Category: taxation

Questions are never stupid!

A powerful guest post from Patrice Ayme on where next for American energy.

Introduction.

I must have spent an age musing over what to call this Post.  Patrice called it simply ‘Energy Question For The USA’ and it’s a highly appropriate question.  But in the end I chose the title ‘Questions are never stupid’ because I was mindful of the well-known saying, “There is no such thing as a stupid question, only a stupid answer!”

So the smart question raised by Patrice is not only very highly appropriate for 2012, it’s also a question that just has to have a smart answer.  Because we are on the brink of it being too late to be flirting with stupid answers.  What many scientists are saying, in one form or another, is that if we don’t embrace the journey of moving away from carbon-based sources of energy for society now and find those alternate sustainable sources by the end of this decade then the laws of unintended consequences will kick in with a vengeance.  The end of the decade is eight years away!

Here’s a picture of my grandson who was one-year-old just a week ago.

Trusting his elders!

That picture reminds me of the comment early on in James Hansen’s book, Storms of my Grandchildren, where he writes ‘I did not want my grandchildren, someday in the future, to look back and say, “Opa understood what was happening, but he did not make it clear.”

So on to the Guest post from Patrice.  It’s not an easy, quick read but I’ll tell you what it is!  It’s the sort of ‘wake-up’ call this fine Nation and this even finer Planet should be getting from countless politicians and leaders.  So do read it and, even better, add your comments, and wonder why we seem so content on fiddling while Rome burns!

oooOOOooo

Energy Question For The USA

THE AGE OF OIL PRODUCED THE AMERICAN CENTURY. NOW WHAT?

No Vision, No Mission, No Energy

***

Another editorial of Paul Krugman firing volleys at republican “paranoia” for accusing Obama of driving up oil prices. As he observes in “Paranoia Strikes Deeper“: …“the president of the United States doesn’t control gasoline prices, or even have much influence over those prices. Oil prices are set in a world market, and America, which accounts for only about a tenth of world production, can’t move those prices much. Indeed, the recent rise in gas prices has taken place despite rising U.S. oil production and falling imports.”

American households tend to borrow as much as they can. Thus, when oil prices increase markedly, Americans have to cut in crucial budgets, such as house payments. I said at the time that it would lead to a peak in housing prices, and it did.

Why such a drastic influence of oil prices on the economy of the USA? Because Americans, except in a few places such as New York, commute by private car to work. So Americans have to feed the car, if they want to feed themselves.

It was not this way a century ago, or so. At the time public transportation systems using electric tramways and trains were found all over, even in Los Angeles. Car companies put an end to that outrage in the late fifties by buying, and then destroying, all the public transportation system they could put their greedy hands on.  Fossil fuel plutocrats were delighted.

But let’s set aside Krugman’s fake indignation. He is smart enough to know that Romney will do what Romney needs to do to win the Obama, I mean, the election. Waxing lyrical about Romney doing as Obama, does not beat going lyrical about sunrise.

Gasoline prices in the USA are way down in real dollars to what they used to be, decades ago. And so is the gas tax. This means that, far from adapting to the gathering multiply-pronged world ecological and energy crisis, the USA has gone the other way, denying there is any crisis. “What? Me worry?” That’s got to be anti-American indeed.  No, real blooded Americans are all into strip searches and the death panel at the White House.

In Europe, gas prices are more than twice that of the USA, thanks to heavy taxes (stations in France have sported two euros a liter, that is 8 euros per gallon, or more than $10.50). [UK unleaded petrol price, as of today, is the equivalent of $8.70 per gallon, Ed.]

This means that far from being down and out, Europe is efficient enough to operate at that high price level. It also means that Europe is much more motivated than the USA to get much more efficient. In other words, high gasoline prices in Europe are a safety margin. The high prices force the European free market to adapt to a situation that the free market of the USA will encounter someday. Adaptation takes decades: new energies take on the average, historically speaking, 50 years to become dominant. Same, one would guess, for energy efficiencies.

Basically, if oil prices doubled from here, gasoline prices would double in the USA. Whereas, even if the Europeans decided to keep the same high taxes, gasoline prices would only augment by 50%. And, in the much more efficient European economy, with plenty of public electric transportation available, the noxious effects on the European economy would be much less than one would expect from a 50% oil price rise.

The world gets 55 × 1018 joules of useful energy from 475 × 1018 joules of primary energy produced by fossil fuels, biomass and nuclear power plants. That tremendous inefficiency (less than 13%!)  needs to be corrected. It will be, if, and only if, prices are kept high. Thus energy taxes are necessary to adapt to the looming penury.

Why looming penury? Because the reserves of other fossil fuels may have been vastly overestimated (by a factor of 5 in the case of coal). Various fossil fuel lobbies have an interest to over-estimate the reserves (because it keeps the world addicted, as they present their industry as a long range solution, which it is not).

Looking at the raw production numbers, as exhibited below in the graphs, paints a completely different story: production from existing fields is going down dramatically (at 5% rate, per year).  In other words we are in the treachorous waters between the catastrophe of CO2 poisoning and the disaster of running out of energy to burn.

The unavoidable rise of fuel prices will be less grave in Europe than in the USA, because many Europeans would opt for the available electric-based public transportation system (the combination of much more efficient electric motors and central generation is much more efficient than distributing oil to put in SUVs all over, as done in the USA; SUVs, because there are too many holes in the asphalt. A problem partly related to high oil prices!).

Yet, the increase of the cost of imported oil corresponds exactly to the Italian deficit ($55 billion). Although that deficit increase had many causes, oil price increase was by far the most important. And the same for other Southern European countries. So the rise of oil prices was the barrel that broke the back of European debt.

In the USA, ten out of 11 post WWII recessions were followed by oil price spikes. Why are American minds so closed up to the looming strangulation of their economy by oil? Because the fossil fuel plutocracy is on a rampage in the USA. It uses a red hot propaganda to persuade the vast American public of undifferentiated sheep that there is no CO2 ecological crisis, and no energy crisis. (Although the latest polls indicate that two thirds of the public, in a splendid turn-around, believe that there is indeed a man-made climate change crisis; never mind that the New York Times had the latest tornado rampage, with 40 dead, presented as discreetly as possible.)

Why are the fossil plutocrats hysterical? Well we are past Peak Cheap Oil. Moreover, the “majors“, the world’s largest oil companies, have been pushed out of more and more countries, and replaced by national oil companies. Desperate, the majors have gone for riskier and riskier drilling in the deep ocean. Now Chevron, and Transocean, after a 4-day leak off Brazil, see prosecutors asking for lengthy prison sentences and enormous fines.

Most of these oil companies are American, so they have pushed forfracking (destroying the underground with poisons to extract fossil fuels). Superficially, it works: USA imports of fossil fuels went quickly from 60% down to 40%.

However, that did not make a dent in the world price situation, because the demand keeps rising, but the world, overall, is PAST PEAK OIL (as I have long argued and the Nature article alluded to below confirmed, using the obvious argument found in the graphs).

So, basically, American fracking finances Chinese oil consumption. Here are some graphs extracted from Nature and the USA government:

When the horrid sun of diminishing resources rises over the parched American oil desert, while fracking reveals itself to be an unfathomable catastrophe, the howling is going to be very great, and one more reason for a depression will blossom.

Much of the USA’s superiority, in the last 150 years, has come from abundant and cheap oil. First in the North-East, then down to Oklahoma, Texas, Colorado, California. Compare with Western Europe, which had basically no oil.

Oil was not just a question of cheap, convenient energy. Oil has, short of nuclear energy, the highest energy density of any material (OK, nuclear energy is millions of time more energy dense).

Oil gave the USA enormous diplomatic and conspiratorial leverage. American oil plutocrats helped Lenin and Stalin develop their colossal fields in the Caucasus and Caspian. One of those plutocrats, Harriman, son of a railroad magnate, and brother of another Harriman, was one of the main operators of the democratic party. Let alone banker to Hitler. He was decorated both by Stalin, and by Hitler. He then went on as U.S. ambassador to major European capitals, and stayed one the main operators of the government of the USA for decades. “Democrats” have long been impure.

Interestingly, I searched the Internet for a document mentioning Harriman’s Stalino-Hitlerian decorations, but could not find it (I have seen the pictures in the past). All I could read is how much Harriman resisted Stalin each time they met, and that was all the time (a total lie that Harriman resisted Hitler, or Stalin: Harriman was an accomplice of Stalin, and helped give him half of Europe, in exchange for manganese and other stuff. But now Internet agents are obviously paid to reconstruct a truth where American plutocrats look good,  knights in shining armor, fighting Stalin or Hitler, each time they met for tea, dinner, lunch, breakfast, and interminable conferences, for years on end, decade after decade).

A famous example of the clout oil provided the USA with: Texaco fueled Hitler’s conquest of the Spanish republic (this one is hard to hide, because the U.S. Congress slapped Texaco with a symbolic fine, well after the deed was done). That used to amuse Hitler a lot (Hitler gave elaborated reasons to his worried supporters for being in bed with American plutocrats; as the Nazi Party was officially socialist, and anti-plutocratic, that awkward situation may have led him to declare war to the USA on December 11, 1941, to ward off the German generals’ argument that he was just a little corporal in above his head).

Another example: Mussolini was hanged from an American gas station in Milan. Italian communists hanged him from his sponsors’ works.

The fueling of the fascists by American fossil fuel companies helped bring the American Century to the world in general, and Europe in particular. Without Stalin and American plutocratic oil, Hitler’s Panzers could not have moved in 1939 or 1940.

The dignified Elie Wiesel, instead of crying crocodiles tears, wondering how such a thing as Auschwitz was possible, should ask how and why the Nazi extermination machine was fuelled by American plutocrats, and how come he, himself, never talks about that.

Wiesel got the Nobel Peace Prize, just as Jimmy Carter (who launched the American attack on Afghanistan). Was it for disinformation? (And how come waging war in Afghanistan is a big plus for the Peace Prize? Is it related to the same mood which made Sweden help Hitler before and during WWII, and never having a serious look at that, ever since? I know the prize is ostensibly given by Norwegians.)

Wikipedia is big on the notion of “weasel words“, and rightly so. Deeper than that is what I would call weasel logic. And ever deeper, weasel worlds. To talk about Hitler without ever wondering who his sponsors were, and what they were after, is to live in a weasel world.

I like Elie Wiesel personally. Yet, just as I like Krugman, Obama, and countless others, such as the infamous Jean-Paul Sartre, he likes power even more than truth. OK, It is unfair to put Sartre, who really espoused the most abject terrorism, with the others… As long as individuals prefer power to truth, the spontaneous generation of infamy is insured.

Total oil sales, per day are about 100 million barrels (in truth the cap is lower, see graph above), at, say $100, so ten billion dollars a day, 3.6 trillion a year. The USA uses about 25% of that. Some have incorporated the price of the part of the gigantic American war machine and (what are truly) bribes to feudal warlords insuring Western access to the oil fields, and found a much higher cost up to $11 a gallon.

Ultimately, and pretty soon, in 2016, specialists expect oil prices to explode up, from the exhaustion of the existing oil fields. Then what?

Moreover, in 2016, the dependence upon OPEC, or, more exactly Arab regimes, is going to become much greater than now. What’s the plan of the USA? Extend ever more the security state, and go occupy the Middle East with a one million men army? To occupy, or not to occupy, that is the question.

Is it time for a better plan? And yes, any better plan will require consumers to pay higher energy prices. As consumers apparently want the army to procure the oil, they ought to pay for it.

***

Patrice Ayme

***

Note 1: Flying cost at least ten times more in CO2 creation than taking a train. And jet fuel is not taxed, at least until the carbon plan of the European Union starts charging next year, in 2013. In spite of the screaming from the USA and its proxies: it’s funny how attached to subsidies American society can be.

Note 2: Refusing to pay for necessary military expenses through taxation and mobilization, was a big factor in the downfall of the Roman Principate.

The Principate then tried to accomplish defense on the cheap, by using more and more mercenaries. Many of these mercenaries or their children and descendants were poorly integrated in Roman republican culture (say emperors Diocletian or Constantine, let alone Stilicho the Vandal, a century later), so they established theDominate, itself a negation of the Roman republic. Amusingly the Western Franks, those salt water (“Salian“) Franks remembered the Roman republic better than all these imports from the savage East… who could not remember it, they, and their ancestors, having never known it.

Guess what? The USA’s army presently employs 300,000 “private contractors” (aka, mercenaries). Curiously, in that case, it’s not so much to save money, than to extract more money from the system (but that’s another story). Still, it will have the same effect.

oooOOOooo

The Greatest Crash – footnote

The story that could run for an awfully long time!

I rather revealed my newness as a US resident by posting my review of David Kauders’ book The Greatest Crash over 2 days last week,  one of them being Thanksgiving Day.  Despite that 1,895 people viewed my review which was entitled The end of an era.

A week has now passed since that review.  I was curious to see what sorts of headlines had been making the news in the last 7 days.  It’s just a random trawl through those items that have captured my attention.

Let’s start with the Financial Times, November 27th,

The eurozone really has only days to avoid collapse

By Wolfgang Münchau

In virtually all the debates about the eurozone I have been engaged in, someone usually makes the point that it is only when things get bad enough, the politicians finally act – eurobond, debt monetisation, quantitative easing, whatever. I am not so sure. The argument ignores the problem of acute collective action.

Last week, the crisis reached a new qualitative stage. With the spectacular flop of the German bond auction and the alarming rise in short-term rates in Spain and Italy, the government bond market across the eurozone has ceased to function.

Wolfgang concludes his article thus,

Italy’s disastrous bond auction on Friday tells us time is running out. The eurozone has 10 days at most.

Then my print copy of The Economist that arrived on the 26th had this lurid cover page,

Unless Germany and the ECB move quickly, the single currency’s collapse is looming

The leader article contains this paragraph,

Past financial crises show that this downward spiral can be arrested only by bold policies to regain market confidence. But Europe’s policymakers seem unable or unwilling to be bold enough. The much-ballyhooed leveraging of the euro-zone rescue fund agreed on in October is going nowhere. Euro-zone leaders have become adept at talking up grand long-term plans to safeguard their currency—more intrusive fiscal supervision, new treaties to advance political integration. But they offer almost no ideas for containing today’s conflagration.

and a few paragraphs later, this,

This cannot go on for much longer. Without a dramatic change of heart by the ECB and by European leaders, the single currency could break up within weeks. Any number of events, from the failure of a big bank to the collapse of a government to more dud bond auctions, could cause its demise. In the last week of January, Italy must refinance more than €30 billion ($40 billion) of bonds. If the markets balk, and the ECB refuses to blink, the world’s third-biggest sovereign borrower could be pushed into default.

Then on Sunday, 27th, MISH’s Trend Analysis blogsite reveals,

ICAP Plc, the world’s largest inter-dealer broker (one that carries out transactions for financial institutions rather than private individuals), is now Testing Trades In Greek Drachma Against Dollar, Euro

ICAP Plc is preparing its electronic trading platforms for Greece’s potential exit from the euro and a return to the drachma, senior executives at the inter-dealer broker said Sunday.

ICAP is the latest firm to disclose such preparations, joining the growing ranks of banks, governments and other key players in the global financial system whose officials are worried enough about the stability of the common currency to be making contingency plans for a possible break-up.

Then Bloomberg published an article by Peter Boone and Simon Johnson, the latter of Baseline Scenario fame, that opened as follows,

Investors sent Europe’s politicians a painful message last week whenGermany had a seriously disappointing government bond auction. It was unable to sell more than a third of the benchmark 10-year bonds it had sought to auction off on Nov. 23, and interest rates on 30-year German debt rose from 2.61 percent to 2.83 percent. The message? Germany is no longer a safe haven.

and concluded,

Ultimately, an integrated currency area may remain in Europe, albeit with fewer countries and more fiscal centralization. The Germans will force the weaker countries out of the euro area or, more likely, Germany and some others will leave the euro to form their own currency. The euro zone could be expanded again later, but only after much deeper political, economic and fiscal integration.

Tragedy awaits. European politicians are likely to stall until markets force a chaotic end upon them. Let’s hope they are planning quietly to keep disorder from turning into chaos.

Finally, on the 29th the BBC News website carried details of the Autumn Statement made by British Chancellor, George Osborne, to Parliament.

Osborne confirms pay and jobs pain as growth slows

Chancellor George Osborne has said public sector pay rises will be capped at 1% for two years, as he lowered growth forecasts for the UK economy.

The number of public sector jobs set to be lost by 2017 has also been revised up from 400,000 to 710,000.

Borrowing and unemployment are set to be higher than forecast and spending cuts to carry on to 2017, he admitted.

Just look at that figure of public sector job losses – 710,000!

Well that’s more than enough from me but it does surely endorse the opening views that David Kauders expounded in his book, as carried in my review, and reproduced here,

Starting with the first sentence, David sets out the core problem;

This book argues that it is impossible to expand the financial system much further.

expanding this a few paragraphs later,

This is the financial system limit: lack of new borrowing plus excessive weight of debt obligations from past borrowing combine to slow economies down. This is the barrier whichever way policy makers turn. It is like the lid on a boiling kettle. Enough steam can lift it for a while but it always snaps back into place. The financial system limit is a roadblock preventing growth.

A few pages later in this opening chapter ‘The roadblock preventing growth‘ this limit is explained thus,

Policy contradictions also show us that the financial system has reached a roadblock. The glaring conflict between bailout and austerity is at the core. Each bailout or stimulus requires creation of more credit, leading to false financial speculation, and for a short while markets recover their poise. The threat of inflation returns. Later, bad debts rise, the markets tumble again and a new crisis emerges. Austerity, the alternative policy, cuts spending thereby cutting the immediate level of economic activity and bringing economic decline more quickly than the stimulus alternative. Whichever way they turn, the authorities are damned.

You can understand why I called this Post a ‘footnote’ not an endnote.

The end of an era, part two.

A review of David Kauder’s recently published book, The Greatest Crash.

Details of the availability of the book are included at the end of the review.

Extracts from the book included are with grateful thanks to Sparkling Books.

Part One of this review was published yesterday which needs to be read before Part Two.

——————-

Chapter 5 continues by examining the over-bearing consequences of excessive public spending, excessive Government regulations, substitute taxation, weakness of Treasury forecasts, and so on. While these are UK issues, there is no doubt that similar restraints of free enterprise exist in many other western nations.

In Chapter 6, ‘Group Think‘, David looks at the strange ways in which we form opinions.  It’s a topic that has been discussed and written about widely but the point behind this chapter is that people have in great part lost the ability to discern truth from fiction, with terrible implications when it comes to understanding how individuals are affected by government and bureaucratic institutions.

The chapter closes;

One of the remarkable points that I have found in writing this book is that many of the detailed errors, incorrect policies et al, have already been amply documented by others. But we never learn. The delegated society, the strength of lobby groups and vulnerability of our political system to pressure, the sheer volume of noise in the media and on the Internet, the immediacy of the demands of daily life, all combine to make our collective memory rather short.

Amen to that!

Chapter 7, ‘Academic differences of opinion‘, was surprisingly short at just 6 1/2 pages. One would have thought the subject worthy of a much longer review especially as David was exploring the fundamental differences between Keynesian and Ricardian economic theories and opportunities for alternative theories. Must say that that I laughed out loud (David’s book is a little short on humour!) at the sentence on p.127 that ran, “One correspondent writing to the Financial Times proposed that economics should be declared a failing discipline, economists as not fit for purpose, and a physicist put in charge of sorting their theories out.”

Chapter 8, ‘The dark side of capital markets‘, is the penultimate chapter and quite a technical one at that. But David manages to trip through esoteric aspects, well esoteric to the lay reader, in a manner that keeps one involved.   Here’s an example from early on in the chapter.

Capital markets follow a long cycle beyond the experience of most practitioners, detectable only by understanding history and then applying this understanding to contemporary conditions.

It didn’t mean much to me. Then the next sentence;

The principles are identical for any market where prices depend on the supply of credit: equities, bonds, property and commodities are all markets where the prices must relate to the availability of credit.

That, at least, was understood but still the penny hadn’t dropped. Then came;

Bond prices prosper when credit is lacking while the other three prosper when credit is abundant.

That then made sense to me but still only at some academic level. David then followed those sentences with these two paragraphs;

The whole market cycle consists of bull market followed by bear market, as surely as night follows day. The bull market in assets is driven by an increasing supply of credit and economic expansion, since more credit leads to higher prices. The bear market in assets is driven by less credit and economic contraction; there is no purchasing power to keep asset prices high. Only fixed interest bonds are contra-cyclical, declining in price as credit expands and rising in price as credit sinks.

There are two useful theories for analysing the whole market cycle: conversion flow and Dow theory.

So in half-a-page of text, the book effectively educated me and then showed the relevance of that learning to the world I was living in. Cleverly done!

Chapter 9, ‘The attitude change‘, is, without doubt, a clincher of a close to this fascinating book. The sentiments conveyed in this chapter are so unexpected that, forgive me, it would be wrong to explicitly refer to them.  Buy the book!

Let me just say that the last chapter fully endorsed me calling this review The End of an Era.

Overall conclusions

This is an important book from a writer who has both the academic and professional experience to enable him to form the views that he expresses. Only time will tell if the whole scenario that is envisaged by Mr. Kauders will play out as he expects. My personal view is that it will.

For individuals and business alike, reading The Greatest Crash will inform you in a manner that I would argue is critical when one notes the precarious and potentially unstable period we are living through. The decisions readers make after reading the book are beyond the remit of this review and, of course, David Kauders, but, at least, read the book!

Prof. Myddelton in the book’s introduction wrote, “But one of the things we need now is new thinking on the fundamentals.” Perhaps not new thinking on fundamentals, as the Prof. puts it, but a reinstatement of core fundamental values.

I am not alone from sensing that the world, especially the western world, is transitioning from an era of greed and materialism, seeing a world of unlimited resources, to a different societal relationship with planet Earth, the only planet we have. A transition across all layers of society towards the values of truth, integrity and compassion; values whose day has come.

The Greatest Crash reinforces immensely my notion that this truly is the end of an era.

——————

Want to buy The Greatest Crash?  The ebook was published in October worldwide, the  paperback published in the UK on the 1st November UK, the hardcover being released any day now in the UK.  For North America both the paperback and hardcover versions are being published on 1st February, 2012.

Full details from the Sparkling Books webpage here.

Copyright © 2011 Paul Handover

The end of an era, part one.

A review of David Kauder’s recently published book, The Greatest Crash.

Details of the availability of the book are included at the end of both parts of my review, part two is published tomorrow.

Extracts from the book included are with grateful thanks to Sparkling Books.

Personal introduction.

Back in the late 90s, when I was living in England, I attempted to bolster my self-employed income by investing and trading in equities. It was a frustrating game, game being the right word! One day I was lamenting this to a close friend and he gave me the name of David Kauders at Kauders Portfolio Management and suggested I might like to contact him.

I followed my friend’s recommendation and met with David. What he outlined at that meeting all those years ago was mind-blowing, no other way of putting it. Essentially, David predicted a financial and economic crisis of huge proportions. He convinced me of the likelihood of that crisis and in November 2001 I became a fee-paying client. As the world now knows that prediction came to fruition. My anticipated residency in the USA meant continuing to be a client was not possible, and I ceased being a client of Kauders Portfolio Management in June 2010.

Thus not only am I deeply indebted to my friend for referring me to David but also unable to write this review from an unprejudiced point of view.

The Greatest Crash

The book, released in paperback in England in October 2011, published by Sparkling Books, is subtitled ‘How contradictory policies are sinking the global economy‘. Frankly, that subtitle doesn’t do much for me. A clearer message that comes from the book is this: the economic world has reached a ‘systems limit’. Indeed, the term systems limit is used widely throughout the book.

In his introduction to the book, Professor D. R. Myddelton, Chairman of the Institute of Economic Affairs, writes,

Adam Smith said ‘There’s a deal of ruin in a nation’, and it would be a mistake to despair. But one of the things we need now is new thinking on the fundamentals. That is what David Kauders provides in his book ‘The Greatest Crash’.

Without doubt, David achieves that.

Starting with the first sentence, David sets out the core problem;

This book argues that it is impossible to expand the financial system much further.

expanding this a few paragraphs later,

This is the financial system limit: lack of new borrowing plus excessive weight of debt obligations from past borrowing combine to slow economies down. This is the barrier whichever way policy makers turn. It is like the lid on a boiling kettle. Enough steam can lift it for a while but it always snaps back into place. The financial system limit is a roadblock preventing growth.

A few pages later in this opening chapter ‘The roadblock preventing growth‘ this limit is explained thus,

Policy contradictions also show us that the financial system has reached a roadblock. The glaring conflict between bailout and austerity is at the core. Each bailout or stimulus requires creation of more credit, leading to false financial speculation, and for a short while markets recover their poise. The threat of inflation returns. Later, bad debts rise, the markets tumble again and a new crisis emerges. Austerity, the alternative policy, cuts spending thereby cutting the immediate level of economic activity and bringing economic decline more quickly than the stimulus alternative. Whichever way they turn, the authorities are damned.

In the next chapter, ‘Evolution by trial and error‘, David writes about economic cycles and reminds his readers that the long economic cycle is often “beyond the practical experiences of our working lifetimes“.  Then later suggesting that because we have seen the greatest period of inflation ever since the end of World War Two, ergo “the unwelcome lesson from history is that the greatest deflation should follow.”

In Chapter 4, ‘An Era of Wishful Thinking‘, the spotlight is put on the horrific policy errors that have been made for decades, try these three examples (there is a longer list in the book),

  • Policy makers believed that debt could expand indefinitely, at no cost.
  • Nobody realised that interest rate rises would make existing borrowing unaffordable and cause a wave of defaults.
  • The world was swamped with so many detailed requirements and standards that nobody could understand how they all fitted together. It was assumed that ‘transparency’, i.e. extensive detail, would solve the inability to comprehend how the parts made the whole.

Part Two of the review, continuing with Chapter 5 is tomorrow.

Want to buy The Greatest Crash?  The ebook was published in October worldwide, the  paperback published in the UK on the 1st November UK, the hardcover being released any day now in the UK.  For North America both the paperback and hardcover versions are being published on 1st February, 2012.

Full details from the Sparkling Books webpage here.

Copyright © 2011 Paul Handover

Government Taxation Departments, don’t you just love them!

Sent in by John Lewis, an old (English) friend of this Blog.

Apparently this is a real reply from the (UK) Inland Revenue. The Guardian newspaper had to ask for special permission to print it.

Dear Mr Addison,

I am writing to you to express our thanks for your more than prompt reply to our latest communication, and also to answer some of the points you raise.   I will address them, as ever, in order.

Firstly, I must take issue with your description of our last as a “begging letter”.    It might perhaps more properly be referred to as a “tax demand”.    This is how we at the Inland Revenue have always,  for reasons of accuracy,  traditionally referred to such documents.

Secondly, your frustration at our adding to the “endless stream of crapulent whining and panhandling vomited daily through the letterbox on to the doormat” has been noted.    However, whilst I have naturally not seen the other letters to which you refer I would cautiously suggest that their being from “pauper councils, Lombardy pirate banking houses and pissant gas-mongerers”  might indicate that your decision to  “file them next to the toilet in case of emergencies”  is at best a little ill-advised.    In common with my own organisation,  it is unlikely that the senders of these letters do see you as a “lackwit bumpkin” or, come to that, a “sodding charity”.    More likely they see you as a citizen of Great Britain , with a responsibility to contribute to the upkeep of the nation as a whole.

Which brings me to my next point.   Whilst there may be some spirit of truth in your assertion that the taxes you pay  “go to shore up the canker-blighted, toppling folly that is the Public Services”,  a moment’s rudimentary calculation ought to disabuse you of the notion that the government in any way expects you to “stump up for the whole damned party”  yourself.    The estimates you provide for the Chancellor’s disbursement of the funds levied by taxation,  whilst colourful,  are,  in fairness,  a little off the mark.     Less than you seem to imagine is spent on “junkets for Bunterish lickspittles”  and  “dancing whores”  whilst far more than you have accounted for is allocated to,  for example,  “that box-ticking facade of a university system.”

A couple of technical points arising from direct queries:

1. The reason we don’t simply write  “Muggins” on the envelope has to do with the vagaries of the postal system;

2. You can rest assured that  “sucking the very marrow of those with nothing else to give”  has never been considered as a practice because even if the Personal Allowance didn’t render it irrelevant,  the sheer medical logistics involved would make it financially unviable.

I trust this has helped.   In the meantime,  whilst I would not in any way wish to influence your decision one way or the other,  I ought to point out that even if you did choose to  “give the whole foul jamboree up and go and live in India ”  you would still owe us the money.

Please send it to us by Friday.

Yours sincerely,
H J Lee
Customer Relations
Inland Revenue

Should you invest in U.S. bonds? Part 4

This is the concluding part four of a multipart series on the factors that drive U.S. and foreign bond prices and yields.

[Part One is here, Part Two here, Part Three here Ed.]

Bond’s in a weak or faltering economy will generate a lower return to lenders than bonds in a strong economy, absent inflation or any other material changes in the purchasing power of the currency.  Weak demand for goods and services means weak demand for financial capital which means low rates of return on financial capital.

The policies of the government can increase the borrowing costs of private industry.  Fiscal policy that increases taxes reduces the profitability of projects and undermines the ability of companies to pay coupons and repay principal.  Monetary policy that increases the money supply may lead to inflation, which also increases the cost of borrowing and reduces economic activity.

Lastly, and of the greatest concern of late, is the level of borrowing by the U.S. government.   Debt levels are at record highs, with no relief in sight. The AAA rating of U.S. debt is reportedly in jeopardy (Chicago Tribune editorial).

Moody's Corporate Logo

Both existing and new lenders worry about the ability of the U.S. government to repay. Yes, the can simply roll over existing debt by raising taxes or creating money to retire old debt and replace it with new, but the interest rate required by new lenders goes up as the ability of the private economy to sustain tax revenues falls and the risk of inflation rises (Moody’s explains U.S. bond ratings).

Both factors are in play now: an anemic economy with little hope that this administration will undertake policies that support business, and a ballooning money supply and weak dollar that undermine the purchasing power of the returns to lenders.  The returns to U.S. debt may still be healthy relative to those one can earn in other countries, but the spread is shrinking. The private economy remains fundamentally strong, thanks to the work ethic of the American people and the profit motive of the capitalistic system, but the policies of the U.S. government are straining those resources.

By Sherry Jarrell

Should you invest in U.S. bonds? Part 3

This is part three of a multipart series on the factors that drive U.S. and foreign bond prices and yields.

[Part One is here, Part Two here, Ed.]

The yield on a bond is made up of several components. Some think of the return on a bond as the sum of the risk-free rate of interest (how impatient we are to get our money back, or how much we need to be compensated to delay consumption) and a risk premium (the additional return we require to compensate us for the risk of default, the risk the bond will be called, the risk of inflation reducing the purchase power of the repaid dollars, and many other sources of risk as outlined in the most recent article in this series).

Another useful way of thinking of the return on a bond is as the sum of the real rate of interest and the expected rate of inflation.  But what is the real rate of interest?  We never actually observe that rate, unless of course the inflation rate is zero and then the real rate is just the nominal rate set in the market.

It is useful, however, to think about what drives the ability of a company to generate a real rate of return to lenders, for this is essence of capitalism and risk-taking and creating economic value and growth.

Bond traders

A firm’s asset cash flows support the real returns to its lenders – all kinds of lenders (debt, equity, hybrid, and derivative security holders). A firm will want to borrow more, and is willing to pay a higher interest rate for those funds, the more profitable are the projects they want to undertake, or the greater the number of profitable projects. Profitability, in turn, is determined by the relationship between demand and supply:  how much does society value a good or service, and how many resources does the business use in producing the good or service.  As the marginal productivity or efficiency of a business goes up, it can afford to profitably fund more projects.  So the core driver of the real return on bonds is the strength of the underlying economic activity of the private economy.

Or, when viewed from the investor’s side, note that an investor will purchase a bond, or lend money to a company, if they expect to earn a return sufficient to compensate them, first, for delaying consumption and, second, for bearing the various sources of risk or uncertainty associated with the bond’s cash flows or return.

By Sherry Jarrell