My plan would have 3 parts. I like a flat tax, I doubt it will ever happen, but if we could get one I would be happy. Cruz proposes that (at 10%). I am fine with his proposal to eliminate all deductions but mortgage interest and charity. I would definitely tweak that some – no more than $50,000 in mortgage interest deduction a year and the same for charity. Basically subsidizing it a bit for the non-rich is fine. Subsidizing these for the rich seems silly so I would cap the deductions in some way. I also wouldn’t mind an almost flat tax, say 12% up to $200,000 and 15% after that (or some such rates).

Cruz’s rate is far too low given the government he wants. The government budget is largely: Social Security, Medicare and Military. Then you also have debt payment which have to be paid. Those 4 things are over 80% of the spending. All the other things are just in the last 20%, you can cut some of that but realistically you can’t cut much (in percentage terms – you can cut hundreds of billions theoretically but it is unlikely and even if you did it isn’t a huge change).

We are piling on more debt than we should. Therefore we should increase revenue, not reduce it. But if we can’t increase it (for political reasons) we definitely should not reduce it until we have shown that we have cut spending below revenue for 2 full years. After that, great, then decrease rates.

The White House, Washington DC by John Hunter. See more of my photos of Washington DC.

The VAT tax on businesses replacing the corporate tax system is in Cruz’s plan and this is the best option for corporate taxes in my opinion. Another decent option is just to pass through all the earnings to the owners (I first heard this proposal from my Economics professor in College) and tax them on the earnings.

Increasing the giveaways to trust-fund baby as Cruz and Trump propose is the single worst tax policy change that can be made. I have explained previously how bad an idea this is: The estate tax is the most capitalist tax that exists. The trust-fund-baby favors should be reduced not increased. I would roll back to the Reagan Administration policy on estate tax rates.

I would raise the federal tax on gasoline by 50 cents a gallon. Use it to fund mass transit improvements and to cut the deficit and to reduce greenhouse gas emissions. I would want have the whole rest of the taxes revenue neutral (and use this as extra income) but if that wasn’t possible, then make the whole thing together revenue neutral.

Social Security taxes are nearly equal to other income taxes. They are highly regressive. I would eliminate the current elimination of the tax on high income earners. I would just have the tax due on all earned income (no cap). If that let me reduce the rate, great, if not fine it would just make the fund solvent for longer. I would not increase the benefits due for high earners beyond what it is now.

I would also prefer to raise the retirement age on which benefits are paid (this isn’t really something that seems likely but I would support it strongly if there was any interest). I would do this in a similar way to the last time this was done. Last time they only raised it by 2 years. I would aim for at least 3 more, but would take whatever we can get. Those increased ages would not take full affect until 20-30 years from now.

I would also strongly support Bernie Sander’s desire to increase all tax revenue and create a single payer health care system. The economic cost of the current USA health care system is an enormous burden we all suffer from every year. A single payer solution isn’t nirvana but the current system is horrible, a single payer system would be a huge improvement.

I would prefer to change unearned income taxes to be more favorable for long term investing (if such income didn’t get swept up into a flat tax). Including it in a flat tax would be my preference, I am just saying if we didn’t get that and had something more like our current system I would want a change in tax on unearned income. Dividends shouldn’t get special treatment. Capital gains should be indexed to inflation – so selling a stock 20 years later would be not calculated on just the purchase price and sales price. The post inflation gain or loss would be calculated and then I would give favorable treatment to long term investments (over 2 years).

So I would gladly take a VAT from Cruz but at a more reasonable rate (perhaps 15%) and the flat tax from Cruz but again at a more reasonable rate (perhaps 15%) and the other adjustments mentioned above. I have no idea but just based on my wild guess it seems like 15% for both might fund a single payer health care system. But if a better health care system wasn’t possible due to special interests then just set those percentages at whatever makes it revenue neutral with the other factors (reasonable estate taxes instead of trust fund baby subsidies, increase gas tax).

I would be much more willing to cut spending than either the Democrats or Republicans. There are only 3 places to cut real money and neither party wants to cut Social Security or Medicare. I don’t want to cut Medicare. I don’t want to cut Social Security benefits but I would move back the age (cutting benefits for people retiring 20+ years from now) I would also be fine cutting payments to the rich, but this is not politically feasible so I am fine not doing it.

Many Republicans want to increase military spending, few are willing to cut it; a few Democrats are willing to cut it but not many. I would be willing to cut military spending to the tune of hundreds of billions a year. We just shouldn’t try to do as much as we do militarily. It is too costly. We need to spend less. Again this isn’t so likely but unless you do this thinking you can cut taxes is foolish. If you want to cut taxes you have to cut spending. I would be willing to cut military spending to cut taxes but it is unlikely there is political will do that in the USA.

Related: Taxes per Person by Country (2010) – USA State Governments Have $1,000,000,000,000 in Unfunded Retirement Obligations (2010) – USA Federal Debt Now $516,348 Per Household (2007) – Lavishing Tax Cuts on Ourselves That Our Grandkids Have to Pay For is Bad Policy (2013)

One thing people in rich countries forget is how many of them are in the 1% globally. The 1% isn’t just Bill Gates and Warren Buffett. 1% of the world’s population is about 72 million people (about 47 million adults). Owning $1 million in assets puts you in the top .7% of wealthy adults (Global Wealth Report 2013’ by Credit Suisse). That report has a cutoff of US $798,000 to make the global 1%. They sensibly only count adults in the population so wealth of $798,000 puts you in the top 1% for all adults.

$100,000 puts you in the top 9% of wealthiest people on earth. Even $10,000 in net wealth puts you in the top 30% of wealthiest people. So while you think about how unfair it is that the system is rigged to support the top .01% of wealthy people also remember it is rigged to support more than 50% of the people reading this blog (the global 1%).

I do agree we should move away from electing corrupt politicians (which is the vast majority of them in DC today) and allowing them to continue perverting the economic system to favor those giving them lots of cash. Those perversions go far beyond the most obnoxious favoring of too-big-to-fail banking executives and in many ways extend to policies the USA forces on vassal states (UK, Canada, Australia, France, Germany, Japan…) (such as those favoring the copyright cartel, etc.).

Those actions to favor the very richest by the USA government (including significantly in the foreign policy – largely economic policy – those large donor demand for their cash) benefit the global 1% that are located in the USA. This corruption sadly overlays some very good economic foundations in the USA that allowed it to build on the advantages after World War II and become the economic power it is. The corrupt political system aids the richest but also damages the USA economy. Likely it damages other economies more and so even this ends up benefiting the 38% of the global .7% that live in the USA. But we would be better off if the corrupt political practices could be reduced and the economy could power economic gains to the entire economy not siphon off so many of those benefits to those coopting the political process.

The USA is home to 38% of top .7% globally (over $1,000,000 in net assets).

Oxfam published a report on these problems that has some very good information: Political capture and economic inequality

The chart shows the correlation between kids and parents income and income inequality for each country listed. The more income inequality the more rigid the economic system is. Those countries with huge amounts of income inequality create economic systems to insure those that have rich parents are rich themselves.

At the least trust fund baby country cultures you have Scandinavian countries. The USA has been moving to an increasingly trust fund baby focus over the last few decades with the expected increase in kids incomes being more related to their parents income than any other factor. In the USA now nearly 50% of someone’s income can be “explained” by their parents income. That is the math showing how income is correlated to factors (such as college education, degree type…) shows that 50% of the kids income can be calculated just using the parent’s income.

That is obviously a very anti-capitalist system. It is the essentially a nobility based system of kids inheriting their place in society instead of earning it. I have written numerous times about this corruption of the word capitalism by the talking heads and politicians in the USA being used to justify corruption. For example, in these posts: We Need to be More Capitalist and Less Cronyist, Anti-Market Policies from Our Talking Head and Political Class and Not Understanding Capitalism.

The corrupt political system adopting economic policy that favors those giving cash to politicians is very bad for our economy and society. We can change this by not electing corrupt politicians but we don’t seem even remotely interested in doing so. Until that changes the corruption system will continue to damage our society, country and world.

If we are lucky we will reduce the level of corruption in the the political parties in the USA and other rich countries. The level of corruption is likely to remain very high though. The rules are being made by those with cash to pay corrupt parties and only minor adjustments around the edges are able to blunt the full force of corruption. It would be wonderful if this corruption could be largely eliminated (such as petty corruption has largely, though there is still far too much, has been USA – bribes to get business license, bribes to avoid sanctions for unhealthy food preparation conditions, etc.).

The current system largely favors the very wealthy and powerful that get special favors only available to them. One way to participate is in those companies that benefit from the current corrupt systems (cable TV, ISPs, too-big-to-fail-banks, copyright cartel industries, health care…). The biggest exception I think is too-big-to-fail banks. In the other industries the executives take large portions of shareholders profits, because then can, but they have some limits where shareholders will finally throw them out.

So the executives many times their fair share of the economic benefits due to the corruption in Washington DC but there is a large amount left for shareholders. In the too-big-to-fail banks the executives treat shareholders like their customers – fools to be fleeced at every opportunity. So they have hugely profitable businesses supported by bought and paid for politicians and bureaucrats but they then take so much of the profits that owning those companies seems unwise to me.

But for many other industries you can participate in the benefits provided by the corrupt political parties in the USA by owning stock in those businesses they provide favors to for piles of cash. You don’t make the .01% global rich list by working hard and a normal job and saving 15% of your income. But you can make the 1% global rich list by doing that with a median income job in the USA (and most other rich countries). It might not be glamorous and you might be jealous of those that are better at exploiting the corruption to get ahead, but you still are better off than 99 our of 100 people economically. That is hardly something worth pity.

Now if your parents are poor you are going to have a much harder time getting to the point where you get a job where you earn a median USA income. It would be better if the USA improved a great deal, but even so, there are very few (if any) places you are better off being born (economically) than the USA. Of course, being born rich in a country like the USA where we elect politicians to create trust fund baby economic policies is even more lucky than just being born in the USA.

Related: Cash for Votes subreddit – Economic Fault: Income Inequality – How Economic Inequality Harms Societies – The Aim of Modern Day Political Parties in the USA is To Scare Donors Into Giving Cash – Rich Americans Sue to Keep Evidence of Their Tax Evasion From the Justice Department

Also credit card providers should let me generate credit card numbers as I wish for use online (that are unique and can be stopped at any time I wish). If I get some customer hostile business that makes canceling a huge pain I should just be able to turn off that credit card “number.”

Laws should be adjusted to allow this consumer controlled spending and require that any subscription service must take the turning off of the payments as cancellation.

For some plan where the consumer agrees up front to say 12 months of payments then special timed numbers should be created where the potentially convoluted process used now remain for the first 12 months.

Also users should be able to interact with there credit reports and do things like turn on extra barriers to granting credit (things like they have to be delayed for 14 days after a text, email [to as many addresses and the consumer wants to enter] and postal notification are sent to the user. Variations on how these work is fine (for example, setting criteria for acceptance of the new credit early at the consumers option if certain conditions are met (signing into the web site and confirming information…).

Better security on the cards themselves are also needed in the USA. The costs of improvement are not just the expenses credit card and retailers face but the huge burden to consumers from abuse of the insecure system in place for more than a decade. It is well past time the USA caught up with the rest of the world for on-card security.

The providers have done a lousy job of reducing the enormous burden of fraud on consumers. As well as failing to deal adequately with customer hostile business practices (such as making canceling very cumbersome and continuing to debit the consumer’s credit card account).

Related: Protect Yourself from Credit Card Fraud – Personal Finance Tips on the Proper use of Credit Cards – Continued Credit Card Company Customer Dis-Service – Banks Hoping they Paid Politicians Enough to Protect Billions in Excessive Fees

I think sites like oDesk provide a potentially great way for people to lead productive and rewarding lives. They allow people far from rich countries to tap into the market demand in rich counties. They also allow people to have flexible work arrangements (if someone wants a part time job or to work from home that is fine).

These benefits are also true in the USA and other rich countries (even geography – there are many parts of the USA without great job markets, especially many rural areas). The biggest problem with rich country residents succeeding on something like oDesk is they need quite a bit more money than people from other countries to get by (especially in the USA with health care being so messed up). There are a great deal of very successful technology people on oDesk (and even just freelancing in other ways), but it is still a small group that is capable and lucky enough to pull in large paychecks (it isn’t only technology but that is the majority of high paying jobs I think on oDesk).

But in poor countries with still easily 2 billion and probably much more there is a huge supply of good workers. There is a demand for work to be done. oDesk does a decent job of matching these two but that process could use a great deal of improvement.

I think if I became mega rich one of the projects I would have would be to create an organization to help facilitate those interested in internet based jobs in poor countries to make a living. It takes hard work. Very good communication is one big key to success (I have repeatedly had problems with capable people just not really able to do what was expected in communications). I think a support structure to help with that and with project management would be very good. Also to help with building skills.

If I were in a different place financially (and I were good at marketing which I am not) I would think about creating a company to do this profitably. The hard part for someone in a rich country to do this is that either they have to take very little (basically do it as charity) or they have to take so much cash off the top that I think it makes it hard to build the business.

But building successful organizations that can grow and provide good jobs to those without many opportunities but who are willing to work is something I value. I did since I was a kid living in Nigeria (for a year). I didn’t see this solution then but the idea of economic well being and good jobs and a strong economy being the key driver to better lives has always been my vision.

This contrast to many that see giving cash and good to those in need as good charity. I realize sometimes that is what is needed – especially in emergencies. But the real powerful change comes from strong economy providing people the opportunity to have a great job.

I share Dr. Deming’s personal aim was to advance commerce, prosperity and peace.

Related: Commerce Takes More People Out of Poverty Than Aid – Investing in the Poorest of the Poor – I am a big fan of helping improve the economic lives of those in the world by harnessing appropriate technology and capitalism – A nonprofit in Queens taught people to write iPhone apps — and their incomes jumped from $15k to $72k

I realize some people see risk in what sites like oDesk make possible to create a market that means people can’t earn a decent living. I do actually see that risk and think it is real. I don’t think trying to block commerce because of this risk is an effective strategy. I do think many millions of people can be helped (and some will be hurt). I think we are better off trying to help those that want to work in such a way to do so.

I do worry that we may well not have decent work for people that are not interested in highly valuable skills and/or are not willing to work (just expect to be given the rich life many of those in places like the USA got to have the last 70 years without much effort). As long as we have corrupt politicians selling out the country to those giving them cash the richest 20% in the USA will have huge trust funds to live off, so they will be rich. Those that aren’t living off trust funds or inheriting huge windfalls will have risks to survive.

They are still economically super lucky to have been born in the USA so I don’t really feel very sorry for them. But yes, there are real risks to the easy riches that we have had (and even so many in the USA struggled even while we have the richest middle class the world has ever seen in the richest country the world ever saw). But it is going to be harder going forward (at least comparatively to the rest of the world contemporaneously) – compared to the struggles people had 100 years ago I am not at all sure it will be more difficult for the average kid born in 2010 than it was for the average kid born in 1910 (especially if average doesn’t mean white boy but everyone and both boys and girls).

In fact, while the Fed has pumped about $2.8 trillion into the financial system through nearly five years of asset buying.

Bank excess reserves deposited with the New York Fed have mushroomed from less than $2 billion before the financial crisis to $2.17 trillion today. In essence, roughly two-thirds of the money the Fed pumped into the banking system never left the building.

The Fed now pays banks for their deposits. These payment reduce the Fed’s profits (the Fed send profits to the treasury) by paying those profits to banks so they can lavish funds on extremely overpaid executives that when things go wrong explain that they really have no clue what their organization does. It seems very lame to transfer money from taxpayers to too-big-to-fail executives but that is what we are doing.

Quantitative easing is an extraordinary measure, made necessary to bailout the too-big-to-fail institutions and the economies they threatened to destroy if they were not bailed out. It is a huge transfer payment from society to banks. It also end up benefiting anyone taking out huge amounts of new loads at massively reduced rates. And it massively penalizes those with savings that are making loans (so retirees etc. planing on living on the income from their savings). It encourages massively speculation (with super cheap money) and is creating big speculative bubbles globally.

This massive intervention is a very bad policy. The bought and paid for executive and legislative branches that created, supported and continue to nurture the too-big-to-fail eco-system may have made the choice – ruin the economy for a decade (or who knows how long) or bail out those that caused the too-big-to-fail situation (though only massively bought and paid for executive branch could decline to prosecute those that committed such criminally economically catastrophic acts).

The government is saving tens of billions a year (maybe even hundred of billions) due to artificially low interest rates. To the extent the government is paying artificially low rates to foreign holders of debt the USA makes out very well. To the extent they are robbing retirees of market returns it is just a transfer from savers to debtors, the too-big-to-fail banks and the federal government. It is a very bad policy that should have been eliminated as soon as the too-big-to-fail caused threat to the economy was over. Or if it was obvious the bought and paid for leadership was just going to continue to nurture the too-big-to-fail structure in order to get more cash from the too-big-to-fail donors it should have been stopped as enabling critically damaging behavior.

It has created a wild west investing climate where those that create economic calamity type risks are likely to continue to be rewarded. And average investors have very challenging investing options to consider. I really think the best option for someone that has knowledge, risk tolerance and capital is to jump into the bubble created markets and try to build up cash reserves for the likely very bad future economic conditions. This is tricky, risky and not an option for most everyone. But those that can do it can get huge Fed created bubble returns that if there are smart and lucky enough to pull off the table at the right time can be used to survive the popping of the bubble.

Maybe I will be proved wrong but it seems they are leaning so far into bubble inflation policies that the only way to get competitive returns is to accept the bubble nature of the economic structure and attempt to ride that wave. It is risky but the supposedly “safe” options have been turned dangerous by too-big-to-fail accommodations.

Berkshire’s Munger Says ‘Venal’ Banks May Evade Needed Reform (2009)

Related: The Risks of Too Big to Fail Financial Institutions Have Only Gotten Worse – Is Adding More Banker and Politician Bailouts the Answer? – Anti-Market Policies from Our Talking Head and Political Class

They say “misguided government incentives” much of which are due to payments to politicians by too-big-to-fail institution to get exactly the government incentives they wanted. There is a small bit of the entire problem that is likely due to the desire to have homeownership levels above that which was realistic (beyond that driven by too-big-to-fail lobbyists).

“Were safer” says a recent economist. Which I guess is true in that it isn’t quite as risky as when the too-big-to-fail-banks nearly brought down the entire globally economy and required mass government bailouts that were of a different quality than all other bailouts of failed organizations in the past (not just a different quantity). The changes have been minor. The CEOs and executives that took tens and hundreds of millions out of bank treasures into their own pockets then testified they didn’t understand the organization they paid themselves tens and hundreds of a millions to “run.”

We left those organizations intact. We bailed out their executives. We allowed them to pay our politicians in order to get the politicians to allow the continued too-big-to-fail ponzie scheme to continue. The too-big-to-fail executives take the handouts from those they pay to give them the handouts and we vote in those that continue to let the too-big-to-fail executives to take millions from their companies treasuries and continue spin financial schemes that will either work out in which case they will take tens and hundreds of millions into their person bank accounts. Or they won’t in which case they will take tens of millions into their personal bank accounts while the citizens again bail out those that pay our representatives to allow this ludicrous system to continue.

Banks Seen at Risk Five Years After Lehman Collapse

If you get the impression I am upset by the actions of those who have been given responsibility that can be used to ruin millions of people’s economic lives and who have done so you are correct. When teenagers are selfish, irresponsible, brats it is obnoxious but fairly common. When our political leaders and those giving those political leaders the most cash behave as our have the last 20 years it is reprehensible. When the obvious result occurs and tremendous suffering is caused by their reckless, greedy, selfish, foolish and uncaring actions and then just continue to do the same things it is despicable.

That we chose to put those politicians that enable this is sad. But those that are risking the global economy in order to continue their narcissistic behavior are not excused by our foolish decision to re-elect those selling out the country to those paying them for favors.

The exact balance that is unknown. What amount of corruption from political leaders and financial executives can the economy support and survive? I don’t know. Maybe we can support the unforgivable behavior of those leaders in the last 5 years and the the 10 years before that. Maybe throwing millions of people out of jobs, killing thousands of businesses, forcing retirees to have their yields cut to almost zero in order to bail out banks that allow their executives to bleed their treasuries dry with more gusto than kleptocratic dictators in soon to be bankrupt countries. It is disgusting that this behavior continues. How many hundred of billions or trillions more in bailouts and fraud will be extracted from the productive parts of our economies to pay for this unsupportable behavior. Maybe our economies can take this kleptocratic behavior and survive. Maybe it can’t. That we elect people that have decided to take the cash and allow that risk to be tested is a foolish risk to take.

The too-big-to-fail crowd is just fleecing foolish taxpayers and paying those taxpayers representatives (I imagine to knowing continue to fleecing or I suppose it is possible the politicians don’t have the ability to understand what they are doing). The global economy generates trillions of benefits. Such wealth allows for a great deal of kleptocracy and risky bets (that can just be passed onto foolish taxpayers if they don’t work).

The scope of the swindle being perpetrated by the too-big-to-fail crowd and their bought and paid for politicians (who it must be said we continue to put back into office) is beyond anything every attempted before. The devastation caused by their reckless action doesn’t slow them down. They just take the bailouts and place even biggest bets, continue to take tens of millions for themselves, and leave the taxpayers to pick up the mess when it is too large.

That too-big-to-fail bailout champions are not only still alive and allowing those working their to take millions every year is nearly unbelievable.

In order to survive this massively risky economic future you would be wise to be very financial adept. Debt is very risky in such a situation. But debt is actually a way to get huge rewards at the right times in this environment (but do this wrong and you will be bankrupt). The huge bailout culture creates bubbles – making a great deal during the bubbles can be used a way to get capital to survive the costs of bailing out the kleptocrats we have allowed to steal from the productive economy. I am not even sure what are safe investments.

My guess is that the right real estate is one good place to invest (but the kleptocrat economy creates all sorts of risks that are difficult to measure). Companies that are very resilient to economic catastrophe are likely another good place. You have to find companies that don’t listen to the too-big-to-fail crowd that attempts to create risky financial structures in order to make cases to justify taking tens of millions (basically they pretend that this financial engineering created millions in value today so count that as earnings, based on those earnings I get millions… it is innately crazy that anyone accepts this junk but just watch those CEOs of our too-big-to-fail institutions when they testified on the hill and you see these are people that don’t have a clue about running an honest business.

This is such utter crap. For decades this excuse has been used to justify insane risks. Businesses may need cash to fund growth (buy assets, invest in research and development…). They might need some cash to get by while cash flow is not adequate. It may well make sense to have some sensible hedging. None of this requires too-big-to-fail banks.

Relatively small banks can do facilitate these needs. Insurance for business risks can be financed by insurers.

There is nothing that requires us to have speculators allowed to create risks that require government bailouts larger than the largest expenses any governments have every made (larger than World War II). There is nothing that requires 98% of the speculation. I don’t care if people speculate with their money and do not have the ability to massively impact the entire market (capitalism is based on the idea no actors have market power – every actor is a the mercy of the market, not the other way around).

Too-big-to-fail speculation mainly allows fake financial estimates to claim profits that haven’t actually taken place yet have. We can eliminate that with no loss to society. It also allows creating financial speculation so complex no-one can understand the huge fees the too-big-to-fail crowd takes. Again who cares, eliminate this. Nothing should be allowed to be 1/10 the size of too-big-to-fail. The only potential cost of this (and I doubt it would be a cost but theoretically it could be) is perhaps borrowing or hedging would be a bit less efficient. This is completely fine. There is not even remotely any justification for large, risky financial institutions in order to reduce the costs a small bit.

The current financial system is extremely complex and risky. There is no economic reason to allow such risks to continue. We can have financial needs met without ludicrously risky financial gimmicks. We should not vote in people that continue to sell out our productive economy to kleptocrats in the too-big-to-fail financial institutions to game the system the way they have the last 30 years.

The collusion (investment banking fees, front running trading [“high frequency trading”], libor, foreign exchange price fixing…) are illegal actions that use fraud to steal from market participants. Those actions should be investigated and criminally prosecuted but frankly that is minor compared to the main too-big-to-fail system corruptions.

The truth is I am able to navigate the massively distorted investment climate created by out too-big-to-fail designed financial system better than most. It is tricky but I think I’ll do fine. I imagine I will actually likely benefit – there are massive distortions and bubble that too-big-to-fail directed economies will generate that I imagine I will likely benefit from (though I have a greater risk of messing up in this riskier investment climate than one that would be much better for everyone in the economy outside the too-big-to-fail kleptocrats). I would much rather be able to invest without the massive distortions caused by the too-big-to-fail directed economic policies of our largest governments. But others are much less able to navigate the massively distorted investing climate. It is immensely more difficult to just make sensible long term, and safe, investment strategies today than is was until recently (the last 10 years or so).

But hundreds of millions or billions of people are suffering greatly and likely to continue to as long as we allow the kleptocrats at too-big-to-fail institutions to direct our government’s to continually do those too-big-to-fail institutions huge favors.

13 Bankers

Related: Buffett Calls on Bank CEOs and Boards to be Held Responsible – Credit Crisis the Result of Planned Looting of the World Economy – The Best Way to Rob a Bank is as An Executive at One – Is Adding More Banker and Politician Bailouts the Answer? – Paying Back Direct Cash from Taxpayers Does not Excuse Bank Misdeeds – Executive pay “excesses are so great now they will either force companies to take huge risks to justify such pay and then go bankrupt when such risks fail” – Failure to Regulate Financial Markets Leads to Predictable Consequences – Small Banks Having Trouble Competing with Bailed Out Banks

The massively too big to fail financial institutions that exist on massive leverage and massive government assistance are a new (last 15? years) danger make it more likely the currency losses value rapidly as the government uses its treasury to bail out their financial friends (this isn’t like normal payback of a few million or billion dollars these could easily cost countries like the USA trillions). How to evaluate this risk and create a portfolio to cope with the risks existing today is extremely challenging – I am not sure what the answer is.

Of the big currencies, when I evaluate the USA $ on its own I think it is a piece of junk and wouldn’t wan’t my financial future resting on it. When I look at the other large currencies (Yen, Yuan, Euro) I am not sure but I think the USD (and USA economy) may be the least bad.

In many ways I think some smaller countries are sounder but smaller countries can very quickly change – go from sitting pretty to very ugly financial situations. How they will wether a financial crisis where one of the big currencies losses trust (much much more than we have seen yet) I don’t know. Still I would ideally place a bit of my financial future scattered among various of these countries (Singapore, Australia, Malaysia, Thailand, Brazil [maybe]…).

Basically I don’t know where to find safety. I think large multinational companies that have extremely strong balance sheets and businesses that seem like they could survive financial chaos (a difficult judgement to make) may well make sense (Apple, Google, Amazon, Toyota, Intel{a bit of a stretch}, Berkshire Hathaway… companies with lots of cash, little debt, low fixed costs, good profit margins that should continue [even if sales go down and they make less they should make money – which many others won’t]). Some utilities would also probably work – even though they have large fixed costs normally. Basically companies that can survive very bad economic times – they might not get rich during them but shouldn’t really have any trouble surviving (they have much better balance sheets and prospects than many governments balance sheets it seems to me).

In many ways real estate in prime areas is good for this “type” of risk (currency devaluation and financial chaos) but the end game might be so chaotic it messes that up. Still I think prime real estate assets are a decent bet to whether the crisis better than other things. And if there isn’t any crisis should do well (so that is a nice bonus).

Basically I think the risks are real and potential damage is serious. Where to hide from the storm is a much tricker question to answer. When in that situation diversification is often wise. So diversification with a focus on investments that can survive very bad economic times for years is what I believe is wise.

Related: Investing in Stocks That Have Raised Dividends Consistently – Adding More Banker and Politician Bailouts in Not the Answer –
Failures in Regulating Financial Markets Leads to Predictable Consequences – Charlie Munger’s Thoughts on the Credit Crisis and Risk – The Misuse of Statistics and Mania in Financial Markets

When markets hit extremes it is better to get out, but it is very hard to know in advance when that is. So just staying pretty much fully invested (which to me includes a safety margin of cash and very safe investments as part of a portfolio).

I really don’t know of a time more disconcerting than the last 5 years (other than during the great depression, World War II and right after World War II). Looking back it is easy to take the long term view and say post World War II was a great time for long term investors. I doubt it was so easy then (especially outside the USA).

Even at times like the oil crisis (1973-74…, stagflation…, 1986 stock market crash) I can see being confident just investing in good businesses and good real estate would work out in the long term. I am much less certain now.

I really don’t see a decent option to investing in good companies and real estate (I never really like bonds, though I understand they can have a role in a portfolio, and certainly don’t know). Normally I am perfectly comfortable with the long term soundness of such a plan and realizing there would be plenty of volatility along the way. The last few years I am much less comfortable and much more nervous (but I don’t see many decent options that don’t make me nervous).

One of the many huge worries today is the extreme financial instruments; complex securities; complex and highly leveraged financial institution (that are also too big to fail); high leverage by companies (though many many companies are one of the more sound parts of the economy – Apple, Google, Toyota, Intel…), high debt for governments, high debt for consumers, inability for regulators to understand the risks they allow too big to fail institutions to take, the disregard for risking economic calamity by those in too big to fail institutions, climate change (huge insurance risks and many other problems), decades of health care crisis in the USA…

A recent Bloomberg article examines differing analyst opinions on the Chinese banking system. It is just one of many things I find worrying. I am not certain the current state of Chinese banking is extremely dangerous to global economic investments but I am worried it may well be.

China Credit-Bubble Call Pits Fitch’s Chu Against S&P

For the last several years it has seemed to me one of the better long term investments was USA real estate. Sure I wasn’t confident how well it would due in the short term but in the long term it seemed very good. Lots of people have seemed to reach the same conclusion. I still think it is true but it is becoming less safe (as prices rise) and will be less attractive if interest rates rise too much. There are problems with how to invest in it best (REIT can be good but have some issues – expense rates… and owning personally can be annoying).

About the only thing I am fairly confident in for investing these days is to be much more focused on quality. I think it will pay off to invest in assest that are able to cope with extreme chaos in the markets and economies. Other than that I have never had less confidence in knowing what investment moves are wise than I have had the last several years. I do still believe it is wise to invest globally and take part in what I believe will be very strong growth in at least some “emerging markets” over the next 30 years – but I also think some will get completely clobbered.

Related: Stock Market Capitalization by Country from 1990 to 2010 – Investing Return Guesses While Planning for Retirement

In my reading stories on the wonderful success of “avoiding the fiscal cliff” seems to amount to passing the George Bush tax cuts again (except this time when in a much much worse budgetary position) and modifying the extent to which the absolute richest benefit from those cuts (so the richest don’t get quite as step cuts as they had been getting but still are getting big cuts from before the Bush tax cuts were made. And the recent trend of treating trust fund babies as the absolute most favored taxpayers was continued (though a few of the absolute richest trust fund babies will have to have some taxes withheld from their windfalls).

I haven’t read anything about them getting rid of the “hedge fund manager” tax favors. Did they? Did they even bother to change the law so retired managers don’t get the super huge tax favors too?

On the spending beyond our means issue they seem to have just decided that having the grandkids continue to fund our spending is wonderful.

If it were up to me I would have continued some of the Bush tax cuts (certainly not for those making more than $200,000 – unless we can cut spending way more than I would guess in which case I would be fine having taxes even for the richest few lowered). I would have continued treatment that reduced taxes owed on dividends and capital gains, though perhaps a bit less than they did. I would cap mortgage deductions (at say $50,000 a year or something).

I certainly would not have supported such massive Bush tax cuts without large spending cuts. If this level of spending is what we intent to do, we need to pay for it and not just bury our kids and grandkids with huge bills. Without spending cuts I would not have voted again for the Bush tax cuts, which seems to be the main extent of their “solution” (taking a bit of the tax cuts for the wealthiest off the plate but pretty much just passing Bush’s tax cut again).

I would have accepted deficits in the next few years (given the irresponsible behavior by our elected leaders for te last 15 years paying our bills for the next few years is not feasible) but the long term trend would have to be much different for me to vote to continue huge Bush tax cuts for today on the backs of our kids and grandkids. We either have to cut spending or raise taxes, likely we have to do both.

The current system is completely unsustainable. We have enormous deficits even with artificially low interest rates. The sustainability of this living beyond our means will be crushed when interest rates rise. We are setting ourselves (or our descendants) up for huge problems.

If you are young and voting for these people you either plan to live fast and die young or are willing to sacrifice your future so your parents and you can live better today at the expense of your kids and grandkids.

No action would have been better than the action they took. The consequences today would have been bad. But the consequences of what they have been doing for decades of making our descendants pay for us living beyond our means is very bad policy and has drastic consequences. It would have been better to address the core issues by reducing spending significantly (hundreds of billions a year) and raising taxes.

I don’t see how you can cut spending enough to matter without significantly cutting military spending and also social security spending and health care spending. TSA security theater should certainly be one of the cuts but it save a few billion maybe tens of billion at most (the security theater problems are more about treating citizens unjustly more than a budget issue). Health care is a special area in that the problem is not a matter of reducing budget allocations but fixing a massively broken system that wastes hundred of billions a year. But it can’t be fixed by just reducing budgets. It has to be fixed by fixing extremely bad policy that will then result in the USA saving hudred of billions a year.

One article says they finally fixed the Alternative Minimum Tax (AMT). The AMT is a good idea but implementation was faulty requiring them to adjust it every year or trap lots of people that were not meant to be. They have supposedly instituted a permanent fix, which is good.

Related: The Long-Term USA Federal Budget Outlook – Political and Corporate Cronyism are not Capitalism – House Votes to Restore Partial Estate Tax Very Richest: Over $7 Million

If you want to really cut taxes you must cut taxes and not pass on paying for your cuts to your kids. It seems pretty obvious those that advocating cutting current taxes the last few decades were only interested in living beyond their means today and foisting the responsibility to pay to their grandchildren. That is despicable behavior.

The fiscal cliff is an opportunity to return to a budget that has the generation doing the spending paying the taxes (last seen in the Clinton administration). The fiscal cliff outcome is going to be far from perfect. But the result will be a much more honorable outcome than foisting ever increasing taxes on future generations to pay for our current spending.

Obviously, if you reducing how much you are adding to your credit card balance each month and start paying your bills that means you don’t get to live off your future earnings today. So you will suffer today compared to continuing to tax the future to pay for your spending.

I hope the compromise results in spending cuts and an elimination of the Bush generation shifting taxes (cutting taxes on the the current wealthy without spending cuts – so just taxing the future to pay for tax cuts today). It is unlikely the fiscal cliff results in us actually paying for our spending (the best possible result is not an elimination of adding to the taxes future generations must pay but just a reduction in the level of tax increases we are imposing on the future every year).

Lots of little things should be done to save a few billion (maybe it could add up to $50 billion a year if we are very lucky). But the serious spending cuts have to come from reductions in military spending, reducing waste in the health care system and making social security more actuarially sensible (social security is not part of the fiscal cliff discussions though). Reducing tax breaks also has to happen, unless absolutely huge spending cuts can be found which is not at all likely.

The concept of the minimum tax rate (AMT – Alternative Minimum Tax) is fine (even good actually), but the implementation now is very poor. Every year they have to pass an exemption to avoid catching millions of actually middle class (say earning $50,000 a year) from being caught by poorly written law. I think they should rework this to be a policy that actually works instead of one they have to make exceptions for every year (they pass the law the current way to avoid paying for the policy they want – it is only waste in order for them to lie about the income level they are voting for).

I wouldn’t mind if the fiscal cliff results take affect without action. Then they can step in and make a few adjustments. Add some spending; reducing taxes on those making less than $100,000; possibly add some adjustments to reduce taxes on investment income (capital gains and dividends). A change to cap the mortgage deduction would make a great deal of sense. Helping people buy a modest house is fine. Taxpayers helping people buy mansions is silly. If we go this route things will be harder at first (and financial markets will get excited and talking heads will bather on and on) but we will get a better long term result. But we will still only be reducing the level of extra taxes we are adding onto future generations. I expect they will compromise before significant fiscal cliff affects take place (which is long after the fake “deadline”).

The debate is mainly about which special interests win (is military spending going to be reduced at all from the enormously high levels, are we going to stop wasting money on security theater, is social security policy going to acknowledge drastically longer life expectancy, are we going to continue the coddling of trust fund babies and hedge fund managers the current politicians have to voting for, how large of excessive health care costs will be tolerated…?) and how large the additional taxes we will pass along to the future will be.

No one is talking about paying for some of of the huge spending we did in the last few decades that we didn’t pay for. No one is even talking about paying for our own spending. Hopefully the fiscal cliff will result in a reduction of the amount of the taxes we are adding to the future every single year. Sadly we are likely to increase taxes on our grandchildren at a much higher rate than if we did nothing (the compromise is largely about who gets to benefit today at the expense of our grandchildren not actually paying for the spending we are going to do and have done the last few decades).

We also have failed to reform the health care system for decades. The costs in the US are double that of other rich countries with no better results. This results in hundreds of billions of dollars in costs to the government annually (health care for employees – including military, government retires, and medicare and medicare). These costs have to be reduced by getting the USA system so it is closer to the rest of the world. Even just getting to mediocre results would save hundreds of billions a year but seems unlikely given how extremely poorly we have done. Mainly this is due to those benefiting from the current massively overpriced system paying congresspeople to avoid any fixes that reduce their personal benefits from the current broken system.

The USA government is likely to foist a large cost on those holding USA government debt in order to reduce the amount of tax increases on future generations. This will take the form of inflation. This means holding USA government debt is risky and not very sensible in my opinion (if you do so use inflation protected bonds). Essentially investors today are betting they can time their investment to avoid the inflation that is nearly inevitable. Given the extremely low payments currently this is a very bad investment idea in my opinion.

The extent of the irresponsible spending and taxing-the-future has been so large that massive levels of inflation in the USA are possible in the coming decades. It is a significant risk to the economy created by those seeking to lower taxes the last few decades by increasing the tax on our grandchildren.

Related: The Long-Term USA Federal Budget Outlook – Economic Consequences Flow from Failing to Follow Real Capitalist Model and Living Beyond Our Means – Anti-Market Policies from Our Talking Head and Political Class – The USA Economy Needs to Reduce Personal and Government Debt – NY State Raises Pension Age to Save $48 Billion