Have you noticed that the Fed Chairman seems to be far more concerned about deflation than inflation? It's reflected in his public comments and in the policies being pursued by the Fed.
In a nutshell, when deflation is caused by corrections of bad investments made during a bubble (like the sub-prime mortgage loans and their related derivatives) it is manifested by bad loans that don't get repaid. Individuals and businesses take bankruptcy or they negotiate more favorable terms. Most of the lenders are banks and they don't get repaid. Never mind that the banks made a lot of those loans with artificial money created by the Fed or the fractional reserve banking system. The banks don't like to write off their loans.
In addition, deflation has the opposite effect of inflation. Whereas inflation is caused by an increase in the money supply, deflation reduces the money supply. The effect is to make it more expensive for banks to secure money with which to make loans.
in case you may have missed it, the Fed is owned by the banks. It's completely separate from the Federal government, despite the implication caused by the name "Federal Reserve Bank".
So it makes sense that the Fed is far more concerned about preventing deflation than about preventing the kind of inflation that is caused by an increase in the money supply and by the fractional reserve banking system.
Just my two cents.
Vern
Wednesday, January 19, 2011
Monday, January 17, 2011
Dealing with the Debt Ceiling
The Republicans who were supported by the Tea party are talking about not agreeing to an increase in the national debt ceiling as a way of putting a lid on more federal spending. Treasury Secretary Geithner is telling lawmakers that failing to raise the debt ceiling could "Have catastrophic economic consequences".
Not mentioned in any of the articles I've seen about this matter is the impact not raising the debt ceiling would have on interest rates being paid on short term U.S. debt. Right now U.S. treasury bills are paying less than 1% interest in trillions of debt. If we don't raise the debt ceiling, it's my understanding that the bond rating services would be obliged to downgrade our credit rating as a nation -- which would result in our having to offer higher interest rates to induce people to buy our bonds and short term paper. This is in addition to numerous other dire consequences predicted by Geithner.
Mark Thiessen in the Washington Post tells us that "The Treasury Department has many tools it can use to continue paying U.S. obligations during an impasse -- such as suspending sales of non-marketable debt, trimming or delaying auctions of marketable securities and under-investing in certain government trust funds." He also argues that if the GOP stands firm, Obama will be forced to agree to serious spending concessions in order to get the debt ceiling raised.
So it looks like a game of high stakes "chicken". Who will cave first?
Vern
Not mentioned in any of the articles I've seen about this matter is the impact not raising the debt ceiling would have on interest rates being paid on short term U.S. debt. Right now U.S. treasury bills are paying less than 1% interest in trillions of debt. If we don't raise the debt ceiling, it's my understanding that the bond rating services would be obliged to downgrade our credit rating as a nation -- which would result in our having to offer higher interest rates to induce people to buy our bonds and short term paper. This is in addition to numerous other dire consequences predicted by Geithner.
Mark Thiessen in the Washington Post tells us that "The Treasury Department has many tools it can use to continue paying U.S. obligations during an impasse -- such as suspending sales of non-marketable debt, trimming or delaying auctions of marketable securities and under-investing in certain government trust funds." He also argues that if the GOP stands firm, Obama will be forced to agree to serious spending concessions in order to get the debt ceiling raised.
So it looks like a game of high stakes "chicken". Who will cave first?
Vern
Wednesday, January 5, 2011
Have You Memorized the Entire Tax Law?
Yesterday I received a book in the mail from Commerce Clearing House (CCH), one of the largest tax publishers in the U.S. The book is an analysis of recent 2010 tax laws along with a copy of the actual legislation and the tax writing committee reports. The analysis part is about 500 pages, single spaced, about 11 point type. The part that copies the law is about 9 point type. The complete book is 927 pages. Earlier in 2010, I received a copy of the Health Care Act, which was about 800 pages in size.
Have you read these books? Are you familiar with the changes in the law?
Did you say "Of course not."?
Really! Perhaps you are not aware that you are expected by the IRS and by the courts to able to understand ALL of your obligations under the tax law. It's true. You are. Of course, you can hire a tax professional to help you, but that does not relieve you of the legal duty to be familiar with the full scope of the U.S. tax laws, the related IRS Regulations and rulings, plus any relevant court decisions.
According to www.fourmulab.ch, "... the complete Internal Revenue Code is more than 24 megabytes in length, ... printed 60 lines to the page, it would fill more than 7500 letter-size pages. It contains more than 23,000 cross references to other parts of the tax code or to other parts of the U.S. Code." Based on the printed size of my copy of the tax code, the IRS regulations are about 4 times as large.
It seems to me that we have reached the point where even the brightest tax professionals are unable to understand and advise clients relative to the entire tax law. Like the medical profession, tax professionals have to decide whether to be general practitioners or specialists. Those who choose to be specialists can choose from over two or three dozen major categories of tax law. We have also reached the point where a general practitioner who prepares returns is rarely able to do so without the aid of a computer and tax preparation software.
The tax law has reached the point where it is virtually beyond comprehension. No taxpayer can reasonably be expected to understand the thousands of special rules and exceptions to exceptions. If the taxpayer is unable to understand the law, it is not possible to comply with the law in every respect.
Nonetheless, the Congress continues to add hundreds of new pages to the tax laws every year. At some point more and more taxpayers will decide that the law itself must be scrapped in its entirety and replaced with a totally different kind of tax to provide funds for national defense and other essential services.
Vern
www.offshorepress.com/liberty/
Have you read these books? Are you familiar with the changes in the law?
Did you say "Of course not."?
Really! Perhaps you are not aware that you are expected by the IRS and by the courts to able to understand ALL of your obligations under the tax law. It's true. You are. Of course, you can hire a tax professional to help you, but that does not relieve you of the legal duty to be familiar with the full scope of the U.S. tax laws, the related IRS Regulations and rulings, plus any relevant court decisions.
According to www.fourmulab.ch, "... the complete Internal Revenue Code is more than 24 megabytes in length, ... printed 60 lines to the page, it would fill more than 7500 letter-size pages. It contains more than 23,000 cross references to other parts of the tax code or to other parts of the U.S. Code." Based on the printed size of my copy of the tax code, the IRS regulations are about 4 times as large.
It seems to me that we have reached the point where even the brightest tax professionals are unable to understand and advise clients relative to the entire tax law. Like the medical profession, tax professionals have to decide whether to be general practitioners or specialists. Those who choose to be specialists can choose from over two or three dozen major categories of tax law. We have also reached the point where a general practitioner who prepares returns is rarely able to do so without the aid of a computer and tax preparation software.
The tax law has reached the point where it is virtually beyond comprehension. No taxpayer can reasonably be expected to understand the thousands of special rules and exceptions to exceptions. If the taxpayer is unable to understand the law, it is not possible to comply with the law in every respect.
Nonetheless, the Congress continues to add hundreds of new pages to the tax laws every year. At some point more and more taxpayers will decide that the law itself must be scrapped in its entirety and replaced with a totally different kind of tax to provide funds for national defense and other essential services.
Vern
www.offshorepress.com/liberty/
Friday, December 17, 2010
Tax Cuts and Deficits
After nearly ten years and at the last minute, the Congress finally passed an extension of the 2001 tax cuts. But only for two more years. With a Republican House and a Democratic Senate and White House, there seems to be little chance for agreement on a permanent solution to the problem that was caused by a budgetary gimmick used in 2001.
For those who don't recall, the Congress generally has to make revenue neutral laws over a period of ten years. So if they cut taxes somewhere, they have to increase taxes somewhere else or they have to cut expenses somewhere. And, the Congress always likes to push problems into the future when other legislators will have to deal with the problems. So the tax cuts in 2001 were set to expire in 2011 with a reversion of the tax deductions, credits and other variables to the 2001 levels. Meanwhile, in the intervening nine years, they introduced voluminous changes in a law that was at risk of being repealed by a sunset provision. Trying to deal with all of the changes from 2002 through 2010 would be a legislative and regulatory nightmare.
After nine years of lower tax rates, increased deductions and exemption, plus hundreds of subsequent revisions, the argument about extending the 2001 cuts turned into an argument about whether extending them would be the same as a tax cut or whether letting them expire would be the same as a tax increase.
Take your pick. Is the glass half full or half empty?
For me, letting the cuts expire would be a tax increase on everyone, rich and poor alike. (Even the poor were getting "refundable" tax credits.) Simple logic suggests that you can't have a tax cut by letting the rates and exemptions remain the same. The alleged "cut" is simply a cut from a fictitious amount that might have been if the "cuts" were extended. The cuts have been embedded in the law for nine years and the potential repeal was a mere budget gimmick.
But the Liberals want to argue that extending the tax cuts is like a new tax cut and will cause an increase in the annual deficit and in the national debt. First, it's not a cut from the existing law. It's a continuation of what is. Second, the Liberal/Keynesian argument that taxpayers won't react to tax increases and that the higher rates will result in added revenue has been proven false time and again. The rich are sensitive to higher taxes and they are able to hire experts to help them find ways to modify their business or investments to postpone or avoid the higher taxes. As a last resort, if taxes are increased beyond their toleration level, they will vote with their feet and will leave the U.S. permanently.
For some details about the 2010 tax relief act, see http://finance.groups.yahoo.com/group/JacobsReport/message/881
Vern
For those who don't recall, the Congress generally has to make revenue neutral laws over a period of ten years. So if they cut taxes somewhere, they have to increase taxes somewhere else or they have to cut expenses somewhere. And, the Congress always likes to push problems into the future when other legislators will have to deal with the problems. So the tax cuts in 2001 were set to expire in 2011 with a reversion of the tax deductions, credits and other variables to the 2001 levels. Meanwhile, in the intervening nine years, they introduced voluminous changes in a law that was at risk of being repealed by a sunset provision. Trying to deal with all of the changes from 2002 through 2010 would be a legislative and regulatory nightmare.
After nine years of lower tax rates, increased deductions and exemption, plus hundreds of subsequent revisions, the argument about extending the 2001 cuts turned into an argument about whether extending them would be the same as a tax cut or whether letting them expire would be the same as a tax increase.
Take your pick. Is the glass half full or half empty?
For me, letting the cuts expire would be a tax increase on everyone, rich and poor alike. (Even the poor were getting "refundable" tax credits.) Simple logic suggests that you can't have a tax cut by letting the rates and exemptions remain the same. The alleged "cut" is simply a cut from a fictitious amount that might have been if the "cuts" were extended. The cuts have been embedded in the law for nine years and the potential repeal was a mere budget gimmick.
But the Liberals want to argue that extending the tax cuts is like a new tax cut and will cause an increase in the annual deficit and in the national debt. First, it's not a cut from the existing law. It's a continuation of what is. Second, the Liberal/Keynesian argument that taxpayers won't react to tax increases and that the higher rates will result in added revenue has been proven false time and again. The rich are sensitive to higher taxes and they are able to hire experts to help them find ways to modify their business or investments to postpone or avoid the higher taxes. As a last resort, if taxes are increased beyond their toleration level, they will vote with their feet and will leave the U.S. permanently.
For some details about the 2010 tax relief act, see http://finance.groups.yahoo.com/group/JacobsReport/message/881
Vern
Wednesday, December 1, 2010
Why Do Super Wealthy Support Higher Taxes?
Warren Buffet, Bill Gates father and about 43 other millionaires have sent a letter to President Obama in support of his attempt to repeal the Bush tax cuts for the wealthy. Some of them have also previously spoken out in support of reinstating the estate tax.
Why do some of the most wealthy people in the country want to pay more taxes?
Is it because they are genuinely patriotic or are they financial masochists? They argue that it's because the country needs the taxes on the super wealthy to help pay down the deficit.
But these are the same people whose wealth is mostly generated from owning stock in some of our largest corporations. And I suspect that all but a few of them have established a family foundation to own a large part of their stock. So if you have a billion dollars worth of stock do you sell it and pay taxes on the gain, or do you hold it and let the estate tax consume a large part of it -- or do you donate a few million each year to your foundation and claim an income tax deduction for that contribution? And by giving the stock to a charitable foundation, it isn't subject to the estate tax.
Another way that the super wealthy are able to generate tax free cash to pay for their multiple homes and planes is with borrowed money, that is secured by the appreciated stock in their corporation and/or by the assets they acquire.
From my perspective, there is nothing wrong with doing what the law permits. But let's not be deceived into thinking that the super millionaires who advocate higher taxes on the wealthy are going to incur any financial pain from their patriotic gesture.
Vern
Why do some of the most wealthy people in the country want to pay more taxes?
Is it because they are genuinely patriotic or are they financial masochists? They argue that it's because the country needs the taxes on the super wealthy to help pay down the deficit.
But these are the same people whose wealth is mostly generated from owning stock in some of our largest corporations. And I suspect that all but a few of them have established a family foundation to own a large part of their stock. So if you have a billion dollars worth of stock do you sell it and pay taxes on the gain, or do you hold it and let the estate tax consume a large part of it -- or do you donate a few million each year to your foundation and claim an income tax deduction for that contribution? And by giving the stock to a charitable foundation, it isn't subject to the estate tax.
Another way that the super wealthy are able to generate tax free cash to pay for their multiple homes and planes is with borrowed money, that is secured by the appreciated stock in their corporation and/or by the assets they acquire.
From my perspective, there is nothing wrong with doing what the law permits. But let's not be deceived into thinking that the super millionaires who advocate higher taxes on the wealthy are going to incur any financial pain from their patriotic gesture.
Vern
Tuesday, November 23, 2010
The Best is Yet to Come
Have you seen the t.v. commercial that expounds on the merits of gold as an investment?
Near the end of the message, the announcer is talking about how much gold prices have increased in the past ten years or so. And then he says,
"And the best is yet to come."
Really?
Do you really want the price of gold to increase? If so, do you really understand that the price of gold is a measure of fear, inflation and political instability?
I first bought some gold back in 1979 when the price was closing in on $700 an ounce. By early 1983, the price was down to near $300 an ounce and it stayed there for nearly twenty years.
Why? The monetary policy of Paul Volcker drove interest rates way up and set off a serious recession. But it took the steam out of the double digit inflation we were experiencing. And it took away a large part of the reason that gold prices were so high. In spite of moderate inflation from 1980 through 2003, gold prices didn't increase -- which demonstrates that gold is not a pure inflation hedge. The price of gold does not correlate closely with inflation because it is also a measure of the degree of political instability. And, of course, the price is affected by large purchases and sales by governments.
Speaking for myself, I'd be happy if the price of gold were to drop from it's current level because that would be an indication that things were back to normal. Over time I do believe that gold will increase to reflect the loss of value in the dollar due to creeping inflation.
As far as the price of gold is concerned, I surely hope the best is not yet to come and that gold won't go up to $5,000 an ounce as some promoters are claiming.
Nonetheless, I will continue to maintain a portion of our net worth in what Lord Keynes called "the barbaric relic" -- just in case things get worse instead of better.
Vern
Near the end of the message, the announcer is talking about how much gold prices have increased in the past ten years or so. And then he says,
"And the best is yet to come."
Really?
Do you really want the price of gold to increase? If so, do you really understand that the price of gold is a measure of fear, inflation and political instability?
I first bought some gold back in 1979 when the price was closing in on $700 an ounce. By early 1983, the price was down to near $300 an ounce and it stayed there for nearly twenty years.
Why? The monetary policy of Paul Volcker drove interest rates way up and set off a serious recession. But it took the steam out of the double digit inflation we were experiencing. And it took away a large part of the reason that gold prices were so high. In spite of moderate inflation from 1980 through 2003, gold prices didn't increase -- which demonstrates that gold is not a pure inflation hedge. The price of gold does not correlate closely with inflation because it is also a measure of the degree of political instability. And, of course, the price is affected by large purchases and sales by governments.
Speaking for myself, I'd be happy if the price of gold were to drop from it's current level because that would be an indication that things were back to normal. Over time I do believe that gold will increase to reflect the loss of value in the dollar due to creeping inflation.
As far as the price of gold is concerned, I surely hope the best is not yet to come and that gold won't go up to $5,000 an ounce as some promoters are claiming.
Nonetheless, I will continue to maintain a portion of our net worth in what Lord Keynes called "the barbaric relic" -- just in case things get worse instead of better.
Vern
Dangers of Online Tax Preparation and Banking
I've been what's called an "early adopter" with respect to personal computers since the seventies. I was one of the first people to develop a tax forecasting and planning software program for the very early personal computers. And I've been using the WWW and Internet since about 1994. The reason for making these statements is only to clarify that my refusal to use online tax software and online banking is not based on a lack of familiarity with computers.
Banks today go to great lengths to persuade us that their computer systems are ultra-secure and safe. And they may well be right.
But it doesn't make a dime's worth of difference if your own connection to the Internet is not equally secure. When you consider the cost of developing and maintaining a secure computer system by a bank, having an equally secure system on your home computer is not an option.
I've been hyper-sensitive to computer security for many years and probably have a fairly effective system for a home based business. But that gives me virtually no comfort with respect to whether my system is 100% secure.
Have you heard about "key stroke loggers"?
According to Wikipedia, "Keystroke logging (often called keylogging) is the action of tracking (or logging) the keys struck on a keyboard, typically in a covert manner so that the person using the keyboard is unaware that their actions are being monitored." These key logging programs can be inserted in a computer with a variety of worms or computer viruses.
Once a key stroke logger is on your computer, the people who put it there can then retrieve the data -- consisting of the history of your key strokes. Your key strokes clearly include any passwords that you enter to use your online banking and/or online tax preparation software. Other software used by the thief analyzes the data to reconstruct what is being done. Connections to various web sites are easy to identify. With the password and other data obtained from your computer, the thief has complete access to all of your online banking, investment and tax returns.
What can you do to protect yourself?
The safest solution is to not use online financial services, but that's becoming impractical in today's world.
The second safest solution is to have a separate computer that is used exclusively for online banking, investment management services and tax planning or preparation. That computer should be 100% off limits for any kind of email or web surfing that is not essential for the online financial services. If you have an IRA or 401k, you should be able to afford the cost of a separate computer to be used only to manage your investments, taxes and banking.
Even if you have a stand-alone computer for this purpose, you also need to avoid using public wireless connections such as those at airports, hotels or coffee shops.
One of the greatest dangers of getting some kind of malware onto your computer is the use of your computer by your children or by anyone else. If you can afford it, it's best to provide the kids with their own computers. If that's a bit too expensive for you, let them use the older computers that you have replaced with newer models. Failing that, you may want to simply prohibit the kids from using your computer at all.
And, as a last resort, you can simply not use any kind of online financial service.
Vern
Banks today go to great lengths to persuade us that their computer systems are ultra-secure and safe. And they may well be right.
But it doesn't make a dime's worth of difference if your own connection to the Internet is not equally secure. When you consider the cost of developing and maintaining a secure computer system by a bank, having an equally secure system on your home computer is not an option.
I've been hyper-sensitive to computer security for many years and probably have a fairly effective system for a home based business. But that gives me virtually no comfort with respect to whether my system is 100% secure.
Have you heard about "key stroke loggers"?
According to Wikipedia, "Keystroke logging (often called keylogging) is the action of tracking (or logging) the keys struck on a keyboard, typically in a covert manner so that the person using the keyboard is unaware that their actions are being monitored." These key logging programs can be inserted in a computer with a variety of worms or computer viruses.
Once a key stroke logger is on your computer, the people who put it there can then retrieve the data -- consisting of the history of your key strokes. Your key strokes clearly include any passwords that you enter to use your online banking and/or online tax preparation software. Other software used by the thief analyzes the data to reconstruct what is being done. Connections to various web sites are easy to identify. With the password and other data obtained from your computer, the thief has complete access to all of your online banking, investment and tax returns.
What can you do to protect yourself?
The safest solution is to not use online financial services, but that's becoming impractical in today's world.
The second safest solution is to have a separate computer that is used exclusively for online banking, investment management services and tax planning or preparation. That computer should be 100% off limits for any kind of email or web surfing that is not essential for the online financial services. If you have an IRA or 401k, you should be able to afford the cost of a separate computer to be used only to manage your investments, taxes and banking.
Even if you have a stand-alone computer for this purpose, you also need to avoid using public wireless connections such as those at airports, hotels or coffee shops.
One of the greatest dangers of getting some kind of malware onto your computer is the use of your computer by your children or by anyone else. If you can afford it, it's best to provide the kids with their own computers. If that's a bit too expensive for you, let them use the older computers that you have replaced with newer models. Failing that, you may want to simply prohibit the kids from using your computer at all.
And, as a last resort, you can simply not use any kind of online financial service.
Vern
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