Archive for November, 2010

Mike Bechara Featured in The New York Times!

What can we say?  The mainstream media continues to warm up to us.  Please see our featured story below:

http://www.nytimes.com/2010/11/16/business/16expenses.html?_r=3&scp=1&sq=bechara&st=cse

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Pavlov’s Dogs Get The Short End of the Stick

Most of us are familiar with the story of Pavlov’s dogs.  To recap, Ivan Pavlov was a Russian scientist who was famous for his research on classical conditioning.   His most well known experiment was to condition dogs to associate the ringing of a bell with the delivery of food.  After a period of time when the dogs heard the bell ring, their digestive system would react by producing saliva.  The dogs began to salivate based on the ringing of the bell, regardless of whether food was actually delivered or not.     

Ah my friends ….has all of America become a pack of compliant dogs? 

Recently the Fed introduced QE2 (for those in the peanut gallery this is not the cruise ship) or Quantitative Easing Part 2.  Under this plan the Fed will purchase approximately $600 billion in Treasury bonds.  Translated into English this means that the Fed will “print money”……lots of money.  

The Pavlovian response expected by the Fed, is that this will cause asset prices to rise creating a “wealth effect “ that will make Americans “feel rich.” 

Oh boy…..the bell is ringin but people aint salivatin, if you know what I mean.  

After QE1, or the first round of quantitative easing, rather than go out and spend, spend spend, Americans did the right thing and instead focused on debt reduction.  Various news agencies have reported the reductions in private debt over past months.    

Having been burned in the tech bubble and then in the housing bubble, Americans just aren’t buying it anymore.  Rather they seem to be embarking on a rational course of action.  Cleaning up the household balance sheet is currently taking precedence over wild speculation or consumer consumption.    

There is another side to this story as well.  If you recall, the stated mandates of the Fed are to promote price stability and maximum employment.  

“Yes, yes, we know…and enough with the remedial information Bechara!” come the screams from the peanut gallery.  

OK, let’s take a quick look at how well the Fed has done in achieving price stability.  The following illustration charts the real value of the dollar since 1913. 

 
   

 

Wow, the value of the dollar has sure dropped like a rock since 1913.  What year was the Fed formed by the way? 

In a normal universe, attaining price stability would usually mean not devaluing your currency so it buys less and less every year.  Of course as every Econ 101 student knows, printing money does exactly that.  

Finally, how is the world reacting to the latest Fed attempt to “save” the US Economy?  I think German Finance Minister, Wolfgang Schäuble said it best.  To CNN for the quote (emphasis added): 

On Friday, Mr Schäuble described US policy as “clueless”. In a Der Spiegel magazine interview, to be published on Monday, he expanded his criticism further, saying decisions taken by the Fed “increase the insecurity in the world economy”. 

Mr Schäuble added: “It is not consistent when the Americans accuse the Chinese of exchange rate manipulation and then steer the dollar exchange rate artificially lower with the help of their [central bank's] printing press.” 

Germany’s export success, he argued, was not based on “exchange rate tricks” but on increased competitiveness. “In contrast, the American growth model is in a deep crisis. The Americans have lived for too long on credit, overblown their financial sector and neglected their industrial base.  

There was also “considerable doubt” as to whether pumping endless money into markets made sense, Mr Schäuble argued. “The US economy is not lacking liquidity.” 

Of course all of this is coming from Germany, a country that knows a thing or two about the consequences of printing too much money.  See this prior post for more information.  Anyone remember the Weimar Republic?

But hey, maybe those Germans are just jealous of us Americans….right?  Probably still bitter about World War II and they just don’t want to admit the “brilliance” of the Fed’s plan.  

What does the President of the World Bank, Robert Zoellick (an American by the way) think?  To the Wall Street Journal: 

And here’s Mr. Zoellick’s sound-money kicker: “The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values. Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.” Mr. Zoellick’s last observation will not be news to investors, who have traded gold up to $1,400 an ounce, its highest level in real terms since the 1970s, as a hedge against the risk of future inflation.  

That’s right Mr. Zoellick is suggesting a new global monetary regime with gold as a component.  The phrase “new global monetary regime” is simply a euphemism for replacing the US Dollar as the world’s reserve currency.  

And so the Fed keeps ringing the bell, although it seems no one is listening.  Perhaps if the bell keeps ringing we will have to finally ask the famous question, “For whom does the bell toll?” 

Have a great weekend,

Michael Bechara, CPA

Managing Director

Granite Consulting Group Inc.

mbechara@consultgranite.com

www.consultgranite.com

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Small Business Gets It Coming and Going

Karla once again defends the truth.  Hats off to this insightful lady.   

It is time to stop being politically correct and start being pragmatically correct.

As someone who is constantly working with taxes, I often fail to see how compounding taxes on the top 2% or 5% of wage earners, who already pay an astonishing amount of the overall taxes in the nation, is somehow fair or proper.

I am also astonished that the bottom 47% of the nation, who pay an accumulated total of 0% of total taxes, do not realize that private enterprise accounts for everything they have. Government does not supply anything to anyone on its own. It must confiscate the wealth of others in order to provide anything for anyone.

The top 5%…those individuals and businesses earning $153,000 a year, shoulder 60% of the overall tax burden. That is a huge burden. Yet, the government claims it is concerned with the health of small businesses in America, but at the same time is proposing policies that will hurt businesses both large and small.

In a Labor Day speech in Milwaukee, the president suggested that helping small businesses is vital to economic recovery and proposed a permanent extension of the research and development credit established by the Bush administration. He also argued for letting businesses write down 100 percent of their capital investments over a one-year time frame, instead of the current three to 20-year process.

Yet, in almost the same breath, the president also proposed allowing income tax rates on those making more than $250,000 to go dramatically up, which will destroy small business profits, since those profits are often filed as individual income. The president also defended letting rates shoot sky high for supposedly “wealthy” taxpayers on investment profits, including capital gains and dividends.

But what is often misunderstood is that small business owners will take a substantial hit from these taxes. Many small businesses make more than $250,000 a year—though they don’t earn enough for it to make financial sense to file their taxes in the corporate bracket.

Your local small business: a pet shop, dry cleaner or deli is likely brings in more than $250,000, but then they have to pay their few employees from those earnings, leaving the owners with take home pay far below the rich man’s threshold. It is these employers and entrepreneurs that would be hit hard by a rate increase on the top two tax brackets.

The Tax Foundation has recently estimated that—assuming business income is the last dollar of income a taxpayer earns—39 percent of the proposed $629 billion tax increase on high-income taxpayers would be extracted from business income. This policy runs completely opposite of what the administration claims it is doing to attempt to boost small business spending. Of course, that policy path has additional flaws of its own.

Even if the tax cuts work as planned, they certainly won’t be nearly enough to lead the economy out of recovery. While the R&D credit would be permanent, the investment credit would only be for one year. This means the short-term investment in 2011 will be partially stolen from 2012 and 2013 just as we’ve seen with the aftermath of 2009’s “Cash for Clunkers” program. 

the small business tax cut did not inspire any new investment to come off the bench. Many small businesses already write off up to $250,000 on equipment and other capital investments. So small businesses would have to significantly increase what they spend to see a tax benefit.

Further still, businesses are only likely to invest once their debt has been brought down significantly.  They have to see a near-term benefit for their investment.  

One of the odd presuppositions of the government tax plan is that since savings don’t help the economy, it would be better to tax the rich (who are savers), and give that money to spenders to stimulate the economy. But on the contrary, without savings—cash put in the bank—far less capital would be available to borrow for productive private sector investments.

Increasing the top marginal tax rates to generate $650 billion to $900 billion in federal revenues over the next 10 years means that the same amount of money won’t be invested in the economy as consumption or savings. If the government can find a way to get a better return with that cash than the private sector, however, then the White House may be able to make a strong argument for the tax cut in retrospect. Historical data suggests this won’t be the case.

The near-term goal for the government should be fighting uncertainty. Nervousness about future tax increases—either in 2011 or beyond—has frozen many businesses in their tracks. Regulatory concerns are keeping the banking industry holding tightly to its cash. Sadly, the one sector of the economy I can truly predict will do well would be the sector I work in – tax preparation.

Now is the time to get a good tax strategist. 

To your success…

Karla Dennis

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