The Dark(er) Side of Raising Taxes

As our co-writer noted in yesterday's post, raising taxes during a recession is a bad idea. Raising taxes during a depression is a very, very bad idea. President Herbert Hoover raised taxes during the 1929 Depression, and thereby helped dig a deeper pit for the American economy.

As President Obama's new tax regime is cranked up, it will turn a problem into a crisis. When -- if we are correct -- the U.S. dollar is devalued significantly, it will turn a crisis into a disaster. Let us explain:

According to the President, 'rich' is now classified as a couple making $250,000+ a year. At present purchasing power, only about 1.5% of all households are making that much money. So, by the numbers, these people are apparently 'rich.' Tax them!

But wait... what about all those bank bailouts, car-maker bailouts, insurance funds, synthetic CDOs, pension funds, hedge funds, ad infinitum? Surely the top 1.5% of households by income cannot support such largesse on the part of the government... so the money's got to come from elsewhere. We turn to Messrs. Ben Bernanke and Gideon Gono, as they know the answer: the printing presses.

With money flowing magically into being from the sky, those little financial concerns disappear in a puff of inflation. The question is how much inflation will happen: we posit a nice, comfy ten-times devaluation. In that scenario, today's dollar coin is tomorrow's dime.

Also in that senario, today's $250,000 is tomorrow's $25,000. Feeling a cold chill, dear Reader? We do. We'll work hard to preserve our modest lifestyle, but that means we'll be making more and more money -- nominally -- in order to keep up with inflation. At some point, we see no reason why we won't slam headlong into the 'rich' tax bracket... even though we're far from the classic definition of 'rich.' What's your income, Reader? And what tax bracket would you be in if you tacked another zero at the end of it? If you're not careful, you may become rich without even knowing it!

Think the Fed is Out of Ammo? Think Again

The Federal Reserve has been publicly clamouring about how they've used up their "conventional monetary firepower." It seems that the media is rather confused about the situation: they apparently think that interest rates, quantitative easing, and balance sheet debauchery are the only tricks that the Fed has to play with. Oh, how wrong they are. There are "still arrows left in the quiver."

At this point, we'd like to assure you, dear Reader, that if what we write about seems familiar, it is. Mr. Gideon Gono of the Reserve Bank of Zimbabwe has played with most of them... but not all. He didn't use every little trick, because he was trying to contain inflation. The Federal Reserve, on the other hand, is desperate to stoke the flames of buying power destruction.

In May 2003, Federal Reserve Bank of Dallas Vice President Evan Koenig and Senior Economist Jim Dolmas wrote a piece titled Monetary Policy in a Zero-Interest-Rate Economy. Read it, and read it well, dear Reader. This will be the game plan of the Federal Reserve in the future... perhaps even the near future.

We will glide over the more pedestrian methods that Messrs. Koenig and Dolmas list, and instead focus on two of the most powerful tools they discuss: taxing bank deposits, and making currency have an expiry date. If and when the occasion arises, we posit that the two tools will be applied simultaneously. The why is easily demonstrated:

Would you, dear Reader, keep your money in a bank account if your savings and chequing accounts suffer a -1% or -2% monthly tax? No, you'd pull your money right out of those accounts and stuff them in a mattress, the same as every other citizen or business. However, the physical money you get from the bank will have a little stamp on it, saying something like 'legal tender until July 1st, 2011.' You're damned if you keep your money on account at a bank, and you're damned if you sleep on $100 bills at night.

So... the only thing you can do is spend, spend, spend. The Fed will see the velocity of money shoot to the moon, and everything will seem better - for a while. But these policies -- along with all the other ones the piece listed -- are ultimately destructive beyond belief. The economy would be gutted, the U.S. Dollar would become worth more as a heat source than as a currency.

But hey! At least Mr. Ben Bernanke can get his inflation. Unfortunately, he will get far more than he bargained for.

Tragedy, or Farce?

With the latest joke rolling out of the Zimbabwe Central Bank, we wonder why such ridiculousness is able to thrive so long. In all honest, we feel that a $100 trillion note is probably Farce, but we really cannot be certain.

The history of Zimbabwe is most definitely one of Tragedy: a nation in continual economic collapse, aided and abetted by non-stop embargoes brought on by the United Kingdom and the United Nations, among others. The fine, upstanding governments of the world really know how to dole out "change," don't they?

It seems in history that every Tragedy has a correlating, and larger, Farce. In this case, the Farce is the embargoers -- the United States, the United Kingdom, the European Union -- following in the footsteps of the Tragedy they helped create. Many policies, such as price controls and rapid expansion of national money supply, have been well-tested by Zimbabwe's central bank.

In the flaming tailspin of the 2007 Depression, this collection of nations are flirting with the very same financial policies that Gideon Gono used to make Zimbabwe's hyperinflation-from-Hell. As the Wikipedia article notes, perhaps ironically, Mr. Gono is a "proved deflation-fighter." Mr. Bernanke, of the Federal Reserve, M. Trichet of the European Central Bank, and the Rt. Hon. Mr. Darling of the Bank of England are all working to fight deflation, as well.

They might not have noticed, but they're following in the footsteps of a failed nation.