Get Ready for Government Taxation Without Representation

Regardless of whether a new bailout bill passes, Americans will be taxed heavily in the course of the ongoing “rescue.” Federal Chairmen Ben Bernanke all but guarantees it...

Now I remember why I hate politics.

It goes back to 1999 -- the year I gave up cable TV. Back then I would sit down with my dinner in front of the set, flip through the channels, and wind up with some cable news show more often than not.

Then, over the next half hour or so, a funny thing would happen. It didn’t matter the show or the topic or the host... almost invariably, something would arise that irritated the heck out of me.

After countless nights of this, I had a mini-epiphany. I realized that politics was ruining my dinner three nights out of five... that I might as well be jabbing myself in the leg with a fork every two minutes for all the good those shows did me.

So I quit cable news -- and cable TV -- forever. (Now I just watch DVDs via Netflix.)

Trying to make sense of this bailout mess reminds me of those days. It’s all just so tiresome.

Nobody gets a pass; this thing has been a complete fiasco on all sides. (I can think of more colorful words than “fiasco,” but I’ll refrain.)

Secretary Paulson sold his “plan” in perhaps the dumbest possible way, with the weakest possible reasoning, and came off like a dictator to boot. In presenting the bill, House Speaker Pelosi turned the partisan screws at the worst time. And President Bush was a big fat liability to the whole process... a president so hated by his own party that he might have pulled more nay votes than yays on the Republican side.

But those who voted “nay” in response to populist pull are no heroes, either. It’s certainly an odd time to be celebrating.

After the news came in, for example, more than a few activist “stop the bailout” Web sites began chanting, “We won! We won!”

To which I ask, won what exactly? The chance to roll the dice and see if the system implodes? Can we really call it a victory for democracy when there is no plan other than “stop the current plan”? For those who say, “Oh please, the system isn’t really at stake. Everything will be fine...” How do you know? Is that a reasonable belief, or just the flipside of a comforting moral certainty?

It’s a weird kind of nihilism. “We no longer trust our current leaders, so let’s not have any leadership at all.” That’s not democracy, it’s anarchy.

If the credit market gears grind to a halt, small businesses across the land shut down, and America winds up with 14% unemployment, who wins in that scenario? Certainly not democracy. That’s the stuff that extreme uprisings are made of. (Whether you get fascism or socialism depends on the flavor of the times.)

Yes, it was a poor solution, poorly packaged and poorly sold, by a group of dolts who had already squandered what little credibility they had.

But to rejoice in shooting down a plan of action in time of crisis, without offering a workable alternative plan, is to stare merrily into the dark abyss (in my humble opinion).

“But at least they aren’t spending my money,” some of you reply. “At least the taxpayer’s wallet is safe.”

Wanna bet?

Taxation Via Printing Press

As we’ve talked about in these pages before, Fed Chairman Ben Bernanke is a devoted student of the Great Depression. You could almost say that a study of the Great Depression -- its causes, its quirks, and finding the means to ensure it never happens again -- makes up the sum total of Bernanke’s lifework.

In 2002, Bernanke gave a speech titled, “Deflation: Making Sure ‘It’ Doesn’t Happen Here.”

This is where the, uh, taxing part comes in (underscore emphasis mine):

Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

Do you know what gentle Ben is really saying here? He is saying he can tax the dollars right out of your wallet if he chooses to. And if he has to, he will... and there isn’t a thing you or I can do about it (other than convert those dollars into something else before they get devalued).

Simply put, inflation is a form of hidden tax. Whenever the U.S. government prints dollars from thin air, it lessens the value of the dollars in your bank account.

This is no different than taking money from your bank account... except the process is much more stealthy. When the government practices taxation by inflation, many of us don’t even know we’ve been taxed. The value has been drained from the dollars, even if the dollars are still there.

If you’re still fuzzy on the concept of inflation as a hidden tax, ask yourself this: Why does the government bother with collecting taxes at all? In theory, Uncle Sam could just print up dollars for everything he needs.

If there were, say, $10 trillion in circulation, the government could just print up $10 trillion more for itself.... dropping the value of all existing dollars by 50%, but hey, so what.

If we did it this way, there wouldn’t have to be an IRS. We could abolish April 15th, stop worrying about tax lawyers... When Uncle Sam needs something, he just writes himself a check. So why not do it?

There are at least two reasons why direct “taxation by inflation” -- a system where the government prints what it needs -- does not happen.

For one, lobbyists and their masters love a complicated tax code. It allows them to exploit loopholes and siphon dough from the system in all kinds of ways.

But, more importantly, taxation via printing press would be too obvious. If we did it that way, most everyone would understand the concept of inflation as a hidden tax. There would be no room left for stealth. A lot more people would pay a lot more attention to those printing presses chugging away in the dead of night.

And that’s really one of the ironies of this whole bailout mess.

Now that the Fed and Treasury have been rebuffed in their efforts to go through the front door, they’re just going to concentrate even harder on saving the system via the back door... and that means big-time taxation without representation (i.e., taxation via the printing press).

No Votes on This One

There won’t be any votes on this. The printing has already begun, as The New York Times spelled out on Monday:

Without the broad bailout plan they invented and lobbied hard for, the two agencies are once again forced to careen from one desperate path to another, and to dig deep into their toolkits to rescue the global financial system. Even before the House stunned the world on Monday by rejecting the Bush administration’s bailout bill, the Fed was already resorting to the oldest action in its book: printing money.

In the past two weeks alone, the Fed has borrowed and lent a whopping $710 billion -- more than the cost of the proposed bailout -- in an effort to keep the system afloat. Some of that went to an “emergency lending program” for various banks; some of it went to “swap lines” with foreign central banks to help shore up European and Asian money markets; and some of it went to flailing institutions like AIG (AIG).

And the ironic thing is, the Fed is just getting started. If a follow-up bailout plan doesn’t pass -- and many of those chanting “No! No!” are hoping it won’t -- then Bernanke will just gear up the printing presses to an even further degree.

Bernanke = Villain?

So does the above reality make Bernanke a villain? After all, this is the guy who wants to tax all American savers without their consent... the guy who, in the name of saving the system, plans to siphon the value from our dollars until the bank account tank runs dry. He gave a speech about it, for Pete’s sake.

But still, does all that make him a villain if his actions are really all that stand between us and a depression? If everything goes down without the Fed saving us now, should we get the system back on its feet, fire all the Wall Street bozos, and then fire the Fed? Or will everyone just have grown complacent again by that point?

This is why I hate politics.

There are no easy answers, and half the time there are no real good guys or bad guys, either -- just a bunch of incompetents surrounded by shades of gray. And all too many times, those who pound the table in moral certainty about this or that black-and-white issue are misled in thinking it’s black and white at all.

I think the Austrian Endgame paints a fair picture of where we’re headed. I think we’re locked in now by our past poor decisions, decisions that have built up over years and even decades. Ahem, (cough) GREENSPAN (cough).

And I think that if “destroying the economy” or “destroying the currency” are the two ultimate choices we have to face, letting the dollar get whacked makes more sense. People can hedge against a diving dollar. They can put their savings in other places. They can't really hedge against lost homes, lost jobs and lost retirements.

I do know one thing for sure: I’m tired of talking about all this. I’ve had it up to here with politics. This kind of thing will always be in the background, but hopefully the in-your-face nature of this giant political mess can fade into the background for a while.

It’s time we got back to a good, old-fashioned focus on ferreting out market opportunities and finding ways to make money. So I’m going to do a little hiking on Mt. Rose this afternoon -- no radios or TVs or newspapers in sight -- and ponder how we can do just that.

Stock position: None.

Comments

[madmilker:]

well, i'll be dip! ain't nuttin' like climbin' a mole hill are sittin' on a bank watchin' a cork float. With being $53 trillion in debt....to some people tat is news but to the nincompoops in D. C. its jus more ink for the dang press.

2008 Oct 02 08:14 AM

[xsuddensam:]

What are you talking about?

We've accepted taxation without representation for years and it looks like nothing will change.

I hear no outcry for accountability, no call for investigations, no demand for term limits and no insistence on real campaign finance reform. If the people do not demand responsible government, we will get more of the same--a greedy Wall Street with dishonest politicians in the pocket.

2008 Oct 02 08:48 AM

[megjak123456:]

I found it interesting to say the government will print money when it wants something. The thing is our government has been doing this for decades, not a problem as long as you take in what you print as in the Clintion administration- i did not vote for Mr. Clinton, but he left office with a economy that was booming and we had a serious surplus, the issue is we have a President who does what he wants - ie several wars not declared just attacked, this has hurt our economy, his family and friends have made billions due to the before knowelge of any action by our president and bam they are in positoin to make the big money, look at oil, all of a sudden its down to arround a hundred dollars a barrel, the big players kept it high, without intervention from our president, on the other hand he committs troops on lies of weapons of mass disstruction that never existed nor did he know if they existed - he simply wanted to finish what his dad started, so in short what do we have now, a congress that can not vote on any major issue, we are dead in the water nothing is happening, and our president is a dead horse - less then 28 percent of our voters like him, the 28 percent that do like him are feeding from the presidents table and as long as they get feed they will follow this president, i think we have more of this with MCCAIN -and i Oboma is too inexperienced- i predict a depression not a major resession, why - a resessoin the politicians will be able to manipulate what little money we have and spend it - in a depression they will not be able to do that, due to the lack of money to manipulate, so we have nothing but greedy rich people who have made there money at the expense of 300 plus million people and add a govenment who does not represent the people, things will simply fall apart, the 700 billion dollars bail out is a band aid for the rich who have lost there shirt and the shirt of the stock they protect for say 401 k and retirement funds ie ira, they need this money to build back those funds and watch them, they will bail out and go to safe havens and watch the stock go down again, which the little guy hase and then all those little guy retirments die- as a retired army officer i see it clearly - and i see there strategy, but can not do anything about it- not even certain this blog will get to anyone- good luck chuck

2008 Oct 02 09:43 AM

[RECON605:]

It is time to start a revolution, to start a new party to combat what the government is doing.

I wonder how many people remember what the BOSTON TEA PARTY is/was; maybe we need to start up a new one; my email address is gijoe605 in gmail.

2008 Oct 02 11:10 AM

[Smarty_Pants:]

Fact: The recession/depression is coming, regardless of what bailout package is passed or defeated.

Passing or not passing the bailout will not prevent the huddled masses from experiencing difficult times.

The only people who will benefit from the bailout will be the bankers and the politicians in the bankers' pockets.

We have nothing to gain by bailing them out. It was their malfeasance which got us here in the first place. Let them suffer with the rest of us. Misery loves company.

2008 Oct 02 11:33 AM

[Econ 101:]

What you fail to understand, that most real people do is that we are already screwed. That the first step in getting out of a hole is to stop digging. The congress doesnt understand this. They need to pay off their real constituancy (the banks, lawyers and wall street) for those campaign contributions.

Our economy is already going to tank over the next couple of years and the little guy is going to get fleeced if he hasnt already. The big guys want one last deal toclose out the theift, that is what this "Crisis" and bailout really is about.

Go to GOLD if you can find it. Silver also would work, but you will not get delivery. So try cigarettes, whiskey and coffee...stock up!

Cash wont work because the dollars will be worthless. Will the government nationalize gold like it did in 1933? Will the unemployment go to 20%? Oil to $250 a bbl? Or to $10 a gallon at the pump?

2008 Oct 02 11:40 AM

[pissed off J6P:]

no alternatives? there were PUH-LENTY of alternatives from people with no vested interest in Wall Street- hence they were summarily dismissed. what planet were you living on the past two weeks??

2008 Oct 02 12:52 PM