Today's Tedbits is about broad social trends and what you can bank on in formulating your investment strategies. It is not gloom and doom, it is reality! See it for what it is and thrive. The world is changing, change provides opportunity: Globalization is the future unfolding before our eyes. Understand it, don't be afraid of it, none of us can prevent the future coming at us at one day at a time. Next week will be doing an in-depth analysis of the Energy markets, don't miss it!!
The "Something for Nothing Army", on the March!
The United States has finally entered the plateau while other economies continue to grow run of its demise as a global economic power. The broad majority of its Citizens now pay NO income taxes and rather than relying on hard work and wealth producing activities they now focus on how to TAKE what they want from a small minority who pay virtually all of the cost of government. A cost so high that it destroys the ability of these taxpayers to invest in the future jobs and businesses which are vital to future growth and prosperity. The top forty percent of all income earners pay 99% of all taxes. The top 1% pays 35% of all taxes with that set to rise to 40% with current legislation in Congress. Capital gains Taxes are slated to rise to 31% from the current rate of 15%, further discouraging investment and risk taking in funding Capital and business creation.
Taxes are now set to increase as the broad middle class no longer pays taxes and are willing to gore anybody who they believe can restore their lost former prosperity. Only the people that destroyed their prosperity are the very same people "populous politicians" who are leading the attacks on the most productive parts of their economies. And the people under attack are the very same ones who are their only hope for creating a more prosperous future. It is George Orwell's book 1984 brought to life! When I first read this book I couldn't imagine this in the United States, now presto change-o, here we are.
The Congressional budget office in a recent report outlined that the top 40%, those who make more than $43,200 dollars pay 99% of all taxes. The top 10%, those who make more than $87,300 pay 70.8% of all income taxes, an increase from their share of 48.1% in 1979. Politicians everywhere slowly but surely define the term rich lower and lower as they destroy them systematically and move them lower on the income ladder. It is no wonder that two incomes have now been made to replace one.
I don't believe anyone would classify someone making $87,300 dollar a year as RICH, except one group. POLITICIANS. Politicians point at corporate executives which make obscene amounts of money (millions and millions of dollars), a handful of people, but actually are going at the roots of American prosperity, the small businessman. A man or woman who runs a small business with 1 to 50 employees, who makes a quarter to a half a million dollars a year. Why is this important to you? Because these are the entrepreneurs who take the risks necessary for most people to have a job. These are the primary drivers of employment and wealth generation throughout the economy. As the politicians destroy the American dream of getting rich by working hard, and being well educated we will always have fewer and fewer people reaching for the dream. Creating less and less seeds of future growth. Why try hard to create something if you have no hope of reaping the rewards of 13 hour days, risking your investment capital and exposing yourself to the vagaries of global and local competition.
What are the implications of this? The majority of Americans now do not understand the costs involved of government. It is easy to vote for more irresponsible spending if the cost of the spending never reaches you. For the majority of Americans this is now the case, so they vote for the people that promise the most goodie bags, not understanding that they pay for it one way or another. In this case they pay the taxes through the printing press, the government prints the money and your money is worth less every day as it is debased by the financial authorities. It is a stealth tax that the voting majorities do not realize they are paying. If the government expands the monetary base by 12%, that is a 12% tax they extract from the dollar bills you have in your pocket, as it is now worth 12% less, add the effects of compounding and the theft really gets UGLY!
The governing classes can say wages are rising, but actually they are falling, only most people can't grasp the illusion the Mandarins of Washington have conjured up. That is the illusion of growth implied by phony inflation numbers. Inflation is supposedly running at 2 to 3% a year as reflected in the core PPI and CPI (Producer Price Index, Consumer Price Index); the headline number which includes "FOOD and ENERGY" is running in the 4 to 6% range.
True inflation as measured in purchasing power loss on a compounded basis is about 18% a year as can be computed by the price of gold in dollars. This is the true loss income since 2002! It is no wonder that people are running scared and grasping for "Political solutions" to the true loss of the ability to buy groceries every time they go to the store. Every year when they go to the grocery store what used to buy 5 bags of groceries now buys 4, and this has now happened 5 years in a row. Its no wonder the republicans are gone, we will all vote to end this type of destruction to our way of life and standard of living. Unfortunately, the latest group to be elected to office has planned even more aggressive doses of the same medicine we have had since 2000.
Aiding and abetting this atrocity is the financial and mainstream press and its support for politicians of all stripes. The press believes people are stupid and need to be herded like cows through life; actually it is herded like cows to slaughter or the milking machine. The federal budget has increased by over 60% since 2000. The Congressional budget office clearly reports that outstanding future obligations of the federal government has now increased from 20 trillion dollars in 2000, to over $47 trillion dollars today, an increase of almost 150%, and these obligations do not include future state and municipal spending obligations which are increasing at an alarming rate.
Spending restraint is never considered, as all government boondoggles are deemed essential to one campaign constituency or another, one of the latest and most wasteful programs set to roar into your pocketbook is CORN BASED ethanol, as big a stupidity as can be imagined, a technology which has NO Economic benefit, it yields nothing but higher prices, bigger government deficits (money printing) and it is slated to explode in costs over the next five years as congressional mandates drive the cost of all your food into the stratosphere (see ethanol, in the Tedbits Fingers of instability archives at (www.TraderView.com). This abomination is going to waste 10's of billions if not 100's of billions of dollars that could have gone into productive uses.
Spending restraint comes from the impetus of accountability, if everyone is paying taxes they demand spending accountability of elected officials. Since less and less pay taxes, accountability goes out the window. In fact the opposite occurs, as the voters then become oriented to elect people whose accountability is counted by how much more they spend. This is now how it is in the United States and Much of Europe. As the middle classes are impoverished, less accountability is the result, a rising standard of living inspires accountability, and a receding one creates less of it. As citizens in the developing world make more money they demand more accountability of their governments, as the middle class is impoverished in the developed world accountability recedes.
State Governments and the US Congress have gone "HOG WILD" trying to buy the next election through government pork barrel, and it doesn't matter which side of the aisle you reside in, they both believe government spending is essential. Essential to election reelection that is. The democrats are tax and spenders, the republicans are borrowing and spenders, they both agree on the spending side of the equation. The squandering of resources is an epidemic on the American economy.
The new Medicare drug program is another source of future economic destruction, a health care program that was unsustainable and bankrupt became more so, piling more than 20 trillion dollars of new obligations on present and future generations. The immorality of the State and Federal politicians and the constituents that elect them in the United States is breath taking in its enormity. Current retirees and the Baby Boomers are spending the money now and sending the bill to our children and grand children.
Most families throughout history have worked hard so their children could have a future and life better than their own. Not so in America and Central Europe, they are spending the money now and sending future generations the bills. Creating debt slaves of their children and grandchildren to fund their current lifestyles which they themselves cannot afford. These debts are calls on future income and destroy the ability to invest in the future. As that future investment is diverted into current consumption as politicians and their something for nothing constituents confiscate it for spending on non producing activities. How can people and politicians look at themselves in the mirror? It is immoral what is unfolding.
One of the things I learned as a young man when I first got a credit card was how easy it was to be irresponsible with the ability to borrow. Credit cards are really meant to be a means for facilitating commerce, not consumption. They are supposed to be used because of their ubiquity in being accepted and as a convenience to everyone, as the merchant can rely on being paid by the card issuer, negating the need to accept cash (DO you want to walk around with wads of cash?) or checks which could bounce. Also they create records which can be used for accounting purposes.
They have now morphed into the means to having things you cannot afford now and put paying off into the future, while paying USURIUOS interest rates, it is loan sharking made legal as payoffs to the banking industry for campaign support. Now even this has gone to newly absurd lengths as politicians have extended the noose even further with "BANKRUPTCY" reform. Another disastrous sellout of the American people by the ruling class which will exacerbate the coming bankruptcy of America. Bankruptcy is important in a capitalist economy as it allows the creditor to clear their balance sheets of cancer which prevent them from future borrowing: it also allows the debtor to clear their books of the cancer of previous poor decision making. As long as the vast majority behaves in a responsible manner, this price is part of the costs of doing business and can be planned for by the businessmen running their respective companies.
Since voters don't understand the price we pay for fiscal irresponsibility by "PUBLIC SERVANTS" and oxymoron of unbelievable proportions. They just know something's wrong and someone must pay. Unfortunately it is themselves and they don't even know it. At the recent Democratic presidential debate, lip service was paid to building the economy and business always with the caveat that business must PAY MORE for the privilege of providing people with a JOB. They told the mobs they should have more health care, fatter retirement accounts, higher wages all at the expense of the people who employ them. We all want more of these things, but this cannot happen if the business and country is not profitable, domestically and internationally!
Even though business taxes in the US and Europe are the highest in the world. Corporations and Businesses nationwide are slated for even more tax increases, and more mandated "benefits" for their employees. The AMT (alternative minimum Tax) was supposed to only tax about 150 to 350 of Americas richest families when it was passed in the late 1980's, since it was never indexed for inflation, now it is snaring 25 million people as inflation have moved into the category of RICH people.
Not to mention the Tsunami of new regulations politicians plan to further bring the wealth and income producing corporations and businessmen to heel, further impeding their ability to save, invest, in future growth. Local shackles impeding profitability, and Global competitiveness. Why do you think capital spending has ground to a halt since Novembers elections? Today's multinationals only invest in America for access to the American markets; most if not all of future investment capital is targeted for more business friendly climates.
These government inspired costs are the nails in future job creation as a business that can't make a profit is soon gone, and must curtail investing in the companies future growth. Profits and wealth are now the purview of evil RICH people and corporate exploiters, which are a now vanishing species in the United States. Government school systems have trained the public to believe the government is great. As the Democrats have set the sites of their most economically ignorant constituents on them, marking them for further attacks after they are elected.
Selling the prospect of something for nothing, to desperate people who have been impoverished through the same politicians on the stage. Through their previous episodes of irresponsible spending and government programs, and money printing. Government spending destroys jobs and wealth creation, creating less wealth to be paid in salaries and jobs. Government is not the source of security, it is the source of insecurity, ask anyone from the former Soviet Union, China today or during Mao, or Ireland during the potato famine. A politician talking about being responsible is a contradiction in terms. In France political responsibility is defined by the benefits the candidates pledge to spend, or the industries they pledge to subsidize.
Republicans are dazed and confused and in disarray as advocacy of fiscal responsibility and less government spending is now a quick ticket to retirement. And no one would believe them if they did after the spending orgy that was George Bush and the republican congress. People no longer believe they can get ahead by the virtues of working hard, saving and investing. And it is true, the politicians have now created a society where that is now not a reasonable expectation. So more and more people give up on working towards the American dream of getting rich on a daily basis. Succumbing slowly to the siren song of the political class which is: if you elect me I will get whatever it is you think you are entitled to for you, and make somebody else pay, the implication that the person paying the bill somehow stole it from the audience. And the politician is the white knight using government power to ride to the rescue.
(Authors note; looking for assistance in creating portfolio diversification that can survive and thrive in what I am outlining? In fingers of instability? If so contact me through www.TraderView.com. Subscriptions to this newsletter are also free at this address; send it to a friend, Thank you)
There a concept that is taught in Economics 101 at every university in the world and that is TANSTAFL, "there ain't no such thing as a free lunch", as somebody always pays. It is the basis of the Austrian school of economics. It should be taught in preschool, and the 1st grade, and the 2nd and throughout the educational process. Unfortunately Keynesian economists believe in the power and benevolence of government, so the Keynesian view is the preferred school of thought by politician's world wide. Whereas the true reality is power corrupts, absolute power corrupts absolutely and that is now where the US and Central Europe have now arrived.
Governments with few exceptions are the biggest cancer infecting the world, their poorly thought through policies and poor understanding of wealth creation i.e. ECONOMIC GROWTH". They only know power and how to grab it through the illusion of rhetoric, demagoguery, and misdirection. People know something is wrong in their guts, they can feel it, they don't know what is specifically is wrong, both congress and the president hold equally poor approval ratings of about 30% and vast majorities say we are on the wrong track. This is the case in central Europe as well. In the United States and central Europe wealth creation is only available to the politically connected (CAMPAIGN CONTRIBUTORS). If you are not connected you can expect your competitor who is to soon have a government regulator knocking at their doors using the regulatory system as a cudgel into submission. An example of this is small businessmen who are tortured by regulators while their bigger brethren are never touched as they have armies of lawyers and compliance teams to fight them off.
These stupid regulators think they are protecting the public, but they are actually protecting the politically connected businesses that pay the toll to the politicians so they can be reelected. In the US and Central Europe Capitalism and wealth creation is now on the wane, moving to more friendly venues. The really big money sees these things and are voting with their feet, all the banks and brokerages concentrate their growth plans offshore. It no longer pays to invest in America or Central Europe. Wall Street is now just on a downhill slide which will reach its end point many years from now as the supertanker of entrepreneur's and wealth creation that was the US economy slowly sinks from thousand of cuts in the hull and slowly but surely sinks sometime in the future. Someone in London understands these things as regulation is much more hands off, so capital markets are migrating to there and other new growing financial hubs around the world.
I used to be a small businessman, now I am part of a larger organization as the time and money spent on compliance and government regulation destroyed my ability to spend time helping investors. I try very hard to conform to the law, breaking the law is a fool's game and I don't look good in pinstripes. I have a top CPA whom I pay thousands of dollars to do my tax's, I tell him to comply to the law, don't play games, but use the rules of the tax code, and I do not use tax shelters, but how could I ever hope to comply with the tax code that is 9 million words long? How can I hope that this professional can? When you have to keep in mind 9 million words who can? When the tax code is 9 million words long and filled with contradictory sections it is impossible to do them correctly. Impossible.
Even the IRS agents could not and cannot do them correctly, which is the ultimate indictment of the current tax code. They use these laws which they themselves cannot define to beat people into submission, people who had no intention to break the law or evade the taxes. They only had the unfortunate event of a random audit darken their futures. This is government terrorism. It is the same thing with business regulation in the United States and Europe. Capitalism and wealth creation are being strangled on the alter of catering to the voters who pay little or no taxes.
Five to six years ago I spent 2 hours a day, by last fall it was 8, leaving 2 to 3 hours a day finding and helping new customers will not be a business that has a future. Every year my business shrank as I spent more and more time and money on compliance and made less and less as my ability to grow my business continually shrank. The people voting for something for nothing and more regulation of evil businessmen don't understand that 3 jobs went out the window when I was forced into joining the larger group so I could my time and experience to increasing my customers wealth (www.TraderView.com). These people form the voting majorities in the developed world.
The politicians making these promises have no one in their sites but all businesses in the US, Wal-Mart, Microsoft, GE, and small businesses all are slated to be slaughtered on the alter of the "something for nothing" mentality that is the key to their election or reelection. Every year more and more multi national firms leave the United States, Halliburton just did so, and British Airways has just announced they are DELISTING from the NYSE. Why is this? Because they have to or they will perish in the competitive world that is globalization.
The broad social character flaw of "something for nothing" is destroying the developed world and now that the majority of people pay no taxes there is no hope of stopping it. For every 40 people pulling the wagon of the economy there are 60 in the wagon flogging the "HORSES".
Reducing spending, eliminating pork barrel and ineffective programs are not to be considered as it would reduce the government's power, and create problems for the something for nothings among us, as they then would then have to do for themselves. So it's Essential after that point. Invest accordingly as this is inflation writ large as the politicians slowly chip away at the productive sectors and wealth generators, tax receipts are reduced because of less profits and growth to tax, and they are forced more and more to turn to the printing presses to fund their spending plans.
Conversely, countries as diverse as Ireland, Singapore, Viet Nam, China, India, Japan, Russia, The new EU 15, and Hong Kong taxes are flat or falling, reducing regulation as quickly as possible, part of the global effort to reward growth and foster more of it. Capitalism cannot work when the broad majorities of citizens refuse to participate; socialism and the poverty it engenders are now the order of the day. Reaganomics is now dead in the place of its birth.
In Conclusion, This is not the end of the world, the economic decline set to continue will just move The US and central Europe more and more towards where France and Italy now are. Unproductive, High Tax, semi banana republics. Where the mob is more and more in charge, taking from others that which they themselves believe cannot be created by their own efforts. It will happen in slow motion.
Italy used to use constant currency devaluations, hasn't had a stable government which can implement growth policies in many generations. France is now a comic book: the French way is that of 50% of GDP gobbled up by government and the mob, high taxes, government control of the economy and National Champion industries which are basically wards of the State. Other parts of the world will thrive and grow. Globalization will continue to marginalize and impoverish these nations in an increasing manner as their politicians refuse to accept the future which they have no ability to stop. Inflation is set to skyrocket. As to continue to create an illusion of growth politicians will print their way to paying for their follies. These themes are broad strokes of investment plans, set your sails accordingly and thrive!! www.TraderView.com Don't miss the next edition of Tedbits, a blistering glimpse at the world's energy markets, sans the SPIN. If you enjoyed this commentary, send it to a friend or subscribe its free at www.traderview.com.
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