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often not covered by the mainstream media, articles of interest
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abroad, plus much more. Finally, our very popular readers write
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have - that no one else wants to answer truthfully, except us!
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Our February 20,
2010 Newsletter
Edition
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EDITORIAL: A
FEW THOUGHTS AND IDEAS TO PONDER
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Please allow me to begin by asking you a philosophical question: Does
Government exist to fulfill the will and welfare of it's citizenry, or
does the citizenry exist merely to fulfill, maintain and service the
Government? While some may laugh this off as being a somewhat
rhetorical question, we do think current events and trends could
actually make such a question the true quintessential argument going
forward. Naturally, all depending upon how you answer the above
question, will determine if you should be concerned, or not.
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In terms of the historical American mind frame of what government is or
should be, if we look back at the US Declaration of Independence,
Thomas Jefferson wrote (as part of the actual text of that document)
that: Governments are instituted among Men, deriving their just powers
from the consent of the governed (end of quote). The final part,
consent of the governed, it the most interesting and pertinent part, in
our opinion. Of course the term consent can have different
meanings for some people. In other words, we would certainly argue or
ask: simply because a voter elected a particular politician, does this
mean by default that the very same voter automatically consents to all
or everything that politician does going forward (theoretically at
least for, or in the name of, the voter)? We think not, but it
could be the case that many politicians will hide behind such a logic,
when defending their actions.
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Along the lines of the this very last idea or theme, surely it would be
preposterous to micromanage the purchase of a box of paper clips for a
government office. On the other hand, the concept of increasing
the Government debt even further, in regards to Trillions upon
Trillions of even more debt, should be put forth in the form of a
general referendum, voted upon by the citizenry directly. After
all, the cost for a case of paper clips will not make a material
difference in the lives of the populace, but an extra US$50,000 per
household as a share of the national debt (and the taxes to pay for it)
surely will.
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You are going to read a number of news items we have highlighted for
you below, but if we have to consolidate or highlight a few key points
specifically, one would certainly be a comment we have given you
before. Which is, anytime a Central Bank using a fiat currency
and a fractional reserve system is confronted with a choice of either
Deflation or Inflation, they will choose inflation every time.
Why? Because deflation benefits and empowers those with CASH and
SAVINGS, where as inflation benefits those with DEBT and LEVERAGE (even
though it also destroys the value of salaried income as well).
However, such a plan only works for the benefit of the government when
the debt is denominated in the nation's own currency, AND held almost
entirely by the local populace or citizenry. When such debt is
denominated in another currency and or held by foreigners, that is when
you get into trouble. Of course, you will notice that we
specified benefit to the government, because as the national debt goes
away (or is paid off) with funny money, the citizenry do indeed get
their principal back for the government bonds they hold, but it is as
worthless as monopoly script. And yet again, this brings us back
to the philosophical question: is it the case that government should
abuse, defraud or damage the citizenry (economically or financially
speaking) in order to keep the government solvent, OR is it the
responsibility of the government to guarantee that the citizenry is
always made whole regardless, and as a priority (because the citizen is
sovereign and the government the servant of the citizenry)?
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To be fair, there are many economic pundits who opine that Deflation,
and not inflation, will be the persistent near-term problem.
However, while it is true that real estate prices have come down (due
to defaults, an estimated 2 years worth of unsold housing inventory,
and greatly reduced or stricter credit lines offered by banks),
commodities priced in US Dollars look poised for a run up (to balance
off, or account for a devalued US Dollar). A tip off of course is
to watch such prices for wheat, sugar, coffee, oil, copper,
etcetera. In any event, the constant issuance of new debt and the
proverbial running of the printing presses are inflationary, and NOT
deflationary. Many of the pundits in Washington want you to
believe that there is sufficient deflation at the moment (and or lack
of inflation) to justify these kinds of policies and activities.
But, we must remember that no nation on the planet has ever been able
to inflate their way out of trouble. Throughout history they have
tried, with the same result each and every time.
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IN THE NEWS:
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THE $555,000
STUDENT-LOAN BURDEN
By Mary Pilon – February 13, 2010
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When Michelle Bisutti, a 41-year-old family practitioner in Columbus,
Ohio, finished medical school in 2003, her student-loan debt amounted
to roughly $250,000. Since then, it has ballooned to $555,000. It
is the result of her deferring loan payments while she completed her
residency, default charges and relentlessly compounding interest rates.
Among the charges: a single $53,870 fee for when her loan was turned
over to a collection agency.
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To be sure, Dr. Bisutti's case is extreme, and lenders say student-loan
terms are clear and that they try to work with borrowers who get in
trouble. But as tuitions rise, many people are borrowing heavily
to pay their bills. Some no doubt view it as "good debt," because an
education can lead to a higher salary. But in practice, student loans
are one of the most toxic debts, requiring extreme consumer caution
and, as Dr. Bisutti learned, responsibility.
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Unlike other kinds of debt, student loans can be particularly hard to
wriggle out of. Homeowners who can't make their mortgage payments can
hand over the keys to their house to their lender. Credit-card and even
gambling debts can be discharged in bankruptcy. But ditching a student
loan is virtually impossible, especially once a collection agency gets
involved. Although lenders may trim payments, getting fees or
principals waived seldom happens. Yet many former students are
trying. There is an estimated $730 billion in outstanding federal and
private student-loan debt, says Mark Kantrowitz of FinAid.org, a Web
site that tracks financial-aid issues—and only 40% of that debt is
actively being repaid. The rest is in default, or in deferment, which
means that payments and interest are halted, or in forbearance, which
means payments are halted while interest accrues.
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http://online.wsj.com/
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EDITORS NOTES:
According to the above article, Sixty Percent of student loans in the
US are in default, or arrears, and there is an incredible US$700
Billion Dollars of such loans out there (ironically the entire pentagon
budget for one year). With so much debt hanging over the heads of
these young people before they even get started with their careers or
professions, we cannot imagine how it would be possible for this next
generation to ever get ahead financially.
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HUGE DEFICITS MAY
ALTER U.S. POLITICS AND GLOBAL POWER
By David E. Sanger – February 1, 2010
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In a federal budget filled with mind-boggling statistics, two numbers
stand out as particularly stunning, for the way they may change
American politics and American power. The first is the projected
deficit in the coming year, nearly 11 percent of the country’s entire
economic output. That is not unprecedented: During the Civil War, World
War I and World War II, the United States ran soaring deficits, but
usually with the expectation that they would come back down once peace
was restored and war spending abated.
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But the second number, buried deeper in the budget’s projections, is
the one that really commands attention: By President Obama’s own
optimistic projections, American deficits will not return to what are
widely considered sustainable levels over the next 10 years. In fact,
in 2019 and 2020 — years after Mr. Obama has left the political scene,
even if he serves two terms — they start rising again sharply, to more
than 5 percent of gross domestic product. His budget draws a picture of
a nation that like many American homeowners simply cannot get above
water.
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http://www.nytimes.com/2010/02/02/us/politics/02deficit.html
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EDITORS NOTES:
One problem that afflicted the Roman Empire, The British Empire and a
host of others, was the fact that world-wide military activities became
so costly and such a burden, that these expenses started sapping life
out of the domestic economy at home. In other words, how much
military spending, in terms of a nation's GDP, could any country really
afford? If the economic situation at home is on the wane, then
one of two things will happen. Either military spending must be
cut, or domestic social welfare programs must be cut, because the
country cannot afford both. At the moment, US government pension
(Social Security) and other kinds of welfare initiatives (Medicare and
Medicaid) appear to be on unsound financial footing, while at the same
time, the US Defense Department reports a whopping annual budget of US$
700 Billion Dollars for 2010. And of course it should be noted
that US Government spending on Medicare (and just Medicare alone)
surpassed US$500 Billion Dollars in 2009. And so the question
is: Will Americans be willing to forgo a social security pension
check or government medical insurance in order to continue funding
wars, or so-called police actions, in other countries? This may
sound like a ridiculous question, but I can assure you, it is not (or
will not be in the future).
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An additional relevant news item is a recent article from the Wall
Street Journal titled: Deficit
Balloons Into National-Security Threat (By Gerald F. Seib – February 2, 2010).
The author of the article, Mr. Seib, claims that: The federal budget
deficit has long since graduated from nuisance to headache to pressing
national concern. Now, however, it has become so large and persistent
that it is time to start thinking of it as something else entirely: a
national-security threat. Mr. Seib goes on to say that: These
numbers are often discussed as an economic and domestic problem. But
it's time to start thinking of the ramifications for America's ability
to continue playing its traditional global role. The U.S.
government this year will borrow one of every three dollars it spends,
with many of those funds coming from foreign countries (end of quote).
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These numbers are incredible, and no nation can go on borrowing THIRTY
PERCENT of the annual national budget. Imagine if you will, that
you borrowed 30 percent of your annual salary each and every year to
pay for your daily living expenses. Stated another way, imagine if you
constantly were living beyond your means, to the tune of 130 percent of
your annual income. How long could you do this and what kind of
financial havoc would this bring upon yourself and your family?
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GEITHNER ALMOST GETS
IT ABOUT DEFICIT
By Jack Markowitz – February 4, 2010
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Well, it's nice to find something to agree on with Treasury Secretary
Timothy F. Geithner. He says our federal budget deficits are
unsustainable. The government can't keep doing what it's doing.
And who wouldn't second that motion? But Geithner and good sense
part company in his follow-up.
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He claims the national money machine dare not turn off yet. It's got to
keep cranking out $1 trillion a year more than comes into Uncle Sam's
pockets via tax, fee, fine and tariff. This is so that recovery from
the recession can speed up and scoop up our millions of unemployed,
10.1 percent of the labor force. Our man at Treasury may be a bit
weak on psychology, though. Because deficits crazier than ever before
are scary, Mr. Secretary. They might even be paralyzing. Uncharted
waters here and rocks ahead.
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Will people in business be tempted to expand and hire while the
government is maxing out the credit card of the universe? And printing
money so furiously as to practically invite a future dollar
collapse? Yes, a sprinkle of tax breaks might encourage small
business to hire -- a $5,000 tax credit per new employee, for example.
But big banks, oil companies, manufacturers with foreign operations and
$250,000-a-year couples will have higher taxes to pay. That's a sure
chill on business. If you're a consumer, especially the thrifty
sort, you've got to worry about future inflation, maybe hyperinflation.
Huge increases in money supply to cover unrestrained government
spending in the long run cheapen the currency. Will a wise consumer run
out to buy now and beat the price hikes?
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http://www.pittsburghlive.com/x/pittsburghtrib/business/s_665496.html
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EDITORS NOTES:
According to the author of the above article, the US Treasury Secretary
seemingly admits that the game-plan is to allow inflation to run wild
in order to assuage the job or unemployment situation. But what
good is a job, or salaried income, if the salary you earn cannot cover
your daily living expenses (because of inflation)? And so here is the
conundrum: How indeed does the average citizen protect him or herself
from lunatic government financial or economic policy? What is the
point of holding deposits (or monetary instruments, such as bonds)
denominated in US Dollars, when it would seem that the US Treasury has
a devaluation (inflation) plan in effect as official policy?
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OFFSHORE MEANS NEVER
HAVING TO PAY PAYROLL TAXES
By David Isenberg – January 27, 2010
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Many of the top 29 U.S. publicly-traded defense contractors--those with
$1 billion or more in DOD contracts in fiscal year 2008--have created
offshore subsidiaries to facilitate global operations, as in avoiding
paying various taxes. Between fiscal years 2003 and 2008, they
increased their use of these subsidiaries by 26 percent, maintaining at
least 1,194 in 2008, according to a report released yesterday by the
U.S. Government Accountability Office. 97 percent of the
subsidiaries generally supported global commercial and foreign
government clients, while the remaining 3 percent supported DOD
contracts performed overseas.
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http://www.huffingtonpost.com/
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EDITORS NOTES:
As many of these democratic social welfare states find themselves
pressed for cash, they will continue to find ways to increase tax
revenues, one way or another. And of course, the more the
government pressures both citizens and companies to foot the bill, even
more so will such tax-payers push back, and try to find ways to legally
avoid it, if they can.
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In terms of US initiatives, one example we have already given was the
creative recalculation of the tax tables for 2010, so that even though
the actual tax rates were not increased, the tax brackets were changed,
pushing more and more people into higher tax bracket rates as a
result. And of course as it relates directly to the news article
above, the politicians in Washington closed this tax loophole via the
Heroes Earnings Assistance and Relief Tax Act, passed in 2008.
Which is to explain that Americans working abroad, and the company that
hires them, regardless if for a foreign or domestic US subsidiary, now
have to cough up the proverbial pound of flesh in terms of Social
Security and Medicare deductions (or contributions as they would prefer
to call it).
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The next question you probably have is: how does this effect me?
Well, the result of this new legislation is that (while meant to go
after companies such as Kellogg, Brown and Root, which incorporated in
the Cayman Islands) many foreign companies no longer wish to hire US
citizens at all. Why? Simply because it becomes that much
more expensive, in terms of employee costs, to hire an American in
comparison to say a Canadian or German. In other words, a company
in South Korea, or Singapore, or where-ever, would have to pay roughly
an additional 12 percent of the employee's salary into the social
security system of a foreign nation (meaning the United States) even
though they may not have any US presence or operations, AND simply
because they happen to have an employee that is a US citizen on the
payroll. This is yet another reason why a second or other
citizenship could give you a benefit when looking for employment abroad.
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OBAMA TO TARGET
OVERSEAS TAX BREAKS
By Krishna Guha – February 2, 2010
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The Obama administration yesterday unveiled plans for a fresh assault
on international tax avoidance that officials say will help reduce the
deficit from a record $1,556bn this year. As part of the plan,
US-based multinational companies that transfer brands and patents to
foreign affiliates that pay little tax overseas would pay a surcharge
on the excess returns on those assets. The administration also proposes
denying companies that borrow money to invest overseas the ability to
take immediate tax deductions on the interest payments.
dministration officials say the crackdown on international tax
avoidance by companies and individuals would raise $122bn over the next
10 years.
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http://www.ft.com/cms/s/0/e28db450-0f9a-11df-b10f-00144feabdc0.html
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EDITORS NOTES:
This should come as no surprise, as we suggested previously that when
the government starts digging around for cash, one of the groups they
will attack are expatriates and related kinds of juridical entities
(and of course this is one of the areas that is easy to target,
politically speaking). However, with a 2010 government budget
deficit figure approaching somewhere between US$1.5 to 2 Trillion
Dollars annually (all depending upon which estimates you may prefer to
use), this above initiative supposedly will only cough up a measly
US$12 Billion per year (122 Billion over ten years, divided by 10, to
get the per year amount). A mere drop in the proverbial
bucket. In addition, with a Pentagon budget that reportedly has
been increased by roughly US$50 Billion Dollars for 2010 alone, where
are the savings? Supposedly they will dig up 12 Billion more in
revenue, but then spend 50 Billion more? The politicians in
Washington must be using that new math we have heard so much about.
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On the other side of the pond, these same issues can be found currently
in British politics as well, as a renewed vigor is in place to chase
what are deemed to be tax avoidance programs. On this very topic, Ms. Janet Daley has written an
article appearing in the February 2,
2010 edition of the Telegraph Newspaper (Titled: Tax Rises Don't Help the Economy).
Ms. Daley goes on to opine that: The new 50 percent rate on
higher earnings has had the absolutely predictable effect – even before
it is introduced – that any student of the Laffer curve would have
foretold. It has caused all those remotely likely to fall within its
reach to take avoidance measures – which people within this earning
bracket find it very easy to do. And stopping them from doing this is
not, as Gordon Brown often suggests, simply a question of closing
loopholes in the tax system. To prevent high earners from leaving the
country (and taking their economy-stimulating activity with them) would
require a totalitarian blockade of British exit ports, not just a
bureaucratic tinkering with the tax rules. The economist Arthur
Laffer was right – as everybody who has studied these matters knows: in
a free society, raising tax levels beyond a certain point acts as a
disincentive to higher earning and wealth creation as well as
increasing tax avoidance, thus actually reducing government tax
receipts. The magic number in Britain seems to be 50 percent: when
people see half of their income being confiscated, they rebel (or they
lose heart altogether) and decide that enough is enough (end of quote).
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It all sounds so simple to tax the rich, and of course this idea does
appeal to a large number of people, or better said, those that consider
themselves to be the non-rich. The problem is though: Who
are the rich? Is it someone that earns more than US$35,000 per
year? Is is someone that earns US$100,000 per year? Who is
it exactly, and what does it take these days to be considered
rich? Some recent statistics indicate that the average median
household income in the US is US$50,000. If that is the case,
then we can certainly rule out someone with this income level as being
rich – no? In the least, the tax rate tables should be inflation
adjusted (with the real numbers and not the bogus numbers the
government makes up), for it were, one might be very surprised to
realize just how much it does take to simply live a middle-class
lifestyle, never mind the rich and famous (and how a combined family
income of 5 o 6 digits is not all you think it is, in terms of
purchasing power, ability to afford a university education for
children, etc.).
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In any event, we do think Ms. Daley might be demonstrating clairvoyance
when she talks about the idea of a totalitarian blockade of exit
points. Stated another way, she is suggesting that the only way
to stop citizens from leaving with their money, is to indeed actually
physically prohibit them from removing cash and assets (otherwise known
as exchange controls and related forms of financial
incarceration). Of course, Ms. Daley was trying to be cynical and
state the obvious ridiculousness of such an idea in a supposed free and
democratic country. However, one never knows how far politicians may
eventually take things, all depending upon the level of
desperation. In other words, never say never, and be
vigilant. We would be inclined to argue that the so-called rich
or wealthy have already gotten their money out, so it is the
middle-class they want to corral.
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RASH OF RETIREMENTS
PUSHES SOCIAL SECURITY TO BRINK
By Richard Wolf – February 7, 2010
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Social Security's annual surplus nearly evaporated in 2009 for the
first time in 25 years as the recession led hundreds of thousands of
workers to retire or claim disability. The impact of the
recession is likely to hit the giant retirement system even harder this
year and next. The Congressional Budget Office had projected it would
operate in the red in 2010 and 2011, but a deeper economic slump could
make those losses larger than anticipated.
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Things are a little bit worse than had been expected, says Stephen
Goss, chief actuary for the Social Security Administration.
Clearly, we're going to be negative for a year or two. Since
1984, Social Security has raked in more in payroll taxes than it has
paid in benefits, accumulating a $2.5 trillion trust fund. But because
the government uses the trust fund to pay for other programs, tax
increases, spending cuts or new borrowing will be required to make up
the difference between taxes collected and benefits owed. Experts
say the trend points to a more basic problem for Social Security:
looming retirements by Baby Boomers will create annual losses beginning
in 2016 or 2017.
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http://www.usatoday.com/
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EDITORS NOTES:
Mr. Stephen Gross, the head actuary over at Social Security, says that:
Things are a little bit worse than had been expected (end of
quote). Do you really think so Stephen? If the politicians
had NOT touched the so-called surplus, then at least there might be
some economic breathing space, but of course we know different.
And the US$64,000 Dollar question is: If these so-called learned
gentlemen (and ladies) cannot manage the Social Security program as it
already stands, using some sound financial judgment and fiscal
restraint, then how the heck can they believe people would be willing
to turn over their private 401K or annuities to them? This is
after all the latest nonsense to be proposed, and it is akin to putting
the pyromaniac in charge of the Fire Department. But, you should
not be shocked or surprised as we suggested this idea has been on the
table for some time (they just forgot to inform you previously that
this is what they were thinking).
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PROPERTY TAX MAY GO
UP DESPITE DECLINING HOME VALUES
By Linda Stein – February 10, 2010
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Although property values have declined by 20 percent in Yavapai County
in the last couple years, residents may get a nasty surprise when their
tax bills arrive. That's because even if their property falls in value,
taxes may go up depending on the needs of various tax authorities like
the county, towns or school districts. Residents have 60 days to
appeal the valuations that were determined by the county Assessor's
Office and mailed last week. One property owner appealed
the full cash value of his property only to have a hearing officer
decide the property was undervalued rather than overvalued, Pearsall
said. The officer then increased the valuation, which is based on
estimated market value, by $100,000.
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http://www.dcourier.com
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EDITORS NOTES:
None of this should be surprising, and this is not an issue unique to
just Arizona alone. The residents of West Clermont (Cincinnati,
Ohio) are going to wake up to an additional $73.50 a year per $100,000
of home value in property taxes beginning on January 1, 2011.
Virginia and Colorado now want to tax on-line purchases, such as items
bought on E-Bay or Amazon (good luck with that). New York City
residents are also going to find higher bus and subway fares in 2011 as
well, not to mention cut backs in services. And of course Gov.
David Paterson of New York wants a higher tax on the payrolls of New
York City businesses and higher fees for grocery store wine
sales, which should really bum out the bums we would think. Not
to be outdone by those New Yorkers, Gov. Ed Rendell of Pennsylvania
wants to add new taxes for funeral services and caskets (death and
taxes, a natural combination), Gold Bullion and investment coins,
dry-cleaning, professional services, electric bills, candy, gum and
personal hygiene products (it will cost more in Pennsylvania to feel
squeaky fresh and clean).
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Ironically, a new study regarding New Jersey by the Center on Wealth
and Philanthropy at Boston College, claims that New Jersey has lost $70
billion in wealth over the past five years because residents of that
state have been leaving to places with lower tax rates or no income tax
at all (because such persons are fed up with the taxes in New
Jersey). They actually spent money to do this study and come to
such a conclusion. We would have told them for free that when a
government raises taxes, people kind of feel the need to get the heck
out of there (but they never asked us). In any event, stay tuned
for more to come. |
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