It's Time To Tax

The following story appeared in Reuters and made my stomach turn.

Some U.S. firms paid more to CEOs than taxes: study

 Here's an excerpt:

"Compensation for the 25 CEOs with pay surpassing corporate taxes averaged $16.7 million, according to the study, compared to a $10.8 million average for S&P 500 CEOs. Among the companies topping the IPS list:

* eBay whose CEO John Donahoe made $12.4 million, but which reported a $131 million refund on its 2010 current U.S. taxes.
* Boeing, which paid CEO Jim McNerney $13.8 billion, sent in $13 million in federal income taxes, and spent $20.8 million on lobbying and campaign spending
* General Electric where CEO Jeff Immelt earned $15.2 million in 2010, while the company got a $3.3 billion federal refund and invested $41.8 million in its own lobbying and political campaigns.

Though the companies come from different industries, their tax breaks fall into two primary areas.

Two-thirds of the firms studied kept their taxes low by utilizing offshore subsidiaries in tax havens such as Bermuda, Singapore and Luxembourg. The remaining companies benefited from accelerated depreciation."

I can fully understand Warren Buffet's call for more (and better structured) taxation.  And how else can the U.S. ever get out from under the massive debt pile?

Look at the chart below.  If we merely revert to more historically "normal" tax receipts as a percentage of GDP (excluding social insurance which is a completely different issue) the extra revenue will come to some 4% of GDP, or $900 billion per year.  The federal budget deficit in 2010 was $1.17 trillion.

 Chart: The Big Picture

US Tax Revenue as a Fraction of GDP by Component

The Eurozone: A Family Snapshot

Given what is going on in the eurozone at the moment, I thought it would be nice to have a snapshot picture of it, circa 2010.

 Data: Eurostat (2010)

Ninety percent of the Eurozone's GDP is produced by just seven countries

Before you reach Greece, number 8 on the list with a mere 2.5%, you are already up to 89.99% of total GDP.  That is to say, the "black sheep of the family" is a relative spiffle and its fiscal troubles should have been dealt with firmly and - most importantly - FAST.  It didn't happen, so the debt crisis has been allowed to fester and spread, threatening to become a serious systemic issue for the entire European Union.  A huge mistake for Europe's leaders, particularly Frau Merkel and Monsieur Sarkozi who should have known better.  Much better.  

After the collapse of the USSR and America's Bush II, it seems that it is now Europe's time to go through its very own Era of Total Ineptness.

History is a harsh mistress whose cycles shall not be disturbed, indeed...

Sudden Debt Redux: Where Are We Now?

Sudden Debt was started five years ago warning of excess in debt, asset bubbles and the end of the "Permagrowth" model.  Today, some of the most egregious excesses have been reversed or at least arrested after wrenching and painful adjustments to the real economy.

Here are some relevant charts (all apply to the United States).

• Total debt as a percentage of GDP is still extremely high, but at least it has stopped growing.

 

• The debt service ratio has come down significantly, mostly through rock-bottom interest rates engineered by the Fed.

• The personal saving rate is rising, even if only slowly.

• Residential real estate, the biggest bubble of them all and Mr. Greenspan's biggest mistake, has burst spectacularly.

The charts above tell me, at least, that the Permagrowth model of the US (and global) economy is finished and must be replaced with something entirely new.  I simply cannot imagine that we will just roll over and once again start pumping the same old bubbles of consumption, debt and real estate as remedies for "low growth".  History teaches us that it can't be done: once a bubble is burst it stays burst for a long, long time and any attempts to re-inflate it ends in wasted time and resources  (Just look at Japan..).

What we need, instead, is a paradigm shift.  My choice is to focus on raising earned income and savings,  investing the surplus in renewable energy and resource management, basic R&D and technical education.

Gold vs. Debt and GDP

Continuing a bit from the last post's subject, here's another comparison between gold and US debt: The value of the entire amount of gold in existence in the world vs.  total debt of the USA (a proxy for global debt), and global GDP.

According to the World Gold Council there were a cumulative 169,100 tonnes of gold mined by the end of 2010, all of it still in existence since gold practically does not degrade, react, corrode, etc.   At the recent high price of $1,800/troy oz. its total market value was $9.8 trillion, or 16% of global GDP.

Using data from the Federal Reserve (US debt) and the US Geological Survey (annual global gold production) I come up with the following chart.

The value of gold is essentially a psychological phenomenon, since it has very few tangible uses. At 15% of global GDP, up from 5% just six years ago, it seems to me like it is discounting a lot of panic (the euro will fall apart, the West will inflate away all of its debt, the US will devolve into a second-rate power, etc. etc.).

They Are Scared Witless..

In this post's title "they" are speculators/investors (are there any true investors left in this world, I wonder?) and "witless" means exactly that: they have taken leave of their wits (assuming they had any to begin with, of course).

Proof? The following charts, showing:

(a) The price of gold soaring to new highs, apparently discounting a heavy bout of inflation in the future and,

(b) The yield on 10-year US Treasury bonds crashing to near new lows, apparently discounting future deflation.

Gold Flying High

10-Year Yields Collapsing

It stands to reason that this situation is untenable and can only occur when speculators are very, very scared, running about like chickens with their heads cut off.  I am a long-term investor myself, a natural-born contrarian bent on spotting exactly such nonsensical divergences.

Markets always provide tremendous opportunities to level-headed contrarians at two nexus points: bubble bullishness and panic.  Characteristic to both is the absence of common sense, observable and easily calculated by simple arithmetic (ratios are as far as you have to go).

For example, the ratio of gold price to 10-year yields stands now at 776 (it went as high a 850 a couple of days ago).  Just three years ago it was at 210...

The witless in search of "safe" havens, indeed...

As The World Burns

Well, now it's official:  The Debt Crisis is global.  But what lies at the heart of it? What are the economic fundamentals which have created it?

In a word, "China".  Oh, I don't mean that China as a nation is at fault, that it is to be blamed for the profligacy of Western consumers and their politicians' astonishing inability to lead, predict or - at least - to react properly.  No, I use "China" as a label for our present borrow-spend-inflate assets economic paradigm

In the last couple of decades we in the West have moved a huge portion of our manufacturing to China and become junkies of debt-financed ultra-cheap goods.  Said finance provided by China, of course.  It doesn't take a PhD in economics to spot the imbalance, of course.  As I have said many times before, the Debt Crisis is not the disease but a symptom, albeit a lethal one.

What is the proper remedy?  Nothing less than a global shift in the economic paradigm: we urgently need to move away from global consumerism to local "investism" (to coin a word).  Invest in what? you ask.  Green energy, mass transport, environmental amelioration, recycling, responsible resource management - and these are just a few items that have the very real potential to create a boom in local manufacturing and skilled jobs for a very long time, measured in decades.

Think of it this way: what is more important for our own present and our kids' future?  A third (and fourth and fifth) pair of cheap sneakers, or a new solar power plant?  Another V8 4x4 monster, or a new electric railway?  A fossil-fuel economy that resembles a roller-coaster nightmare, or an increasingly feasible electric utopia?

It's time to wake up from the bad dream and get to work building our very own Utopia.

PS For my European friends: Do you seriously think you can have a common monetary policy (the euro) without a common fiscal policy? Do you, really?