Taxes oh My

Posted on December 31, 2008 by TheGauntlett

Taxes:

The ubiquitous “necessity” that engulfs us continually. That sentence reminds me of just how complex and absurd the tax code is to follow and comply with every year and every day. On another board there was recently a discussion about the Auto companies with respect to their inefficiencies. Simply looking at all the rules and regulations they must follow in addition to the UAW well no wonder they need a bailout. Henry Ford was on the cutting edge and now Ford is close to falling off a cliff. If I had to pay a worker $70.00 an hour for a repetitive task how could I be competitive?

So, back to the issue of taxes. I’d love to say they we don’t legally have to pay them, but you go right ahead and give that a try and see where you end up. The IRS will find you or your money and take it. Remember they have the backing of the US Government, which has plenty of people who will enforce the IRS rules if you decide to not comply.

Today is December 31, 2008 and in a few hours 2008 will be put in the history book. There will be plenty to say and perhaps in five years it might be considered the beginning of the end. Who knows…

I obviously have plenty to say about 2008, but at the end of each year investors have to decide if they are going to take any unrealized gains or losses to offset their other gains and losses to minimize tax consequences. You then have to wait 30 days before interacting (buying/selling short) with that particular equity if you want to take the loss.

Something about this just doesn’t sit right with me. So, 2008 draws to a close and I have to close out positions just for tax reasons, but I can’t buy them back for 30 days. Heaven forbid if I entered the market at the wrong time and want to reenter prior to 30 days. I’m sure someone gave a great reason when instituting this law, but really it punishes even a swing trader unless they are designated as a trader (which there are plenty of stipulations for). Once designated a trader you can elect mark to market status, which eliminates the wash rule as well as eliminates the limitation on carry forward losses.

Ultimately, I just don’t see how these laws benefit anyone except by “decreasing volatility”. If you trade more often than an “investor” you may be penalized. What happens if a trade is accidentally executed that then puts you in the wash rule category and you can’t take the loss? Bummer.

All in all these rules are supposed to “help” the taxpayer and average citizen, but really I’m missing something here. For all you commenters out there I’m sure someone will have something to say as to why it is needed. Go right ahead and show me.

Don’t we pay enough in taxes from inflation?

Banks are lending — NOT

Posted on October 22, 2008 by TheGauntlett

The theory was beautiful (well in the abstract)…

Give troubled banks more credit and they will lend it out and the economy will stop its free-fall. Now, that sounds like utopia to me. Create credit and we will all be saved for unemployement, slowing production, decreased consumer spending, and rising interest rates.

HOLD ON… let’s put a toe back on the plane of reality…

Banks aren’t lending much more than before eventhough they are being handed gobs of cash. Why wouldn’t banks lend out free money?

What if…

there aren’t any borrowers worthy of getting loans? — Let’s say during a recession! Oh right the economy slows WAY… DOWN.
there are more troubled banks and unknowns on banks balance sheets.
banks are holding the cash knowing full well that there is another storm on the horizon

I didn’t pull this out of thin air like the Fed does with money. An article in the NY Times starts with

The banks aren’t lending. And despite what you have heard, they probably won’t start just yet.

Sorry Paulson your plan isn’t working.

“Our purpose is to increase confidence in our banks and increase the confidence of our banks, so that they will deploy, not hoard, their capital,” Mr. Paulson said in a statement Monday. “And we expect them to do so, as increased confidence will lead to increased lending. This increased lending will benefit the U.S. economy and the American people.

Of course, with a $250 billion injection into America’s biggest banks — not all of which were troubled — Mr. Paulson has a political sales job to do. And no requirements to lend were attached to the money. (Some banks may use the money to buy others.)

But Mr. Paulson is making a big assumption about confidence, because until the real economy recovers — which could take more than a year — lending to Main Street is unlikely to return rapidly to normal levels.

“It doesn’t matter how much Hank Paulson gives us,” said an influential senior official at a big bank that received money from the government, “no one is going to lend a nickel until the economy turns.” The official added: “Who are we going to lend money to?” before repeating an old saw about banking: “Only people who don’t need it.”

Again banks don’t want to lend into a very uncertain future. They want confidence in the economy — there isn’t any and the opposite is occurring. People are spending less as they become more concerned about the safety of their jobs. Most Americans have no savings cushion to fall back on.

Roger Bootle and Jonathan Loynes of Capital Economics in London wrote a sobering note on Monday about the cash infusions into European banks that may apply here as well. “We expect rising loan defaults and further asset write-offs over the next couple of years to practically wipe out the governments’ capital injections, leaving banks back at square one,” they said. “Given that banks will need to increase their capital in order to expand their lending book, these measures on their own are unlikely to prevent bank lending from stagnating.”

Wait a minute… all that money being put into the system to restore confidence and spur lending may just vanish? So at the end of the day more banks fail, the economy continues to contract, available credit continues to contract, unemployment rises, and interest rates eventually rise. This isn’t what Paulson sold to us with his bailout plan. Were we duped?

Nah, the individuals responsible for the government’s actions are always in need of votes and making a horrible situation look not so bad or at least feasible to fix. At the end of the day our failed bailouts will have a disastrous effect. The consequences are a HUGE debt burden, a larger interest payment on that debt, the world losing confidence in the value of the dollar, and a prolonged recession probably followed by major inflation. I’ve been singing this song for a while and it will take time to play out, but as you can see this is a VERY rocky road.

Another bailout, more credit… when will we learn?

Posted on October 20, 2008 by TheGauntlett

It seems that the tune to march to these days is credit o credit we need more credit. Somehow somewhere we forgot quite quickly that credit got us into this mess. If credit is expanding much faster than real economic growth the outcome will be instability in the economy. That is like an individual taking on more debt while their income stays steady or worse is in decline. At some point in the future the debt will become unmanageable. Once debt is too great a burden that individual is going to have to either sell assets to pay off the debt, declare bankruptcy, increase their income, or default. The one thing that makes the government lucky or so it seems is that they can increase “income” through inflating the money supply event hough it is really illusionary. All they have done is take money from every taxpayer to service the ever growing debt burden.

I find it distressing that Bernake and Co. are talking about further fiscal stimulus to the tune of $150 billion dollars and Democrats want double that. We are already over $1 trillion in debt for this year. Where o where are we to find this money? Perhaps a leprechaun will appear beneath the rainbow and we will be saved. If the politicians and bureaucrats have their way this is exactly what will happen.

American’s have no or very little savings to invest in capital goods. We are laden in debt and attempting to service that debt. If unemployment rises substantially then servicing that debt will become even more burdensome. Another stimulus package will probably be used to payoff existing debt, which does nothing for stimulating growth.

So, what do we do… Many have proposed various solutions.

Why not reduce the size of the government for one.
– Yes, people will lose their jobs. However, with time they will find other jobs as that money can now be used for other things.

Reduce taxes, and the size of the tax code.
— Our tax code is way to complicated and confusing. I would love to know the cumulative hours wasted on tax returns every year by companies and individuals. Imagine if we had a flat tax of 10-15%… get rid of tax incentives, credits, exemptions, etc… Not everyone is going to be happy about it, but a reduction in the tax burden in actual numbers and time would enable people to use their money elsewhere and as they choose versus having someone decide for them where to best put it to use.

Return our currency to one backed by a physical commodity — GOLD and SILVER
— The government would hate this, but it would eliminate the major booms and busts and enable constant growth. Money would again have a true value versus the value instilled by the gov’t. Money’s value would be returned to the people and taken away from the money printers, and confiscators of our savings.

Bring our troops home
— We don’t need to be the world’s police. Occupying over 140 countries is absurd and very costly. I agree that we need to have an army to defend the country, but it needs to be defensive and not offensive. Our paws are in too many honey jars. We are bound to piss off the bees, which we are continually doing and then blame them for getting upset at us. Ironic don’t you think.

Remove all subsidies and tariffs
— All they do is distort the market place and what people produce. For example why do we have corn syrup in our soda, but in the rest of the world they use sugar? Corn is highly subsidized, while sugar has many tariffs on it. Corn Syrup is cheaper due to government policy. Corn farmers love this, while it hurts all of us. We pay for those subsidies, and also pay high sugar prices.

I’m going to leave it at that, but there are plenty more options. People say that ignorance is bliss. NO it isn’t bliss it is being LAZY. Will you get out of a parking ticket or a speeding ticket if you claim ignorance? Not unless you are really smooth with words.

What happened to being responsible? If you take on too much debt then you have a problem. American’s have a virus, and it is contagious. We live beyond our means, and then when we get in trouble someone bails us out at the cost of everyone. The one’s who really pay are the responsible ones who are living within their means.

The US Dollar gaining? What?

Posted on October 7, 2008 by TheGauntlett

Hyperinflation, inflation, deflation, depression, recession, stagflation… well which is it? I have no clue, but there is a massive monetary inflation occurring, and a looming recession. Hmmm so does this mean a inflationary depression? Yikes.

Last week I took a break from overwhelming myself about the markets and the state of the economy. The timing wasn’t perfect, but I had personal reasons.

Before I start on the quest of exploring our present situation of the potententional…”ion”s I want to make sure we are on the same page. Therefore lets have a defining moment:

Money: Easily exchangeable, is relatively scarce, and is a store of value.

Inflation: An increase in the money supply
Deflation: A decrease in the money supply
Hyperinflation: A self-perpetuating unstoppable (more or less) state of inflation
Recession: A significant decline in business activity, mainly a contraction in the economy or slowing of growth
Depression: A long-term economic state characterized by unemployment and low prices and low levels of trade and investment
Stagflation: A period of time characterized by high inflation and recessionary conditions.

I’ve been looking at calls for the vaious scenarios and needed some clarification as to what happens in the various situations. For the most part it seems obvious, but I’ve been struggling with the increase in the value of the United States dollar. Our national debt is above 10 trillion and rising rapidly as the recent bailouts continue, and the most recent increase in military spending added another $612 billion that we have to pay for.

Why is the risk of deflation so frightening that the Fed, Treasury, governments, and foreign central banks will do anything to stave it off? Deflation is like the grim reaper knocking on your door for a fiat currency. A fiat currency survives on debt and inflation (credit expansion). Too much inflation and it can become worthless, and negative inflation (deflation) and it gains value. That sounds like a good thing but it isn’t. As the currency gains in value debt becomes more expensive, and thus more difficult to pay off. Imagine taking out a $100,000.00 loan with todays dollars and paying it off with dollars from 1930. Good luck! During deflation prices also fall due to the decrease in the money supply and as there is no longer credit being handed out for people to use to consume and invest. The whole system comes tumbling down and the reaper walks in the door to say hello!

When credit is created (a loan) that is an increase in the money supply, and when it is paid off that is a decrease in the money supply. Say the loan is $100.00. That is $100.00 of money put into existance with a very small percentage actually backing it. Now I repay my $100.00 loan and that credit is erased and the money supply contracts. This is the normal situation that occurs daily. However, if people don’t want to lend or borrow then we have a problem.

No credit means no ability to borrow, which means no abilty to purchase goods and services. Everything is based on debt today. The change began in 1913 with the Fed, and the ultimate shift to fiat money was in 1972 during the Nixon presidency when we abandoned the gold standard and thus savers were punished from that day forward.

Okay this leads to me to the strengthening of the United States Dollar… Why I ask is it getting stronger. Many argue that it is because Europe is weakening, which may be part of the picture. However, I read something that made a clear point that because European banks are required to hold dollars for various toxic debt they hold denominated in dollars they normally use the interbank markets based on the LIBOR rate. However, that market is seized up and nobody wants to lend so they start using the EUR / USD credit swap market. As they purchase dollars its value goes up. Notice today that the Euro gained against the dollar when the Fed decided to start purchasing short-term commercial paper. They are stepping in and becoming the new mainstay for that market: which one? EVERY MARKET <Interesting…>

And tomorrow is a new day!

Force FED chickens…

Posted on September 26, 2008 by TheGauntlett

Ironic that WaMu’s collapse happens to coincide perfectly with this bailout proposal trying to be hurriedly pushed through Congress. It will for sure pass now <that was my take last night><now we are seeing major hiccups in the process (thankfully)>. We have been sold out by various individuals in the United States Government. Very unfortunate indeed, and some say the greatest looting operation ever in history. Mark my word it isn’t over and will continue to spread to regional banks. I find it interesting that Goldman Sachs and JP Morgan are the golden children in this whole mess, not to mention that Paulson used to be CEO of Goldman. Coincidence?

In the EXTREME case you are going to want to have food and water on hand. A decent supply. I don’t know if it will get to that, but there is a lot of uncertainty in people’s minds. When they are fearful they do stupid things. Besides it never hurts to be prepared for an earthquake. I’m concerned about a run on the dollar starting abroad than at home.

Yes, I realize I sound like a doomsdayer, but I’m just taking a pragmatic approach to the whole thing. Show me some good news in this mess and I might be willing to alter my view slightly.
Has it occurred to you that we were fed the same crap with respect to going into Iraq about weapons of mass destruction? This administration has been credited with being stupid, but I’m starting to wonder if that was all a line. They have systematically destroyed the dollar, taken us to a never ending war – Iraq, allowed the credit bubble to get as big as it did, and in the end who gets to pay the bill? The taxpayer.

And I’ll now step off my soapbox

-T

And don’t forget about Voltaire!

“Paper money eventually returns to its intrinsic value – zero”

~ Voltaire – 1729

Fed inflating with no restraint – Hyperinflation?

Posted on September 25, 2008 by TheGauntlett

A picture is worth a trillion words…

Money Supply 09/25/2008

Frankly I’m not surprise to see what the Fed is doing and can only imagine what this is going to look like if this bailout goes through. There is a precedent throughout time that inflating the monetary supply only prolongs the inevitable. This is a sad state of affairs and I see only troubled times ahead for the once mighty dollar. Like the Romans who clipped their gold and silver coins the United States is creating more and more money from nothing. Why do we need a bailout package when we can just print money? It isn’t actually printed anymore, but issued through treasuries between the Fed, the Treasury, and private banks.

We are headed towards a recession if we aren’t already in one. Inflating the money supply while in a recession presumably means higher prices. The contraction in prices we recently saw was perhaps a byproduct of the Fed contracting the money supply, which it has now reversed course. During the Great Depression of 1929 many banks tried using their depositor’s money to help keep the market afloat just as the Fed is now doing… The outcome? You know what happened…

Now we are taking the opposite position and inflating. What happened to Rome… and thanks to Mike Hewitt at dollardaze.org he lists many countries plagued by hyperinflation.

Angola (1991-1999)
Argentina (1975-1991)
Austria (1921-1922)
Belarus (1994-2002)
Bolivia (1984-1986)
Brazil (1986-1994)
Bosnia-Herzegovina (1993)
Bulgaria (1991-1997)
Chile (1971-1973)
China (1939-1950)
Free City of Danzig (1923)
Ecuador (2000)
England
Greece (1944-1953)
France (1789-1797)
Georgia (1995)
Germany (1923-1924, 1945-1948)
Greece (1944-1953)
Hungary (1922-1924, 1944-1946)
Israel (1979-1985)
Japan (1944-1948)
Krajina (1993)
Madagascar (2004)
Mexico (2004)
Nicaragua (1987-1990)
Persian Empire (1294)
Peru (1984-1990)
Poland (1922-1924, 1990-1993)
Romania (2000-2005)
Ancient Rome
Russia (1921-1922, 1992-1994)
Taiwan (late-1940′s)
Turkey (1990′s)
Ukraine (1993-1995)
United States (1812-1814, 1861-1865)
Yap (late 1800′s)
Yugoslavia (1989-1994)
Zaire (1989-1996)
Zimbabwe (1999 – present)

The fiat money system that we presently have, which in its present form has only been in existence since 1971 when we went off the gold standard. To say that we have a precedent for what may or may not happen is incorrect. We are now in uncharted territory, however history has its lessons.

Ron Paul clearly states the situation…

Posted on September 24, 2008 by TheGauntlett

Fox News did a ten minute interview with Ron Paul and actually gave him the time to clearly state what is going on. If the anchors were actually listening I don’t know, and frankly they need to. The present situation is dire and people are only barely starting to take it seriously. Given that Bernake is a student of the Great Depression he thinks the only way out is government intervention through bailouts and inflation. The issue with that is we have a problem: Excess has built up in the system and it needs to be corrected. By easing the debt burden on the banks the problem doesn’t go away, but only gets pushed further out into time.

According to Austrian Economics whenever a bubble forms due to excess credit it must be deflated. During the deflation excess inventory is bought at cheap prices, and the economy then moves forward. This allows the economy to go though a minor correction and then move on. The mortages need to be sold off and housing prices need to come down. Our fiat monetary system only survives on debt and credit, which we are finding out has its limits.

Instead of letting the system correct the taxpayer might be on the hook for other people’s mistakes. Why is it imperative that house prices go back up? Let them readjust to a point where people can afford them. We will survive, and in the short-term it might be rough. The dollar is at the brink of destruction. A bailout will necessarily ensure that the dollar will be dumped because nobody wants to hold worthless paper.

Warning: If you see interest rates rising and the dollar falling this is a sign that major players are getting out of the dollar. This is cause for concern.

Bernake, Paulson, and Bush are selling this proposal as a way to avoid a catastrophe. A necessary evil that if not enacted immediately will be the downfall of the United States and its citizens will suffer. Bush in his address to the nation did comment on the credit problem, but then went for the jugular and instilled fear just as Bernake and Paulson have been doing. He said that he believed in the free-market, but tough times call for decisive action. If he truly believed in the free market the Fed would not exist, there wouldn’t be sugar tariffs and corn subsidies, and I could go on and on. If you believe that we went into Iraq because of WMDs (Weapons of Mass Destruction) then go ahead and believe him on this one.

I find it quite convenient that we have major swings in the stock market and then this proposal comes to light. The banking crisis isn’t something new. Its been going on for over a year, and why now must it be passed right before Congress goes to recess. Fear will induce irrationality and it is imperative that this bill does NOT pass. I would rather face major banks failing then have the government try to sort this out.

Watch this video it is right to the point!

Potential outcomes at current juncture…

Posted on September 23, 2008 by TheGauntlett

I’m attempting to grapple everything going on apart from my disgust… and come up with a couple scenarios. Any help will be appreciated.

Overall economic trend:

- Economy is sliding deeper into a recession

- Housing prices continue to fall

- The dollar’s short-term value is undecided, and long term looking weak

- Unemployment rising

- Prices falling

- Interest rates falling

Present Situation:

If a bailout is passed we might be able to presume that:

- The dollar will lose value potentially very much if large reserves are sold off

- Interest rates will have to rise as that is the only way foreigners will want to hold dollars

- Imports will become very expensive

- Prices will skyrocket

- Recession will deepen – Depression?

- Stock market will rally — for how long?

If the bailout isn’t passed:

- Dollar might stabilize a bit

- Uncertainty will continue

- Markets will gyrate while overall trending down

- Financial markets will tighten

- Stock markets will plummet

Finally: A potential indicator of a dollar collapse

If interest rates rise and the dollar falls people are selling off their dollars and treasuries, which means nothing but bad for the dollar.

—–
How am I doing so far?

Trevor Gauntlett

Tag Archives: Bailout