Chinese Slowdown Puts a Drag on Energy Markets

May 28, 2013 Leave a comment

Oil is the world’s most important commodity. Its market provides a good indication of where the economy is going.

The price of oil fell for five days before jumping today because of strong consumer confidence numbers in the US. The push down had been largely due to news from China.

Chinese manufacturing activity fell in May after months of slower growth. Its PMI hit a seven-month low of 49.6. A value below 50 indicates a contraction.

Oil consumption in OECD countries has fallen the last few years. In the rest of the world, it is has grown. The biggest of these consumers is China.

China is the world’s major exporter of manufactured goods. The decline in manufacturing activity implies the world’s slowing demand. This in turn will result in a reduced demand for energy.

China is a major factor in the marginal demand for oil. The oil price is not set by speculators, but supply and demand. Producers pump as much as they can. Chinese demand — in no small part driven by radical monetary expansion — is largely responsible for the boom in oil prices, from $20 a barrel in 2001 to current levels.

Chinese slowdown will cause oil prices to fall. When the economy is growing, oil prices rise because there is greater demand for energy. Prices fall when demand falls. This is elementary economics. The price of oil will decline.

— Read more at Marketwatch —

Filed under Asia, CMR, Commodities, Economics, Energy, Oil Tagged with , , , ,

Does Capitalism Need the State?

May 16, 2013 2 Comments

Some guy named “William R Gillies” has been trying to troll CMR on Twitter for the past week or so.

He is failing, because he doesn’t know what’s he’s talking about. He is a “Cartographer, Psychogeographer, Historicist.” All historicists struggle with understanding economics.

Mr Gillies is no different. He does not understand economics and the nature of markets. What is his problem? He believes that capitalism and markets can only exist if there is a state to enforce private property rights. This basically sums up his position:

He is completely wrong. Since this is a widely held view, however, it is worth discussing.

Firstly, let’s define our terms. Generally, capitalism is taken to mean “private ownership of the means of production.” This is a reasonable definition. We can elaborate a little bit by saying capitalism is the social order characterized by respect and recognition of private property. The market is the outcome of capitalism — essentially, people producing stuff and trading with each other. And the state? It is a territorial monopoly on the use of force.

Capitalism exists despite the state, not because of it. There are four basic arguments that refute the notion that capitalism depends on the state to exist.

(1) TRADING WITHOUT THE STATE

A simple thought experiment can helpfully highlight Mr Gillies’ basic error.

Robinson Crusoe, alone on an island, doesn’t have to worry about issues like “private property” or “markets.” It’s just him and maybe a few animals. He cannot trade with anyone. His use of resources affects no other economic agents on the island, because there are none. It is an autarkic economy. He spends his days catching fish and eating them. Property rights are literally a non-issue.

The arrival of Friday considerably changes the situation. Suppose Robinson Crusoe decides to trade some of his fish for some of Friday’s berries. This would literally create a market economy. It’s just a small and simple one.

The only way trade is possible is if both recognize the property rights of the other. Transferring ownership is what trade means. Otherwise there can be no trade. Either no exchanges will take place, or a hegemonic relationship will arise if one actor uses violence against the other.

If trade is possible in this situation, and there is no state, then a market economy does not depend on the state. Since trade clearly is possible in this situation, then it follows the market economy depends not on the state, but something else A modern economy is more complex and its division of labor much wider than the “two people on an island” economy, but in principle nothing changes between them.

(2) CATEGORICAL ERROR

The idea that the market economy depends on the state gets things entirely backwards. The state depends on the market, not the other way around. To say otherwise is to say the host depends on the parasite, rather than the parasite depends on the host. It just makes no sense.

The state literally cannot exist unless there is something to tax (because it produces nothing). The market, on the other hand, can arise spontaneously and exists anywhere people are trading goods and ideas with one another. The state depends on the market. The market does not rest on “state violence” as Mr Gillies claims. The state rests on state violence, the way the robber depends on robber violence. Just because there might be property rights violations where there is no state does not mean property rights depend on the state, because the state has property rights violations too. If the market must exist before the state, and the market depends on private property, it’s hard to understand how only the state can establish property rights.

It is simply incoherent to claim that the state, the very nature of which necessitates interference with property rights, is the source of property rights. All states without exception tax their subjects and outlaw competing institutions of compulsion. To say that the greatest, most systematic violator of private property rights is the only way to protect private property rights is simply absurd, and reveals a level of cognitive dissonance so severe it must cause migraines. The state fails the number one requirement of a valid lawgiver: that it follow its own laws.

The very idea of the state as a protector of property rights is contradictory. Hoppe writes:

Yet how can there be better protection for A and B, if S must tax them in order to provide it? Is there not a contradiction within the very construction of S as an expropriating property protector? In fact, is this not exactly what is also—and more appropriately—referred to as a protection racket? To be sure, S will make peace between A and B but only so that he himself in turn can rob both of them more profitably. Surely S is better protected, but the more he is protected, the less A and B are protected from attacks by S.

We should at this point offer some other remarks on the Hobbesian thesis, that there cannot be peaceful relations without a Sovereign to enforce agreements. Hobbes’ argument asserts that in the “state of nature”, A and B cannot cooperate, so they must agree to have S tax them and resolve their disputes. If this is true, then ostensibly property rights depend on the state.

But who enforces the agreement between S, A and B? After all, S is still a human and unable to form agreements without a Sovereign according to the Hobbesian thesis. So there would need to be another enforcer, S*. But then who enforces this agreement? You would need another enforcer, S**. And then you would in turn need to enforce this with S***, and S****, and so on into an infinite regress. To escape this conclusion, it must be conceded that agreements and property relations are possible without the state, otherwise no agreement or trade could ever arise (this argument comes from Anthony de Jasay).

(3) EMPIRICAL EXAMPLES

The essence of Mr Gillies’ position is private property rights are “not natural” and “must be enforced.” Sure, rights need to be enforced. So what? It is a non sequitur to take that claim then say it follows that only the state can enforce rights. There is nothing inherent in private property rights that require enforcement to come from the state.

There are historical cases in which the enforcement of property rights occurs with the state. Yet there are also examples without the state. This is extremely important. Basically, all legal systems deal with property rights, and if there have been non-state legal systems, Mr Gillies must be wrong. A legal system of enforcing rights does not inherently require the state at all.

Remember, the state is specifically a territorial monopoly on the use of coercion. Yet throughout history there has been enforcement of rights without such monopolists. Most of the Anglo-Saxon law grew out of voluntarily adopted norms, rather than authoritarian decree. Off the top of my head, here are some other random examples of customary, non-monopolistic legal systems: ancient Ireland, the Law Merchant, many other forms of commercial law, the Yurok Indians, the Ifugao, the Kapauku Papuans, medieval Iceland, and eBay.

(4) THE A PRIORI OF COMMUNICATION AND ARGUMENTATION

Most critically, the proposition “Private property rights depend on the state” is proven wrong by the act of saying it. For it is not possible to argue anything without presupposing that one has private property in one’s body. This is logically antecedent to the formation of any system of rights enforcement. It’s what makes it possible to have a rational standard by which to judge a system of rights enforcement in the first place.

CONCLUSION

Mr Gillies simply doesn’t understand the relationships between capitalism and the state. He relies on a tissue of fallacies believed by those whose understanding of reality is completely distorted by historicist nonsense. His confusion is so profound that he doesn’t even come close to understanding property rights, capitalism, or markets. He doesn’t understand the foundations of the market economy at all.

For further reading:

Hans-Hermann Hoppe — A Theory of Socialism and Capitalism

Jörg Guido Hülsmann – The A Priori Foundations of Property Economics

Follow Canadian Market Review on Twitter here.

UPDATE: For the record, Mr Gillies has seen this article. After reading it, he swiftly retreated from the debate. He was clearly in over his head.

I didn’t want him to think I was being unfair, so naturally I offered him a chance to reply. Instead, he went crying to his friends on Twitter for support. To them he made made a bunch of inane comments, like “Austrian School econ also underpins a fair bit of the neoliberal consensus” (lol wut), and “Must be a Randian.” Right. Because anyone who defends free market anarchism from an rationalist, objective idealist position — pretty much the opposite of statist, egoist, empiricist Rand  — must be Randian. Which… makes no sense at all.

He also said that “plenty” of “economists” have “refuted” everything I wrote. Of course, he provided no names or links or anything. I am pretty confident I have seen those arguments and anticipated them. Otherwise, I would gladly respond to any specific arguments. His behavior is to be expected from someone who understands nothing about economics and history.

Filed under CMR, Economics, Intervention, Philosophy Tagged with , , , , ,

The Most Important Fact About April’s Employment Numbers

May 13, 2013 1 Comment

The unemployment rate for April was unchanged at 7.2%. Enough full-time jobs were added to keep the rate from rising. If you look at the mainstream headlines, most of them focus on the fact that the economy added 12,500 jobs.

Compared to March’s numbers — which were the worst since February 2009 — some might think, “Well, that’s pretty good! It’s nice that the rate didn’t go up.”

Actually, the numbers are quite awful. The new jobs were all in the public sector: 34,000 of them. The private sector lost 20,000 jobs.

The most important fact about April’s employment numbers is this: Fewer people are going into productive tax-paying work than non-productive tax-consuming work. These numbers imply a weakening economy. Government jobs must be paid for with private sector production.

The economy is down for about 13,000 net jobs for 2013 so far. If you look back since April 2012, there is job growth. Yet looking closer, we see that the government has added 94,000 jobs in that period year. Private sector jobs? Only 10,000.

It is important to understand that just “creating jobs” should not be a goal of policy. Any job is not inherently valuable. Instead, what matters is creating wealth.

The buying and not-buying of consumers normally determines what should be produced, but no one “buys” government services. Public sector jobs earn wages and that money gets spent in the economy, but the consumer does not voluntarily pay the government for the goods and services produced by these jobs. Therefore, it cannot be said that government jobs provide any economic value at all.

Practically speaking, this accounts for why all governments are characterized by incompetence, arrogance, inefficiency, carelessness, and poor service. Government jobs are just subsidies for production with no regard to the consumer.

For the past year, the parasite has been growing at the expense of a progressively weaker host. This cannot continue if we want to see a stronger Canadian economy.

— Read more at CBC.ca —

Filed under Bureaucracy, CMR, Economics, Employment Tagged with , , , , , ,

When Will Interest Rates Rise?

May 7, 2013 1 Comment

Everyone wants to know: when will long-term interest rates rise?

Are we so sure they aren’t rising now?

Let’s consider a few recent events: Microsoft recently raised $2 billion selling bonds. Soon after, Apple raised $17 billion selling bonds. These companies have historically shied away from borrowing long-term money. Microsoft has not sold debt since 1996. The last time Apple sold debt was 20 years ago.

They both have huge amounts of cash, but the interest rates on these instruments were ridiculously low for both companies. Investors wanted a slightly higher rate from Apple than from Microsoft. In any case, both normally debt-averse companies believe that now is the time to lock in low rates. These companies must believe that rates will stay low or rise. Either way, they do well at the expense of bondholders. If rates rise, then they have cheap borrowed money with which to cash in on the higher rates. They borrow at 4-5% and make double, triple, or more on that money. If rates fall, then they can buy back the bonds and reissue the debt at lower rates.

When asked about Apple bonds specifically, Warren Buffett said: “We’re not buying bonds of Apple — we’re not buying bonds of anybody. It has nothing to do with them being a tech company. The yields are too low.” Berkshire Hathaway has been selling corporate bonds over the last two years.

I had a spasm of intuition in reading about the above events. “Are we at or around the bottom”? It seems to be a fair interpretation that “smart money” is selling bonds, and “dumb money” is buying bonds. Look at corporate debt — can those rates seriously go lower?

FRED Graph

The economy is bad, but is it Great Depression bad? Apparently not, so maybe the rates can’t go any lower… for now.

This year, it seems those rates have been pushed up. Is fear of inflation creeping in there?

Look at the 30 year Treasury yield, which has fallen to insane lows post-2008. Yet at the right end of the graph, we see the rate trending upward despite Operation Twist.

Chart forTreasuryYield30Years (^TYX)

I am talking about long-term rates. Short-term rates are basically going nowhere. As I wrote last year, I believe this is because there is fear and “regime uncertainty.”

FRED Graph

Even so, data seems to indicate that real rates are climbing back into positive territory.

fed real int

CONCLUSION

While people can describe the conditions under which rates will rise, they cannot reliably predict when this will occur. It seems assured that anytime someone says with confidence, “Rates cannot get any lower,” the rates still get lower. If you want an example that baffles investors endlessly, look at Japan. There is a reason shorting Japanese government bonds is a trade known as the “widow-maker.”

I don’t want to be one of “those” guys, but I think we are around the bottom on long-term interest rates for this stage of the business cycle. I’m not making a “hard” prediction on this, because I think a recession will push rates down further. I think that recession will occur soon. However, it is theoretically possible to muscle through the recession with expansionary monetary policy and keep the “boom” going. The Fed is in full offensive mode. Short-term and long-term rates will rise if the Fed continues this policy and banks are no longer willing to stockpile excess reserves. In Canada, the BoC has been buying debt for Harper and the Conservatives, resulting in net increases in assets for two years. I interpret this to mean that both American and Canadian central banks are desperate to hold off recession.

“The yields are too low.”

Filed under Banking and Finance, Central Banks, CMR, Economics, Inflation, Investments Tagged with , , , , , , ,

Poloz Prepared to “Nourish” Economy. Translation: He Will Inflate

May 6, 2013 Leave a comment

Poloz thinks it will be necessary to “nourish” the economy.

To a Keynesian central banker from the EDC, this means “buy assets” i.e. inflate.

The boneheaded idea that this strengthens the economy is characteristic of cranks throughout history.

Currency depreciation cannot ever boost the economy. If Poloz were to announce that he will start expanding rate of growth in the money supply, the outcome on the foreign exchange market would be for other currencies to appreciate versus the loonie. Domestic producers would want to increase exports due to increased international demand, and would borrow from commercial banks to fund production at interest rates lower than otherwise. Resources would shift away from other industries into Canadian export industries. Exporters would record higher profits, but in real terms, the citizens of Canada would be getting fewer imports for each export. Basically, Canada would gain more foreign exchange, but they would get getting fewer real goods in exchange. Canadians in general would therefore become poorer.

And those higher exporter profits? As time goes by, monetary expansion would cause prices to rise and those artificial, subsidized profits would disappear. The end result is a weaker economy where resources have been misallocated due to credit expansion and interference with market exchange rates, and along the way some politically-connected export industries would make a bit of extra money.

Poloz needs to read Mises:

The much talked about advantages which devaluation secures in foreign trade and tourism, are entirely due to the fact that the adjustment of domestic prices and wage rates to the state of affairs created by devaluation requires some time. As long as this adjustment process is not yet completed, exporting is encouraged and importing is discouraged. However, this merely means that in this interval the citizens of the devaluating country are getting less for what they are selling abroad and paying more for what they are buying abroad; concomitantly they must restrict their consumption. This effect may appear as a boon in the opinion of those for whom the balance of trade is the yardstick of a nation’s welfare. In plain language it is to be described in this way: The British citizen must export more British goods in order to buy that quantity of tea which he received before the devaluation for a smaller quantity of exported British goods.

The Canadian dollar will surely suffer under Poloz’s governance.

Filed under Banking and Finance, Central Banks, Currencies, Economics, Inflation, Money, Trade Tagged with , , , , , , , ,

Mourn for the Lost Penny

May 4, 2013 Leave a comment

Every Canadian hated pennies. Even homeless street beggars hated getting pennies. If someone dropped a penny, they wouldn’t even bother to pick it up. Every Canadian seems happy that the penny is gone.

Sadly, Canadians do not realize how this loss is truly a tragedy, because it unequivocally shows how the government and the Bank of Canada have abused the monopoly over money. If you go to the BoC website, you can see that since 1914 the Canadian dollar has lost 95% of its value.

This is the inevitable result of the age-old credo of monetary cranks and inflationists. Mises wrote:

A very popular doctrine maintains that progressive lowering of the monetary unit’s purchasing power played a decisive role in historical evolution. It is asserted that mankind would not have reached its present state of well-being if the supply of money had not increased to a greater extent than the demand for money. The resulting fall in purchasing power, it is said, was a necessary condition of economic progress. The intensification of the division of labor and the continuous growth of capital accumulation, which have centupled the productivity of labor, could ensue only in a world of progressive price rises. Inflation creates prosperity and wealth; deflation distress and economic decay.

All this time, rather than having pennies lose value until they must be eliminated, pennies should have been increasing in value. We should have been able to buy more stuff with pennies today than 50 years ago. That is how a free economy with a stable money supply works. Money is saved and invested into more production. Workers create more goods, and so the monetary unit can purchase more stuff. Instead, the Canadian government and its central bank have distorted the economy and redistributed wealth by means of monetary policy. Monopolies are always bad, and a monopolization of money is the most dangerous of all.

The death of the penny should be a blaring wake-up call to Canadians. The Bank of Canada should be shut down, the government should abolish legal tender laws, and Canadians themselves should decide what their money should be. Otherwise, expect to someday bid farewell to nickels, dimes, and even loonies as the government continues its destruction of our currency.

— Read more at the Mises.ca —

Filed under Banking and Finance, Central Banks, CMR, Economics, Inflation, Money, Monopoly, Ottawa, Totalitarian Democracy Tagged with , , ,

BOOK REVIEW: Ludwig von Mises – Human Action (Scholar’s Edition)

May 3, 2013 Leave a comment

Human Action: The Scholar’s Edition

There is no way I can say all that I want to say in this review. Murray Rothbard has aptly said: “Every once in a while the human race pauses in the job of botching its affairs and redeems itself by producing a noble work of the intellect. . . . To state that Human Action is a `must’ book is a greater understatement. This is the economic Bible of the civilized man.”

I would take Rothbard’s praise further. This is not only the single most important economic tome ever, but also the pathbreaking, definitive exposition of praxeology, the correct basis for social sciences and also necessarily the foundation for epistemology. Only a few living economists of the “Austrian” school of economics seem to have truly absorbed the Misesian “praxeologic” method.

Mises’ contribution to economics cannot be understated. In basing economics on the axiomatic status of action, Mises established the ultimate foundation for economic science. The fact that humans act — that is, human beings act purposefully to reach subjectively chosen ends — is, of course, irrefutable (to argue against the axiom of action is itself an action). This, however, may seem like a trivial observation. Humans act, big deal? Why is it so important? Its importance is in praxeology’s methodology, which uses deductive chains of reasoning to realize the implications. In understanding what is implied by action — values, ends, means, choice, cost, preference, profit, and loss — economic science can be deduced logically, so it is a purely an a priori science where economic laws tell describe apodictically real relationships in the world. In this way, key economic principles follow from the action axiom (as well as a few general, explicit assumptions about the empirical reality in which the action occurs), such as the law of diminishing marginal utility, how taxation changes time-preference schedules, the counterproductive nature of interventionism, involuntary unemployment, and so on. So long as the logic deriving the principles is correct, then economic laws are a priori-valid, and empirical testing has no bearing on them.

This book initially appeared in a difficult time, when positivist methodology and the Keynesian paradigm were dominant. Thus, upon Human Action‘s release it was mostly derided and ignored by the mainstream, rather than studied and criticized. It did, however, gain notoriety among academic circles for rebuilding economic science from the ground up, all the while plowing through the epistemological shortcomings of previous standards. It also sold surprisingly well for a nearly 1000 page book about economics.

Mises provided considerable ammunition for institutional critique in Human Action. He uncovered the socialist calculation problem — a central planning authority has no rational way to allocate resources for production without market prices — and this is an insurmountable hurdle for any state-run economy. In fact, when analyzed fully, it shows that any government intervention in the economy results in market distortion and inefficiency. In essence, nothing can ever be provided more efficiently by the government nor can the government do anything to make the market more efficient. Murray Rothbard, who was of course Mises’ student, explored this thoroughly in his critique of interventionism, Power and Market.

Lee Carlson’s shamefully inane review can be wholly disregarded. He believes economics can benefit from aping the methods of physics, when actual physicists and engineers recognize that is foolish. Carlson fallaciously appeals to authorities, and it does not change the fact that the search for mathematical constants that describe human choice is futile. If it is possible to learn and have different ideas in the future, which cannot be denied without contradiction, then you cannot know in advance how one will act based on new ideas. That’s why economics must deal with the formal implications of choice, and not the formation of specific choices. Mises understood this. Few other economists do.

In regards to the reviews criticizing Mises extreme rationalism, they would do well to better understand Mises’ methodology and the epistemological problems of economic science. He spends nearly 200 pages early in the book discussing this, but people are lazy and think the rationalist foundations of economics is “boring” or somehow not relevant.

To Mises, ultimately, all economic laws were derived from the incontestable axiom that, trivially enough, humans act, choosing between alternatives in a finite universe. In understanding the effects of different forms of economic activity, the economist must determine correct theory by relying on human choice as the guiding factor. To consider the effects of a change brought about by action, we need recognize that by taking certain choices, the opportunities for other choices are destroyed. And because the relationship between these universes resulting from different choices are a priori related to the others, there is no need to rely on empirical confirmation for correct theory. The corpus of economic science is essentially a system of counterfactual laws where empirical testing is completely useless.

It would be foolish to argue that consumption need not be preceded by production, or that that which is consumed now cannot be consumed later, just as it would be foolish to argue that money inflation does not raise prices higher than otherwise, just as it would be nonsensical to argue that 1+1=3, just because of an “observation.” Like a mathematical proof, all economic laws must be refuted by identifying errors in the axiomatic-deductive chain, not finding “conflicting” data. This is also the only truly valuable way to understand complex economic phenomena. For example, were rising real incomes in Canada 1950-1990 a result of increased taxes, or despite of more taxes? Would they have been higher still with higher or lower taxes? The traditional economist is utterly helpless, because they have actually rejected economic theory in favor of a misguided empiricist prejudice. Praxeology is more valuable than any mathematical model because of of its method. They require no qualifying considerations (“all things being equal” or “ceteris paribus”) and are always true.

Finally, the original issue of the Scholar’s Edition was a BEAUTIFUL book. It really shows how a physical book can be damn sexy in a way that ebooks and such can never be. From the Mises Institute:

“The Scholar’s Edition is printed on stunning, pure white, acid-free Finch Fine 50 lb. paper; carefully set in the readable and beautiful Janson typeface, including the 1954 index, the most comprehensive ever done; covered in spectacular dark azure Odyssey cloth from Prague, the finest natural-finish, moisture-resistance book fabric in the world; secured by the finest caliper Binders board; protected by an impressive slipcase from the famous Old Dominion company; graced with antique-soapstone endpapers from Ecologic Fibers; casebound with the strongest Smyth-sewn signatures; fitted at head and foot with silken endbands, thick wrapped for durability; complemented with a double-faced, satin-finish ribbon marker; stamped with brilliant, non-tarnishing gold foil from Japan’s Nakai International; and produced at R.R. Donnelly’s famed Crawfordsville Bindery, where’s America’s finest books are assembled.”

Pretty delicious, actually!

The Scholar’s Edition also features an exhaustively compiled index and — most importantly — restores all the ambiguities and deleted material from the third and fourth editions. In particular, Yale University Press’ complete butchery of the 1963 edition is now nothing more than a bad memory.

UTTERLY ESSENTIAL FOR ALL CIVILIZED HUMAN BEINGS.

(This review was originally published in 2004.)

— Purchase Human Action from Amazon.com for a ridiculously low price —

Filed under Book Reviews, Economics, Philosophy Tagged with , , , , , ,

RRSPs Are a Government Trap

April 26, 2013 2 Comments

Tax season. Ugh. Around this time of year, you always get a lot of people chattering about how RRSPs are totally awesome.

Mises wrote that a fundamental category of human action is preferring goods now to goods later. That is why present goods cannot be traded for future goods unless they are discounted (hence the phenomenon of interest).

The government relies on present-orientation when it comes to tax-deferred retirement accounts like RRSPs. The government reduces the taxpayer’s suffering now — tax deferral — for the sake of a nebulous future benefits that may not materialize. As the saver puts more and more money into the account, the reluctance to withdraw the funds grows. Hence, RRSPs are a trap.

Everyone hopes they will be in a lower tax bracket when they withdraw from their RRSP. They always assume tax rates won’t be higher, and inflation will not push them into higher tax brackets. They assume won’t be victims of capital markets gone bad.

Think about what happens if there is an emergency while the markets are being hammered. Your assets will drop significantly in value, and yet if you are forced to sell them to raise money in a situation where you are already in a high tax bracket, you then you have to pay the taxes on your accrued capital gains/whatever at the same time. It would be pretty painful.

The government gets a sweet deal by having people siphon money into these tax-deferral (not tax-free) plans:

  • Annual reports to CRA about what you own
  • Regulatory control over what is an authorized investment
  • A massive supply of assets that can nationalized in a serious financial crisis
  • The government can change the tax code so you’ll be in a higher tax bracket than expected when you withdraw
  • Inflation will push you into higher brackets as time goes on
  • It becomes harder to escape the more money you put into it

Such accounts also drive greater levels of resources into government-approved investments. The over-investment this fosters will bring and even harsher day of reckoning: when a significant number of people decide to retire and start eating into their retirement accounts, the prices on these assets will fall quickly. There will not be enough bids to cover the offers at those high prices. Younger savers will fear long term implications and withdraw early. There will be too much risk and the entire RRSP system will be exposed as a dangerous scam.

Some will deny the possibility that the government would ever confiscate the assets in retirement accounts. But why wouldn’t they? There is ample historical precedent for confiscation. Heck, the United States nationalized its mortgage industry to “save the economy” just a few years ago. Why wouldn’t Western democracies do so with retirement accounts, under the pretense of protecting citizens’ hard-earned savings?

Of course, the confiscation would be sneaky. In a major crisis, retirement accounts would be devastated. The high (nominal) gains for long-term savers would diminish. A government would declare that the safety of people’s retirement cannot be left to the heartless whims of the market. Therefore, the government would nationalize those accounts and replace the assets with “loonie bonds” or some such thing. The bonds would have a “guaranteed” return of, say, 3%.

Those bonds would not be marketable and represent nothing more than an accounting trick by the government. Since the government would be broke, the retirement accounts would have to be covered with general revenues. It would simply be a huge transfer of wealth from younger people to older people. This completely distorts the natural state of society, where older people help the younger people, because they have more accumulated wealth.

Tax-deferral can be useful, but it is not risk-free. It is not even that favorable compared to the non-registered alternative. Your capital gains outside of the RRSP are taxed at 50% of your marginal rate. You can also offset capital gains with capital losses, which is not possible in the RRSP. You can also consider the option of selling losers at the end of the year to offset gains, and if they are still good investments, just buy them back after time frame required by the superficial loss rule.

A TFSA is a much better saving tool. You pay no tax on your returns (but you can’t offset with losses).

CONCLUSION

Do you trust the government? If so, then maybe the RRSP is right for you. If you lack such trust, then be careful about dumping piles of money into one. You’ll probably be regret it someday. Take responsibility for your after-tax income and don’t delude yourself into thinking the government is trying to do you a favor.

Filed under Banking and Finance, Economics, Investments, Regulation, Stock Market, Taxation Tagged with , , , , , , ,

Mini-Review: CBC Documentary “The Secret World of Gold”

April 19, 2013 Leave a comment

On April 18, CBC aired a documentary called “The Secret World of Gold.” Though flawed, the program was interesting and covered many issues.

Here are some things talked about in the documentary:

  • The Bank of Canada has sold almost all our country’s gold over the last 30 years.
  • Underwater treasure hunts for gold.
  • Secret government deals to control gold.
  • Futures market manipulation (this was by far the weakest part of the show — the futures market is not explained and the case made for manipulation is very thin).
  • Buildings with gold windows.
  • Wars for gold.
  • How Chavez got all Venezuela’s gold back from the US and Europe
  • Gold shifting to the East from the West
  • Death gold from Nazi extermination camps (some of which was used to fill Hitler’s teeth — WTF).
  • Allocation of central bank gold holdings — who owns the gold? Is the gold even there?

Think about taking 45 minutes out of your weekend to check it out. You can watch it here for free, the only drawback is there are a few dumb CBC ads.

UPDATE: You no longer need to watch it at CBC. The copyright police got to “The Secret World of Gold” on YouTube, so it looks like you have to watch on CBC…

Filed under Banking and Finance, Central Banks, Currencies, Economics, Gold, Imperialism, Inflation, International, Intervention, Investments, Mining, Precious Metals, War Tagged with , , , , , , , , , ,

Harper: Free Trade is a Tax Break for China

April 17, 2013 2 Comments

Harper was criticized the other day for wanting to increase taxes on various imported consumer goods.

There is no defense for raising taxes ever. This is even more important when Canada will be soon in recession. So what is Harper thinking? He rightly pointed out that the Liberals had voted against budgets in which there were some tiny tax cuts. Okay, sure, the Liberals lack any principled objection to higher taxes. What was his rebuttal to their criticism on the tariff issue?

“What the Liberal Party seems to stand for, Mr. Speaker, is that somehow we should give tax breaks to emerging economies like China.”

OMG, my brain just exploded from the unbelievable stupidity of that statement. I love a good cheap shot at a Canadian political party as much as the next guy, but Harper’s statement is just dumb.

So not taxing imports is a tax break to the countries from which we are buying those imports. So a free trade policy is a tax break for our trading partners.

That is incoherent, protectionist nonsense. First of all, the importer pays the tax, not the exporter. So China is not getting the tax break, per se. It is the one importing Chinese stuff.

But then this is kind of like saying it’s a “tax break” if the government taxes anything less than 100% of your income. The meaning of “tax break” is clearly being twisted. A “tax break” is meant to be a means of reducing a tax liability that already exists. The absence of a tax is not a tax break. Adding new taxes is not the same as taking away tax breaks. The underlying philosophy revealed in Harper’s words is that the government rightfully owns everyone else’s wealth, and letting people keep anything is a tax break. The whole notion is economically utterly perverse.

The case against protectionism is logically irrefutable. Harper, like virtually all politicians, is a mercantilist who thinks protectionism is good (for his friends), meaning he is no ally of capitalism and free trade. He is a classic Canadian crony prime minister.

— Read more at CBC News. —

Filed under Asia, Economics, Ottawa, Politics, Regulation, Taxation, Totalitarian Democracy, Trade Tagged with , , , , , ,

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