Gold vs. “real money”

Gold Mine — image credit: Kake Pugh via flickr (cc)

The basic function of money is as a medium of exchange. Inevitably, a secondary function arises as a measure of value. Money can be paper, precious metals, shells, whatever people in a particular time and place use as a medium of exchange. There’s no reason that it would need to have “intrinsic” value. If people use U S currency to buy and sell, then it is “real money.”

So is gold “real money?” I don’t think so. Just about nobody uses it as a medium of exchange. Historically, gold coins have sometimes been used but for ordinary people silver, copper, or base metal fiat-type money would be much more common.

Certainly fiat money can depreciate, usually does, and for us in the U S that has been and will almost certainly continue to be the trend. And gold might be a good investment, in the sense that it will be exhangeable in the future for more real wealth than it is now, or at least more in comparison to other kinds of investments available to ordinary people. Of course, gold can depreciate too, if large new deposits are discovered or folks decide they really don’t want gold after all. Which isn’t to say that either of these things will happen any time soon.

Anyone who wishes to resurrect the “gold standard” might want to read the late Peter Bernstein’s “Power of Gold,” or some other history books. Somehow we end up electing people who don’t put a high priority on keeping the dollar strong (or at least, not too much weaker). If that’s a problem, then maybe we should be electing other people, or finding ways to reduce the power of those who purchase elections. Making the U S dollar convertible into a fixed amount of gold is not going to bring prosperity, or even prevent further disruption. There are plenty of examples of economic collapse under a gold standard.

It might, however, benefit those who own gold, or gold mining stocks.

Somebody please disagree with me, or I will assume all of the above to be true.

Let’s treat corporations like people

Corruption — credit: Berkeley T. Compton via Flickr (cc)

Lots of folks seem upset that corporations are being treated like people. True, America prospered for centuries with tight limits on corporate powers (fine history here), and it might be a good idea to again restrict the privilege of forming and maintaining corporations. Or maybe to do away with them altogether.

But if, instead, corporations are going to have the same powers as natural persons, let’s go about this systematically.

A corporation can deduct all its expenses before calculating its taxable income. A natural person should be allowed to do the same, deducting the cost of food, housing, medical treatments, transportation, and everything else. If the result is a net loss, carry it over to the next year.

A person doesn’t get full legal rights until the age of 18 (or for some rights, 21). Until then, the parents are responsible for most kinds of damage which the person might do. So if a corporation is formed today, the stockholders should for 18 or 21 years be liable for the corporation’s debts and damages. The stockholders would also be responsible for making sure that the corporation is properly cared for and educated. In serious cases of irresponsible stockholders, the State Department of Children, Family, And Infant Corporation Services would come in and take the corporation away.

How about voting? Should a corporation, having reached the age of majority, be permitted to cast a vote? I’m not sure about this. Under “one corporation one vote” the megacorporations really wouldn’t be very influential. But wealthy people might choose to form many small corporations in order to influence elections. And of course if they can vote, wouldn’t corporations have to be permitted to hold office? Voting is definitely a concern, but since the rich and their corporations control major elections now, I doubt any choice in this matter would make things appreciably worse.

2014 Business Report

Blue Screen of Bankruptcy — image credit: Ged Carroll via Flickr (cc)

I used to be in the forecasting business; still am in a way. So here’s a forecast: Look for financial difficulties in the next few years at Sandisk, Yankees Entertainment and Sports (YES) Network, Louisville Arena Authority, and Harmony Oaks housing development in New Orleans. What kind of difficulties and when?

I don’t exactly know. Sandisk has apparently survived sixteen years of Goldman Sachs help, and the smart parasite does not kill its host too quickly. Maybe not all four; in fact maybe these four have been selected for survival.

53% thank the Occupants

Apparently the time has come for CNN to decide that Occupy Wall Street really doesn’t have broad support. So, based on the claim that 47% of Americans don’t pay federal income tax (tho most do pay payroll tax, state and local taxes), CNN found four people who (claim to) pay federal income tax and do not support the Occupants.

I’m sure there are more than four, probably more than four hundred thousand, who oppose the Occupants, but speaking as a guy who does pay federal income tax, lots of it, plus more to the folks who help me prepare the forms, I thank the Occupants for representing me. I would be with them if I didn’t have other obligations.

I suspect that most of the Occupants would be happy to take decent jobs if any were on offer. In fact, what will probably happen– you read it here first– is that the Overlords will find a way to use our tax money to offer a few thousand jobs, Occupants will take them, and the movement will fade.

The Wealth Defense Industry

Wonderful phrase; wish I had thought of it. It’s Jeffrey Winters’ term for the pile of lawyers and others who contrive technically-legal ways for wealthy people to avoid paying most of the tax for which they would otherwise be liable. His recent book, Oligarchy, seems to have a lot of other details we haven’t seen elsewhere.

All I actually know about Winters and his work comes from this interview, broadcast this afternoon on WBEZ. I did note one error: The U S federal income tax imposed in 1894 was the second, not the first, which was in 1861. He seems to have compiled a lot of data that we don’t usually see (some of it presented in this pdf article). Naturally, altho his work is descriptive, he is asked about the potential for the Occupants or other movements to alleviate the oligarchs’ control. One wishes that he had mentioned the importance of taxing privilege, instead of production. Perhaps he is unfamiliar with the concept.

With enough assumptions, you don’t have to be correct

Does anyone pay any attention to the “retirement” investment advice that financial institutions provide? I do, once in a great while. Of necessity, these comparisons assume stable tax laws and regulations, and ignore state income taxes. That’s two unrealistic assumptions right there. So why should we worry if the rest of the example is wrong, too?

What brings this to mind is an article in the Fall, 2011 issue of a publication from a major stockbroker. The story centers on Jane, the daughter of William Smith, who died in 2010. William left her a $900,000 IRA. What should she do? Three options are presented:

Transfer the IRA into her own name immediately. According to the article, this would yield $620,100, after taxes, all received in 2011.
Inherit the IRA thru the estate. Apparently IRS regulations provide that you can sit on it for five years, then must withdraw the entire thing. Assuming 6% annual returns (another assumption that we know cannot be correct), Jane would in 2015 then inherit $782,862, after taxes.
Be the IRA’s designated beneficiary. (This would require that William had made the designation, which seems to be the point of the article.) Under this scenario, Jane withdraws minimum annual distributions, with the result that, in 2036 when she is 65 years old, she will have withdrawn $1,221,117 plus she will have an IRA worth $1,652,117.

But, if Jane took options (1) or (2), what would she have done with the money? We have assumed she is in the 35% tax bracket, so plausibly she doesn’t need the money right away, but would prefer to pile up more. So she would invest it. And we can assume she’ll get the same 6% annual return that we assumed for everything else. Further, we will assume that she pays 35% tax on this income (whereas in reality she will probably pay a lower rate on at least some dividends and capital gains, and might be able to hide some). So, netting 3.9% what is her pile worth in 2036? For option (1), I calculate $1,613,803. And she had complete control of this money, she could invest it in things prohibited to IRA’s, she could use it to flee the country, anything she wanted not effectively criminalized. That’s over twice as much as our friendly discount brokerage firm asserted.

So did the broker make a mistake here? No, because at the bottom of the chart it says:

Source: Ed Slott & Co, LLC. [the broker] is not responsible for information, opinions or services provided by third parties.

Just remember this if you are tempted to spend time reading, or worse yet taking, “investment” advice provided without charge by financial firms. It’s worth every penny, almost.

I really shouldn’t be spending time on this, I have serious responsibilities in the world, but one does what one is compelled to do.

Yes, LVT falls on the rich

In case anyone doubted it, Bloomberg reports that real estate prices in vacation areas favored by the wealthy, such as Mount Desert ME and the Hamptons on Long Island, continue to rise even as prices generally have dropped. And, yes, these are land prices, not house prices:

[B]illionaire Mitchell Rales bought a $5.5 million estate and tore it down to build a $25 million mansion

The only specific figure given for the wealthy enclaves is a rise of 14% in Southhampton, and the period to which this applies isn’t specified.

One hopes that local assessors are closely monitoring and responding to these trends.

Banksters vs. Patent Holders

The Capitol Hill site Roll Call reports that a proposed bill would make it harder for holders of “business process patents” to sue banks which they claim are infringing. Frankly I do not understand the details, what a “government review of the patent’s validity” means, since I thought patent examiners review all applications before a patent is granted. An opposing lobbyist is quoted as saying “This is nothing less than an earmark for big banks disguised as a new government program.” One presumes that bank lobbyists have something equally cogent to say, but somehow that didn’t get into the article.

Unfortunately, it seems very unlikely that both sides could lose this one.

New horizons in corporate subsidies

I thought it was a scandal when, years ago, businesses were given subsidies– free money– in exchange for doing the community the favor of employing people. I thought it was a bigger scandal when retailers were allowed to retain sales taxes, paid by their customers, to pay for capital equipment used in their business. I thought it was about the biggest possible scandal when Continue reading New horizons in corporate subsidies

Inside Job gets outside

Prize-winning documentary Inside Job was posted for free download at archive.org a few days ago. It was withdrawn late yesterday or this morning, but in the interim I had a chance to watch it. It was pretty much as I expected: A very well-documented expose of the forces which brought down the world economy, emphasizing that they have been rewarded, not punished, for doing so, and essentially escaped prosecution (some paid fines amounting to a small part of their takings.) It’s well put together, director Charles Ferguson seems to be a skilled and persistent interviewer, getting on-camera answers even from some of the guilty parties. Ominous music reflects our ominous economic future, lots of shots showing the Manhattan skyline, other centers of wealth, as well as foreclosed houses and abandoned developments.

As a documentary with a point of view, this film says “The guys who drove us off this cliff and unpunished and still in charge,” which might lead one to suppose that, if only they could be caught and punished, perhaps our long-term future would become brighter. These guys own the government, of course, so exactly how a prosecution would work isn’t clear. Elliott Spitzer’s experience, reported in the movie, does not make one optimistic.

The problem, as I see it, is that Inside Job doesn’t tell the story from the beginning. I would represent the principal causes of the global financial crisis as the five connected items below

5 Regulatory capture and control of the government

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4 Concentration of financial power

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3 Securitization

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2 Loans against capitalized rent

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1 Private collection of economic rent

IJ describes 5 quite well, addresses 3 and 4, but doesn’t get into the fundamentals. As long as, and to the extent that, we have private collection of economic rent, we will continue to suffer from economic crashes. Inside Job needs a prequel explaining the root cause of the problem.