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The Daily Reckoning | Wednesday, June 16, 2010 The opportunity cost of saving the world, "Getting out of Dodge" vs. "A-O.K. America!" Plus, Bill Bonner on mealy-mouthy nonsense and more... The Persistent Myth of American Economic Dominance How America left the path of prosperity and fell in a ditch of indebtedness Eric Fry Reporting from Laguna Beach, California... "The great enemy of the truth," John F. Kennedy declared in a 1962 commencement address at Yale University, "is very often not the lie - deliberate, contrived and dishonest - but the myth - persistent, persuasive and unrealistic." Fifty years later, a Yale education, itself, may be one small part of a vast American myth - the idea that America is forever and always the land of the free; the land of opportunity; the land of true capitalism. A degree from Yale, like so many other facets of the American economic myth, may possess more prestige than genuine economic value. But the declining value of a college education is a mere sub-plot to the de- mythologizing of American economic prowess. Increasingly, the land of the free is the land of the fettered. Although a vestige of entrepreneurial dynamism continues to operate within the American economic system, this dynamism faces a growing number of impediments and antagonistic forces. The familiar anti- entrepreneurial elements - like punitive tax laws and debilitating regulations - are not only multiplying, they are combining into a toxic brew of hostile economic policies and attitudes. Many capitalistic ventures manage to succeed anyway. But the government's (misad)ventures always seem to "succeed" even more. Thus, as the government increases its awkward, counter-productive intrusions into the private sector, the only certain result is rising national indebtedness. America is no longer the potent, manufacturing-based superpower that it was when President Kennedy addressed the Class of '62 at Yale University. Instead, the America of 2010 is a frail impostor of that long lost superpower. America is still strong, no doubt about it. But her strength is in decline. And as that strength declines, the myth of American economic omnipotence becomes as exposed as a naked swimmer at low tide. In 1962, US GDP totaled a whopping 46% of world GDP. Today, the US percentage of world GDP is only half as large: 22.9%. This relative decline is both the result of other countries imitating American virtues, and America imitating other country's flaws. America, to an important extent, has lost her way. She has diverged from the path that produced her prosperity. Typically, successful capitalistic economies facilitate the failure of faulty ventures so that successful ventures can emerge in their place. But the Hank Paulson/Tim Geithner bailouts of 2008 and 2009 perverted this essential process of creative destruction. Instead of allowing incompetent financial institutions to fail, Paulson initiated mega- billion-dollar bailouts of a privileged few, deemed "too big too fail." The Paulson/Geithner "Doctrine" advanced the necessity of rescuing banks that posed a "systemic risk." Left unsaid was that this multi- trillion-dollar version of "too big to fail" rendered thousands of potential businesses too small to succeed. For example, because Fannie Mae and Freddie Mac will collectively drain $1 trillion of taxpayer money into the black hole of their legendary incompetence and mismanagement, hundreds of potential banking entrepreneurs will never receive the opportunity to bid for the distressed assets of Fannie Mae and Freddie Mac, and then utilize these assets as the core of a successful new banking operation. This is not capitalism; it is, to quote a friend, "crapitalism." Goldman Sachs, Bank of America and many other bailout recipients are still standing, despite making the identical strategic errors that have doomed more than 200 smaller banks since late 2008. When small banks fail, the FDIC dismantles them, relieves management of its duties (and its paychecks) and sells the remaining assets to a stronger operator. This system works pretty well. And it probably would have worked just fine if, for example, Goldman Sachs had failed. When Lehman Bros. failed, competitors fought over its carcass. The bankruptcy process worked. There is no good reason, therefore, why a failing Goldman Sachs could not have become a division of Bank of New York Mellon, or a division of Jefferies...or even "Scottrade Goldman Sachs." But that's not what happened. Somehow, at the end of all the bailouts and the "lending facilities" and "stimulus programs," $1.5 trillion deficits have become the new norm. (For perspective, just two years ago, the Bush Administration posted a then-record deficit of $438 billion. Nine years ago, the outgoing Clinton Administration posted a $128 billion surplus). Soaring government indebtedness is the ultimate "anti-stimulus." Soaring indebtedness leads directly to soaring tax burdens, rising interest rates, weakening currencies, and many other impediments to capital formation. In short, America's entrepreneurial vigor may not be able to endure much more help from the government. [Eric' s Note: When observing the troubling trajectory of American economic policies and behavior, some folks merely shrug their shoulders and say to themselves, "Hey, it ain't so bad. Life is still pretty darn good here in the US of A." Other folks, still a distinct minority, voice a very different sentiment. "It's time to get out of Dodge," they say. The latter point of view finds full expression in today's Daily Reckoning column entitled, "10 Benefits of Expatriation." But we'd like to hear what our dear Daily Reckoning readers have to say (email us here: joel@dailyreckoning.com) on the topic. We'd like to hear why you might sympathize with the "Hey, it ain't so bad" point of view, or why you might be intrigued by the "Get out of Dodge" perspective. Please share with us your first-hand encounters with either the virtues or flaws of the American economy. Tell us about the personal successes America has nurtured, or about the potential successes the American system has impeded. At the same time, feel free to share first-hand experiences - good or bad - from any other economy around the globe. But please refrain from hyperbole or gratuitous America-bashing. Instead, please offer first-hand accounts that may shed valuable light on the American economy past, present and future. In upcoming editions of The Daily Reckoning, we will share some of these firsthand accounts from our unique group of readers, with the hope that we might all gain valuable insights about how to equip ourselves for the uncertain future ahead.] The Daily Reckoning Presents Ten Benefits of Expatriation Casey Research Team Everybody has their own personal reasons for expatriating, but here are some of the benefits: 1) Freedom from the global US tax net. Taxing you no matter where you breathe on this earth is wanton American exceptionalism. What other nations don't dare do to their citizens, the US government doesn't think twice about. Once you renounce, it's your choice either to live the rest of your life free of any tax net, or to pick a place you want to be year-round and opt into the tax system (assuming it's not a tax- free jurisdiction). If you do, you'll at least know you have the freedom to walk away from it by simply moving elsewhere. Taxes in the US are already high, and rates are set to increase across the board. To gain some perspective, it's clarifying to calculate the number of months per year you work for the government. How many months did it take to pay all the federal, state, and local income taxes, capital gains taxes, FICA taxes, property taxes, and AMT - plus the raft of permitting, licensing and accounting costs you incur over the course of a year? Add corporate taxes if you're a business owner. And don't forget the new 3.8% health care surcharge tax on all investment income, including dividends. Be honest and add it all up. You'll then have a decent idea of how much it costs you in time and money to be a US citizen every year. That cost will rise dramatically going forward. Here's the take-away: The biggest guaranteed return on your capital that you'll ever have is investing your money free of taxes. Do some long-run compounding calculations with and without taxes to see what I mean. I'll wager John Templeton did. 2) Freedom from the death tax. Its political label is the "estate tax," but the fact is the tax is based solely on your demise. I used to think the death tax only applied to gains on assets that had not been taxed already. How naïve I was! It grabs half of all your assets, regardless of the fact that you've paid taxes on them. If you have over a few million dollars net worth, your heirs will be writing a heart-stopping check to the IRS. They also may be forced to liquidate your assets to raise cash. This has happened to countless small businesses and family farms. And if you're a young, talented entrepreneur who goes on to earn substantial wealth over the course of your life, the death tax has you in its crosshairs too. The death tax is 45% now and is scheduled to jump to 55% in 2011. Either way, the amount is staggering. Expatriation lifts the death tax burden from your children and other heirs. 3) Freedom from the US government's War on Solvency. Washington's crazed debt addiction is uncontrollable and endemic. US politicians have strapped an inconceivably large debt burden on the backs of their subjects. It pays to spend some time on www.usdebtclock.org. The multi- trillion dollar debt avalanche roars on, headed straight towards economic hell. After "Debt Per Taxpayer" and "Liability Per Citizen," check out "US Unfunded Liabilities" to see a number that's suited to astronomical calculations - not economics. Don't be tricked into thinking this is a partisan issue. It's sobering to review the debt records of both Democratic and Republican administrations...to behold what politicians do when given trillions of dollars of other people's money. They spend it all - and then borrow trillions more! Of course, the burden of servicing that debt is on you, not them. Their six-figure salaries are guaranteed, along with their uber-perks and fully funded pension plans. While often described as "the richest nation in the world," the reality is that the US is the most indebted nation, by a country mile. No other government comes close to matching the debt burden that has been dumped onto every taxpayer. The US government is rampantly incurring debt in your name, and you have no way to stop it or slow it down. Standing in free speech zones with protest signs didn't work when it came to war and crony bailouts, and it won't work for the debt burden either. The one truly meaningful act you can take as an individual is to opt out. Unload the government's debt burden off your back. Don't let yourself or your family be a casualty of the government's War on Solvency. 4) Freedom from being treated like a "toxic citizen." When traveling abroad, being a US passport holder used to be a positive thing. Now it's an albatross. The New York Times article I cited earlier explains it plainly: Americans abroad are being treated like "toxic citizens." They're cut off from banking and other business and investing opportunities solely because of their US citizenship. Typical currency controls don't permit you to take money out of a country. The US doesn't have that (yet). Instead, and this is quite clever, the government enacts laws and regulations that function as indirect currency controls. There are so many Patriot Act and other costly impositions forced on foreign banks that handle US customers that they're simply refusing to put up with the harassment. Here's the upshot: Your money isn't fenced in; it's fenced out. If you seek firsthand evidence, visit a major banking center outside the US and try to open a bank account. Odds are you'll be turned away when the bank finds out you're a US citizen. Reports abound of US citizens' long-held accounts at foreign banks being summarily terminated. The US government has made its subjects, along with their money, persona non grata. I've read that some foreign banks are now setting up, in essence, holding pens designed to handle US citizens who want to bank offshore. But, really, what's the point? You're burdened with having to file extra IRS paperwork, along with FBAR forms to the Treasury Department. And even if you don't file all the extra papers (not a smart move), new laws force foreign banks who accept US customers to report on you anyway. They are pressured to sign "information reporting agreements" to have US citizens as customers. Google "FATCA" and "qualified intermediary agreements" if you want details. Now for the most extreme instance of liability. Being a US passport holder can mean life or death in the context of a terrorist attack. The US government's never-ending War on Terror makes the world more dangerous for Americans. After so many years of bombing and military occupation in the Middle East, how can the hundreds of thousands of civilians who've been maimed and killed by the US government NOT be the source of enduring resentment and blowback? Needless to say, the US passport is on the short list of ones you least want to have if somebody sticks a gun in your face and says, "Passport." Unfortunately, this has happened on more than one occasion, and it would be unreasonable to assume it won't happen in the future. 5) Freedom from the paperwork prison. Millions of Americans are plagued every year by days, sometimes weeks, of preparing tax documents and paying thousands of dollars to accountants to decipher the IRS tax code. There are, literally, hundreds of different IRS forms. The tornado of rules and regulations in the tax code fills roughly 70,000 pages. And then you have to save boxes and boxes of papers for years in fear of someday being audited and not being able to produce the demanded documents. If you're unfamiliar with audits, here's how they work: You're guilty of whatever the IRS claims, unless you prove yourself innocent. If that sounds preposterous, I encourage you to ask a tax lawyer. "Innocent until proven guilty" does not apply. Freedom from spending days of tedium on mind-numbing paperwork and thousands on accounting fees has been an absolute joy. Highly recommended. To be continued... Whether you're planning to stay right here in the US or get out of Dodge, you might want to know about gold, the one "currency" that is accepted at more places than either Visa or the American Express card. Jeff Clark, the editor of Casey's Gold and Resource Report, has been saying it for years: Buy physical gold and silver. And if you want even greater gains, invest in solid, undervalued gold producers that can provide leverage of up to 4:1 to gold itself. Read more in our report, here. The Casey Research Team, for The Daily Reckoning Bill Bonner US Economy in a Self-Made Vise Bill Bonner Reckoning from Delray Beach, Florida... Stocks rallied yesterday. The Dow rose 213 points. Gold went up too - plus $9. So many people are buying gold coins that the storage vaults are getting crowded, says a Bloomberg report. But since we don't trust the numbers anyway...let's return to words. Vise is a funny word. It looks like it should be pronounced like 'vies'...but it is actually pronounced like 'vice.' Whatever. The New York Times says it has a grip on Congress. On the one side, the pols are pressured to cut deficits. On the other, they are pushed to create jobs. Of course, the TIMES misses the point. It makes it sound as though Congressmen were just innocent, well-meaning schmucks, trying to do their best to resolve conflicting pressures. Not at all. They're the ones who built the vise. On the one hand, they passed hugely expensive programs. They didn't have the money to pay for all the boondoggles and bailouts, so they had to borrow. The deficits, in other words, are a problem they brought on themselves. The pressure to cut deficit spending is merely reality raising a boot with which to kick them in the derriere. On the other side of the vise is the pressure to create jobs. The idea is preposterous flattery. Congress never actually created a single additional job in all its history. Jobs come from productive effort. From making things or providing services - at a profit. One person pays another to cut his lawn. Another pays a person to fix his teeth. Both the lawn mower and the dentist have jobs. The government, on the other hand, is a job destroyer. It takes away resources that might have been used to hire a dentist or buy a lawnmower. It can put people to work...but only by taking away resources, and real jobs, from the wealth-producing economy. If it wanted to, government could force everyone to work digging holes or counting each other. It could increase salaries and report 'full employment.' But no one would have a real job. And we'd all go broke. American politicians are facing up to the phony challenge in a phony way. That is, they are pretending to create jobs. The Europeans, on the other hand, say they are cutting deficits. They have to; lenders said they wouldn't give them any more money. As Nouriel Roubini put it, in the Old World, "austerity is not optional." Here at The Daily Reckoning, we're with the Germans. The euro feds are beginning to correct a mistake, albeit dishonestly. Americans are just adding on a new one. Neither Americans nor Europeans are happy with each other's response. US Treasury Secretary accused the Europeans of threatening the 'recovery' by withdrawing demand at a critical juncture. He insinuated that if there were another Great Depression, it would be the Europeans' fault. Claude Trichet, meanwhile, head of the European Central Bank, says it's the American who are to blame. It was they who came up with subprime mortgages and it was they who permitted Wall Street's reckless and greedy speculations. At this point, most responsible journalists and economists would say something such as: "both sides should put aside their differences, work together and put the economy back in order." But you won't get that kind of earnest drivel from us! It's just mealy-mouthy nonsense. The Europeans should stop bailing out French and German banks (by guaranteeing the debts of Greece and the other PIGS). The Americans should stop trying to bail out everyone. Both should stop bailing and merely get out of the way so the economy can collapse if it wants to. Dear readers may find our opinions too radical. Everyone else does. But the evidence shows that collapse is actually a good thing. Free market economies are remarkably robust. They don't require the genius of politicians and bureaucrats in order to operate. And when they occasionally stumble and fall, it's actually healthy for them. It's how they shake off parasites. Bloomberg reports: Currency collapses tend to spur a resumption of economic growth rather than fueling a decline in gross domestic product, according to the Bank for International Settlements. Currency collapses are associated with permanent output losses of about 6 percent of GDP, on average, though the drop tends to appear beforehand, the Basel, Switzerland-based BIS said in its quarterly review yesterday. "This suggests that it may not be the currency collapse that reduces output, but rather the factors that led to the depreciation," Camilo E. Tovar wrote in the study. "To gain a full understanding of the implications of currency collapses on economic activity it is important to carefully examine the full circle of events surrounding the episode." The positive effects of a weaker currency on GDP, including making local products cheaper than imported goods, may outweigh the negative ones, such as rising inflation. Currency collapses occur when the annual exchange rate drops by about 22 percent, according to the BIS, which identified 79 such episodes, "more commonly in Africa than in Asia or Latin America," since 1960, Tovar said. And more thoughts... In a futile effort to prevent relatively small losses, the feds set us up for big ones. The New York Times: President Obama on Saturday implored Congress to provide more aid to states and cities to blunt "the devastating economic impact of budget cuts" by local governments that imperil the jobs of teachers, the police, firefighters and other public employees. In a letter to Democratic and Republican Congressional leaders, Mr. Obama said the "mounting employment crisis" in the states "could set back the pace of our economic recovery." Mr. Obama had supported about $50 billion in aid initially - $25 billion for public employees, $23 billion of which would go for teachers' salaries, and $25 billion to offset states' increased costs for their share of Medicaid, the public health program for the poor, people with disabilities and many nursing home residents. And here is another related report from The Wall Street Journal: As the new head of the Illinois Department of Human Services, Michelle R.B. Saddler knew she would confront tough choices in preparing a budget that juggled rising needs for services with tumbling state revenue. But she wasn't prepared for the long list of mandates and governor's priorities that tied her hands. She wasn't supposed to eliminate services required by law or court order. She was to spare Medicaid- eligible services and food-stamp benefits. And she couldn't jeopardize residents' safety or well-being. "What's left?" she said. State-agency heads nationwide face similar dilemmas as they confront gaping budget deficits. Last month, Illinois lawmakers cobbled together partial remedies to a $13 billion deficit-nearly 50% of its expected general-fund revenue of $27.44 billion for the fiscal year beginning July 1. Illinois agencies are bracing for deep spending cuts, and the cutting falls largely to people like Ms. Saddler, a cheerful 49-year-old who, in October, took over a department with 13,500 employees and a general- fund budget of about $4 billion. Her agency serves two million Illinois residents, coordinating everything from drug and alcohol treatment to home aides for disabled people to food stamps. The state provides about a quarter of the services itself and contracts with private businesses for the rest. Ms. Saddler estimated that budget shortfalls would cost the state a total of 6,220 private-sector jobs and some or all services for 178,500 people. "I'm concerned that we will see a real public-health crisis and a real public-safety crisis with these cuts," she said. Yes, the bureaucrats are indispensable. At least they think so! And more from Bloomberg: Spending cuts by state and local governments from New York to California may act as a drag on the economy into 2011, only the second time in more than a half century that such reductions have restricted growth for three consecutive years. States face a cumulative budget gap of $127.4 billion as 46 prepare for the start of their fiscal year on July 1, according to a report this month by the National Governors Association and the National Association of State Budget Officers. They will have to fill that hole largely on their own, as aid from the federal government under programs including President Barack Obama's $787 billion stimulus package starts to wind down. State and local cutbacks may trim growth by about a quarter percentage point in 2010 and 2011 after shaving it by 0.02 point in 2010, said Mark Zandi, chief economist at Moody's Analytics Inc. He also sees the governments lopping payrolls by 200,000 during the next year after reducing them by 190,000 in the 12 months through May. "The budget cutting that is dead ahead will be a significant impediment to economic growth later this year into 2011," he said in an interview. That impact will help convince Federal Reserve Chairman Ben S. Bernanke and his colleagues to keep the federal funds rate banks charge each other for overnight loans at zero to 0.25 percent through the end of this year, said John Lonski, chief economist at Moody's Capital Markets Group in New York. So there. That's what a collapse looks like. Without aid from the feds, the states will have to make cuts. If they make cuts, thousands of people may die from massive public-health and public safety failures. Not only that, but the decline in state spending will affect the private sector too...resulting in an even worse slump! What the hell... Bring it on! Regards, Bill Bonner, for The Daily Reckoning ------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com Mortgage Market Mayhem Continues in the Economic Downturn There is always a way to make money. When prices were rising, unscrupulous speculators made money by pretending houses were worth more than they really were. Now they make money by pretending they’re worth less than they really are. Trouble is, no one knows exactly what things are worth. They know even less what they’ll be worth tomorrow or the next day. Japanese Debt Crisis to Mirror that of Greece? Government Spending and the Façade of a Successful Economy Euro Declines on a Sea of Bankruptcy and Paper Promises Do you ever get the feeling that you are in some kind of weird dream, where someone is holding a pillow over your face so that you can’t breathe, and you can dimly hear your children asking, “Is he dead yet, mom?” and I am thrashing around and yelling out, “No, I’m not dead, you morons!” but nobody is paying attention? Me, too! The Correlation Between Morons and Government Debt Insufficient Silver to Supply China’s Growing Demand Avis Budget Group (NYSE:CAR) — Room For Downgrades Avis Budget Group (NYSE:CAR) is a New Jersey-based international company that provides car and truck rentals as well as related services. Given the latest Manheim Used Vehicle Value Index value of 121, a new record, there’s plenty of reason to take a second look at this name. Governments and Banks Making Sure Everyone’s Underwater School Administrator Earns Pension of Over $26 Million The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. Cast of Characters: Bill Bonner Founder Addison Wiggin Publisher Eric Fry Editorial Director Joel Bowman Managing Editor The Mogambo Guru Editor Rocky Vega Editor