Wednesday, December 4, 2013

The Coming Global Wealth Tax

 The Coming Global Wealth Tax

Indebted governments may soon consider a big one-time levy on capital assets.

By 
Dec. 3, 2013 7:15 p.m. ET
Between ObamaCare, Iran and last quarter's uptick in U.S. economic growth, taxpayers these days may be distracted from several dangers to come. But households from the United States to Europe and Japan may soon face fiscal shocks worse than any market crash. The White House and New York Mayor-elect Bill de Blasio aren't the only ones calling for higher taxes (especially on the wealthy), as voices from the International Monetary Fund to billionaire investor Bill Gross increasingly make the case too.
In his November investment commentary for bond giant Pimco, Mr. Gross asks the "Scrooge McDucks of the world" to accept higher personal income taxes and to stop expecting capital to be taxed at lower rates than labor. As for the IMF, its latest Fiscal Monitor report argues that taxing the wealthy offers "significant revenue potential at relatively low efficiency costs." The context for this argument is the IMF's expectation that in advanced economies the ratio of public debt to gross domestic product will reach a historic peak of 110% next year, 35 percentage points above its 2007 level.
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Between 2008 and 2012, several of the developed world's most fiscally challenged nations (including the United Kingdom, Ireland and Spain) increased top personal income tax rates by an average of 8%. In the United States, the expiration of the Bush tax cuts pushed the highest federal income tax bracket to 39.6% from 35%.
What the IMF calls "revenue-maximizing top income tax rates" may be a good indication of how much further those rates could rise: As the IMF calculates, the average revenue-maximizing rate for the main Organization of Economic Cooperation and Development countries is around 60%, way above existing levels.
For the U.S., it is 56% to 71%—far more than the current 45% paid in federal, state and local taxes by those in the top tax bracket. The IMF singles out the U.S. as the country where raising top rates toward 70% (where they were before the Reagan tax cuts) would yield the most revenue—around 1.25% of GDP. And with a chilling candor, the IMF admits that its revenue-maximizing approach takes no account of the well-being of top earners (or their businesses).
Taxes can rise in ways both prominent and subtle. In the United Kingdom, the highly advantageous "resident non-domiciled" status—requiring wealthy residents to pay taxes on overseas earnings only if they "remit" the money to the U.K.—has become much harder to qualify for and more costly after recent reforms.
In France, President François Hollande finally managed to pass a 75% tax on income above one million euros and now he is seeking to limit the tax benefits of "life insurance contracts," a long-term savings instrument used by most wealthy households. As for the uniquely French "impôt sur la fortune," taxing those with net worth above 1.3 million euros, it is alive and well. Japan too is taking steps to increase personal taxation, though it hasn't yet targeted top earners in particular.
Of course these measures won't return the world's top economies to sustainable levels of debt. That could be achieved only through significant economic growth (the good way) or, as the IMF puts it, "by repudiating public debt or inflating it away" (the bad way). In October the IMF floated a bold idea that didn't get the attention it deserved: lowering sovereign debt levels through a one-off tax on private wealth.
As applied to the euro zone, the IMF claims that a 10% levy on households' positive net worth would bring public debt levels back to pre-financial crisis levels. Such a tax sounds crazy, but recall what happened in euro-zone country Cyprus this year: Holders of bank accounts larger than 100,000 euros had to incur losses of up to 100% on their savings above that threshold, in order to "bail-in" the bankrupt Mediterranean state. Japanese households, sitting on one of the world's largest pools of savings, have particular reason to worry about their assets: At 240% of GDP, their country's public debt ratio is more than twice that of Cyprus when it defaulted.
From New York to London, Paris and beyond, powerful economic players are deciding that with an ever-deteriorating global fiscal outlook, conventional levels and methods of taxation will no longer suffice. That makes weapons of mass wealth destruction—such as the IMF's one-off capital levy, Cyprus's bank deposit confiscation, or outright sovereign defaults—likelier by the day.
Mr. Hatchuel is managing partner of Square Advisors, LLC, a New York-based asset management firm.
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Tuesday, December 3, 2013

This one number explains how China is taking over the world

An announcement Tuesday by the obscure-sounding Society for Worldwide Interbank Financial Telecommunication, better known as SWIFT, may not get much ink. China's currency, it reported, was used in 8.66 percent of global trade finance transactions in October, the group said. It's now the No. 2 most widely used currency for trade finance, supplanting the euro.
But that is a lot more important than it might sound. It gives an important window into how the global economy is changing--and why America's long reign of economic dominance is at risk.
Let's back up. Suppose you're a textile manufacturer in Malaysia, and you want to sell your goods all across Asia and beyond. You sell those goods on credit, letting buyers pay you later for goods shipped today. But what currency should that credit be extended in? You might prefer it be denominated in Malaysian ringgit. Your buyers would prefer their home currencies--the Indonesian rupiah, the Thai baht, whatever. So you settle on something neutral--a currency that is viewed as having stable value and which each party can easily convert funds into and out of.
For decades, that has meant you finance this trade in dollars, and only dollars. This is one important piece of America's role as issuer of the "global reserve currency," a result of the dollar functioning as the bedrock of the global financial system.
But the SWIFT data show that the renminbi, China's currency (also known as yuan), is fast becoming the dollar's major competition for dominance in global trade. It held only a distant second place in October, to be sure. the dollar accounted for more than 81 percent of global trade finance, to less than 9 percent for renminbi. But the speed with which China's currency has gained market share as a tool for international trade is astonishing. In January 2012, it accounted for less than 2 percent of trade finance, behind the dollar, euro, and yen. One can easily imagine the renminbi being the dominant currency for financing trade within Asia within a few years.
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It is no accident. The Chinese government has long sought a role as a financial power to match its economic might. It has sought to establish Shanghai as a financial capital on par with London or New York. Internal advocates of reform, particularly at the People's Bank of China, have used this nationalistic goal to push for the changes that China will need to undertake if it to achieve those goals: Allowing a more free flow of capital in and out of China, backing away from its aggressive interventions to depress the value of the currency, and encouraging the development of modern bond markets.
Encouraging the use of yuan in trade finance has been perhaps the most successful aspect of China's financial rise to date. In the new SWIFT report, quite logically China itself and Hong Kong (a special administrative region of China which has its own currency) account for the vast majority of the renminbi-denominated trade finance, 58 and 21 percent respectively. But China is making inroads beyond its own borders, with Singapore, Germany, and Australia counting for much of the remainder.
And the PBOC has established linkages with a range of foreign central banks, first in Asia and now in Europe, that will help ensure that banks around the world can get access to renmimbi when they need it. These "swap lines," including one agreed to in October with the European Central Bank, should help give businesses confidence that they can finance trade with renmimbi without the fear that there will be a sudden freeze-up in money markets that mean they can't convert their funds.
A German exporter, for example, can have confidence that if his bank has trouble getting access to yuan for whatever reason, the ECB can get access to the currency through the PBOC and then extend emergency loans to European banks.
There is an interesting parallel: This is exactly the tool that the U.S. Federal Reserve used during the 2008 crisis to help flood the global financial system with dollars at a time banks were hoarding them. At the peak, in December 2008, the Fed's liquidity swap linesamounted to $580 billion with 14 foreign central banks. The Fed was the lender of last resort to the world; the fact that it would do such a thing is part of the reason the dollar is the global reserve currency.
So China is taking concerted measures to make renminbi a more useful currency for global commerce, and it is starting to pay off in its usage for trade finance. Should America care? Does this matter for the United State's financial future?
The dollar's status as reserve currency creates an "exorbitant privilege," as it has been called, insulating the United States from many of the vicissitudes of global financial flows and making long-term U.S. interest rates lower than they would be otherwise. It also has some costs, most notably keeping the value of the dollar higher than it would otherwise be on global currency markets, which makes U.S. exporters a bit less competitive.
On one level, the rise of China as a financial giant could be good for the world. There's no obvious reason that when a Malaysian company and an Indonesian company do business, they should use the currency of a country that is 9,000 miles away and speaks a different language. And for China, leadership in the financial sphere could help speed along a process of maturing as a leader on the world stage. If China becomes Asia's banker, it might be too busy making money to be a geopolitical threat.
In the meantime, put China's rise in trade finance on a long list of ways that the United States can't count on being the only global hegemon around forever.

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Dems Pressuring GOP to Extend Unemployment Insurance Again

WASHINGTON – Congressional Democrats are pressuring Republicans to once again extend emergency benefits to the nation’s unemployed, asserting that more than one million people unable to find work will see their assistance expire just after Christmas unless the issue is addressed.
Democrats on the House Ways and Means Committee signed and sent a letter to Rep. Dave Camp (R-Mich.) asking the panel’s chairman to hold a hearing on the approaching end of the federal Emergency Unemployment Compensation program, characterizing it as “an urgent economic issue.”
“With the end of the year fast approaching, we must hear from Americans who just days after Christmas would immediately lose their unemployment insurance if Congress takes no action,” the letter said. “We invite you to work with us in setting up such a hearing, so that the human consequences of the pending expiration of the federal unemployment insurance program are fully understood.”
Republican lawmakers have remained relatively quiet about the looming deadline. A spokesman for House Speaker John Boehner (R-Ohio) would only say GOP leaders would consider an extension proposal.
Legislation has been introduced in both the House and Senate to extend federal unemployment insurance benefits through 2014 at an estimated cost of $25 billion. The fate of those measures remains unclear.
“Both parties have extended emergency unemployment insurance in times of high unemployment and we need to continue that now,” said Sen. Debbie Stabenow (D-Mich.), a co-sponsor of the Senate bill. “The economy is getting better, but unemployment is still too high and there are still three people looking for work for every one job opening. Congress needs to focus on helping businesses create jobs, not pull the rug out from families unemployed through no fault of their own.”
The unemployment insurance system is a partnership between the federal and state governments that provides a weekly benefit to qualified individuals who lose their job and are seeking work. The amount of that benefit is based in part on a worker’s past earnings.
States typically provide unemployment benefits for 26 weeks. The temporary Emergency Unemployment Compensation, initiated in 2008 during the height of the financial crisis, allowed the states to extend that time limit. Last year lawmakers agreed to an extension and included a provision that allows individuals attempting to start their own businesses to continue collecting benefits even though they are not actively seeking new jobs.
Failure to preserve unemployment insurance will affect 1.3 million Americans who will find themselves cut off if an extension isn’t approved by Congress by Dec. 28. Another 1.9 million Americans will be denied access to the emergency program during the first six months of next year. If Congress does not renew the law, those out of work who file for unemployment benefits in 2014 will only qualify for state benefits, which last a maximum of 26 weeks. Reports show that the average unemployed person is out of work and searching for a new job for 36 weeks.
The federal government reports that 36 percent of those unemployed have been out of work for more than six months and the economy still has 1.5 million fewer jobs than before the 2008 recession.
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Power outage plunges most of Venezuela into darkness

By Diego Ore and Andrew Cawthorne
CARACAS (Reuters) - Venezuela's second massive power outage of the year plunged much of the nation into darkness on Monday night, prompting renewed talk of sabotage from President Nicolas Maduro's government and cries of incompetence from its foes.
Power went off in Caracas and other cities around the country soon after 8 p.m. local time (0030 GMT), to the intense annoyance of residents and commuters.
"I feel so frustrated, angry and impotent," said sales adviser Aneudys Acosta, 29, trudging through the rain along a street in the capital after having to leave the disrupted underground transport system.
"I live far away and here I am stuck under the rain. Something's going wrong that they're not sorting out. The government needs a Plan B. This is just not normal."
Monday's outage appeared similar to a massive September 5 blackout that was one of the worst in the South American OPEC member's history.
Maduro, a 50-year-old former bus driver who narrowly won a presidential election this year after the death of his mentor and former leader Hugo Chavez, accused the opposition then of deliberately sabotaging the power grid to discredit him.(sound familiar.they are learning from obama. blame others)
His powerful ally and National Assembly president, Diosdado Cabello, repeated the same accusation after Monday's blackout that affected more than half of Venezuela.
"I have no doubt that today's electricity sabotage is part of the right-wing's plan," Cabello said on Twitter.
PROTESTS
In some wealthier parts of Caracas, where opposition to the socialist government is strongest, people began banging pots and pans out of their windows in a traditional form of protest.
Some shouted, "Maduro, resign!"
Venezuela has been suffering periodic electricity cuts around the country since 2009, although the capital has been spared the worst outages.
Critics say the power problems symbolize the failure of the government and its 15 years of socialist policies in resource-rich Venezuela. The country has the world's largest crude oil reserves and big rivers that feed hydroelectric facilities generating two-thirds of its power.
The blackouts, some due to planned power rationing and at other times to utility failures, have not affected the oil refineries, which are powered by separate generator plants.
State oil company PDVSA said its installations were all working normally on Monday night, with fuel supplies guaranteed.
Electricity Minister Jesse Chacon said the same major transmission line that went down in September - and carries about 60 percent of national supply - had again been affected.
Power began returning to most parts of Caracas within an hour or two, though remoter parts of the nation of 29 million people were still in the dark late into the evening.
"We ask Venezuelans for patience," Chacon said.
PRESIDENT CUT OFF LIVE ON TV
Maduro was giving a live address on state TV when he was abruptly cut off. He later Tweeted that he was continuing to work in the presidential palace despite the "strange" blackout, and appeared live on state TV surrounded by school children.
"Be strong against this electrical war that yesterday's fascists have declared against our people," Maduro said in another address to the nation at about 11 p.m. local time.
Security services were on alert, while the oil industry had been "put on emergency", the president said.
Since winning office in April, Maduro has accused political opponents of conniving with wealthy businessmen and their allies in the United States to undermine his government.
As well as accusing them of sabotaging the power grid, he has alleged plots to assassinate him and to destroy the economy through price-gouging and the hoarding of products.
Venezuelans are suffering from a 54 percent annual inflation rate, as well as scarcities of basic products from flour to toilet paper. Nationwide local municipal elections on Sunday are seen as a major test of Maduro's standing.
Opposition leader Henrique Capriles said government officials' bellicose statements were "pathetic" at a time of national disquiet. "For once in your lives, be responsible," he Tweeted.
Capriles and others say the reasons for the power failures are obvious and simple: lack of investment, incompetence and corruption within the state-run power company Corpoelec since Chavez's 2007 nationalization of the sector.
Venezuela has a maximum generation capacity of about 28,000 megawatts and normal demand of about 18,000.
The government constantly chides Venezuelans, however, for wasteful habits in a nation where the average household consumes an average of 5,878 kilowatt hours per year, about double the average in Latin America.
(Additional reporting by Deisy Buitrago and Daniel Wallis.; Editing by Philip Barbara and Christopher Wilson)
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Sunday, December 1, 2013

Obamacare: 500M Lines of Code, $500M, 60% Complete, No Surprise

The historic IT disaster known as the Obamacare web site has been of intense interest to me, since I've been a Senior Software Engineer for decades, and I have personally participated in, witnessed, and reported on (as a technology reporter) a number of IT disasters. But even so, the size of the Obamacare web site catastrophe on October 1 still takes my breath away.
When I first heard, shortly after October 1, that there was 500 million lines of code in Healthcare.gov, I quickly rejected that figure, because it's impossible. 

Going back to the development of IBM's System/360 operation system, as described in Fred Brooks' classic book, The Mythical Man-Month, the average programmer on the project wrote six lines of code per day. Of course, every programmer writes a lot more than that on SOME days, but on other days he writes zero lines of code, since he's doing testing or debugging or rewriting or documenting. So for System/360, it all averaged out to six lines per day per programmer. 

So let's say that the Obamacare programmers were much better than that, and wrote 100 lines of code per day average. Let's say that there were 1000 programmers. And let's say that, over the three year period, there were about 660 business days. Then, with those generous assumptions, you get 100*1000*660 = 66,000,000 lines of code. It's simply impossible to reach 500,000,000. 

And yet, the 500 million figure is apparently true. I've heard it dozens of times in the last month, and no one is denying it. Healthcare.gov apparently really does have 500 million lines of code. How is that possible? 
I get a picture in my mind of 1,000 people sitting a computers typing code, without worrying about whether or not it works. Given the size of the catastrophe, some variation of that must have happened.
More important than that, a code base that size is unsupportable. Health services is a rapidly changing field, and every time there's some kind of process or rule change, it will take an army of programmers to make all the necessary changes in the code base. And that assumes that all the bugs have been fixed, which is far from true. Healthcare.gov will not be fully functional at any time in the foreseeable future, if ever. 
On October 1, Healthcare.gov had 500 million lines of code, and could handle a handful of simultaneous users. Facebook.com has 20 million lines of code, and handles millions of simultaneous users.
Then there's the cost. Healthcare.gov should have cost $5-10 million to implement. Take into account government corruption and incompetence, it should have cost $10-25 million. Instead, it cost $300-600 million -- let's say $500 million. How do we get to that figure? Well, assume 1000 programmers are paid an average of $100 per hour ($200,000 per year) for 8 hours per day for 660 business days: $100*1000*8*660 = $528 million. So at least that figure makes sense -- as long as you understand that the Obama administration poured half a billion dollars into the pockets of his cronies and supporters, and got exactly what he deserved with Healthcare.gov. 
How could President Obama have been so wrong?
There have been numerous reports that the Obama administration had been informed many times, including by McKinsey & Co. in March, that Healthcare.gov was in serious trouble. And yet, just two weeks ago, on November 19, President Barack Obama said: 
I was not informed directly that the Web site would not be working the way it was supposed to. Had I been informed, I wouldn't be going out saying, boy, this is going to be great. You know -- I'm accused of a lot of things, but I don't think I'm stupid enough to go around saying this is going to be like shopping on Amazon or Travelocity a week before the Web site opens if I thought that it wasn't going to work. So, clearly, we and I did not have enough awareness about the problems in the Web site. And so, since he posed the question of how he couldn't have been that stupid, let's try to find an answer.
And so, since he posed the question of how he couldn't have been that stupid, let's try to find an answer. 

Once again, I have a number of personal experiences that relate to this, and the main one I'd like to relate is the most bizarre day of my professional life. 

In 1985, I was doing contract programming for Northrop Corp., developing embedded software for munitions guidance systems. The project manager had to be reassigned, and I became acting manager. After being in this position for 2-3 weeks, it was clear to me that the whole project was in trouble, would slip at least three months. I told this to the program manager, and he nearly freaked out. 

I was then pulled into one meeting after another, and met high-level managers that I never knew existed. Their conclusion apparently was that I was full of crap, and they decided to fire me, but they weren't sure, so they decided to let me stay on until the release date, and then they would fire me. 

About a week before the release date, there was a meeting in the lab, where the lead programmer was to demonstrate the embedded system to the Corporate VP. I attended this demo, but I was ordered just to stand there and keep my mouth shut. So I stood back, leaned against the wall, and just watched the proceedings. 

The lead programmer gave his demo, and the VP ooohed and ahhhhed. He then asked, "And this will be ready for release next Monday?" The lead programmer said, "Yes, it will be ready on Monday." The other managers in the room also said, "Monday." 

I was holding my breath through all this. I couldn't believe what I was hearing. Either I was crazy or all of them were crazy. That's why I call this the most bizarre day of my life. 

Well anyway, to make a long story short, the project was not ready for release the following Monday. It slipped six months. I wasn't fired because one Silent generation manager went around and told everyone that "Xenakis was right, so he shouldn't be fired." So I wasn't fired. 

I've had several other experiences like that, except that usually I was fired, even though I was always right. In 1992, I was working as a contract programmer for Fidelity. I did a little unit testing, and wrote a memo to my manager, listing numerous problems why the project was in trouble, saying that it would slip at least six months. The manager was so furious that he had smoke coming out of his ears. He fired me. The project crashed completely a couple of months later. I was right, and he was wrong, though I paid the price. 

In a previous article ( "14-Oct-13 World View -- HealthCare.gov IT systems a continuing disaster") I related a 2005 experience where I was fired for telling my management that the $10 million project currently under development would slip 6-12 months. I was fired and out of a salary, while the dozens of incompetent engineers kept collecting salaries for over another year, at which time the disastrous project was canceled completely. 

So there's really nothing about the Healthcare.gov disaster that's a surprise to me (except the 500 million lines of code). I've been a Senior Software Engineer for a long time, and I've worked on over 100 projects, so I've seen disasters. The only thing that's different about Healthcare.gov is the breathtaking size of criminality of the Obama administration in wasting so much money on cronies and corruption, and the breathtaking size of the resulting well-deserved disaster. 

It's now December 1, the scheduled date of the Healthcare.gov re-launch. Based on news reports, the following has been done: 

  • The screens will be changed to be prettier and more fun.
  • All the small business functionality has been removed and postponed for a year.
  • All the functionality for online payments has been removed, which means that customers will have to be billed by mail by the insurance companies.
  • The security issues, including the exposure to identity theft, have not been dealt with at all.
  • According to some reports, the web site is only 60% completed, even after 500 million lines of code and $500 million. The cost of the web site could run into the billions.
  • Users will be encouraged to go online at "off-peak hours," to keep the web site from being overloaded.
  • The administration is licensing other web sites to share the load. GoHealth.comand TheHealthSherpa.com have been named in news reports.
With regard to the billing being done by mail, as I understand it, you have to miss three payments in a row to be dropped off your Obamacare plan. If that turns out to be true, then what you can do, Dear Reader, is sign up for an Obamacare plan, not pay your bill, and then sign up with a different insurance company in three months. However, your doctor won't be happy to see you, since the insurance company won't reimburse him for treating you. 
The Future of Obamacare
Long-time readers are aware that from the day it was first proposed in 2009, I've referred to President Barack Obama's health care plan as a proposal of economic insanity,because it's a repeat of President Richard Nixon's wage-price controls, which were an utter, total disaster for the economy. 

In an article on July 5 ( "5-Jul-13 World View -- Eurozone and Obamacare continue their parallel economic collapse"), I explained in greater detail why Obamacare would fail for the same reasons as Nixon's wage-price controls and Mao Zedong's Great Leap Forward in the 1950s. 

A couple of people criticized me for making the comparison to Mao's Great Leap Forward. However, Mao's Great Leap Forward contained exactly the same elements as Nixon's wage-price controls and Obamacare -- attempts to control a huge market by passing a law, which makes just as much sense as trying to control the weather by passing a law. 

But if the elements are the same, there are major differences in degree. Mao carried those elements much farther, and the results were commensurately more disastrous, with the deaths of tens of millions of people. Nothing like that happened with Nixon's controls, or is expected to happen with Obamacare, where the "only" result is a disastrous economic and medical crisis, with the destruction of much of the medical services marketplace. 

Still, there's one more lesson to be learned from Mao's Great Leap Forward. When things started going wrong in early 1959, Mao was warned by numerous experts. Instead of heeding those warnings immediately, which might have saved ten or twenty million lives, Mao had the experts fired or executed. We're now at a very dangerous time when the economic calamities of Obamacare are obvious to almost everyone, and are being pointed out by many people. But instead of heeding the warnings, President Obama is ignoring them, and threatening political opponents with such things as further IRS audits. The longer President Obama continues in this way, the more damage he does. Obamacare will not cause the tens of millions of deaths that Mao's Great Leap Forward did, but it's now quite possible that Obamacare will be the direct cause of hundreds or even thousands of deaths. Investors Business Daily 
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