A National Sales Tax Is Coming

If you favor national health care and big government you will also love the 60% cumulative tax rates we will have in the next few years, if earlier. Congress already knows they won't be able to only tax the rich to pay for all this spending. They just are not telling us yet. Don't you love it?

Source: ZeroHedge

By: Jeff Harding

The “Center for American Progress” is the best example of an oxymoronish name that I can think of. This is a “progressive” (socialist) “think tank” (another misleading term) lead by John Podesta, a former Clinton Chief of Staff and Obama adviser.

They are coming out with a report on Wednesday that will recommend that:

[T]he administration should consider a tax on consumption, such as a value-added tax [VAT] system similar to that in use in the European Union. Mr. Podesta suggested that its impact should be limited to protect lower-income people, who otherwise might be hit particularly hard.

The center’s president and chief executive, John Podesta, who is an Obama adviser, said the administration should consider a tax on consumption, such as a value-added tax system similar to that in use in the European Union. Mr. Podesta suggested that its impact should be limited to protect lower-income people, who otherwise might be hit particularly hard.

“As progressives we need to debate the policy merits [of] a range of options, including designing a small and more progressive value-added tax,” Mr. Podesta said in a statement Tuesday.

Apparently even they recognize that you just can’t tax the rich enough to cover the Administration’s vast spending programs:

In order to pay for the national health care plan, the Democrats were already planning to impose a tax surcharge of between 1.0% and 1.5% on those whose income is $350,000 or more. I did the numbers on this and I came up with 300,000 lucky taxpayers who will be burdened with the privilege of paying for our health care (the Democrats say it’s more like 1,000,000 taxpayers, but I think I’m closer). Now it looks as if the regressives agree with me.

The report, which will be released on Wednesday, said the administration can’t rely on taxing richer Americans and companies to reduce the deficit to sustainable levels by 2014 because those groups would see 40% tax increases.

Guess what else is happening on Wednesday? Just a coincidence I’m sure, but the Volker Panel on How to Raise Taxes Without Anyone Noticing is meeting as well. The meeting will be streamed live starting at 12:30 if you wish to tune in to their public deliberations.

I predicted in March of this year that the Administration would look to a VAT to raise taxes:

My guess is that it will include non-food retail sales and they will add services (information, professional, technical and scientific, administrative and support, waste management and remediation, but excluding medical services). The services aspect is important because this will skew the tax more to corporations and upper income taxpayers. …[Obama] will structure it so that low income people will get a refund of taxes paid. The refund will be phased out as income increases.

In 2008 retail sales (excluding food) were about $4 trillion. Services in 2007 were another $2 trillion. Let’s say they need to raise $1 trillion over the next 4 fiscal years, or $250 billion a year. That would require a 4.5% national sales tax. In Europe they call this a value added tax (VAT) and the rate in the E.U. is about 15%.

Volker already said he thinks the VAT is a good idea. No surprise there; that’s why Obama chose him.

So, let’s see. They want to stimulate consumer spending to revive the economy. How do we get people to part with their money instead of socking it away in the bank? I know: let’s tax consumption. Brilliant.

FINALLY.....A Congressmen Does His Job!!!

MUST WATCH

Risk Pyramid for Uncertain Times

In times of extreme uncertainty, which we will certainly be entering in the coming months and years, one needs to know what asset classes to diversify into. I don't see the U.S. being around, in it's current form, for very much longer. Saying this, check out the "risk pyramid" to figure out what you should own in a coming deflationary depression.

Notice the two most important assets:

1) Gold
2) Cash (physical dollars, not electronic credits in a bank account)

FDIC Discloses Deposit Insurance Fund Now Negative

Source: ZeroHedge

In an unprecedented disclosure, the FDIC has highlighted that it expects the DIF reserve ratio to be negative as of September 30. As there are a whopping 48 hours before that deadline, one can safely assume that the DIF is now well into negative territory: as of today depositors have no insurance courtesy of a banking system that has leeched out all the capital of the Federal Deposit Insurance Corporation. Let's pray there is no run on the bank soon.

Pursuant to these requirements, staff estimates that both the Fund balance and the reserve ratio as of September 30, 2009, will be negative. This reflects, in part, an increase in provisioning for anticipated failures. In contrast, cash and marketable securities available to resolve failed institutions remain positive.

Additionally, the FDIC has now raised its expectation for bank failure costs from $70 billion $100 billion. Feel free to expect this number to continue growing.

Staff has also projected the Fund balance and reserve ratio for each quarter over the next several years using the most recently available information on expected failures and loss rates and statistical analyses of trends in CAMELS downgrades, failure rates and loss rates. Staff projects that, over the period 2009 through 2013, the Fund could incur approximately $100 billion in failure costs. Staff projects that most of these costs will occur in 2009 and 2010. Approximately $25 billion of the $100 billion amount has already been incurred in failure costs so far in 2009. Staff projects that most of these costs will occur in 2009 and 2010.

First Mary Schapiro has failed at her task of "regulating" anything on Wall Street, and now Sheila Bair presides over a newly insolvent institution. Chalk one up to Washington's success at "containing" the crisis. Zero Hedge wishes Ms. Bair all the luck in the world in returning the DIF to its statutory minimum requirement of 1.15% of all insured deposits (a shortfall of a mere hundred billion or so). Maybe she can convert the FDIC to a REIT and have Merrill Lynch do a concurrent IPO and follow-on offering (while Goldman raises it to a Conviction Buy which incorporates the firm's expectations for 10% GDP growth in 2010 coupled with projections for $1,000 per barrel of crude)?

FDIC's full memorandum outlining its failure can be found here.

Short thought....

I wrote a paper on the inefficient government action of Katrina's disaster in New Orleans and here is a short thought on the government:

"What I do understand, or think I understand, is that people relied on the federal government to help them. With all of the social safety nets and social programs they were justified to rely on the government and that is the problem. When people are justified to rely on the government it creates huge problems. Risks that shouldn’t be taken are taken, people act without thinking, lives are lost, and progress is halted. This crude example puts it into perspective. If you manage assets for a “too big to fail” company and you earn a commission on profits what incentive do you have to minimize risk? If you make big bets and you are right, you make millions. If you are wrong you normally would put the company at risk to going bankrupt but in our current environment you would just get a bailout for almost no interest and make your money back in a few years. You might get fired but you get unemployment/welfare until you get your next job. Without risk of failure we have risk of collapse. Risk is a good thing; without it we have people taking riskless risks at the expense of the system (which we all pay for unless you take the risk, then you’re rewarded). My point is to get rid of social safety nets because then innovation and progress will happen. Do you think that the people of New Orleans would have ignored the problem if they knew they were the only ones to fix it? More power needs to be in the state and city level then the federal level because the federal government and their programs are a joke."

How you spell correlation:

First chart is the weekly NASDAQ from 1995 to present; Second chart is the weekly Dow Jones Composite from 1924-1939 and the one that has skinny bars is a daily chart of Dow Jones Composite in 1929 and 1930. I'm pretty sure without the labels no one could tell the difference.... Proof of socioeconomic relevance



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Market Wave Count Update and deflation update

S&P 500 Index

Are we turning Japanese? (MISH)


Bernake's Deflation Fighting Scorecard (MISH)

Here is Bernanke’s roadmap, and a “point-by-point” list from that speech.

1. Reduce nominal interest rate to zero. Check. That didn’t work...

2. Increase the number of dollars in circulation, or credibly threaten to do so. Check. That didn’t work...

3. Expand the scale of asset purchases or, possibly, expand the menu of assets it buys. Check & check. That didn’t work...

4. Make low-interest-rate loans to banks. Check. That didn’t work...

5. Cooperate with fiscal authorities to inject more money. Check. That didn’t work...

6. Lower rates further out along the Treasury term structure. Check. That didn’t work...

7. Commit to holding the overnight rate at zero for some specified period. Check. That didn’t work...

8. Begin announcing explicit ceilings for yields on longer-maturity Treasury debt (bonds maturing within the next two years); enforce interest-rate ceilings by committing to make unlimited purchases of securities at prices consistent with the targeted yields. Check, and check. That didn’t work...

9. If that proves insufficient, cap yields of Treasury securities at still longer maturities, say three to six years. Check (they’re buying out to 7 years right now.) That didn’t work...

10. Use its existing authority to operate in the markets for agency debt. Check (in fact, they “own” the agency debt market!) That didn’t work...

11. Influence yields on privately issued securities. (Note: the Fed used to be restricted in doing that, but not anymore.) Check. That didn’t work...

12. Offer fixed-term loans to banks at low or zero interest, with a wide range of private assets deemed eligible as collateral (…Well, I’m still waiting for them to accept bellybutton lint & Beanie Babies, but I’m sure my patience will be rewarded. Besides their “mark-to-maturity” offers will be more than enticing!) Anyway… Check. That didn’t work...

13. Buy foreign government debt (and although Ben didn’t specifically mention it, let’s not forget those dollar swaps with foreign nations.) Check. That didn’t work...

A little humor....

http://www.despair.com/ <==== more

Today Primary Wave 2 Peak?

• Today was likely the peak of the primary wave (2) or "b" of the current bear market. After the Fed meeting optimism was at historic extremes (very bearish) and the market sold off rather quickly after a weak breakout attempt. Of course today might not have been the very peak, however a peak is imminent and the start of primary wave (3) or "c" is coming.
  

S&P 500 Index

• Wave C is going to be long and hard, this is the wave where our current debt bubble will collapse and the zombie financial system will be cleansed. Wave C is likely to bring dramatic social and political changes to the United States. It is safe to say, if primary (2) peaked today, that we are witnessing the end of an era and the United States will never be the same, as it is today, again.

• Notice on this chart, showing our debt/GDP ratio, that debt is at historic levels never seen before in the United States. That debt bubble has not popped yet, just as the debt bubble of the 1920s didn't pop until 1930, a year after the stock market peaked. I have mentioned before that this bear market is on a scale higher than the 1929-1930 one. The debt/GDP chart puts this in perspective.

United States Debt/GDP Ratio

• This bear has only just begun to awaken. Right now we are where the Dow was in 1930 at the peak of "b", debt was still rising, the market had rallied 50% from the lows, and people were speaking of a recovery. What followed was a total debt collapse and a 80% drop in the stock market........watch out....wave C is upon us....

Dow Jones during The Great Depression

Green Shoots? I think this chart explains itself

Channel looks like it's breaking....

Two Short Set-Ups...

Mylan Inc (MYL)

Macy's (M)

Why Aren't We Teaching This In Our Schools?

Source: M3 Financial Analysis - great work and great blog, republished here

One of the other points I would like to make in regard to come of my earlier posts, is something that has grave impacts economically and for investors. People need to be very active in managing and understanding what is going on in order to protect themselves and understand the real impacts of a potential dollar rally on their purchasing power, assets, and employment.


First and foremost, I would like you to take a close look at this dollar chart. Do you notice anything? Okay, look very carefully at the only significant dollar rally since the Fed has been responsible for the dollar?

Clearly debt pushing policies inflated asset values from 1913 to 1929. During this time dollar purchasing power declined markedly if you want to call 50% markedly. This was Fed engineered. There was a reason so many banks popped up during the 20's...and its the same reason that this century has been the era of the banking - so far - THE FED and its conflicts of interest...and fractional reserve lending. Fractional reserve lending is the manner in which 95% of the money in the world is created and the primary dilution factor for the dollar.

Now lets go back to my previous post, in which I refer to the dollar as a certificate representing the corporation of the United States of America. Well, the dollar IS the stock certificate of the United States...and that certificate is currently not an asset or value, but an IOU.

The selling/issuing of dollars through credit (IOU's) - is a short sale that by implication will need to be covered. Its just the same as a short on Pets.com or AIG common shares or ES SP500 futures...the sale of these securities needs to be covered with the purchase of same to close the transaction.

Ron Paul has said it many times, the dollar reserve system has ended and the question is what is next. But the question is also how are all these short sales going to be closed...what kind of mess will that create?

We have appointed people to be responsible for our national value and stock certificates who are the equivalent of appointing a bunch of AIG shorts to run AIG. Additionally, you can tell that the Fed and its governmental co-conspirators have done a terrible job...the chart says they did.

Why are they still employed? Normally you would try to cover your tracks or at least do a bad job, not a catastrophic one, if you were trying to steal from someone while smiling at them at the same time. This dollar chart is catastrophic.

Subsequent to the debt pushing of the 1913 to 1920's, when debt became oversupplied and dollars to service the debt became scarce - as has happened now - we had the only rally in the dollar purchasing power of consequence in nearly 100 years. That rally for the dollar was the great credit contraction called the "Great Depression" - curiously, this was roughly a 27.2% rally.

The Fed used the depression to ensure that their goals would be achieved. The panic of those times led anyone who was scared to the conclusion that its beyond imagination the Fed could engineer such a condition. Worse yet, to be able to conceive that they, instead of attempting to fix the problem, would implement an agenda to make a much bigger one. So, fear led to more and more power which the Fed used to continue to expand its policies - ironically under the guise of preventing a depression which they engineered in the first place.

In achieving these objectives they did an excellent job. Is it any wonder that the SP500 bottomed at 666? I wonder?

Is it any wonder that your Dow Jones Industrials certificates are now worth less in purchasing power in real terms than at the peak of 1929?

So, where to from here? Well, that is a very good question. Look again closely at the dollar chart. Theoretically, the dollar is worth .04 cents. Under a reasonable scenario (but still a bad one), a short squeeze capitulation rally could take the dollar's purchasing power to between 15 to 30 cents...that could be a 750% increase in the purchasing power of the dollar. I am not going to go into details as to what that would do to the values of stocks, real-estate, and other assets such as silver and other commodities.

Though I really hope to god that none of this happens...recognizing that it can happen - because it has happened before - is an important thing to do given where we stand currently.

There may be some further efforts to fuel a hyper-inflation story. If gold rallies, for instance, people will think that inflation is about to explode...but that rally will likely be short lived.

How Does The Federal Reserve Push The Debt (create money) ?

The Story
Money is created when the factory (bank) loans you principle. An imbalance is created when you promise to repay money that does not exist - in the form of interest.

I know this is difficult to rationalize. But its the way things work. As long as ponzi scheme bankers can keep giving out loans and increasing the money supply the imbalance is not apparent. Until it is of course.

Now, if I was a smart ponzi scheme banker (and they are). What I would do is, try to create theoretical money. Imaginary money that everyone believed actually existed and could be used to settle future obligations - such as Warren Buffett's potential $50 billion+ obligation on his european style puts. (see: Warren Buffett - the ultimate bull-market manifestation)

The vast pools of money

You have probably heard of the vast global pool of money - its supposed to be around $70 trillion. This pool of money simply trades the debt money created by fractional reserve lending activity - paper. $70 trillion does not even begin to touch the amount of debt + interest obligations there are in the world. One of the key elements of fractional reserve lending is that once a credit is created...a note or paper is created that represents the value of the borrowers promise to repay and assets he posts as collateral. That is what trades in the vast global pools of money. And as long as the music is playing - everyone is dancing. Credit (Money), however, is not for the most part created by these pools of money (theoretically that could represent value and that would not be good for growth). In the majority, it is created by regulation via fiat when fractional reserve lending takes place. And this is why the dollar chart looks the way that it does. The banks have shorted the dollar into oblivion and sold it to suckers who think buying a depreciating asset and paying interest for it is great if they can invest that money in inflating assets that theoretically outperform the depreciation of their dollars. Obviously, this is a hair brained plan and can not work when the music stops. It also blows up when your inflation assets depreciate.

Just to announce it formally - the MUSIC HAS OFFICIALLY STOPPED...but the fed is still dancing.

So this brings is to derivatives.

Ok, we have all heard of naked shorting. This essentially means that people are selling shares that don't even exist. I have seen instances where the float of a company was tripled due to naked shorting. This operation creates theoretical shares. This is what the banks do with our financial system every day - only with currency.

Now what are derivatives? Who came up with them? Why did they come up with them?

There are a lot of reasons that people will give as to why a derivative is useful or required.

1. Hedging
2. Risk Management
3. Speculation

But do we need them and why were they created?

Let me answer that question in two parts. Firstly, people who work at banks do not ask themselves what money is. The question seems almost too ridiculous. So, most bank employees can not give you the correct answer as to what money is and how it is created. So, we have a lot of smart people furthering a scheme that they don't even know they are participating in. As long as its not illegal they go along with it.

With derivatives we have a similar situation. A lot of brain surgeon types who never asked essential questions about what the real impacts of their work was. But lets look at what that is.

Theoretical money

1. Asset appreciation
2. Credit
3. Interest on credit
4. Modeled Obligations

When stocks or real estate go up, money is created that never existed before. When they go down the opposite happens.

When a loan is given, money is created.

Interest on credit theoretically exists...but the credits (Money) for that interest money need to be created somehow. This is why we need derivatives or vehicles like them, to create the money for the interest due on debt money that is created by banks.

Details:

If I loan $100,000 to someone on a 30 mortgage at 7.5%. I create $100,000 of new money...but the person promises to repay me $251,717.22. So, I need to create $151,717.22 somehow. If on the basis of that issue of credit I create more credit, I will have to create a lot more than $151,717.22. In any case, the only way to create the interest money is to create credit - which creates interest obligations (and that debt money does not exist in the system) and ultimately blows up the system.

Modeled Obligations - to the rescue - they can create money at a whim similarly to how the stock market does...theoretically with no standard interest requirements and very few participants which is rather advantageous when compared to the stock market or other publically owned and priced assets.

If I have a fraudulent money system. I need mechanisms that can create money (Debt) without requiring interest. That's what derivatives are for. And that's why we had 790 trillion dollars of them at one point and why JP Morgan currently has 89 trillion of them on their books (all perfectly hedged mind you).

But what are derivatives?

Derivatives are Modeled Obligations.

1. Options
2. Futures
3. Exotic Agreements
4. CDS's
5. CMO's
6. CDO's
7. Structured Products

Options are fairly simple - though spreads and volatility make them complicated. All derivatives have option characteristics. Options themselves do not usually create very much new money.

Futures are also quite simple. However, highly leveraged. With 1 future you can control 40, 50, 60, 80, 100 times the money requirement to trade the future. Guess what? That creates money...theoretically of course. Since you have agreed to take on all the risks of that position - the 100,000 of theoretical money can be written into the books - again theoretically of course. If you look at what it costs you to control that amount of money there is a problem. Clearly this credit is being supplied at such a high discount that there is barely a cost in the standard form of credit issuance. Therefore the money system is creating new money that can be theoretically used to pay the interest on existing credit with money that creates very little interest. Remember, how our money system operates - theoretically - of course.

Most of the other structured products and other derivatives operate on the same basis except even more leveraged and primarily based on ratios of one agreement to another...bundled up as a unit they can considered a single derivative - i.e. a derivative is usually built out of multiple subordinate derivatives.

What's our total debt?

The total dollar debt in the world is roughly in the 350 trillion area...with interest requirements that over the term of those notes requires 500 to 600 trillion of theoretical money to be created...this can be done as I indicated earlier through inflation or through theoretical mechanisms. Derivatives are the Fed authorized/endorsed/promoted mechanisms capable of theoretical money creation that does not implicitly create large interest obligations and can be used to support expanding asset inflation and as a result create enough money to theoretically repay all the interest on the total outstanding obligations.

When Tim Geithner discusses the need for Derivatives regulation, keep in mind that the development of derivatives was explicitly developed under his watch and Greenspan's auspices. These guys knew we needed derivatives. It was their only way out. And they implemented the scheme deliberately, promoting SIV's and off balance sheet transactions and flakey accounting along the way for spice, so that Bank balance sheets could be manipulated and theoretical money could be created without standard interest obligations.

The Fed is the driver of the Fraud. JP Morgan is one of the primary vehicles for it and the most dangerous bank in the world.

What to do about this debacle:

Learn as much as you can.

• Watch the dollar. If the dollar breaks out strongly...then we know a bad case or worst case scenario is playing out. For the scenario discussed here to not take place, the dollar MUST sell-off and remain weak. If that does not happen (I know I am repeating) things are going to get very bad.

• I recommend that you read the book Conquer the Crash - You Can Survive and Prosper in a Deflationary Depression by Robert Prechter.

• Subscribe to Elliott Wave International: http://www.elliottwave.com/

• Make a plan...do not trust the FDIC...they are the primary enabler of the debt pushers...I heard these two guys on CNBC discussing how "you should not even worry about the FDIC - its backed by the full faith of the US Government." That's called complacency...complacency and investing do not go together. If politicians were rational, we might not have to worry. But if politicians realize that they will be voted out of office for putting the US taxpayer on the hook for another trillion here and another trillion there...we can not be sure that the faith of the government will be there when it's required. I know is seems improbable...but if you told me that we would put the supposedly smartest minds in finance on the job of protecting our purchasing power, managing prices, and protecting the dollar and they would run it into the ground 96% - I would say that is improbable too.

• Watch this movie: Money as Debt. Show it to people you care about.

• Watch this movie by Aaron Russo: America: Freedom to Fascism.

• Read Blogs like Mike Shedlock's - http://globaleconomicanalysis.blogspot.com

• Help Ron Paul and Rand Paul defend the Constitution and reign in the Fed

• TRY TO UNDERSTAND THE PROBLEM. THIS IS NOT A LIE. THIS IS NOTHING BUT THE FACTS. PROTECT YOURSELF, ASK QUESTIONS, BE A CONTRARIAN, AND FIRST OF ALL BE A PATRIOT.

"IN A TIME OF DECEIT, TELLING THE TRUTH IS A REVOLUTIONARY ACT."

-George Orwell



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Corporations and Political Donations

No one will argue that every person has the right to donate to their political candidate of choice. Some people have argued what a person is, and the Supreme Court has ruled that corporations are considered people when it comes down to almost all rights granted to people in the constitution. This means that, under the first amendment, corporations are allowed to donate to a political candidate just like you and I. There is a limit to how much a corporation can donate; Obama’s largest corporate donation was from Goldman Sachs coming in just under a million dollars and if you didn’t already hear the Supreme Court is voting on a proposed overhaul of the campaign finance system that would eliminate donation restrictions from corporations.

Looking at this from a moral perspective, obviously a corporation can’t think for itself like a real person. So how does a corporation decide who to politically support? Board of directors or CEOs. These are people who already have their own human rights. So what this boils down to is a board of director member has more than twice the human rights than you and I do because he gets to choose the fate of his own rights plus the corporation’s rights. The worst part about a public corporation donating to their political belief of choice it the fact that they wronged the shareholders. Shareholders have the right to profits after reinvestment and I’m sure that I would rather receive a higher dividend next quarter then have my money donated to the board of director’s buddy politician. That is theft.

Let’s look at this from a different perspective and assume the board of directors leaves their personal political, social and moral views behind and focus in on only maximum profit. Maximum profit does NOT mean maximum benefit but the corporation doesn’t think like that and there are millions of examples if you care to look. The job of the board of directors is to maximize profits, which is a good thing, but they shouldn’t influence political elections that shape our morals. Without real conscience human beings making decisions like you and me making moral decisions then it is left up to the corporations where its feast or famine on the people.

Why Corporations Shouldn't Be Allowed t

No one will argue that every person has the right to donate to their political candidate of choice. Some people have argued what a person is, and the Supreme Court has ruled that corporations are considered people when it comes down to almost all rights granted to people in the constitution. This means that, under the first amendment, corporations are allowed to donate to a political candidate just like you and I. There is a limit to how much a corporation can donate; Obama’s largest corporate donation was from Goldman Sachs coming in just under a million dollars and if you didn’t already hear the Supreme Court is voting on a proposed overhaul of the campaign finance system that would eliminate donation restrictions from corporations.

Looking at this from a moral perspective, obviously a corporation can’t think for itself like a real person. So how does a corporation decide who to politically support? Board of directors or CEOs. These are people who already have their own human rights. So what this boils down to is a board of director member has more than twice the human rights than you and I do because he gets to choose the fate of his own rights plus the corporation’s rights. The worst part about a public corporation donating to their political belief of choice it the fact that they wronged the shareholders. Shareholders have the right to profits after reinvestment and I’m sure that I would rather receive a higher dividend next quarter then have my money donated to the board of director’s buddy politician. That is theft.

Let’s look at this from a different perspective and assume the board of directors leaves their personal political, social and moral views behind and focus in on only maximum profit. Maximum profit does NOT mean maximum benefit but the corporation doesn’t think like that and there are millions of examples if you care to look. The job of the board of directors is to maximize profits, which is a good thing, but they shouldn’t influence political elections that shape our morals. Without real conscience human beings making decisions like you and me making moral decisions then it is left up to the corporations where its feast or famine on the people.