John Pugsley - The Anarchist

Milton Friedman on tax cuts

As you must already know, economist Milton Friedman died on November 16. All of us who have studied and written on free-market economics over the past half century owe him a great debt of gratitude.

When another of my economic mentors, Murray Rothbard, died in 1995, I wrote that I could not fully grasp the loss of a such a brilliant and developed mind. It seems so disconcerting that a vast store of knowledge and powerful engine of ideas can abruptly disappear. What grief the ancients must have felt to lose someone, before there were books and the written word to preserve memories.

Fortunately for us, we do have the books of the great minds that pass, and we can preserve at least some of their wisdom. While only students of economics are likely to have read Friedman’s Monetary History of the United States, or his later book, Price Theory, his book and TV series Free to Choose, written with his wife Rose, brought his libertarian wisdom to hundreds of thousands.

Author and economist Mark Skousen was a friend of Friedman, and lunched with him just two weeks before Friedman’s death. In his tribute on his website, he noted that Friedman was not only a great economist, but a most quotable wordsmith. And in reading through Mark’s examples, I was struck by three of Friedman’s most well-known quotes:

"I favor tax reductions under any circumstances, for any excuse, for any reason, at any time."

"Inflation is always and everywhere a monetary phenomenon"

And "Inflation is taxation without legislation."

Some might think I disagree with Dr. Friedman on tax reductions, since I recently published an essay titled “Tax Cuts, Tax Cuts—We Don’t Need No Stinkin’ Tax Cuts.” In my essay I advocated not cutting taxes, but raising them high enough to fully cover all federal spending. The point was to force politicians to steal directly and openly from citizens at gunpoint rather than fraudulently and secretly through deficit spending and inflation. This way, people know who is robbing them. Reducing taxes but at the same time increasing borrowing to cover the revenue loss is a deception, a pretense, a political trick to make voters and contributors happy.

Since total real taxes are the sum of government deficits plus government tax revenues, real tax reductions would require the sum of both to fall. (Such sum would have to include future promises, e.g. social security, pensions, and medicare, as well as current borrowing.) Taxes are pure theft, but, as Friedman points out, monetary inflation is just another form of taxation, and is therefore also theft. What’s not realized is that inflation is more insidious and destructive than taxation at gunpoint.

Based on his quoted words, I believe Dr. Friedman would agree.

Inflation, deflation, and technology

I was recording some thoughts regarding price inflation on my tiny digital voice recorder yesterday, and it made me reflect on the 1.5-ounce gadget I was holding in my hand.

Fifty years ago this year, spent nine months on a sailing/jeeping adventure through Mexico and Central America. Our equipment included the latest portable reel-to-reel tape recorder, a bulky affair weighing around fifteen pounds. 

In the photo my partner, Hank Young, is using a hydrophone to record underwater sounds in an El Salvadorean lake. The price of the bulky reel-to-reel recorder when we bought it in 1955 was approximately $250. Adjusted by the CPI, that’s the equivalent of $1,600 in today’s purchasing power.

Today, I slip my tiny digital voice recorder in my shirt pocket. It’s a remarkable music-quality device that can hold 32 hours of music or voice recordings, runs on a single AAA battery, and with its built in USB port, plugs directly into my computer. Yet this digital voice recorder, which provides vastly higher quality, cost me just $150. There has been a ten-fold decrease in price, accompanied by an unmeasureable increase in functionality.

Throughout our lives, the quality of literally everything we consume has risen with the onslaught of technological progress, while the amount of human labor and capital investment required to produce the things we use has plunged.

So, if we’re producing more and doing it more cheaply, why has the price level risen so relentlessly?

Government debasement of money, of course.

Imagine a world in which there had been no expansion of the money supply. For example, imagine we're back to a time in which gold was money. Would that mean stable prices? Not at all. It would mean plunging prices for just about everything.

Would this be bad?

To bankers like those at the Fed, it would. They would rage and predict catastrophe! Check back again tomorrow and I’ll tell you why what would be good for you, and would be bad for them.

The Origin of Thanksgiving

It seems to me that there is no better way to enjoy Thanksgiving, than to reflect on its origin.

Most who have read American history are aware that it goes back to the fall of 1621. A small band of English Puritan Separatists (the Pilgrims), escaping religious persecution in England, arrived on the coast of New England in November of 1620. Barely surviving the first winter, they realized that there was no hope of new supplies from abroad.

Originally organized as a communistic effort, individuals worked, but contributed their meager output to the common granary. Like all past and subsequent attempts to create a happy, communistic society, it failed. William Bradford, the governor of the group, kept a personal journal, which he completed around 1650. It is his journal that tell the true story of what Thanksgiving means.

All this while no supply was heard of, neither knew they when they might expect any. So they began to think how they might raise as much corn as they could, and obtain a better crop than they had done, that they might not still thus languish in misery. At length, after much debate of things, the Governor (with the advice of the chiefest amongst them) gave way that they should set corn every man for his own particular, and in that regard trust to themselves; in all other thing to go on in the general way as before. And so assigned to every family a parcel of land, according to the proportion of their number, for that end, only for present use (but made no division for inheritance) and ranged all boys and youth under some family. This had very good success, for it made all hands very industrious, so as much more corn was planted than otherwise would have been by any means the Governor or any other could use, and saved him a great deal of trouble, and gave far better content. The women now went willingly into the field, and took their little ones with them to set corn; which before would allege weakness and inability; whom to have compelled would have been thought great tyranny and oppression.

The experience that was had in this common course and condition, tried sundry years and that amongst godly and sober men, may well evince the vanity of that conceit of Plato's and other ancients applauded by some of later times; and that the taking away of property and bringing in community into a commonwealth would make them happy and flourishing; as if they were wiser than God. For this community (so far as it was) was found to breed much confusion and discontent and retard much employment that would have been to their benefit and comfort. For the young men, that were most able and fit for labor and service, did repine that they should spend their time and strength to work for other men's wives and children without any recompense. The strong, or man of parts, had no more in division of victuals and clothes than he that was weak and not able to do a quarter the other could; this was thought injustice. The aged and graver men to be ranked and equalized in labors and victuals, clothes etc., with the meaner and younger sort, thought it some indignity and disrespect unto them. And for men's wives to be commanded to do service for other men, as dressing their meat, washing their clothes, etc., they deemed it a kind of slavery, neither could many husbands well brook it. Upon the point all being to have alike, and all to do alike, they thought themselves in the like condition, and one as good as another; and so, if it did not cut off those relations that God hath set amongst men, yet it did at least much diminish and take off the mutual respects that should be preserved amongst them. And would have been worse if they had been men of another condition. Let none object this is men's corruption, and nothing to the course itself. I answer, seeing all men have this corruption in them, God in His wisdom saw another course fitter for them.

The “fitter course” is believed by some to be directed by God. Others of us see as the nature of man that has evolved through natural selection over vast time. In either case, history demonstrates that thanks should be given to individual self interest and individual responsibility, the combination of which provides the ultimate solution to a bountiful harvest and survival of the species.

Jimmy Rogers on Investing

One of my favorite investment gurus, and one of the more impressive, successful, and interesting speakers at last week’s New Orleans Investment Conference, was famed investor and author Jim Rogers. During 1990-1992, Jimmy (as he’s known to his fiends) took a motorcycle trip of over 100,000 miles around the world, crossing six continents and setting a Guinness World Record. His best selling book, Investment Biker: On the Road with Jim Rogers, was a result of that trip.

Not satisfied with surviving that outing, he set out again on January 1, 1999, with Paige Parker on a 116-country, 152,000-mile overland trip to chronicle the world during three years spanning the turn of the millennium, which resulted in another book, Adventure Capitalist.

Earlier in his career, he was co-founder with George Soros of the wildly successful Quantum Fund, a global-investment partnership that gained more than 4,000%. At age 37, having made a purported billion dollars, he retired, but kept busy by serving as professor of finance at Columbia University Graduate School of Business and, in 1989 and 1990, as moderator of WCBS's "The Dreyfus Roundtable" and FNN's "The Profit Motive with Jim Rogers."

What is his best advice today? “The single best advice I can give you of any kind,” he said, “is to teach your children and grandchildren Chinese. It’s going to the most important language in their lifetime.” He has a three year old girl who is already learning to speak Mandarin. Jim hired a Chinese nanny, and instructed her to never speak anything but Mandarin to his daughter.

China is going to become the world’s leading economy and nation, and is on the way. They want what we have and they’re willing to work to get it. It’s staggering to see. So, he said, “buy China”. Invest, and when there are setbacks, don’t worry, just invest more.

Second, he urged the audience to sell all bonds, and particularly get out of the U.S. dollar. The dollar is and has been the world’s reserve currency, he noted. "As recently as 1987 we were a creditor nation, and today we owe the rest of the world over $10 trillion. And our foreign debt is increasing at the rate of $1 trillion every 15 months." The US federal debt is out of control.

Third, his advice is to buy commodities. In the case of oil, for example, he pointed out that there have been no major oil discoveries in 35 years. Yet the population is steadily growing, along with the demand for oil. Moreover, buy agricultural commodities, such as coffee and grains. Politicians can print money, stock promoters can print stock certificates, but no one can print commodities.

Personally, I’m in complete agreement with all three of Jim Rogers’ recommendations. Get out of the dollar, invest in natural resources, and diversify into China.

I highly recommend that you immediately buy and read Jim Rogers’ latest book, Hot Commodities : How Anyone Can Invest Profitably in the World's Best Market. You can find it on Amazon.com.

ONLY 3% inflation?

According to figures released today by the Bureau of Labor Statistics, the CPI declined by 0.5% in October, most of  the decline being in apparel and energy. During the first ten months of 2006, the CPI-U rose at a 2.4 percent  seasonally adjusted annual rate.  This compares with an increase of 3.4 percent for all of 2005.

Many respected economists have argued that a little inflation is good for an economy, and 2% or 3% seems like a little, so we imagine that Mr. Bernanke is relieved to see the year-to-date figures. No doubt the public and the financial markets will be relieved, as well.

But, just what does a 3% inflation rate really mean to the average citizen over the long run? It means that in purchasing power, a dollar held for 25 years would be worth about 50 cents, in 50 years about 23 cents, and in 100 years, about a nickel.

The old story is that if you put a frog in a pot of hot water, it will jump right out, but if you put it in room-temperture water then gradually bring the water to boiling, the dumb frog will just let itself get cooked.

Right now, the monetary pot is only luke warm, so most people holding dollars are insensitive to the loss and don't feel any urge to jump out of the pot. Even if the chefs at the Fed don't increase the rate of money creation, and price inflation stablizes at 3% a year,  dollar holders are still being slowly cooked. Moreover, there's little doubt that these low inflation rates can't last for long.

What's the alternative to holding depreciating currencies? Tangible goods...the very things that the dollars will be buying. That's why those of us at The Sovereign Society are strong advocates of natural resources, including precious metals, oil and gas, industrial commodities, and the companies that produce them. Visit us at www.sovereignsociety.com.

Tweedledumb vs. Tweedledee

As a card-carrying septuagenarian, I’ve been witness to sufficient election cycles that I’m immune to the hoopla. I mean no offense to those who have a deeply held faith in politics, but I suspect that the defeat of Tweedledumb’s party by Tweedledee’s party will have minimal effect on the long-term direction of government. The same would be true if the outcome was reversed, of course. The point being that the Tweedle twins can’t be told apart.

One of the major fears of many is that the Tweedledee party will raise taxes. I got myself in hot water by tackling this tax problem in the Sovereign Society A-Letter of October 31. I argued that taxes should be raised, not lowered. Yup, that's my position, even though I hate taxes. After all, taxes are theft at gunpoint.

One reader, who chose to remain ‘anonymous’ wrote,

There's no such thing as a bad tax cut.  Can't believe anyone who believes in liberty would ever endorse a tax increase no matter how convoluted the logic. Rather than tax increases, how about endorsing SPENDING CUTS! If the politicians won't cut spending, then the government will just go formally bankrupt that much sooner ... to the benefit of all who want be free.  After all, if the government has no money, then it sure isn't gonna be able to enforce laws and regulations because it isn't gonna be able to pay those hired to put a gun in our face.

Cut taxes to the bone and starve the beast !

Ah, no, my logic isn’t convoluted if read carefully. The beast doesn’t starve when you cut taxes. Anything it can’t get us to cough up in taxes, it steals from our savings by inflating the money supply. And that form of theft by fraud is much worse than theft by force.

Anonymous, you are totally correct on the key point. The problem is government spending. Unfortunately, the government won’t actually go bankrupt, it will just debase the currency, and pay off it’s debts in depreciated dollars, meanwhile collapsing the economy, and destroying the people who are most helpless…retirees and the poor.

A sign above the capitol steps should read, “Abandon Hope, All Ye Who Enter Here.” Even well-meaning and honest politicians (and there is at least one in Congress, Ron Paul) are helpless to stop this beast. The juggernaught of government spending is unstoppable. This is a democracy, and ignorant voters really believe they can vote themselves a free lunch by electing one of the Tweedle twins. Lest you think there really is a difference in the actions of the two parties once in power, study this graph of federal spending and try to identify the points at which these twins changed places. And, if you notice, when tax revenues go down, the debt just grows faster!

 

Canadian income trusts re-examined

In my blog on November 1, I discussed Canada’s decision to tax income trusts for the first time and raise dividend tax rates for pension funds and foreign investors that own trusts. I said the move strikes a blow at the companies structured to offer high-yield securities that have flourished in Canada, but simultaneously strikes a blow at retirees who have sought cash distributions to boost their retirement incomes.

I went on to opine that Canadian socialism still prevails, noting that some retirees who’ve depended on the tax-free distributions from income trusts will find their incomes dropping, will now stop investing in free-enterprise corporations, and find it easier to demand more subsidies from the welfare government.

In a thoughtful reply to the blog, a Canadian reader, Mr. M.S., pointed out that there was more to the trust-taxation change than I had perceived, and suggests that the move toward socialism in Canada is actually slowing down, if not reversing. He writes:

Although your take on socialism in Canada is mostly right, you are wrong about the direction. The current government is trying very hard to reduce the size and dependence on government. They have reduced federal sales tax called GST, and are planning a further reduction. They have reduced spending in certain completely unproductive but politically correct areas and have eliminated related programs.

Their stance on the income trust issue is correct for a couple of reasons. First of all income trusts and related tax treatment were badly conceived. Trust payouts are an alternative to dividends but with more favorable tax treatment. However the related regulations virtually eliminate any retained earnings. [the law requires all income be distributed. Ed.] Since their introduction more and more companies have converted to income trusts in order to receive this tax treatment. This has produced a capital-market anomaly by distorting the cost of capital between the two business models.

Ordinarily this would not be a bad thing. However, in this case the resulting behavior is that businesses operating under the trust model have little appetite for risk or innovation, and are dependent on acquiring assets to replace those depleted, in the case of resources. And to make these acquisitions they must issue more capital. Thus most businesses become more like consolidators, rather than engaging in much organic growth. They are managed for efficiency rather than effectiveness. Their piece of the economic pie was growing as more companies were converting to trusts. They were stifling innovation and productivity.

My initial reaction when the income trust matter came up was that the solution should have been to level the playing field by reducing the tax on dividends at the corporate level. And combining it with a change in the withholding tax. More on that below. But that would have required changes to international tax treaties, which I am sure was going to be a losing proposition.

The other reason that their stance on trusts was correct was another unintended consequence. Withholding tax on certain foreign investors, including those from the US was only 15%. Thus there was considerable tax leakage because of the numbers of foreign investors participating, as well as the numbers of non-tax entities such as pension funds. Consequently foreign investors received better tax treatment than Canadian unit holders. And particularly in the case of oil and gas, little extra incentive is needed to attract investors at today’s energy prices. I wouldn't ordinarily worry about tax leakage, however, Canada needs to invest billions to bolster its deplorable military capability.  From a nation with almost 1 million men and women serving during world war 2, and with a population base of about 20 million, we can barely muster an effective fighting force of 5000 today. And in Afghanistan we are getting badly hurt because we don't have transport helicopters. The previous government sold them as unnecessary. Our military is a joke and a national disgrace and must be rebuilt.

Letting the military degenerate into being a national disgrace was surely a socialist direction. Rebuilding it, which the current government has promised to do, is a reversal of that direction. It is one of many steps currently being taken. I agree they are small, and there is a long way to go.

Thanks for taking the time to respond, M.S.. I greatly appreciate the explanation, and certainly cheer any move in the direction away from socialism. Such a path is devoutly to be wished.

Favorable tax treatment for holders of income trusts has definitely segregated the capital markets, directing those seeking income toward the trusts, and those seeking capital gains toward conventional equities. It would seem that the system more efficiently divides the market into two asset types, those that offer regular income at low tax rates, and those that offer capital gains. Thus, retirees can focus their portfolios on income, which is what they need, and the younger investors can direct their capital toward companies that need it to expand and grow.

As the market gradually segregates between growth and income, investors benefit and Canada loses tax revenue, which is why the law is changed.

It would seem to me that the capital-market anomaly created is a positive evolution for the marketplace, allocating capital more efficiently, according to the need of the investor, and the nature of the business. It happens, of course, because individuals and corporations always try to minimize loss through theft (i.e., taxation). It also happens because it’s more efficient for investors.

The question of whether Canada would be better off with more tax revenue in order to expand their armed forces is an issue open to debate, and one I shouldn’t delve into here. I still take the rather odd position that while I’m against taxation, since it’s theft by force, I’m even more against deficit spending, since it’s theft by fraud. The real objective, given that government will spend money, is to make it balance it’s budget by meeting all expenses through taxation, and none through borrowing.

The ultimate answer that solves every segment of this tangle is to achieve a society in which taxes don’t exist because all products and services are privately produced, and all government is self government. It’s a world of sovereign individuals.

The War on Drugs

Recently John Walters, the director of the White House Office of National Drug Control Policy, told reporters that Afghan authorities were succeeding in reducing opium-poppy cultivation.

Really? Despite hundreds of millions of tax dollars being spent by Congress to stop the trade, a UN report in September estimated that this year’s crop was breaking all records, up over fifty percent from the 4,100 tons produced last year. Visitors to poppy producing areas in Afghanistan noticed that schools in the areas were closed as teachers and students were busy harvesting the ripened poppies. A prosecutor from the local Crimes Department told a reporter that his clerk, driver and bodyguard hadn’t made it to work as they, too, were busy harvesting. Working in poppy harvesting paid $12 a day. Wheat only pays $2 a day. With such profits to be made, it’s hard to blame those who rush to earn that cash.

Nor is it hard to grasp why the easy money attracts the young in America. Flip burgers for minimum wage, or sell dope and make many multiples. All you need to be willing to do is take the risk.

Why are the profits so high? Because dope is cheap to make, but the War on Drugs makes it expensive on the street.

It’s important to recognize, however, that the drug laws go far beyond the war on street drugs, and are vastly more deadly than even the war on terrorism.

Durk Pearson, author of the best seller, Life Extension, has been doing legal battle with the FDA for the past decade (and has won battle after battle in court). At the recent Liberty Editors Conference he pointed out that by controlling the public’s right to medications, the Federal Drug Administration (FDA) has blocked American citizens from drugs that could have saved over a million lives in the past year. According to Pearson, because of the FDA restrictions, more people die unnecessarily every week in the United States than died in the attack on the World Trade Center on 9/11.

The War on Drugs, both recreational drugs and medicinal drugs, is a war on individual  liberty. It is one of the great tragedies of the 20^th century, and a continuing disaster as we enter the 21^st.

Please, don't democratize the web

Last Thursday in a radio interview, Sir Tim Berners-Lee, the inventor of the world wide web, said that he was concerned about the future of his creation. If trends continue, he suggested, the Internet could become an "undemocratic" virtual space riddled with "misinformation" and "untruths". With 100 million websites up, and bloggers (like me) ranting unchecked, he thinks it’s time to put a bridle on the horse he created.

Well, Sir Tim, I first must express my gratitude for the genie you’ve released from the bottle. You’ve changed the world. But you should pray that the internet never becomes democratic, for the last thing this marvelous new advance needs is for people to start voting on how it should evolve. Can you imagine what life on earth would be like today if the early life forms (assuming they had brains equal to the average voter today) had used majority rule to determine the course of evolution? Well, you can be pretty certain that you and I wouldn’t be here today.

Certainly, the web is filled with “misinformation” and “untruths”, but egads, if such things were done away with in our lives, what would politicians do for a living?

Sir Tim, have a little confidence in evolution, and a lot less confidence in majority opinion.  Natural selection handles misinformation and untruths quite efficiently, albeit  somewhat slowly.  Your offspring is evolving, and is creating a melting pot of ideas that is  glorious. Don't muck it up with bureaucratic controls. Let each contributor be sovereign. In the virtual world as in the tangible world, free markets, free speech and free men are the essential ingredients to progress.

Tax cuts? NO!

My A-letter article on this past Tuesday ignited some pretty agitated responses, such as:

There's no such thing as a bad tax cut.  Can't believe anyone who believes in liberty would ever endorse a tax increase no matter how convoluted the logic.   

Rather than tax increases, how about endorsing SPENDING CUTS ! If the politicians won't cut spending, then the govt will just go formally bankrupt that much sooner ... to the benefit of all who want be free.  After all, if the govt has no money, then it sure isn't gonna be able to enforce laws and regulations because it isn't gonna be able to pay those hired to put a gun in our face.

Of course the answer is spending cuts! But the only way to get that spending cut is to wake the public up to just how they're being robbed. To cut taxes without spending cuts is what's put the country (and every country that engages in deficit spending) into the mess its in. As long as John Q. Public thinks he's better off with lower taxes, without looking at the fact that government borrowing is even more disastrous than taxing, the politicians can continue their evil ways.

Cut taxes and starve the beast? No, it won't starve, it will just eat your savings instead of taking it up front. And that's not convoluted logic, it's just common sense.

The Canadian Spiral

Canadian Finance Minister Jim Flaherty told reporters in Ottawa yesterday that Canada will now tax income trusts for the first time and raise dividend tax rates for pension funds and foreign investors that own trusts.

The move strikes a blow at the market for the high-yield securities that have flourished in Canada, but simultaneously strikes a blow at retirees who have sought cash distributions to boost their retirement incomes. You can expect turmoil on the Toronto Stock Exchange.

The new rules won’t just hit Canadian retirees, as foreign investors own more than a fifth of outstanding income trust units. The number of trusts in Canada has tripled in the past six years to about 250, and their market value has soared 20-fold as companies convert to trusts to avoid taxes and boost share prices.

A decade ago I was asked to debate the Canadian welfare state with an economics professor from McGill University, and we wrote opposing articles in the Canadian journal, World Economic Review. His title was “The Welfare State, a Work in Progress,” and mine was titled “The Welfare State, a Failed Experiment.”

I worked for over a month constructing what I considered an iron-clad defense of the free-market, which seemed to me to would convince any open-minded individual that freedom always works better than socialism.

A month after publication, I received a letter from the editor of WMR, which simply said that both the professor and the subscribers (all Canadian academics) considered me simply crazy.
Well, Canada marches on, and socialism still prevails. As the welfare state expands, taxes must rise to pay the rising welfare class. The retirees who’ve depended on the tax-free distributions from income trusts will now stop investing in free-enterprise corporations, and find it easier to demand more subsidies from the welfare government. Corporations that have depended on investor capital will find the source drying up, and many of them will also turn to government for handouts.

Down, down, goes productivity.

Can you profit from this turmoil? Yes. There’s one Canadian advisor who understands exactly what this will mean to Canadian shares. Eric Roseman, the Sovereign Society’s investment director, is a world-class expert on trusts.

Be among the first to unerstand the effect of this destructive legislation by attending Eric's presentations at The Offshore Advantage Seminar in Puerto Vallarta, Mexico. Hurry! It happens next week, November 8-11. Reserve your spot today. Cal LaVita at 561-272-0413, x122, or register online by clicking here!