Copyright 2013 John T. Reed
There is a chilling and word-to-the-wise op-ed on page A15 of today’s (12/4/13) Wall Street Journal titled “The Coming Global Wealth Tax.” Google the title to read it. It basically says that the International Monetary Fund has noted that advanced economies are approaching a record average debt-to-GDP ratio of 110%. The U.S. is currently at 108% (http://www.usdebtclock.org) (up from 106% a few months ago).
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The IMF says this has to be fixed. Correct.
Their preferred solution appears to be higher tax rates which they claim will produce higher tax revenues. The Laffer curve—and common sense—say that increasing tax rates, mass transit fares, or the house percentage of casino gambling and lotteries increases revenue but only up to a point, after which revenue actually declines because people change their behavior to avoid the high rates. In other words higher tax rates result in higher tax revenue as you rise from a 0% tax rate, but when the rate becomes too onerous, people start avoiding the tax which means after that point higher tax rates mean lower tax revenues. Namely, people engage in tax avoidance—including cheating and/or cessation of the taxed activity, stop using mass transit, or find another place to gamble.
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The IMF says the Laffer curve peak is around 60%! For the U.S. in particular, they claim it is 56% to 71%! They’re nuts.
Hauser’s Law (http://en.wikipedia.org/wiki/Hauser's_law) says tax revenue in the U.S. has almost always been 19.5% of GDP since World War II. That being the case, the only way to increase tax revenue is to increase GDP, not tax rates. But Democrats, and the Pope, don’t want to believe that. They call it “trickle down” economics. They pay lip service to raising GDP, but their voodoo Keynesian economics—the notion that government spending increases GDP—is precisely what got us into this mess.
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The IMF notes that this excessively high debt-to-GDP ratio problem can be solved by repudiating the national debt (see my article Defaulting on the national debt makes a surprising amount of sense” at http://www.johntreed.com/default.html) or monetizing the debt, that is, inflating it away. See my book How to Protect Your Life Savings from Hyperinflation & Depression, 2nd edition. (http://www.johntreed.com/hyperinflationdepression.html) Repudiating and inflating are roughly the same for US bond holders, but repudiating screws only holders of U.S. government bonds. Inflating screws everyone on earth who owns U.S. dollars or USD-denominated assets, but still only benefits the U.S. government by the same amount as repudiating the debt.
Nevertheless, the politicians typically favor inflating—screwing everybody—to repudiating—screwing only U.S. bond holders—because they figure the voters are too stupid to blame the politicians for inflation, but they WOULD blame them for repudiating. The politicians are right about that. Screwing everyone is more likely to get the politicians reelected than screwing just US bond holders. So they will screw everyone.
The global wealth tax referred to in the article title means federal governments around the developed world simply confiscating part of the net worth of wealthy people to pay off some of the vote-buying debt the politicians have run up. They say it would be a one-time thing. IMF recommends taking 10% of your life savings.
Show of hands for those of you who believe it would only be a one-time thing?
Me neither.
The proposed, but later rejected “tax” on all depositors in Cyprus was such a wealth tax. Instead, they decided to honor their federal deposit insurance on deposits up to 100,000 euros and let uninsured depositors in the two bad banks get whatever—little or nothing—the proceeds of liquidation of the two bad banks turned out to be.
IMF’s basic point is that conventional levels and means of taxing no longer provide enough revenue.
Or, as I would put it, conventional means of getting rid of bad politicians—voting—no longer provide fiscally responsible government. We need to amend the Constitution along the lines of my grand jury Congress and binding national referendums.
I don’t know how many times I have to tell you this. The politicians are not going to cut spending—not here, not in Euro Zone, and not in Japan. There is a name for elected officials who cut spending: former elected officials. And there is a name for elected officials who inflate the curency then pass price controls after exclaiming that they are shocked, shocked that all the businessmen in the country simultaneously became hyper greedy as evidenced by they’re all raising prices astronomically at the same time: our saviors.
One of those three currency zones is going to tip over into hyperinflation and that shock will probably cause the other two to tip over into hyperinflation. Or maybe they will enact a confiscation of life savings tax on the wealthy. Or maybe they will repudiate the national debt. Or maybe all of the above in their desperate search for a way to keep paying entitlements and keep their jobs.
And what have I been telling you, boys and girls, for years? Get out of the USD and all USD-denominated assets, e.g., bonds denoinated in USD. Get into hard assets—like your principal residence which politicians are scared to go after and long-shelf-life food (ditto)—and into well-selected foreign currencies. I recommend AUD, CAD, CHF, and NZD. Also SEK and DKK if you want six of them.
Or you can just sit on your butt and do nothing and wait for them to arrive to confiscate part of your net worth by “tax” or repudiation or inflation.
And if you think they are NOT coming, here’s a special recommendation just for you. Get a guardian appointed to take care of your financial affairs and invest some money in a psychiatrist to learn how to overcome your propensity to substitute denial for rational action. Stop listening to what politicians say and start focusing on what they do. What they do is endlessly spend money to buy votes and tax, borrow, “print,” or whatever it takes to keep the freebies going out. It doesn’t matter which party is in control.
John T. Reed