Redistribution of wealth? good luck with that...

i suppose the few people that read my blog may have gathered that i have had the economy on my mind lately. not surprising, i would guess most people in the world have that on their minds more often these days. but i have to address another issue that is irking me.

lots of people are looking forward to the current administration's attempt to 'right the wrong' that is the unfair distribution of wealth. I could point out that the majority (not all... we have Paris Hilton to consider... ick!) of those that are ultra wealthy, paid their dues and in my opinion deserve their HARD EARNED wealth. the lesson we should learn is that if we work as hard as they do we can be wealthy too.

but that is an aside. my real topic is this. IF you want to redistribute the wealth of this nation, putting greater regulation on the industry is counter productive. sounds strange? here let me explain my reasoning.

our current economy is marked by lots of "Delevering" and "Deglobalization," these are natural consequences to an over bloated market that was fed by the very government that is now attempting to "fix" it. these are good things because they are correcting the market naturally. the economy is also marked by lots of re-regulation and new regulation. this is not a natural consequence. this will create an "inefficient market" (which is actually the whole point of the regulation). instead of rewarding the smartest and hardest working person, you can force (through regulations) a "fair" price, etc. fairly simple to understand.

here is where i start to smile to myself (more of a smirk, really). the reason that many investment banks made a KILLING in Eastern European countries, India, China, Brazil, etc. is BECAUSE they are inefficient markets. i mean for crap sake, i work for a "alternative" investment bank that specializes in this! we are practically licking our chops waiting for this to happen here in the US. inefficiency is what creates the opportunities to make money. so even though you are trying to redistribute the wealth, who do you think is going to be capitalizing on these markets? I can assure you that it will be the wealthy and they are going to remain wealthy.

so my advice: stop with the jealous whining and stop waiting for government handouts. they aren't helping any of us.

why raising Corporate taxes is a problem

here is the thing. if the economy is failing (which it is) how is the government going to save it?

the answer: it can't

the government gets its funding from two main sources: taxes and it prints its own.

if it just prints the money to cover the shortfall that we are seeing then we will have inflation, maybe even hyper-inflation. that is VERY bad. don't believe me? look at what Mugabe has done in Zimbabwe. we are already being threatened by high inflation rates. so Obama (or any government) can't do that to fix it...

that leaves taxes to collect all the necessary funds for the 'relief' programs (Social security, Welfare, Unemployment, TARP, Bailouts, etc). now here's the thing, individual citizens are suffering in the economy and are making less money, so you can't increase their taxes without causing more harm. so who can the government tax? Corporations, of course! i mean, they are greedy and make too much money anyway (sarcasm is present). i will admit that some corporations are greedy and corrupt, but the vast majority of them are not. most of them are trying to keep producing in a stagnant economy. so when you increase taxes on them, that cuts into the earnings and revenue and the company needs to compensate in some way. the company has two ways to do this (1) increase the sale price of their product, or (2) cut costs. in order to increase the sales price to compensate for the proposed tax increase, most companies would need to up the price between 10%-30%. They wouldn't be able to sell very much in a sinking economy by doing that, now would they? so that leaves them with cutting costs. guess what is the easiest and most efficient way to cut costs? get rid of employees. that is right, lay-offs.

so increasing the corporate tax will lead to more unemployment. which leads to further recession, etc. i believe the term we are looking for is 'a vicious spiral.'

so here is a suggestion for employers that i heard and I think it is good enough to propagate. if you are having trouble deciding which employees to let go. just go to the parking lot, and find the cars with 'Obama' stickers. after all, they did want change...

disconnected from reality

the current market is completely disconnected from reality. all last week, i stared at the market indices and wondered what was going on...

unemployment is STILL on the rise, so how is it good news that unemployment is ONLY at 10% on average across the country, just because the pundits THOUGHT that it would be closer to 11%? or the fact that Goldman Sachs, Citigroup, and JPMorgan reported black in their earnings for 1Q09? not hard to do when you change your fiscal accounting period so that you don't have to include December 2008, one of the WORST months in history (Goldman didn't have to report almost $7 Billion in losses with that stunt). Or writing more Credit Default Swaps (CDS) that are one of the risky assets that people are trying to get rid of (JPMorgan holds close to 50% of all of the worlds CDS's). the accounting gimmicks are running wild.

Further more, housing prices are still dropping, foreclosures are WAY up, and defaults are climbing. these are not good pieces of news. that is why i am RELIEVED that the market has lost everything that it gained last week. it just didn't make sense...