"...politicians were defrauding the public by pretending to lower taxes. The real level of taxation in a society is the equal to total government spending. Government covers their expenses through the combination of direct taxes and government borrowing. Taxpayers either pay it currently when they file their tax returns, or later through price inflation. Price inflation is much worse for an economy than direct taxation."
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Today's comment is by John Pugsley, Chairman of The Sovereign Society, best-selling author, and long-time libertarian.
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Dear A-Letter Reader,
Federal Reserve Chairman Ben Bernanke testified last week before the Senate Committee on the Budget. Being used to the central bankers normal double-talk, I was shocked that he told the truth. But I think I understand why.
The Congress is driving the ship of state directly into an iceberg. Bernanke knows it, and wants it clearly written in the Congressional Record that he warned them. He's covering his rear. He doesn't want history to hold him responsible.
My earlier remarks here in the A-Letter weren't kind to Mr. Bernanke. Last June he told another congressional committee that rising energy prices were a cause of inflation. I wrote that Mr. Bernanke "...should either be indicted for perjury or fired for incompetence." The belief that individuals and corporations cause price inflation by raising the prices of their products is destructive horse manure. I'm confident that Mr. Bernanke is aware that the only cause of rising prices is an incease of money relative to goods and services. Of course, he could hardly have admitted that money creation is the cause of price inflation since he operates the start/stop button on the monetary printing presses.
Yesterday, however, he exposed the root of the problem-the thing that forces him to keep the printing presses going-government deficits. Deficit spending creates the tectonic pressure that forces him and his central-bank counterparts in other nations to print money. This time, he told the truth. He pointed the finger of blame directly at the Senators.
The heat has somewhat subsided on the gang of big spenders in Washington. The unified federal budget declined for a second year in fiscal year 2006, falling to US$248 billion from US$319 billion in fiscal 2005. The improvement resulted from growth in tax receipts. Democrats, now in control of the Congress, are anxious to start spending. And they have the green light to do so, as official projections are hinting at stable or moderting deficits over the next few years.
Mr. Bernanke warned the Senators that it won't work out that way. "Unfortunately, we are experiencing what seems likely to be the calm before the storm. In particular, spending on entitlement programs will begin to climb quickly during the next decade."
It is the calm before the storm. Even the unified federal budget, the one that includes current Social Security and Medicare income and outlays, doesn't account for the future impact of federal pension and healthcare promises that have been made to retiring government employees, social security payees and to future Medicare recipients.
In fiscal 2006, federal outlays for Social Security, Medicare and Medicaid together totaled about 40% of federal spending, or roughly 8.5% of total U.S. GDP. By 2030, according to projections by the Congressional Budget Office itself, they will nearly double - accounting for 15% of GDP. The perfect storm of Social Security and Medicare has bee coming for some time - but we're inching closer and closer to crisis every day.
The looming problem of entitlement spending is known to most, so it wasn't news. However, I was clapping my hands when Mr. Bernanke addressed the political hot-potato of tax rates. Recently I was criticized by many readers when I suggested that "we don't need no stinkin' tax cuts." My argument was that the politicians were defrauding the public by pretending to lower taxes. The real level of taxation in a society is the equal to total government spending. Government covers their expenses through the combination of direct taxes and government borrowing. Taxpayers either pay it currently when they file their tax returns, or later through price inflation. Price inflation is much worse for an economy than direct taxation.
I was delighted to find that Bernanke made my point. He said:
"In the end, the fundamental decision that the Congress, the Administration, and the Amrican people must confront is how large a share of the nation's economic resources to devote to federal government programs, including transfer programs such as Social Security, Medicare, and Medicaid. Crucially, whatever size of government is chosen, tax rates must ultimately be set at a level sufficient to achieve an appropriate balance of spending and revenues in the long run. Thus, members of the Congress who put special emphasis on keeping tax rates low must accept that low tax rates can be sustained only if outlays, including those on entitlements, are kept low as well." [Emphasis added.]
Mr. Bernanke's candor is unlikely to affect the Senators. They will listen intently and nod their heads sagely. But politicians rarely worry about the long run. Politicians are most concerned about the next election, and no candidate gets elected by talking about short-term pain, while promising long-term gains. The majority of voters are not only ignorant of economics, but they frequently vote with their pocketbooks in mind.
At this point the politicians and central bankers have no way to turn the ship in time to avoid the iceberg. The state's momentum is carrying it toward bigger and bigger deficits. Even if Mr. Bernanke knows the source of the problem, he will monetize enough Treasury debt to prevent a credit-system collapse. In the end, the value of money must continue to fall at an ever-increasing rate. Price inflation is in our future.
Knowing this, what does the individual investor do?
Recognize the danger and the opportunity. First, direct taxes will rise, in spite of what the politicians tell you. Just watch tax collections. They've been rising, even as the politicians tell us they are cutting taxes. Thus, it is more important than ever for individuals to use every legal domestic and international strategy available to minimize taxes on their incomes and investments.
JOHN PUGSLEY, Chairman
On behalf of The Sovereign Society |
