Tax Reform and Guaranteed Minimum Income

Another sensible policy proposal out of Wellington. I blame the weather myself. The sunshine must be sending rays of optimism and clarity of thought into the capitals’ thinking tanks.

First it was Arthur Grimes from Motu and now Adolf Stroombergen from Infometrics. Adolf raises the idea of a flat tax and a guaranteed minimum income (GMI). The concept of a GMI has been around for a long time but it’s good to see it mentioned alongside tax reform.

Last year Charles Murray, co-author of the Bell Curve, came out with a similar proposal based on a basic income and dismantling of the welfare state. There has been plenty of commentary around “In Our Hands” but it is a sign that policy analysts are starting to realise that our current fiscal arrangements are sorely in need of attention.

Coupled with the fact that monetarism is dead in the water it leads me to believe that we are on the cusp of a major evolution in our economic structures. Also it should be noted that none of these proposals are original in thought although perhaps in detail.

Students of financial history will know that many good ideas have fallen by the wayside or been ignored but eventually they will come to the fore. We have a land tax proposed, GST reform, income tax lowered or abolished and a universal income. Well hey now things are starting to come together.

What we need now is serious analysis into these types of proposals. Anyone interested?

Reverse mortgages suck!

At last an article which pans reverse mortgages. I’ve never been a fan of these instruments which are really another form of credit card debt but with a supposedly safe pay off at the end.

They are a brokers favourite with the usual trailing commissions compounding along. It’s another sub prime fiasco waiting to kick in as people realise their wealth has been eaten up and they now have nothing.

There are other ways of raising cash which include trading down or borrowing from family members with the property as security.

Avoid these schemes like the plague.

How to finance public transport

Dave Wetzel, Vice-Chair of Transport for London, writes an interesting paper focusing on the issues of transport infrastructure and increases in surrounding land values. The issue of land and its possible taxation reared its head recently here in NZ but has since had little media interest.

However, its time we really focused on land and its value within the economic system. One of the examples Dave looks at is the building of the Jubilee Line Extension back in the 1990s. It was a marvelous piece of engineering and brought new and convenient transport options to many Londoners.

It also brought wealth to people who owned land and property in and around the areas where new stations were sited. He quotes Don Riley, a London property developer, who calculated,

“..these land values alone, have increased by a staggering STG13bln when the construction of the line itself was only STG3.5bln.”

So this wealth has been gained for no effort (well there is always effort in speculation) and represents a windfall gain. So why shouldn’t some of that have been used to actually fund the line itself.  Dave uses this example to develop an argument for a Land Value Tax as a way of funding public infrastructure.

We don’t need PPPs when projects can be funded out of future wealth gains. This is a subject which gets little attention but deserves much more.

The Amero….coming soon?

With the meltdown in the US $ has come a raft of stories about the end of the greenback as we know it. Messrs Chavez and Ahmadinejad have been whooping it up at the recent OPEC summit and gloating over the demise of the $ etc etc. Well not everyone agrees with their opinion on the matter but clearly the $ has had a major kicking and there are now other options on the table for currency reserves such as the Euro and now more than ever the Yuan though it’s not fully convertible.

Already some well known investors such as Jim Rogers are looking elsewhere to put their money. Last year he called the US recession and the $ decline. Interestingly he saw the Euro as disappearing within 15-20 years as it was a “political currency”. I never though it would last 10 years so it’s done well. He also recently said he would like to put all his money into Yuan…wouldn’t we all?

But there has also been plenty of chatter about new currency unions….Asian? or what about a NAFTA based system?

It’s called the Amero, a union between the US, Canada and Mexico.  It’s an interesting project, overrun with innuendo and conspiracy theories. As Jim Rogers says political currency unions never last (the same goes for free trade agreements).

Whatever the merits of the Amero, it’s clear that the geo-currency axis is shifting to incorporate more players. It could make for some interesting times ahead in the global currency markets.

The first run on the Bank of England

No not today but back in 1696. But its useful to just retell the story as it has laid the foundation for the development of industrial societies all over the world but primarily the UK and the USA.

When the Bank of England was formed in 1694 it was not as a government agency but a joint stockholder company who then lent money to the government to wage war. Money and war go hand in hand really….sound familiar?

But the deal was interesting. Coin, in the form of gold and silver, had to be deposited and then was lent at a rate of interest which at the time was 8%. This is where the term “gilt edged” comes from.

So far so good. But at the same time new money in the form of paper bills was issued against the same deposit of coin. Therefore at a stroke the amount of money as measured by coin and paper was doubled. The paper money was exchangeable for coin so in fact there was only enough coin for half the supply of money.

I’ve seen more complicated magic tricks at a children’s birthday party!

Needless to say some bright spark decided to up the ante somewhat and the first run took place. Over time this settled down so that 4 to 6 times the gold on reserve could be lent out as paper money. This paper money became known as “good as gold”. Quite clearly it wasn’t but it became accepted.

This was taken to extreme by the Farmers Exchange Bank from Rhode Island which was found to have issued banknotes to the tune of $580m backed up by metal reserves of just $3m (note to Les Hunter for that information).

It never hurts to check the balance sheet of your bank to see exactly how much it does have in the way of equity but as we saw in the UK recently it doesn’t really matter since its all guaranteed by the authorities anyway!

The People vs The Banks

News comes of a huge class action suit brought in Canada by a litigator called John Dempsey. Following on from John Kutyn’s (a Canadian living in NZ) paper “the Nature of Money” it takes the next step of actually calling banks to account under the law.

It’s being held up in the courts but at some point the suit must be acknowledged and heard. Its a tough one for the judges as they are being asked to rule on one of the most accepted practices in society today, namely the equivalence of “digital money” and cash in the form of notes and coins.

With the relentless advance of Peer to Peer lending systems coming online and complimentary currencies in every country it is easy to see how a major change is underway. Sure the banks may not be too concerned now but we are seeing the beginnings of a major revolution in what we know as money.