PaulBlog

Washington Must Ban U.S. Credit Derivatives as Traders Demand Gold

paullewis — Mon, 08 Mar 2010 19:32:36 +0000

Well those Credit Default Swaps are likely to cause even more problems in the future. It appears that those taking out insurance against the US$ defaulting may be requiring payment in something tangible rather than pieces of paper and ink

Congress should act immediately to abolish credit default swaps on the United States, because these derivatives will foment distortions in global currencies and gold. Failure to act now will only mean the U.S. will be forced to act after these “financial weapons of mass destruction” levy heavy casualties. These obligations now settle in euros, but the end game is to settle them in gold. This is so ripe for speculative manipulation that you might as well cover the U.S. map with a bull’s-eye.

Credit default swaps are not insurance. If you buy fire insurance on your home, you must own the house. If you buy credit protection on the United States, however, you do not need to own U.S. Treasury bonds. If your protection gains value after you buy it — not because the U.S. defaults, but because of market mood changes — you can resell that protection and make a profit.

Lower credit risk means a lower price for protection. Zero implies zero risk. The higher the basis points, the higher the implied risk. When U.S. credit default swaps were first introduced, the price of protection was around two basis points. According to Bloomberg, the price for five-year protection was around 38 basis points (per annum) on Friday. But the price in the over-the-counter market — where this stuff actually trades — was almost double or around 75 basis points.

Since most traders in U.S. credit default swaps don’t think the U.S. will default any time soon, why are they trading U.S. credit default swaps? They are speculating on price movements the way a day trader buys and sells stocks to speculate on stock price movements.

Volume in U.S. credit default swaps is relatively small, but it can explode rapidly, just as volume expanded rapidly for credit default swaps on mortgage debt in 2006 and 2007.

Speculators Want U.S. CDS Payoffs in Gold

Remember AIG? When prices moved against AIG on its credit default swap contracts, AIG owed cash (collateral) to its trading partners. AIG paid billions of dollars and owed billions more when U.S. taxpayers bailed it out in September 2008.

U.S. credit default swaps currently trade in euros. After all, if the U.S. defaults, who will want payment in devalued U.S. dollars? The euro recently weakened relative to the dollar, and market participants are calling for contracts that require payment in gold. If they get their way, speculators on the winning side of a price move will demand collateral paid in gold.

Government is the great fiction through which everybody endeavors to live at the expense of everybody else

paullewis — Sat, 13 Feb 2010 20:49:26 +0000

Here in the UK we will no doubt be in for a few months of endless political arguments leading up to the 2010 General Election. In my opinion both the main political parties are clueless about about economics and will end up causing more problems by interfering. Unless that is they take away the power of banks to create debt/money out of thin air, somehow I doubt that will happen as it would appear that the bankers really do control the main political parties.

Government should be the united power of the people, organised, not to be an instrument of oppression and mutual plunder among citizens; but on the contrary, to secure to everyone his own, and to cause justice and security to reign

Written in 1848 by Frederic Bastiat but still very relevant today

http://bastiat.org/en/government.html

Government

by Frederic Bastiat, 1848

I wish some one would offer a prize for a good, simple, and intelligent definition of the word “Government.”
What an immense service it would confer on society !

The Government! what is it? where is it? what does it do? what ought it to do? All we know is, that it is a mysterious personage; and, assuredly, it is the most solicited, the most tormented, the most overwhelmed, the most admired, the most accused, the most invoked, and the most provoked of any personage in the world.

I have not the pleasure of knowing my reader but I would stake ten to one that for six months he has been making Utopias, and if so, that he is looking to Government for the realization of them.

And should the reader happen to be a lady: I have no doubt that she is sincerely desirous of seeing all the evils of suffering humanity remedied, and that she thinks this might easily be done, if Government would only undertake it.

But, alas! that poor unfortunate personage, like Figaro, knows not to whom to listen, nor where to turn. The hundred thousand mouths of the press and of the platform cry out all at once -

“Organize labor and workmen.”
“Repress insolence and the tyranny of capital.”
“Make experiments upon manure and eggs.”
“Cover the country with railways.”
“Irrigate the plains.”
“Plant the hills.”
“Make model farms.”
“Found social workshops.”
“Nurture children.”
“Instruct the youth.”
“Assist the aged.”
“Send the inhabitants of towns into the country.”
“Equalize the profits of all trades.”
“Lend money without interest to all who wish to borrow.”
“Emancipate oppressed people everywhere.”
“Rear and perfect the saddle-horse.”
“Encourage the arts, and provide us musicians, painters, and architects.”
“Restrict commerce, and at the same time create a merchant navy.”
“Discover truth, and put a grain of reason into our heads. The mission of Government is to enlighten, to develop, to extend, to fortify, to spiritualize, and to sanctify the soul of the people.”

“Do have a little patience, gentlemen” says Government, in a beseeching tone. “I will do what I can to satisfy you, but for this I must have resources. I have been preparing plans for five or six taxes, which are quite new, and not at all oppressive. You will see how willingly people will pay them.”

Then comes a great exclamation: – “No! indeed! where is the merit of doing a thing with resources? Why, it does not deserve the name of a Government!

So far from loading us with fresh taxes, we would have you withdraw the old ones. You ought to suppress
“The tobacco tax.”
“The tax on liquors.”
“The tax on letters.”
“Custom-house duties.”
“Patents.”

In the midst of this tumult, and now that the country has again and again changed the administration, for not having satisfied all its demands, I wanted to show that they were contradictory. But, what could I have been thinking about? Could I not keep this unfortunate observation to myself!

I have lost my character forever! I am looked upon as a man without heart and without feeling – a dry philosopher, an individualist, a plebeian – in a word, an economist of the practical school. But, pardon me, sublime writers, who stop at nothing, not even at contradictions. I am wrong, without a doubt, and I would willingly retract. I should be glad enough, you may be sure, if you had really discovered a beneficent and inexhaustible being, calling itself the Government, which has bread for all mouths, work for all hands, capital for all enterprises, credit for all projects, oil for all wounds, balm for all sufferings, advice for all perplexities, solutions for all doubts, truths for all intellects, diversions for all who want them, milk for infancy, and wine for old age – which can provide for all our wants, satisfy all our curiosity, correct all our errors, repair all our faults, and exempt us henceforth from the necessity for foresight, prudence, judgment, sagacity, experience, order, economy, temperance, and activity.

What reason could I have for not desiring to see such a discovery made? Indeed, the more I reflect upon it, the more do I see that nothing could be more convenient than that we should all of us have within our reach an inexhaustible source of wealth and enlightenment – a universal physician, an unlimited treasure, and an infallible counselor, such as you describe Government to be. Therefore it is that I want to have it pointed out and defined, and that a prize should be offered to the first discoverer of the phoenix. For no one would think of asserting that this precious discovery has yet been made, since up to this time everything presenting itself under the name of the Government has at some time been overturned by the people, precisely because it does not fulfill the rather contradictory conditions of the programme.

I will venture to say that I fear we are, in this respect, the dupes of one of the strangest illusions which have ever taken possession of the human mind.

Man recoils from trouble – from suffering; and yet he is condemned by nature to the suffering of privation, if he does not take the trouble to work. He has to choose, then, between these two evils. What means can he adopt to avoid both? There remains now, and there will remain, only one way, which is, to enjoy the labor of others. Such a course of conduct prevents the trouble and the satisfaction from preserving their natural proportion, and causes all the trouble to become the lot of one set of persons, and all the satisfaction that of another. This is the origin of slavery and of plunder, whatever its form may be – whether that of wars, imposition, violence, restrictions, frauds, &c. – monstrous abuses, but consistent with the thought which has given them birth. Oppression should be detested and resisted – it can hardly be called absurd.

Slavery is disappearing, thank heaven! and, on the other hand, our disposition to defend our property prevents direct and open plunder from being easy.

One thing, however, remains – it is the original inclination which exists in all men to divide the lot of life into two parts, throwing the trouble upon others, and keeping the satisfaction for themselves. It remains to be shown under what new form this sad tendency is manifesting itself.

The oppressor no longer acts directly and with his own powers upon his victim. No, our conscience has become too sensitive for that. The tyrant and his victim are still present, but there is an intermediate person between them, which is the Government – that is, the Law itself. What can be better calculated to silence our scruples, and, which is perhaps better appreciated, to overcome all resistance? We all therefore, put in our claim, under some pretext or other, and apply to Government. We say to it, ” I am dissatisfied at the proportion between my labor and my enjoyments. I should like, for the sake of restoring the desired equilibrium, to take a part of the possessions of others. But this would be dangerous. Could not you facilitate the thing for me? Could you not find me a good place? or check the industry of my competitors? or, perhaps, lend me gratuitously some capital which, you may take from its possessor? Could you not bring up my children at the public expense? or grant me some prizes? or secure me a competence when I have attained my fiftieth year? By this mean I shall gain my end with an easy conscience, for the law will have acted for me, and I shall have all the advantages of plunder, without its risk or its disgrace!”

As it is certain, on the one hand, that we are all making some similar request to the Government; and as, on the other, it is proved that Government cannot satisfy one party without adding to the labor of the others, until I can obtain another definition of the word Government I feel authorized to give it my own. Who knows but it may obtain the prize? Here it is:

“Government is the great fiction through which everybody endeavors to live at the expense of everybody else.”

For now, as formerly, every one is, more or less, for profiting by the labors of others. No one would dare to profess such a sentiment; he even hides it from himself; and then what is done? A medium is thought of; Government is applied to, and every class in its turn comes to it, and says, “You, who can take justifiably and honestly, take from the public, and we will partake.” Alas! Government is only too much disposed to follow this diabolical advice, for it is composed of ministers and officials – of men, in short, who, like all other men, desire in their hearts, and always seize every opportunity with eagerness, to increase their wealth and influence. Government is not slow to perceive the advantages it may derive from the part which is entrusted to it by the public. It is glad to be the judge and the master of the destinies of all; it will take much, for then a large share will remain for itself; it will multiply the number of its agents; it will enlarge the circle of its privileges; it will end by appropriating a ruinous proportion.

But the most remarkable part of it is the astonishing blindness of the public through it all. When successful soldiers used to reduce the vanquished to slavery, they were barbarous, but they were not absurd. Their object, like ours, was to live at other people’s expense, and they did not fail to do so. What are we to think of a people who never seem to suspect that reciprocal plunder is no less plunder because it is reciprocal; that it is no less criminal because it is executed legally and with order; that it adds nothing to the public good; that it diminishes it, just in proportion to the cost of the expensive medium which we call the Government?

And it is this great chimera which the French nation, for example, placed in 1848, for the edification of the people, as a frontispiece to its Constitution. The following is the beginning of the preamble to this Constitution: -

“France has constituted itself a republic for the purpose of raising all the citizens to an ever-increasing degree of morality, enlightenment, and well-being.”
Thus it is France, or an abstraction, which is to raise the French to morality, well-being, &c. Is it not by yielding to this strange delusion that we are led to expect everything from an energy not our own? Is it not giving out that there is, independently of the French, a virtuous, enlightened, and rich being, who can and will bestow upon them its benefits? Is not this supposing, and certainly very gratuitously, that there are between France and the French – between the simple, abridged, and abstract denomination of all the individualities, and these individualities themselves – relations as of father to son, tutor to his pupil, professor to his scholar? I know it is often said, metaphorically, “the country is a tender mother.” But to show the inanity of such a constitutional proposition, it is only needed to show that it may be reversed, not only without inconvenience, but even with advantage. Would it be less exact to say:

“The French have constituted themselves a Republic to raise France to an ever-increasing degree of morality, enlightenment, and well being.”
Now, where is the value of an axiom where the subject and the attribute could change places without inconvenience? Everybody understands what is meant by this: “The mother will feed the child.” But it would be ridiculous to say, “The child will feed the mother.”

The Americans formed another idea of the relations of the citizens with the Government when they placed these simple words at the head of their constitution: -

“We, the people of the United States, for the purpose of forming a more perfect union, of establishing justice, of securing interior tranquillity, of providing for our common defense, of increasing the general well-being, and of securing the benefits of liberty to ourselves and to our posterity, decree,” &c.
Here there is no chimerical creation, no abstraction, from which the citizens may demand everything. They expect nothing except from themselves and their own energy.

If I may be permitted to criticise the first words of the French Constitution of 1848, I would remark, that what I complain of is something more than a mere metaphysical subtlety, as might seem at first sight.

I contend that this personification of Government has been, in past times, and will be hereafter, a fertile source of calamities and revolutions.

There is the public on one side, Government on the other, considered as two distinct beings; the latter bound to bestow upon the former, and the former having the right to claim from the latter, all imaginable human benefits. What will be the consequence?

In fact, Government is not maimed, and cannot be so. It has two hands – one to receive and the other to give; in other words, it has a rough hand and a smooth one. The activity of the second necessarily subordinate to the activity of the first. Strictly, Government may take and not restore. This is evident, and may be explained by the porous and absorbing nature of its hands, which always retain a part, and sometimes the whole, of what they touch. But the thing that never was seen, and never will be seen or conceived, is, that Government can restore to the public more than it has taken from it. It is therefore ridiculous for us to appear before it in the humble attitude of beggars. It is radically impossible for it to confer a particular benefit upon any one of the individualities which constitute the community, without inflicting a greater injury upon the community as a whole.

Our requisitions, therefore, place it in a dilemma. If it refuses to grant the requests made to it, it is accused of weakness, ill-will, and incapacity. If it endeavors to grant them, it is obliged to load the people with fresh taxes – to do more harm than good, and to bring upon itself from another quarter the general displeasure.

Thus, the public has two hopes, and Government makes two promises – many benefits and no taxes. Hopes and promises, which, being contradictory, can never be realized.

Now, is not this the cause of all our revolutions? For, between the Government, which lavishes promises which it is impossible to perform, and the public, which has conceived hopes which can never be realized, two classes of men interpose – the ambitious and the Utopians. It is circumstances which give these their cue. It is enough if these vassals of popularity cry out to the people: “The authorities are deceiving you; if we were in their place, we would load you with benefits and exempt you from taxes.”

And the people believe, and the people hope, and the people make a revolution!

No sooner are their friends at the head of affairs, than they are called upon to redeem their pledge. “Give us work, bread, assistance, credit, instruction, more money,” say the people; “and withal deliver us, as you promised, from the demands of the tax- gatherers.”

The new Government is no less embarrassed than the former one, for it soon finds that it is much more easy to promise than to perform. It tries to gain time, for this is necessary for maturing its vast projects. At first, it makes a few timid attempts. On one hand it institutes a little elementary instruction; on the other, it makes a little reduction in some taxes. But the contradiction is forever starting up before it; if it would be philanthropic, it must attend to its exchequer; if it neglects its exchequer, it must abstain from being philanthropic.

These two promises are for ever clashing with each other; it cannot be otherwise. To live upon credit, which is the same as exhausting the future, is certainly a present means of reconciling them: an attempt is made to do a little good now, at the expense of a great deal of harm in future. But such proceedings call forth the spectre of bankruptcy, which puts an end to credit. What is to be done then? Why, then, the new Government takes a bold step; it unites all its forces in order to maintain itself; it smothers opinion, has recourse to arbitrary measures, ridicules its former maxims, declares that it is impossible to conduct the administration except at the risk of being unpopular; in short, it proclaims itself governmental. And it is here that other candidates for popularity are waiting for it. They exhibit the same illusion, pass by the same way, obtain the same success, and are soon swallowed up in the same gulf.

We had arrived at this point, in France, in February, 1849. At this time the illusion which is the subject of this article had made more way than at any former period in the ideas of the French people, in connection with Socialist doctrines. They expected, more firmly than ever, that Government, under a republican form, would open in grand style the source of benefits and close that of taxation. “We have often been deceived,” said the people; “but we will see to it ourselves this time, and take care not to be deceived again?”

What could the Provisional Government do? Alas! just that which always is done in similar circumstances – make promises, and gain time.

It did so, of course; and to give its promises more weight, it announced them publicly thus: “Increase of prosperity, diminution of labor, assistance, credit, gratuitous instruction, agricultural colonies, cultivation of waste land, and, at the same time, reduction of the tax on salt, liquor, letters, meat; all this shall be granted when the National Assembly meets.”

The National Assembly meets, and, as it is impossible to realize two contradictory things, its task, its sad task, is to withdraw, as gently as possible, one after the other, all the decrees of the Provisional Government. However, in order somewhat to mitigate the cruelty of the deception, it is found necessary to negotiate a little. Certain engagements are fulfilled, others are, in a measure, begun, and therefore the new administration is compelled to contrive some new taxes.

Now, I transport myself, in thought, to a period a few months hence, and ask myself, with sorrowful forebodings, what will come to pass when agents of the new Government go into the country to collect new taxes upon legacies, revenues, and the profits of agricultural traffic? It is to be hoped that my presentiments may not be verified, but I foresee a difficult part for the candidates for popularity to play.

Read the last manifesto of one of the political parties – which they issued on the occasion of the election of the President. It is rather long, but at length it concludes with these words: “Government ought to give a great deal to the people, and take little from them.” It is always the same tactics, or, rather, the same mistake.

“Government is bound to give gratuitous instruction and education to all the citizens.”

It is bound to give “A general and appropriate professional education, as much as possible adapted to the wants, the callings, and the capacities of each citizen.”

It is bound “To teach every citizen his duty to God, to man, and to himself; to develop his sentiments, his tendencies, and his faculties; to teach him, in short, the scientific part of his labor; to make him understand his own interests, and to give him a knowledge of his rights.”

It is bound “To place within the reach of all literature and the arts, the patrimony of thought, the treasures of the mind, and all those intellectual enjoyments which elevate and strengthen the soul.” It is bound “To give compensation for every accident, from fire, inundation &c., experienced by a citizen.” (The etcetera means more than it says.)

It is bound “To attend to the relations of capital with labor, and to become the regulator of credit.”

It is bound “To afford important encouragement and efficient protection to agriculture.”

It is bound “To purchase railroads, canals, and mines; and, doubtless, to transact affairs with that industrial capacity which characterizes it.”

It is bound “To encourage useful experiments, to promote and assist them by every means likely to make them successful. As a regulator of credit, it will exercise such extensive influence over industrial and agricultural associations as shall insure them success.”

Government is bound to do all this, in addition to the services to which it is already pledged; and further, it is always to maintain a menacing attitude toward foreigners; for, according to those who sign the programme, “Bound together by this holy union, and by the precedents of the French Republic, we carry our wishes and hopes beyond the boundaries which despotism has placed between nations. The rights which we desire for ourselves, we desire for all those who are oppressed by the yoke of tyranny; we desire that our glorious arms should still, if necessary, be the army of liberty.”

You see that the gentle hand of Government – that good hand which gives and distributes, will be very busy under the government of the reformers. You think, perhaps, that it will be the same with the rough hand – that hand which dives into our pockets. Do not deceive yourselves. The aspirants after popularity would not know their trade, if they had not the art, when they show the gentle hand, to conceal the rough one. Their reign will assuredly be the jubilee of the taxpayers.

“It is superfluities, not necessaries,” they say, “which ought to be taxed.”

Truly, it will be a good time when the exchequer, for the sake of loading us with benefits, will content itself with curtailing our superfluities!

This is not all. The reformers intend that “taxation shall lose its oppressive character, and be only an act of fraternity.” Good heavens! I know it is the fashion to thrust fraternity in everywhere, but I did not imagine it would ever be put into the hands of the tax-gatherer.

To come to the details:-Those who sign the programme say, “We desire the immediate abolition of those taxes which affect the absolute necessaries of life, as salt, liquors, &c., &c.”

“The reform of the tax on landed property, customs, and patents.”

“Gratuitous justice – that is, the simplification of its forms, and reduction of its expenses.” (This, no doubt, has reference to stamps.)

Thus, the tax on landed property, customs, patents, stamps, salt, liquors, postage, all are included. These gentlemen have found out the secret of giving an excessive activity to the gentle hand of Government, while they entirely paralyze its rough hand.

Well, I ask the impartial reader, is it not childishness, and more than that, dangerous childishness? Is it not inevitable that we shall have revolution after revolution, if there is a determination never to stop till this contradiction is realized: -”To give nothing to government and to receive much from it?”

If the reformers were to come to power, would they not become the victims of the means which they employed to take possession of it?

Citizens! In all times, two political systems have been in existence, and each may be maintained by good reasons. According to one of them, Government ought to do much, but then it ought to take much. According to the other, this two-fold activity ought to be little felt. We have to choose between these two systems. But as regards the third system, which partakes of both the others, and which consists in exacting everything from Government, without giving it anything, it is chimerical, absurd, childish, contradictory, and dangerous. Those who parade it, for the sake of the pleasure of accusing all governments of weakness, and thus exposing them to your attacks, are only flattering and deceiving you, while they are deceiving themselves.

For ourselves, we consider that Government is and ought to be nothing whatever but the united power of the people, organized, not to be an instrument of oppression and mutual plunder among citizens; but, on the the contrary, to secure to every one his own, and to cause justice and security to reign.

Hayek vs Keynes Fear The Boom and Bust

paullewis — Sat, 13 Feb 2010 20:31:21 +0000

At present most western governments are continuing to spend money they don’t have under the illusion that credit expansion can create wealth and get the economy moving again. They are merely delaying and increasing the size of the eventual bust.

The Austrian school of economists predicted the present crisis well in advance. And Ludwig von Mises and F A Hayek predicted the 1930′s depression using their business cycle theory. Unfortunately our present leaders are continuing with the failed policies of Keynes.

Many have not heard of the Austrian School of Economics as they make the case for limited government, competing commodity currencies, the abolishment of central banks and their central planning of interest rates. In my opinion its about time people looked at their ideas before the economy continues to get worse and we head towards hyperinflation and the devastation that will cause.

This music video will hopefully help spread the message that Keynes ideas need to die so that the economy can live

Some in the US are preparing for Hyperinflation

paullewis — Tue, 15 Dec 2009 20:37:48 +0000

Worth 30 minutes of your time to watch

History shows that the insane policies of quantitative easing (printing money) all end with the destruction of the currency. Always good to be prepared I think.

Global Warming

paullewis — Tue, 15 Dec 2009 20:22:20 +0000

Two videos worth watching regarding the global warming scam which has been conveniently retitled to climate change as the data shows that the world temperatures are no longer increasing. Maybe some should check the Suns activity. Unfortunately, they have not figured out a way to tax the Sun.

I believe that the scam is being used as a way of increasing taxes and control by the well connected and the bureaucrats.

$4.8 trillion – Interest on U.S. debt

paullewis — Thu, 19 Nov 2009 21:11:52 +0000

Those making policy decisions still keep going on about the danger of deflation meanwhile central bankers continue to print money and governments continue to go further and further into debt.

What they fail to realise is you can not solve a problem caused by easy money with more easy money. They will only ultimately devalue the currency and cause high inflation.

Some are expecting the US debt to grow by $9 trillion over the next decade and over half of that amount is forecast to be interest. The expression when you find yourself in a hole stop digging comes to mind. Unfortunately all politicians are interested in short term results to garner votes.

Link

NEW YORK (CNNMoney.com) — Here’s a new way to think about the U.S. government’s epic borrowing: More than half of the $9 trillion in debt that Uncle Sam is expected to build up over the next decade will be interest.

More than half. In fact, $4.8 trillion.

If that’s hard to grasp, here’s another way to look at why that’s a problem.

In 2015 alone, the estimated interest due – $533 billion – is equal to a third of the federal income taxes expected to be paid that year, said Charles Konigsberg, chief budget counsel of the Concord Coalition, a deficit watchdog group.

On the bright side – such as it is – the record levels of debt issued lately have paid for stimulus and other rescue programs that prevented the economy from falling off a cliff. And the money was borrowed at very low rates.

But accumulating any more interest on what the United States owes at this point is like extreme sport: dangerous.

All the more so because interest rates will rise when private sector borrowers return to the debt market and compete with the government for capital. At that point, the country’s interest payments could jack up very fast.

“When interest rates rise even a small amount, the interest payments go up a lot because of the size of the debt,” Konigsberg said.

The Congressional Budget Office, which made the $4.8 trillion forecast, already baked some increase in rates into the cake. But there is always a chance those estimates may prove too conservative.

And then it’s Vicious Circle 101 – well known to anyone who has gotten too into hock with Visa and MasterCard.

The country depends heavily on borrowing to fund what it wants to do. But the more debt it racks up, the more likely it becomes that creditors could demand a higher interest rate for making new loans to the government.

Here is a similar story about Britains debt problem

OECD warns Britain risks ‘debt spiral’

The Organisation for Economic Co-operation and Development said that even if Britain reduces its deficit in line with other leading nations, it will still have the rich world’s biggest deficit from now until 2017 and potentially beyond, casting serious doubt on its economic credibility.

The warning coincided with shock public finance statistics showing that public borrowing in October was 88 times what it was in the same month last year, making it likely that the Chancellor will miss his £175bn borrowing forecast this year.

The double blow is acutely embarrassing for Downing Street, coming ahead of next month’s pre-Budget report and only 24 hours after it pledged to create a Bill to halve the deficit within four years and to reduce debt every year for the coming decade.

In fact, the OECD predicted in its annual Economic Outlook, Britain’s deficit was likely to be even higher next year than this year, at 13.3pc, raising the prospect that the Government could break its own law in its very first year.

Britain’s deficit will remain higher than any other major country, including even Iceland and Ireland, unless the Government takes far more drastic action to repair it, said the OECD’s acting chief economist Jørgen Elmeskov.

“Halving the deficit would be a start, but since the UK is starting out from a deficit which is in double figures, one should go further still,” he said. “The concern is that there could be a cost spiral – where debt increases, hitting confidence in the market, which pushes up interest rates, and this leads to even higher deficits.”

The prospect of interest payments on Britain’s rapidly growing debt rising to 12pc of tax revenues has already prompted Standard & Poor’s to issue a warning about the security of the UK’s credit rating

It would seem it really is a race to the bottom for both the $ and the £

INDIA BUYS GOLD – UK BUYS BANKS

paullewis — Wed, 04 Nov 2009 10:19:59 +0000

Well we have another momentous day where the UK Government invests even more tax payer money propping up failed institutions.

On the other side of the world we learn of a different investment.

http://goldswitzerland.com/index.php/india-buys-gold-uk-buys-banks/

India, like China, understands the virtues of gold. This is why they have snapped up 200 tons of gold from the IMF at around $1,045 per ounce or $6.7 billion. The UK does not understand gold, that is why Gordon Brown sold most of the nation’s gold in 1999 at virtually the low of $250.

Instead the UK has today spent $51 billion on propping up bankrupt banks. Royal Bank of Scotland received another $41 billion today making it the costliest bailout worldwide with a total of $75 billion. Lloyds Bank received another $10 billion. The US is of course also spending printed money on rescuing bank creditors with 115 bank failures so far in 2009.

So who is likely to make the best return on their investment, India with their gold or the UK or US with their bankrupt banks. We certainly know who we will put our money on.

On 22 October we forecast in our report “Final Warning” that starting in November we are likely to see major changes in markets and in the economy. We have barely entered November and gold is already making a new all time high at $1,081. It is interesting that it is happening right after IMF has disposed of half of the planned gold sales. The same event in the 1970’s was the catalyst for the acceleration of the gold price.

But this is just the beginning as we have been discussing in our reports. We would suggest that investors don’t follow the example of the UK and US and throw good money after bad but instead do like India and protect themselves by buying gold.

3rd November

Gold Switzerland – Matterhorn Asset Management

The Inflation Tax

paullewis — Sat, 31 Oct 2009 19:49:41 +0000

In my opinion the inflation tax is the worst of all government taxes. It is largely ignored as most do not realise the government’s ability to transfer after-tax investor assets into pre-tax income, which can then be taken from individuals through the Inflation Tax.

Inflation is often defined as a general rise in prices. Inflation is actually the increase in the money supply itself, which then leads to an increase in prices that would have otherwise not occurred. The higher prices are a consequence of the increase in the money supply.

On the 5^th April 2008 Gordon Brown completely abolished the Indexation Allowance for individuals when calculating Capital Gains Tax. He had partly restricted it from the 5 April 1998. The Indexation Allowance was supposed to ensure that individuals did not suffer tax on gains that were purely down to inflation, assuming that the inflation statistics used to calculate the indexation allowance were accurate and did not understate actual inflation. Individuals now generally suffer a flat 18% Capital Gains Tax (1) on gains made from the disposal of capital assets.

The following simple examples illustrate how inflation tax can drastically reduce an individual’s after tax net worth. Please note that I have not included calculations of yearly income and expenditure as I wish to illustrate what is happening with the actual capital alone.

Example 1 shows an individual who invests £1,000,000 for 10 years. The asset increases at 10% compounded so that after 10 years it is worth £2,593,742. However, inflation also averages 10% per year so that £2,593,742 in year 10 only purchases the same amount of goods that £1,000,000 did 10 years earlier. In effect no real gain has been made. This is not how the tax man sees it, as a gain of £1,593,742 is taxed at 18% resulting in tax of £286,874 being due. The inflation adjusted after tax result is therefore £889,398 a fall of £110,602 or 11% purely down to the inflation tax at 14% similar to the 1970’s

Example 1
Years	Cash Investment	Value	Borrowings	Net worth	Inflation adjusted	Capital Gains Tax	Inflation adjusted after tax net worth
						18%
0	1,000,000	1,000,000	-	1,000,000
1		1,100,000	-	1,100,000
2		1,210,000	-	1,210,000
3		1,331,000	-	1,331,000
4		1,464,100	-	1,464,100
5		1,610,510	-	1,610,510
6		1,771,561	-	1,771,561
7		1,948,717	-	1,948,717
8		2,143,589	-	2,143,589
9		2,357,948	-	2,357,948
10		2,593,742	-	2,593,742	1,000,000	286,874	889,398

(1) certain allowances and reliefs may be available

What if inflation is higher say

Example 2 shows an individual who invests £1,000,000 for 10 years. The asset increases at 14% compounded so that after 10 years it is worth £3,707,221. However, inflation also averages 14% per year so that £3,707,221 in year 10 only purchases the same amount of goods that £1,000,000 did 10 years earlier. In effect no real gain has been made. This is not how the tax man sees it, as a gain of £2,707,221 is taxed at 18% resulting in tax of £487,300 being due. The inflation adjusted after tax result is therefore £512,700 a fall of £131,446 or 13%.

Example 2
Years	Cash Investment	Value	Borrowings	Net worth	Inflation adjusted	Capital Gains Tax	Inflation adjusted after tax net worth
						18%
0	1,000,000	1,000,000	-	1,000,000
1		1,140,000	-	1,140,000
2		1,299,600	-	1,299,600
3		1,481,544	-	1,481,544
4		1,688,960	-	1,688,960
5		1,925,415	-	1,925,415
6		2,194,973	-	2,194,973
7		2,502,269	-	2,502,269
8		2,852,586	-	2,852,586
9		3,251,949	-	3,251,949
10		3,707,221	-	3,707,221	1,000,000	487,300	868,554

What if your investment grows but doesn’t manage to keep up with inflation say at 6% per annum when inflation is 10% per annum.

Example 3 shows that even though the investment hasn’t kept pace with inflation tax of £142,353 is still due. The inflation adjusted after tax result is £635,566 a fall of £364,434 or 36%.

Example 3
Years	Cash Investment	Value	Borrowings	Net worth	Inflation adjusted	Capital Gains Tax	Inflation adjusted after tax net worth
						18%
0	1,000,000	1,000,000	-	1,000,000
1		1,060,000	-	1,060,000
2		1,123,600	-	1,123,600
3		1,191,016	-	1,191,016
4		1,262,477	-	1,262,477
5		1,338,226	-	1,338,226
6		1,418,519	-	1,418,519
7		1,503,630	-	1,503,630
8		1,593,848	-	1,593,848
9		1,689,479	-	1,689,479
10		1,790,848	-	1,790,848	690,449	142,353	635,566

What are the solutions

There are a number of ways of avoiding the inflation tax. Here are a few

ISA’S

Certain assets can be sheltered in Individual Savings Accounts and any growth is tax free.

Pensions

Again some assets can be sheltered to grow tax free

Limited Companies

Limited Companies still receive the Indexation Allowance and therefore unreal gains should not suffer corporation tax.

Borrowing

Perhaps a more risky method, but there is a way that inflation can be used to your advantage. By borrowing £’s today and paying back with future £’s of reduced value.

Using the same figures as Example 1 only this time with an investment of £100,000 and using £750,000 of borrowed money.

Example 4 shows the results.

The inflation adjusted after tax net worth is £600,240 an increase of £350,240 from the original £250,000 a 140% increase. This is mainly due to the fact the original borrowings of £750,000 have reduced in value, due to inflation, down to £289,157.

Example 4
Years	Cash Investment	Value	Borrowings	Net worth	Inflation adjusted	Capital Gains Tax	Inflation adjusted after tax net worth
						18%
0	250,000	1,000,000	750,000	250,000
1		1,100,000	750,000	350,000
2		1,210,000	750,000	460,000
3		1,331,000	750,000	581,000
4		1,464,100	750,000	714,100
5		1,610,510	750,000	860,510
6		1,771,561	750,000	1,021,561
7		1,948,717	750,000	1,198,717
8		2,143,589	750,000	1,393,589
9		2,357,948	750,000	1,607,948
10		2,593,742	750,000	1,843,742	710,843	286,874	600,240

What if, as in example 3, your investment grows but doesn’t manage to keep up with inflation say at 6% per annum when inflation is 10% per annum.

Example 5 shows that even though the investment hasn’t kept pace with inflation, tax of £142,353 is still due. The inflation adjusted after tax result is £346,409, an increase of £114,409 (46%). Even though the investment has not kept up with inflation, the inflation adjusted after tax result has still increased. This is due to the fact that the real value of the debt has been eroded, due to inflation.

Example 5
Years	Cash Investment	Investment Value	Borrowings	Net worth	Capital Gains Tax	Inflation adjusted after tax net worth
					18%
0	250,000	1,000,000	750,000	250,000
1		1,060,000	750,000	310,000
2		1,123,600	750,000	373,600
3		1,191,016	750,000	441,016
4		1,262,477	750,000	512,477
5		1,338,226	750,000	588,226
6		1,418,519	750,000	668,519
7		1,503,630	750,000	753,630
8		1,593,848	750,000	843,848
9		1,689,479	750,000	939,479
10		1,790,848	750,000	1,040,848	142,353	346,409

The inflation tax transfers wealth from the savers and the prudent to borrowers and the government. A fact that both governments and bankers know only too well.

Prepare for Inflation

paullewis — Sat, 31 Oct 2009 12:32:41 +0000

Although many so called experts are worried about defaltion, I think that the opposite is very likely to happen.

Inflation is the debasement of the currency, central banks create more paper or digital money and the increased supply of this currency devalues its purchasing power. The increase in prices is a consequence and not a cause of inflation.

There has never been a prolonged period in history when unbacked fiat currencies have increased their purchasing power. There may be periods of asset deflation, especially with assets traditionally purchased with leverage, but the cost of goods for daily use will continue to rise in price as governments and central banks continue to increase the money supply. There is usually an initial delay between the time new money is created and when that shows up in a rise in prices, but history shows that it does and the hardest hit are those on fixed incomes.

John Paulson , one of the worlds most successful fund managers has also prepared for inflation. And it is another reason I have been investing in Gold since 2004.

http://www.dailywealth.com/archive/2009/oct/2009_oct_29.asp

Here we get to John Paulson, a presenter at the Grant’s Fall Investment Conference and undoubtedly the richest man in the room. Portfolio magazine dubbed him “The Man Who Made Too Much” after he made $3.7 billion by betting against mortgage-backed securities (MBS). He is one of the greatest hedge-fund managers ever.

Gold is his favorite today. As to why, Paulson presented a simple, but compelling case. First, the monetary base has exploded in a way we’ve never seen before. The monetary base is essentially the Federal Reserve Bank’s currency and reserves. The Fed, by buying up securities in this crisis, has pumped a lot of money into the economy.

You’ve probably seen this chart, or some variation of it. Still, there haven’t been noticeable signs of inflation as a result of that big spike – not yet.

As Paulson explained, that’s because this base money has not yet been lent out and multiplied throughout the economy. Yet the monetary base and money supply are highly correlated, “almost 1-to-1 between the two,” Paulson said.

That means that as the monetary base expands, the money supply surely follows, though there is a lag. (Money supply is a broader measure of money than just the monetary base, as it includes personal deposits and more. The monetary base is like a kind of monetary yeast. It makes money supply rise.)

If money supply grows faster than the economy, that will create inflation, says Paulson. As it is impossible for the economy to grow anywhere near that vertical spike in the monetary base, Paulson contends inflation is coming.

The U.S. is not alone in its money-printing exercise. The supply of most currencies is expanding rapidly – even the normally tame Swiss franc. In the race of paper currencies, they are all dogs. Hence Paulson’s interest in gold, which no government can make on a whim.

Therefore, in the content of the exploding monetary base, gold seems relatively cheap. In other words, as the money supply rises, so does the price of gold, eventually. As a result, says Paulson, “gold has been a perfect hedge against inflation.”

There is some slippage over time. The gold price can change faster or slower than the money supply. But when the market gets worried about inflation, the gold price usually changes much faster – as happened in the 1970s. In 1973 – to pick a typical year – inflation was 9% and gold rose 67%. That was a pattern common in the 1970s.

The potential for inflation this time around is greater than it was in the 1970s, given that the growth in the monetary base is so much greater than it was in the 1970s. Gold could do much better this time around, reaching “$3,000 or $4,000, or $5,000 per ounce” as Paulson said.

Future historians will look back at the present day and see clearly how this unfolded. They will see the litany of news items that pointed to the dollar losing its top perch: China and Brazil are settling up trade in their own currencies. The Russians and others are openly calling for a new monetary standard. Even mainstream outlets are discussing alternatives to a dollar-based standard, a province once solely occupied by cranks and gold bugs. Not a week goes by without these kinds of stories.

Why You’ve Never Heard of the Great Depression of 1920

paullewis — Tue, 27 Oct 2009 20:44:30 +0000

The US suffered a severe economic downturn in 1920/21, worse than the first year of the Great Depression of the 1930′s.

In my opinion the reason for the quick upturn in the economy was due to the fact that the central planners in the Government and at the Central Bank were unsure what to do and therefore did very little. This allowed the market to correct the mistakes of the past, poorly run businesses were liquidated and the strong businesses survived and prospered. In addition Government expenditures were reduced.

This is in contrast to what happened in the 1930′s when the policies chosen included price fixing of farm wages, increased regulations, increased tariffs on imported goods and the devaluation of the US Dollar.