Taxes and OPEC

"The hardest thing in the world to understand is the income tax."
Albert Einstein

"In this world nothing can be said to be certain, except death and taxes."
Benjamin Franklin

As the world descends into the synchronised Global recession, Keynesian fiscal policies are being used to try and counter market forces. Like pushing on a piece of string, our institutions and leaders will still not admit that we have been living in a bubble, and continue trying to spend money they don't have. Deficit spending has never worked and never will and government intervention has never worked either, but yet this is exactly what we are doing. Governments are increasing their debts, meaning more interest payments are being made to just cover the debt repayments. Money is being poured into overpriced assets such as finance and houses, rather than being spent on infrastructure, hospitals and schools. All this extra debt leads to one thing as time goes on - higher taxes. In my opinion this will happen. With the US presidential election taking place in a matter of days, both candidates are as clueless as each other of how to solve the current problems. Barack Obama is on a mission of change, one of redistributing wealth or to put it bluntly, he seems to be edging towards raising income taxes. In the UK, the pound is sinking and capital is fleeing, with the worst deficits since the Second World War, and coinciding with declining Oil and Gas revenues. The government should be cutting spending at times like these, however this is never a politically popular policy so they borrow. With further borrowing comes further taxation later.

One policy that made the Great Depression so Great, was when Hoover raised income taxes to try and fund the governments deficits. In my opinion we will see this again in the not too distant future. If we take the US for example, they have over $10 trillion of debt on the books, and around $50-$60 trillion of future liabilities, which will more likely increase as time goes on. You can't pay these vast numbers without tax increases, and this will put further strains on Western economies. Ireland and Spain boomed when they joined the EU as they benefited from the generous EU subsidies. Ireland in fact had their first housing boom in their history due to this extra income, but it was all a short term illusion. The Celtic tiger is due for a long decline, with emigration rather than immigration, occurring again. Spain too has issues, reliant on selling foreigners overpriced holiday homes. As air travel becomes more expensive over the years to come there will be further collapse. Italy has huge debts and is in complete denial. With a retirement age of 58, and a lethargic economy it is only being protected by its membership of the Euro. The UK after amounting huge debts, the biggest seen in the west proportionally per head, and with huge external liabilities seems to have run out of time. The plug could be pulled at any moment on any of these. IMF bailout talks have begun. Pakistan, Hungary and Iceland are a few, that have become unwound.

Increasing taxes are the worst thing a government can do during a downturn. This further compounds the problem, taking money out peoples pockets and thus the economy so the government can use it for their own inefficient consumption. If more taxes are implemented then expect very hard times indeed. I feel we have boxed ourselves into this position due to all the waste that has occurred over the previous years and we will have to pay more taxes, and I've been saying this for some time. They will either be taken from income or other indirect forms, or maybe a combination of the two. Governments will look to this to try and re-balance the books, rather than admitting the social system is too extended and cutting spending.

Income tax - Do we need it?

There are some people who feel that we shouldn't need to pay income tax at all. I always find this an interesting concept. Can you imagine getting all your salary with no tax deductions? We used to have no income tax in the UK a long time ago. It was in 1798 when William Pitt introduced income taxes in order to pay for the wars with France. This is essentially how it began. By Governments running up debts that they needed to fund, so turned to the working people to take some of their pay to subsidise their spending. So how could we survive without income taxes? Well we would use our newly untaxed income to pay for stuff ourselves, rather than the government spending our money for us. Schools and hospitals, for example, can function without the need for state systems. The best schools and hospitals are already private institutions. This system would in fact be incredibly efficient despite what people tell you that we need government. Income could be raised by taxing consumption, land etc. The working people who produce wealth for the economy, by expending energy should be the least taxed sector of the economy.

There is a problem with the above. It relies on people making the right decisions and being in control of their own lives. I and many others could manage our own affairs and ensure we had medical insurance and paid for schools etc. However a lot of people can't manage themselves, thus making the wrong decisions and taking the incorrect measures. A lot of people still need to be spoon fed and can not take responsibility for the actions.

OPEC and the Oil Barron's

OPEC have announced that they are going to cut supply and surprise, surprise, the uninformed governments and media have repeated the common mantra that the greedy cartel are responsible for high oil prices and they want the price to remain as high as possible. Nothing could be further from the truth. OPEC are simply trying to keep supply in line with demand and ensure a greater longevity in their oil fields. If they kept forcefully pumping their oil fields the way they have been, oil supplies would collapse within the next decade inducing worldwide collapse and a breakdown of society worse than anyone could imagine. Over pumping a field leads to a steeper decline, the best examples are the Russia's fields which during the eighties the Russians began overproducing them as it was the only way to get hard currency to support the collapsing Communist system. The curve of these fields is a very sharp increase in production, followed by an equally sharp decrease in decline as the field becomes depleted. Contrast that with the fields in Norway that have been well maintained and gradually extracted, the production gradually ramps up and peaks but the decline is gradual and thus the field yields more oil in the long run.

Saudi Arabia the worlds biggest oil producer have already damaged their oil fields, with various technical issues being reported by the Saudi Aramco engineers over time, as early as the sixties and seventies. During the oil spikes in the seventies Saudi Arabia ramped up production to cover the short term shortfall to ensure the west didn't enter a terrible depression, or try and find alternatives. Oil fuels Saudi Arabia's economy along with other OPEC members economies. The last thing they want to do is send the price sky high, thus destroying world economies with economic collapse and destroying their number one export industry. They are simply hinting to the world that this once abundant resource has ceased to be cheep and abundant. It is becoming increasingly hard to extract and more energy is required to get the remaining oil. High hydrocarbon prices are here to stay and countries need to adapt and accept this fact.

It's also amusing when the media mentions that the oil companies are making obscene profits, at the expense of the public. Again its all uninformed dribble, something that has become common in modern journalism (read any of John Pilgers work as he details the decline of journalism, I would personally recommend Heroes as a starting point). For a start oil companies are public listed companies. If they make huge profits profits, compared with other stocks then buy shares in them and reap the dividends. However there is nothing stellar in that aspect and they are like any other tradable company. Profits for big oil companies seem huge, but this is only because they work in huge volumes of the product they sell. Compared with other industries, oil companies actually work on lower margins. Oil company share prices are based more on their oil reserves rather than their profits, as a company without oil has a pretty weak business model, hence the fairly recent fiasco with Shell. The fact that oil is so volatile in price compounds their problem, which brings me onto the next issue of the recent oil price collapse.

This price collapse was to be expected. As with all markets, speculators got involved and drove the price of oil too high and subsequently as oil is bought in 6 month futures contracts these positions were unwound as the delivery date got closer. I predicted to my dad a few months ago that I thought they would fall to around $70-$80 a barrel, with them now around $67 so a tad below. I don't know how low they will fall or when they will begin to rise again, I'll leave that to the technical analysts amongst us. I like to focus on the fundamentals as short term markets behave irrationally, and $67 is cheap. While the public think this is great news, this is in fact setting up a future disaster in the next few years. Future oil projects are being cancelled as the price has collapsed, which means lower oil production for the future which will lead to a greater oil price spike. Projects that were producing, are now being shut down as the oil price has dropped below economic viability recently. It's not like setting up an Internet company. Getting oil projects set up along with the distribution network takes time, years in fact. That's why the looming crisis has the potential to be catastrophic. When it will hit I don't no. If the world collapses then never, but I think the world will go on and continue to grow. The above applies to all commodities. Similar projects are being cancelled as prices drop and projects become less commercially viable. The lack of credit compounds the problem too as money is not available to finance these projects.

I will end with a graph that I found regarding world oil production and projected demand. As can be seen, there's been no substantial increase for the past few years. If the predictions are to be followed as detailed on the graph have a look at how the population demand increases as supply keeps declining. It looks pretty scary 5-10 years from now, just when the next boom should begin. We may be looking at a complete disruption of the business cycle for years to come until we adapt the way we use energy.

The Run on the Global Financial System

The systematic liquidation of the financial system has truly gripped the worlds attention this week, as fear has spread to all facets of society. Global Stock markets have been crashing. As prices fall, margin calls are being made ensuring further deleveraging of positions. Comparisons with the Great Depression have become widespread in the mainstream media. World leaders and Central Banks have been meeting to try solve the issues, with co-ordinated interest rate cuts and monetary packages. Iceland, a whole country, is on the verge of collapse. Citizens everywhere have been withdrawing savings from banks, feeling safer holding cash themselves. Physical precious metal dealers are running out of gold and silver. The American mint has stopped issuing certain gold coins. All assets are in free fall with no place to go, apart from cash. Libor is rising, the Fed's balance sheet has exploded, talk of the CDS meltdown has begun as positions at Lehman, the recently collapsed investment bank, are unwound. The US debt clock in New York has run out of digits. The UK has part nationalised it's remaining banking system, after the full nationalisations of Bradford and Bingley and Northern Rock. If the general public didn't realise the severity of the situation before, they do now, after a week of paralysis and sheer terror caused by decades of high finance prominence, as savings and production were side lined for the new age. The public will pay dearly for the misallocation of capital, the loss of private savings and the end of cheap energy in the years to come. To illustrate what an unusual week it was, we saw Gordon Brown making banking jokes. It was a week of many surprises.

The years to come will be more of the same with many mini crisis to come. And in times of crisis, history has always shown there is great change. Politicians and governments always intervene in a panic stricken manner when all around them seems to be crashing and failing. Emergency laws are enacted for the 'good' of the nation. Normality of the past, has been replaced with the normality of the foreseeable future. This brings me to the point of what could possibly happen over the next decade. There are many interesting and viable possibilities that could occur and I will explain my thoughts on what actions could be taken, in order to try and stem the future crisis that will take place.

• Confiscation of gold is more than plausible or the suspension of moving from paper assets into gold and silver. Precious metals are always seen as a safe haven when finance is in trouble. As the mistrust of paper based money becomes more prevalent after years of financial incompetence, people will start looking for tangible assets, ones outside the system. It would be an irrational decision and make no sense, but our leaders always seem to endorse those types of ideas.
  
  
• I still believe in inflation in medium to long term. Prices may be falling currently but this is deleveraging not deflation. The governments and authorities are embarking on the great reflation, slashing interest rates, pumping future earnings into the system. Therefore I can see certain key commodities becoming very expensive and price controls at some point seem likely. Of course an idiotic policy, but they did it in the seventies.
  
  
• Rationing is also a policy I can see been implemented at some point in the future. Food and energy rationing may become standard.
  
  
• Further nationalisation of the system. The banks are gradually relying heavily on governments, but it won't stop in the finance sector. You will probably see airlines, car makers, other key industries handing out the begging bowl for government intervention. If we begin drinking vodka and producing fine cigars, then we know we really are in trouble.
  
  
• Higher taxes sometime in the future are inevitable in my opinion. We are accumulating huge amounts of debt, more future promises to pay based on future earnings, with no current capital now. Western governments can't manage the books, and were running deficits well before the slowdown in the global economy. All of these future earnings may be severely impeded by our ageing populations and the end of cheap energy. I think Colin Campbell, a prominent proponent on the peaking of Oil, summarises it well in a speech he gave to Parliament in 2004 about the coming oil depletion, where only 3 MEPs bothered turning up.
  
  "The perception of looming decline may be worse than the decline itself. There will be panic. The market over-reacts to even small imbalances. Prices are set to soar in the absense of spare capacity until demand is cut by recessions. We will enter a volatile epoch of price shocks and recessions in increasingly vicious circles. A stock market crash is inevitable."
  
  And this from a geologist, someone not specialised in the details of economics and finance.
  
  
• Further government borrowing will have further consequences on how much money our governments can keep borrowing, and if they can find a buyer. As Robert Preston, a mainstream journalist states:
  
  "Possibly the biggest risk for the US is that in bailing out the finances of the private sector, Paulson would dent international investors' confidence in the American government's balance sheet - which could ultimately undermine the dollar, push up inflation even more and raise the cost of servicing debt for the US authorities."
  
  What happens if the Saudis, Japanese and Chinese don't want to keep lending money to the West? We have little capital in our own societies. The prices of government bonds will go up, as investors suddenly realise certain institutions have no intent on making good on their promises as the currency devalues further.
  
  
• Interest rate cuts have been used progressively over the past year. The trend will continue. They will fight the inflationary boom, that has just occurred, with more inflationist policies during the bust. Don't expect to be living on easy street though. Debt is far too high and the last thing banks are thinking about are more risky loans, just as defaults are rising and capital is being destroyed at a rapid rate.
  
  
• I heard recently that bonuses in the city this year are due to decline 60-70% this year. As I have said in a previous post, finance will be in big decline for years to come. The age of excessive rewards are over, and in my opinion finance will become a middle earning job, with places like New York and London, that were heavily reliant on high finance to be in a state of terminal decline. For how long who knows. We may have seen a top, for the rest of our life times.
  
  
• It may be all hands to the pump, co-ordinated action, on the current events, but this may turn as time goes on. Protectionist policies and the hoarding of certain assets will become more and more common between countries.
  
  
• Regarding the above, if the flight of investors from certain countries does occur then governments may freeze assets to try and keep them within their borders, enacting emergency laws.
  
  
• Wars regarding resources are bound to become more prominent. We have already had the invasion of Iraq and Afghanistan, which was the establishment of a middle east police station for the West. With more shortages to come, these areas will be of critical importance to many economies, with countries organising themselves into coalitions. China has already been in agreements with Venezuela regarding Oil supplies to name one of many relationships that are being formed. Water will become more important, with the potential for conflict between Israel and Palestine, Pakistan and India to name a couple. The Twentieth Century was the most bloody Century in human history, with the second half involving more deaths. I expect the first half of the twenty first century to continue this trend and be even more bloody, although I do hope I'm wrong on this point.

I suspect there will be a rally in the markets next week. The governments should be able to calm investors fears in the short term. More runs and panics will happen over the following years. With these events will come great changes. We are all in uncharted waters. Governments have the buckets at hand, but will it be enough to save the sinking ship? Or is the ship destined to sink as the damage done so far, is irreversible?

Buying is Dead Money

It has been widely assumed for years now that renting a property is a waste of money, or what has become known as dead money. For years now I have rented, moving from property to property, one end of the country to another, and I have never understood the saying of 'dead money'. How can paying for a living space be dead money? I mean, I pay rent to the owner of the property, who then provides me with a house to live in. He maintains all the upkeep, insurance, wear and tear and I get to live in a fully furnished property. Now that property prices are completely collapsing, along with the overinflated UK economy, I can view the events occurring with no worry or stress, in fact with enjoyment as I watch an interesting chapter in human history unfold. I have no huge debt. If I need to move for another job I can relocate within a month or two. If I wish to move into a larger place I can do so. Renting, during a downturn like the one we are about to go through is anything but dead money. It's money well spent and let me break down some of the 'home ownership' myths that have been falsely put forward in the age of stupidity.

• The first one, and I always enjoy hearing this, which reveals the majority of peoples financial illiteracy, is rental payments are dead money as opposed to paying a mortgage. For the type of properties I rent in order to buy them in the past couple of years the interest payments on the mortgage would have been larger than the rent I paid. Now if I actually wanted some sort of payment plan, then it would have obviously cost a lot more, in fact all my wages pretty much. Then of course if I miss payments on a mortgage persistently I risk having the property repossessed and of course obtaining a terrible credit rating, with the bank chasing me for years to come. If I miss a rental payment persistently, the landlord will eventually be able to evict me, but I have no bad credit rating, no legal proceedings. I just have a bad reference, in which case you just don't use for your next property as most landlords are desperate for tenants.
  
  
• Rents will rise and mortgage costs will drop. This is the complete opposite of what will happen over the next few years. As credit becomes tighter and banks try to repair their balance sheets they will seek to deter borrowing and encourage saving. Therefore mortgages will be more more expensive. If I did buy in the last couple of years I would have needed to get a huge adjustable mortgage which would have been in negative equity by the time re-mortgaging came around therefore I would be paying the much higher adjusted rate. I feel sorry for a lot of people in this position who will have to pay a lot more in the years to come, especially when they see rents falling. Despite what the 'experts' say (the same people that were telling you the sound fundamentals of the economy, when I was telling you they were lying), rents will come down, in fact they already are. People are emigrating, moving back in with relatives as jobs are lost and so on, meaning less demand for rentals. This is how it always works in economic downturns.
  
  
• I have no upkeep costs of the properties I live in. If the boiler breaks down, I don't pay a penny, and its the landlord who is responsible. Washing machine breaks? No worries, my landlords wallet can pick that one up. Fancy a change of decor? Rather than buy a load of tat with the stress of getting it and building it, I can go find a house that is furnished to more of my tastes (if I was interested in that kind of thing).
  
  
• In the event I loose my job, I simply give my landlord two months notice and leave. Go back with the parents what ever I want. I can walk away, intact and with money still in the bank.
  
  
• The savings I have acquired so far I can put into savings accounts that will earn interest. If this money was put into a deposit a couple of years ago, it would have long been eaten away by the price drops of the past year.
  

Point is, I'm comfortable and happy renting, and for some reason for the past decade, in particular in the UK and the US if you rent you are almost seen as a second class citizen. The sad thing is, people are still trying to buy property now, thinking because it has dropped 10-20% it is somehow a bargain. People are still viewing property through the tinted glasses of a way to get rich. In reality the equity they will have will be shortly wiped out in the next few years and will not be recovered for decades. The collapse of Bradford and Bingley should completely topple BTL owners and it will bring about even more drops to come, along with the rising unemployment and government budget deficits. Despite the deteriorating state of the economy people are still talking about a bottom on property. A bottom will appear when everyone stops talking about a bottom. It will happen when people have become weary of debt, governments and banks. It will happen when mortgages are far cheaper than rents, and sizable deposits are required, with banks lending to prudent standards once more. It will happen when people have lost their 'pensions' in BTL and say there is no money in property and only a fool would buy now. It will happen when people say, buying is dead money.


Turning to the Bailout

The situation is quite clearly going from bad to worse. I said that the governments and institutions of the world would try and prop the economy up, and this would only make things worse. It's no suprise that the $700 Billion Bailout package has passed on the second attempt. Since the post war period, Western economists and leaders have become drilled in Keynesian economics, a tragic and false theory whereby governments should become active in fiscal stimulus activities during recessionary periods, with the discouragement of saving and encouragment of consumption. I mean it defies logic when you think about it, and its what is occurring at this very moment. We've just had the biggest consumer boom and spending spree, well ever. According to John Maynard Keynes whose theories our leaders are trying to follow, we should be increasing spending and government intervention, trying to prop up the very excesses that were caused during the boom. House prices are too expensive, therefore we throw money at the problem, which is a waste of resources and goes against the very market forces that demand the correction. What the market at the moment is saying, is that we have too much debt in society too little savings and are not producing any real value in the economy due to all the mal investment that has occurred. Therefore prices in certain areas need to fall and fall fast in order to bring about a normalisation to the economy. All good economists recognise the recession is the good part of the business cycle, and at the end of one the economy is returned to a state of optimal efficiency. The media and mainstream 'experts' however, have made economic contractions into something that should be avoided at all costs, even if it induces a worse recession in the end. Its all scaremongering, just like terrorism, rather than looking at causes and reasoning as to why the terrorism was created in the first place. It's how institutions always control people. Religion, for example Christianity, does this by giving the concept of 'hell', a place where people go if they don't conform with convention and ask questions.

This bailout package won't be the last. It's just the foot in the door. There will be more, with politicians proclaiming it needs to be carried out in order to save the system from collapse, when in reality the problems are compounding further, with the endgame of a worse collapse. Government deficits are increasing along with debts, while savings are being depleted further, thus the fundamentals are continually getting worse. I was hopeful we may let the bust proceed but as ever the powers that be have decided to prolong the bust and ensure that we experience the worst recession any of us have ever seen. We are entering a period of great change, as we pass the opening chapter of many chapters to come.