Sponsors
Categories
- Economic Comentary (19)
- General Topics (2)
- Political Cartoons (5)
- Political Commentary (34)
- Videos (14)
- World News (2)
-
Latest Articles
- Individual 401(k) vs. SEP-IRA For Self-Employed Individuals and Small-Business Owners
- America’s Lost “Idea”
- Sarah Palin 2012 Political Cartoons
- Osama Bin Laden DEAD Political Cartoons
- Ron Paul Responds To Ben Bernanke Press Conference
- No Business is Too Big to Fail
- Why Eliminating Certain Tax Deductions Is A Terrible Idea
- Facts About U.S. Debt Woes
- How To Make Money From Inflation
- Poor Decision Making; The New Good Decision Making
Polls
Loading ...Economic Blogs
Political Blogs
-
Recent Comments
- stephen commented on: How did The Huffington Post become so popular?
- Ziggy Banks commented on: David Lettermen Gets Deep
- Becca commented on: Obama “Spreading the Wealth” Political Cartoon
- matt commented on: Obama “Spreading the Wealth” Political Cartoon
- Eric commented on: Obama “Spreading the Wealth” Political Cartoon
Popular Tags
Afghanistan Auto Bailout Barack Obama Ben Bernanke Bernie Madoff Bill Gates Bin Laden Capital Gains Tax Capitalism Communism Corporate Taxation Dividends Dow Federal Reserve First Amendment George Bush Gold Inflation Iran Iraq Jesse Ventura Joe Biden Mahmoud Ahmadinejad Marijuana Marketplace of Ideas Marxism Michelle Obama National Debt Obama Obama's Tax Plan Obama Political Cartoons Peter Schiff Rachel Maddow Recession Ron Paul Russia Sean Hannity Shawn Hannity Socialism Spread the Wealth Stephen Baldwin Stephen Colbert Stimulus Warren Buffett World War 3
Economic Comentary
No Business is Too Big to Fail
I apologize to anyone who has been following my column for not writing at all this past week. I have been quite busy with finals coming up next week.
My fiance Leah asked me yesterday where I see our nation and our personal lives in ten years. Let me start by saying that I am extraordinarily proud of being an American. I love this great nation and I could not imagine living anywhere else in this world. Our nation was founded by a group of men who loved our country and the idea of liberty even more. Our ancestors came to this land to escape the monarchy of Great Britain and live in a place where they could worship freely and thrive in a competitive and free market.
I am sick and tired of people in our own country saying that a socialistic society is a better economic plan than capitalism. As most people know, socialism and communism are similar but different, in that, socialism is an economic system, whereas communism is a political system. The more well-known communistic nations are: North Korea, Cuba, Russia, and China. Now, although countries like China (a free communistic society) seem to be well off and have everything they need taken care of, the normal wage of a working Chinese person is $10,000 per year. They live in the same colossal buildings that they work in. Their bedrooms are small, cramped, dorm-style rooms with four, maybe five family members in each.
Foxconn, a factory in China that manufactures Apple products such as iPhone’s, iPad’s, and iPod’s. The company itself employs 400,000 people. They are asked to sign an overtime agreement so that the managers can have their subordinates work obnoxiously long hours. By signing this agreement, the workers MUST work whatever hours the management makes them. In recent years, there has been nine suicide attempts and seven confirmed deaths. The workers make 900 Chinese Yuan ($130) per week. They cannot even afford the products that they themselves build. They are forced to stand for their entire shift and some of the workers admit that they would think about dropping something on the floor so that they could bend over and rest for a second to pick it back up. In fact, the workers are forbidden from friendships with one another for fear that they might unionize. These are the working conditions of the “most successful” communistic society in the world. Now I don’t know about anyone else but I would NOT like to live this way.
Everyone wants to blame the wealthy for our nations financial issues. However, capitalism thrives on competition and motivation. When one business fails, another will eventually rise from the ashes. When Henry Ford manufactured the first automobile, he put a man named William Durant, the leading manufacturer of horse drawn vehicles, out of business. Mr. Durant did not blame Henry Ford for his failure, nor did he beg our government for a bail out. William Durant went on to start a new company in Detroit, Michigan named GENERAL MOTORS! This is the same company that our government bailed out not even a few years ago. Some businesses fail while others expand. It is not always fair, but it works and it has for over three hundred years.
The point that I am trying to make is that when there is a reason to succeed, people will always strive to be the best. When companies become “too big to fail” it eliminates the motivation to be successful. The fear of failure drives business to the top, I believe. No company is too big to fail and when one does, inevitably fail, there will ALWAYS be an innovative and motivated business to take its place.
To be honest, I do not know where I see the United States of America in ten years from now. However, I do know that if we continue to stray from our capitalistic, free market, we could be destined to fail. I believe that we need to preserve our standards for success and always encourage innovation. Competition, and the fear of failure will continue to drive our economy and will continue to motivate people across the land. Anyone from anywhere can make something of themselves in this great nation and I do not ever want that to change.
- Joe Piperato
How To Make Money From Inflation
I first wrote about investing in gold in November 2008 when gold was trading at $735 per ounce. It is now April 2011 and gold is now trading at $1,496 — over a 200% return. Silver has also been on a tear, rising from $9 per ounce in November 2008 to $42 per ounce in April 2011 — over a 400% return.
Silver lagged gold from November 2008 through August 2011 until silver broke out as investors saw an opportunity due to the “gold-to-silver ratio” which has historically been a 15:1 ratio meaning that if silver kept pace with the ratio, it should be trading around $150 per ounce.
However, we all know it doesn’t make sense to dive into precious metal investments after they’ve doubled and quadrupled in price. If you wanted to invest in gold and silver, the time to do that has passed because the risk vs. reward is much higher now. I would still suggest holding 5-10% of your portfolio in precious metals despite these giant moves. The gold bugs are still out there convinced that gold is going to $2,500 and silver is going to $100. I wouldn’t be surprised to see that, but it’s a late trade at this point to me.
I’ve though about increasing my exposure to gold lately, but it doesn’t make sense to me to invest in gold at these levels. Will gold go to $2,500? Perhaps, but a move back down to $1,350 or even $1,100 wouldn’t surprise me one bit, especially if there is a correction in the overall market. Gold and silver are very crowded trades. All it takes is one huge hedge fund to unwind this trade to shake individual investors out.
What are other ways to profit from inflation? Most poeple would think stocks. If inflation is tame, in the range of 2-4% per year, it wouldn’t be bad for stocks, but if inflation is over 6% per year, it would have a severe adverse affect on equity markets.
For those who want to place bets on rising inflation and feel that gold and silver are crowded trades, another way to play it is shorting treasuries. If interest rates rise, bond prices fall. The Fed has shown no signs of raising interest rates, but what will happen when QE2 ends on June 30, 2011, and the number one purchaser of treasuries is out of the market? Who is going to take over for the drop in demand? With less demand for treasuries, interest rates are sure to rise and demand is sure to fall.
The only thing that can keep interest rates this low in the U.S. is if The Fed announces QE3. My bet is that treasury yields rise over the next year now that The Fed will no longer be purchasing treasuries temporarily boosting demand to keep interest rates low.
You can make a play on rising interest rates with ProShares UltraShort 20+ Year Treasury ETF ($TBT). The TBT is the double inverse of the performance of Barclays Capital 20+ Year U.S. Treasury Bond Index (the Index). However, if the inflation fears are overblown, this one may take a beating.
The year-to-date return on the TBT is -1.5%, while the 6-month return is 8.67%, and the 1-year return is down a staggering 23.56% despite yields being exactly the same one year ago. In other words, the stock is very volatile to direction changes in rates since the ETF resets daily and is based on intraday moves of rates rather than an overall trend in interest rates. I would recommend looking at a yield chart of the 30-year treasury to put current rates into perspective.
Rates have been in a steady decline since the 1980s. Here is a list of the approximate yields on the 30-year treasury through the last 30 years.
- 1980 – 12%
- 1985 – 12%
- 1990 – 8%
- 1995 – 8%
- 2000 – 6%
- 2005 – 4.5%
- 2010 – 4.5%
30-year yields hit an all-time low in September 2010 when the yield hit 3.5%. Since September 2010, yields bounced right back up to 4.5% — a 1% increase in the yield in 6 months. If you nailed this one via the TBT, you’ve seen a 17% return since rates have bottomed in the 30-year treasury.
With U.S. debt worries coming to the forefront with Standards and Poors downgrading the U.S. outlook to negative, I’m taking a bet that future interest rates are on the rise and I’m looking to purchase January 2012 TBT options to limit my downside risk if inflation fears are overblown.
How much assets and treasuries do The Fed have?
I came across an interesting article in this month’s Smart Money Magazine discussing how the end of QE2 at the end of June will affect the markets.
The articles seemed to indicate that The Fed does not plan on QE3. I have a different opinion about QE3. When QE2 ends in June, bond yields should rise. The 10-year treasury currently yields 3.4%. That yield should rise to well above 4.0% without the number one buyer of treasuries participating in the market.
As interest rates rise, the government’s cost of borrowing will begin increasing, making interest payments as a percentage of GDP much greater (and frankly alarming), further exacerbating the U.S. government’s borrowing problems. Since the The Fed has substantially monetized the government’s debt over the past four years, what makes anyone think that they will suddenly stop?
What would happen if the 10-year treasury hits 5%? Would The Fed step in at that point and announce QE3? Would The Fed finally let the market dictate interest rates or will they continue to artificially keep them low to encourage the U.S. government to borrow even more money? Will Congress really pass a long-term debt reduction bill? If 10-year yields rise to 5%, mortgage rates on a 30-year mortgage will also have to rise from 5% further hurting the real estate market. It will be an interesting summer for markets.
Here are the interesting stats. In March 2007, the amount of assets held by the Federal Reserve was $899 billion. In March 2011, the amount of assets held by by the Federal Reserve is $2.5 trillion.
Peter Schiff Slamming Ben Bernanke
The U.S. Dollar has hit an all-time low, commodity prices are soaring, our cost of living is increasing, and our standard of living is decreasing, yet this was planned by The Fed and Ben Bernanke to create jobs and help real estate. That’s a laugh. All QE1 and QE2 has done is screwed this country over even more. Bernanke should listen to Peter Schiff. Bernanke is nothing more than a crack dealer for the U.S. government’s spending addiction.
Obama Golf Joke
Why does Obama play golf so much?
So he can claim that he saved or created more jobs than his handicap.
Obama Golfing Pictures:
Peter Schiff Explains Effect of Sovereign Debt On Markets
A few words from the straight shooter Peter Schiff who discusses the ramifications of the soverign debt of Spain, Portugal, Greece, and Lithuana. He puts the Dow down 268 on February 4, 2010 into perspective. Somehow overlooked in this whole story is the debt load of the United States and what will happen when California needs to be bailed out. What is going to happen when our debt-to-GDP of 11% catches up to that of Greece, which is just 12%. Watch and learn.
Obama’s Stimulus: Success or Failure
Ron Paul and Robert Reich debate whether Obama’s $787 billion stimulus was a success or failure and whether Keynesianism or Austrian free-market economics is the answer for the nation’s problems.
Ron Paul’s Federal Reserve Audit Bill Passes House Financial Committee
The House Financial Committee approved a bill that would allow Congress to audit the Federal Reserve. The measure was approved by a 43 to 26 vote and could be up for a vote in the House by December 1. 309 House members are already on board with the bill. The bill has been met with opposition of Federal Reserve Chairman Ben Bernanke and U.S. Treasury Secretary Timothy Geithner, who claim that the bill would hinder The Fed’s “independence.”
The Fed is saying that by becoming “more transparent” to the American public, institutions would be afraid to borrow from The Fed since they will be seen as “troubled firms,” which will only make the economic situation worse. Ron Paul, the leader of the Federal Reserve Audit Bill, made the following comments about the proposed legislation:
If you care about transparency of the Fed, you would allow a look at monetary policy. We’re dealing with trillions of dollars that doesn’t get audited. There is no reason why the world can’t know, eventually, what the Fed is doing.
Warren Buffett recently spoke out about the pending legislation and is opposed to the bill. Buffett says that curbing the Fed’s independence would lead to a lot of “mischief.”
Why Eliminating Certain Tax Deductions Is A Terrible Idea
If some ordinary business expenses get the boot or are limited as permissible deductions, I believe it would have a chilling effect on the economy. I highly doubt that the tax code would be amended to reflect a tax based on revenue with zero deductions rather than net income after deductions, but you never know what Washington is capable of. Washington wouldn’t be able to tax revenue since deductions for things such as the cost of goods sold and advertising are essential and without these deductions, businesses will be broke. However, what if deductions for things like business equipment are eliminated? To illustrate why this is such a bad idea, I’ll demonstrate the effect this would have on business spending and taxation.
Let’s assume that a software business in California that has 50 employees generated a net profit of $1 million. We’ll assume that they’re in the 35% tax bracket and taxed $350,000 on that $1 million leaving them with $650,000 of after-tax profit.
Now, come the end of the year, they’re likely celebrating their success and thinking of reinvesting those profits back into their business to expand and give them a competitive advantage. Perhaps they’re thinking of upgrading their office equipment.
Now let’s assume that the company has decided to upgrade all their employee’s office equipment such as computers, printers, and the like. The company wishes to spend $250,000 on upgrading their equipment.
Thanks to the new tax laws, rather than pro-rating their deduction over the period of the useful life of the equipment such as 5 years, the company can take a full deduction in the current tax year. This tax law was passed by Obama to encourage businesses to spend money.
Now the business can write off $250,000 for a net pre-tax profit of $750,000. Assuming they’re taxed at the a 33% level (just to arrive at some nice round numbers), this will generate $250,000 in tax income for the government, leaving the company’s after-tax profit of $500,000. Essentially, this company received $250,000 worth of equipment for a price of $150,000 thanks to the tax break.
We’ll assume that their computer equipment was purchased from HP and that all income was earned and reported in the United States. HP will now have earned $250,000 from this software company, which resulted in $87,500 of additional tax revenue for the IRS.
Now if the Republican plan to lower the tax rate to 25% while eliminating some deductions is passed, the company would have to pony up $250,00 in taxes regardless of whether or not they upgrade their company’s equipment. If they do purchase the equipment and are taxed 25% without the deduction, they now have a net profit of $500,000 and are in the same position they were in if the tax rate was 35% and they took the deduction. However, without the deduction, now you’ve provided them in incentive not to purchase business equipment which would increase HP’s sales by $250,000 resulting in another $87,500 in tax revenue from HP.
To summarize, whether the tax rate is 35% with this particular deduction or 25% without this deduction, it basically has the same effect on tax revenue. However, you’ve eliminated any incentive for businesses to reinvest their profits in the business by purchasing equipment needed to expand if this particular deduction is eliminated, which in turn results in even less tax revenue. Assuming those profits are going to American companies, those earnings can then be taxed, ultimately producing even more revenue for the IRS.
Although the tax code needs some reform, I don’t believe a complete overhaul is necessary. Yeah, it’s complicated and convoluted, but it keeps CPAs in business and most of the tax deductions serve good public policy.