into an area where I had the opportunity to attend many auto auctions, and often I actually made the bids. I soon learned getting the best price is an art. It is a combination of things, like timing, you soon learned when to step in or how to slow the bidding down thus cooling the animal spirits. Often simply not bidding against yourself was a good start.

When it comes to value the market place is the final judge and shows little favor or mercy. One of the favorite stories garnered from this experience came from when a seller complained to the auctioneer  about the low bids he was receiving on a car he was selling. When the high bid came in at one thousand dollars the surprised seller said, "but I paid four thousand for that car just last week". The auctioneer's response said it all , "well sir, it is a thousand dollar car today"!

This "theory of value" is something that also extends to stocks. These are promises that were at one time no more then a piece of paper known as a certificate that signified part ownership in a company, now it is just a line on a financial statement. How many investors have seen that line vanish? "Value" can change in a heart beat, and we live in a time that information travels at the speed of light. May I mention just two of the great teachers of what I call financial reality, Bernie Madoff and Enron.

When it comes to real estate low interest rates and liquidity have a huge impact on value effecting both the value by making it easier to purchase thus driving up prices, and at the same time allowing more building to take place and increasing the supply. When we exceed demand rents fall and people stop buying it as an "investment". Prices must rise more then the natural depreciation from the wear and tear of age or the main driver for owning real estate vanishes. Oversupply is the bane of real estate and crushes the value of this hard and expensive to maintain commodity.

Call me a skeptic but I contend that the illusion of value should not be held to close. The value of a building can be altered when a tenant goes bankrupt. The value of a currency drops when everyone starts to sell it and even the value of gold can drastically change if a government confiscates it and makes it illegal to buy, sell or even own can. What something is worth can be difficult to determine. And most of all tell me the value of a promise on paper or implied, remember if you own gold that is represented by a certificate, you own a piece of paper.

Footnote;  Your comments are welcome and encouraged. If you have time check out the archives for other post that may be of interest to you. The two post below delve deeper into how the value of money can quickly change,


Saturday, November 17, 2012

Under Reported Weather Events

Venice Italy Knee Deep In On Water
In our fast moving world some stories that should be noted often are overlooked and ignored. We all saw and heard about hurricane Sandy, in addition to flooding the subway system of New York and halting financial trading Sandy may of even tilted the Presidential election. If Sandy had indeed made a difference in the election outcome one might say Sandy has had the impact of also altering our future. While we are becoming more use to these uncommon "weather occurrences", it is possible that we should be viewing them as a warning of worse yet to come.

Most of the world took little notice that on July 21 Beijing suffered its largest rainfall in 60 years. The storm caused widespread destruction and tragedy throughout China's capital, leaving 37 people dead. The rainstorm that created a record breaking 16 inches of rain and has caused $1.6 billion in flood damage. The storm started on Saturday afternoon and continued late into the night flooding everything in its path including major roads and underpasses while also crushing and collapsing homes.

I recently saw a picture of Venice Italy where the tourist in the famous Saint Marx Square found more then a little water. Heavy rain and a storm surge had left Venice severely flooded, it was the lagoon city's sixth worst flood on record. Residents and tourists were left to wade through the city on Sunday, with 70 percent of the city flooded, including pathways along Venice's fabled canals. By late afternoon the level had receded slightly to 4.6 feet above normal. The storm has also caused chaos across northern Italy, including Tuscany. Heavy rainfall and floods in Toscana caused hundreds of residents to flee their homes, in one area 9 inches of rainfall was recorded in just four hours.

Are stories like these that a busy world often overlooks or discounts the "canary in the coal mine"? A great number of hot and cold record breaking temperatures have been shattered across the world over the last few years. Droughts and other harsh climate changes that negatively effects crop yields hold the potential to turn our lives upside-down.This is not a new concern for me, for years I have preached quality over quantity and questioned the sustainability of the course mankind has chosen to pursue. It will take years or even decades to make a difference after we alter our lifestyles. Sadly efforts and pain to reset our course will not take place till the pain becomes massive.

To those interested the two post below also deal with the issue of sustainability;

Thursday, November 15, 2012

The Looming Financial Cliff

Are we headed for a double dip, and will we go over the looming financial cliff? Many economist question whether we ever really exited the grip of the "great recession". We should note that the Great Depression had more then one stage. I find myself wondering if the recent higher consumer confidence is merely based on an acceptance of a economic reality called "the new normal" and the result of a positive spin manufactured by a pro Obama media during the election?

To my surprise I recently discovered that many people are so poorly informed that they do not even know about the fast approaching fiscal cliff. This term refers to the convergence of two events on December 31, 2012 — the expiration of almost every tax cut enacted since 2001, and a scheduled reduction in government spending. If the experts are to be believed, when taken together these two events threaten to bring the American economy to a schreaching halt.

Middle and higher income earners will most likely receive a tax increase, but reality is that all, including the poor are looking at less disposable income going forward. All the government's spending does have a price. To many the answer is  putting on another patch attached to another promise, hope abounds we can avoid the pain tomorrow and kick the can further down the road into the future. 

Just yesterday I heard several financial television shows putting out the idea that the "fiscal cliff" may be more like a "bunny slope" and not have the impact that many of us fear. One fella pointed out that the financial cliff is not etched on the earths landscape but made by man. This optimist went on to say that Washington was ready to make the hard choices and do the right thing.

Is this really our economic doomsday? Even the most diabolical demons could not have created a more daunting economic ditch or troubling monetary trough. If the most optimistic forecasters wish to call what faces the American economy a bunny slope they should at least be honest enough to concede that it is ugly. Their so called "bunny slope" may go on, and on, and on forever, and only end when it reaches the depths of hell. 

If you have time please go on to read my post about government debt;

Post Office Blues, a sinking ship

The Post Office also known as the USPS has just announced that last year it lost a staggering 15.9 billion dollars. If  Washington cannot, or will not deal with fixing this broken arm of government how can we take confidence that they will deal with the far larger problems facing America? The Postal Service employs some 530,000 workers, if this is the governments answer on how to keep Americans working we have bigger problems then most voters can imagine.

I recently posted on this subject, please view;

Saturday, November 10, 2012

Natural Gas Prices Have Been A Tailwind

We should stop every now and then and count our blessings, America has been lucky during the great recession that new methods of locating and taping into deposits of natural gas have increased the availability and lowered its cost. It should be pointed out that natural gas prices have been a huge tailwind to the economy for several years. This is in effect the equivalent of a huge tax cut.

While economist often focus on the price of gasoline and oil, natural gas is often overlooked. The drop in price has helped lower the cost of generating electricity as well as the cost of producing many goods, natural gas is a huge component in many plastic and polymer materials. Natural gas has been trading for about $3 per 1,000 cubic feet across the country through much of this year. In Asia, it costs closer to $12.

This means that consumers have had more money to spend on retail goods because it has not cost an arm and a leg to heat their homes. It also means a bunch of good paying new jobs in exploration and development in the coming years. America would do well not to squander this good fortune and make the best use of this resource. This type of luck does not often occur.

I would be hiring if.......

I recently heard a CEO that was being interviewed say he would be putting people on his payroll if he had some clarity as to where the economy was heading. He indicated he was looking for a positive sign before committing to expanding, Duh!  The gal doing the interview acted as if she had discovered the answer to all our economic problems. This is another way of saying "confidence" is the problem, but its not.

The reality is that much of what we see on the economic landscape is a mirage, all of us who own businesses would be adding workers if our phone was ringing off the hook and a demand existed for our products, but that situation simply does not exist. Like everyone else in my industry I'm sitting on empty office space and buildings, cutting cost, and waiting for demand to increase. Constructing more new buildings while paying taxes, insurance, and maintaining a huge supply of empty space makes no sense except to those in government that are not using their own money.

If things were so good, or getting better, the Federal Reserve would not have recently been forced to add new props to the economy through more monetary easing. During a interview last week when asked about the looming "fiscal cliff" former Congressman Ron Paul said we had already gone over it. If he is correct the reason we are not feeling a great deal of pain is that we have not yet hit bottom. The numbers we have to deal with are incredible, they do not add up, they do not work. Much like Greece and Spain who also kicked the can down the road, America can not avoid reality for ever.

It appears many people have been caught up in the hype that things are getting better, but that does not make it so. What I am seeing is "fluff", much like what Texans years ago referred to "all hat and no cattle", the people I'm coming in contact with lately lack substance. Like a Texan that is all talk and has neither a ranch or any money most new business start-ups lack funding and have a weak business plan, this bodes poorly for the hiring picture going forward.

Footnote; A recent post on April 21, 2013 goes into the issue of inequality and how the burden of work must be spread out over a larger part of the population, if you have time the link is below,


Thursday, November 1, 2012

Election Disgust

It is disgusting that this country has such a pathetic and stupid method to select a president. It is now clear that only a few states and counties will decide who will hold the oval office. Recent polling over the past few days shows Mitt Romney enjoying a slight advantage nationwide and Barack Obama holding the edge in the electoral college. This election has been called "too close to call" by many, in truth it is "impossible to call". The final results will depend on what happens on the ground. The latest polls indicate we risk Romney getting a majority of the popular vote but Obama being reelected based on the electoral college.

In 1992, millionaire Ross Perot damaged the incumbent George H W Bush and helped to propel Bill Clinton to the White House with only 43% of the popular vote. And Ralph Nader is still vilified by some Democrats for taking crucial votes away from Al Gore in Florida. It is most likely that the few minor party candidates that are running will not effect this election, but they could, as even a few votes could skew the results and tilt the election. If  a gap exists between the enthusiasm of either candidate's supporters it will determine who is the next President. The so-called "swing states" will make our choice for us.

As we look at a swing state, we must ask what influences the vote in that particular state. Factors like their unemployment rate and the demographics, Obama benefits if a state has an unemployment rate below the national average or a large number of minorities reside in the state. One thing is clear, this system needs to be changed, it makes a mockery of the idea that every vote counts. If you look at the areas getting attention, or where the money is being spent, you quickly realize some votes count a lot more than others.