Category Archives: China

India’s new tax code?

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This video reminds me of one of my college classes relating to Asia.  We discussed how China was leading the way with its foreign direct investments, and creating capitalistic free zones.  Unfortunately, we are seeing how that played out, but it was a good run and if they can figure out their water and pollution issues they will probably be quite successful.  Half of the quarter was dedicated to India.  Our professor was Indian and seemed so frustrated with India and the amount of bureaucracy and red tape.  To have anything done required stamps, signatures, and more stamps and signatures before a final approval.  It kind of reminds me of Obama’s health care proposal, and what it will do to free enterprise.

The first time I visited India we drove from Agra to Jaipur.  Now the road is four lanes, and paved.  However, when I went in 2005 it was a two lane road filled with scooters, camels, donkeys, cows, buses, cars, and I’m sure I’m missing a few things (many of these are still on the road in 2009).  At that time the road was under construction, which made the drive even more precarious not to mention we almost slammed head on into a bus going 60 Mph  (I was luckily asleep, and found out afterwords).

For the dividers and to have traffic change lanes they were using bricks.  At first I just couldn’t belief it, and then I sort of nodded my head and thought well it is India after all.  All along the journey there are small cones sticking up into the sky spouting smoke, and all around were bricks.  So, from a semi-practical standpoint I can understand, but imagine trying to move all these bricks when the time came.  No barricades to hopefully prevent being run over, but a small series of bricks.

I was just there in 2009 and some things have changed, but much is the same.  A lovely country in many respects, but very 3rd world at the same time.  Getting horrendously sick in Agra didn’t help matter nor did being at the hottest place on the planet.  However, what struck me was the construction of the underground.  They already have one, but it is being expanded at a rapid pace for the upcoming Commonwealth Games Delhi 2010.  All around the ground is being ripped open, but there  are dividers, there are areas you can’t go so it seems like a step up.  For the rest of the country I can’t speak.

Now we get to the big news.  I think it is big new because simplification of the tax code is no small feat.  Watch the following video.  Instead of raising taxes, India is proposing to drastically simplify its code.  No tax up to a certain point (in the video), a 10% tax on incomes above said level.

Without knowing all the details… what does this potentially mean?

Let’s start with a few basics about the government and taxes:

1) Governments don’t have an income  — I know someone will try to refute this, but the majority and I mean majority of income comes from two places.  Its tax base meaning you and me, and through inflation.  You know that thing that Ben Bernake is so fond of doing these days.  Right we aren’t experiencing drastic price inflation at the moment, but he is monetizing debt like crazy, which means printing money out of thin air and buying crap with it.

2) As a government provides more services it needs more cash.  How do they get that?   See #1

3) Government doesn’t like to reduce its tax income because that means it has to provide fewer “services”, subsidies, welfare programs, etc…  This makes getting elected more difficult, because people want to be provided for.

4) With a smaller government due to a reduced “income” there is less of a foothold on controlling its society.

5) Less control over its society means more free will to the people.

You may or may not agree with me about points 1-5, which is fine as I won’t take it personally.  What it does mean is that people will have more money in their pockets to utilize as they see fit.  Who wouldn’t want more of their hard earned cash to spend as they wish.

I imagine if India passes this reform, and it is what they say it is there will be a boom in India.  Business will flourish, people will come out of their shacks, and start producing on a grander scale.  For clarification when I say shacks I mean it literally.  There is a staggering amount of poor people in India, crippled, sick, and desperate.

As businesses grow due to increased retained earnings, which will be used as productive capital there will be an increased demand for employees.  Greater demand for work, wealth increases all around, and everyone’s living standard rises.

For the sake of the people of India if this proposal is what it might be I hope it passes.

So, take a couple minutes and watch this!

Congressional Budget Outlook :: CBO

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Hold your hats folks as here are some of the forecasts for 2009 (link):

  • GDP falling by 2.2%
  • Slow recovery in 2010
  • > 9% unemployment by 2010
  • Decline in inflation (hmmmm… if monetary policy says anything this will reverse or at least eventually destroy the dollar)
  • Continued decline in housing prices
  • Decline in real consumption of more than 1%
  • Indeterminate on the financial system

And the best of all

$1.2 trillion dollar budget deficit for 2009*

*That doesn’t include the proposed stimulus package
*That amounts to 8.3% of GDP

So, we have an economy in decline, and digging a deeper and deeper hole to climb out of.  What I really want to know is how are we going to pay for 1) a 1.2T dollar deficit, and 2) a large fiscal stimulus package of a indeterminate size.

Let’s see our foreign friends have been purchasing our debt, which enabled us to essentially live off of their productive labor.  China for example is seeing a marjor reduction in exports, its economy is contracting, and eventually it is going to have to decide if it is worth supporting the American lifestyle at their own expense.  Presently, everyone is so intertwined I think there is a fear that if one jumps the house of cards falls down and we all lose.  However, is it possible for say China to pull out of the house of cards with minimal damage?  Is there a way they can reduce their exposure to US debt, and not have their savings collapse?  This is something I’d really like to know.

Seems to me that if they slowly shift some of their dollar reserves into commodities and other currencies SLOWLY, especially when there is increased demand they will be able to lessen their exposure.  The US import market is tanking, and has been tanking.  With unemployment increasing Bloomberg people are going to have a smaller income and will be forces to save thus hurting exporting countries.  This isn’t a US phenomena alone as Europe and frankly the rest of the world is contracting simultaneously, while being fed a mouthful of credit from central banks to re-inflate the bubble.  Last I checked it is very difficult to inflate a popped bubble.

Let’s take the latest number from Taiwan Bloomberg.  Their exports dropped by a record 41.9%.  We all know that Taiwan exports electronics, which have been a major boon ever since the technological revolution, which also saw a major hiccuup in 2000-2003.  So, this is confirmation of a major exporting taking a major hit.  There will be ramifications for the Taiwanese economy.

I can’t imagine that after the dust settles the world’s economies will look the same.  The sea of money will shift to where is sees the most opportunity and in its movement will tear apart the economies of many.

Here are a few more headlines on Bloomberg alone that tell a um telling story:

Fed Revives Discussion of Inflation Target to Counter Risk of Price Slide

ECB Expanded Balance Sheet by 36 Percent Last Year to Revive Bank Lending

Apartment Rents Fall, Vacancies Rise to Four-Year High on U.S. Job Losses

Shopping Center Vacancies in U.S. Approach 10-Year High as Stores Fail

Procter & Gamble Fights to Refinance as U.S. Borrowings Reach $2 Trillion

U.S. Banks Will Need to Raise More Cash in 2009, Meredith Whitney Writes

I’ll leave it at that, but what I’m seeing is RECESSION coupled with the Fed trying to stave it off through any means necessary, which is now including outright purchases of securities on the open markets.  Again we have no savings and are either monetizing debt or borrowing it from somewhere.  To do this will be disastrous to the dollar and our reputation as a solid financial center of the world.  Sure there are plenty of other economies in dire situations, but in the end who will come out with the heads up high and who will come out still in the sand?

Running out of water…

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Lately all we hear about is the price of oil, food, and gold. We hear about how this bank or investment has enough funding, but what we aren’t hearing about as much is the issue of water. Jim Roger’s is concerned about Northern China and its ability to procure water. I’m curious about investing in water rights because as the population grows, and civilization improves from third world status to first demands on water will increase. In a recent article on CNN, Monsanto (MON) CEO Hugh Grant said that he thinks the food shortages will pale in comparison to the water shortages of the future.

What happens when global food demand continues rising as will have to happen with a rising world population and water demands aren’t taken into account? We could have a shortage of food just because there isn’t enough water to produce it.

Maybe we will be watering the crops with the surplus of water in bottles from Fiji, Norway, Iceland, and don’t forget the LA water basin!

India and China

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I’m going to start a section on India and China, which I will eventually turn into its own section. For now this is mainly my mental vomit.

So, the Shanghai stock market is down about 60% for the year, China is seeing factory closures, and what will the gov’t do? If they keep money cheap China will see what we are seeing. However, to compare China’s situation to ours is foolish. We are the largest debtor nation in the world and China the largest creditor. Regardless of the depth and length of their recession the eventually outcome will be massive growth. India will be another to keep an eye on. If I were Jim Rogers I would probably buy now and hold on through thick and thin. Also, looking at my previous post I’d be a bit contrarian and buy now. However, given the global outlook, which seems to be weakening I’m going to hold off.

However, I do plan to diversify into the Yuan. From a debt analysis I’d rather have my money in Chinese Yuan than US dollars. EverBank looks to be a decent option, and the easiest at the moment shy of opening an account in China.

Any ideas here will be appreciated!