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What Went Wrong With Japan’s Economy (Part Three of Three)

2012/01/31 1 comment

And How to Repair It

by Bill Totten

http://www.ashisuto.co.jp/ (January 31 2012)

I read this in a news report the other day:

Japan’s prime minister told parliament Tuesday he will move to double sales taxes, warning that the future of the world’s third-largest economy depends on turning the rising tide of public debt …

… Noda’s proposals could boost annual tax receipts by roughly ten trillion yen ($130 billion), the first step towards Tokyo weaning itself  off borrowing. {11}

This really is cheeky. Mr Noda really is saying our government must double sales taxes because it has cut Income Taxes by 28 percent, Corporation Taxes by 51 percent, and Inheritance Taxes by 32 percent since  1988 {Japan Taxes.xls, cells c102, d102, e102}. He wants to boost regressive Consumption Taxes by ten trillion yen, but says nothing about the nearly eleven trillion yen our government has cut from progressive and proportional taxes since 1988 {Japan Taxes, cell p101}.

The story also said,

… only around forty percent of what the government spends is currently made up from taxes.

The rest is financed from borrowing, leaving debt at more than double  the country’s gross domestic product, an eyewatering ratio that dwarfs troubled Greece and will only grow unless more tax revenue is raised, experts warn. {11}

It is true that now, only forty percent of what our government spends is currently made up from taxes, but it also is true that the portion covered by taxes was much higher until 1989 when our government started slashing progressive or proportional Income, Corporation, and Inheritance Taxes while trying to make up some of those tax losses by instituting then raising the Consumption Tax {Japan Taxes.xls, cells p101, q101}.

Japan Taxes

But why is the rest of our government’s spending, the portion not financed by taxes, financed by borrowing?
Actually, that statement isn’t entirely true, about fourteen percent of our government spending not financed by taxes is  financed by other government revenues {Japan Money & Debt.xls, cells f51 to  f73}. But most, now close to half, of our government spending is financed by borrowing?  {Japan Money & Debt.xls, cell g73}.

Japan Money & Debt

Why?

Because, instead of creating all of our nation’s money itself, as it did before it began mimicking and obeying western nations during the Meiji Era, our government now let’s private banks create about ninety percent of our nation’s money {Japan Money & Debt.xls, cells j53 to j68}. And our government allows those private banks to charge us citizens, our businesses, and our government itself for using that ninety percent of our nation’s money.

Our government mints our coins and prints our bills but they are only about ten percent the money we use to buy and sell things {Japan Money & Debt.xls, cells i53 to i68}.  The supply of government money increases when it mints new coins or prints new bills and decreases when the government doesn’t replace lost or worn out coins or bills.

Private banks create money by making loans. Our government allows private banks to loan out about 100 yen for every one yen the bank has in its vaults. Our government doesn’t allow hotels to rent out 100 rooms for every room they actually have, nor does it allow airlines rent out 100 seats for every seat they actually have, nor does it allow rental car agencies to rent out 100 cars for every car they actually have, but it allows banks to loan (rent out) 100 yen for every one yen they actually have.  This is special privilege is called “fractional reserve banking” and most western governments now provide it to their private banks {12}.

The supply of private-bank money increases whenever a bank makes a loan and decreases whenever a loan is repaid.

Since our government allows private banks to create ninety percent of our nation’s money by making loans, and since private banks charge interest on those loans, we all (including our government itself) must pay interest to private banks on ninety percent of our nation’s money. In effect, our government has given private banks the unique privilege of renting to us citizens, businesses, and government itself ninety percent of the money we need to buy and sell things. Put another way, our government allows private banks to levy a tax on ninety percent of the money used by the citizens, businesses, and central and local governments of our nation.

One disadvantage of this is that unless our economy grows enough to pay the interest on this money created by private banks, people or businesses or governments will go bankrupt. Thus, assuming banks charged only two percent interest on loans, we needed four percent GDP growth in the 1990s but got only one percent {Japan Money Supply.xls, cells n61, p61} and during the past decade we needed three percent GDP growth but got zero percent  {Japan Money Supply.xls, cells n64, p64}. This is sufficient to explain the restructuring and bankruptcies over the past two decades.

Japan Money Supply

This is the real reason behind our government’s, our business community’s, and our media’s obsession with economic growth. If our economy doesn’t grow fast enough to pay the interest private banks charge on the ninety percent of our money our government allows them to create, individuals and businesses face bankruptcy – and businesses nearly always will dump employees to avoid bankruptcy.

This private-bank creation of our money via “fractional reserve banking” also the predominant cause of our public debt.

In 1970, our public debt was less than three trillion yen {Japan Money & Debt, cell h8}.

From 1971 to 2010, our public debt increased by 642 trillion yen, which is 99% of the monies private banks created during that period {Japan Money & Debt, cell h48/(cell j48 – cell j8)}.

If our government had never borrowed any money since 1971 {Japan Money & Debt, column g} it wouldn’t have had to spend any money servicing the public debt {Japan Money & Debt, column c}.  In that case our public debt in 2010 would be only seven trillion yen {Japan Money & Debt, cell i52} instead of 642 trillion yen {R, cell h48}.  In other words, if our government had created a mere seven trillion yen (one percent) of the 649 trillion yen it allowed private banks to create since 1971 {Japan Money & Debt, cell j48 – j8}, we would have no public debt today!

Moreover, if our government had created all the money it allowed private banks to create since 1971, it would not have had to borrow any money, so it would not have had to spend any money servicing public debt, so we would have a 657 trillion yen public surplus {Japan Money & Debt, cell k52} instead of a 642 trillion yen public debt today {Japan Money & Debt, cell h48}!

Our government should take the following steps:

1. Announce immediately that it is eliminating “fractional reserve banking” as of April 1st of this year. From April 1st it will require private banks to have 100% reserves for all loans, including currently outstanding loans. That is, from April 1st, banks can loan only monies they actually have: their own paid-in capital plus monies customers have deposited for fixed terms. For example, if a bank has ten billion yen of paid-in capital, it can loan out ten billion yen for so long as it maintains that capital. And if a bank has three billion yen of deposits that cannot be withdrawn until the end of this year, it can loan out those deposits until the end of this year. If a bank’s reserves are not enough to cover its currently outstanding loans, the government will loan the bank enough money to bring its reserves up to 100% of those loans. The government will charge the bank the same rate of interest the bank is charging its customers on each of those outstanding loans.

2. Announce that from April 1st it will cease paying interest on all monies it has borrowed, but will repay each of those loans (for example, redeem each of its bonds) immediately upon demand.

3. Then our government should create enough money  to repay imediately all of its outstanding debt, which was about 642 trillion yen at the end of 2010 {Japan Money & Debt, cell h48}.

4. From April 1st, our government should create all money it needs to spend that is NOT covered by taxes. For example, if our government needs a billion yen to build a bridge, it should print the money and pay it to the builders (or transfer electronic digits to the builders’ banking accounts).

If our government had taken these steps since 1971, we would now have a 657 trillion yen public surplus instead of a 642 trillion yen public debt {Japan Money & Debt, cells k51, h48}.

These steps won’t harm our government’s creditors, because the creditors will now have 642 trillion yen less of older assets (the loans the government buys from them buys back from them) and 642 trillion yen more of new assets (the money the government pays them for those loans).

These steps won’t harm our government, because it will now have 642 trillion yen less of liabilities (the loans it buys buys back from creditors) to balance its 642 trillion yen more of new liabilities (the money the government creates to pay its creditors for those loans).

These steps won’t cause either inflation or deflation immediately because they will neither increase nor decrease the amount of money in circulation. And they will cause neither inflation nor deflation in the future so long as our government creates new money at a neither faster nor lower rate than private banks have in the past.

Can we trust our government to use this money-creation power properly, so as to cause neither inflation nor deflation?

My answer to that is another question: Who can we best trust, the government that we elect democratically or private, profit-seeking banks?

Are these steps impossible?

Not at all. The US Federal Reserve and Treasury has created, spent, lent, and guaranteed $29 trillion (about 2300 trillion yen) since 2008 to rescue US and foreign banksters. This astounding number is more than twice US gross domestic product, the nominal value of all goods and services produced for the year 2010. But they created spent, lent, and guaranteed this money only to help their fellow crony banksters and other financial pirates, not the general populace. {14}

Conclusion

I believe our government’s tax policy, not the 1980s asset bubble, is what caused our “two lost decades” and what is causing our economy to continue to stagnate if not shrink.

In the 1970s and 1980s our economy grew by ten percent per year.

During the bubble land prices doubled and stock market prices tripled, but the real economy grew at about the same rate as before the bubble, never by more than ten percent per year.

When the bubble burst, land prices and stock prices fell by half,  but the real economy continued to grow.

The bubble was a gambling binge by rich people and giant corporations. Most people and small businesses were not involved.

But after the consumption tax was levied in 1989, growth of the real economy fell from ten percent annually to four percent annually. And after the Consumption Tax rate was hiked to five percent in 1997, our economy began to shrink.

This is easy to understand because seventy percent of our economy is consumption and 29% is investment and inventory increase to supply consumption.

(The remaining one percent is net exports. Our economy is not and never has been “export driven”.)

Our economy is and, except during wars, always has been driven by the consumption of lower and middle income families and smaller businesses who spend most of their income consuming the clothing, food, and housing essential to health and happiness.

But since 1989, our government has been burdening these lower and middle income families and smaller businesses with higher, regressive taxes while cutting taxes on richer citizens and giant corporations: Since 1989 our government has increased regressive Consumption Taxes by  about thirteen trillion yen while cutting progressive or proportional Income, Corporation and Inheritance Taxes by about eleven trillion yen.

What better way to cut kill consumption, and the investment and inventory increase driven by consumption, which together comprise 99 percent of our economy?

Increasing the regressive consumption tax now is sure the shrink our economy further.

A fair tax policy taxes progressively or, at least proportionally, to ability to pay.

A wise tax policy encourages activity that benefits society and discourages activity either harms or doesn’t benefit society.

Our government should (1) abandon the Income Tax because it discourages work and saving, (2) abandon the Corporation Tax because it discourages production, (3) abandon the Inheritance Tax because it discourages saving.

Our government should replace those taxes with taxes on land values, trading of previously-issued corporate shares, and trading of yen as foreign exchange because (1) the income is unearned and (2) these taxes would discourage speculation which doesn’t benefit society and often harms society: gambling on land values drives up land prices, making land more expensive for homes and productive activity; gambling on previously-issued corporate shares forces managers give short-term profits priority over long-term health of their business and its contribution to society; and gambling on the value of our yen harms our international trade and the international value of our income and assets.

Our government should replace the current regressive Consumption Tax with a steeply progressive Consumption Tax because (1) it is fair and (2) it discourages excessive consumption which doesn’t benefit society, wastes energy and other precious resources, and pollutes our environment excessively.

Finally, to eliminate our public debt and reduce taxes our government should (1) terminate fractional reserve banking, allowing banks to loan only money they actually have, thereby eliminating their ability to create money out of thin air as loans (2) create enough new money out of thin air to pay off all of its current borrowings, (3) announce that, say after April 1st, it will no longer pay  interest on those borrowings, and (4) pay off immediately all loans that its creditors want paid off. And, say from April 1st,  our government should create out out of thin air all money it needs to spend that is not covered by taxes.

Our government always should create enough money to prevent deflation but not enough to cause inflation and it always should take in enough money in taxes to discourage gambling on land values, share prices, the value of our yen; to discourage excessive consumption; and to discourage other activity harmful to our society.

Can we trust our government to do these things fairly and wisely?

If we cannot, why do we bother with elections?

Notes:

{11} http://news.yahoo.com/japan-premier-announces-sales-tax-hike-plan-061902391.html

{12} ‎Here is my understanding of “fractional reserve banking” {13}. I will greatly appreciate anyone telling me anything I got wrong.

In Japan, the “reserve requirement” seems to be about one percent. This means, basically, that a bank can loan out 100 yen for each one yen it has in its vaults.

This seems to be a very special privilege extended by our government to banks, but not to other kinds of enterprise. Our government doesn’t allow hotels to rent out 100 times more rooms than they actually have, an airline to rent out 100 times more seats than they have, or a rental car agency to rent out 100 times more cars than they have.

Suppose a bank with one yen in its vault extends you a loan of 100 yen. If you are a prime customer, it charges you its prime interest rate of about two percent per annum. If you are not a prime customer, it  charges you an interest rate of, perhaps, four percent per annum. So to borrow 100 yen from a bank, you and the bank’s other customers pay the bank interest of two to four yen per year. Put another way, you and other borrowers are paying the bank two to four yen per year to rent 100 yen from the bank.

But the bank needed only one yen to create this 100 yen loan, so it is earning 200 to 400 percent  per annum in interest on the one yen it actually risked.

What if you default on this 100 yen loan?

Since the bank only needed one yen to create the 100 yen loan, it loses only that one yen, not 100 yen.

But the bank convinces its cronies in government that it lost 100 yen, so they take 100 yen of taxpayer money to repay the bank for the 100 yen it supposedly lost. In Japan, we call this “furyou saiken”. In English-speaking nations it’s called a “bailout”. In plain language it’s a scam.

So, by risking one yen to create a 100 yen loan, the bank receives two to three yen per year in interest (a 200 to three hundred percent per year return on its one yen) until the loan is repaid and, if the borrower defaults, the bank gets a 100 yen bailout from taxpayers (a 100 10,000 percent return on the one yen it risked).

So far we have focused on just one bank.  If the borrower deposits that 100 yen (created out of thin air from one yen) in the bank that loaned it to her, in another bank, or in several other banks, the banking system will now have 100 yen in its vaults, so it can now create another 10,000 (=100 x 100) yen by making new loans at say two to four percent, bringing them profits of 200 to 400 yen per year from that 100 yen. And if the borrowers of that 10,000 default, the banks will only lose that 100 yen because they created the other 9,900 yen out of thin air or, more precisely, out of the special privilege our government extends and to banks and banks only. But the banks will say claim they’ve lost the entire 10,000 yen and cry to government for a 10,000 yen bailout that we taxpayers will have to bear.

If borrowers do not default on this 10,000 yen newly created by private banks as loans, and the borrowers deposit that 10,000 in banks, the banking system can now use it to create still another 1,000,000 (=100 x 10,000) yen in loans. This can go on indefinitely, allowing the banking system to create a practically infinite amount of money, all from that original one yen in the vault of one bank.

I think this explains why nearly as much money is spent gambling on corporate shares in our nation as is spent producing goods and services {Stock Market.xls, cells i68, j68} and why worldwide gambling on foreign exchange is eighty times greater than international trade and thirty times greater than worldwide production of goods and services {Forex.xls}. Since 99 percent of the money gambled was created out of thin air by private banks, the payoffs on winning bets are huge while the real losses on lost bets are only one percent of the amount wagered.

Japan Stock Market

Forex

I also think this explains what the banks are doing to Portugal, Ireland, Italy, Greece and Spain, the so called PIIGS. Here banks used, say, one million dollars of their own money to loan 100 million dollars to these PIIGS and got two to four million dollars per year in interest until the PIIGS threatened to default. When the PIIGS threaten to default, the IMF (the bill collector for the international banking cartel) insists that these PIIGS raise taxes on, and cut services to, their citizens to raise enough money to repay the real pigs 100 million dollars for the one million dollars they  they (the pigs) actually risked.

Wouldn’t you like to become a pig (aka “banker”)?

{13}: https://en.wikipedia.org/wiki/Fractional-reserve_banking

{14} See the following:

https://billtotten.wordpress.com/2012/01/02/modern-money-blog-number-twenty-nine/
https://billtotten.wordpress.com/2011/09/19/it-takes-real-skill-to-lose-2-billion/
http://neweconomicperspectives.blogspot.com/2011/09/debt-pyramid-and-clearing-responses-to.html
https://billtotten.wordpress.com/2011/09/27/modern-money-blog-number-sixteen-responses/
https://billtotten.wordpress.com/2011/09/30/euro-toast-anyone/
https://billtotten.wordpress.com/2011/12/14/bernankes-obfuscation/
https://billtotten.wordpress.com/2011/12/25/bail-out-bombshell/

Categories: Uncategorized

What Went Wrong With Japan’s Economy (Part Two of Three)

2012/01/30 8 comments

And How to Repair It

by Bill Totten

http://www.ashisuto.co.jp/ (January 30 2012)

I think our government has much better ways than the regressive Consumption Tax for increasing tax revenues.

I see at least two important criteria for taxes:

1. They should be fair:  that is, progressive or at least proportional to ability to pay, not regressive.

2. They should encourage behavior beneficial to society and discourage behavior harmful or not benefiacal to society.

Our Consumption Tax, whereby the poor pay the same rate as the rich on the same consumption, clearly is regressive and so violates the first criterion.

Our Personal Income Tax meets the first criterion because it is somewhat progressive to income. But, to the extent that higher personal incomes come from higher contributions to society, it discourages effort beneficial to society. And to the extent people save a portion of their incomes, it discourages saving (which provides others with money to borrow and invest).

Our, Capital Gains Tax, which allows speculators to pay no more than ten percent tax on gains of millions, billions, or even trillions of yen from gambling on land or financial assets – the same rate a worker pays on a salary of 3.3 million yen or less – encourages behavior that does not benefit and almost surely harms society {9}.

To the extent that higher business profits are earned by contributing to society, our Corporation Tax punishes those contributions.

And our Inheritance Tax, if it were levied much more widely than merely on the five percent largest fortunes, would discourage saving; other things being equal, people who squander their wealth would pay less tax than people who save it to pass on to their heirs.

So what would be better taxes than we have now or that our government is trying to levy soon?

Here are my proposals.

Land Tax

A land tax is a tax on the value of the land itself, not a tax on things built on the land – such as homes, offices, factories – nor a tax on revenues from things produced on the land.

The value of land has almost nothing to do with the owner’s effort or ability. Land values almost entirely depend on what others (than the owner) do nearby the owner’s land. For example, land values rise as cities grow in size,  and shrink when cities shrink; land values rise when a subway or railroad station, a department store or shopping center,  or a school is built nearby, and so on.  So a land tax is a tax on unearned income, unlike an Income or Corporation tax that taxes earned income.

Richer people and larger corporations own more land, and more valuable land, than poorer people and smaller businesses, so a land tax is proportional to income and wealth, that is, it varies directly with ability to pay the tax.

The value of all taxable land in our nation now is about 1,000 trillion yen {Japan Land.xls, Line 5} so:

* A two percent tax on land values would yield our government about twenty trillion yen in new revenues, about the same as it would collect from raising the current five percent Consumption Tax to eight percent {Japan Taxes.xls, cell q114};

Japan Land

* A three percent tax on land values would yield our government about thirty trillion yen in new revenues, about seven trillion yen more than it collected from all personal income, corporation and inheritance taxes in 2010 {Japan Taxes.xls, cells c93 + d93 + e93), and about five trillion yen more than it could collect from the ten percent Consumption Tax our government is planning to levy soon {Japan Taxes.xls, cell q115}.

Japan Taxes

* A  four percent tax on land values would yield our government about forty trillion yen in new revenues,  more that it collected from all personal income, corporation, inheritance taxes, and consumption taxes in 2010 {Japan Taxes.xls, cells c93 + d93 + e93 + q93} and more than it could collect from raising the Consumption Tax to fifteen percent as the IMF urges {Japan Taxes.xls., cell q116}.

Such a land tax also would discourage land speculation because a landowner who could not get more value than the tax from the land annually would lose money.

Securities Gambling Tax

About 420 trillion yen of corporate shares are traded every year, and only one percent raise new capital for corporations; that is, only one percent are sales of newly issued shares {Japan Stock Market, line 66}. The other 99% of share trades (trades of previously issued shares) is pure gambling.

* A one percent tax on trades of previously-issued shares would raise more than four trillion yen of new revenues for our government without affecting the ability of companies to raise capital by issuing new shares;

* A two percent tax on trades of previously-issued shares would raise more than eight trillion yen of new revenues without affecting the ability of companies to raise capital by issuing new shares;

* A three percent tax on trades of previously-issued shares would raise over twelve trillion yen of new revenues (about the same as our current five percent Consumption Tax) without affecting the ability of companies to raise capital by issuing new shares; and

* A four percent tax on trades of previously-issued shares would raise over nearly seventeen trillion yen of new revenues (about the same as the eight percent Consumption Tax our government wants to levy from next year) without affecting the ability of companies to raise capital by issuing new shares.

Which do you think is more desirable, to tax consumption of the necessities of life or to tax gambling on previously-issued corporate shares?

Such a Securities Gambling Tax also would benefit corporations and society in another way. The 416 trillion yen spent annually gambling on corporate shares is about 84% of the amount our nation spends producing all goods and services annually {Japan Stock Market, cell J68}.  This much money spent gambling on share prices forces corporations to focus almost exclusively on the short-term, at the expense of their long-term, because no publicly traded corporation can afford to have the value of its shares fall significantly. Both the corporations themselves and society as a whole suffers when corporations are forced to think and act almost exclusively according to short-term criteria.

Japan Stock Market

Foreign Exchange Gambling Tax

About 476 trillion yen worth of foreign exchange is traded DAILY worldwide. This is 48 times greater than worldwide international trade and 24 times greater than Gross World Product (GWP) or gross worldwide production of goods and services.  {Forex.xls, lines 4 to 11}.

Forex

Of this foreign exchange trading, about ninety million yen worth of yen is bought or sold DAILY, or about 33,025 trillion yen per year. This is about is 47 times greater than our GDP, and 176 times greater than our foreign trade (exports plus imports), so over 99.6% of it is pure gambling . {Forex, lines 12 to 19}

* A one percent “Tobin Tax” on each yen bought or sold would provide our government with 330 trillion yen of new revenues {Forex, line 20}, over four times more than all  taxes our national and local governments collected in 2010.

* A one tenth of one percent  “Tobin Tax” on each yen bought or sold would provide our government with 33 trillion yen of new revenues, about 2.6 times greater than the consumption taxes it collected at five percent in 2010 and also about 2.6 times greater than the new revenues our government could collect by doubling the consumption tax from five percent to ten percent.

Again, which do you think is more desirable, to tax consumption of the necessities of life (food, clothing, housing) or to tax gambling on corporate shares?

Of course, such a “Tobin Tax” would likely dampen severely the motivation to gamble on the yen’s international value so, instead of enabling our government to collect such a great amount of new revenues, it most likely would greatly discourage speculation on the yen’s value, thus dampening the ability of speculators to whiplash the value of the yen to our detriment.

To put this in perspective, our government spent twelve trillion yen from August to October last year buying foreign currencies (mostly Dollars and Euros) in a pernicious and futile attempt to keep the yen from rising.

This was PERNICIOUS because, while a strong yen harms our manufacturers to the extent they haven’t yet moved their production offshore, it helps all citizens by raising the international value of our incomes and assets, and it makes our imports less expensive (which is important because we must import sixty percent of our food and nearly all of our energy). When net exports are only one percent of our economy, why spend twelve trillion yen subsidizing them at the expense of all citizens and all other businesses?

What do you think of a government that spends twelve trillion yen futilely trying to subsidize our exports while it hasn’t given one single yen in compensation to the 80,000 citizens it compelled to evacuate the area within twenty kilometers of the Fukushima nuclear plant?

It was FUTILE because during the three months it spent those twelve trillion yen selling yen to keep its value from rising, speculators were spending spending 8,100 trillion yen, mostly buying yen because they expected it to rise {Japan En Yasu, line 21}.  Is our government stupid enough to believe its twelve trillion yen could counter the 8,100 trillion yen betting that the yen will rise?

Japan En Yasu

Over the past five years the Yen has been rising eight percent per year vis-a-vis the Dollar {Japan En Yasu, line 15}, and in the mere three months since last October 31st the Yen has risen seven percent against the Euro {10}.
It these trends continue, and I see no reason they won’t continue, our government stands to lose much of this twelve trillion yen in the coming months.

If our government had spent that twelve trillion yen on us citizens, it could have:

1. Paid compensation of 150,000,000 yen to each of the 80,000 citizens it compelled to evacuate the area within twenty kilometers of the Fukushima nuclear plant {Japan En Yasu, line 25}; or it could have

2.  Hired all 3,000,000 of our “officially” unemployed workers at our nation’s average minimum wage and still paid 95,000,000 yen compensation to each of the 80,000 citizens it compelled to evacuate the area within twenty kilometers of the Fukushima nuclear plant {Japan En Yasu, line 28}.

But to our government, exporters seem to be more important than citizens.

Graduated Consumption Tax

I am not opposed to a Consumption Tax per se, only to a regressive Consumption Tax where those least able to pay the tax must pay the same rate as those most able to pay it.  Consumption uses scarce resources and pollutes our environment, so a Consumption Tax that discourages excessive consumption would benefit society immensely.  I would like to see a steeply graduated Consumption Tax such as this:

If a person’s total annual consumption is less than one million yen, tax rate is zero percent.

If a person’s total annual consumption exceeds one million yen, tax rate is one percent.

If a person’s total annual consumption exceeds two million yen, tax rate is two percent.

If a person’s total annual consumption exceeds ten million yen, tax rate is ten percent.

If a person’s total annual consumption exceeds fifty million yen, tax rate is fifty percent.

If a person’s total annual consumption exceeds 100 million yen, tax rate is 100 percent.

If a person’s total annual consumption exceeds 200 million yen, tax rate is 200 percent.

And so onward and upward, with no maximum cap.

Such a Consumption Tax would discourage excessive consumption, conserving scarce natural resources and reducing pollution, without falling on the people whose consumption barely, or hardly, covers the things (food, clothing, housing) essential to a healthy and happy life.

Moreover, today’s Consumption Tax is inefficient and expensive to administer because it taxes each individual purchase, so billions of transactions must be recorded and examined each year. This puts an enormous burden on both merchants and government.

A graduated Consumption Tax would be simple, easy, and inexpensive to administer. By definition, all income is either consumed or saved, so

Consumption = Income – Savings.

Each individual or family already must report its Income each year to our Tax Agency. It would now also be required to report the amount it saved or dis-saved during each year. Only savings or dis-savings that the Tax Agency can confirm would be allowed, for example increases or decreases in bank accounts, purchases or sales of stocks or bonds, et cetera; not funds hidden in closets or gardens. Each March 15th we would be required to pay the rate above on our consumption (Income – Net Savings).

It is fair, because it is based on ability to pay.

It doesn’t discourage productive work or savings, both of which benefit society.

And it does discourage excessive consumption, thereby helping to conserve energy and other scarce resources and reduce pollution.

Summary of My Tax Proposals

I would eliminate:

* The Personal Income Tax, which penalizes both productive work and savings,

* The CorporationTax, which penalizes both productive work and capital investment,

* The Inheritance tax, which penalizes savings, and

* The present regressive Consumption Tax, which is unfair.

I would replace them with:

* A Land Tax, which taxes unearned income, instead of productive work, savings, or consumption of essentials,

* A Securities Trading tax on previously issued, not newly issued, corporate securities, which would take revenues from such gambling rather than from productive work, savings, or consumption of essentials and would discourage such gambling,

* A Foreign Exchange Tax on all domestic sales and purchases of the Yen, which also would take revenues from this gambling rather than from productive work, savings, or consumption of essentials and would discourage such gambling,

* A Graduated Consumption Tax, which is fair because it varies progressively with ability to pay, which doesn’t tax productive work, savings, or consumption of essentials, and which would discourage excessive consumption that excessively uses scarce resources and causes excessive pollution.

If our government were primarily interested in the health and happiness of the citizens, it easily could and would make these changes to our tax system. But if our government is mainly interested in the political campaign funds, lavish entertainment, “descent from heaven” jobs, and free propaganda provided by our mass media, it surely will reject these proposals and continue shifting our tax burden to poorer and weaker citizens and businesses.

Notes:

{9}  Need footnote showing source for “Our Capital Gains Tax, which allows speculators to pay no more than ten percent tax on gains of millions, billions, or even trillions of yen from gambling on land or financial assets – the same rate a worker pays on salary of 3.3 million yen or less …”

{10} http://www.xe.com/ucc/convert/?Amount=1&From=EUR&To=JPY

Categories: Uncategorized

What Went Wrong With Japan’s Economy (Part One of Three)

2012/01/29 8 comments

And How to Repair It

by Bill Totten

http://www.ashisuto.co.jp/ (January 29 2012)

I’ve lived in Japan for 42 years. The first half of those 42 years were called our “economic miracle”, while the second half are called our two “lost decades”.

During our “economic miracle”, we had low unemployment, low income differentials, low suicide rates, and so on.

During our two “lost decades”, our economy has stagnated while most indicators of well-being have worsened: unemployment rates have more than doubled {1};  we now have one of the highest income disparities of all rich nations (among OECD nations, only the United States, Mexico and Turkey have higher income disparities than our nation) {2}; suicide rates now are among the highest in rich nations {3}; and so on.

Why has our economy stagnated during the past two “lost decades”, while unemployment, income inequality, the suicide rate, and most other indicators of social illth have gotten much worse?

Economic Stagnation

From 1971 to 1988, our GDP grew by ten percent annually;

From 1989 to 1996,  our GDP grew by  four percent annually; and

From 1997 to 2010, our GDP shrunk annually {Japan GDP.xls, cells c66, c67, c68}.

Japan GDP

What caused this sudden crash of our economy?

The media focus on the crash of our 1986 to 1991 “asset bubble”, but I suspect they are wrong for several reasons:

1.  99% of our economy is consumption, capital investment, and inventory growth. These grew a mere fraction as much as much as real estate and stock market prices as the asset bubble inflated from around 1986 and declined a mere fraction as much as real estate prices crashed after the bubble popped in 1991. Land prices more than doubled from 1985 to 1990; by now they have fallen back to about the same as they were in 1985, less than half their 1990 peak {Japan Land.xls, line 5}.  The Nikkei 225 (more commonly called the Nikkei, the Nikkei index, or the Nikkei Stock Average) stock market index for the Tokyo Stock Exchange climbed from 12,500 yen in 1985, reached a peak of 38,916 yen in 1989, crashed to half that peak in 1991, an now is under 9,000 yen {4}. By contrast the economy itself grew only 44% from 1986 to 1991, has never fallen below its 1991 peak,  and was two percent larger in 2010 than in 1991 {Japan GDP.xls, cells B71, B72}.

Japan Land

2. Moreover, I think mostly only rich people and giant corporations participated in the bubble; they’re mostly the ones who gained as it inflated and lost when it deflated. Most citizens and most businesses, which are primarily small and medium sized, neither gained nor lost by betting on stocks, land, or other assets during the bubble. In 2010, the average worker’s after-tax income was 390,000 yen per month, s/he spent 280,000 on consumption, leaving only 110,000 for saving or paying off a home mortgage. I doubt if many of these workers gambled much on stocks or land.

3. Finally, I cannot see how a five year bubble could have caused our economy to stagnate for two decades.
Governments and the mass media blamed the worldwide recession after 2008 on the “Lehman Shock”,  but I think that was either very bad analysis or pure propaganda to hide the real cause of that recession, which was the rise in oil prices to nearly $150 per barrel during the same month that Lehman Brothers failed. How can the failure of one gambling house crash the entire world’s economy? However, every aspect of today’s economy depends on oil, and when it’s prices rise severely that restricts the money available for both consumers and businesses to spend on other things.

One the other hand, here are some things I can see:

1. The Maekawa Report was published in 1986, under heavy pressure from the US government, to propose “economic reforms designed to make the living standards of Japanese more comparable to levels enjoyed in the West” {5}. Apparently that meant to bring our living standards down to those of the USA, and it certainly has worked! The Maekawa Report launched the era of deregulation and privatization, under the idiotic pretense that we can trust profit-maximizing corporations to serve society better than we can trust the governments we elect democratically.

2. Our government began cutting taxes on richer persons and larger corporations while raising taxes on poorer citizens and smaller businesses.

From 1971 to 1988 all of our taxes varied progressively or proportionally with ability to pay. None of our taxes varied regressively with ability to pay {6}.  By 2010, the latest year data are available, progressive and proportional taxes had declined to 85% of total tax revenues while the regressive Consumption Tax had risen to  sixteen percent of all taxes {Japan Taxes.xls, cell r93}.  Moreover from 1989 to 2010,

Japan Taxes

* Personal Income Taxes were cut nearly five trillion yen (28%)  {Japan Taxes.xls, cells c101, c102},

* Corporation Taxes were  were cut nearly ten five trillion yen (51%) {Japan Taxes.xls, cells d101, d102}, and

* Inheritance Taxes were cut nearly 600 billion yen (32%) {Japan Taxes.xls, cells e101, e102}, while

* Consumption Taxes were raised from zero to nearly thirteen trillion yen {Japan Taxes.xls, cells q101, q102}.

Put another way, from 1989 to 2010,

* Regressive Consumption taxes were raised by nearly thirteen trillion yen, while progressive and proportional income, corporation and inheritance taxes were cut by nearly eleven trillion yen (10%) {Japan Taxes.xls, cells p101, p102}.

This clearly shows that our government, since 1989, has been shifting the tax burden from richer citizens and larger corporations to poorer citizens and smaller businesses.

Why is this important?  Here are three things that come to my mind:

First, is it fair to shift the tax burden from those most able to pay to those least able to pay?  Is that what we believe as citizens, as a  nation?

Second, why are our politicians and mass media crying about the national debt while cutting taxes on those most able to pay (richer people and larger corporations)?

Third, I think it explains clearly why our economy has crashed since 1989.

Look at these three periods again, keeping in mind that (1) Total Consumption (private and public) comprises about seventy percent of our economy {Japan GDP.xls, column j} and (2) poorer citizens and smaller businesses are our primary consumers: the poorer a citizen or the smaller a business the more of her income she spends on consumption while the richer a citizen or the larger a corporation, the less of her income she spends on consumption {7}.

1971 to 1988

GDP grew by ten percent annually {Japan GDP.xls, cell c66}.

Total Consumption also grew by ten percent annually {Japan GDP.xls, cell k66}.

This is natural because taxes were proportional or progressive to income or wealth, so the tax burden fell most on those who could most afford to pay taxes (and consume less of their income or wealth) leaving those least able to pay taxes (who consume more of their income or wealth) more to spend on  consumption.

And with Consumption growing at ten percent annually, it was natural for suppliers to invest in more capacity, which they did at a rate of nine percent per year {Japan GDP.xls, cell n66}.

Also, expecting to sell more year after year, suppliers increased inventories at a rate of 64 percent per year {Japan GDP.xls, cell q66}.

Meanwhile, our nation’s net exports (exports minus imports) shrank at a rate of  77% percent per year during this period {Japan GDP.xls, cell t66}.   In other words, during Japan’s high-growth era, our so-called “economic miracle”,  we were a net importer not a net exporter. We did not have an “export-driven” economy, we had an economy driven by the domestic consumption of such an increasingly prosperous citizenry that our own manufacturers couldn’t supply sufficiently despite rapid capital formation and inventory increase, so we had to import more than we exported to close the gap between domestic demand and domestic supply.

1989 to 1996

GDP growth sank drastically to only four percent annually {Japan GDP.xls, cell c67}.

Our government instituted a three percent tax on consumption from 1989 while cutting personal Income Taxes by 22 percent,Corporation Taxes by nineteen percent , and Inheritance Taxes (which fall only on the five percent largest estates) by  seventeen percent {Japan Taxes.xls, cells c105, d105, e105}. So the richer citizens and larger corporations, who spend less of their income or wealth on consumption, paid less taxes while the poorer citizens and smaller businesses, who spend more of their income or wealth on consumption, had to pay more of their income in taxes, leaving less to spend on consumption.

As one would expect, growth of Total Consumption (seventy percent of our economy) shrank by sixty percent from ten percent annually before the Consumption Tax was levied to only four percent annually after it was levied {Japan GDP.xls, cells k66, k67}, pulling down GDP growth.

With growth of domestic consumption dropping drastically from ten percent annually to four percent annually, suppliers naturally cut capital formation, from nine percent to three percent annually {Japan GDP.xls, cells n66, n67}.

And, with that drastically lower domestic demand,  suppliers cut back drastically on inventories; inventories that had grown 64 percent annually from 1971 to 1988, shrunk by more than 100% annually from 1989 to 1996 {Japan GDP.xls q66, q67}.

Since Consumption, Capital Formation, and Inventory Increase comprised 98 percent of our economy during this period, and the latter two are driven by Consumption, there was no way our economy could grow by more than four percent annually when Consumption was growing only by four percent annually …

… Unless, if Net Exports were increasing enough to make up for the shrinkage in Consumption, thus Capital Formation and Inventory Increase. But Net Exports were still shrinking by five percent annually {Japan GDP.xls, cell t67}.

As if this wasn’t enough to cripple our economy, and bring our living standards down to Western standards as the Maekawa Report recommended, let’s look at what our “Dear Leaders” have done since 1997.

1997 to 2010

GDP growth turned negative, shrinking the economy itself {Japan GDP.xls, cell c68}.

Our government hiked the Consumption Tax by two-thirds, from three percent to five percent in 1997, while slashing Personal Income taxes by another 32 percent, Corporation taxes by another 38  and Inheritance taxes by another 48 percent {Japan Taxes.xls, cells c108, d108, e108}.  Put another way, from 1997 to 2010, our government slashed progressive and proportional Income, Corporation, and Inheritance taxes by nearly thirteen trillion yen while hiking Consumption taxes by more than six trillion yen {Japan Taxes.xls, cells p107, q107}.

What can you expect, other than for consumption to shrink further, when a government continues to slash taxes on richer citizens and larger corporations, who spend the smallest portion of their incomes and wealth on consumption, and continues to hike taxes on poorer citizens and smaller businesses, who spend the largest portion of their incomes and wealth on consumption?

Our government did even better!  It curtailed consumption growth altogether, to zero percent!  {Japan GDP.xls cell k68}.

And with no annual growth in domestic consumption, suppliers cut their Capital Formation by three percent annually {Japan GDP.xls, cell n68} while shrinking their inventories by 48 percent annually {Japan GDP.xls, cell q68}.

Since Consumption, Capital Formation, and Inventory Increase comprised 99 percent of our economy during this period {Japan GDP.xls, cells j64 + m64 + p64], and the latter two are driven by Consumption which was no longer growing, there was no way our economy could grow …

… Unless Net Exports grew enough to make up for the shrinkage of Consumption, and thus Capital Formation and Inventory Increase. Net Exports did grow by 39% annually during this period {Japan GDP.xls cell t68} but, as Net Exports are only one percent of our economy {Japan GDP.xls, cell s64}, they could not make up for the shrinking of domestic Consumption.

Where did the propaganda media get the idea that ours is a “export driven” economy?

So just as I think blaming the worldwide recession after 2008 on the failure of one gambling house, Lehman Brothers, when the real cause was the rise of oil prices to $150 per barrel, I think that blaming our nation’s two lost decades on a five-year asset bubble in the 1980s is either very bad analysis or a smokescreen to hide the real cause.

Which is?

Our government’s two-decade policy of cutting taxes on richer citizens and larger corporations – who provide most of the political campaign funds, “descent from heaven” jobs for used bureaucrats, lavish entertainment, and advertising revenues for the propaganda cum entertainment media – while raising taxes on poorer citizens and smaller businesses!

What Next?

Now that our government has used regressive Consumption Taxes to strangle our economy, what is it planning to do next?

Apparently, more of the same.  Prime Minister Noda is planning to raise Consumption Taxes in two stages, from the current five percent to eight percent, and then to ten percent. And the International Monetary Fund or IMF, controlled  by the US government on behalf of international financial pirates, says our government must raise Consumption Taxes to fifteen percent {8}.

Hiking the Consumption Tax rate from the present five percent to eight percent would raise this regressive tax from six percent of all taxes when the rate was three percent during 1989 to 1996 {Japan Taxes.xls, cell r96} and fifteen percent of all taxes when the rate was five percent during the period of 1997 to 2010 {Japan Taxes.xls, cell r97], to 21 percent of all taxes {Japan Taxes.xls, cell r114}.

Doubling the Consumption Tax from the present five percent to ten percent would raise this regressive tax to 25 percent of all taxes {Japan Taxes.xls cell r115}.

And tripling this regressive Consumption Tax to fifteen percent would raise it to 33 percent of all taxes {Japan Taxes.xls, cell r116}.

If first instituting a three percent Consumption Tax in 1989 cut our economic growth from ten percent to four percent annually, and if raising the Consumption Tax to five percent in 1997 completely eliminated our economic growth, what else can we expect from raising it further to eight percent or ten percent or fifteen percent than to put us into rapid economic decline?

Some people think our “dear leaders” are ignorant and stupid; some think they are parasites pursuing bribes in the form of political campaign contributions, cushy jobs for used bureaucrats, lavish entertainment, and favorable publicity from our advertising-controlled mass propaganda cum entertainment organs; others think they are traitors bribed or blackmailed by the “world’s sole superpower”; and still others think they are all of the above.

I don’t know, but I cannot find any reason for believing that our “dear leaders” are intelligent, diligent persons selflessly serving the interests of our nation and our citizenry.

Notes:

{1} Japan Unemployment Rates.xls and OECD Historical Unemployment Rates.xls

{2} OECD Inequality.xls

{3} https://en.wikipedia.org/wiki/List_of_OECD_countries_by_suicide_rate

{4} Email: 01/23/2012 02:22 PM from Mayumi Kita.

{5} https://en.wikipedia.org/wiki/Haruo_Maekawa

{6} More accurately, nearly  all of our taxes varied progressively or proportionally with ability to pay. Our nation has a third type of “other” national and local taxes, a plethora of minor taxes:

* At the national level, for example: Liquor tax, Tobacco tax, Gasoline tax, Petroleum gas tax, Aircraft fuel tax, Petroleum and coal tax, Exchange tax, Securities transaction tax, Motor vehicle weight tax, Customs duties, Tonnage tax, Stamp duties, Local gasoline tax, Petroleum gas tax, Aircraft fuel tax, Motor vehicles weight tax, Special tonnage tax, Crude oil et cetera tax, electric power source development tax.

*  At the local level, for example: Local corporate tax, Real Estate tax, Tobacco tax, Golf tax, Automobile Purchase tax, Light Oil Trading tax, Automobile tax, Small Automobile tax, Special land owner tax, Bath tax, Corporate office tax, City Planning tax, National Health Insurance tax, Nuclear Fuel tax, Gasoline Price Adjustment tax, Used Nuclear Fuel Tax, Enviromental tax, Industrial Waste tax, Environment Future tax, Fishing tax, Accommodation tax.

Some of these are regressive for very good reasons, such as to discourage consumption of things inimical to health, such as tobacco and liquor), things that must be imported (petroleum and other forms of energy),  luxury items (golf tax), and so on.

I ignore this plethora of minor taxes here because the detail would only distract from the main analysis without affecting it significantly.

{7} Email: 01/23/2012 03:23 PM from Mayumi Kita:

Bill-san, I am not sure this can be a proof, but the average net income (income including tax) of average worker in 2010 is 427,000 yen.  Disposable income, net income minus tax and social insurance premium) is 390,000 yen. Average consumption expenditure is 283,000 yen. Balance goes to saving or mortgage payment. The richer, the more one can save (or repay the loan)  http://www.stat.go.jp/info/guide/asu/2011/27.htm

{8} http://moslereconomics.com/2012/01/19/imf-staff-on-japan/

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‎Fractional Reserve Banking – Correction

2012/01/28 4 comments

Note: In the version of this I sent last evening, I looked at only one bank. This update includes how fractional reserve banking affects the entire banking system.

by Bill Totten

ashisuto.co.jp (January 28 2012)

Forty years after I received my doctorate in economics, specializing in econometric analysis of money and banking, I think I finally have come to undertand the meaning of “fractional reserve banking” {1}.

I will explain my understanding of “fractional reserve banking” here, and will greatly appreciate anyone telling me anything I got wrong.

In Japan, the “reserve requirement” seems to be about one percent. This means, basically, that a bank can loan out 100 yen for each one yen it has in its vaults.

This seems to be a very special privilege extended by our government to banks, but not to other kinds of enterprise. Our government doesn’t allow hotels to rent out 100 times more rooms than they actually have, an airline to rent out 100 times more seats than they have, or a rental car agency to rent out 100 times more cars than they have.

Suppose a bank with one yen in its vault extends you a loan of 100 yen. If you are a prime customer, it charges you its prime interest rate of about two percent per annum. If you are not a prime customer, it  charges you an interest rate of, perhaps, four percent per annum. So to borrow 100 yen from a bank, you and the bank’s other customers pay the bank interest of two to four yen per year. Put another way, you and other borrowers are paying the bank two to four yen per year to rent 100 yen from the bank.

But the bank needed only one yen to create this 100 yen loan, so it is earning 200 to 400 percent  per annum in interest on the one yen it actually risked.

What if you default on this 100 yen loan?

Since the bank only needed one yen to create the 100 yen loan, it loses only that one yen, not 100 yen.

But the bank convinces its cronies in government that it lost 100 yen, so they take 100 yen of taxpayer money to repay the bank for the 100 yen it supposedly lost. In Japan, we call this “furyou saiken”. In English-speaking nations its called a “bailout”.

So, by risking one yen to create a 100 yen loan, the bank receives two to three yen per year in interest (a two to three hundred percent per year return on its one yen) until the loan is repaid and, if the borrower defaults, the bank gets a 100 yen bailout from taxpayers (a hundred-fold or 10,000 percent return on the one yen it risked).

So far we have focused on just one bank.  If the borrower deposits that 100 yen (created out of thin air from one yen) in the bank that loaned it to her, another bank, or several other banks, the banking system will now have another 100 yen in its vaults, so it can now create another 10,000 (= 100 x 100) yen by making new loans at say two to four percent, bringing them profits of 200 to 400 yen per year from that 100 yen. And if the borrowers of that 10,000 default, the banks will only lose that 100 yen because they created the other 9,900 yen out of thin air or, more precisely, out of the special privilege our government extends and banks and banks only. But the banks will say they’ve lost the entire 10,000 yen and cry to government for a 10,000 yen bailout that we taxpayers will have to bear.

If borrowers do not default on this 10,000 yen newly created by private banks as loans, and the borrowers deposit that 10,000 in banks, the banking system can now use it to create still another 1,000,000 (=100 x 10,000) yen in loans. This can go on indefinitely, allowing the banking system to create a practically infinite amount of money, all from that original one yen in the vault of one bank.

I think this explains why nearly as much money is spent gambling on corporate shares in our nation as is spent producing goods and services {2, cells i68, j68} and why worldwide gambling on foreign exchange is eighty times greater than international trade and thirty times greater than worldwide production of goods and services {3}. Since 99 percent of the money gambled was created out of thin air by private banks, the payoffs on winning bets are huge while the real losses on lost bets are only one percent of the amount wagered.

I also think this explains what the banks are doing to Portugal, Ireland, Italy, Greece and Spain, the so called PIIGS. Here banks used, say, one million dollars of their own money to loan 100 million dollars to these PIIGS and got two to four million dollars per year in interest until the PIIGS threatened to default. When the PIIGS threaten to default, the IMF (the bill collector for the international banking cartel) insists that these PIIGS raise taxes on, and cut services to, their citizens to raise enough money to repay the real pigs 100 million dollars for the one million dollars they actually risked.

Wouldn’t you like to become a pig (aka “banker”)?

Links:

{1} https://en.wikipedia.org/wiki/Fractional-reserve_banking

{2} Japan Stock Market

{3} Forex

Categories: Uncategorized

Fractional Reserve Banking

Fractional Reserve Banking

by Bill Totten

ashisuto.co.jp (January 27 2012)

More than forty years after I received my doctorate in economics, specializing in econometric analysis of money and banking, I think I finally have come to understand the meaning of “fractional reserve banking” {1}.

I will explain my understanding of “fractional reserve banking” here, and will greatly appreciate anyone telling me anything I got wrong.

In Japan, the “reserve requirement” seems to be about one percent. This means, basically, that a bank can loan out 100 yen for each one yen it has in its vaults.

This seems to be a very special privilege extended by our government to banks, but not to other kinds of enterprise. Our government doesn’t allow hotels to rent out 100 times as many rooms as they actually have, an airline to rent out 100 times as many seats as they have, or a rental car agency to rent out 100 times as many cars as they have.

Suppose a bank with one yen in its vault extends you a loan of 100 yen. If you are a prime customer, it charges you its prime interest rate of about two percent per annum. If you are not a prime customer, it  charges you an interest rate of, perhaps, four percent per annum. So to borrow 100 yen from a bank, you and the bank’s other customers pay the bank interest of two to four yen per year. Put another way, you and other borrowers are paying the bank two to four yen per year to rent 100 yen from the bank.

But the bank needed only one yen to create this 100 yen loan, so it is earning 200 to 400 percent  per annum on the one yen it actually risked.

What if you default on this 100 yen loan?

Since the bank only needed one yen to create the 100 yen loan, it loses only that one yen, not 100 yen.

But the bank convinces its cronies in government that it lost 100 yen, so they take 100 yen of taxpayer money to repay the bank for the 100 yen it supposedly lost. In Japan, we call this “furyou saiken”. In English-speaking nations its called a “bailout”.

So, by risking one yen to create a 100 yen loan, the bank receives two to three yen per year in interest (a 200 to three hundred percent per year return on its one yen) until the loan is repaid and, if the borrower defaults, the bank gets a 100 yen bailout from taxpayers (a 10,000 percent or 100 to 1 return on the one yen it risked).

Multiply these numbers by a million or so and you can see what the banks are doing to Portugal, Ireland, Italy, Greece and Spain, the so called PIIGS. Here banks used, say, one million dollars of their own money to loan 100 million dollars to these PIIGS and got two to four million dollars per year in interest until the PIIGS threatened to default. When the PIIGS threatened to default, the IMF (the bill collector for the international banking cartel) insisted that these PIIGS raise taxes on, and cut services to, their citizens to raise enough money to repay the real pigs 100 million dollars for the one million dollars they actually risked.

Wouldn’t you like to become a pig (aka “banker”)?

Note {1}: https://en.wikipedia.org/wiki/Fractional-reserve_banking

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George Soros predicts riots, police state and class war for America

RT.com (January 25 2012)

Billionaire investor George Soros has a new prediction for America. While it might be as dire as it gets for the financial wiz, this bet concerns more than just the value of the buck. According to Soros, there’s about to be an all-out class war.

Soros, 81, previously bet against the British pound in the early 1990s and made $1 billion off its collapse. In the years since, he’s remained active in investing, but also in advocacy. He’s helped keep Wikipedia afloat thanks to impressive contributions and through donations to the Tides Center, has indirectly funded Adbusters, the Canadian anti-capitalist magazine that put Occupy Wall Street on the map. Speaking to Newsweek recently, Soros neglected to acknowledge his past successes, but instead offered a word of warning: a period of “evil” is coming to the western world.

“I am not here to cheer you up. The situation is about as serious and difficult as I’ve experienced in my career”, Soros tells Newsweek.

We are facing an extremely difficult time, comparable in many ways to the 1930s, the Great Depression. We are facing now a general retrenchment in the developed world, which threatens to put us in a decade of more stagnation, or worse. The best-case scenario is a deflationary environment. The worst-case scenario is a collapse of the financial system.

Soros goes on to compare the current state of the western world with what the Soviet Union was facing as communism crumbled. Although he would think that history would have taught the globe a thing or two about noticing trends, Soros says that, despite past events providing a perfect example of what is to come, the end of an empire seems imminent.

“The collapse of the Soviet system was a pretty extraordinary event, and we are currently experiencing something similar in the developed world, without fully realizing what’s happening”, adds Soros.

Soros goes on to say that as the crisis in the Eurozone only worsens, the American financial system will continue to be hit hard. On the way to a full-blown collapse, he cautions, Americans should expect society to alter accordingly. Riots will hit the streets, says Soros, and as a result,

It will be an excuse for cracking down and using strong-arm tactics to maintain law and order, which, carried to an extreme, could bring about a repressive political system, a society where individual liberty is much more constrained, which would be a break with the tradition of the United States.

The recent adoption of the National Defense Authorization Act for Fiscal Year 2012 and the proposed Enemy Expatriation Act, if approved, have already very well paved the way for such a society. Under the NDAA, the US government is allowed to indefinitely detain and torture American citizens suspected of terror crimes without ever bringing them to trial. Should lawmakers Joe Lieberman (Independent, Connecticut) and Charles Dent (Republican, Pennsylvania) get their Enemy Expatriation Act through Congress, the US will also be able to simply revoke citizenship without trial, essentially removing constitutional rights from anyone deemed a threat.

Others have cautioned that, as inequality becomes more rampant in America, the country’s citizens are becoming increasingly agitated with those on the other side of the extreme. In a recent survey released by the Pew Research Center, 66 percent of the adults studied believe that either “very strong” or “strong” conflicts exist between America’s elite and the impoverished, a statistic that has skyrocketed in recent years. Between 2009 and 20011, the proportion of those that sense conflicts exist as such between the class groups grew by nineteen percentage points. While less than half of Americans fearing a fight brewing at the dawn of the Obama administration, today two-out-of-three Americans feel that there is a strong conflict between both extremes of society.

Addressing the issue of inequality, Soros tells Newsweek that the main issue that will make or break a reelection for US President Barack Obama will be whether or not the rich end up being taxed more. Among the current frontrunners in the Republic Party’s race for the GOP nomination, wealth and taxes have been of the biggest concern of party rivals. The top candidates have made millions off of investments, and at a time of immense inequality, represent what 99 percent of Americans don’t. Taxing the rich to a bigger degree might finally bring a chance, and Soros says, “It shouldn’t be a difficult argument for Obama to make”.

Soros adds that if the US manages to make it through the troubled times to come, it come [sic] allow the nation to enter another golden era. “In the crisis period, the impossible becomes possible. The European Union could regain its luster. I’m hopeful that the United States, as a political entity, will pass a very severe test and actually strengthen the institution”, he tells Newsweek.

With almost seven percent of Americans living below half of the poverty line, four unemployed Americans for each job, a shrinking middle class and an increasingly overzealous police state, it could very well be a tough road to get there, though.

(c) Autonomous Nonprofit Organization “TV-Novosti”, 2005 – 2011. All rights reserved.

http://rt.com/usa/news/george-soros-class-war-619/

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Banks too big to fail …

… Bankers too powerful to jail.

Beyond Money (January 25 2012)

According to the Associated Press, federal negotiators are close to concluding a deal with major banks that would essentially forgive them of crimes committed in connection with the mortgage crisis. You can read the story and a critique of the proposed settlement “Obama Is on the Brink of a Settlement With the Big Banks – and Progressives Are Furious” below.

http://beyondmoney.net/2012/01/25/banks-too-big-to-fail-bankers-too-powerful-to-jail/

————————————————————————————-

Mortgage Settlement Between Banks, States ‘Close’

by Derek Kravitz, AP Business Writer

ABC News (January 19 2012)

————————————————————————————-

A $25 billion settlement between the nation’s major banks and US states over deceptive foreclosure practices during the housing crisis is nearing completion.

Five major banks – Bank of America, JPMorgan Chase, Wells Fargo, Citibank and Ally Financial (formerly GMAC) – and US states are “very close”, Housing and Urban Development Secretary Shaun Donovan said Wednesday.

Separately, two officials briefed on internal discussions say a proposed deal could be announced within weeks. Negotiators are finalizing a draft of the agreement, which must be reviewed by state attorneys general. Under the deal, banks would pay states and the federal government, which would fund programs to compensate homeowners.

The two officials asked to remain anonymous because they were not authorized to speak publicly about the deal.

Talks have been dragging on for more than a year between major US banks and state attorneys general over fraudulent foreclosure practices that drove millions of Americans from their homes during the housing crisis.

In October 2010, major banks temporarily suspended foreclosures following revelations of widespread deceptive foreclosure practices by banks. That has backlogged millions of foreclosures that must be cleared before the housing market can fully recover.

The settlement would only apply to privately held mortgages, not those held by government-controlled Fannie Mae or Freddie Mac. Fannie and Freddie own about half of all US mortgages, roughly about 31 million US home loans.

Individual states can opt out of the proposed deal. Some have disagreed over what terms to offer the banks.

In September, California announced it would not agree to a settlement over foreclosure abuses that state and federal officials have been working on for more than a year.

New York, Delaware, Nevada and Massachusetts, which sued five major banks earlier in December over deceptive foreclosure practices, have also argued that banks should not be protected from future civil liability.

And both sides have also fought over the amounts of money that should be placed in the reserve account for property owners who were improperly foreclosed upon. Many of the details of the deal, including a $25 billion cost for the banks, have been agreed upon, officials say.

http://abcnews.go.com/Business/wireStory/mortgage-settlement-banks-states-close-15389511#.TyC2Pqtx21D

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Obama Is on the Brink of a Settlement With the Big Banks …

… and Progressives Are Furious

by George Zornick

The Nation (January 23 2012)

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For months, a massive federal settlement with big Wall Street banks over their role in the mortgage crisis has been in the offing. The rumored details have always given progressives heartburn: civil immunity, no investigations, inadequate help for homeowners and a small penalty for the banks. Now, on the eve President Obama’s State of the Union address – in which he plans to further advance a populist message against big money and income inequality – the deal may be here, and it’s every bit as ugly as progressives feared.

The Associated Press reports that a proposed deal could be announced within weeks. Five banks – Bank of America, JPMorgan Chase, Wells Fargo, Citibank and Ally Financial (formerly GMAC) – would pay the federal government $25 billion. About $17 billion would be used to reduce the principal that some struggling homeowners owe, $5 billion more would be used for future federal and state programs and $3 billion would be used to help homeowners refinance at 5.25 percent. Civil immunity would be granted to the banks for any role in foreclosure fraud, and there would be no investigations.

There are several reasons why this is could be a terrible deal. For one, the dollar amount is inadequate in relation to both the tremendous loss of wealth via mortgage fraud and the hefty balance sheets of these massive companies. Furthermore, the banks might be allowed to use investor money instead of their own funds – this makes the penalty even lower. Beyond all that: it’s extremely hard to justify the absence of investigations and punishment for mortgage fraud that was so widespread and so damaging to people’s lives.

There are also many other, more serious problems besides a lack of punitive action. The small amount of money – and the federal government’s recent inability to truly help underwater mortgage holders, of which there are currently eleven million – means that the victims of mortgage fraud might not see enough relief. And perhaps most importantly, with no real punishment for widespread damaging fraud, what are the incentives on Wall Street not to engage in similarly destructive practices once again?

On a major conference call this morning, many leading progressive voices inside Washington and out blasted the deal.

Senator Sherrod Brown of Ohio characterized the rumored deal as “not much more than a slap on the wrist”, and added that while banks were always know to be too big to fail, they were now apparently “too big to jail”.

“When laws are broken there need to be full investigations”, Brown said. “Wall Street should not get another bailout”.

Brown urged Obama to reject the deal and order investigations into the banks’ practices immediately. Simon Johnson, an economist at MIT and well-known progressive voice, also called for no deal and immediate investigations.

“This is not just the right thing do, and not just good politics, it’s good economics”, Johnson said. “What’s at stake here is the rule of law”.

Robert Borosage, co-director of the Campaign for America’s Future, blasted the rumored deal as well and urged the administration to consider the political optics.

“No one who robbed a bank would be offered immunity, a modest fine, and no admission of guilt before there was an investigation”, Borosage said. “Americans are increasingly cynical with the ability of democracy to deal with special interests”.

“The president’s campaign will sensibly highlight his commitment to fairer rules”, he continued. “Needless to say, a sweetheart deal with the banks will contrast with that”.

As we noted last week, many progressive groups have begun a massive petition drive to push back against the settlement and demand fair investigations. Moreover, attorneys general in California, New York, Delaware, Nevada and Massachusetts have previously said they won’t be a part of any deal that offers civil immunity.

So the deal is far from done – but it’s certainly moving towards an undesirable conclusion. We’ll have plenty more in this space all week.

http://www.thenation.com/blog/165806/obama-brink-settlement-big-banks-and-progressives-are-furious

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