Sunday, December 11, 2011

Let's Go Back to 2008-2009 to Learn Some Lessons

I apologize, as I will fail those who expect exact numbers and figures on the period of 2008-2009 where we were at the "brink" of financial collapse. Fortunately, there is a Google search tab at the top of this page that can aid you in your research, I only endeavor to describe concepts in this blog, and hear what other folks think - so I (and others) can be enlightened.

In order for you to form an opinion on this post, I respectively suggest that you use your incredible imagination to go back in time and think of how YOU felt at the time of the US financial crisis in late 2008-early 2009.

Two major things happened to "solve" the crisis. The first step taken was for the federal government to bail-out banks and auto-makers. The second step was to create a "stimulus" plan to help jump-start the economy.

At face value (at the time when assets were valued at half the price they are now), many nervous or soon to be retired folks were likely frightened about the standard of living they will have in retirement based on their 401k balances at the time (which some folks referred to as 201k's - bc of the 50% hair-cut they saw on their investment statements).

If you have used your incredible imagination to jump back to the time aforementioned above, then here is where you will take value from this long and boring post.

I agree whole-heartedly with the $700 billion bail-out plan for the banks, AIG, GM, etc. This statement will piss off conservatives (and Liberals - I really don't care), but they fail to realize one CRITICAL factor. Conservatives are the biggest opponents of Communism (and rightfully so). If the banks, and especially AIG - were allowed to fail, then we would all be speaking Russian in a few years. If you disagree, think of the game of Dominoes and how that works...

The funny thing that the media doesn't cover, whether it be "The View" or Fox News - is the fact that the majority of the TARP funds have been recuperated and will be at worst - a breakeven investment for US citizens. This fact does not make it right for the US government to step-in and use US citizen dollars to bail them out. However, desperate times call for desperate measures - and I fully back TARP.

What needs to happen is increased regulation of "financial firms". This has already happened to the extreme on many levels. However, is it wise to pressure financial institutions now when they are on their backs, or to enact more appropriate restrictions on them once they are have dusted themselves off and willing to go back to business as usual?

If you have made it this far in my blabbering, then give yourself a pat on the back (or two). I hopefully have addressed all of the concerns by conservatives and the OWS folks in regards to TARP. However, there was another $700 Billion plan pushed through upon US citizens from the current administration. The first one was logical (in my opinion) which was a part of the Bush legacy. The second part which was used to "spur" economic growth, was a complete farce and only the curent administration can take responsibility for.

Since we are still in the time-machine back in 2008-2009, let's look at the "stimulus" plan created by the administration. Let's look back at the crisis based on an anology of a patient that has been rushed into the Emergency Room with a heart attack (because that is where we were 3 years ago).

My thoughts would be to make a quick decision on this emergency (much like using shock-therapy to bring back the patient from their possible demise). "Shock Therapy" in this situation would have meant allowing citizens to keep 100% of their salary for 6 months. Calculate your own NET paycheck and add 30-40% on that to determine the amount of money you would have received (to save, invest, or spend - it is up to YOU). The reason I say this, is because this matches up identically to the amount of money our current administration has used for "stimulus" to build roads and bridges and turtle tunnels and under-water treadmills for shrimp (Google it)....

Friday, December 9, 2011

Triple Taxation of Company Dividends

Many astute investors and folks who have retirement plans, or extra money to invest probably already know about the "double taxation" of dividend payments. Go ahead and "Google" the phrase "double taxation of dividends" and you'll have a decent understanding of this info. I'll break it down as briefly as possible here.

The US sports a corporate tax rate that is the highest (or nearly the highest) of any "developed" country in the world. The news headlines always berate companies for moving jobs over seas, but they fail to realize that money flows to places where it is best treated on a tax basis - much like consumers put their money in savings accounts that yield the highest interest rates....

The "double-taxation" of dividends is based on these facts. If you own a stock within a mutual fund for your retirement plan (which most of you do), or own it directly - you own the right to receive any dividend payments from the company (and may experience appreciation in stock price in favorable conditions).

Here is where the math comes in and where one may fall asleep. If you hold shares of companies in a mutual fund/retirement plan, YOU have a share in the excess profits of the company that can be paid as dividends. You in effect - own the company. The company pays a record-high corporate tax rate of approx 35% on profits - so you just took a 35% tax hit off the top. Then they reward loyal shareholders like yourself with a dividend. That dividend you receive is taxed at 15% (currently - but will likely go much higher). So, your share of profits from the company are taxed at an "effective rate of 45-50% or more).

Here is where my "triple taxation" statement takes hold - and no one else has talked about. Let's say you have some extra money to invest after you have already paid the income taxes on the cash. In this situation, you can buy a stock that pays a nice dividend, but you already paid income taxes on your paycheck of say 25% - then the evil corporation gets taxed at a 35% rate (which cuts into your possible dividend pay-out), and then you get taxed again on the dividends at a "low" rate of 15%.

And people wonder why the rich take tax loop holes (and move their businesses over-seas), and why the poor keep getting screwed. It all lies in our oppressive tax code....

Wednesday, November 23, 2011

Crisis in Europe

There is a fire in our basement! Should we put it out or just sit back and hope that it fizzles out by itself...? Unfortunately there is a large can of gasoline in the basement that we forgot about - a highley concentrated supply of fuel that will explode and take everything down with it if we aren't brave enough to go down there and stamp it out before it spreads.

Should we just sit back and "hope" that the fire won't spread, or should we get off our rear-ends and go down there and put it out?

Unfortunately, everyone can agree that politicians in general will only act when the house is half-way burnt to the ground. The leaders and people of Europe must make some extremely difficult decisions, and they have to do it NOW. The longer they wait, the more costly the problem will become.

However, without going into all of the details and history as to how and why Europe has gotten to this point - I will explain some of the solutions being proposed in a general sense.

First, there is a tug of war going on between the fiscally responsible nations such as Germany - and the fiscally irresponsible nations of Italy and Greece. The Germans do not wish to bail out the fiscally irresponsible countries because they do not feel that it is fair to essentially pay for their sloth and bloated government spending programs when they have been so frugal and efficient with their own spending, etc.

One of the solutions being proposed is having the European Central Bank buy the faltering debt of Greece and Italy in order to keep borrowing rates artificially capped at levels that will allow them to refinance their debts that are coming due in the future. This is thought to be a way to stop the spread of the contagion of rising rates. There is a point to which the rise of borrowing costs for these countries will become so burdensome that they will be forced to default on their debts. Greece has already essentially defaulted on their debts, which has caused many trickle effects - but not as severe as the possible chaos that an Italian default would pose.

Italy's debt is approximately 6 times that of Greece's at $2.6 trillion (which is a sum of which the European Union can not bail out on their own). If Greece can cause as many problems as it has in financial markets, a default by Italy could be the beginning of a financial armageddon - as it spreads to the rest of the European countries (and then the rest of the world).

Another solution being proposed is to simply let the chips fall where they may by not taking any action.

Yet another solution being thrown around is to have the European countries create a single "Euro-Bond" that would consolidate the debts and rates into one security. This would be much like the Euro currency. This is the path that I believe is the best option. That is not to say it is a perfect answer to the crisis, but it is likely to be the only way that the contagion can be stopped in the short-run and begin the long road to recovery.

In addition to the issuing of "Euro-Bonds", there must be widespread economic reforms in the Euro Zone countries. Politicians talk of two ways to solve the budget problems they face (not enough tax revenues and too much spending). The problem is that by raising taxes, the economy will flounder and therefore make tax revenues decline. If the governments drastically cut spending, then the economy will falter as well because government workers will lose their jobs - companies will lose government contracts, which will cause a decline in tax revenues.

So it seems that Europe is in quite a conundrum here. What you will not hear as a solution (at least not as much as it should be being discussed) are ways to grow the economies of Europe and hence - tax revenues thereby lowering the deficits that caused all this mess. Politicians are scared to cut taxes, as they feel that would lower revenues (which has some merit). It is my humble opinion that they should start by making the act of doing business there much more attractive by drastically reducing regulations (both environmental and business). I am a conservative who is extremely concerned about the environment and how businesses act ethically (shocking, huh?). However, drastic times call for drastic measures. This solution wouldn't cost any material amount in tax revenues and would lower spending naturally as fewer guard dogs are needed. I do not believe that loosening these regulations should be a permanent endeavor, rather a temporary adjustment for a tentative time to encourage businesses to grow and hire more employees - thereby helping to reverse the spiral Europe is in.

There could also be some tax reforms done locally by the governments as they see fit. I also agree that there should be spending cuts in areas that are redundant and wasteful. However, I believe that Europe will experience it's greatest bang for the buck (or Euro) by dramatically reducing regulations across the board. I do not see any other way out of this, and would love to hear your opinions on this monumental matter.