Some thoughts on debt

Hey now this is an interesting idea.
Lets think it through shall we ?

We first tell Tiger Woods that after winning 2 tournaments he should sit out the rest of the season. Doubt his mangers would let him play for free when he has other business interests to look after. The public will love this. And ticket prices at the first few tournaments of the year will be very high as you wont see Tiger after March. Pity he'll miss the Masters.
Oh yeah, and the taxes on the other 9 mil he'd have won will never see the US Treasury. So we'll just have lawmakers raise taxes on the rest of us ..... read that the middle class.

Next the men who create businesses that emply more than 1000 people will have to either work for free [not likely] or let their businesses freeze. If men of their talent were around to replace them, they'd start their own firms. So no more large business. No economies of scale to bring down costs and prices for the consumer. The public will love this.

While we are at it, we can make coaches in all sports change their strategy once they get too far ahead. This will make games closer and more interesting. Nevermind that standard of play will plummet. The public will never know as excellence will be a distant memory for only the old folks who are losing their memories anyway. Equality and excitement trumps virtue.
Great plan.

I could go on ..... but you get the idea.
You, btw, can run for public office on a platform like this one.
And you would likely win.
The public often buys this BS as it 'sounds so good'.
Then eventually comes the depression and everyone wonders why ?

 

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You assume the worst. It is also possible that Woods would continue to play to retain eligibility for his next year's $1 million (the rules of sports would likely be different in such a society), or continue to play for fun or practice. And if he doesn't play out the remainder of the year then someone else would take his place until the start of the new year, and the crowds, having no one better to see, would see other players. And if the crowds were dramatically lessened, that might be a small price to pay for having a society that is much improved in other ways in which you gave no consideration.

Consider also the possibility that there might a wider variety of popular sports in such a society, since there might be more stars in the limelight. Once Woods takes a leave after his $1 million in any given year, people could direct their attention to some other sport that doesn't exist today due to Woods taking a lion's share of the attention.

The best business people would likely remain in their businesses regardless of a cap on income. Do you think Bill Gates works for money? Doubtful. More likely he works because it's what he enjoys most, regardless of pay.

Yes, taxes on the middle class would be raised, but then the average middle class wage would be something like double or triple today's average, because 90% of all wages would no longer be going to just 1% of the people, or whatever the current outrageous stat is.

I could go on ..... but you get the idea.

 

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If you have the time, reading Atlas Shrugged would give you a good picture of the chaos that would ensue if this concept were ever put into practice. Very quickly, the producers would drop out of sight, taking their accumulated wealth and expertise with them, and the world would quickly descend into chaos, because the people who actually had the intellectual horsepower to keep things running would be gone.

Put it this way, suppose you did give everyone $1M. Within a few years, the rich would be rich again, and the poor would go back to being poor. It's not an accident that some accumulate wealth, while others continue that same bad habits that prevent them from rising above poverty.

 

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No, I was able to legally save a bundle by parking "my" savings in my children's “owned” CD's etc for more than 15 (20?) years. My last child was only 2.5 months old when she had to file her first IRS return! (Her interest income was carefully planned so it was just below that which would have caused her to pay taxes to the State of Maryland - so it was effectively tax free interest. - more Maryland tax details in my earlier post, #32)

I was among the first to understand this then legal trick on the IRS; but our numbers were growing every year. After my youngest went to college, the IRS rules changed. - I just checked for you. - The change, is still in effect.* It makes any (passive only?) income of child under 18 taxed at the parent's rate, even if legally owned by the child and reported to IRS in child's social security number. (Probably IRS would not detect, but I never cheat on IRS. - was once audited. - I was correct (on another matter - The treatment of "return of capital" a company erroneously reported to IRS as a "dividend.") and the IRS BACKED DOWN AND APOLIGIZED, in writting for the inconvenience, when I threated to file amended returns for prior three years that would have given me additional small refunds! They have never messed with me again.)

Sorry - I got a legal free ride, but you are a couple of decades too late. (I have knack of being ahead of the crowd. - It has made me rich. - Fortunately, five years ago, I foresaw the current movement out of dollars and moved my dollars into ADRs, as many other wise people have done more recently - Their buying has more than trippled the average value that I moved before some others also foresaw the coming dollar collapse. - On this (ADRs) you have already missed the main real gain, but probably there is still a lot of appreciation (in dollars, not in real value) yet to come - but you do not want that as that is the IRS's trick. - I.e. you pay taxes on "profits" that are not real.

For tax reasons, I could not cash in all my retirement plan funds (Early widthdrawal penalty and huge tax on the profits if taken in one year.) Thus I parked most of it in TIPs (US's inflation protected bonds) within the last 6 months - had the courage to leave it in the stocks until many others started talking about US's problems. TIPs pay less interest than regular bonds and are not yet recognized as smart investment, especially if as is my case, you are only trying to preserve your purchasing power, not add to it, by capital gain.

You might want to think about TIPs; it not too late to buy them. When foreigners will not lend any more to finance the US's growing debts (at less than 15% interest) and BoP problems, although reduced, are still continuing (because the US rich will still be buying French wine, BMWs etc. - GWB has increased the concentration of wealth into their hands, so the falling value of dollar will not stem imports as much as it normally should.), the mint's presses will run 24/7.

After making a valiant effort (higher interest rates that kill US growth) at inflation control, Bernachie will resign (or be fired for destroying US growth) and then even Joe American will want his savings (unfortunately already at a negative rate for two years) in TIPs. The US voters will understand (or at least think) that as they have very low (or negative) net worth / essentially zero saving (have spent the equity in their houses by refinancing it.) inflation is not such a bad thing. (The dislike of the rich will also play a role - the masses will think (falsely, as the rich will already have their money out of US, in ADRs, foreign bonds etc.) that inflation will at least hurt the rich (who have caused this disaster, conveniently forgetting that they voted for GWB) and Bernachie's replacement will tilt strongly to restoring growth even if that is driving inflation into double digits (15%/year?). (The FED has an impossible charter: Control inflation, stimulate growth and full employment, etc.)

That is my view of the coming decade (a nearly global depression, by or before 2021, with China, India, and their suppliers of raw material and food stock less hurt than makers of high added value products.) - I have not been wrong yet in my long term views. I am not happy about this and have done all I could to educate the public that a better future was possible as my children and grandchildren all live in the USA. (I have also taken steps to protect myself.)

I am now resigned to my failure to influence the future. - It is like the "Indian's Prayer" - I had the strength to try** to change what could have been changed, (starting five years ago when I did, but no longer can be). Now I must have the tranquility to accept the inevitable. I think I have had the wisdom to know which is which (changeable and inevitable). That is the third part of the "Indian prayer" - three requests of God; but only time will tell if that has been true. I sincerely hope this is my first error in long term prediction, but every passing day seems to confirm my view.
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*For more details from IRS, see form 8615 &6251 and their instructions, but the essence is as I stated: Child under 18 is now taxed at the parent's rate. I.e. the trick is no longer legal.

**Wrote (more than 3 years ago) and published book Dark Visitor at my own expense, with no effort for "fame" (Author is also Billy T, my false name) or profit - (Read it for free at web site under my name.) and been so active here and at other forums for years with the same "broken record" message of "dollar collapse gloom coming," that few even bother to read my generally long posts to the end. I gave it my best shot, but even at the start, I realized I would probably fail.
Dark Visitor is a physics book in disguise, trying to interest more students (who would never knowingly open any science book) to study the hard sciences etc. so US does not lose scientific learership as it already has technological leadership; However, the title is also alogorical for the dark cloud coming to the Western world's economies (as well as a literal reference to the black hole approaching the solar system that throws Earth into a permanent ice age with small orbit change.)

 

That book is fiction. One of the worst I've tried to read, so depressing! I don't believe what the author predicts would happen. Her predictions were pretty ridiculous. IIRC, she had executives dropping out of society to make their own oil individually. That odds of that even being possible are nil. According to the author, only the execs (the "producers") do the real work. I think it's mostly the opposite. Ann Rand had a very conservative outlook that isn't upheld by even a cursory look at the real world.

I didn't say give everyone $1M. I said cap pay at $1M annually. If the "producers" drop out of sight, they lose their chance to make more money in subsequent years. They'd not be able to buy the yacht they want unless they stay in business. And if they did drop out of society, plenty of other capable people would vie to replace them.

 

Oh well. Thanks for checking! I’m not sure I would have your attention to detail anyway. I hate paperwork!

Re TIPs, I’ve checked into those, and they suit my conservative fiscal style (I’m adverse to risk, especially nowadays). My concern is that when push comes to shove the US will understate inflation; it seems they have that incentive. Do you think CD rates will adjust upward for inflation due to market forces? It seems that that was true in the past, like in the 70s and 80s.

I’d like to be largely out of the US dollar, but I need to sell my house first. I agree with you that harsher times are on their way. I agree that Bush & gang have severely damaged the US economy and it’s sliding downhill. I’m a little afraid to have money in US banks—things could get so bad that bank assets are frozen and converted to a lower-value currency, like they were in Argentina.

Yes, acceptance is the key. Also living lightly. The less money a person needs to be comfortable, the less a recession or depression affects them.

Re scientific leadership, I don’t believe that so much anymore. It seems to me that scientific progress does more harm than good. (Consider that there's a couple thousand scientists in the US whose job it is to invent diseases for which drugs are sold. How many people had acid reflux disease before 2000? It wasn't invented yet!) I don’t want my son to work his brain for ten years to get a slight advantage over someone from another country, just so he can make an average wage and still be prone to being laid off at any time. Someone told me “If I learn how to type, then I’ll have to type.” That is, be a drone instead of a decision maker. If the US lost its scientific edge and became more like Spain, with its lower wages but far better culture, that would be a good thing in my book.

 

CD rates will go up (or none will be sold - people will quickly learn that a CD promising to pay 8% after a year is not a good deal if (1) the government will take 2 of the 8% as taxes on your so called "earnings" or "profit." (i.e. your marginal tax rate assumed to be 25% here) and (2) the purchasing power of the dollar is decreasing at 10% per year.

TIP's have the value of the principle adjusted, by index that will be hard to modify significantly. (But you are correct - the hard pressed government will try and must as it can not pay the also inflation adjusted growing collections from Social Security - "Baby Boomers" declining wages of those still working, etc.) That admitted, the principle of tips, along with the interest payments should at least let you retain your buying power - that is all I ask of them. If I can do that I am well fixed for life, and my kids are too, but diversity is always a good idea - I.e. get significant cash out of dollars. ADRs do that for you as arbitrage makes their dollar price track the value of the foreign company shares they represent.

Only took R$2.03 to buy a dollar tody in Brazil (not the R$4 is took 5 years ago. This has doubled the dollars needed to buy all of my different ADRs of Brazilian companies. The demand for then, by farsighted Americans mainly, has trippled the price in Brazilian Reals so all those five or less year old ADRs now cost between 5 and 7 times more dollars than they did when I bought.

In May of last year, I got tired of paying Schwab the $29.95 charge to a "foreigner" and switched my account to AmeriTrade (got 45 free trades for doing so). I sold a few of those ADR and bought about 30 different early stage drug developers. (They are such high risk that the dollar risk is only a slight increase - and I really enjoyed studying their ideas for "magic bullets" when deciding which to buy)

Well the IRS got even with me for the tricks I played on them many years ago. I was so busy researching which drug developers to buy that I forgot, until yesterday (when I did my 2006 IRS return), the tax implications of selling several long term investments for 30 to 50 thousand dollars profit each in the same tax year.

Those 45 "free trades" were not so free after all! - Cost me about $600 each in extra taxes. I am a buy and hold guy. - One stock has been held more than 25 years. - Normally, it would take me at least 5 years to make 45 trades, so this is first time I have been pushed way off the IRS's tax tables, by stock profits. I would still be close to the table, if the dollar had the purchasing power it had when I bought those stocks.

That is the IRS's "trick" - tax the false profits, which are really just dollar depreciation, as well as the genuine increase in value of the stocks. The change in the tax brackets, standard allowance etc, does not begin to cancel out this IRS "trick" which is very obvious to a long term "buy and hold" investor. At least I will not forget again, and now plan to "realize paper profits" every year - about $50,000 worth so I can stay close to the table if not on it.

 

The explanation got lost in translation. It is a very simple concept.

Consider the mortgage from the lender's point of view.

The lender provides 120,000 today and gets monthly payments totaling far more than 120,000 in 20 years. If he invested the 120,000 in CD’s. govt bonds, stocks, whatever he would have far more than 120,000 in 20 years.

The lender would have no reason to give the home owner the 120,000 if he did not end up with more than 120,000 in 20 years.

 

Which he does will of course depend on which increase he thinks will be greater.

Now days, many with money are thinking that neither US choice is a good idea. I.e. better to sell the 120,000 dollars and buy gold* or Euros etc.

IMHO, they too are making a non-optimal choice. Better still is to buy shares (via ADRs) in Asian companies with bright future and great current growth potential. Only countries, like Brazil and the Asian countries they supply with raw materials and food stocks to keep their factories humming (to meet their internal domestic demand) will fare reasonable well when the dollar falls.
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*Gold is a static asset, which cost to hold. Euros will follow the dollar down when the run on the dollar starts.

 

It's a sweatheart theft deal because that money is all phoney, trumped up and the bank itself that originally printed it, WOULD NOT HONOR(pay owner) ALL OF IT.

We all know that banks loan out way more money than that actually even have. This is the criminal part of this pyramid scheme.

 

Thanks for all the advice. I'll look into how well TIPS (i.e. the gov't) have tracked inflation.

 

nietzschefan You do not seem to have a clue about the way banks function. The following is not true.

I do not know current banking practices and current laws about lending practices, but I know that banks never loan more money than they have on deposit.

BTW: Phrases like "We all know" are a standard ploy used in an attempt to justify a claim without providing any supporting arguments or evidence. Use of such phrases is intellectually dishonest.

You do not seem to understand the basic nature of the banking industry. Banks primarily make money by loaning money. If they did not loan money, how would the average person buy a car or a house? How would a business get money to finance capital expenditures required to expand? Loaning money is a requirement of any modern economy, as has been the case for 300 to 600 years.

The only source of money available to a bank is money deposited, which can be withdrawn at any time. There is no way a bank can lend more than it has on deposit. If it did, it could not possibly cover the next check issued by a depositor or the next withdrawal from a savings account.

A bank uses past experience and some statistical analysis to determine how much it can loan.

Historically, a bank never loaned out more than 80% of the funds deposited. I could be wrong on the percentage of total deposits held in reserve. It is my guess that a 20% reserve is likely to be lower rather than higher than the amount currently kept to take care of withdrawals by depositors.

Obviously a bank must keep a much higher percent of demand (checking) accounts on hand as compared with savings accounts. Today, the percentage is probably regulated by banking laws. Historically, it was based on rational decisons by bankers who are seldom charlatans or fools.

I would guess that a bank might keep 60-90% of the money in checking accounts on hand (surely not less than 40%). I would expect a bank to keep 30-50% of the amount in savings accounts available for withdrawals.

BTW: Banks can have a serious problem if too many depositors close their accounts or start withdrawing more than usual. When this happens, the bank must sell some of its loans to other banks (often at a loss) or call in loans payable on demand. Some loans to businesses are so called demand loans, while mortgage loans and loans to finance cars, appliances, et cetera are not demand loans. If all the banks (or a large percentage of them) have a similar problem, the bank cannot sell its loans or call in enough demand loans, and there is a real crisis, resulting in bank failures and loss of depositor money.

BTW: Calling in demand loans is a last resort, since it hurts future business.

 

You are of course correct. Probably what led nietzschefan to make his error is what is called the "multiplier effect"

I.e. Bank "A" with $100K on deposit and a 20% reserve requirement lends out $80K . Perhaps 10K of this 80k is cash in circulation and 70K is deposited in other banks, collectively called bank "B."
With these 70K of fresh deposits, and 20% reserve requirement, Bank can lean 56K out, say 6K adding to the cash in circulation and 50K going to bank "C" as fresh deposits. Etc thru banks "D", "E" ...etc. so effectively the banking SYSTEM does lend out more that the original or "real" (non-borrowed) deposits from cash existent, without the multiplier effect.

In my example the total amount loaned out on the original 100K of "non borrowed" cash is some thing like 70+50+35+20+15+10+5 = >200K. Actually, the multiplier effect is usually between 2 and 3 (I think). That is in some sense the banking system lends out 2 or 3 times as much as is deposited with out being "borrowed money."

BTW, by changing the reserve requirements, the FED has a powerful tool (about the only real powerful one it has in times of slow downs)* to control the money supply. I. e. it can modulate the “multiplier effect.”

Trying to stem its explosive growth, China has three times in 2007 already raised the reserve requirements. I am not sure but think that Chinese banks must now deposit with the central bank 30% or 35% of all their deposits. The central Bank of Brazil also fights inflation with high reserve requirements (40% I think!). This means that the interest rates the bank must charge on the remaining 60% they can lend out must be higher to met their operation cost and make a profit. I.e. the "spread" between what they pay depositors and charge borrows is great.
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What you say about the posibility of a "run on the bank" (and this has occured, both in the US and more often in other coutries) exposing the over extended nature of the banking SYSTEM, can also happen to a nation's over-exposed currency in general. (Never in peace time history has any nation's currency been as "over-exposed" as the US's is now.) IMHO, we are now in the initial staqges of a "run on the dollar" which will destroy the dollar and US economy, just as runs on an unsound bank have spread to other banks and brought down entire bankng systems. If (or should I say when?) the dollar goes down in a run to get out of it, this will spread to the global economy and a terrible depression will be the final result.

I am active at another forum where Raul641 has made an insiteful post explaining how the US got into the current overextended, dangerous position it is. See his post at:
http://www.elitetrader.com/vb/showthread.php?s=&postid=1431371#post1431371
In his next post, he note that the US reserves total only 41 billion (approximately 1/3 of Brazil's reserves! - the US is riding high on a giant bluff - a "con-man's" confidence game, if there ever was one!)
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*In a slowdown, when outlooks are for worse things to come, the FED is "pushing on a string" when it cuts the discount rate (currently 5.25%).
This was very evident in Japan for a decade. - The BoJ pushed interest rates so low after their real estate bubble burst that they were less than the inflation rate. In real terms, a negative interest rate, or BoJ paid you to borrow in real terms, but as people were burned in the real estate collapse (many vacant buildings - over building during the prior decade) they were not willing to borrow, even if effectively paid to do so and Japan stagnated for more than a decade.
In the US the FED can not even try to stimulate a slowing economy this way, as with the dollar going down in value and the US still spending more than it earns, the foreigners lending money (especially China) are in control of the interest rates and US economy - I.e. US interest rates must go up to what ever level the foreigners demand as compensation for the declining value of the dollar.