Tag Archives: taxes

Bits and Pieces – 20171020, Friday

 

Commentary: After publishing my last commentary, Bits and Pieces – 20171013, Friday, I came across this video by Gordon T. Long: UnderTheLens – 09 21 17 – OCTOBER – Coming “Nationalization” of Markets. It subsumes my comments with the exception of the scenario of how the Fed might take over the US stock market. In the 26 minutes, he does a much more thorough job of documenting how central banks globally are the dominant players in many capital markets such as sovereign bonds, and are rapidly becoming the dominant players in stock markets.

In the case of stocks, where their “printed money” has gone is a puzzle. If they print a billion dollars and buy a billion worth of equities in the market, the money goes into the accounts of the sellers. What do the sellers do with it? Do they use it to ‘walk the market higher’ isolating the new money in the market or do they take it out and move it into the economy causing inflationary pressures?

Already, in some sovereign bond markets, there is a liquidity problem, Investment funds and pension funds have traditionally used sovereign bonds as a a stable, low-risk component of their portfolios. These institutions are finding that they can’t get the bonds they require because the governments are mopping them up. The other problem is that these are not free markets and proper risk and price discovery simply can’t happen. Given the global history of sovereign defaults, particularly by the top economies, a zero interest or negative rate sovereign bond is simply not pricing in the real, if small, risk of a sovereign default. With central bank taking over ownership in these markets the risk of default is rising because so far, current monetary policy is proving to be a one way street.

Bits and Pieces – 20170224, Friday

Commentary: I had come to the point of thinking that writing and presenting factual material had little value other than to myself – which is why I continue to do so. In conversations with people I had noticed that when presented with facts contrary to their position they seemed to back off but fail to change their position. Here’s support for that observation: Why Facts Don’t Change Our Minds. To note: “Once formed, impressions are remarkably perseverant.” This points to our early life as the formative stage for many of our narratives about the world. It also shows the danger the school system poses when it strays beyond the 3 Rs.

The writer notes “People believe that they know way more than they actually do. What allows us to persist in this belief is other people.” This is due to the sociability nature of our species. The application of this principle to current events (Trump) is enlightening since”as a rule, strong feelings about issues do not emerge from deep understanding,” but from what we hear from friends and read in the MSM, particularly if it reinforces what we already believe we know (confirmation bias).

The Fallacy of the Value of a Low Loonie

 

Conventional wisdom has it that a low dollar is a competitive advantage for Canadian manufacturers. It is easy to show that this is not the case. It does provide an advantage for natural resource industries whose primary resource values are not directly related to currency values, but that is a sector largely eschewed by our government.

To understand why there is no currency advantage to manufacturers, consider the case of Acme Widget Company. Acme Widget makes widgets in Ontario and Michigan. It wants to double its production capacity at one of its plants and has to decide which one.

A widget has three components, one made in Canada, one made in the US and one made in Indonesia. Let’s assume the Canadian dollar (CDN) is trading at 0.75 to the US dollar (USD). The Michigan plant pays $1.00 USD for the part from Indonesia. The part costs the Ontario plant $1.33 CDN because the trade is in USD. The Michigan plant buys the US part for $1.00 USD while the Canadian plant has to pay $1.33 CDN. The Ontario plant pays $1.00 CDN for the part made in Canada but the Michigan plant only pays $0.75 USD.

The total cost for materials for the US plant is $2.75 USD and for the Canadian plant, $3.67 CDN which is $2.75 in USD. In other words, the relative value of the two currencies offers no competitive advantage to either plant on a materials basis.

But there are other costs associated with production. Suppose the employees are paid the minimum wage. In Michigan, that is $8.50 / hour USD while in Ontario it is $11.40 / hour CDN or $8.55 USD. On wages alone, it is a toss-up. However, one must also include the cost of statutory benefits such as health insurance, EI, and pension plan premiums which in Ontario, are all costs to the employer.

Further, electricity costs are important. Time of day use, purchase contracts, and unbundled charges for distribution and other services are complex and require a case by case analysis based on projected usage characteristics. One might need to consider other utilities such as water and sewer rates also.

Finally, there are municipal, state or provincial, and federal taxes to consider. The regulatory framework may be important in terms of adding additional operating costs. With NAFTA coming under review, tariffs and border taxes may be a consideration.

In conclusion, the relative value of the Loonie has no impact in the long run, on the material cost of manufacturing. The costs that will affect a decision to build a new plant or extend an existing one are all soft costs associated with the local jurisdiction being considered, and what incentives might be negotiated with governments.

Socialism: Taxes and Unemployment

There is an inverse relationship between taxation and unemployment in a socialist economy. An article by Martin Armstrong, Socialism v Capitalism, has prompted this essay.

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