The Plan that Prevents Plans

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The two biggest stories affecting Australia this morning come from neighbours in the North, Japan and China. In Japan, GDP contracted at an annualised pace of 12.7% in the fourth quarter. It’s the worst quarterly performance for the Japanese economy since the oil shock of 1974.

The oil shock caused a contraction in trade by putting up the global price of energy. Today, energy is comparatively cheap. But the whole financial system that developed following the oil shock is now falling apart. Trade is contracting. Interdependencies between national economies are being exposed, strained, and sometimes broken.

How many States will fail in the coming years? Mexico? Pakistan? China? America?

The Japanese import a lot of Australian thermal coal and iron ore. They use that energy and that steel making materiel to export finished goods to China and America. An-export based economy probably isn’t going to fare all that well in a world depression.

Keep in mind, Japan’s public debt-to-GDP ratio is 180%. Ever since its own bubble in stocks and real estate popped in 1989, the government has tried to step in and restore consumer confidence, spending what household’s won’t.

It hasn’t worked, of course. And the whole structure of the Japanese economy is oriented to exports and competitive currency devaluation. The local population, where more people die than are born, is shrinking. What can the government possibly do to reverse a demographic trend like that?

Japan’s slow-motion, demographic, and Keynesian decline is a problem for Australia. But there is a more urgent issue to deal with in the pursuit of Australian resource assets by the Chinese. Is it good? Is it bad? Is it inevitable?

Distressed Oz Minerals has accepted a $2.6 billion takeover bid by Chinese state-backed metals trader Minmetals. Oz has been unable to strike a deal with its bankers, who are otherwise preoccupied with their own survival. As a result, part-ownership of the world’s largest zinc mine in Queensland and the promising gold and copper mine at Prominent Hill in South Australia will be shared with Australia’s strategic partners in China.

Nobody wants to own or operate zinc or nickel mines at the moment, apparently. That is probably the single best time to be a buyer. You get a good price.

But wait! We interrupt your regularly scheduled daily dose of scepticism and humour with a complaint. It’s one we often get.

“It’s easy to criticize everyone else. But what’s your plan!”

First off here’s an important point: the Obama/Geithner plan is a plan that prevents plans. It doesn’t cut government spending. It just spread the wealth around on things that don’t fundamentally change America’s position in the world (which is not good).

Second, the Obama/Geithner plan actually prevents anyone else from making plans! Because it doesn’t address the insolvency of America’s (and the world’s) banks, it means no other entrepreneurs can make plans themselves, because they can’t get money from banks…who aren’t lending because they don’t want to sell their bad assets at a discount when they think they can get the government to pay full price later!

It’s a plan that perpetuates the miserable status quo. But then, that’s what stability is, isn’t it! You freeze things just as they are, believing that a lack of movement is actually progress. It’s nuts.

What we need is more instability. The world can’t move to a new production possibilities frontier until we move away from the old, failed, field of our last boom. The Western world needs a giant intervention, where it admits to itself that the thirty-year flirtation with financial capitalism produced a boom on Wall Street and a fictitious housing boom that didn’t leave households or national economies any wealthier.

It was a giant misallocation of resources based on the vague idea that you can spend your way to prosperity and enjoy life on credit. That’s not the world we live in. So the sooner we get past trying to “stabilise it” the better.

In that spirit, we present our plan to save the world. The plan is in no particular order. And all of its premised on one big important action to take at all costs: abolish the Federal Reserve and let there be a free market for money and a natural rate of interest. After that, the following steps should be taken:

1. Reduce the wages of all elected officials to the national median income. If they mismanage the nation’s finances, laws, and future, they certainly shouldn’t be compensated for exemplary performance. Public service shouldn’t be a lucrative career. Throw them in prison for a year if they can’t balance the budget.

2. No more raising the statutory debt level. You can keep rewriting the law to allow yourself to spend more money you don’t have.

3. Declare a one-year moratorium on payroll taxes. The most important stimulus check anyone gets is from his employer. Let people keep their money and they’ll spend it in the way they want. Get government out of your pocket.

4. In the spirit of “bold experimentation,” allow cities and states to establish real “free enterprise zones” where small and large businesses enjoy a five-year tax moratorium on new investment and profits. Do you want to see high-wage manufacturing jobs return to Western shores that are accompanied by high rates of capital investment and employment and income growth? Then let Detroit be more like Hong Kong. Turn Baltimore into Taiwan.

5. Allow R&D tax credits for green technology. The private sector will be far more willing to fund green investment than the government, if the incentives are there. So change them.

6. Let businesses expense capital expenditures rather than depreciate them over time. This is what FedEx founder Fred Smith advocates. He reckons it will increase long-term business investment and get us away from a culture of chronic short-term financial and earnings management, which has proven a disaster for shareholders.

7. For America, bring home American troops from Japan, Germany, Okinawa, South Korea and the dozens of other countries they’re in. It’s not popular in those countries. America can’t afford it. And if the world doesn’t want it, then America shouldn’t be trying to export security or a set of political beliefs. Let people take responsibility for defending themselves and stop intervening in their lives. Enough is enough.

8. The government must stop making promises it can’t keep and naive taxpayers should grow up and realise these promises can’t be met except through theft and redistribution, both of which make an economy poorer. Let’s admit that that State-sponsored retirement benefits will have to be means tested and the retirement age will have to be raised. Is it fair to change the rules on people who’ve invested their whole life believing they’d be able to retire? No. But life is not fair. The world has changed. We can either admit it and try to adjust in a humane way so that the social safety net that’s there doesn’t collapse altogether. Or we can stubbornly cling to the notion that it’ll all be right. It won’t. It isn’t. And we had better be realistic about it soon, or we are doomed.

9. Let’s finally adopt a balanced budget amendment and make it illegal for Congress or national governments to run deficits. Economists will say it is unrealistic and that the government needs the flexibility to borrow and spend money when the private sector and households can’t. But all this has ever gotten us is more wars and the long-term expansion of government programs which we now know we can’t pay for and generally don’t work very well.

10. End the costly, ineffective, and militarising drug wars that put local police at war with ordinary people. The drug war fills the legal system with petty offenders and turns civilized society into a police state. Give up on trying to coerce people into a drug-free life. Persuade, don’t legislate. Punish behaviour, not lifestyle. If you de-criminalise drug possession (not abuse i.e. driving) the price will come down and the incentive to commit violent crime to get a piece of the drug trade will be gone.

There are other issues like education, healthcare, and Steven Segal films. But those are beyond the scope of this plan. If you have your own plan, send it along to dr@dailyreckoning.com.au .

Also, we recommend reinstituting a poll tax and or an IQ requirement for voting. Either that, or you must actually pay taxes (rather than being a net recipient of government benefits) in order to vote. Otherwise, the population is going to keep voting itself money it doesn’t have.

See? How easy is that?

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. Agreed, agreed and agreed.

    One more : the government must decide what income and capital gains tax rates are, and lock them in for 10 years. These should be indexed to prevent bracket creep. All increases in government services must be met by either cuts in other expenditure, by cost efficiencies, or by increases in the net GDP of the country (and therefore tax receipts). Stop fooling around with the taxation system every 12 months.

    However, all this sounds distinctly unpalatable for the hooked-on-handouts voters. This would be as likely as children agreeing to get rid of the cookie jar and unilaterally agreeing that Santa is a fictional character, thus ending the process of ‘free’ christmas presents.

    With regards to elected officials salaries : I say let them keep up to a maximum value. However, they can only receive their benefits within the budget. This would encourage thrifty behaviour to receive a larger income, and align the public’s interest with their own. It’s simple to be free and easy when it’s not your money.

    Reply
  2. But wait! We interrupt your regularly scheduled daily dose of scepticism and humour with a complaint. It’s one we often get.

    “It’s easy to criticize everyone else. But what’s your plan!”

    Shoot down the vultures. Capice?

    maltwhiskman
    February 18, 2009
    Reply
  3. Campaign to Cancel the Washington National Debt By Constitutional Amendment Begins in the U.S.
    See the following URL for more information:
    http://www.facebook.com/group.php?gid=67594690498&ref=ts

    Reply
  4. Treat families more as businesses. I am in the business of trying to raise children who will be decent productive citizens valuable to society. I propose that as a single income supporting a wife and children you get a tax free threshold to reflect this rather than the current ridiculous scenario of the government taking money then giving it back as child support. Other options could be that “business” related expenses such as mortgage, food and schooling should be a deduction from gross income. Allow people to get out of the shackles of a mortguage quicker and have a certain amount of security.

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  5. I also strongly agree with your 10 steps particularly on the initiative on drugs and balanced budgets.Deficits should only be entertained when it involves long term infrastructure that gets at least 75% bipartisan support. ALSO;

    11. There is a chronic shortage of health professionals therefore encourage more young people to become involved in the industry. No HECS fees for medical students unless they repeat a subject.

    12. Employers’ superannuation contributions to be redirected against employees’ mortgages as opposed to managed funds which have proven to be nothing more than “ponzi schemes” or in the case of public companies, an employee should get stock in the company he actually works for.

    13. Impose SALARY limits on “public company executives”. Incentives to be based on real long term wealth creation. Therefore bonuses should be paid in stock redeemable over time. The current system is flawed in that executives are rewarded in such a way that they can afford to be reckless and irresponsible with the future. I have no time for the argument “you need to pay outrageous money to attract the best” there is always the private sector for people to prove there worth!

    14. All companies producing environmentally sustainable products should be tax free. Tax only the dividends paid to its shareholders. GST on such products should also be discounted against less sustainable options.

    15. We must educate the world that resources are indeed finite and that continual exponential growth is simply not an option or essentially necessary.The current paranoia on GDP as a measure of our
    “well being” must be shifted to embrace SUSTAINABILITY.

    16. As part of high school corriculum THE ABJECT FAILURE OF CUMMUNISM.

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  6. It would be an improvement to ensure that Politicians do not profit from their time in office. A fair wage should be paid, and no expenses or lobbying should be payed. They can not take up employment with a company they have politically been involved in for 5 years after they leave office. No nest feathering is allowed.
    Perhaps then they could concentrate on public need and not their own.

    It would equally be prudent to insist that prospective politicians have to sit an I.Q test and reach a creditable score. Having idiots who can’t read (except when the material is upside down!!) in charge is surely a recipe for disaster.

    I would also insist that no organisation can pay more than a set factor for its’ top brass than the minimum wage in its’ organisation. The only exception to this, are people who literally do own the company and the company is not listed. Anyone else, remember you are just an employee, and earning 100 times (or some such factor) the wage of another worker is by far and away enough.

    If a performance bonus or some reward for steering the company into profitability is to be paid to said top brass, then have it measured over 5 years, paid in shares 5 years later. Based solely as a ratio of annual earnings and measured to accurately assess the difference in value between when the measuring period runs.

    If your efforts are to the benefit of the corporation, then surely 10 years down the line they will then be seeing the fruits of your efforts and influence.

    Perhaps then 28% of Western GDP will not be paid in 1 year to 2% of the population.

    Personally I like one other thing (and is something I would do if ever in power), ban all taxes bar one. Call it TAX. And charge it at a flat rate on every dollar/pound/yen you spend. Save it and you pay no tax. Eventually people will spend money and tax will be due and collected. Since there is only one simple tax, jail anyone that gets collecting it, and paying it to tax officers, wrong.

    No need for accountants.

    No need for auditors.

    Since there is only 1 form of revenue, if a government is doing well, then the rate of tax will fall. If however it is doing badly, it will increase. No hidden taxes, or taxes on taxes, or taxes on taxes on taxes, which we have now.

    Why on Earth would it be cost effective to have people apply for tax back. If it is collected in error, then it should never have been collected at all. A $100 annual tax rebate must cost collectively $500 in effort to collect account and return. There is something fundamentally wrong with your tax system and associated tax legislation when there is a need to do this.

    In the 80’s and 90’s Business Process Re-Engineering was a very popular methodolgy for organisations, and was widely taken up by Private companies. It never moved into the public sector because they had no need for it as there was no pressure on them to improve or reduce their processes/costs. Again the politicians taking I.Q tests might help with motivation here.

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  7. If Oz Minerals had listened and bought gold, gold, gold when you said they wouldn’t be in the mess, would they just?

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  8. Dan you have seen my thoughts before. Liquidate the banks, subsidise the mortgage payments of the underwater households, fund it with death duty. Kill the programme and cut the duty as the mortagees jump or die. The corporates all have to sink or swim, including the GM’s.

    My plan addresses the insovency but unfortunately yours doesn’t. I see Obama now wants one side of the plan (the giveaway) but leaves the death duty on the shelf, that means monetising and that means a conflagration, and that means all the savers get burnt and all the borrowers eventually get cheap virtually no cost assets at the expense of the grandkids.

    Socialism was what Bubba and Rubens did, like a COMECON barter trade exercised with phoney dollars and the cronies clipping the ticket just like party officials. And if a defined programme takes some of it back from the worthless cows then so be it. The money will be more productively spent than the trickle down on motor yachts given to their kids.

    I agree with most else of what you say so my criticism is limited.

    But the success of tax cuts like those under Reaganomics underwroting growth is overplayed. Before I start, I don’t like Noam Chomsky, but if you read Year 501 he sets out clearly the military industrial debt funded reagonomics miracle. And when it comes to Japanese, Taiwanese, German, Swiss key export oriented industry growth and even American drug companies for that matter, it wasn’t so much tax breaks as it was domestic subsidisation through higher consumer prices that were fed back into capital spending.

    Some tax breaks yes, but not ones that can be churned forever by a class playing funny buggers taht gets less entrepeneurial year after year. Cuts to govt, the nanny state and deeply into the US military yes, but watch that kill even more households in the short term and extend insolvency. Look at Texas and upstate NY on the latest houseprice monitors down only 5% while the hotspots are down 40%.

    And drugs, well not like Amsterdam mate, not like Zurich. A health issue yes but one dealt with with a firm hand rather than a Utopian dream.

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  9. You had me until I read #8! C’mon man, raised the retirement age! You want people to work until they just drop dead! Seriously??? And because of #8 I had to review the list twice, so I think #4 is forgetting the fact that most jobs shipped overseas is fueled by corporate greed for more profits! Free Trade Agreements are the real culprits here…Your plan is wic-wic-wack!

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  10. Pookiedog…the notion of retirement in our 60’s has to change anyway – we are living longer. Is it possible that the whole idea of retirement in our 60’s was unrealistic to start with? See, it might work for the generation before the boomers, because they had a much larger thriving(?) population working to give the government taxes and make this possible.

    The idea that those same boomers can now retire after blowing up our financial system and inflating asset prices beyond our imaginations is laughable – almost like the notion of bank CEO’s leaving with million dollar bonuses.

    The key problem here is ‘sustainability’. Can economies sustain a retiring population that expects healthcare benefits and pensions, if they are going to continue to live another 30 or 40 years? If so, how? What about the next generation? And the next?

    The welfare system breaks down. Retirement is achievable…but seems unlikely to be a wealthy one.

    Ironically the children of the boomers won’t be supporting them…they have inherited higher mortgages and a higher cost of living.

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  11. Sir, yes we are living longer…however

    Excerpt from the NY Sun- “Life expectancy was up for both men and women, and whites and blacks. Although the gaps are closing, white women continue to have the highest life expectancy (81 years), followed by black women (about 77 years), white men (76) and black men (70). Health statisticians said they don’t have reliable data to calculate Hispanic life expectancy, but they hope to by next year.”

    Have you even consider some important factors that would make it impossible for many people to work until 70. Primarly, health issues regarding their physical & mental well-being. Let’s be honest here, you start feeling the effects of old age in your 40’s. (Especially, with all the GM foods being pumped in our bodies.)

    And if you’re a black man, you can definitely look forward to dying on the job, if you have to work unitl your 70!

    I think your position is a covert advocation for the abolishment of social security and medicare. Well at least for the baby boomers.

    Peace and thanks for the feedback!

    p.s. What do you think of the Kuwati Dinars position in the world currency market, if the dollar were to collapse or be demonetized?

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  12. “Reduce the wages of all elected officials to the national median income.” – music to my ears.

    On drug legislation :
    You do realise that the drug-mafia bribe the judiciary with drug money to keep it all illegal? (decrease the supply, increase the demand and profits)

    Those vociferously against legalizing drugs are either mafia or the pawns of mafia: Ie the big-time dealers themselves.

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  13. I have a very rudimentary grasp of economics to say the least.
    It hardly extends beyond Dickens “Annual income 20 shillings, anuual expenditure 19 shillings and 6 pence; result hapiness. Annual expediture 20 shillings and 6 pence; result misery.” I have had a life long aversion to debt, bordering on paranoia. It has served me well.
    Freedom from debt has brought me freedom in my personal life choices. It has given me the freedom of time, not sweating over the next repayment. It has given me time to travel, time to loaf under a palm tree. Time to build my own house, time to spend with my kids.
    To me, debt is a temporary insanity driven by dire need. How could a person, a household, a community, or indeed a nation, contemplate it as a permanent state?
    I was recently talking to a mixed group complaining that this next generation now coming to maturity didn’t even know the meaning of words like parsimony, thrift and frugality. Right on cue, a girl about 18 asked “what is frugality.” I rest my case.
    So my financial analysis comes down to:-
    1) If you haven’t got any money, dont spend more.
    2) If you owe, look for cuts to pay it off.
    3) Carefully analyse what you need, what you dont.
    4) Grasp opportunities and be prepared to change.
    5) Darwin has proved that adaption = survival.
    6) Plan your own survival, the cavalry may not arrive.
    7) Dont start wars. They are messy, expensive and life-threatening.
    8) Filter information from media and politicians and economists through a fine mesh to avoid ingesting bullshit.
    9) Rely on your own judgement.
    10) Relax! Money isnt the most important thing in your life. Relationships are.

    My own 10 point plan to save the world.

    Paul Tredgett
    February 21, 2009
    Reply
  14. As far as Oz Minerals is concerned. Yes, Century is one of the biggest zinc mines in the world but unfortunately its metallurgy means it will always be one of the high cost ones – I would think 50 cents/lb at least. Also it has until 2016 at current reserves and the head grade is always dropping. Hardly a good buy in my books but you never know….

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  15. Nice post Paul Tredgett…I couldn’t agree more

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  16. “We recommend reinstituting a poll tax and or an IQ requirement for voting.” A poll tax is a tax on having a head – not likely to be popular, and not based on the individual’s ability to create the wealth to pay it. An IQ requirement for driving – or anything else – shows more faith in IQ than I personally possess. Otherwise a lot of good if improbable ideas.

    Philip Coggan
    February 23, 2009
    Reply

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