Economics

[nanningbob]

So far as fiscal reform goes, US military spending definitely needs to take a hit, and it absolutely needs to implement sweeping tax and subsidy reforms (i.e. increase taxes, improve tax enforcement, eliminate loopholes, decrease overtly broad corporate subsidies). Unfortunately the US federal government is far too beholden at the moment to rich and corporate donors to enact decisive change on these issues; money in politics and its increasingly corrupting influence is easily the single greatest problem facing the States at the moment. That said, most of the hope for deficit and fiscal stability in the States must come from growth as a practical matter until there is constitutional reform to rein in the blight of growing plutocracy afflicting it.


As for John Mauldin, I'm not going to pretend that he's never made a successful call in his life, but he has made a lot of bad ones, and his incomplete understanding of the economy shows:

http://investingcaffeine.com/2010/04/14 ... ries-wolf/

The latest call cited in that article, April 2010 was disastrously wrong as the S&P 500 skyrocketed and never looked back save for a brief period in mid-late 2011.

The overall profile I get of the man is a sensationalist, permabull doomsayer (not unlike many Austrians/gold stackers/debt worriers) that benefits from being a 'broken clock' and stumbles upon a correct and seemingly impressive prediction every now and then. In otherwords, I think his best calls have stemmed not from a solid understanding of economics but by making the same ones until he's eventually right, thereby enacting a sort of credibility martingale if you will. To be fair, I don't devoutly follow the man based upon this perception and the call outs I've seen that inform it, but I definitely would be hesitant to look to him for insight without taking it with a mountain of salt.

I am not going to be an outright Maudin defender. I like the guy and his currency calls when he talks about them. I do recognize over the years he has missed the boat in some areas so not going to argue with you that much about him. My feeling is and what I teach guys to do is find out about economic and currencies from non-Forex guys. Forex economic prognosticators are some of the most ridiculous guys I have met. I find I get much better news from those who do not make Forex their primary focus but are covering economics in general. I find it better to listen to those who talk about economics as the big picture and then apply their teachings to Forex to give me an idea of where I should look to place my trades.

The other stuff you mention especially corp., govt., and military I couldn't agree with you more. I have some ideas of tax reforms that I may share later and would like your opinion on. I need someone to bounce some ideas of off anyway.

[trucomallica]

Stop losses are for wrong calls. A lot of techno-fundamental traders get it wrong often, and that doesn't mean they don't make money. If Mauldin was wrong on April 2010 I bet he wasn't counting on the possibility of QE2, remember that as soon QE1 finished the stock market had the correction of May 2010 along with the flash crash. When Bernanke anounced QE2 he knocked out a lot of predictions of a full correction to take place.

[Layzars]

But if so why would he not anticipate QE2 and other stimulus action given prior precedent and stated Fed policy?

Of course Mauldin (and those who heed his predictions) can still make money in spite of bad calls if he manages his risk well, that's half the battle after all, and a critical coefficient of success, but I personally suspects he makes most of his money by selling his ideas, not by profiting from them (directly anyways).


@ nanningbob: Definitely look forward to hearing them!

[nanningbob]

My theory of govt. economics. What I would like to see and am thinking of writing a book on the subject. I guess this will be a place to bounce my ideas off of. Most of this will focus on USA application even though I think it can be applied to other government budgets quite easily.

My theories (beliefs) will focus around several points. I developed them after a quote attributed to Adam Smith that goes something like this. "There is one truth about government, we know they will wont ever pay off their debt." or something like that.

So here are some jumping off points or foundations for changing our USA tax system.

1. Everyone benefits to some degree from government, some more than others, but everyone benefits. Whether its the laws that protect us, military, fireman, police, etc. road systems, communication systems, education systems, unemployment, retirement, health benefits, product and workplace safety, etc. on and on. We all benefit to some degree from having these things provided by govt. Therefore everyone rich and poor employed or unemployed should willing give to support the govt. This is called taxation. You can argue about how much or how little you should contribute but everyone should pay because everyone benefits. This is part of human nature. If you are paying for something then you are more concerned about how the money is spent. If you are not paying for something then you will be less concerned. Therefore everyone should pay something to the national treasury. How some of this can be done will be discussed in further posts. So there should never be a debate over the figure of how many people are not paying taxes because everyone is paying. This would help tremendously in properly funding govt. and it should make each citizen more concerned about how his tax money is being spent versus how much service can I get from Uncle Sugar Sam.

[nanningbob]

Having established the first foundation we then go to the second.

I would support a progressive tax system where those that make more money should pay more than those that dont. It is reasonable to understand that a person making 10 to 20K a year can afford a smaller percentage of his income going to taxes as compared to a person who makes a 100K and to those who make over a million. However, in my presentation that will be limited in scope and not universally applied in all tax areas.

[nanningbob]

A third foundation and the heartbeat of my taxing system is to create clearly defined funding and budgets for each dept./expense. For example corporations would shoulder the expense of our defense needs. Whatever our defense needs would be needed the tax on corporations would rise or fall based on that need. If total corporate income was 1 trillion a year and we needed 200 billion for defense their effective tax rate would be 20%. Of course I know corporate income is much greater than that and our defense budget is much bigger than that but that would be an example of clearly defining funding and budget the military.

Another example would be retirement. Instead of the present Social Security system we would replace it over time with a straight income tax over all income of (just a guess here folks) of 5%. We would then guarantee a minimum income of 1500 (or 1000 or 2000) dollars a month when a person retires. Anyone wanting a bigger retirement would then designate more to his retirement fund or have a personal retirement of his own. Each person would designate what their retirement would be but every citizen would participate and every citizen could choose options. What this would do is cut the employer contribution out of retirement and make companies and corporations more profitable. Tax relief in this area. It is my conviction that the self-employment tax is one of the biggest busters of new business startups. It is a killer to go out into your first year in business and be in the 15K-50K income range only to have the govt. grab 18% of it for SS tax plus any employees tax. Relieve small businesses of this burden and you will see more startup businesses and more of a success rate in businesses succeeding. Each person chooses their own retirement objectives but the govt. provides a minimum. Companies, small businesses would no longer be involved unless they wanted to add it as an employee benefit. Each individual would be responsible for their retirement but a minimum retirement would be guaranteed and the cost be covered by all income.

The percentage would rise or fall with expenses. If we have more retirees then the tax would rise if less then the tax would fall. Everyone pays this tax because we take a position nationally that everyone gets at least a minimum retirement when they get old. We take care of our elderly.

We would do the same for medicare. A percentage of all income would pay into this fund thereby insure the health needs of our elderly. Each individual would pay all their life to enjoy a retirement and health care when they got old the expense coming from everyones income because all get to participate. Those that contribute a higher percentage of income can opt into better plans.

In essence for these two budget items it would be flat taxed differently on all personal income.
Retirement would be a flat tax on all income and any kind of health tax (medicare, medicaid, any national health care plan) would be based on a progressive tax. I do not wish to get into a debate on national health care just want to point out how it would be taxed. I will deal with this matter in more detail later.
My point to this is it would lower overall income tax rates and low income people would just have to understand they are buying into their future. Even minimum wage people would understand they are paying for a service they will receive someday. It benefits all therefore it should be paid by all including those receiving retirement benefits. The details would be worked out later. This is an overview of a basic idea not an actual proposal.

[nanningbob]

So lets break down each basic govt. spending program and talk about how it would be funded.

I am using 2010 budget percentages. It changes from year to year but it will get the point across.

For example Social Security payments are 19.6 of the federal budget
Defense was 18.7%
unemployment 16.1%
Medicare 12.7%
Medicaid and childrens health ins. 8.2%
Interest on national debt 4.6%
Health and human services 2.3%
Transportation 2%
All others 15.8%

Income for govt. comes from
Individual taxes
41.5% from individual taxes
40 % Social security taxes (half is employer, half is income tax)
20% is an income tax
20% employer tax
9% Corporate income tax
3.1% excise tax
6.5% other (fees, energy taxes, etc.)

I would change the tax system to:
Corp. and business tax would pay for Defense. This business tax would replace contribution to Social Security.
Personal tax would pay for retirement and health
A Value added tax (VAT) would pay for all other categories any surplus would pay down national debt.
Excise tax and other taxes would pay for interest on national debt and begin pay down of national debt.

Without writing the book this is a general outline of the proposal.
Everyone pays. Tax write offs and deductions (other than actual expenses) would be minimized, most eliminated.
We know where our money is being spent and where the money is coming from.
Politicians then can be held accountable by the people for specific issues and votes.
We want more govt. services we know what taxes would need to be increased. We want less govt., less taxes we know what budgets to cut. This should fuel better debates and positions by political parties and candidates. It would be easier to ask specific questions and get specific answers. It should also produce a better understanding by the electorate of how govt. budgets work.

This proposal would lower all income tax rates on individuals and corporations. Those that havent been paying taxes will now pay taxes. The rich would pay more in a progressive tax on health care tax and VAT taxes which would be collected when money is spent. However, they can also save and invest more with a lower tax rate. The poor would be paying into their retirement (they already do with SS) and when they purchase items.

[MurphyMan]

Interesting approach, Bob. Where would you place education in all this?

Sam

[nanningbob]

Interesting approach, Bob. Where would you place education in all this?

Sam

Education is included in the other expenses. Because of brevity and just trying to get the main point across I am just trying to outline this. Anything that takes up less than 2% of the Federal budget was placed in this category. If we wanted to spend more or less on education you would create a separate tax to cover that expense. This way the people know how their money is being spent and where it is coming from. My personal position would be to keep education as local as possible so local property tax is where most of education's money comes from. The state then provides some and the Federal govt. provides the least. Most Federal spending on education is specific programs like the No Child Left Behind and College loan programs, etc.

The big expenditures for govt. are Social Security (retirement plans and pensions), military defense, and health care and recently unemployment benefits. The rest are a drop in the bucket.

[MurphyMan]

Here in Illinois, famous for incarcerated governors, the lottery was enacted many years ago. To sell the concept of state sponsored gambling they said the proceeds would go into the education budget. What really happened, is they put the lottery proceeds into the general budget, to spend as they wished. When they were called out on this, the reply was something along the lines of "Well, we put the money into the general budget and education money comes from the same place, so it's the same thing"

Right.

Sorry for the off topic, Bob.