The importance is dependent on your perspective. Those people who are not borrowing money to spend are thus suffering the pangs of a lowering of their lifestyle, which depended on borrowing money to spend; and then they come around, whining about stupid things like, "Daddy, things have gone up so much in price that I need more money, which you would give me if you loved me. Don't you love me? I love you! Won't you please love me, daddy?"

And so I ask, "Can't you love me if I don't give you any money?" and they say, "No. You could borrow the money, and then we would love you", and I reply, "I have been borrowing money and now I can't pay them back" and so the kids say, "Then borrow some more!"

And, in a terrifying revelation, I realized that it is not only my children, but all the rest of the economy that is totally dependent on everybody else borrowing money to spend, too.

So now you see how Chaos Theory was right, and that all things are connected to all things? If not, then pay attention to how they will now commence to all drag each other down into the Nightmarish Hell Of Inflationary Insolvency (NHOII).

And it doesn't take a real genius to see why, but the point is not that the American people were stupid enough to think they could get a perpetual free lunch by borrowing money to pay for it, or even that a smaller subset of those who are suffering the pangs of a lowering of their lifestyle is composed of those who also think that they can call me on the phone and either 1.) Ask to borrow some money from me, or 2.) Ask me to pay them back the money I borrowed from them.

My response is the same, in that I give neither one of them any money because I don't have any money; so to one I laugh in scorn, and to the other I say that I have just put a check in the mail to them, and that they will get their money soon, and if it hasn't arrived in a few months, call me back and I'll write you a new check and get it right into the mail.

The point is that a much larger subset of those who are suffering the pangs of a lowering of their lifestyle is composed of those people who think that they can elect government representatives who legislate all problems out of existence, that will tax me and then give the money to them, or the Federal Reserve will create more money to loan to investors with which to buy government debt so that the government can spend, spend, spend us into blessed Utopia. Either way, it's Bad, Bad News (BBN).

And, alas, one way or the other, they are right. Unfortunately. And that is one reason that I weep, alone, in the Mogambo Bunker Of Bunkers (MBOB), doors locked, radio blaring, machine guns cocked and loaded, mostly drunk or nearly so, soon to be blissfully comatose.

Another reason that I cry so piteously and drink so abusively is that all this new government borrowing will create so much new money that it will destroy the dollar's buying power, taking my own country down with it.

The only reason that I stop bawling like a little crybaby is the knowledge that the people who own gold, silver and oil will get rich, rich, rich, and since I own gold, then people will want me to loan them a few bucks out of my huge stacks of money because they are starving, and their children are starving, and I will say, "No!" and it will be thin gruel indeed for them to hear my mocking voice again echoing in their heads, "Buy gold, silver and oil, you morons, because your stupid government is letting a private bank (that misleadingly calls itself the Federal Reserve when it is, in fact, neither) to create so damned much fiat money that it will produce catastrophic inflation in consumer prices that will destroy the country, just like it has done to every other stupid country in the last 4,000 years that let its stupid government increase a fiat money supply at its whim! Hahahaha! Now you see why I always said you were freaking doomed! Hahaha!"

But I feel terrible, as this constant infliction of inflationary pain by heedless expansion of the money supply is so unnecessary, and that is why I was pleasantly surprised to read in The Wall Street Journal the headline "Central Banks Consider Gold" in its Commodities Reports column.

The reason is easy to see if you read the article backwards, in that there was a question about central bank buying "last week, when gold saw a record single-day gain", especially Chinese central bank buying of gold, which is already the ninth-largest holder of gold in the world but which holds only 1% of its foreign-exchange reserves in gold, although it actually said it would like to hold more. And Mark O'Byrne at Gold & Silver Investments says that he would "be surprised if the Chinese hadn't been nibbling at the gold market," which leads to the news that Asian banks "are seen as keen buyers" of gold, which leads to the news that "other central banks are now far more likely to be holders of gold", which leads us back to the second paragraph that "Turbulence in the financial markets and recent US dollar weakness are helping the precious metal claw back its reputation as the central monetary anchor within the international monetary framework", which leads to the opening paragraph of "Central banks may be starting to turn one of the few assets in which they can invest; gold."

In short, those crafty Chinese, a fifth of the world's population, may be getting ready to issue a gold-standard money, which will instantly make their currency the strongest in the world, which is just what a country needs if it wants to import a lot of things cheaply so as to respond to demand for internal economic growth without stoking inflation in prices!

And, fortunately for those of us who both love to have large profits handed to us and who also own gold, a Chinese gold-standard may soon make a dream come true as gold would skyrocket when priced in suddenly depreciated dollars.

Whee! This investing stuff is easy!

Until next time,

The Mogambo Guru
for The Daily Reckoning Australia

• Borrowing Money is no Longer in Fashion
• Does This Mean You Should Sell Your Gold?
• Why Do Men and Women Want Money and Power?
• Millions of Zimbabweans Face Starvation due to Nationalisation caused by Hyperinflation
• The Return of the Cattle Market

"The damage caused by high taxation during the Great Depression is the real lesson we should learn. A government simply cannot tax a country into prosperity. If there were one warning I'd give to all who will listen, it is that U.S. federal and state tax policies are on an economic crash trajectory today just as they were in the 1930s.

"The Smoot-Hawley tariff of June 1930 was the catalyst that got the whole process going. It was the largest single increase in taxes on trade during peacetime and precipitated massive retaliation by foreign governments on U.S. products...beginning in 1932 the lowest personal income tax rate was raised to 4% from less than one-half of 1% while the highest rate was raised to 63% from 25%. (That's not a misprint!)... By the end of January 1934 the price of gold, most of which had been confiscated by the government, was raised to $35 per ounce. In other words, in less than one year the government confiscated as much gold as it could at $20.67 an ounce and then devalued the dollar in terms of gold by almost 60%. That's one helluva tax....

"Inflation can and did occur during a depression, and that inflation was strictly a monetary phenomenon..."

"The 1933-34 devaluation of the dollar caused the money supply to grow by over 60% from April 1933 to March 1937, and over that same period the monetary base grew by over 35% and adjusted reserves grew by about 100%. Monetary policy was about as easy as it could get. The consumer price index from early 1933 through mid-1937 rose by about 15% in spite of double-digit unemployment. And that's the story."

We had no doubt that inflation can occur during a depression; hey, we read the papers. Anyone who has followed the Zimbabwe story knows that you can have a deadly depression...and dizzying levels of inflation at the same time.

But there's always more to the story. Devaluing the dollar in terms of gold had the immediate effect of increasing the money supply - it was like adding zeros to the currency.

In our wallet is a ten trillion dollar Zimbabwean bill, with a picture of stones on it. Those words - 'ten trillion' - did not get printed on that bill by accident. We assume they got printed on their by a printer in the employ of a government that figured that the cost of printing a ten trillion dollar bill was less than the cost of not printing it.

That is, by a desperate government that had so fouled-up the economy that a period of hyperinflation might seem like an improvement. Besides, hyperinflation might have a therapeutic, purgative effect.

But let us not get sidetracked by hyperinflation. It is nowhere in sight. Nor is its more civilized cousin - normal, polite inflation. The money supply in America - as measured by M2 - is contracting. The banks get money from the feds, but they don't pass it along. The chain of reflation is broken - or at least temporarily stretched. Currently, it takes a long time for money to get from one end to the other. The cash tends to get waylaid -either by the bankers...or by consumers themselves. It stays in bank vaults...or in bank accounts. Money is not being multiplied by the speed by which it changes hands. Instead, it is divided by immobility. It sits. It shrinks. It waits for a real boom.

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

• Oil and Gold Prices Linked for Most of Recession Period
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• Policy Makers and the Depression

Maybe we'd interpreted her submission incorrectly. Comments left on the Money Morning and Daily Reckoning website suggested we had.

That's the thing with publishing a daily newsletter. We've got a quick turnaround time on researching, writing and then sending it out.

We arrive at our building on Fitzroy Street by around 8am each morning.

We then quickly head for the Editorial Office - avoiding the 'roundhouse' and 'spinning crescent' kicks from our black belt Taekwondo kicking assistant publisher Joanne Ha.

Once planted at our desk looking out onto the neighbours' balcony we settle in to two full hours of reading, typing and editing. Needless to say, we're not immune from making the odd mistake.

Of course I use my best efforts to make sure we publish error-free.

But, if an error does slip through, that's the beauty of the comments section on the Money Morning website. If you think I've got it wrong, the best way to highlight it is to post a comment. As you'll notice, there's no censorship.

Providing you keep the wordage clean I won't edit your comments. The only other thing we ask is to try and keep your comments relevant to the subject, but that's all.

Anyway, back to Michelle But's submission to Lord Emperor Henry of Canberra. If you click here you can read it for yourself.

We read it countless times yesterday evening. Maybe she didn't support an effective 30% compulsory super contribution after all. Time for some humble pie we thought.

And then we 'un-thought' the idea of eating some humble pie.

It seems that rather than coming to the wrong conclusion, instead we made a schoolboy error by quoting the wrong part of the submission.

We should have referred to the summary on page one which makes it clear:

"(5) increasing compulsory employer SG contribution from 9% to 15% by 2012;

(7) establishing gradual and compulsory 15% personal superannuation salary sacrifice contributions (from gross pay taxed at 15%) by 2014."

You can't get much clearer than that. There's no ambiguity there. "Employer" contributions to be increased to 15% by 2012, and "Employee" voluntary contributions to be made "compulsory" and also at 15% by 2014.

That in our books, makes a proposal for 30% of your salary to be expropriated by the government by 2014.

The idea about "voluntary" contributions being made "compulsory" is enough to make any defender of freedom and liberty cry!

Look, we're not really interested in singling out one person here based on their submission to the enquiry. There are plenty of other hare-brained and mad-cap ideas from others too.

But frankly, if someone is lobbying the government to take 30% of your salary by force then you should probably know about it.

So in that respect we make no apology for highlighting this one submission in particular.

The fact is, almost every submission to Emperor Henry is advocating ways to slice, dice and mince your money.

But while we appear to have made a schoolboy error in quoting the wrong paragraph, it seems Ms. But - like many others - has made a schoolgirl error of assuming "employer" and "employee" contributions are unconnected.

We received this email from a Money Morning reader yesterday:

"The wage earner doesn't care how much super goes up because it's the employer who HAS to provide that amount. It could be argued that it comes from their wage... but it doesn't technically. If the super amount was increased to 12%, the boss wouldn't cut their take home pay, he would have to find the difference as it is added on after the wage is paid."

It's a common mistake made by many people. The government propaganda with superannuation has been mind-blowingly effective.

It seems very few employees consider superannuation as a tax on their income. A tax which reduces your take home pay by 9%. A tax which reduces the average worker's pay packet by $465 per month.

If the super guarantee is lifted to 15% then that's $9,300 per year or $775 per month you're missing out on. And if compulsory super is lifted to 30% then the average worker will be out of pocket by $18,600 per year or $1,550 per month.

All because there's a chance you could "squander" some of it.

Superannuation is treated as a mystical and magical entity. "It's the boss that pays for it, not me."

Wrong. Someone does pay for it, but it's generally not the boss.

Where does it come from then?

Well, that's where you have to take one step back and look at what isn't seen. Everyone can "see" the super contribution on their payslip, but few equate it as a tax, or a pay cut.

You see, superannuation is paid for from one of three places:

• A cut in your wages
• An increase in unemployment, or
• Increased prices

There is a fourth option, and that is for the business owner to reduce his/her profit. Although possible, this is less likely. Besides, why should a business owner who has put his/her own capital at risk take a cut in profit just to subsidize the government?

Make no mistake about it, in most cases, an increase in superannuation contributions will result in a decrease in your take home pay over time. When the employer employs you, he/she will naturally try and pay you as low a salary as possible in return for you providing as much productivity as possible.

That's just how it works. And that's how it has to work. If the employer tries to pay too low a salary of course, then he/she will not attract the appropriate staff and will therefore lose out.

If he/she pays too much then they will not get as good a return on the investment, especially if the worker's productivity does not justify the higher salary.

The market therefore, helps to determine the 'price' (salary) at which an employee is to be paid.

But what happens if suddenly the government decides to impose an arbitrary 6% increase in costs per employee? Will the business owner take that from his profit?

Not a chance. And neither should he/she be required to just because a government is implementing an arbitrary redistributive incomes policy.

So, the employer will look to take the money from the employee. Doubtless it would be made illegal for an employer to cut wages to an employee directly, so they would have to find another way of doing it.

Such as a freeze in pay increases. Inflation will have taken care of the 6% impost after just two years anyway. If an employee doesn't like the sound of that they can look for another job, but chances are the pay being offered will be lower to take into account the increased superannuation expense.

And when the employer advertises a replacement he/she can factor in the lower pay.

Another unseen option for the employer is to cut the workforce. If they have 20 staff on similar pay scales doing a similar job then it's fairly easy to get rid of one, or let attrition take its course and then not rehire - one less person on the payroll, but same cost to the employer.

That's a simple example of how government contributes to increased unemployment.

The other option is for the business owner to increase prices. We're not talking rocket science here. Trade unions would have you believe there's no connection between pay (especially when they talk about the minimum wage) and prices to the consumer.

That's twaddle. It does have an impact.

Again, it's the individual that loses out at the expense of incompetent government policy.

As I've quickly shown above, the business owner will want to rightly preserve their profit margins, and therefore will try to achieve this in one of three ways.

So when these submissions are made to Emperor Henry's enquiry using throw away numbers such as 12% or 15% or even 30% for compulsory superannuation contributions, just remember that the money to pay for it has to come from somewhere.

That somewhere my friend is from your pocket.

You shouldn't forget that.

Kris Sayce
for The Daily Reckoning Australia

• Proposals Inviting Government to Take Money from You and Give it to Someone Else
• Is Kevin Rudd Planning to Steal Your Superannuation and Bankrupt Your Retirement?
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• Actively Managed Superannuation Funds Have Not Had a Stellar Few Years
• Your Average Australian Super Fund

Front page in The Washington Post: "The Madoff Files...A Chronicle of SEC Failure..."

According to the Post, Madoff was "astonished" that the SEC didn't bother to verify whether he was actually doing the billions of dollars worth of trades he claimed to be doing.

In response, the SEC says it "doesn't have the resources" necessary to keep an eye on "the exploding number of financial firms."

And according to today's International Herald Tribune, Senator Schumer has suggested a way for the SEC to increase its budget by 75%. The idea is to turn it into a kind of tax farmer...with the right to earn money directly from the industry it is supposed to regulate. There's an idea for you - a very bad one. It would give the SEC more money to waste...allowing it to hire more people to meddle in the marketplace...giving investors more illusions that they are playing 'on a level playing field'...and ultimately corrupting the financial sector even more than it already is.

Which brings us back to our original question: what was the SEC doing?

The Madoff group was very suspiciously doing billions in trades with remarkable profitability and consistency. Every trader in New York knew something was up. What was so intriguing to SEC eyes...when they weren't keeping their eyes on Madoff?

We can tell you. Us! Your editor and his colleagues. No kidding. We'll give you the full story next time. Promise.

Bill Bonner
for The Daily Reckoning Australia

• Who Was the SEC Harassing Instead of Madoff?
• Bernie Madoff is a Giant in His Field
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• Bernie Madoff and the SEC
• The Dow Gives Up the Post-ZIRP (Zero interest rate policy) Gains

So this morning we have a full plate on offer to us. But we can't cope with them all, so the ANZ Bank's $2.85 billion capital raising, Bendigo Bank's $615 million tree exposure, and Rio Tinto's iron ore negotiations can wait for until tomorrow and Friday.

This morning the subject is tax. We're looking at it for two reasons, one is the "12-page lift-off Smart Tax Guide" from today's Australian Financial Review (AFR), and the second is thanks to an email from Money Morning reader Graeme Beal.

Mr. Beal sent through an email last night to the Money Morning Mailbag [moneymorning@moneymorning.com.au] writing:

"Recently I felt moved to give the Tax Review panel my take on tax policies here and abroad which I contend contributed mightily to the recent shemozzle in financial markets."

Mr. Beal sent a copy of his submission to us. It's 26 pages long. Unfortunately, we haven't had time to read it yet - but we will. Therefore at this stage we've got no idea whether we agree with Mr. Beal's proposals or not.

But that's not the point, we're grateful he's sent it to us as it's highlights an important fact...

Australians pay waaaaaaaaaaaay too much tax. We've highlighted before that the government's total tax intake is around 40% of GDP. We're aware the government enjoys expressing things as a percentage of GDP, although we haven't heard them mention that statistic too often.

So, we thought we would pay a visit to the Australia's Future Tax System website, and in particular drop-in on the terms of reference for the review.

Remember, this is the review that the omnipotent treasury secretary Ken Henry is running.

Take a look for yourself by clicking on the above link, it'll only take you a few minutes to read.

It's a perfect example of how government's in general claim to be helping out, whereas in reality all their proposals (whatever the political party) will only succeed in destroying everything they claim they are building.

We don't have the space to reprint everything here, but even the first paragraph serves up so many untruths it's not funny:

"The tax system serves an important role in funding the quality public services that benefit individual members of the community as well as the economy more broadly. Through its design it can have an important impact on the growth rate and allocation of resources in the economy."

Actually, let's rephrase our comment above. It's not that all their claims are untrue at all. In fact they are right. Only not in the way they believe.

The tax system does have "an important impact on the growth rate and allocation of resources in the economy." It's just that the government has a negative impact on growth, and ends up allocating the resources in all the wrong areas.

Thanks to government interference and meddling, more resources than necessary are diverted into parts of the economy such as construction at the expense of say, manufacturing.

Simply because the government taxes excessively but then provides tax breaks back to property developers and investors, capital is drawn towards funding those ventures.

Yet something of intrinsic value, say manufacturing, is hampered due to restrictive government policies (again, it's all parties) such as the minimum wage. Who would invest in domestic manufacturing without the ability to freely negotiate the cost of labour.

In a free market neither the property sector nor the manufacturing sector would be assisted nor handicapped by the government.

But that aside, there was another paragraph in the tax review's terms of reference that stuck out like a sore thumb. It was this:

"The review's recommendations should not presume a smaller general government sector and should be consistent with the Government's tax to GDP commitments."

In other words, don't even think about suggesting the government spends less. Although in reality the inclusion of such a clause is purely academic. As if a public servant would recommend less government spending.

But how can you have a tax review where one important part of the outcome is already decided. Namely government expenditure.

Therefore the review cannot possibly recommend an cut in taxes if it is to propose a balanced budget. The outcome of the review must and can only conclude that current levels of taxation - at least - are necessary.

The result will be not so much of a tax review, but rather a tax reshuffle.

And that's not all, I mentioned above how government's claim they are helping but only succeed is harming, well, here's how they believe they can help:

"The review should make coherent recommendations to enhance overall economic, social and environmental wellbeing, with a particular focus on ensuring there are appropriate incentives for:

• workforce participation and skill formation;
• individuals to save and provide for their future, including access to affordable housing;
• investment and the promotion of efficient resource allocation to enhance productivity and international competitiveness; and
• reducing tax system complexity and compliance costs."

We can sum this up very quickly. Workforce participation and skill formation become lower the more government is involved. The first home-buyers bribe and high taxes make it hard and for some impossible, to save for housing.

A government cannot by any stretch of the imagination promote "efficient resource allocation." Do we really believe a government bureaucrat can better manage the allocation of resources than a truly free market? We don't think so.

And as for the last point, that's the double whammy. This will be Ken Henry's coup de grace. It will be the recommendation that individuals not be burdened with having to complete tax returns every year...

That it takes up too much time and too much money, and that it is best for the individual to just pay tax and not have to worry about filling in a form.

This will ensure that many taxpayers lose complete control of how much tax they pay. But of course, it won't be marketed that way. It will be marketed as a way to "help you" or in real government-speak "responsibly helping working families around the kitchen table."

And you can bet the tax office will increase the number of audits and prosecutions of tax payers just to drive home the point that filling out a tax return is too hard. "Which would you prefer? A $500 tax refund, or a 6-month jail term? Your choice!"

The final point that drew our attention was this:

"The review should take into account recent international trends to lower headline rates of tax and apply them across a broader base, as well as domestic and global economic and social developments and their impact on the Australian economy."

Well, that's just another way of saying keep the rates as high as they can get away with, but increase the number of things that are taxed...

I mean, they state it clearly what their intentions are, "apply them to a broader base."

The biggest tax grab will come from carbon taxes, or emissions trading, or greenhouse taxes - whatever they want to call it.

But to put it simply, just think of anything that isn't currently being taxed, write it down and then look at your list in a couple of year. Because by then chances are the government will have found a way to tax it.

Kris Sayce
for The Daily Reckoning Australia

• Obama Plans to Do Away With Ireland’s Tax Advantage
• Is Kevin Rudd Planning to Steal Your Superannuation and Bankrupt Your Retirement?
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• US Dollar is Getting Trashed
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Your editor operates a mini-multinational. Yes, we have offices all over the world - in Paris, London, Madrid, Buenos Aires, Johannesburg, Melbourne, Bombay...and Waterford, Ireland. That is why we spend so much time traveling...just trying to keep up with business.

We moved to Waterford to take advantage of the 12% corporate tax rate. You gotta be somewhere? Why not go somewhere where they don't tax you so much?

In practice, this has not proven very important, because we never made enough money in Ireland for the tax rate to matter. Still, it was nice to know that if we ever did make any money in Ireland at least we wouldn't have to give so much of it to the Irish government.

But along comes Obama's anti-tax haven initiative...and poor old Ireland is even poorer. The American president proposes to do away with Ireland's tax advantage altogether...at least as it applies to American firms, who are the main beneficiaries. In fact, he'll penalize U.S. firms abroad. Not only will they pay local taxes...but they'll pay U.S. taxes too!

Yes, our poor little micro-multinational will have to pay more taxes. And your poor editor too.

Dear reader...please do us a favor. Please write your congressman. Tell him to drop dead.

Until next time,

Bill Bonner
for The Daily Reckoning Australia

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Setting aside the precipitous downward slide in the definition of "rich," there is ample reason to suspect that Obama's tax changes portend much higher, if not confiscatory taxes on the most productive Americans. Obama has strongly argued for higher taxes as a way of employing government to alter the pre-tax distribution of income, which he believes has concentrated too much of the gains from productivity in recent years in the hands of the very rich.

He seems to think that the "very rich" are a closed caste of more or less fixed membership, which changes little from year-to-year. This figures in his concept of "fairness," which supposes that it is perfectly just to burden a small fraction of the population with a majority of the costs of running the Federal government. This was detailed in a New York Times article on "spreading the wealth" by David Leonhardt. He wrote of Obama:

"He would then pay for the cuts, at least in part, by raising taxes on the affluent to a point where they would eventually be slightly higher than they were under Clinton. For these upper-income families, the Tax Policy Center's comparisons with McCain are even starker. McCain, by continuing the basic thrust of Bush's tax policies and adding a few new wrinkles, would cut taxes for the top 0.1 percent of earners - those making an average of $9.1 million - by another $190,000 a year, on top of the Bush reductions. Obama would raise taxes on this top 0.1 percent by an average of $800,000 a year. 'It's hard not to look at that figure and be a little stunned. It would represent a huge tax increase on the wealthy families. But it's also worth putting the number in some context. The bulk of Obama's tax increases on the wealthy - about $500,000 of that $800,000 - would simply take away Bush's tax cuts. The remaining $300,000 wouldn't nearly reverse their pretax income gains in recent years. Since the mid-1990s, their inflation-adjusted pretax income has roughly doubled.'

"To put it another way, the wealthy have done so well over the past few decades, with their incomes soaring and tax rates plummeting, that Obama's plan would not come close to erasing their gains. The same would be true of households making a few hundred thousand dollars a year (who have gotten smaller raises than the very rich but would also face smaller tax increases). As ambitious as Obama's proposals might be, they would still leave the gap between the rich and everyone else far wider than it burdensome on the young entrepreneur who was making his first millions as it would on the aging plutocrat who actually had enjoyed the prosperity of the past-quarter century since Reagan cut marginal tax rates."

An October 13 editorial in The Wall Street Journal clarifies the mysterious arithmetic of Obama's sweeping claims to cut income taxes for millions who currently have no income tax liability and pay no taxes:

"For the Obama Democrats, a tax cut is no longer letting you keep more of what you earn. In their lexicon, a tax cut includes tens of billions of dollars in government handouts that are disguised by the phrase 'tax credit.' Mr. Obama is proposing to create or expand no fewer than seven such credits for individuals:

• A $500 tax credit ($1,000 a couple) to 'make work pay' that phases out at income of $75,000 for individuals and $150,000 per couple.
• A $4,000 tax credit for college tuition.
• A 10% mortgage interest tax credit (on top of the existing mortgage interest deduction and other housing subsidies).
• A 'savings' tax credit of 50% up to $1,000.
• An expansion of the earned-income tax credit that would allow single workers to receive as much as $555 a year, up from $175 now, and give these workers up to $1,110 if they are paying child support.
• A child care credit of 50% up to $6,000 of expenses a year.
• A 'clean car' tax credit of up to $7,000 on the purchase of certain vehicles.

"Here's the political catch. All but the clean car credit would be 'refundable,' which is Washington-speak for the fact that you can receive these checks even if you have no income-tax liability. In other words, they are an income transfer - a federal check - from taxpayers to nontaxpayers. Once upon a time we called this 'welfare,' or in George McGovern's 1972 campaign a 'Demogrant.' Mr. Obama's genius is to call it a tax cut.

"The Tax Foundation estimates that under the Obama plan 63 million Americans, or 44% of all tax filers, would have no income tax liability and most of those would get a check from the IRS each year. The Heritage Foundation's Center for Data Analysis estimates that by 2011, under the Obama plan, an additional 10 million filers would pay zero taxes while cashing checks from the IRS.

"The total annual expenditures on refundable 'tax credits' would rise over the next 10 years by $647 billion to $1.054 trillion, according to the Tax Policy Center. This means that the tax-credit welfare state would soon cost four times actual cash welfare. By redefining such income payments as 'tax credits,' the Obama campaign also redefines them away as a tax share of GDP. Presto, the federal tax burden looks much smaller than it really is."

After all the sloppy definitions are parsed, one point remains clear. The top 5% of U.S. income earners, who presently pay 60.14% (2006 figures) of all income tax, are destined for a huge federal tax increase under Obama.

One of Obama's specific proposals is to raise the capital gains and dividend taxes to 25%, which will sharply increase capital confiscation as increasing percentages of "gains" will reflect inflationary depreciation of the currency. In the U.S., an investor must pay tax on the difference between the sales price of an asset and it purchase price, with no adjustment for inflation. Consequently, when the tax rate and inflation are high, a large portion of the "capital gain" is illusory. Any asset that appreciates by less than the rate of inflation will result in its owner losing purchasing power and having to pay taxes on the illusory gains. At Obama's higher tax rates, (he has suggested that capital gains and dividend taxes should be hiked to as much as 25%,) capital confiscation would result from modest levels of inflation.

And the Great Credit Crunch implies that inflation will be far higher than in recent experience.

Setting aside whether it is moral or equitable to force a small fraction of the population to essentially pay for the whole cost of government, much of which entails the shuffling of checks to purchase votes of various aggrieved groups, there is a bigger question. Can it be wise for the whole fiscal regime to stand on the shoulders of a small group, like a pyramid tottering on its point, so that any tribulation which undermines the prosperity of those who pay would promise to bankrupt the state?

It is a worthwhile question to ask if you have considerable assets. In light of the worldwide credit crunch, which has deflated assets of all kinds, the prospect of burgeoning prosperity at the magnitude required to enable one-in-20 Americans to become "Super Rich" benefactors of Big Government is vanishingly small. There won't be enough rich people to fill the role assigned to them in Obama's scheme. The result to be expected, in addition to confiscatory taxation, is a dramatic shortfall of revenues. This, in turn, implies surging deficits and deficit financing requirements that will rapidly swamp the capacity of the Treasury to borrow.

Regards,

Jim Davidson

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And what we reckon today is that two extraordinary things happened yesterday – related to one another and equally absurd.

Yesterday, the Fed did what it was widely expected to do – it lowered rates by 25 bps, bringing the key Fed lending rate down to 2%, or about half the rate of consumer price inflation. And that is where we begin to wonder. What kind of a bank would lend money for less than the inflation rate? Isn't it sure to lose money?

Yes, of course...but it's a long, long story...

The other extraordinary thing that happened was that the U.S. federal government began sending people "tax rebates." Of course, they are not tax rebates at all. Everyone who filed a tax return will get $300, whether he owed any taxes or not. A taxpayer will get another $300. Plus, children and dependents will get $300 each.

Alas, today's news tells us that much of the presumed benefit from the giveaway program will be lost because of higher fuel and food prices.

(And here we offer some helpful advice: We've heard that SUVs aren't selling very well anymore. Maybe the feds should give every family an SUV – one made in America, of course. That would be good for the auto industry – and then people could take the money they save from not having to buy a new car themselves and use it to buy gasoline and groceries.)

The U.S. government is already $9.3 trillion in debt (not to mention the other $40 trillion ‘financing gap'). It is giving out money it doesn't really have – $106 billion worth. But it is doing so for good reason – or so it believes. The president of all the Americans – George W. Bush – said that the handouts will be "good for the consumer economy."

Lending money below the inflation rate...giving out money you don't have, when you are already so deep in debt you will never get out – how could any of this be good for the real economy? But by this time we are so far into Never-Never Land that we will never find our way back.

A consumer economy may benefit from consumer spending – but only if consumers have money to spend. If giving away phony money, which you don't really have, could make things better – why stop at $300 a head? Why not give away $1,000 a person...or $5,000?

Likewise, if it's a good idea to lend money at 2% below the inflation rate...why not lend it at 10% below the inflation rate?

The really extraordinary thing is that the brightest minds in the nation think they can control the economy in these extraordinary ways. But they would think so, wouldn't they? The guy who believes drinking doesn't affect his driving is always the guy with the whiskey bottle.

Meanwhile, there was some ordinary news yesterday too. The Dow eased off 11 points. The euro stayed at $1.55. And gold lost another $11 – dropping to $866. Wouldn't it be nice if the price would fall below $800! Maybe it will; maybe it won't. But Dear Readers are urged not to lose heart. This bull market in gold isn't over yet. The real excitement is still ahead.

Bill Bonner
The Daily Reckoning Australia

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