News That's Fit To Punt - 27/Feb/2016

The Rich Avoiding Taxes

I missed getting around to this earlier but this came in from Pleiades about how the globalised super wealthy avoid paying tax. It's from behind the pay wall at the Australian Financial Review so I can't go and post the entire thing, but it is a really interesting read.

Gabriel Zucman, who teaches at the University of California at Berkeley, has two goals in his new book, The Hidden Wealth of Nations: to specify the costs of tax havens, and to figure out how to reduce those costs. While much of his analysis is technical, he writes with moral passion, even outrage; he sees tax havens as a "scourge". His figures are arresting. About 8 per cent of the world's wealth, or $7.6 trillion, is held in tax havens. In 2015, Switzerland alone held $2.3 trillion in foreign wealth. As a result of fraud from unreported foreign accounts, governments around the world lose about $200 billion in tax revenue each year. Most of this amount comes from the evasion of taxes on investment income, but a significant chunk comes from fraud on inheritances. In the United States, the annual tax loss is $35 billion; in Europe, it is $78 billion. In African nations, it is $14 billion. 

The fractions of wealth held abroad are highly variable. In Europe, it is about 10 per cent. In African and Latin countries, it is much higher, between 20 per cent and 30 percent. In Russia, it is a whopping 52 percent. It follows that while tax havens hit wealthy nations hardest in absolute terms, they can have especially destructive effects on poorer or developing countries, because such a high percentage of their money is offshore. Zucman does not explain why this is so, but it is possible to speculate that one reason is rampant corruption within both the public and private sectors. The extraordinarily high figure for Russia might be best understood as involving money corruptly acquired or invested, which suggests an important point: All uses of tax havens are not the same. Sometimes government officials are the ones who are evading taxes, and they do not want to stop that evasion. 

In the aftermath of the financial crisis, you might expect that there would be an international crackdown on the use of tax havens, and, as we shall see, international attention is indeed growing. But the numbers demonstrate that no crackdown has occurred. In Luxembourg, offshore wealth actually increased from 2008 to 2012 (by 20 per cent). In Switzerland, the increase has been comparable; foreign holdings are now close to an all-time high. Disturbingly, the new wealth is coming mostly from developing countries, which poses a serious problem in light of the severe strains on their limited budgets. 

Zucman is the first economist to produce specific numbers of this kind, and, to do so, he had to undertake some creative detective work. In order to identify hidden wealth, he focuses on "anomalies" – situations in which international balance sheets show, in aggregate, more liabilities than assets. To see the importance of that inquiry, Zucman asks readers to imagine that a citizen of the United Kingdom holds an American security – say, stock in Google – in a bank account in Switzerland. In the United States, statisticians estimating U.S. wealth overall will record a liability, because a foreigner owns U.S. equities. But in Switzerland, statisticians will see nothing, and for a good reason: Google stock held in Switzerland by a U.K. resident will be, for Switzerland, neither an asset nor a liability. In the U.K. too, nothing will be registered, but for a bad reason: The UK has no way of knowing that one of its citizens owns Google stock in Switzerland. From this example, we can see the anomaly: On the global level, liabilities will be recorded as exceeding assets. 

Zucman puts it this way: "As far back as statistics go, there is a 'hole'; if we look at the world balance sheet, more financial assets are recorded as liabilities than as assets, as if planet Earth were in part held by Mars." For the purpose of producing an accounting of hidden wealth, that is actually helpful, because "money doesn't evaporate randomly into the ether, but instead follows a precise pattern of tax evasion". In 2015, for example, the nations of the world reported $2 trillion as mutual fund holdings in Luxembourg; this is the total of recorded liabilities. But Luxembourg's own statisticians calculated that worldwide, $3.5 trillion in mutual fund holdings were kept in Luxembourg; that is the total of recorded assets. What happened to the missing $1.5 trillion? In global statistics, that amount had no owners. For Zucman's purposes, the anomaly is a revealing one: The amount by which assets exceed liabilities is a measure of wealth hidden in offshore accounts

That is a lot of money leaking out of the system, avoiding tax.  The article goes on to discuss how these rich people might get taxed, but the overarching information is just how much money escapes taxation.

It's galling to think that the government of the wealthy by the wealthy for the wealthy - a.k.a.the Coalition government, wants to re-jig taxation in a way that increases the tax burden on the poor while giving more tax breaks to the rich.

A Different View On The Property Bubble

It would be unfair of me if I didn't put up an article arguing against the Property Bubble being an immediate problem. Here it is in a nutshell:

But the report also caused howls of outrage from local experts, who variously described Tepper's claims as "fanciful" (Australian Bankers' Association CEO Steven Munchenberg) and "as insightful as another work of fiction, Hunter S. Thompson's Fear and Loathing in Las Vegas" (Mortgage Choice chief executive John Flavell). Sure, there may be some vested interests there, but economists point out several reasons why they think Tepper's claims are over the top. The main one is that for a slide of that magnitude to occur, Australia would need to experience a sharp downturn in the economy, causing a spike in unemployment. That's currently not expected. But there are other signs the housing market isn't about to hit reverse, for example credit growth - seen as a key ingredient of a bubble. While housing credit has picked up, it is still a long way from previous highs.

Hmmm. If you go to the linked article, you'll find that average home loan payments look manageable; mortgage buffers are up;  Credit growth is not extreme; mortgage arrears are low; Low-Doc loans have fallen by proportion; and the Sydney marketing particular was merely playing catch up.

Now here's the thing: none of those charts address the fact that Australia's got the highest private sector debt per capita in the world. Just because on average we're managing this debt and not falling into arrears does not mean there isn't a whole bunch of debt money loaded into the system. As with all dynamic systems, the apparent equilibrium being maintained for now does not indicate the equilibrium is going to hold indefinitely into the future. It's hard to imagine what is going to rock the boat, but should something come along that rocks this boat, it is going to be very susceptible to capsizing.

But then one imagines the government will bail out the banks in order bail out the Mum & Dad investors who put their investment money into housing.

Gerry Harvey Thought It Was Nuts Too

More on the Dick Smith stores closing... Gerry Harvey also thought the AnchorageCapital's float of Dick Smith in 2013 was a bit of a joke.

Retail billionaire Gerry Harvey said he thought the "world had gone mad" when investors paid up in the $520 million float of the now-defunct Dick Smith business.
Dick Smith's receiver, Ferrier Hodgson, announced on Thursday that it was closing the electronics retailer's doors, putting about 3000 staff out of work. 

Mr Harvey said Dick Smith's profits evaporated years ago, prompting then-owner Woolworths to sell the business on the cheap to private equity firm Anchorage Capital in 2012. 

"Then five minutes later this bloke [Anchorage Capital] dresses it up and sells it for $500 million [in 2013], and I'm looking at this and saying 'I don't believe this, this business is stuffed'... I'm thinking I wouldn't buy these shares for 10¢, let alone $2," he said.
"I'm looking at all this and thinking to myself: the world has gone mad."

You would, wouldn't you? 

View From The Couch - 26/Feb/2016

This Isn't Working

There are days where I think Malcolm Turnbull might be smart, lucky and rich, but maybe - just maybe - he's not very good at this politics thing. It's a weird thing to say about a guy who is immensely popular and managed to become Prime Minister of this country but... there are moments where it looks a lot less certain, a lot less solid. For instance, he now has a coterie of backbenchers who are holding his policy platform to ransom.

It comes as Mr Turnbull and his Finance Minister, Mathias Cormann, continue to discuss the unorthodox move of bringing forward appropriation bills in Parliament to before the May budget in order to keep a double-dissolution election option open without risk of the government running out of money to pay public servants.

Fairfax Media reported earlier that informal discussions had been held about bringing forward budget day, but the latest thinking is believed to favour the early introduction of the appropriations - also called supply bills - which would clear the way for a snap poll to be called either before the budget or immediately after. 

Proponents say there is no legal problem with appropriating funds prior to the budget but admit the move would be tantamount to admitting an early election call was imminent.
The $15 billion figure is a similar amount of money that would have been available to spend after a GST rise to 15 per cent, which would raise about $35 billion, and the payment of compensation to low-income earners. 

The group of Liberal economic dries are, in particular, determined to kill any change by the Coalition - such as a dollar limit on the amount that can be deducted - to negative gearing because in the words of one MP, "why would we attack Mum and Dad investors?"

Which is all very weird. We appear to have a Prime Minister with very little authority over his own party in spite of his high personal polls.

The quick answer to the rhetorical question why the Liberal Party might attack the Mum and Dad investor might be because they're way in over their heads and need to back out before the shit hits the fan. In fact, not doing so is a kind of moral hazard situation that the conservatives and economic dry types hate so much. Making matters worse, negative gearing as it stands is kind of the wrong economic incentive that encourages the very same moral hazard that conservatives hate so much. 

Put more bluntly, the very same Mum and Dad investors are now the most indebted people on the face of this earth. Yes, Australia has the highest per capita private sector debt and the majority of it is locked up in mortgages. The whole point of winding back negative gearing is to take the wrong incentives out of the system, so the same Mum and Dad investors can make a more rational decision, based on a more rational economic policy. 

I'm pretty sure this is not lost on Malcolm Turnbull. It's just that he seems incapable of explaining this to his own side and making them shut the hell up. You'd think a conservative PM could explain traditional conservative economic policy to his own side. Of course, it might be that these backbenchers aren't conservatives at all but simply just "greedy cunts" as Paul Keating would have characterised them. Turnbull is letting these people hold his office to ransom too much. He should be playing hard ball with his side if he wants to get anything serious done. A leader is only good as his willingness to whack his own side to make the deal stick. Even I know that - why doesn't the prime Minister? 

I Hate It When Things Close

Some years ago at the height of the GFC, Starbucks closed a slew of their stores in Australia. They had picked the wrong moment to expand with their stores when all of a sudden, carrying debt became a dirty word. I was walking through Martin Place on the day they announced the mass closures, and I could see they were having a staff meeting about it in their store. It just looked terrible, witnessing all these people losing their jobs in a very public place. I didn't particularly like their offerings, but it was just terrible to see them in that situation. 

Anyway, Dick Smith stores are closing and 3000 people are about to lose their jobs. 

Dick Smith's debts total about $400 million including $140 million to its banks, National Australia Bank and HSBC. 

Dick Smith staff will now have to liquidate the remaining stock, which is understood to have a book value of about $200 million. 

It's the second fire sale in three months for the chain, which launched a desperate pre-Christmas clearance in a bid to prop up sagging sales.

One Dick Smith worker said the sale was likely to kick off as early as Friday.
The store manager said it was an anxious time for staff even though they knew the end was nigh. 

"There was a false sense of community for a while with everyone trying to look on the bright side and then there was the news about a potential buyer from China," he said.
"But we have an update this morning, saying no more customer orders and we thought uh oh!" 

"Then when we got told about a national conference call . . . and we knew that this was probably going to be bad news, not good."

It has to be said, Dick Smith stores were terrible. They didn't offer up a big range of stuff, they didn't offer up a good range of stuff, they weren't price competitive and they never really had up to date stuff. It was kind of the electrical doodad shop you went to when you couldn't get to any other electrical doodad shop. You couldn't decipher what the selling proposition was, when compared to its competitors, let alone if it even had a unique selling proposition at all. You just couldn't understand how it was supposed to operate, let alone compete with JB HiFi. As it turns out, neither could they.

A long time ago, this kind of something-nothing shop sort of blundered on in the market place. Grace Brothers which turned into Myers, was for years operating like this where you could get second tier goods for second tier prices guaranteed to leave you somewhat dissatisfied. Not surprisingly, Myers has been on the ropes for the last decade because it simply has no edge whatsoever in the modern retail marketplace (and never really had anyway). In many ways it's not surprising at all that Dick Smith stores hit the wall. 

Nonetheless I really do feel for the employees in the stores. It's terrible watching a long time going concern close down. Working through the process is even worse. Some of these private equity people that brought about the debt-laden IPO need to be investigated. 

The Meaning Of Bernie In The US Presidential Elections

It's 56 years since John F. Kennedy was elected President. There have been equal years with Republicans and Democrats in the White House since 1960: Nixon with 6; Ford with 2; Reagan with 8, George Bush Snr. with 4; and Dubya with 8 making 28. Kennedy with 3; Johnson with 5; Carter with 4; Clinton with 8 and Obama with 8 including this year also makes 28. It's surprising because it feels like there have been more years under Republicans and crazy ones at that: Nixon, Reagan and Dubya make you want to reach for the American Psychiatric Association's DSM. It was also a long time between Kennedy who was a Northern Democrat and Obama who is from Chicago. 

The years since Kennedy's assassination have been quite depressing from a progressive point of view, up until Barack Obama. If we cast our minds back to the 2008 election, Obama's campaign essentially ambushed and derailed Hillary Clinton's campaign, largely on building from the grassroots, and this in turn delivered the first Northern democrat President since JFK. Which goes to show it hasn't been easy for a Northern Democrat to get up. Just think of Walter Mondale and Michael Dukakis and their terrible campaigns in 1984 and 1988 respectively. And while Bill Clinton's two terms gave some respite, he was decidedly a Southern Democrat who wooed back the Southern vote. Thus the rise of Obama in 2008 signals a new direction for American politics. All of a sudden, the Northern Democrats are a big force, thanks to a progressive grassroots. 

It's enough to make one sort of wonder if Hillary Clinton's problem is that next to Bernie Sanders, she's not Northern Democrat enough. She may even not be Southern Democrat enough. Bernie Sanders is of course, espousing a lot more progressive politics. There was at one time great expectation for Elizabeth Warren running, because she too is more progressive than the Clinton camp. There are strong indications that the younger demographic is radically slanted towards the progressive end of the spectrum. 

The more historic view I take on the Sanders campaign is that it is the first time since Robert F. Kennedy was gunned down in 1968 that a Democrat is running with a very progressive platform. It's the first time in 48 years we're seeing the kind of galvanising force assembling a strong youth vote turn out, in favour of the Progressive cause. Sanders' platform - much more than Obama's platform - inherits the legacy of the1960s activism and builds upon it until it finally reaches the middle of American politics. It's the moment the protest songs and the hippies and the activists and the New Left finally arrive, decades late - but better late than never. 

It's funny because back in 1992, Bill Clinton fooled us all into thinking *he* was that guy. The fact that he wasn't is demonstrated by his presidency, by the things he was not able to achieve in office. It's actually the kind of baggage that really weighs down Hillary Clinton's campaign. 2016 is 24 years beyond 1992. There's a whole generation of kids who grew into adults, not believing in the Clinton name, and they'll be out there not voting for her. Should Sanders get up over Clinton, there are going to be a lot of 'Regressive Left' types who are going to be upset. But then they were upset when Obama got up over Hillary in 2008 and that didn't exactly change anything for them. The Clinton supporters are essentially Baby Boomers who are still fooled by the Clinton name. 

As for Bernie Sanders, in a certain way, the most impressive thing about him is how long he's been fighting for equality. He has been 'on message' since before Generation X was even born. The photos that have emerged from his activism in the early 1960s are heartening. They give us great strength and let us understand that it is possible to fight the power for a lifetime and make it count. If the defining characteristic of leadership is to inspire people into being their best, then certainly Bernie Sanders has that quality in spades.

That's him right there during some sit in in 1962. It could have been you, it could have been me in another time and place; but as it turned out, it was him all along. If people really think the 1960s activism meant something more than just what people did to kill boredom, they really ought to look into Bernie Sanders.