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Europe’s Future: Inflation and Wealth Taxes – Ludwig von Mises Institute Canada

Europe’s Future: Inflation and Wealth Taxes – Ludwig von Mises Institute Canada.

Tax burdens are so high that it might not be possible to pay off the high levels of indebtedness in most of the Western world. At least, that is the conclusion of a new IMF paper from Carmen Reinhart and Kenneth Rogoff.

Reinhart and Rogoff gained recent fame for their book “This Time It’s Different”, in whichthey argued that high levels of public debt have historically been associated with reduced growth opportunities.

As they now note, “The size of the problem suggests that restructurings will be needed, for example, in the periphery of Europe, far beyond anything discussed in public to this point.” Up to this point in the Eurocrisis the primary tools used to rescue profligate countries have included increased taxes, EU and IMF bailouts, and haircuts on government debt.

These bailouts have largely exacerbated the debt problems that existed five short years ago. Indeed, as Reinhart and Rogoff well note, the once fiscally sound North of Europe is now increasingly unable to continue shouldering the debts of its Southern neighbours.

 

General government debt (% GDP) Source: Eurostat (2012)

General government debt (% GDP)
Source: Eurostat (2012)

Six European countries currently have a government debt to GDP ratio – a metric popularlised by Reinhart and Rogoff to signal reduced growth prospects – of over 90%. Countries that were relatively debt-free just five short years ago are now encumbered by the debt repayments necessitated by bailouts. Ireland is a case in point – as recently as 2007 its government debt to GDP ratio was below 25%. Six years later that figure stands north of 120%! “Fiscally secure” Scandinavia should keep in mind that fortunes can change quickly, as happened to the luck of the Irish.

The debt crisis to date has been mitigated in large part by tax increases and transfers from the wealthy “core” of Europe to the periphery. The problem with tax increases is that they cannot continue unabated.

Total government tax revenue (% GDP) Source: Eurostat (2012)

Total government tax revenue (% GDP)
Source: Eurostat (2012)

Already in Europe there are seven countries where tax revenues are greater than 48% of GDP. There once was a time when only Scandinavia was chided for its high tax regimes and large public sectors. Today both Austria and France have more than half of their economies involved in the public sector and financed through taxes. (Note also that as they both run government budget deficits the actual size of their governments is greater yet.)

With high unemployment in Europe (and especially in its periphery), governments cannot raise much revenue by raising taxes – who would pay it? With already high levels of debt it is questionable how much revenue can be raised by further debt issuances, at least without increasing interest rates and imperiling already fragile government finances with higher interest charges.

Instead, Reinhart and Rogoff see two facts of life for Europe’s future: financial repression through higher inflation rates and taxes levied on savings and wealth. This time is no different than other cases of highly indebted countries in Europe’s history – just look to the post-War examples as similar cases in point. Don’t say you haven’t been warned.

David Howden is Chair of the Department of Business and Economics, and professor of economics at St. Louis University, at its Madrid Campus, Academic Vice President of the Ludwig von Mises Institute of Canada, and winner of the Mises Institute’s Douglas E. French Prize. Send him mail.

Duct Tape Politics | KUNSTLER

Duct Tape Politics | KUNSTLER. (source)

The ObamaCare website rollout fiasco, joined by the bait-and-switch “You can keep your current insurance (not)” tempest, obscure the fundamental quandary about so-called health-care in America: that it is a gigantic racket structured to allow countless layers of grift and counter-grift. The end product of all that artifice is that medical care costs twice as much in America as any other civilized country, and that it has to be operated by a cruel and despotic matrix of poorly coordinated bureaucracies that commonly leave people more disabled financially than the diseases that brought them into the system.

ObamaCare was designed to work like a giant roll of duct tape that would allow the current cast of characters in charge (Democratic Progressives) to pretend that the system could keep going a few years longer. But it looks like it has already blown out the patch on the manifold and is getting ready to throw a rod — which duct tape will not avail to fix.

I had three major surgeries (hip, open heart, spine) the past year and paid attention to the statements that rolled in from my then-insurer, Blue Shield (the policy was cancelled in October). These documents were always advertised as “this is not a bill” and that was technically true, but it deflected attention from what it really was, a record of negotiated scams between the “providers” (doctors and hospitals) and the insurance company.

There was never any discussion (or offer of discussion) of the cost of care before a procedure. When asked, doctors commonly pretend not to know what their work costs. Why is that? It’s not to spare the patient’s feelings. It’s because sick people are hostages and both the doctors and the hospital management know they will agree to anything that will get them through the crisis of illness. This sets up a situation that allows the “providers” to blindside the patient with charges after the fact.

My hip “revision” operation was necessary because my original implant was a defective (“innovative” circa 2003) metal-on-metal joint that released metal fragments into my system and it had to be removed. The stated charge for replacement part — a simple two piece bearing made of metal and plastic, about the size of tangerine — was $14,000. Blue Shield “negotiated” the price down to about $7,000. If you go to the websites of any of the manufacturers of these things, you will not see any suggested retail or wholesale price. The markup on these things must be out of this world. Cars come with four ball joints that carry roughly the same time warrantee, and they come with a staggering array of “extras”— engines, transmissions, air-conditioning, seats, air-bags, and radios. The pattern was similar for the other surgeries and what they entailed. I ended up paying five-figures out-of-pocket. Lucky for me that I saved some money before this all happened. I don’t have kids so I haven’t been paying extortionate college tuitions during my peak income years.

All the surgeries I had required hospital stays. For the hip op, I was in for a day and a half in a non-special bed (no fancy hookups). The charge was $23,000 per day. For what? They took my blood pressure nine times. I got about six bad meals. The line charge on the Blue Shield statement said “room and board.” It would be a joke if this extortion wasn’t multiplied millions of times a day across the nation. Citizen-hostages obviously don’t know where to begin to unravel this skein of dreadful rackets. If you think it’s possible to have a productive conversation with an insurance company rep at the other end of the phone line, then you’re going to be disappointed. You might as well be talking to a third-sub-deputy under-commissar in the Soviet motor vehicle bureau.

This ghastly matrix of corruption really only has two ways to go. It can completely implode in a fairly short time frame (say, five years, tops), or we can, by some miracle of political will, get our priorities straight and sweep away all the layers of racketeering with a single-payer system. The evidence in other civilized countries is not so encouraging. England’s National Health Service has degenerated into a two layer system of half-assed soviet-style medicine for the proles and concierge service for the rich. France’s system works more democratically, but the nation is going bankrupt and eventually their health care network will fall apart. The Scandinavian countries have relatively tiny populations. I don’t know, frankly, how the Germans are doing.

Here in the USA, you can make arguments for putting a greater share of public money into a single-payer system. For instance, if we redirected the money spent on our stupid military adventures and closed some of the countless redundant bases we run overseas. That would be a biggie. Given the current choke-hold of the military-industrial complex on our politicians, I wouldn’t expect much traction there.

You can argue that nobody complains about government spending on the highway system, so why should “the people” complain about organizing a medical system that really works? Obviously, there’s no consensus to make that happen. Too many doctors want to drive BMWs. Too many insurance executives and hospital administrators want to make multi-million dollar salaries. Too many lobbyist parasites and lawyers are feeding off that revenue stream. Too many politicians with gold-plated health insurance coverage don’t want to change the current distribution of goodies. End-of-story, as the late Tony Soprano used to say.

It’s the old quandary of fire or ice… which way do you want to go? Since I’m interested in reality-based outcomes, my bet would be on implosion. In any case, several of the other systems that currently support the activities of our society are scheduled for near-term implosion, too. That would be the banking-finance system, the energy supply system, and the industrial agriculture system. As those things wind down or crash, you can be sure that everything connected with them will be affected, so the chance that we could mount a real national health care system is, in my opinion, zero.

The ObamaCare duct-taped system will go down. The big hospitals, HMOs, insurers, pharma companies will all starve and shrivel. Like all things in the emergent new paradigm, they will reorganize on a small and much simpler basis. Everyone will make less money and high-tech medicine will probably dwindle for all but a very few… and for them, only for a while. Eventually, we’ll re-set to local clinic style medicine with far fewer resources, specialties, and miracle cures. There will be a whole lot less aggravation, though, and people may die more peacefully.

Finally, there’s the pathetic American lumpen-public of our day itself, steadily committing suicide en masse by corn byproducts, the three-hundred pounders lumbering down the Wal-Mart aisles in search of the latest designer nacho. What can you do about such a people, except let fate take them where it will?

 

Published as an E-book for the first time!

The 20th Anniversary edition

With an entertaining new introduction by the author

 

GON_thumb

 

 

Guest Post: Finland’s Gold | Zero Hedge

Guest Post: Finland’s Gold | Zero Hedge. (source)

On Wednesday Finland gave in to public pressure and revealed where she stores her gold reserves. The statement followed a press release by the Bank of Sweden on similar lines released on Monday.

The totals (in tonnes) for these two Scandinavian countries are as follows:

Location Sweden Finland
Bank of England 61.4 25.0
Swedish Riksbank 15.1 9.8
New York Fed 13.2 8.8
Swiss National Bank 2.8 3.4
Bank of Finland 2.0
Bank of Canada 33.2
Total 125.7 49.0

So far, so good. But then the Head of Communications for the Bank of Finland added some more information in Finnish in a blog run on the Bank’s website. It is not available in English, so I asked her for a translation, but I am still waiting.

Instead, a Finnish reader of my own blog and a Finnish journalist who has been following this topic have independently given me an English translation of a highly relevant and interesting paragraph, three from the end. This is the journalist’s:

“Maximum half of the gold has been within investment activity over the years. Gold has been invested among other things in deposits similar to money market deposits and using gold interest rate swaps. Gold investment activity is common for central banks. The risks associated with gold investments are controlled using limits, investment diversification and limitations concerning duration.”

And my reader’s translation:

“Throughout these years no more than half of the gold has been invested. Gold has been invested in for example deposits similar to money market deposits and gold interest rate swap agreements. Gold investment activities are common for central banks. Risks related to gold investments are controlled with limits, decentralising investments and limits regarding run times.”

Half Finland’s gold is stored at the Bank of England, and “no more than half” is “invested”. If any “investment” is to take place it would be in London. It is not immediately clear what is meant by invested, but presumably this is a result of translation of what has happened from English into Finnish plus explanation for a non-specialist readership. However if it has been invested, then by definition it is no longer in the possession of the Bank of Finland, and will most probably have been sold into the market in return for a promise to redeliver at a later date. This follows the Austrian National Bank’s admission to a parliamentary committee a year ago that it had earned EUR300m by leasing its gold through London.

The evidence is mounting that Western central banks through the Bank of England have been feeding monetary gold into the market through leasing operations. Indeed, the Finnish blog says as much: “Gold investment activities are common for central banks”.

This explains in part how the voracious appetite for gold by China, India and South-East Asia is being satisfied, without the gold price rising to reflect this demand. It is also consistent with my disclosure earlier this year of the discrepancy of up to 1,300 tonnes between the gold in custody as recorded in the Bank of England’s Annual Report, dated 28th February 2013 and the amount recorded on the virtual tour on the Bank’s website the following June.

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