politics

Government Ponzi

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It is the height of irony that the US federal government has put Bernie Madoff in prison for running a ponzi scheme: he took people’s retirement funds and spent it frivolously instead of investing it.  Many have pointed out that the largest ponzi scheme in the history of humanity is actually run by the US federal government itself:  the Social Security System.  The US government has taken people’s retirement–but not voluntarily, as the felon Madoff, but by force through payroll taxes.  Then it spent it frivolously instead of investing it.

Yet today, Zacks (via Yahoo) defends the ponzi security system:

There is a huge amount of hysteria in the country that says that Social Security is nothing but a ponzi scheme and is about to go bankrupt. This is simply not true, and is mostly being propagated by those who would love to see Social Security turned over to Wall Street. Doing so would put the retirement security of millions of Americans into grave danger. …

Starting in 1982 with the Greenspan Commission, Social Security recognized the demographic time bomb posed by the “baby boom” and subsequent “baby bust.” As a result, the idea was that people would pay in more than required for Social Security to run on a pay-as-you-go basis (which is how it was run up until that point). The extra funds would go into a trust fund. That trust fund now holds $2.5 Trillion. So how is that money invested? It is invested in the safest assets around: T-Notes and Bonds. The government holding its own liabilities is a bit strange, and that is where the claim that the Social Security trust fund is composed of nothing but “worthless IOUs comes from. However, if that is true, then it is equally true that the assets of a T-bond fund run by Vanguard or PIMCO are also composed of worthless IOUs.

So the Social Security System has basically taken people’s retirment money and lent it to the Federal government which has spent it as part of its continual deficit spending. It did not invest it in anything that could give workers a return on their investment, but spent it.  Now, in order for the government to pay back the Social Security System–all those wonderful t-bills and bonds–it will have to either borrow from someone else, or steal it a second time in the form of further taxes from the very people who are paying into the system.   Either the anonymous author of the article is dumb, or she thinks all the rest of us are.

Meanwhile, Monty Pelerin asks his readers to name the author of the following quote:

The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. Deficit spending is simply a scheme for the confiscation of wealth.

… the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold.

And Vasko Kohlmayer writes about the demise of the US dollar:

The dollar has already entered its terminal phase. The word “doom” is written across it for anyone with the eyes to see. Sad to say, there is no way to reverse its downward slide. With more than $13 trillion in public debt and some $100 trillion in unfunded mandates, our federal government has assumed far more obligations than it can ever make good on. Worse still, these figures are growing larger every year.

Thus, the basis of a civil society is breaking down in the US because the world’s most powerful political entity is a criminal organization which is running ponzi schemes and uses its power to borrow and create money, producing inflation which robs citizen’s of their wealth.

What’s wrong with inflation? Do you have enough to eat?

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Monty Pelerin has a excellent article on inflation this morning.  He maintains that the great temptation for government will be to try to solve the problem of debt and unfunded obligations by inflating it away, and that, since politicians are cowards, they will not make the tough decisions to avoid inflation.  He writes, however, about the consequences of inflation:  “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.”

I believe that the real danger of inflation may lie in the consequences it will  have on the food supply.  Never mind that food shortages have never been a problem in the living memory of most North Americans (unless they are over 75 or immigrated here from a war zone or something).  Today, obesity in developed countries is feared more than starvation.  So I made the following comment on Pelerin’s blog:

I am reading Adam Ferguson, When Money Dies (1975). He tells the story of Frau Eisenmenger, an Austrian who at the end of WWI had sufficient investments to live on and care for her family (31). She went into her bank in 1918 to withdraw some funds and her banker advised her to buy Swiss Francs, but it was illegal to hoard foreign currencies, and so she declined. Eventually, her savings became worthless. Her situation was greatly helped by her daughter working in the “American mission” paid in dollars, renting a room in her apartment to an American, and speculative investments in the Austrian stock market.

I fear that what will happen is similar to Europe in that period, when food was scarce and required a large percentage of income to procure. Eventually, the price of food will sky rocket and so more dollars will be created ex nihilo. Eventually the farmers will refuse to supply their food to people for worthless dollars and foods stamps from the government, and they will have to stop producing–because their costs have to be covered too. Then, we will see shortages like never before. A farmer offered Frau Eisenmenger three month’s provision for her grand piano (33); and acquaintance of hers sold her own piano for a sack of wheat flour.

Message to investors: Stay out of the USA

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The Globe & Mail tells us that Conrad Black has just been sent a 70,000,000 (on 116,000,000 income!= 60% tax rate) bill from the IRS. This is as he is about to have his felony conviction overturned by the US Supreme Court.  Judging by the comments section, the readers of the Globe & Mail are ok with this.  But supposing Black paid his taxes as a Canadian resident, there is no way that he would owe any taxes in the states, because the rates here are higher, and Black, who shouldn’t have to file personal tax for his income by virtue of being neither or a resident nor a citizen of the US, would be in any case entitled to the foreign tax credit, which is a dollar per dollar tax deduction for taxes paid in another country (in this case Canada).  Canadian taxpayers should be furious because this is a blatant attempt to steal their tax dollars.  If Black is required to pay in the US, he would then file amendments to his Canadian tax and get a refund from the Canadian government.  No!  I presume that the money has already been collected and spent here by the Canadian federal and provincial governments.  The IRS is not entitled to a penny.  In any case, the message from the IRS to foreign investors is clear:  keep your money and your butts out of the US lest we imprison you and send you an exorbitant tax bill.  My investments are all in Canada as a result of the current investment climate in the US.  It is not an investor friendly region anymore.

Note:  Black’s defense is that he wasn’t a US citizen or resident during the period in question.  A few others related to the same case have been sent very large bills:  Forbes comments:

McCallum [attorney for Radler] said U.S. tax jurisdiction extends only to U.S. citizens, permanent U.S. residents with green cards and people from other countries meeting a “substantial presence” test, generally defined as spending 183 days or more a year in the U.S. McCallum said a U.S.-Canada tax treaty specifies “tax-breaker” criteria to be used in identifying a sole country for taxing jurisdiction.

So the case will hinge upon whether Black stayed longer than 183 days during the years in question (i.e., more than half of the year so that the US has more claim than any other country).  It would appear to me that Black’s case is one of competing jurisdictions and that the CRA better make sure that they don’t get ripped off by the IRS.

Staying clear of certain countries

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News that First Quantum’s mineral rights in Congo have been overturned is hardly surprising.  Personally, in my investments I try to steer clear of highly volatile regions where war, bribery and theft are more common than sound business practices.  The other day I sold my shares of Centerra Gold because the coup in the Krygyz Republic, where CG has a huge percentage of its NAV, created too much volatility for my liking.   Nor would I ever invest in Venezuela with its kleptocratic dictator, Chavez.

First Quantum’s mistake was taking on too big a risk–as long as the governments in Africa remain corrupt and violent, investors need to be wary and not stick their necks out no matter how lucrative the deal may seem to be.  Africa’s riches, gold, uranium, diamonds, and oil, are indeed tempting and lucrative.  Indeed, the more lucrative, the more you have to be worried that the corrupt government will want to rescind their contract, so that they can get a bigger piece of the action–or in the case of Chavez, all of the action!   This is what happened to Kosmos Energy in Ghana. If it happens in “safe” places to invest like Australia and Alberta, how much more is it going to happen in volatile regions like Congo.  Australia recently announced a 40 per cent “profit” tax on mining companies (the latest is that the government may relent on that plan).  Alberta has repented of its increased royalty structure on oil and gas in order to try to get things back the way they were before when oil companies found the province attractive for new investment.

When in Chad, I stayed in an “air conditioned” house of a Exxon employee.  The air conditioning worked about 2/3s of my stay. The rest of the time you bake because Ndjamena is in the desert.  My friend said that he was in charge of a 24 hour plan, planned to the minute, to evacuate all Exxon employees in case of an outbreak of violence in the country.  A few short months after my visit, rebels stormed the city of Ndjamena and thousands of refugees fled across the river into Cameroon.  The rebels later fled, even though they were on the brink of successful coup, and the refugees returned a few days later to pick up the pieces of their lives.  Why, for heaven’s sake, would you want to send your employees to a country like that?  The Chinese and Koreans are finding that there are still plenty of places to invest their billions of dollar right here in “safe” Canada.  I say “safe” because no place is immune to kleptocracy and war.  It is just that some regions present far less risk than others.

Hath not a half Korean eyes? Part V: Principled meritocracy (updated)

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Prof. John Stackhouse sitting atop his endowed perch as Regent College’s Sangwoo Youtong Chee Professor of Theology, wrote:

You certainly make it clear when dialogue is a waste of time. Your rage and bitterness simply render conversation impossible. I’m frankly glad you’re not in the academy where you can influence people. I hope you’re good at making people money as the “righteous investor” you advertise yourself to be, but I think we’re done listening to you on this subject.

Well, now that I know that I am not welcome in North America to teach, once again, I asked Dr. Daniel Kambou if he would have me at the francophone graduate school that he is planning to found in Burkina Faso.  He accepted my services without first asking me to get professional counseling for my rage and bitterness.  Since Kambou lives next door, I think he knows me better than Stackhouse.

In any case, Stackhouse’s pronouncement will not result in a global ban of my teaching services.  I often think about how academics and economics can be harmed by reverting to rewards systems other than meritocracy.  I’ve expounded seriously upon the failure of affirmative action but here are some other reward systems that are available both here and in other countries:

(1) Nepotism:  Students told me in Africa that they could take an aptitude test for a foreign scholarship and do well, but the president will send his nephew in the place of the high performing student.  It should be noted that nepotism in a privately held business is usually not unethical–but it can still frustrate other employees.  But in public companies, churches, universities, and public service, nepotism is extremely dubious and usually unethical.

(2) Sleeping one’s way to the top:  When, e.g., a woman sleeps her way to better grades.  One manifestation of this is the exploitation by male professors of women, but it can sometimes be ruthless women who use their sexuality for advancement.

(3) Old boys’ club:  To get into Harvard, e.g., it is helpful to be a child of a graduate of Harvard university.  Or in business, if you have the right connections, you can get the jobs.

(4) Affirmative action: This seeks to redress perceived historical injustices by preferring certain aggrieved groups in the decision making.  The problem is that it most often leads to a quota system and to a watering down of quality.

(5) Tribalism:  All the best jobs go to a single tribe or coalition of tribes; this usually leads to jealousy and resentment and sometimes to war and genocide.

(6) Plagiarism:  If not punished when caught, plagiarism allows unqualified students and professionals (e.g., journalists) to move up the ranks.

(7) Quotas:  This leads to the limiting of the number of qualified people of an identifiable group from attaining admission in schools or from being hired for jobs.  It was widely used in the 20th century to limit the number of Jewish people accepted into certain universities and is likely being used today to limit the enrollment of Asians.  The idea is that if a group is only 5% or so of the population, it is necessary to limit their numbers to something proportionate to their percentage in the general population.   Affirmative action often becomes a quota system in practice.

(8) Blacklists:  An individual may be temporarily or permanently banned because of bad behavior, but not always:  it could be because of a personal vendetta or an attempt at censorship.  Blacklisting may be accomplished by attacking the character of the person, such as by saying without justification that they are angry and therefore not suitable for a job.  Blacklists are usually not published, and the blacklisting of a person could in some circumstances be illegal in Canada under the Personal Information Protection and Electronic Documents Act (PIPEDA).  The fear of being blacklisted discourages whistle-blowers.

(9) Corruption and bribery:  The wealthy and powerful have the means of buying themselves and their friends jobs and offices and this will not depend on their actual ability to perform the function.  This may take the form of a quid pro quo.  For example, if you help the Chinese government by divulging state secrets while you are president, they will pay you a million dollars to give a speech or two once you are out of office.

All such systems clash with a principled meritocracy that rewards talent, ability, hard work and results.

To ameliorate past injustices, such as apartheid or segregation, or a lack of qualified leaders in a diverse group, it may be necessary to promote education among certain groups more than others.  So, for example, we started a scholarship program for evangelical francophone Africans to help promote theological seminaries in that region.   But then this isn’t necessarily inconsistent with meritocracy.  I have no problem saying that Dr Daniel Kambou is more qualified to teach in Burkina Faso than say, Prof. John Stackhouse–he was actually more qualified from day one with only a Master’s degree–this is by virtue of his ability in French and his intimate knowledge of African culture, he is much more qualified to teach in that region than the most prestigious of North American born and trained scholars.

But one of the major failures of affirmative action is that it has largely passed privilege from white men to white women.  That does very little to correct past injustices.  So imagine that you decided that you would correct the injustice of apartheid.  You would just simply give white women the jobs that are held by white men?  How does that help?  Didn’t the white women also benefit from apartheid, or was it only white men?  As an Asian man, I am unimpressed with affirmative action’s correction of past wrongs because it is still mostly white folks that have jobs, it’s just that more of them are women today.  And this gets to the heart of the unfairness.  If you are going to try to correct past wrongs using the above systems, you will likely create new wrongs.  Meritocracy is therefore superior to all the other reward systems listed above.