December 2011
The debate on whether to extend the present payroll tax cut to employees and employers has led to the unseemly sight of Republicans being against the tax cuts and Democrats calling for them, claiming that refusing to extend the tax cuts would mean a thousand dollar per family tax increase for millions of hardworking families. Did we just go through the looking glass? Has the world turned upside down?
This is why context is so important. I could never pledge to not increase taxes, since there are times when the alternative would be worse. This is such a time. What is amazing to me is the complete inability of Republicans to state their case for this particular "tax increase.” Instead they use the same old, tired, argument that temporary tax "decreases" don’t work, have never worked, and won’t stimulate the economy.
Look at the unemployment rate, Republicans argue, that is testimony enough to the ineffectiveness of the tax cuts. Are Republicans arguing against themselves? Their muddled argument, no matter how “correct” it may be, is falling flat against the moral argument for "fairness" being put forth by Democrats, who are asking those who make more than a million dollars each year to pay a small amount so that millions who are suffering financially don’t have to. Democrats argue this will help these hard working families, bring down the unemployment rate, and help the economy. Not surprisingly, Republicans are losing this argument.
The reason they are losing the argument is because they aren’t fighting it on the moral grounds. If allowed to become law, this tax will establish a precedent neither conservatives nor libertarians seem to grasp. Taking from those of ability and giving it to those in need, a principle right out of the communist manifesto, Karl Marx's dream come true, is the new Obama/Democrat plan. Karl Marx at least called it what it was, taking from those of ability, while the liberals now call it asking the rich to contribute their “fair share.” Either way it’s confiscating money from citizens who have committed no crime.
The plan calls for tax increases on some of the most successful members of our society; individuals who earned their wealth fair and square. Democrats propose that we take money from the successful and “give” it to those "in need.” This bill is constructed to increase government spending, redistribute wealth, all while ignoring paying down the deficit.
Obama and the Democrats don't want this tax holiday to lapse, despite the fact that the deal was temporary. Any extension would add approximately 330 billion dollars to the deficit. But here's the real shell game. Instead of taxing the rich and using those taxes to pay down the deficit, the money would be used to pay for the middle class's social security. Meanwhile the deficit increases 330 billion dollars! What happened to paying down the deficit?
This is pure redistribution of wealth without shame. It is not tax policy and does nothing to address the deficit emergency, so it can’t even be called fiscal policy. The objective is to take from the rich and give to potential voters—the deficit be damned!
Instead of the Republicans trying to sidestep the Democrat’s maneuver by accepting the tax decrease only at the expense of cuts in other government programs, it looks like they will instead tie it to passing the Keystone pipeline project. I’m for that project. But what happened to reducing the deficit? It looks like both parties have now given up on that in favor of playing politics and that both parties are in favor of taking from the rich to pay for their particular pet projects.
Obama has come out swinging against inequality and unfairness. The fact that the worst decade in America’s history other than the 30’s, was the 70’s, which was a decade of “fairness and equality,” but which in reality led to dwindling wealth creation and progress, will not be mentioned by Republicans.
(Reuters) - The White House rejected on Friday the latest proposal from Republicans in Congress on a payroll tax cut, saying its costs needed to be offset in a balanced way and not with budget cuts exempting the rich.
Whatever happens, it will not undo the harm Republicans have done through their inability to call this bait and switch tactic for what it is: an attempt to legitimize the government’s right to redistribute wealth by taking from those who have more money to pay the costs of government programs for those who have less. How does that work out? Ask the survivors of the Soviet Union, communist China (before allowing people to keep more of their money), and Cuba. They’ve been there.
__________________________
An interesting news item came out of China recently. China is allowing trading in gold contracts in terms of its own currency, which will lead to marked increase in gold demand—some say a tripling of volume in China.
Even more important, this opens the way for China to potentially establish a reserve currency sometime in the distant future. In my article, Is China Moving toward a Gold Standard, I point out why China must have a convertible currency in order to compete worldwide. China also wants to be monetarily independent of the dollar and America. In the article I suggest that gold is the key to such independence and this current news seems to indicate China is indeed making such moves.
The first step in that direction was launched through the Hong Kong Exchange. Now that the yuan and its equivalent local expression, the renminbi, are convertible to gold, China’s currency is indirectly convertible for the first time into all currencies. This allows those who want to invest in Chinese currency to do so apart from the dollar. Breaking this dollar tie is significant.
I see it as one more move toward an international gold standard. There is little doubt China is establishing a reserve currency. The question is if they can do so before their command economy self-destructs. Just as fiat currencies tend to self-destruct, so do command economies. For China it is a question of becoming part of the international trading, financial, and monetary community—or turning inward again. This move looks more like a step toward integration than isolation.
But integration requires a nation to relinquish its stranglehold on its economy. We will see if political reform in China can keep up with its monetary reform. If they aim to have a reserve currency they will need to move toward free trade and financial integration with the rest of the world. They have a long road to travel.
___________________
The 60 minutes feature on congressional insider trading, shocked the nation, and congress immediately called hearings to find out what was going on--that, probably just after they hung up the phone with their broker. As a group they’ve pleaded ignorance of this loophole and some have proposed legislation to do away with a practice that they put common people in jail for. Of course those criminals were business people, not Senators and Congressional Representatives. And as any TV reporter will now tell you, business people are crooks, and politicians are our protectors.
What puzzles me is why no one is calling for all loop holes that hold a double standard for politicians versus "just us folks" to be closed? I know there has been a proposal circulating on the internet for some time that calls for no laws to exist that treat politicians differently as if they are a privileged class. That would force them to change their pensions, healthcare benefits, and a dozens of other perks us peons are prohibited from having.
This is just another example of politicians refusing to think in terms of principle. If it’s wrong to be exempt from one law, it’s wrong to be exempt from any law. They need to write that down.
________________
The great and very scary Newt Gingrich has made a move to the front of the political pack. Newt is scholarly, well informed, politically savvy, and understands what makes America exceptional. If he gets the nomination I will vote for him in the general election.
At the same time however I'll be prepared to sell my stocks. While Newt has the ability to be a good, even great President, he also has the capacity to make the Great Mistake. He has stated more than once that the first thing he will do after being elected is to fire Ben Bernanke. Of course he can’t just do that, but he will ask congress for the reduction in his term, and eliminate him sooner rather than later. Who he will replace Bernanke with is anyone's guess. But we do know Newt has said he wants to return to a monetary policy where the dollar is good as gold.
Unfortunately, if he were to accomplish this, it would lead to a devastating deflation and recession—or worse. You cannot graft a monetary system of discipline on to a society run by undisciplined fiscal policies. A gold standard must be earned, not compelled. Under a gold standard you cannot print money; it is set by the amount of gold produced and gold coming into the system from abroad. Nor can you simply print money to save a bank, or institution, or to protect depositor’s money if a bank is run. There will be no more "too big to fail" thinking in Newt’s world. Instead of working to reduce the size of institutions, and increase the solvency of companies gradually through de-leveraging, Newts policy would have to allow failure. This will accelerate a slow de-leveraging into quick implosion.
If Newt gets his way, he will stay loyal to the principles of capitalism and the gold standard, allow de-leveraging to take affect, and stand by while deflation takes hold and prices and wages fall. As the banking system implodes, Newt will explain to everyone how capitalism works, and why this is necessary. And four years later we will be in a great depression, Newt and most of congress will be out of office, and capitalism and the gold standard will be a discredited political and monetary system.
Ron Paul is even scarier. Once again, I agree with much of his libertarian principles. I voted for libertarian Harry Browne for President. He, unlike Paul, was one of the most articulate spokesmen for the principles of freedom I've ever heard. His run for Presidency did not include ending the Fed, or imposing a gold standard, or allowing the banks to fail. He concentrated on providing more freedom to individuals, and working toward progressively less government. He was a gradualist. Browne knew that fiscal and monetary stability had to be worked toward and that this process would take decades. He showed wisdom in his proposed policies to move America toward freedom.
You see, it's all in the way you approach returning to freedom. It’s the perspective you have and the context in which you operate that will determine success or failure. Paul talks about ending the Fed and eliminating government Departments en mass. But he has no authority to do such a thing. He's not a dictator. If he can't do what he's running on, what is his plan B? He doesn’t have one. There is no transition plan. Yet, transitioning is the only way you get to a gold standard and freedom. Newt’s and Paul’s way is suicidal. Good principles without the wisdom of context are worthless. Worse, they are counter-productive.
Some candidates are less radical. They want to return to an international gold standard, not a domestic one. But even if you tried to just fix the price of gold to the dollar and fix exchange rates like we did under Bretton Woods, it still wouldn't work. You’d need all the governments involved to be fiscally prudent, run balanced budgets, and to allow the free flow of capital and goods between nations. Let's see if America and Europe can achieve this kind of discipline before we try to adhere to the discipline of a gold standard. A plan of fiscal discipline is one thing. As we see, implementation is quite another. It's time conservatives stop putting carts before horses.
A free preview of this week’s Market Update:
Remember the old saying..."Just because your paranoid, doesn't mean that somebody's not after you?" Well, just because I'm bullish one day and bearish the next, doesn't mean things didn't change in the last 24 hours.
The world is in a similar position to a family that has to come up with the mortgage payment by the first and sit waiting for the afternoon mail and the check they are supposed to get that would cover it. If the check doesn't make it, life as they know it will change forever. The nasty banker will foreclose and they will be out on the street. If they do get the check, they can breath a little easier--at least for awhile. That's where we are going into the weekend.
As investors and traders, we're all hoping that "the check's in the mail." The rumors and new policies we hear being talked about might change the fate of the world, but as they toss the market one way and another, we try to just stay focused on the economy and the earnings of the companies we invest in. We are trying to do business as usual in very unusual conditions.
But every week we deal with the fact that even if the check is in the mail it may become stamped as "insufficient funds." At the same time our political leaders keep saying, "Don't worry, we're doing fine, and things are going to get better."
So am I schizophrenic? Am I nuts? Or is the world messed up and I'm the one that's normal? As I buy and sell stocks like a mad man, I have to wonder. Then I look around at the nations of the world and realize that my finances are in better shape than theirs! So I'll just continue doing what I've been doing and hope they stop doing what they've been doing and get on with life.
Now to the Markets and our stock picks…
Subscribe now to recieve this and future Market Updates.
Paul is author of “The New Gold Standard”. Follow My Take here for free. Also available on a subscription basis is Market Update, which includes in-depth weekly market analysis, stock picks, real-time trade alerts, and instant commentary on what developing stories mean to us as investors.