Wednesday, January 28, 2009

Don't blame capitalism for the credit crunch

The number of writers and pundits, and politicians who blame "extreme-capitalism" and "greed" for the credit crisis is astonishing. And it follows that their remedy for the crisis must be less capitalism. This means less economic freedom, more taxes, more regulation and in many cases, nationalising huge industries.

Gordon Brown, Kevin Rudd, Sarkozy and Obama have all used these words. Alan Greenspan said he was surprised by the investment banks "failure to self-regulate". Krugman, Stiglitz and other Keynesians are blaming lack of regulation and unhampered free markets.

Last night, I read the opening chapter to Milton Friedman's "Free to Choose", which presebted a defebce of self-regulation and the pursuit of self-interest with one simple and elegant statement :
"self-interest does not mean myopic selfishness".

Politicians seem to blame mistakes, errors and risk taking as being something unique to capitalism. But this couldn't be further from the truth. Under capitalism, you suffer the consequences for making mistakes and errors. And you get rewarded for responding to market conditions quickly and dynamically, and changing your plans as soon as the business landscape changes.

In fact, with a proper framework, one would conclude that politicians and regulators are much more guilty of short term selfishness and mistakes than the entrepreneurs and industrialists who are captains of industry. Looking at the past 12 years, it is beyond any doubt that governments screwed up badly and created this mess.

Now you have more than a few businesses that lost spectacular amounts of investor's money by taking risks or failing to disclose their details- Madoff, Merrill Lynch, General Motors, Bank of America, Bear Sterns and more.

But so what ? Under capitalism, these businesses and their shareholders would be liquidated as punishment for their errors. The crisis would be short and sharp. What happens if government steps in, or if government was already the owner and guarantor of the business (such as Fannie Mae) ?

The losses are passed on to the taxpayer, and future generations of tax payers. And that is what we have seen with trilion dollar bailouts.

Given the global government interventions and ongoing bail-outs of the banks, it would be safe to rename Wall Street to the Federal Department of Wall Street.

In this point in history, the remedy for the crisis is surely going to be more painful and hazardous than the actual problems itself.

Every central banker - Bernanke, Paulson, Trichet, Mervyn King, Glenn Stevens - all prescribe monetary stimulus as a remedy. We also see every single treasurer fall into line, and prescribe fiscal stimulus.

Mike Shedlock aptly describes this resurrection of failed theories as the Fiscal Insanity Virus.

The British economy has a higher level of government spending and control than some of the former Soviet states did at the fall of communism.

And all these central banks that keep inflating the supply of money which creates the boom-bust cycle - since when is that part of the free market ? In fact central banks are one of the main platforms of the communist manifesto !

I say that the mainstream is entirely deluded if they think free markets caused the crash.

Friday, January 23, 2009

Government responds to my question by not answering it !

Back on 30th October, I wrote a letter to the Victorian Premier explaining the new evidence that the manufacturing of solar panels actually creates greenhouse gases much more potent than C02 and could actually contribute towards global warming.

I suggested it was unwise for our State gov't to subsidise solar energy through the feed-in-tariffs. ( Whilst the Federal gov't subsidises the cost of solar panels through a rebate scheme.)

In typical bureaucratic fashion, it was forwarded to the relevant department - Department of Primary Industries. And on the 21st Jan, I received a letter in response. Basically, it doesn't provide any new information and doesn't address my concerns. 2 paragraphs were a complete re-hashing of the Victorian gov't's policy position. i.e Reducing greenhouse emissions by 60% by 2050, compared to 2000 levels, supporting renewable energy through a range of actions.

Finally, a paragraph tries to sweep the issue under the rug as follows.

"We note the news reports in relation to the use of nitrogen trifluoride in the production of solar panels, and in many other types of electronic equipment. DPI believe that concerns about reducing the use of this gas are appropriately dealt with at the national and international level. This could in future be, for example, through potential inclusion of the gas as part of those greenhouse gases regulated by the 1997 Kyoto Protocol.

It looks like my question was completely avoided ! They are basically trying to say that they believe concerns about reducing the use of this gas are *PRESENTLY* appropriately dealt with ... which in *FUTURE* could be done by taking a particular action... ?

Are they trying to say that my concerns are addressed today, because in the future some action may be taken ?

It also indicates a willingness to adhere strictly and faithfully to the Kyoto Protocol, in the face of new evidence and new data emerging.

The letter then recommends I read up on climate change at and hopes that I found the information useful.

Does anybody think they have addressed my concerns ?

Wednesday, January 21, 2009

Australia - the next domino to fall

Very sober figures, via the Daily Reckoning, show we have a problem here in Australia:
--First up is Christopher Wood, regular analyst at CLSA Asia-Pacific and writer of handy newsletter called GREED and Fear. "The ban on shorting Australian financial stocks is due to expire on 27 January," he writes. "If it is not extended, this presents a clear opportunity for absolute-return investors. GREED and Fear continues to take the view that Australian financials will be the last area of Anglo-Saxon consumer financing excess to bottom with, as in Britain and America, the seemingly inevitable involvement of taxpayer money before the end of the cycle."

--"GREED and Fear also continues to recommend, as has been recommended since March 2008, that Asia-Pacific relative-return investors maintain a zero weighting in Australian financials. Australian banks, including their New Zealand subsidiaries, are characterised by high loan-deposit ratios and low loan loss provisions."

--"Meanwhile, the household sector is extremely leveraged while the former high flying residential property market is weakening fast. Household debt to disposable income is still running at 156%, compared with 130% in America. While Australian residential building approvals fell by 32% year-over-year in November, with new home sales down 15% year-over-year."

--"GREED and Fear hears from recent visitors to the 'Lucky Country' that there is still a state of denial, which is certainly not the case in America or Britain. If so, this mentality will not last. But the good news is that reluctant Australian taxpayers will be able to afford to pick up the tab. Public sector debt is only 15% of GDP."

Obama takes oath of office.. and commits perjury.

Here is the footage of Obama being sworn into office in front of a truly immense crowd of millions.

You've all heard Obama campaign for well over a year now. You've heard his speeches about healing the planet, making health care affordable, ending conflicts, defending the country from terror, forming new alliances. You've heard his pledge to get America's economy moving, to create new jobs and invest in alternative energy to end oil dependence.

And on this very platform, and on these pledges and ideals, articulated and delivered very eloquently by Obama, he was elected to the office of the president of the U.S.A.

Well today is the day he took office, and did he have to reiterate his previous pledges in order to accept the role in an official manner ? What exactly are the technical requirements for being president ?
Simple - to take the oath of the office. So let us look at that oath in its entirety to see what exactly is demanded from the office of the president.

I, Barack Hussein Obama, do solemnly swear that I will faithfully execute the office of President of the United States, and will to the best of my ability, preserve, protect, and defend the Constitution of the United States so help me God.

And with that, he became the president. Canons fired, the President's March was played, the crowd roared with approval. Emotions were stirred.

Yet .. this is the biggest display of blind ignorance I can recall. Did anybody in the crowd even read the Constitution ? Do they realise that defending the Constitution contradicts every single speech Obama has delivered ?

Obama must realise that in order to attempt government solutions to a range of issues, he must do as previous presidents have done, and defy certain passages in the Constitution. He must grant himself new powers to tax and regulate, despite them being specifically banned by the Constitution.

Even maintaining the status quo is a gross violation of the Constitution. Income taxes, anti-drug laws, nation building, censorship and limits on speech, restrictions on firearm ownership, providing and regulating medical and education services go well beyond the defined scope of the office of the presidency as defined by the Constitution.

Today was a day where a man intentionally and knowingly commited perjury to the roar and cheer of millions. Even if you agree with Obama's intentions, you should find it deeply troubling that he agreed to take the oath which, if honoured, would tie his hands and preclude him from acting to carry out his campaign intentions. This is a sign of dishonesty and tyranny, a man who lies to obtain power. The ends do not justify the means.

(This is not a personal attack on Obama. The entire arguments above apply equally to Bush, Clinton or Carter. Certainly they apply to tyrannical presidents like FDR and Hoover)

Tuesday, January 20, 2009

New President today.. same old ball-game

Theres some kind of 3-day rock concert / celebrity gala Washington event to celebrate the inauguration of "the one" - Obama.

Putting aside all the fanfare, there really are only 2 aspects to this story that interest me.

1/Just how little in terms of the structure of the Government of the United States of America will actually change. There really is very little breathing room between Republicans and Democrats. Both are regulatory-statists, social democrats and fans of Keynesian tax-and-spend strategies. They both know how to spend the country into deeper deficits with every year.

In order to pay $47m for extra security at the big party, the mayor of Washington actually needed Federal Gov't assistance. Soon-to-be-former President Bush was all too happy to oblige.

Get this.. he declared a national emergency to get the funding ! I'm not making this up. These kinds of powers are reserved for hurricanes, cyclones and earthquakes, but the president has no qualms invoking them on his last week in office to fund the mother of all parties in Washington.

2/ Will Obama flinch or shudder when he takes his presidential oath ?
For those who aren't familiar, all he has to do is swear to uphold the U.S constitution. Sounds simple, yet every president in modern history has desecrated this document which places a limit on the powers of governments. Each president has added more powers to government, the executive and the office of the presidency, thus removing certain individual liberties. Obama is no different, with his empty promises to tax-and-spend the country into prosperity.

Who suffers under this system ?

  • The taxpayer. He who works. He who spends. He who operates a business. He who earns and engages in free trade with others.
  • Future generations. Those who aren't even born yet will bear the burden of government debt.
  • Retirees and pensioners - they think that their pensions and entitlements are secure, but they are simply unfunded and they have no reason to expect to reason the full amount of their entitlements.
  • The sick. They think the medical system can provide for their health into the future when it really faces insolvency and a wave of unfunded liabilities.
  • Those who hold dollars and have savings. The bailout and stimulus guarantees inflation will arrive in the next 3 years, and wipe out their purchasing power.
Whats the end result of all this socialism and Obama's ideals ? As scary as it is, its nothing new. Socialism always produced the same results in the 20th century - people become more equal as they become equally impoverished.

Widespread unemployment, economic collapse, political instability, endless military conflicts and huge collapses in standards of living, schools, medical services, welfare and infrastructure.

These are my general predictions for the Obama presidency. Change your dog can roll in.

Friday, January 16, 2009

Prohibition is back

Very disappointing news from Western Australia.

TOUGH new drinking restrictions are set to be introduced right across the north of Western Australia after a landmark decision by the state's director of liquor licensing to tackle Aboriginal lawlessness, alcohol abuse and social disfunction.

the bans will specifically target takeaway sales of beer in bottles known as "King Browns", two-litre wine casks and packaged full-strength beer.

Socialism killed tens of millions in the last century. It also destroyed massive amounts of wealth, and took away all kinds of freedoms and liberties. Prohibition was a failed social experiment where crime gangs and mafia power thrived, and it ultimately had to be done away with.

Here we are in 2009 and its back in fashion. Socialism is considered too tough for us, yet we try to administer it to our indigenous population to alleviate their hardship when what they need is a good dose of freedom and capitalism.

Monday, January 12, 2009

My submission to the Tax Review

I have just submitted my 2 cents (or 10 priorities if you will) to the government's Tax Review. Feedback is welcome:


I have suggested 10 points which will improve economic growth and stimulus, cut red tape, improve fairness, foster entrepreneurship and new businesses, improve the government’s fiscal position, remove moral hazards such as welfare dependency and overall make it easier for people to understand and comply with the current the tax and welfare system.

1) Abolish all stamp duty on car and property transfers.

Firstly, this is in line with the current government’s short term objectives of stimulating and supporting the housing and auto markets. Sales volumes, car and house prices will definitely be bolstered by this move.
But more importantly, there is no rational reason for government to actively intervene in these voluntary exchanges between 2 parties, and taking a percentage of wealth out of the hands of every transaction. These transactions are economically desirable, as whenever property changes ownership, both parties have profited from their exchange (otherwise they would never have entered it) Stamp duty acts as a huge disincentive for people to make these exchanges, it makes people hold on to their current assets for longer than they otherwise would have.
It means individuals and families alike are faced with a huge penalty for changing homes and moving as their lifestyles or workplaces change. It also means that people keep old vehicles, to themselves or within the family for longer than they should, which compromises safety and risks lives. Stamp duty does nothing to enhance economic efficiency, they are simply deadweight losses.

2) Automatically index all tax brackets to CPI every year.
Inflation acts as a pernicious tax on everybody’s savings. One small way to help people cope with the impact of inflation is to move the tax brackets upwards to reflect the reality that average incomes increase over time, as do average prices.

3) Abolish the top personal income tax brackets. Bring the top tax rate down to 30%.
This will create an enormous incentive on people’s willingess to provide more labor and earn greater incomes, and it will also substantially reduce the incentives for high-income earners to accrue a large number of deductable expenses which can be offset against their taxable income. All deductions that are purchased by high income earners are discounted by their marginal tax rate, so the current system provides a 46.5% discount for them to purchase cell phones, laptops, travel to seminars and conferences and any other items which can possibly be claimed as business-related expenses.

When people direct spending towards items that they otherwise would not have bought, only to receive the benefits of the deduction, a large amount of wealth is destroyed through malinvestment. The logical and simple solution should not be to ban or limit deductions, but to substantially lower the top tax rate. After all, there is no clear way for the tax office to assess which deductions were incurred with the intention of operating a business, or with the intention of reducing the assessable tax.

4) Changes to capital gains calculations for income tax purposes.
Under the current system, both income and capital gains are assessable for tax. The income as wages that is earned over a financial year must be reported and assessed at the end of the financial year, however capital gains on assets may have been accrued over much longer periods, but the entire gain is assessable in one sudden payment at the end of the financial year.

The current 50% discount rule, on capital gains on assets held for over 12 months, helps spread the gains over the period in which they were made. An even better approach would be to remove the 50% discount and replace it with a new discount whereby capital gains are divided by the number of years an asset is held, rounded up, i.e:

  • assets held for 13 months – divide gain by 2 (50% discount)
  • assets held for 26 months – divide gain by 3 (66% discount).

5) Increase the medicare levy. Abolish the 1% medicare surcharge for high income earners without private health cover. Abolish the 30% rebate for private health premiums.
The current levy is deceptively low and misleads the entire tax-paying population as to the true costs of providing government services. It sends out a false signal to the population that the public system can be operated for only 1.5% of our GDP. This does not at all provide decent transparency and accountability for government operations.
In order to show people exactly how expensive (and not ‘free’) our public health system is, adjust the medicare levy to whatever level it needs to be to actually cover the costs of operating the entire public system (somewhere over 10% of GDP) and increase tax free threshold to compensate income earners, so it is overall revenue neutral.

The medicare levy is a pointless and harmful economic intervention. It suggests an individual places a bigger burden on the public system simply because they don’t have private health cover. It subsidises the insurance sector and forces many individuals who take the effort to look after their health into purchasing more insurance than they otherwise would. It sends out a strong signal, not for people to actually look after their own health, but instead to over-insure to cover the costs of medical procedures. When people who maintain a healthy lifestyle are punished if they do not take insurance, it leads to a huge moral hazard.

6) Allow more flexibility with superannuation accounts.
The principle behind superannuation is to encourage (or force) people to save towards retirement. To motivate this, past and present governments have made superannuation a very lowly taxed investment. It has thus become exceptionally popular and has resulted in a massive boom in superannuation funds held by individuals across the entire population of workers.

The drawback is the inaccessibility of these very sizeable superannuation accounts until a person reaches retirement age. In certain circumstances, such as medical emergencies, financial hardship and debt stress, a particular individual might be in desperate need of such funds. Rather than place a burden on our already over-burdened welfare system, I propose to allow individuals to access their super funds to pay towards medical procedures and education costs for themselves or their families.

7) Reduce the size and scope of welfare payments.
Currently a third of the entire population receives Centrelink payments (6.52 million individuals, 9.98 million entitlements).
Roughly half of government expenditure relates to the welfare system, and this has been alarmingly increasing at a rapid pace. Centrelink’s very purpose, is “Serving Australia by assisting people to become self-sufficient and supporting those in need”. Yet after decades of spiralling expenditures, it has not succeeded in reducing the number of people who are self-sufficient, but to the contrary, has failed by increasing the number of dependant Australian’s who rely on Centrelink payments for a large proportion of their income. This has succeeded in creating a massive dependency on the welfare system, and is perhaps the biggest moral hazard creating disastrous economic loseses which current and future generations of tax payers will have to bear.

8) Eliminating long term welfare dependancy.
Currently there is no counter-incentive for welfare recipients to actually become self-sufficient. One possible method is to introduce a HECS-like repayment scheme where a certain amount of current welfare payments will have to be repaid to the ATO at a future date. Even if we allow for Centrelink to act as an emergency support for people suffering shor term hardship, there should be a time limit after which a person can no longer rely on the tax payer to fund their lifestyle which involves the choice of not working.

Perhaps a reasonable time-frame is 3 months, after which certain welfare payments will be affected in one of the following ways.

  • some entitlements will end completely at the end of this period to force people to become self-sufficient.
  • some entitlements will accrue as part of a person’s debt, and must be eventually repaid when they earn income (similar to HECS).

One way to soften this approach or slowly phase it in would be to copy HECS and for government to contribute 2 or 3 dollars for every dollar of debt accrued.

9) Simplify the tax system and make it more transparent.
The ATO should publish the number of pages of tax-related legislation on its website. It should have the goal of reducing the number of pages of legislation so that many individuals, small business owners and aspriring entrepreneurs can manage their tax affairs without the need to hire tax professionals to comply with one of the most complex areas of legislation in existence. This will also save the ATO huge administrative costs, they currently are allocated huge numbers of public servants tasked with processing millions of tax returns, and they rely upon multiple electronic databases in order to scrutinise and verify information.
Many people with honest intentions can find themselves the target of a painful tax office investigation or audit. This intrusive system which asks individuals to give up much personal privacy and be forced to account for all kinds of private matters should be scaled back to a cleaner system.

10) Remove pay-as-you-go tax on salaries
We should begin by asking why most of our taxes were introduced in the first place. The income tax and pay as you go were introduced during WW2 to pay for our war efforts. PAYG was said to be a temporary tax at the time. It seems that many taxes no longer have a justification at all.

Seeing as Australians are saddled with huge government expenditures to pay for each year, we should at least remove the pay as you go approach where every employer is forced to be an agent of the tax office and an accountant who remits the estimated income tax from each pay-cheque towards the government, before an individual can even receive it. By abolishing the PAYG system, it will act as a huge stimulus, allow individuals to retire crippling debt and to direct spending towards urgent priorities like health or education costs. It will also cut red tape for many businesses, especially small businesses, who do not have the size or resources to hire accountants and HR personnel.

Monday, January 05, 2009

Welcome to '09.

I hope all readers have enjoyed their holidays, and I wish everyone more liberty and wisdom in the coming year.

Here are some quick roundups of online happenings and news bits:

The Australian Department of Broadband, Communications and the Digital Economy (did you even know we had one of those little gems ? What happened to Rudd's promise to cut the number of public servants?) has an online blog.

  • One post on December 12th, titled "We Hear You" announces that comments are open for the public to provide their feedback (99% of which was fiercely negative)
  • One post on December 23rd, titled "Thanks and so long" announces that comments are closed.
That didn't last long :)

Fortunately, other websites are still open to feedback.

The treasury is accepting online submissions (till 1 May) regarding the Tax Review. You can also view other people's submissions. ( Many of these submissions, unfortunately, are the same chain-spam from environmental groups calling for new taxes on petrol). I'm tempted to submit a very short suggestion - abolish income tax, abolish capital gains tax, half the GST and sack the politicians.

And for my under-25 readers, don't forget that the Kennard Freedom Prize awarded to the best essay in defence of freedom, is still open (till 1st February), with the 1st prize being a ticket to FreedomFest in Las Vegas.