## Simple Retirement Calculator

Sorry that I have not been posting much of late.  April is always rough for me.  Taxes play some role in April, because I get a certain amount of my tax data late, but the main reason stems from some charitable boards on which I serve, which meet in/near April.

One of the questions that came to me was how we could educate some of the workers to put away more of their income for retirement, because we don’t have a Defined Benefit plan.  After a little discussion, I said that I could give them good friendly advice.  As most committees go, when someone volunteers to solve a problem, discussion ends.

Now, what I have done is pretty simple, and violates one of my rules — I don’t believe in constant compound interest.  Markets don’t work that way, but for some perverse simplifying reason, retirement planning models do.

What I have done is create a model for retirement income, attempting to express it in terms that someone non-knowledgeable could understand.  You can download the Simple Retirement Calculator (free to download) that I created.

My base case assumes 3% inflation, pay keeps pace with inflation, and the real return on investing is 2% over inflation.  Other assumptions: one works for 45 years from age 25 to 70, and that the options for payout are limited to those that respect spouses and heirs.

So what can one 25 years old expect from saving over a 45 year period of time?

 Savings Rate Salary Replacement 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% J&S 100% Cash Refund 22.9% 27.5% 32.0% 36.6% 41.2% 45.8% 50.4% 54.9% 59.5% 64.1% 68.7% J&S 100% CR Indexed 15.1% 18.1% 21.1% 24.1% 27.1% 30.1% 33.1% 36.1% 39.1% 42.1% 45.2% 4% year 14.6% 17.6% 20.5% 23.4% 26.4% 29.3% 32.2% 35.2% 38.1% 41.0% 43.9% Accum Years Ending Pay 3.66 4.39 5.13 5.86 6.59 7.32 8.06 8.79 9.52 10.25 10.99

This table expresses what is needed in order to have effective income during retirement.  The average investor can’t control asset returns.

J&S 100% Cash Refund -> Spouse gets 100% after death of annuitant, heirs get a payment annuitants got less than the lump sum value at retirement.  Indexed benefits increase at the rate of the CPI.

With a 2%% real return, it takes a lot of saving to replace current income in retirement, even over 45 years. Note that the real return assumption has the largest impact on the results.

Much as I think DB plans are superior to DC plans for the average person, most companies in the present environment will not subsidize a DB plan to the degree that will allow a person to retire at the same level of purchasing power that they had while employed.

There are many ways that I could improve the results of this model, but the improvements would only be incremental.  The main point of this model indicates that most people do not save enough, if all of their retirement outcomes rely on a defined contributions plan.

Let me know what you think  in the comments below.  Thanks.

## Weekly Sorted Tweeets

Federal Reserve

• Long Term U.S. Credit Boom Chart http://t.co/Ywub8HQH By bailing out short-term credit cycles, the Fed created a big asset bubble \$\$ Apr 28, 2012
• Quantitative Deleting: The Fed’s \$400 Billion ‘Gift’ http://t.co/qavtYcQy Fed’s actions lower cost of funding the US Treasury’s deficit 4now Apr 26, 2012
• Bernanke Takes On Krugman’s Criticism Ignoring Own Advice http://t.co/AZ37nx1W Blind & Blinder \$\$ Apr 26, 2012
• I think Ben needs one too. Barkeep, make that a double for the the Fed Chairman! \$\$ RT @soooouuuuurrrrr: @AlephBlog I need a drink. Apr 25, 2012
• That’s all folks — the FOMC show is over!! \$\$ Apr 25, 2012
• Stocks loving Bernanke, who says he doesn’t act to please markets, but I think that he does, b/c he aims to reduces rates & spreads \$\$ Apr 25, 2012
• Good Qs on Labor force participation rate and the “bond bubble.” Bernanke obfuscates. Apr 25, 2012
• But the real canard here with the enhanced guidance is that the Fed is poor at forecasting & consistently drags toward current conditions \$\$ Apr 25, 2012
• When will Fed “transparency” finally be understood to not mean “increased reliability?” Apr 25, 2012
• Interesting that long Treasuries r rallying off of the FOMC second stmt after falling on the first. Not much difference between the 2. \$\$ Apr 25, 2012
• So, short-term inflation up, LT unch. ST Unemp down, LT unch. ST GDP up, 2013-4 down, LT unch. Tightening 6 mos closer than Jan, FF path up Apr 25, 2012
• Central tendencies and ranges of economic projections, PCE average change 2012-14 +0.22%, +.10%, +.09%, longer run 0% (natch) \$\$ Apr 25, 2012
• Central tendencies and ranges of economic projections, unemployment average change 2012-14 -0.40%, -.21%, -.08%, longer run -.01% \$\$ Apr 25, 2012
• Central tendencies and ranges of economic projections, GDP average change 2012-14 0.16%, -.08%, -.24%, longer run 0% \$\$ Apr 25, 2012
• The enhanced guidance of the FOMC is causing more confusion than enhancing understanding \$\$ Apr 25, 2012
• Overview of FOMC participants’ assessments of appropriate monetary policy; Appropriate Timing of Policy Firming 6 months sooner than Jan12 Apr 25, 2012
• Target Federal Funds Rate at Year-End average change 2012-2014, +.015%, +.044%, +.206%, long-run -.015% \$\$ Apr 25, 2012
• PDF isn’t as friendly as HTML… but that’s probably intentional on the part of the Fed. \$\$ Apr 25, 2012
• here they are, Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents http://t.co/OzeYZbRa \$\$ Apr 25, 2012
• Clocks must be slow at the Fed’s website… Apr 25, 2012
• Bond/stock trading bots set loose within the next minute! Apr 25, 2012
• @bondscoop When the FOMC said they would do this, I said “Do they really get what they are setting themselves up for?” Tight coupling. Apr 25, 2012
• @bondscoop Thanks. I’ve got the ancillary data loaded into a spreadsheet to make a quick comparison Apr 25, 2012
• @bondscoop That’s not out yet, right? Apr 25, 2012
• Redacted Version of the April 2012 FOMC Statement http://t.co/wJbPNf5P Shaded up views on housing, inflation & global financial risk. \$\$ Apr 25, 2012
• Of course, that can only last so long as inflation stays low. Brian Wesbury thinks inflation might be rising http://t.co/YfLFURA3 \$\$ Apr 24, 2012
• Gundlach Says Fed Won’t Preemptively Raise Rates http://t.co/YTfjQ6Wj W/debt building up 1 thing saving us: interest rate collapsing \$\$ Apr 24, 2012
• There r historical accidents. The worst that we r dealing w/is Ben Bernanke as Fed Chairman with his mistaken views on the Great Depression! Apr 24, 2012
• Awash in money and piles of debt http://t.co/C9hbSWmf Up next: More QE, financial repression, inflation, deficit spending -> stagflation \$\$ Apr 23, 2012
• \$\$ Coming soon +1 RT @ReformedBroker: Hilsenrath: After-Hours Sell-Off in Netflix Pushes Fed Governors Toward to Further Easing… \$NFLX Apr 23, 2012

China

• Are these companies feeling the Chinese slowdown? http://t.co/bIO0m2vF Machinery companies: Volvo, ABB, \$CAT seeing China orders fall \$\$ Apr 26, 2012
• China Internet Crackdown Silences Another http://t.co/ukw0qzWg More closure of accts found 2b spreading “malicious political rumors.” \$\$ Apr 26, 2012
• Why Wukan Will Remain a One-off http://t.co/LO3tK7kT Optimistic piece shows when there is enough pressure in China, change can happen \$\$ Apr 26, 2012
• China Tire Demand Slows as Economy Decelerates, Bridgestone Says http://t.co/yUK3UEye Q is how much things slow for the Chinese economy \$\$ Apr 26, 2012
• China Escalates Crackdown On Internet Amid Scandal http://t.co/QblN4v3S China wants the internet 4 its economy, but not its politics \$\$ Apr 26, 2012
• China and Social Media Today vs. Japan bubble in 80s http://t.co/0uxQ40xV Vitaliy Katzenelson shares his reasoning on bubbles \$\$ Apr 26, 2012
• Why China’s Economic Policies Are a Failure: Andy Xie http://t.co/WZjILv4J Building redundant capacity, cronyism, recipe for disaster \$\$ Apr 25, 2012
• China Hidden Liabilities for Central Government Seen @ CNY10.94Trl http://t.co/gaqD4suu Opaque governments w/lots of debt can b trouble 2 \$\$ Apr 25, 2012
• Shide Group Mired in Financing Crisis, Massive Debt http://t.co/Iws3h9Ec Beware complex companies w/lots of debt. Default probs higher \$\$ Apr 25, 2012
• The Startling Plight of China’s Leftover Ladies http://t.co/WWK3en7R Leftover Chinese men r not good enuf 4 them, even w/sex ratio tilted \$\$ Apr 24, 2012
• Behind a Chinese City’s Growth, Heavy Debt http://t.co/6eKX3kJp Bo Xilai leaves behind a legacy of debt 4 taxpayers to fund \$\$ #surprise Apr 23, 2012
• Cities get a sinking feeling: report http://t.co/xQE2d46k If China’s cities aren’t careful about their water tables, they’re sunk 😉 \$\$ Apr 23, 2012
• Can China Reflate the Housing Market? http://t.co/rMtYHX0Y Maybe one more time, but eventually you can’t resuscitate a corpse \$\$ Apr 23, 2012
• US barnyards help China super-size food production http://t.co/38GkPJ0T China builds protein industry by purchasing live animals from US \$\$ Apr 23, 2012
• Beijing’s Cracked Consensus http://t.co/1Xep2j6s Don’t assume the fall of Bo Xilai 2b 2big; the CC Party still fights 4 the CC Party \$\$ Apr 23, 2012
• Farmers Retool to Feed China http://t.co/c0loHf82 Dairy processors make longer-lasting milk powder 2sell2 China. They like almonds 2 \$\$ Apr 23, 2012
• China May Finally Let Its People Move More Freely http://t.co/fiTQgY5c Of hukou: how China uses household registration 4 control purposes Apr 23, 2012
• The End of China’s One-Child Policy? http://t.co/dK7sUMTq China is getting old before it gets rich. Toxic combo. Watch wages rise. \$\$ Apr 23, 2012
• The China Rising Leaders Project http://t.co/QuKsr7w2 Very long piece giving very detailed info on next generation of China’s leaders \$\$ Apr 23, 2012
• China’s Biggest Banks Are Squeezed for Capital http://t.co/uveB69fJ Too much and overaggressive lending strains their balance sheets \$\$ Apr 24, 2012

Eurozone

• Spain’s current unemployment rate exceeds the US rate during the Great Depression http://t.co/bj86umZp Ugly chart: http://t.co/M6uchbAx \$\$ Apr 28, 2012
• Why Spain Won’t Reform http://t.co/aIuYUctZ Cultural argument that Madrid historically does not act on problems outside of Madrid \$\$ Apr 28, 2012
• Rising Italy-to-Spain Yields Keep Banks on Life Support http://t.co/kSdshke5 Many banks simply cannot refinance their maturing debt \$\$ Apr 25, 2012
• Continuing flow of capital out of Greece http://t.co/psvzWbJk E.g. Greek refineries r unable to obtain credit & rely on Iran for crude \$\$ Apr 25, 2012
• Spanish property crisis will require Ireland-style banking system recapitalization http://t.co/pDLNF2X7 But who has the money 2do it? \$\$ Apr 23, 2012
• Bundesbank’s Weidmann Says What No EU Politician Wants to Hear http://t.co/ecLHlLIJ EZone monetary policy loose; fiscal union negligible Apr 23, 2012
• Holland, Not Hollande, Is Europe’s Latest Worry http://t.co/AeQtOIVv If Dutch don’t care 4 austerity, little hope 4 rest of the EZone \$\$ Apr 23, 2012

Pensions

• How Retirement Benefits May Sink the States http://t.co/oIEsAWhh Companies emigrate 2 states where future tax pressures r lower \$\$ #bye Apr 28, 2012
• Point Man on Pensions http://t.co/DaXsdkgx PBGC director has experience in restructuring; serves him well negotiating w/dud companies Apr 23, 2012
• Tidbit in last article: FV of DB pension liabs for \$SWY > market cap. Actuarial profession goofed on DB plans valuations; ests r liberal \$\$ Apr 23, 2012
• The Multiheaded Pension Monster http://t.co/oBDNBZYN Multiemployer DB plans- not enough coverage: moral hazard, low PBGC guarantees \$\$ Apr 23, 2012

Energy

• Chevron sticks with oil. And it pays off. http://t.co/uUlsjbBK FD: + \$CVX | That said, buy & hold conventional NG could b good idea now \$\$ Apr 28, 2012
• Tough Talks Loom at Chesapeake http://t.co/OkMGyu8J Having a CEO who has differing interests from common shareholders is a risk \$CHK \$\$ Apr 28, 2012
• Saudi oil puzzle, continued http://t.co/z76fSKTZ Prices r high, but the Saudis keep stockpiling oil. Why? \$\$ #idunno #gouging #painfreak Apr 25, 2012

Information Issues

• Saudi Clerics Out-Tweet Liberals Forcing King to Balance http://t.co/A1TcHeSJ Don’t underestimate the influence of Wahhabi Islam. \$\$ Apr 26, 2012
• Google Stores, Syncs, Edits in the Cloud http://t.co/BrRSauno Walter Mossberg likes \$GOOG Drive, thinks \$MSFT Skydrive worth a try \$\$ Apr 25, 2012
• PGP Creator Phil Zimmermann Has a New Venture Called Silent Circle http://t.co/KNJQJ4X4 There’s also a promise of no backdoors 4 anyone \$\$ Apr 24, 2012
• A New Email Encryption App Your Network Admin Might Not Like http://t.co/7b967z7e Enlocked can encrypt email w/a click, could go viral \$\$ Apr 24, 2012
• Surveillance State evils http://t.co/BKkmM78J Don’t say anything that you don’t want the government 2 know. Repeal the Patriot Act! \$\$ Apr 23, 2012
• Astounding. Reprogram it \$\$ RT @AnnieLowrey: This essay awarded a perfect score by a robo-grader is just delightful. http://t.co/Vc1ORC8T Apr 23, 2012

Company Issues

• Heat Turned Up on Falcone http://t.co/zaiW1Jzu The deal w/the devil comes due for payment; Falcone faces checkmate or LS bankruptcy \$\$ Apr 28, 2012
• Woes at Law Firm Deepen http://t.co/to4dZbJY Dewey & LeBoeuf’s troubles w/debt & revenue shrinkage. Law does not work well 4 big biz \$\$ Apr 28, 2012
• Health Insurers to Give Back \$1.2 Billion, Goldman Says http://t.co/VX0V9sL9 health overhaul limits <20% premium for expenses & profit \$\$ Apr 26, 2012
• US Airways Said to Approach AMR Bondholders on Merger http://t.co/iArkC4nq The unsec bondholders r the economic equity of \$AAMRQ now \$LCC Apr 25, 2012
• Genworth Credibility Eroded as Australia Plan Shelved http://t.co/oyJJ4OCC I’ve almost always ben a sceptic on \$GNW. Toxic lines of biz \$\$ Apr 24, 2012
• Google Unveils Drive Storage Service http://t.co/5R1CAkR0 I use Microsoft Skydrive as a real time backup of my files. \$\$’ Apr 24, 2012
• MGIC Posts \$19.6 Million Loss as Borrowers Struggle on Loans http://t.co/fvoY6cZN Regulators should halt \$MTG’s ability 2 write new biz \$\$ Apr 23, 2012

Rest of the World

• Bubble Down Under? http://t.co/jk4UBFzA “Name a credit bubble built on a commodity bull market built on a bigger Chinese credit bubble?” Apr 26, 2012
• North Korea Poised to Rattle Region With Nuclear Blast http://t.co/MJmALgYi Will believe when it happens; NK always seems 2 get tech wrong Apr 26, 2012
• Swiss housing market inching towards bubble http://t.co/KCbYrs6x Makes me wonder when the Swiss Central Bank will break its Euro peg \$\$ Apr 24, 2012

Financial Markets

• Conference Notes http://t.co/VF5FIPOg On 4/13, Chicago Booth held its 7th Annual Distressed Investing & Restructuring Conference. \$\$ Apr 26, 2012
• No surprise when they only put 3.5% down \$\$ RT @pdacosta: Falling home prices drag new buyers under water http://t.co/bayZVELO Apr 26, 2012
• TARP Profit A Myth, Claims TARP Inspector General Christy Romero http://t.co/iv77kkne Q is related to foreclosure prevention aid & GSEs \$\$ Apr 26, 2012
• My Sister’s Pension Assets and Agency Problems by Jeremy Grantham http://t.co/ANDMdZae On the value of a non-constrained mandate \$\$ Apr 25, 2012
• Force Fed by Ben Inker of GMO, last 3 pgs of http://t.co/ANDMdZae Goes through the problems of Asset Allocation with yields so low \$\$ Apr 25, 2012
• Wall Street Promotes Junk Bonds as Europe Erupts http://t.co/5kIRG7Oi grabbing for yield — it’s the national pastime! \$\$ Apr 25, 2012
• US 10 Year Bond Yielding 0.5% http://t.co/Zrnj9zdL Japan scenario for the US? The 10Y at 0.5% seems farfetched, but everyone hates bonds \$\$ Apr 25, 2012
• REITs Spring an Unnerving Surprise http://t.co/qgStDii0 I’ve warned b4 on Private REITs http://t.co/liQr20vq More bad surprises coming \$\$ Apr 25, 2012
• So, if Egan-Jones did do ABS & governments, that would have been news to me. Surprising to see the SEC going after them \$\$ Apr 25, 2012
• Credit Rater Egan-Jones Lied, SEC Charges http://t.co/c1ym3feC Firm was known 4 its corporate bond ratings by a contingent claims model \$\$ Apr 25, 2012
• Who Gets the Equity Risk Premium? http://t.co/gqdPYexG LT holders, brokers, taxes, firms that issue & retire shares at inopportune times \$\$ Apr 24, 2012
• Commodities don’t provide “diversification” in a crisis http://t.co/7ue9vvjJ Commodities provided diversification when few did it; no more Apr 23, 2012

Catastrophe Bonds

• @merrillmatter If I ran a life insurance portfolio, a closed end fund, an open end HY fund, I would buy cat bonds, u need a balance sheet \$\$ Apr 24, 2012
• @merrillmatter With all the goofy ETFs issued, surely someone could create \$CATB, the Cat bond ETF. Would b very tough 2 source bonds 4 \$\$ Apr 23, 2012
• @merrillmatter That’s why many high yield funds buy them w/both hands. Also special hedge funds that tear Cat bonds apart 2 get the best \$\$ Apr 23, 2012

The Perils of Sitting

• On the sitting kills you piece, would like to get a copy. Est’d increase in death rate from 0.76% to 1.06%/yr. Big %, not so big absolute \$\$ Apr 23, 2012
• Confirmed: He Who Sits the Most Dies the Soonest http://t.co/aif1e8xX I found this article worrisome. I sit > half of my waking hours. \$\$ Apr 23, 2012

US Economy

• New Mad-Cow Discovery Stirs Fears http://t.co/DPm6aLzI This story will have legs, 4 2b exact. 😉 Beef will b down until scope clears \$\$ Apr 25, 2012
• On the Social Security 2012 Report to Congress http://t.co/RPG3qz1p Age <53 today can expect to get 75% of the value a baby boomer got \$\$ Apr 24, 2012
• Rosenberg: U.S. Clients View Canada as ’51st State’ http://t.co/EqVvLFpX Careful, w/rates so low, housing is looking bubbly & banks?? \$\$ Apr 24, 2012
• Fees and Anger Rise in California Water War http://t.co/9GjE5jwx Bad geography to get water to, unless you want to try desalinization. \$\$ Apr 24, 2012
• @moorehn Heidi, I was 1 of the 8 bloggers @ the 1st blogger summit at the Treasury, & not 1 of the noisier ones. I spoke twice in the 90mins Apr 24, 2012
• @moorehn So here is my Q4 Geithner: How do we get out of the entitlements crisis? We have promises equal to 4-5x GDP!? [Amid the deficit] \$\$ Apr 24, 2012
• Housing market no longer yours for a steal http://t.co/xb2E2JIy Low end res RE is not accepting lowball offers to buy as it used to \$\$ Apr 23, 2012
• You Won’t BELIEVE How Bearish Investors Are On Treasuries http://t.co/q9t2sZdE 2% bullish, 81% bearish in Barron’s poll. FD: + \$TLT \$\$ Apr 23, 2012

Miscellaneous

• US College Education Bubble, Planning for the Wrong Future http://t.co/BScEbQJI But many smaller job fields req college & pay well. \$\$ Apr 28, 2012
• Hong Kong Glued to ‘Bride Wannabes’ http://t.co/6p9RCs0X Reality TV aids lovelorn 30-something women, ending w/a mass marriage 4 some \$\$ Apr 26, 2012
• But really, with Agriculture doing so well in the US, isn’t it time to finally cut farm subsidies? And beef up (oops) USDA food safety? \$\$ Apr 25, 2012
• Government Keeps Picking Winners, Losers on the Farm http://t.co/PKiJBHIp Farmer complains healthy food gets less subsidy than unhealthy Apr 25, 2012

## A Visit from the Governor

Since coming back to work in Baltimore in 2007, I’ve tried to be more active in the Baltimore CFA Society.  That has taken on a number of different forms:

But now the program season ends with a bang, with Maryland Governor Martin O’Malley.  What questions would you ask the Governor of one of the bluest states in the US, one that has the advantage of living next door to the money vortex known as Washington, DC?  It’s not as if there aren’t any problems:

• We face a significant budget deficit, and the most likely solution is a special session of the legislature that raises taxes, when taxes are already high.
• The government pension funds are significantly underfunded, and don’t ask about government retiree healthcare…
• Maryland (outside of Montgomery County, and maybe Howard and Baltimore Counties [note to non-Marylanders, Baltimore City is a county, and is different from Baltimore County which is kind of a ring around Baltimore City.]) isn’t the best place to run a public corporation.  Taxes and regulations are high, and it is not a right-to-work state.

That said, aside from proximity to DC, Maryland has a number of things going for it:

• An educated workforce
• The biotechnology industry, aided by the NIH & Johns Hopkins
• The REIT and Hotel industries have a large presence here

So, if you want to, and can make it, there are a limited number of seats to come and hear Martin O’Malley speak.  Please come.  If you can’t come, and you would have a question for the Governor, list it in the comments below.  I will take the best question, and ask the Governor that.

Following this is the press release for our meeting:

 Center Club100 Light Street, Baltimore, MD16th Floor, Harbor Room

# Press Release

 Contact: Niall O’MalleyPhone: (443)600-8050Registration questions email (link below):  info@baltimorecfasociety.org FOR IMMEDIATE RELEASE9 PM ET, April 26, 2012

Maryland Governor Martin O’Malley Speaks to the Baltimore CFA Society: Maryland’s Jobs, Economy, and Innovation

Baltimore, MD, April 26, 2012:  In a time when the economy is under stress and the economies of many states are depressed, Martin O’Malley, Governor of Maryland, comes to speak to the Baltimore CFA Society at Noon on May 3rd, on Maryland’s Jobs, Economy and Innovation.  The meeting will be at the Center Club in Downtown Baltimore.

Though seating is limited, the event is open to the public and registration is available at this web address: Register & Pay.   Check-in starts at 11:45 AM.

In particular, Governor O’Malley will discuss the role of innovation and entrepreneurship in strengthening Maryland’s economy. Financial services play a key role in Maryland’s economy. How will the Invest MD program build on recent success?

Join us for a lively talk and discussion with the current Governor of the great State of Maryland.

BALTIMORE CFA SOCIETY

The Baltimore CFA Society was founded in 1948.  Its mission is to facilitate the exchange of ideas, networking and professional development while adhering to a Code of Ethical Standards.  The Baltimore CFA Society has promoted Baltimore and Maryland businesses through the Baltimore Business Review (www.baltimorebusinessreview.org).  The society’s diverse membership represents over 600 financial service professionals from across the State of Maryland.

# -End-

## Redacted Version of the April 2012 FOMC Statement

• No significant changes from last time.  They shaded up their views on housing, inflation, and global financial risk.  That’s all.
• In my opinion, I don’t think holding down longer-term rates on the highest-quality debt will have any impact on lower quality debts, which is where most of the economy finances itself.
• Also, the reinvestment in Agency MBS should have limited impact because so many owners are inverted, or ineligible for financing backed by the GSEs, and implicitly the government, even with the recently announced refinancing changes.
• The key variables on Fed Policy are capacity utilization, unemployment, inflation trends, and inflation expectations.  As a result, the FOMC ain’t moving rates up, absent increases in employment, or a US Dollar crisis.  Labor employment is the key metric.
• The Fed is out of good policy tools, so it will use bad policy tools instead, and for longer than before.
• Do they want the yield on 30 year TIPS to go negative?  Looks that way.
• GDP growth is not improving much if at all, and the unemployment rate improvement comes more from discouraged workers.  Inflation has moderated, but whether it will stay that way is another question.

Questions for Dr. Bernanke:

• Is it possible that you don’t really know what would have worked to solve the Great Depression, and you are just committing an entirely new error that will result in a larger problem for us later?
• Why do think extending the period of accommodation by a little more than a year will have any significant effect on the economy, aside from stock and bond prices?
• Discouraged workers are a large factor in the falling unemployment rate. Why do you think the economy is doing well?
• Couldn’t increased unemployment be structural, after all, there is a lot more competition from labor in emerging markets?
• Why do you think that holding down longer-term rates on the highest-quality debt will have any impact on lower quality debts, which is where most of the economy finances itself?
• Why will reinvestment in Agency MBS help the economy significantly?  Doesn’t that only help solvent borrowers on the low end of housing, who don’t really need the help?
• Isn’t stagflation a possibility here?  I mean, no one expected it in the ‘70s either.
• Could we end up with another debt bubble from keeping short rates so low?
• If the Fed ever does shrink its balance sheet, what effect will it have on the banks?

## Book Review: The Golden Revolution

This book is highly optimistic that we will restore a gold standard to our world.  Much as I would like it, because it restrains the power of governments that increasingly behave like thugs, I don’t think a gold standard is likely to replace the status quo.

The book has many good areas to commend it, where it deals with history, explaining the problems of the past.  It trashes the concept of the SDR of the IMF, it is the Euro on an even weaker footing.

But the book is weak, because it does not recognize that the standard for money and the regulation of banks are separate issues.  Merely instituting a gold standard will not bring stability.  One must regulate heavily the degree that banks borrow short and lend long.  We had many crises during the gold standard in the 19th century, none as bad as the Great Depression, but they all stemmed from a lack of bank regulation.  I have no sympathy for the concept of “free banking.”  Anyone that is making a large number of promises needs to be regulated; he is a systemic risk.

Chapter seven is the critical chapter of the book, and it fails because it doesn’t go far enough.  In the chapter, Russia adopts a gold standard, and requires payment in gold for exports.  Fair enough, but as other nations attempt to adopt a gold standard, they would find their exporters objecting, leading to no adoption of a gold standard.

Chapter seven is the only thing that makes this book unique, and it is why I requested it from the publisher.  That makes this book a “fail.”

On the bright side, I now know that a gold standard would be difficult to appear, unless hyperinflation drove people to a commodity standard.  (And the odds of that are better than 20% over the next 20 years.

Quibbles

I do not recommend this book.

Who would benefit from this book: No one.  If you want to, you can buy the book here: The Golden Revolution: How to Prepare for the Coming Global Gold Standard.

Full disclosure: I asked the publisher for the book and he sent it to me.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.

## Book Review: The Facebook IPO Primer

There is more money to be lost than made in most controversial IPOs, on average. Don’t get me wrong, this is a good book, and the author knows what she is talking about, but whether one should buy Facebook in its IPO next month is a huge open question, and I would encourage you to read this book to think through the problem.

If you read the book, you will get a healthy dose of skepticism, mixed with the idea that many large IPOs in tech have been successful, like Google.  The main idea is that you have to do due diligence.  All snowflakes have six corners, but they are all different.

The book gives you five different ways to value Facebook, and those methods are all over the map, as they should be for a company where the economics are yet to be determined.  At least it is profitable.

The range of valuation gives everyone something to hang onto, but the thought process should force everyone to think about how Facebook will monetize all of their users.  Will the users behave in a way that allows Facebook to make money off them?  So far, yes, but the future is far more volatile than I can imagine.

In general, I would advise readers to avoid IPOs.  Most people lose money in buying them on the secondary markets.  Better you should buy stock in less flashy businesses like utilities, insurance, and energy stocks.  You will make more money there — businesses with a high earnings yield tend to do better than other stocks, and Facebook does not make it there, for now.  Buying Facebook implies a company that will grow far more rapidly than most, and far a long time, which is not common.

If you are thinking about buying shares of Facebook, spend five bucks or so, and get this book.  It’s less than a brokerage commission, and worth more than most in educating you about the value of Facebook.

Quibbles

None; this is a good book.  What matters most is how you think about it.

Who would benefit from this book: If you want to buy the Facebook IPO, buy this book and learn something.  Be aware before you buy, or be dissuaded before you do nothing.  If you want to, you can buy the book here: The Facebook IPO Primer.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.

## Sorted Weekly Tweets

Busy week last week.  Here’s the economic and other news:

=-=-=-=-=-=–=-=-==-=-=-==-=-=-=-=–==-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-

China

• Bloomberg: Inflated Notions http://t.co/hvMoIFH6 Patrick Chovanec questions whether Chinese economic statistics are correct. \$\$ Apr 22, 2012
• China’s Political Stability Questioned, while Deposit Withdrawals Accelerate http://t.co/X9kJ9oZb Deposits exit China’s banks; many worry \$\$ Apr 22, 2012
• Asia dominates new treasury purchases http://t.co/BXvgGQRi If you want to favor your exporters, you have to suck in the debts of the buyers Apr 22, 2012
• China’s Achilles heel http://t.co/3TPxHEvL Very difficult to change the practice of having fewer children once it is entrenched \$\$ Apr 22, 2012
• Son is a good man, more worthy than Dad \$\$ RT @mprobertson: & the first wife had a son. http://t.co/dFzgm1kp extra extra, read all about it Apr 19, 2012
• Chinese Move to Wealth Products May Undermine Bank Stability http://t.co/bYK4qImP Disintermediation happening increasing shadow bank risk \$\$ Apr 18, 2012
• Chinese Officialdom Indulges in the Almost-Free Lunch http://t.co/tTMkP8JK A modest subsidy/perk looks big if the 1 looking in is poor \$\$ Apr 18, 2012
• The Power Shift in China http://t.co/bgxN7t8h Shifts: 1.weak leaders < strong factions 2. government < interest groups 3. party < country \$\$ Apr 18, 2012
• More Chinese get US green card http://t.co/ZU30ahwF They know where they’ve got it good, not in the Socialist worker’s paradise! \$\$ Apr 18, 2012
• So many Chinese officials r arrested 4 embezzling funds through Macau that 2 scholars devoted a study to the subject http://t.co/YZbDqX57 \$\$ Apr 18, 2012
• That’s Governor Zhou to you http://t.co/AkXcHbPZ Check out chart of central bank balance sheet growth http://t.co/VG0bySGA China leads \$\$ Apr 18, 2012
• China widens the range 4 currency fluctuations. Is it really making x-rate more flexible? http://t.co/Rv79vI0q PBOC still targets x-rate \$\$ Apr 18, 2012
• Rotting From Within http://t.co/vAwKBTzb Investigates the massive corruption of the Chinese military; makes corruption in the US look small Apr 18, 2012
• Bo Xilai’s first wife gets her revenge at last http://t.co/UsrGejSF Some Chinese r very good @ maintaining a grudge 4a long time \$\$ Apr 18, 2012
• China Doubling Yuan Band Signals Drive for Convertibility http://t.co/FK9OohMh Importance overstated; will not have a big effect on x-rate Apr 18, 2012
• China Adds Treasuries for Second Month on Reserve Growth http://t.co/Ev9Fqi8s Export earnings have 2b invested somewhere \$\$ is best of bad Apr 18, 2012
• China New Yuan Loans Surge in March as Money Supply Quickens http://t.co/DmXg6QB5 Sounds inflationary, if not 4 goods, then 4 assets \$\$ Apr 18, 2012

Energy

• Peak oil goes mainstream (again) http://t.co/BijPuVFG Oil & Gas will never run out, but the price to get them could get high \$\$ Apr 22, 2012
• Feeling peaky http://t.co/4mefPCBR “But there is a simpler explanation: that supply is inadequate to keep up with rising demand.” \$\$ Apr 22, 2012
• Could US natural gas run out of storage capacity? http://t.co/8R1aYxjM Yes, it could, and we could see the price of spot gas go 2 zero \$\$ Apr 22, 2012
• Delta’s Oil Refinery Plan Flies Against Economic Sense http://t.co/0xAnIV2z It rarely makes sense to be vertically integrated. \$\$ Apr 22, 2012
• Obama’s oil market plan more politics than substance http://t.co/w2vwKhNx Crude oil market is so big; would be difficult 2 game secretly Apr 18, 2012

Eurozone

• Odds of bankruptcy http://t.co/v0xBexrW Short table of bankruptcy odds: European banks = E-Zone Fringe > US Banks > Other nations \$\$ Apr 22, 2012
• The bank-sovereign linkage in the Eurozone http://t.co/9q7Sx9cn Not 2 surprising; governments & banks comprise most systemic risk \$\$ Apr 22, 2012
• Spain’s loan delinquencies accelerate http://t.co/3Nlf2QDu Really ugly graph: http://t.co/iJVux7fj The Spain issue is not dead \$\$ #ezonedead Apr 22, 2012
• Paulson Said to Short Europe Bonds Amid Spain Concern http://t.co/hJQwSc9n This one isn’t as easy as shorting subprime. Be careful \$\$ Apr 18, 2012
• Modell Deutschland über alles http://t.co/DtrBNHDL Suggests EZone imitate German labor rules, but not austerity \$\$ Apr 18, 2012
• French Campaign Enters Final Week With Hollande Extending Lead http://t.co/whQhmUb1 & widening recently; could make Ezone matters messy \$\$ Apr 18, 2012
• Downgrades Loom 4 Banks http://t.co/EdDRDGQa Moody’s Weighing Ratings Cuts to 114 Institutions in 16 European Countries \$\$ #lookoutbelow Apr 18, 2012
• Spanish Minister Asks ECB to Buy Bonds as Crisis Deepens http://t.co/cUcLRHLW Things r calmer now but this is the path of least resistance Apr 18, 2012
• Spain’s Surging Bad Loans Cast New Doubts on Bank Cleanup http://t.co/QQT2BSsB NPLs /totallending jumped to 8.16% in February, <1% in 2007 Apr 18, 2012
• Weidmann says not ECB job to tackle Spain’s problems http://t.co/kRUWSfyQ Famous last words \$\$ ECB only entity w/flexbility 2act fast Apr 18, 2012
• Ray Dalio’s Bridgewater Says Spain Is Worse Off Than It Was Before The LTRO http://t.co/nVMDpG5c It’s a solvency, not a liquidity problem Apr 18, 2012
• GEORGE SOROS: The Euro Crisis Just Entered A ‘Less Volatile But More Lethal Phase’ http://t.co/uzIev7nm LTRO papers overinsolvency probs Apr 18, 2012

Rest of the World

• Argentina’s shadow FX rate shows total loss of confidence http://t.co/RVRicp1p Dishonesty in one area makes others distrust u elsewhere \$\$ Apr 22, 2012
• Cristina: she is not alone http://t.co/gBWcllwU Many nations engage in expropriation from foreigners. \$\$ Apr 22, 2012
• Pakistan And India To Go To War Over Water? http://t.co/2mx9a7u9 Whiskey’s for drinking, water’s for fighting over — Mark Twain \$\$ Apr 18, 2012
• Unlikely but never say never RT @SCMITHA: @AlephBlog Sir No chance of war bet India & Pakistan both Nuclear Army Chief Kayani wants peace Apr 18, 2012
• Mexico Manifesting its Own Destiny http://t.co/kLwx5A6l “Mexico has clearly stood out to me for its relative and absolute strength.” \$\$ Apr 18, 2012
• Japan’s Teachers Fund to Start Investing in REITs, Hedge Funds http://t.co/9nKnY0zM Trend following; late to the alternative assets party Apr 18, 2012

US Tax Policy & Pensions

• Congress Eyes 401(k)s Again http://t.co/nRL9IkeO Interesting article on some possible/unlikely proposals to change 401(k)s \$\$ Apr 22, 2012
• How to Pay No Taxes: 10 Strategies Used by the Rich http://t.co/ljjgefpc The main problem is defining income, not tax rates on the rich \$\$ Apr 22, 2012
• Occupy defined-benefit pension funds! http://t.co/eQooNetC Employees would be better off with DB plans, even if had to fund them themselves Apr 22, 2012
• New Suits Over Do-It-Yourself IRAs http://t.co/B6UYpG5m They aim for the wrong target; the custodian is only a conduit, not a referee \$\$ Apr 22, 2012
• As population ages, institutions reduce equity holdings http://t.co/rPfescwH A first: US pensions have allocated more to bonds than equities Apr 18, 2012

Miscellaneous

• The New York Times Company in 2015 http://t.co/qp451VDA An optimistic view of \$NYT three years from now. I will not buy it. \$\$ Apr 22, 2012
• Joel Kotkin: The Great California Exodus http://t.co/WOvr2BFE Y California is in deep trouble & will shrink as better places r found \$\$ Apr 22, 2012
• Contra: Climate Change Has Nothing to Do With Al Gore http://t.co/GO0S60J3 Misinterprets Lk 16:2, & I am to believe he is a Christian? \$\$ Apr 22, 2012
• The Celestial Event That Sparked a Revolution http://t.co/Kn3E9XJb Fascinating tale on the transit of Venus across the Sun \$\$ #June6th Apr 22, 2012
• The Downside of Cohabiting Before Marriage http://t.co/a1fFySzW For a man & woman 2 live together long run requires decisive commitment \$\$ Apr 18, 2012
• Amazon’s knock-off problem (35 Shades of Grey, anyone?) http://t.co/oRJNKhVB Fascinating that some r knocking off books & selling on \$AMZN Apr 18, 2012
• Median age for first marriage spikes to record, holding back family formation http://t.co/Uf2SbCTI Long-run effect on society won’t b good Apr 18, 2012
• To Pay Off Loans, Grads Put Off Marriage, Children http://t.co/G72NieZI Far better to skip college than put off marrying & children \$\$ Apr 18, 2012
• The 101 Finance People You Have To Follow On Twitter: http://t.co/pIaCWK1n A good list, but where’s @moorehn, @interfluidity, @edwardnh \$\$ Apr 18, 2012
• Dark Meat Getting a Leg Up on Boring Boneless Breast http://t.co/7BDSaTru “Every single day we have shortage of dark meat.” Who knew? \$\$ Apr 18, 2012
• ‘Pink Slime’ Furor Means Disaster for U.S. Meat Innovator http://t.co/uGwKSIhw The other side of the story; fighting bacteria in beef \$\$ Apr 18, 2012
• RAIL TRAFFIC CONTINUES TO SOFTEN http://t.co/EnhWT7Ay Economy slowing; just another straw blowing in the wind. \$\$ Apr 18, 2012
• Freeport Deal Talk Intensifies on Cheap Copper http://t.co/DH26Nf1s Would be a big deal & difficult to pull off; Interesting idea tho \$\$ Apr 18, 2012
• Taxes are filed and now I have some time to tweet, making up for lost time… Apr 18, 2012
• @danprimack Private Investment Limited Partnership. Features: asset & profit-based fees. Limited liquidity & information. Aims high gets low Apr 17, 2012 (DM: defining “hedge fund” in 140 chars)

Economics & Finance Theory

• Is modern portfolio theory bunk? http://t.co/NrplQvbp Low volatility anomaly says bunk; if you didn’t know MPT was bogus alre ady-> #hopeless Apr 22, 2012
• U.S. money supply growth offers bullish signal http://t.co/aqV6oP0c It is bullish in nominal terms for risk assets; not bullish for the rest Apr 22, 2012
• Slump Taught Profligate Americans Value of Saving http://t.co/22jWf3OL Having slack assets & not being in debt is a virtue not a vice \$\$ Apr 22, 2012
• The Great Depression as a Credit Boom Gone Wrong http://t.co/OBXRGeY2 Until the great depression is viewed as the bust after a credit boom + Apr 22, 2012
• …we won’t get policy right. The credit cycle is real, & the Fed ignores it, providing liquidity as if it were not a structural problem. \$\$ Apr 22, 2012
• El-Erian Breaches The Final Frontier: What Happens If Central Banks Fail? http://t.co/pRcdN42N Goal: print enough credit until promises -> 0 Apr 18, 2012
• Deflation Does Not Lead to a Depression, suggests Research http://t.co/2VTu2bAd Separate probs; falling inflation vs systemic impaired debts Apr 18, 2012
• Depression is a choice http://t.co/F4YdBn8x Every creditor wants 2b paid off @ par; many debtors would like compromise, enabling econ growth Apr 18, 2012
• Difficulties in forecasting the impact of shadow inventory on the housing market http://t.co/xcALioOb Mtge > value makes sales slow, \$\$ low Apr 18, 2012

Financial Markets

• Are fixed income ETFs the new “securitization” product? http://t.co/6qo2U7Zg Shows the many ways that sponsors make \$\$ off of ETFs Apr 22, 2012
• Time for the SEC to institute new disclosure rules on CEO leverage http://t.co/nMJZslXg Insider CEO deals r material & should be revealed \$\$ Apr 22, 2012
• Fear Barometer Bubbling http://t.co/HjXre23p Puts getting more expensive relative to calls on the S&P Apr 22, 2012
• Is This the Book that Inspired Jamie Dimon’s Warnings About Regulation? http://t.co/ikzuXwlD Regs make banks behave alike ->systemic risk \$\$ Apr 22, 2012
• @historysquared One question I always ask is how mgmt/directors treat outside passive minority shareholders. Do we ride the back of bus? \$\$ Apr 18, 2012
• @historysquared Yeh, don’t let management control audit, nominating, or compensation committees. Split Chairman & CEO, etc., etc., etc… \$\$ Apr 18, 2012
• Regulators should encourage more diversity in the financial system http://t.co/xhfvsTlS Consistent regs create less diversity forces conform Apr 18, 2012
• In New Funds, Old Flaws http://t.co/h931mglc Some have high fees, longer-term tracking error, hidden counterparty risk, enable stupidity Apr 18, 2012
• Why Investors Should Pay Attention to the JOBS Act of 2012 http://t.co/kk9seYVH Here’s what Hunter thinks are the positives of the JOBS Act Apr 18, 2012
• Fannie Mae Fix Said to Retain Some US Mortgage Role http://t.co/YPAFyygs Crazy people @ UST. 2much debt on housing in general->instability Apr 18, 2012
• Wells Fargo, JPMorgan Label More Junior Liens as Bad Assets http://t.co/QpwE2S43 Wow, this took a long time to finally happen \$\$ #reality Apr 18, 2012
• Structured-Note Fees (etc) http://t.co/rYf5WXBS IBs must disclose likely value of securities, fees incurred in creation of the notes \$\$ Apr 18, 2012
• Citadel, Millennium Above \$115 Billion With Rule Change http://t.co/j53AMUGG Many hedge funds have borrowed lots; now we know how much \$\$ Apr 18, 2012
• Year’s first outflows from HY bond funds http://t.co/mUmIq0Yw May eventually lead to \$\$ weakness Apr 18, 2012
• Green Light for Hedge-Fund Ads Means Caution on Main Street http://t.co/4mh9LNgW Most people will not fare well w/complex investments \$\$ Apr 18, 2012
• Doing the Right Thing: Upside? Zero. Downside? Financial Ruin… http://t.co/eZlNDJJA We aren’t paid 2b sheriffs a la: http://t.co/egqIsb9V \$\$ Apr 18, 2012
• Do Jubilee shares make any sense? http://t.co/2LxtggJ1 I don’t think so. Unnecessary complexity; increased illiquidity; would not work \$\$ Apr 18, 2012
• 12 Intriguing Insights on Mutual Funds http://t.co/6U3JZegh Interesting mutual fund trivia from Morningstar \$\$ Apr 18, 2012
• Interesting post. But a successful spec on 1 risk can morph into credit risk post-crisis. … http://t.co/Vzlb5xdT Apr 17, 2012
• Falcone looks like a one-trick pony who made one lucky bet and won. Now he loses regularly. http://t.co/dsivgMCs Apr 16, 2012

## Book Review: Then There Were None

The topic of resources running out is perennial.  Go back to the ‘60s and ‘70s, you have the Club of Rome and other doom-mongers.   There are also the bets placed by Julian Simon on commodity prices in the ‘80s and ‘90s, betting the commodity prices would fall, and they did.  Much of the effect stemmed from increasing efficiency in using scarce commodities.

But in the ‘90s and 2000s, large parts of the world came into the capitalist system.  In relative terms, labor, particularly low-end labor was no longer scarce, and resources were the least scarce of the triad of labor, capital and resources.

Then There Were None takes a middling view of resource scarcity.  Commodity prices have risen significantly. Many low-cost resource deposits have been mined out.  Demand for commodities has risen dramatically because of new demand from China and other emerging markets.

There are 21 chapters in the book:

1. two deal with a classes of minerals: rare earths and fertilizers
2. 18 deal with individual minerals, and
3. the last tries to tie the book together.

Each chapter explains why there is demand for the resource in question, shows the change in demand, who produces it, and companies that benefit from the changes.

It also describes what the minerals are used for, so that you can get a better sense of what might drive the pricing of the minerals/metals, and of the products that derive from them.

There has been a shift in the world, and there is more demand on resources than there used to be.  This book fleshes out the effect of the change in demand, and tries to explain, mineral by mineral, the effects on the global economy.

Quibbles

The book focuses too much on China.  It also occasionally makes it sound like China could use up all of the resources of the world, which is ridiculous.

Who would benefit from this book: For investors, and ordinary folks, if you want a good view of what is happening globally with critical minerals, you can read it here.  If you want to, you can buy it here: Then There Were None: Chinese Demand for Critical Materials in the Coming Decades.

Full disclosure: The publisher offered me the book.  I said “yes” and he sent it to me.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.

## Misunderstanding the Tax Debate (II)

I’m going to do something different to start this post.  I’m going to highlight those that disagreed with the last post.  Thanks for disagreeing, because it makes this post better.

Response 1:

It’s all well meaning but it’s likely to fail in practice, with unintended consequences and nasty corner cases where you have to reintroduce complexity.

For example imagine a taxpayer with one, liquid but volatile asset, which is essentially long term flat. It goes up +X in one year, -X the next, etc. So the taxpayer has essentially zero income (amortised) but must pay on the +X on the positive years. The no deferral rule prevents creating an offsetting tax credit on -X years, so he’s either paying tax on non-existing income, no good (>100% tax rate), or requires a refund on the down years, which creates a new class of enforcement problems that didn’t exist before (people creating fake losses to get actual cash, when they could only get tax credits before).

Another example is a taxpayer with a single illiquid asset, say a small business owner who owns nothing else, and the business is with tight cash flow, or a disabled/elderly person who owns their house outright but nothing else and who lives on welfare. If the business/house valuation goes up, these guys have a tax bill. So now they must raise money out of an illiquid asset just to pay tax, and as it’s illiquid and they don’t have cash flow they might have to either pay distressed credit rates on their tax borrowing, or just sell the business/house which is a bit of a harsh punishment for a tax-cashflow issue.

Income is intrinsically a tricky problem. You can clean up the crud from time to time, indeed you must as some nonsensical rules will inevitably accumulate, but a simple tax idyll is unfortunately not realistic I believe.

Response 2:

I respectfully don’t think so. The example of the taxpayer with the volatile asset could also be compared with a person who pays income taxes on a salary. If they lose their job next year (volatility) they would have paid too much this year by your model. The issue is that it seems less fair to tax work (salaries) at a higher rate than wealth (dividend income). Perhaps it could be separated from capital gains – which isn’t real income until it is sold at a profit. It could also be argued that salaried people contribute more to the economy than dividend income does. I’m not a job creator if I go sell a \$100K of stock on the NY Stock Exchange – what have I added to the economy?

Response 3:

This does not strike me as a good idea. It isn’t practical to tax appreciation of illiquid untraded assets, and the overhead and intrusion involved in doing something like this fairly would be tremendous.

I don’t see why we should be so reliant on taxing income anyway. Pigovian taxes would be better for the economy, and consumption taxes would be easier to levy. Even a Henry George style single-tax would seem preferable to trying to impute income to people as a result of asset fluctuations.

I like my readers.  Why do I like my readers? One, they are bright people, even if I might disagree with them.  Second, they are relatively polite.  I was walking through Times Square with another prominent blogger, and he said to me, “When I see the comments at your blog, David, you have nice commenters, whereas those at my blog are not.”  I said to him that there were three factors in play:

• He has more readers than I do.
• His format did not allow for filtering.  I filter, but rarely.    Also, it’s harder to comment on my site, and that’s a feature, not a bug, because I want people who are determined to comment, not something that is off the top of the head.
• I pointed out to him that his rhetoric had bomb-thrower tendencies, and what kind of crowd would that attract?

So, I like my readers, and commenters.  In general, if you comment here, and I don’t delete it, I respect you.  (Deletion rate is less than 0.1%.)

But now to my main point.  Much as I like Buffett, I disagree with him on tax policy, because he is a hypocrite.  Let him argue that stock holdings should be taxed annually on the unrealized increase, and I would agree with him.  He doesn’t pay as much taxes as he should because:

• Berkshire Hathaway doesn’t pay a dividend.
• He never sells shares of his company.
• He engages inside his company to avoid taxes in every legal way.  He is not interested in paying taxes in the slightest.

My tax proposals would make Buffett and those like him pay, and others who game the system as well.  The critiques above miss the point in a major sense.  Much avoidance of taxation comes from having companies that are heavily indebted.  I don’t believe that having heavily indebted companies is a good thing.  If they faced taxation on the presumed increase in their value annually they would be forced to have more liquidity, and that is a good thing.

My proposal would lead to companies not being so heavily indebted.  That’s a feature, not a bug.  We need to discourage debt in the financial sector, because it tends to create booms and busts.  If you want to do a big capital investment, save for it, or borrow on a very short term basis.

My proposal on taxation should be phased in gradually.  Mr Buffett should not be presented with a bill for \$12 billion, but rather a request for \$1.2  billion for 10 years, reflecting the value he has obtained untaxed.  With respect to taxation, he is the ultimate hypocrite.  If he did not speak on such matters, I would respect him, because he is generally such a wise man, but he has prostituted his position to the current political scene.  Thus I don’t respect him here.

(As an aside, we could drop the estate tax after instituting this, because appreciation would be taxed annually.  As such, the cost basis at death would be very near market.  One thing that was little noted in the one year elimination of estate taxes in 2010 was that if you inherited something in that year, your tax basis did not step up to market, but remained at the cost basis of the decedent.  The taxes may be delayed, but they weren’t eliminated.  That’s still quite an advantage.)

I believe that a less levered system is better for the economy as a whole.  It is far better to disallow interest as a deduction for corporations. and allow corporations to dividend to shareholders without taxation.  Or, eliminate corporate taxation, and tax dividend receivers directly, combined with a tax that taxed profitable companies that did not pay dividends.

The economy is better off when it is less levered.  Debt obligations make the economy less flexible, demanding fixed payments, regardless of how likely they are.  For modeling, it is best to think of the unlevered economy. What is the native demand, leaving aside the  speculative demand?  Borrowing to create speculative demand should not be encouraged by the tax code.  After a phase-in, interest should not be tax-deductible, but would add to the cost basis of assets.

My views are relatively simple:

• Taxes should be moderate, and levied on the approximate increase in value annually.
• Corporations and individuals should avoid borrowing to finance investment/consumption, at least, it should not be tax-favored to borrow in the short run.
• Everyone should be taxed; there is no way to avoid it.  This ensures fairness.
• All classes of income should be taxed at the same flat rate.
• There are no non-income deductions/credits, and no use of the tax code for social engineering.
• This should be phased in over ten years to avoid a shock.
• For illiquid situations, businessmen would have to plan in advance for taxation, which would impose a cost on illiquidity in the economy.
• We would not favor savings over consumption — goodbye to the complexities of IRAs, life insurance, pensions, and all other deferral vehicles.

The overarching idea is to create a flat taxation system, where the increase in value is taxed annually, and where there is little incentive to engage in any sort of action to convert one sort of income into another.  This would level out many of the advantages that the wealthy have, while leaving in place a relatively transparent taxation system with few preferences which would be stable, and create predictability in taxation.

Those are my views.  I am trying to create something more stable, fair, and transparent (can’t hide income).  Those are desirable goals.  Why shouldn’t everyone love this, aside from the rich that use the overly generous tax code?  Feel free to comment below…

PS — this would have implications for US entities owning foreign assets, but I haven’t figured out how to make this work globally without making people/firms flee the US.  Ideas are welcome.  Thanks to all readers/commenters, I appreciate all of you.

## Tickers for the Current Rebalancing

When I look at what stocks to switch to as I manage my assets, and those of my clients, I look for assets that may be more valuable than the market currently believes.  Most of that involves looking at industries and valuations, but that has led me to the following group of tickers:

ABC ACCL ADTN AET AKAM ALTR AMKR APA ARB ARKR ARO ARRS ARTNA AVY BBY BDX BEAM BGS BHP BIDU BLT BSX BX BZ C CACH CAG CAH CBG CCH CELL CF CFN CLF CMVT CNQR CODI COV CP CPB CPE CPSI CREE CSCO CSTR CSWC CTRP CZZ DD DFS DGX DHT DLPH DLX DRIV DVN DVR EBAY EEP EFC EFX EPAX ERIC FBHS FCX FDP FORR FSLR FTE FUJIY GD GKK GLDD GLW GNRC GOOG GT GTAT HAL HII HNZ HOGS HON HRC HWCC IACI IART IN IRE ISIL ITRI ITT IVC JBL JCI JCP JNPR K KFN KKR KLAC KNM KOP KRA LDR LIFE LLTC LMCA LOW LPS LSI LVLT MASI MCHP MCK MDCI MDRX MKC MOS MPC MRVL MS MSI MTG MWW NAV NE NFG NFLX NILE NLY NOK NTGR NTI NTIC NTK NTRI NUVA NVDA ONNN PC PCLN PHG PLCM PTNR QCOR QGEN QLGC QSII RAH RIMM RMD RUK SEMG SGX SIGI SLM SNE SNX SOHU SPLS SPN STE STJ STM STX SWKS SXT T TFX THOR TNDM TNS TRGT TRIP TSM TSRA TXN UTHR VAR VFC VOLC VPRT VRX VZ WBMD WBSN WDC WMB WMGI WNR WPI WST XRAY YHOO ZINC

Other ideas are solicited, but I think these companies as a group  will outperform over the next three years.