Germany Considers Constitutional Amendment Against Deficits

May 31, 2009 · Posted in Global Economics · 2 Comments

The next German government is almost certain to crack down on spending and drastically raise taxes after the lower house of parliament yesterday adopted measures that come close to banning budget deficits beyond 2016.

The controversial constitutional amendment, part of a reform of federal institutions, will prohibit Germany’s 16 regional governments from running fiscal deficits and limit the structural deficit of the federal government to 0.35 per cent of gross domestic product.

The amendment still requires approval by a two-thirds majority of the upper house of parliament which represents the regions. The vote is scheduled to take place on July 12 and is expected to be approved.

The most sweeping reform of public finances in 40 years was an “economic policy decision of historic proportions”, Peer Steinbrück, finance minister, told parliament shortly before MPs endorsed the amendment with the required two-thirds majority.

The vote underlines Berlin’s determination quickly to plug the holes that the economic crisis, two fiscal stimulus packages and a €500bn ($706bn, £437bn) rescue operation for German banks are expected to blow in the public coffers this year and next.

In 2009 alone, legislators from the ruling coalition expect the federal budget to show a deficit of more than €80bn, twice the current all-time record of €40bn reached in 1996 as Germany was absorbing the formidable costs of its reunification.

This figure does not include the deficit of the social security system, which is expected to rocket too, as unemployment rises to an expected 5m next year.

The constitutional amendment, popularly known as the “debt brake”, allows a degree of flexibility in tough economic times, just as it encourages governments to build cash reserves in good times.

Yet economists have warned the new rules could force the next government to implement a ruthless fiscal crackdown as soon as it takes office after the general election of September 27 if it is serous about hitting the 2016 deficit target.

“Given the massive fiscal expansion we are currently seeing, the ‘debt brake’ will lead to a significant tightening of fiscal policy in the coming years,” Dirk Schumacher, economist at Goldman Sachs, wrote in a note.

In a separate assessment, the Cologne-based IfW economic institute said the federal government would need to save €10bn a year until 2015 through a mixture of tax rises and spending cuts.

Klaus Zimmermann, president of the DIW economic institute in Berlin, said the next government might have to increase value added tax by six points to 25 per cent. This would be the biggest tax rise in German history.

The “debt brake” could complicate Angela Merkel’s re-election bid. Under pressure from parts of her Christian Democratic Union, the chancellor recently pledged to cut taxes if returned to office in September, though she pointedly failed to put a date on her promise.

The Free Democratic party, the CDU’s traditional ally, has made hefty income tax cuts a key condition for forming a coalition with Ms Merkel’s party should the two jointly obtain more than 50 per cent of the votes.

The debate has cut a deep rift within the CDU, which was threatening to deepen further yesterday as opponents of tax cuts seized on the constitutional change to back their arguments.

Günther Oettinger, the CDU state premier of Baden Wurttemberg, said “promises of broad tax cuts are unrealistic… First we must overcome the crisis, then we need more robust growth, and when we finally get more tax revenues, we should use them to repay debt, finance core state activities and for limited, very targeted tax cuts.”

Oettinger is wrong when he says we have to overcome the crisis first before cutting taxes. It is the same old argument that governments advance again and again so as to procrastinate necessary changes. This amendment is something that states around the world should mimic in one way or another. It is high time to institutionalize fiscal responsibility by legal means.

A strong FDP (Free Democratic Party) in the next German coalition would be the best thing that could happen to Germany. No change will emanate from SPD or CDU, just as in the US no change can emerge from Democrats or Republicans in their current state.

Tags: budget deficit, deficit spending, german economic policy, germany

General Motors Finally Declares Bankruptcy

May 31, 2009 · Posted in Business · Comment

The time has finally come, GM looks to follow Chrysler with quick bankruptcy trip:

The automaker aims to make a swift trip through bankruptcy by cobbling together its stronger assets to create a new more viable company. If all goes as planned, GM would emerge from bankruptcy within three months.

Previously, the idea that one of the biggest and most complex bankruptcies in corporate history could be completed in such a short time was considered impossible as stakeholders bickered about who gets what.

There was never another option for GM than an eventual bankruptcy. I wrote about this before.

December 18th 2009:

Did you ever take a look at GM’s financials? The company is worth minus $60 billion. In a time like this you are asking taxpayers to sacrifice their hard earned dollars and throw them at a business that is worth LESS THAN NOTHING.

(…)

Let’s not again prolong the agony of a necessary correction by trying to keep prices up and failing businesses going, like we did in 1929 and 1930. Let’s help the big 3 become efficient by allowing the consumers to decide what is to happen. Let their owners go through Chapter 11 if necessary. Let the good pieces be turned into efficient and successful businesses and the useless parts be released for more useful occupations so the American car industry can once again be a force in the world rather than a caboose.

November 21st 2008:

As far as GM and Ford, they don’t deserve any more mention. These two giant jokes cannot possibly be called business operations. It is insulting to see the media seriously pose the question as to whether or not the taxpayer should even consider sparing his change for these miserable failures. It hurts to see their executive junkies squander more money on private jets to capitol hill in order to petition for yet another bailout fix. They, along with the UAW, need to be wiped off the face of the earth once and for all and stop making the American car industry the ridicule of the world.

Nancy Pelosi said in December 08:

U.S. House Speaker Nancy Pelosi said she believes either Congress or the Bush administration will step in to aid domestic automakers because bankruptcy is “not an option.”

“I believe that an intervention will happen,” Pelosi said at a briefing in Washington. “Everybody is disadvantaged by bankruptcy, including our economy, so that’s not an option.”

Unsurprisingly, she was wrong. In fact, bankruptcy was the only option. All arguments we heard over these past months in favor or more and more bailouts were wrong. It is important to point this out because even now the people who were wrong on every single thing they said, continue to spread their nonsense publicily.

Tags: bankruptcy, General Motors

Consumer Goods vs. Factors of Production

May 31, 2009 · Posted in General Economics, Interventionism · Comment

The recent consumption business cycle in the US can be easily quantified.

The chart below shows the development of private consumption, private investment, and government expenses in the US since 1947:

Click on image to enlarge.

The output of a country, its GDP, is approximated by adding those three components up and adding exports and deducting imports. The logic being that if someone consumed something, then someone must of course have produced it. Items exported are not consumed inside the country and thus not captured, hence they are added. Items imported are reflected in the components above, but they are produced outside the country, hence they are deducted.

Consumption expenses give us an idea of how many consumer goods are produced in the country, investment expenses give us an idea how many factors of production are being turned out (duly accounting for exports and imports).

It is completely safe to assume that government expenses can be equated to consumption. It is true that the government spends a fraction of its money on investments such as roads and other infrastructure. However, this fraction is almost negligible when compared to consumptive expenses on goods that are used up immediately and don’t aid in any production processes, such as military products and health care.

The chart below shows the development of the percentage of consumer goods production in relation to the total output, GDP from the Great Depression through now:

Click on image to enlarge.

As can be seen above, the percentage of goods produced for consumption by the productive factors in the US has historically oscillated between 79% and 98% since 1929. The average has been 86.27%.

Another way to look at it is to only look at private consumption only:

Click on image to enlarge.

It reveals a severe drop in personal consumption during World War 2 which was more than replaced with government consumption.

Where can we go from here? It is safe to assume that production of public and private consumer goods will at least fall back to the average of roughly 86%, but maybe even drop to around 80%, given the fact that corrections usually seem to overshoot that average and given the severity of the current correction.

A good indicator of when a true recovery is near will be when investment expenses stop to fall and begin to bottom or even rise again. Meanwhile, the production of consumer goods may continue to drop while employment in businesses that produce factors of production should begin to absorb the released resources at some point.

Businesses that produce this capacity may be attractive at that point. This includes in particular companies from the mining and drilling industries, such as the canadian energy trusts (examples: PVX, PDS, PWE, AAV). New AND old energy sources are likely to be explored and expanded. Alternative energy businesses, such as wind or solar energy may be worth looking into for people who understand the technological challenges that they are exposed to. Basic commodities should do well. Gold and silver should continue to act well so long as people consolidate their finances and demand cash to pay off their debt.

Tags: consumer spending, factors of production, Investing

The Business Cycle Revisited

May 29, 2009 · Posted in General Economics · 1 Comment

I have described the basic workings behind the business cycle more or less accurately. However, I have noticed that some things in my description and conclusions remain inconsistent. The lines between too much production spending and too much consumption spending are blurry and confusing.

It is necessary to distinguish between two different types of business cycles to clear this up: The production business cycle and the consumption business cycle. Both can occur separately or at the same time.

Rothbard and Mises hold that a credit expansion that aims at expanding consumer credit will not cause a business cycle:

Mises did not deal with the relatively new post-World War II phenomenon of large-scale bank loans to consumers, but these too cannot be said to generate a business cycle. Inflationary bank loans to consumers will artificially deflect social resources to consumption rather than investment, as compared to the unhampered desires and preferences of the consumers.

But they will not generate a boom-bust cycle, because they will not result in “over” investment, which must be liquidated in a recession. Not enough investments will be made, but at least there will be no flood of investments which will later have to be liquidated. Hence, the effects of diverting consumption investment proportions away from consumer time preferences will be asymmetrical, with the overinvestment-business cycle effects only resulting from inflationary bank loans to business.

Indeed, the reason why bank financing of government deficits may be called simple rather than cyclical inflation is because government demands are “consumption” uses as decided by the preferences of the ruling government officials.

I am of a different opinion. We have recently been able to witness the bust of one of the most severe consumer credit expansions, with significant effects on the alignment of productive factors. But even when we approach it with Rothbard’s explanation: if over-investment causes distortions then why would under-investment cause any less severe distortions? If anything, it will be even harder to ramp up new productive factors whose production has been neglected vs. having to abandon the use of excess capacity and move resources back into consumer based businesses.

Both cycles start with the same precondition. A market unhampered by significant government and central bank intervention. As described in the History of Money, gold and silver have emerged and are used as medium of exchange, money.

Individuals, in their function as consumers demand consumer goods, entrepreneurs employ individuals as workers, combine factors of production and produce consumer goods, seeking an entrepreneurial profit. Individuals also decide to save a portion of their pay and make it available as capitalists in credit transactions against interest. Thus it becomes feasible for some entrepreneurs to borrow this money and employ some individuals in projects that don’t turn out consumer goods but more factors of production. Those factors won’t turn out consumer goods immediately, but will turn out more and/or better consumer goods per unit of worker time in the future which enables the repayment of the loan with interest.

Whenever changes occur in any individual’s behavior, or in the behavior of groups of individuals as a whole, market data will adjust accordingly. We shall observe the effects of some fundamental changes in behavior.

If a significant number of consumers, for whatever reason, decide to consume more goods immediately and hence save less, several things may happen as a response:

- Entrepreneurs may abandon some projects that turn out factors of production and produce more consumer goods instead. No change in interest rates or prices occurs. Balance is restored by sacrificing more productive capacity in the future in exchange for more immediate consumption.

- Prices for demanded consumer goods may go up, thus crowding out previous consumers who will save more instead and make it available as credit to entrepreneurs. Balance is restored by sacrificing one group’s consumption for another one’s. No change in the supply of consumer goods or factors of production occurs.

- Due to less available savings, interest rates for credit may go up. Some entrepreneurs will borrow less money for the production of new factors of production and rather produce more consumer goods. Balance is restored by sacrificing future consumption for immediate consumption.

- A combination of all of the above may occur, only that none of the events would go all the way but rather all of them go a fraction of the way. Also, a sequential progression of the events may occur, e.g. Prices go up as an intermediary step, but entrepreneurs immediately respond with more production of consumer goods vs. factors of production.

Similar adjustments would occur if, say, some consumers decide to consume less in the present and save more for the future. Entrepreneurs may produce fewer consumer goods and more productive factors; or prices for consumer goods may fall, attracting previously abstaining consumers; or interest rates may fall, making previously abstaining entrepreneurs borrow more money in order to produce more factors of production in lieu of consumer goods.

The main point in all of this is that any of these events ensures that market data is restored and aligned to the individuals’ demands and expectations. None of the adjustment procedures come without temporary pains, such as layoffs by one entrepreneur in order to adjust for the changed demands, and the necessity for the laid off workers to find new work or learn new things. Also, overall production will initially decline, as current operations are abandoned and new ones need to be ramped up. A temporary recession might be necessary. But the quicker the adjustment, the more bearable and temporary will the pain be.

It is now necessary to observe the events caused by credit expansion and their effect on the behavior of market participants. The government turns the paper tickets issued in return for gold into fiat money. It outlaws the use of gold money. It grants to the central bank and fractional reserve banks the exclusive right and protection to issue fiat money.

The Consumption Business Cycle

The central bank and fractional reserve banks create new fiat money and make it available in credit transactions to individuals who intend to use the money for the purposes of consumption. Examples would be car loans and home loans which made the US economy align its productive factors accordingly over the past decades. It is likely, but not necessary that interest rates for such credit instruments will drop initially.

Some individuals may now enter into these new credit transactions and use the new money to consume goods that they wouldn’t have consumed before. But they didn’t do so by reducing their savings, nor did anybody else sacrifice consumption to make this money available. It was created out of nothing. No additional consumer goods have been produced.

The prices for the goods demanded will begin to increase. Entrepreneurs will respond by abandoning the production of some additional factors of production and turn out more consumer goods instead. So long as more credit is channeled into the system, prices will continue to increase while entrepreneurs try to catch up. Fractional reserve banks will begin to earn more interest revenue and expand their operations and resource usage.

Businesses that produce consumer goods will report higher profits, while profits for businesses producing factors of production and basic materials will lag behind. A myriad of consumer goods based businesses will spring up over time. The alignment for immediate consumption vs. more/better future consumption continues so long as individuals continue to be able to pay interest on the credit transactions performed and expect to be able to do so in future.

But as explained above, making interest payments and paying off debt is only possible in the long run if the workforce, as a whole over time, becomes more productive per unit of labor. But the opposite occurs. Productivity per labor unit will be lower than the additional consumer loans appeared to indicate, since in an unhampered system credit can only come out of savings (which means someone somewhere forgoes immediate consumption, making room for more factors of production). After a certain period, the amount of debt and interest payments will become higher than consumers can afford. In addition, due to lower interest rates, a lot of rather risky loans were made to individuals that would not have occurred in the unhampered state. Individuals will begin to default on their interest payments.

They start realizing that they need to consume less and save more in order to not have this happen again. Their demand for additional credit drops sharply. Their demand for money to pay off the debt and/or generate savings rises.

The fractional reserve banks will begin to slow down the creation of additional credit. They begin reporting losses on existing consumer debt.

As excess consumption comes to a halt consumer prices begin to fall, businesses aligned for the production of consumer goods will see declining profits, some will start reporting losses. They realize that they will have to abandon some projects since the demand for consumer goods starts to fall back to sustainable levels that match everyone’s time preference and expectations. The desire to consolidate one’s finances takes priority over everything else.

The further the excessive consumption went, the more severe this necessary correction will be. Adjusting the existing productive factors and workers to turn out more factors of production instead of consumer goods will take some ramp up time during which overall less will be produced and consumed. A recession occurs which aligns resources back toward the initial state. The longer individuals take to adjust their consumption behavior, the longer the recession will take. This applies particularly in the case where the government tries to step in and slow down the overall decline in demand.

The Production Business Cycle

The central bank and fractional reserve banks create new fiat money and make it available in credit transactions to individuals who intend to use the money for the purposes of purchasing factors of production. Examples would be business loans. It is likely, but not necessary that interest rates for such credit instruments will drop initially.

Some entrepreneurs may now enter into these new credit transactions and use the new money to purchase factors of production that they wouldn’t have purchased before. But they didn’t do so by reducing their consumption, nor did anybody else sacrifice such purchases to make this money available. It was created out of nothing. No additional factors of production have been produced. Also, a lot of risky projects will be embarked upon that no one was willing to make money available for, based on the entrepreneurial interest component offered.

The prices for the factors of production demanded will begin to increase. Entrepreneurs will respond by abandoning the production of some consumer goods and turn out more factors of production instead. So long as more credit is channeled into the system, prices will continue to increase while entrepreneurs try to catch up.

Businesses that produce factors of production will report higher profits, while profits for businesses producing consumer goods will lag behind. A myriad of businesses that create productive factors will spring up over time. The alignment for more/better future consumption vs. immediate consumption continues so long as businesses accept more debt and continue to be able to pay interest on the credit transactions performed.

But the consumers’ demands have not changed. They still desire the same amount of consumer goods as before. The prices for immediate consumer goods will rise sharply while the workforce is aligned in projects that will only turn out more goods in the distant future. This will continue until prices for immediate consumption goods move so high that businesses will be impelled to adjust their operations and service the immediate demands again.

They will abandon the usage of a part of the obtained productive factors and halt additional purchases thereof. They will also slow down on efforts such as research and development that only yield an outcome in the farther future. In addition to that, some of the riskier projects will naturally begin to fail. They start realizing that they need to purchase fewer factors of production and produce more consumer goods in order to not have this happen again. Their demand for additional credit drops sharply.

The fractional reserve banks will begin to slow down the creation of additional credit. They begin reporting losses on existing business debt.

Employed resources will have to be released and channeled into more consumer goods based businesses. A recession occurs, aligning resources back toward uses that match individuals’ time preferences.

The longer entrepreneurs take to adjust their purchasing behavior, the longer the recession will take. This applies particularly in the case where the government tries to step in and slow down the overall decline in demand for factors of production.

Summary

Both described cycles stem from the same root: The re-alignment of resources, induced by fractional reserve banks, and in last resort, the government. The Production Business Cycle starts by changing the behavior of entrepreneurs, the Consumption Business Cycle starts by changing consumer behavior. Both cycles may appear with overlaps, or even simultaneously. While they may or may not cancel each other out as far as the impact on time preference behavior is concerned, their impact on encouraging overly risky behavior remains, even multiplies, and thus causes severe risk-based distortions that will require recessionary adjustments. This is due to the fact that lower interest rates for business and consumer loans encourage the funding of higher risk individuals in both cases, due to a lower perceived entrepreneurial interest component.

Tags: consumption business cycle, production business cycle

$1B to Build Large Embassy in Pakistan

May 29, 2009 · Posted in Foreign Policy · Comment

After befriending Iraqis by building a humongous US embassy in Baghdad for close to $1 billion, it is now time to expand this thoughtful spending to Pakistan – U.S. undertakes Iraq-scale embassy project in Pakistan:

ISLAMABAD, Pakistan — The U.S. is embarking on a $1 billion crash program to expand its diplomatic presence in Pakistan and neighboring Afghanistan, another sign that the Obama administration is making a costly, long-term commitment to war-torn South Asia, U.S. officials said Wednesday.

The White House has asked Congress for – and seems likely to receive – $736 million to build a new U.S. embassy in Islamabad, along with permanent housing for U.S. government civilians and new office space in the Pakistani capital.

(…)

In Pakistan, however, large parts of the population are hostile to the U.S. presence in the region – despite receiving billions of dollars in aid from Washington since 2001 – and anti-American groups and politicians are likely to seize on the expanded diplomatic presence in Islamabad as evidence of American “imperial designs.”

“This is a replay of Baghdad,” said Khurshid Ahmad, a member of Pakistan’s upper house of parliament for Jamaat-e-Islami, one of the country’s two main religious political parties. “This (Islamabad embassy) is more (space) than they should need. It’s for the micro and macro management of Pakistan, and using Pakistan for pushing the American agenda in Central Asia.”

The fact that the US economy is imploding and shortages are emerging left and right does not seem to bother these gentlemen:

A senior State Department official confirmed that the U.S. plan for the consulate in Peshawar involves the purchase of the luxury Pearl Continental hotel. The official spoke on the condition of anonymity because he wasn’t authorized to speak publicly.

The Pearl Continental is the city’s only five-star hotel, set in its own expansive grounds, with a swimming pool. It’s owned by Pakistani tycoon Sadruddin Hashwani.

The insanity behind this never ending spending spree is surreal. But taken aside all the resources that will be squandered while infrastructure and the economy in the US continue their decay, the foreign policy and national security implications of continuing to try and police the world like this will be far more severe.

We are in the process of creating another Iran, as I explained already:

In 1979, the inevitable occurred. The political pendulum swang where it had to swing. Radical extremists, backed by the revolutionary spirit of the populace, and lead by the popular Ayatollah Khomeini, took power in a sweeping subversion. He promised change. And things did change, unfortunately not for the better.

Thanks to US foreign policies we are right now able to observe a buildup toward the same kinds of radical subversions in other middle eastern countries. Don’t ever let it be said that no one warned against the inevitable blowbacks of an ongoing US support of the Pakistani military and nation building efforts in Afghanistan.

Tags: pakistan, us embassy

April Tax Revenue Falls – New Taxes To Come

May 27, 2009 · Posted in Government · Comment

Back in January I wrote:

The United States government will be facing an unprecedented tax shortfall in the years to come. Declining corporate profits, asset values, and skyrocketing unemployment will cause the tax base to fall flat. It will most likely become evident in April of this year and get progressively worse in the years to come.

Well, April’s number are in now … USA Today writes IRS tax revenue falls along with taxpayers’ income:

Federal tax revenue plunged $138 billion, or 34%, in April vs. a year ago — the biggest April drop since 1981, a study released Tuesday by the American Institute for Economic Research says.

When the economy slumps, so does tax revenue, and this recession has been no different, says Kerry Lynch, senior fellow at the AIER and author of the study. “It illustrates how severe the recession has been.”

For example, 6 million people lost jobs in the 12 months ended in April — and that means far fewer dollars from income taxes. Income tax revenue dropped 44% from a year ago.

“These are staggering numbers,” Lynch says.

Big revenue losses mean that the U.S. budget deficit may be larger than predicted this year and in future years.

What we are seeing now is only the beginning of a massive shortfall. I followed up on the article above in February:

Now that we have updated figures on coming expenses it’s time to update the deficit predictions:

* $1.65 trillion for 2009
* $1.6 trillion for 2010
* $1.95 trillion for 2011
* $2.2 trillion for 2012

If President Obama keeps spending like this, and really wants to cut the deficit in half by 2013, he will at one point be faced with no other choice but to raise taxes on all Americans, rich, middle class, and poor. This is of course nothing new. Taxes have been rising in the US for the past century.

Taxes on all Americans, rich, middle class, and poor? Like a national sales tax? No way, our dear legislators would never consider such a rip off, would they? Why, sure they would … Once Considered Unthinkable, U.S. Sales Tax Gets Fresh Look:

With budget deficits soaring and President Obama pushing a trillion-dollar-plus expansion of health coverage, some Washington policymakers are taking a fresh look at a money-making idea long considered politically taboo: a national sales tax.

Common around the world, including in Europe, such a tax — called a value-added tax, or VAT — has not been seriously considered in the United States. But advocates say few other options can generate the kind of money the nation will need to avert fiscal calamity.

At a White House conference earlier this year on the government’s budget problems, a roomful of tax experts pleaded with Treasury Secretary Timothy F. Geithner to consider a VAT. A recent flurry of books and papers on the subject is attracting genuine, if furtive, interest in Congress. And last month, after wrestling with the White House over the massive deficits projected under Obama’s policies, the chairman of the Senate Budget Committee declared that a VAT should be part of the debate.

What caught my eye was this picture and comment in the article above, giving us an idea of which income group will suffer most from a national sales tax:

Demonstrators called for a suspension of value-added tax on food in Manila last year. Such a tax is attracting real interest among U.S. policymakers. (By Romeo Gacad — Agence France-presse Via Getty Images)

… I wish I wasn’t so sure that under this clueless and misguided Congress, this new tax is bound to happen sooner or later; unless the people raise hell over it and unconditionally reject all the tired, dull, boring, and false excuses and lies that President Obama, Nancy Pelosi, Harry Reid, and all their obedient Congressmen and Senators will try and come up with.

Tags: national sales tax, sales tax, us tax shortfall

Barney Frank on Housing – Clueless in 2005, Clueless Now

May 27, 2009 · Posted in Politics · Comment

I quote:

… but you’re not going to see the [housing] collapse that you see when people talk about a bubble and so those of us on our committee in particular will continue to push for home ownership…

Thanks, Barney, for admitting, at least back then, that you were on the forefront of pushing for excessive home ownership and thus being instrumental to the housing crisis. Would you come forward today and say the same things? But then, I guess, nobody could see this coming, right?

Nobody? Here’s Ron Paul in 2003:

The special privileges granted to Fannie and Freddie have distorted the housing market by allowing them to attract capital that they could not attract under pure market conditions. Like all artificially created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing, the damage will be catastrophic.

… who would you rather listen to?

Tags: barney frank, housing market, ron paul

The Federal Reserve, IRS & Legal Tender Laws – A Criminal Racket

May 27, 2009 · Posted in Government, Monetary Economics · Comment

Robert Kahre, standing up for sound money, freedom of choice, and the rule of law, paid his contractors in gold:

Robert Kahre, who owns numerous construction businesses in Las Vegas, is standing trial on 57 counts of income tax evasion, tax fraud and criminal conspiracy. If convicted on most counts, he could live out his life in prison.

But attorney William Cohan paints Kahre as an American “hero” who believes his payroll system helped keep the U.S. monetary system sound, and was also a form of legal tax avoidance.

A self-made entrepreneur, Kahre, 48, paid his workers in gold and silver coin, and said they could go by the coins’ face value — rather than the much higher market value of their precious metal content — for federal tax purposes. He did not withhold taxes from their wages, and he provided the same payroll system to 35 outside clients, which were other local businesses.

Judge David Ezra is presiding over the criminal trial, which began May 19 in U.S. District Court. Joining Kahre as defendants are his longtime girlfriend, a sister who works in his businesses, and a former business assistant.

Three of the four present defendants were among the nine people tried on similar charges two years ago, but no convictions resulted. In the 2007 trial, four others of the nine defendants, including Kahre’s mother, were entirely acquitted. Two individuals were only partially acquitted, but dropped from the indictment that forms the basis for the trial before Ezra.

This time around, the only new defendant is Danille Cline, Kahre’s girlfriend of 19 years, and the stay-at-home mother of his four children. The government claims she obstructed the Internal Revenue Service by allowing Kahre to place several homes in her name, thus attempting to conceal his assets.

Cline’s former brother-in-law, Thomas Browne, also was indicted this time, for his role as broker in some of the real estate transactions, but has since reached a plea bargain. He is expected to testify against the defendants.

“This is a case about money, greed and fraud.” The line appeared on screen in court during the government’s opening statement by Christopher Maietta, a trial lawyer from the Washington, D.C., office of the Department of Justice.

My comment: From the point of view of a dull and uneducated person there exists of course no other way to “describe” this case. I would more appropriately title it a case about freedom, sound money, and legal tender injustice.

It is obvious that the IRS is terrified about this completely legal way to avoid income taxation. Their indoctrination of the public about the immorality of supposed tax evasion has indeed permeated the minds of the clueless masses.

But before they have the right to attempt even the slightest attack on people like Kahre, they themselves should first of all do their best to justify the current US fiat money system.

Now, anybody who is confronted with any of the age old lies regarding the legality of the US fiat money system can politely point the ignorant blabbermouth to some very simple paragraphs in the US constitution.

It is commonly held that Congress rightfully delegated the powers to print fiat money to the Federal Reserve Bank, based upon the following paragraph in Article I, Section 8:

The Congress shall have power…
To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures;

The problem here is obviously that this section clearly talks about coining money. There is nothing else that could be read into this. Based on this Congress has no right to create fiat money, be it directly or indirectly.

Now, one could argue that the states independently could be allowed to enforce legal tenders other than gold and silver. But there is one problem: The Constitution states explicitly in Article I, Section 10:

No state shall enter into any treaty, alliance, or confederation; grant letters of marque and reprisal; coin money; emit bills of credit; make anything but gold and silver coin a tender in payment of debts; pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts, or grant any title of nobility.

The 10th Amendment clarifies what powers the Federal government does NOT have:

The powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or to the people.

Nowhere does the Constitution delegate to the Federal government the power to print paper money and make it legal tender. Not only that. On top of that it even strictly prohibits this practice to the states. How much more obvious did the founders of the United States have to make their unconditional opposition to the use of fiat money?

And they didn’t do it just for the heck of it. They were well aware of the problems caused by fiat money. They had lived through the disasters caused by the Continental Dollar:

With no solid backing and being easily counterfeited, the continentals quickly lost their value, giving voice to the phrase “not worth a continental”.

The painful experience of the runaway inflation and collapse of the Continental dollar prompted the delegates to the Constitutional Convention to include the gold and silver clause into the United States Constitution so that the individual states could not issue bills of credit.

… so long as people are ignorant and forget, history will repeat itself.

Tags: fiat money, gold, gold money, silver, silver money

Home Prices – March 2009

May 26, 2009 · Posted in General Economics · Comment

Click on image to enlarge.

According to the new Case Shiller report nationwide home prices dropped by 18.7%.

Top 3 annual declines:

1. Phoenix, AZ: 36.02%
2. Las Vegas, NV: 31.23%
3. San Francisco, CA: 30.06%

Top 3 monthly declines:

1. Minneapolis, MN: 6.25%
2. Detroit, MI: 4.85%
3. Phoenix, AZ: 4.52%

Tags: case shiller, home prices, march 2009

Commercial Real Estate Poised to Implode

May 25, 2009 · Posted in Business · Comment

Nothing but grim news on the commercial real estate front. The New York Post writes NO NEW LEASE ON TRILLIONS IN DEBT:

A trillion-dollar storm is gathering over the commercial real estate landscape that’s threatening to add further pain to an already bruised US economy.

At the center of the worries is some $3.5 trillion in debt backed by everything from strip malls to offices and apartments across the nation — the lion’s share of which is badly underwater because this recession followed a five-year commercial property boom fueled by easy money and loose underwriting standards.

Now the owners of the less-than-full malls, apartment complexes and office buildings are succumbing to the worst economic collapse since the Great Depression — because they can’t refinance the debt.

The commercial debt securitization market is dead.

“Because there is no securitization the system cannot process the wave of maturities coming due,” said Scott Latham, commercial property broker at Cushman & Wakefield.

“This is arguably the most important fact we’re going to be dealing with. If there’s no mortgage market that can feed the machine you’re just not going to have deals,” he said. “It’s going to be years before we recover and even when that happens we’re going to discover that we’re in a new paradigm,” Latham added.

About $1.4 trillion in real estate debt is set to mature over the next four years, with some $204 billion coming due this year alone.

Most of that debt won’t be able to be refinanced or restructured because lending standards have tightened and commercial real estate values have cratered since last year, according to Deutsche Bank analyst Richard Parkus.

The debt behind the commercial real estate boom, commercial mortgage-backed securities, or CMBS, entails pooling together commercial mortgages in apartment buildings, shopping malls or trophy offices in different locations, packaging them into bonds and selling them to investors.

CMBS issuance reached its peak with $230 billion transactions completed in 2007. Last year, as the market was dying, a relatively anemic $12 billion in activity was seen, according to industry newsletter Commercial Mortgage Alert.

Most of this does not seem to have a major impact on large national banks, but the total number of small banks affected will be huge, according to the Wall Street Journal Small Banks Face Hits on Commercial Real Estate:

Thursday’s “stress-test” results will bring fresh scrutiny to the nation’s biggest banks. They also are likely to highlight the woes from commercial real-estate loans that are piling up at large and small banks alike.

In the worst-case scenario, federal regulators examining the 19 largest U.S. banks are projecting losses of up to 12% on commercial real-estate loans over two years, according to a document viewed by The Wall Street Journal. The regulators are likely to cite commercial-property debt problems as a major reason why at least some of the large banks need additional capital.

My comment: Does anyone seriously believe that in a worst case scenario the banks will lose no more than 12% on commercial real estate loans? But even then:

With that loss rate, “you’re talking about a depression in the U.S. economy and a major crisis in the banking system,” says Richard Bove, an analyst at brokerage firm Rochdale Securities LLC.

… say hello to commercial property crunchtime.

Tags: commercial real estate