Friday, 15 July 2011

08:09 – For the third time in four years, European banks are undergoing a so-called “stress test”, the results of which are to be announced at noon EDT. No one really believes the test results will reassure anyone, although they’re hoping for the best. During the last such test, Irish banks passed with flying colors only to collapse and be taken over by the government shortly thereafter.

This test is supposed to be much more rigorous, but it’s still nowhere near rigorous enough. It assumes, for example, that Greek debt will lose 15% of its nominal value, while in reality it has already lost at least 50% of its value and will soon lose the rest. The test also assumes that none of the Eurozone countries will default, even partially. Despite the ridiculously unrealistic rosy assumptions made by this test, between 10% and 20% of the tested banks–the 91 largest Eurozone banks–are expected to fail the test and essentially go into government receivership. The problem is that if the tests were actually realistic, all or nearly all of Europe’s banks would fail and the entire Eurozone economy would quickly collapse.

The timing of the announcement is no coincidence. It will be released at 4:00 p.m. London time, after markets have closed for the weekend. When the bell rings Monday morning, I expect to see frenetic activity, and not in a good way. Next week may be remembered as the week the Euro died.

Lab day today. I have a couple dozen lab sessions for the biology book in progress, and I need various reagents and stains before I can actually run them. Actually, I already have most of those on hand, but I purchased many of them rather than making them up myself. I don’t want to use purchased reagents and stains to test the lab sessions, because they’re not necessarily the exact solutions that will be in the kit for the book. So, for example, rather than use the purchased 25 mL bottle of Gram’s iodine stain that I have on the shelf next to my microscope, I’ll make up some Gram’s iodine to a known formulation that I can reproduce later for inclusion in the kits. Actually, one lab day probably won’t be enough.

12:14 – Well, the results of the so-called “stress test” are in, and they’re pretty bad. Of the top 91 European banks, eight flunked what should have been a gimme, and another 16 barely squeaked by. That’s pretty damned pathetic, given that the test specifically excluded the stuff that would make the banks look bad. The whole purpose of this dog-and-pony show was to make the banks look as good as possible, to restore investor confidence. The result is going to be exactly the opposite. Even with training wheels, eight of the banks toppled over, and 16 more nearly did so. Investors aren’t stupid. They’ll see this charade for exactly what it is. Wait for the opening bell on Monday.

13:08 – More good sense from Pat Condell.

Wednesday, 13 July 2011

08:55 – When I started using WordPress, I decided to try using topic-oriented posts for a couple of weeks to see how they worked out. As far as I’m concerned, they’re not. With my old static weekly pages, I’d often post a short update during the day, sometimes only a sentence or two. That’s awkward with topic-oriented posts, not least because it makes it difficult for readers to keep track of comments.

I thought about creating one post per week and updating it daily, but that would be extremely awkward both for me and for readers. So I decided to go to day-oriented posts, one per day, or at least one per day that I post anything at all. I’ll try this for a week or two to see how it works out. If it works better than the topic-oriented posts, I’ll just continue doing it indefinitely.

The Euro crisis continues and deepens. Overnight, Irish debt was cut to junk status, which means it’s now impossible for Ireland to sell bonds in the private markets, as they’d planned to do.

Meanwhile, Italy seems to have fallen off a cliff. Italy had until recently avoided the ire of the bond markets, largely because although its debt is gigantic, something like €1.8 trillion, its current deficit is relatively small. (Spain has exactly the opposite problem: its debt is relatively small, but its current deficit is huge.)

Although Italy is striving mightily to address its economic problems, the best they’ve been able to come up with in austerity measures is a proposal to reduce the current deficit by €10 billion per year for the next four years. So, they currently owe about €1,800 billion, and they propose to reduce current deficit spending by €10 billion per year? That means they’ll still be spending more than they take in, thereby increasing their total existing debt.

For Italy, the elephant in the room is that a huge chunk of its debt, more than €200 billion, comes due next year and will have to be refinanced if Italy is not to default. The chance that Italy will be able to refinance €200 billion privately is nil, which means they’ll need a government bailout. The problem is that the EU can’t afford such a massive bailout, particularly coming on the heels of bailouts for Greece, Portugal, and Ireland.

The reaction to Netflix’s massive price increase has been uniformly negative. When I read the announcement on the Netflix blog, there were something like 3,800 comments from subscribers. Reading only the first page, it seems that they’re about 98%+ negative, with most posters threatening to drop Netflix.

And do what? It’s not like there are any good alternatives. Some people threatened to return to cable TV. Yeah, right. To avoid a price jump from $10 to $16/month they’re going to sign up for cable TV? For $16/month they’ll be lucky to get basic cable.

Many mentioned Amazon Prime streaming, so I went over to take a look at what Amazon had to offer. Not much. I checked the first ten titles in our Netflix instant queue. Amazon had none of them. So I checked 11 through 20. Amazon had none of them, either.

Thinking that maybe there was little overlap between Netflix and Amazon, and that Amazon might have a bunch of titles that weren’t available on Netflix, I started checking Amazon streaming by categories. Nope. There was nothing there that we hadn’t either already watched or had in the Netflix queue. Eyeballing it, I’d estimate that Amazon has maybe 5% of the titles that Netflix does.

The only place that Amazon seemed to have some advantage was in recent movie titles, which Barbara and I pretty much don’t care about. It seems that Amazon prime must appeal to people who like watching new stuff. We prefer watching good stuff, regardless of its age.

09:30 – Boy, am I glad that I decided to use USPS instead of UPS for shipping kits. Yesterday, UPS delivered a box that was supposed to contain eight dozen Sharpie markers. It looked like the UPS truck had run over the box before it delivered it. Barbara found it when she was taking Colin out after dinner, and shouted back to me that there was a really crushed up box on the front porch.

I suppose the good news is that 92 of the 96 markers were actually in the box. The bad news is that the box was crushed and beaten to a pulp and apparently leaked four of the markers. Not surprising, since of the eight Sharpie boxes inside the shipping box, six of them were crushed open and I had maybe 30 Sharpie markers rattling around loose in the shipping box. Fortunately, the remaining markers appear undamaged.

Then this morning I got email from UPS, with the heading “UPS Exception Notification”. In the body of the message, it explained the reason:


In other words, the shipping box must have broken (or been torn to shreds by some UPS machine), scattering my eight dozen 9V batteries all over the floor at some UPS site.

This is by no means the first and second time UPS has done this on my shipments. It happens pretty regularly. I’m not sure why, because it almost never happens with USPS or FedEx.

Tax fairness

Obama and the Democrats seem determined to raise taxes even further, while the Republicans refuse to budge on new taxes unless they’re offset by reduced taxes elsewhere. I have a modest suggestion. As things stand, fully half of Americans pay no income taxes whatsoever. In fact, many pay a negative tax, because tax credits offset any taxes due, resulting in a “refund” of taxes they never paid.

So, how about we remove the personal exemptions and standard deduction, and begin taxing that untaxed 50%. At the same time, we can reduce the tax rate to reduce the taxes due from middle-class taxpayers by an amount sufficient to offset the loss of the personal exemptions and standard deduction. That would make the Democrats happy, because we’d be increasing taxes, but it would also make the Republicans happy because those tax increases would be completely offset by tax reductions elsewhere.

We can then get to reducing the deficit. I suggest a 100% reduction in deficit spending the first year and every year that follows. Economic growth should then allow us to begin cutting down the existing debt.


But it doesn’t matter, because the EU is doomed…

I confess to some small satisfaction in having been absolutely right about what was happening and would happen since I started posting about the collapse of the EU and the Euro more than a year ago. Of course, my satisfaction is tempered by the fact that we’re facing a world-wide disaster, and the fact that the US will do much better than other nations is of little comfort because in absolute terms we’re going to be hurting badly.

Incidentally, a few minutes ago I came across a very smart woman (obviously, she’s a genius because she agrees completely with me).

The countdown has already begun.

Finally, a solution to the Euro crisis

The Europeans have come up with a solution to the Euro crisis: threaten S&P and Moody’s. After all, if no one is allowed to point out that the emperor has no clothes, who’s going to notice?

Meanwhile, everyone with any sense is dumping Greek and now Portuguese debt as fast as they can. Hint to traders: now is the time to dump all of your Icelandic, Irish, Italian, and Spanish bonds, assuming you can find anyone foolish enough to buy them. Fools are quickly becoming harder to find. If someone offered me that junk at $0.10 on the dollar, I’d flee screaming.

To give you an idea of the scale of the problem, Greece, which is about the size and population of Ohio, is now close to $600 billion in debt. But the situation is actually much worse than those figures indicate. Ohio has a robust economy. Greece has no economy to speak of, and no prospect of developing one. Think of Greece as Ohio with a Soviet-style economy and you won’t be far off the mark. And Portugal, Iceland, Ireland, Italy, and Spain aren’t much better.

People are now talking about “partial default” and “temporary default”. There’s nothing partial or temporary about it. We’re looking at default default. One morning in the not-too-distant future, we’ll awaken to news that the dominoes are toppling and the Euro has gone down the tubes. Count on it.

Good money after bad

Yesterday, only two days after the final $17 billion of the first Greek bailout was approved for release, S&P announced that it would declare Greece in default if the French and German national banks carried through on their plan to roll over maturing Greek bonds by using the proceeds from those maturing bonds to purchase new 30-year Greek bonds. That deal was to be carefully structured, including tightly restricted trading of those bonds to prevent them from immediately losing all of their nominal value, which of course in a free market would occur immediately after they were issued.

The simple fact is that Greece is bankrupt. Everyone knows that, but the EU is striving mightily to conceal it because when the Greek domino topples the rest of the Euro economy quickly follows. French and particularly German taxpayers have had enough, watching their wealth being pillaged to subsidize Greece. Everyone knows that once Greece collapses it will soon be followed by Portugal, Ireland, Italy, and Spain, with Belgium and then France itself not far behind.

So the EU pretends desperately that none of this is happening. Hiding their heads in the sand is obviously not an effective solution. Unfortunately, there is no effective solution.

If Germany and the UK have any sense, they’ll withdraw from the EU and return to their national currencies.

Speaking of sales taxes …

North Carolina’s sales tax just dropped 1% because the legislature allowed a 1% temporary surcharge to expire as of this morning. The tax rate in Forsyth County, where we live, and most of North Carolina’s other 99 counties dropped from 7.75% to 6.75%. I just updated my PayPal profile to reflect that change. People who order our chemistry kits for delivery to North Carolina addresses now pay about $1.50 less in sales tax.

I got to wondering why we have a sales tax at all, and, if we must, why that sales tax is considered to be due from the buyer rather than the seller. (As a business, we’re responsible for collecting the sales tax and forwarding it to the state, but it’s the buyer who’s considered to be paying the tax.)

As things stand, if someone from North Carolina orders one of our kits for $150, we have to collect that $150 plus 6.75% sales tax, for a total of $160.13. Of that total, we send North Carolina the $10.13 sales tax. Nor are we paid for collecting and forwarding that sales tax, which seems inequitable.

I have a brilliantly simple revenue-neutral proposal that would address the problem states have with collecting sales tax from out-of-state vendors on sales to state residents, and would not fall afoul of Constitutional interstate commerce provisions. Abolish the sales tax and the use tax entirely. Replace them with a simple tax on gross revenue on any business within the state.

As things stand now, if someone orders one of our chemistry kits for delivery to an address outside North Carolina, we collect $150, North Carolina collects nothing, and the state where the kit is delivered (probably) collects nothing. If someone orders a kit for delivery to a North Carolina address, we collect $160.13, and North Carolina collects $10.13.

Under my proposal, anyone who ordered one of our kits would pay $160.13 and the state of North Carolina would collect a revenue tax at about 6.32% of $10.13 on every kit we sold, regardless of delivery address. Conversely, when a North Carolina resident ordered something from an out-of-state vendor, North Carolina would collect nothing, nor would they be entitled to do so.

If every state implemented such a tax, which they soon would, it would be each state’s businesses that were paying rather than each state’s consumers. When anyone from any state ordered product from us, they’d be supporting North Carolina government services, just as when I ordered anything from any of the other 49 states, I’d be supporting that state’s government services. Everyone would pay the same regardless of where they lived or where the company they ordered from happened to be.

Tax collection would be dramatically simplified, both for retailers and the government. And there would be no Constitutional complications, because each state would simply be taxing the gross revenues of businesses that operated within that state. States would be motivated to keep that revenue tax rate as low as possible, to keep businesses in their states competitive with those in other states, and would also be motivated to make their states as business-friendly as possible to encourage the growth of businesses that would get them “free money” from customers in other states.


The Amazon Tax

The US Constitution clearly prohibits states from taxing interstate commerce, as SCOTUS confirmed in the Quill decision. Unless a business has a physical presence in a state, that state cannot tax transactions between that business and a resident of the state.

Cash-strapped state governments and brick-and-mortar retailers wish desperately that were not true, the states because they want more money and the retailers because they want to force sales to their local stores. Several states, North Carolina among them and most recently California, have passed laws on the dubious theory that affiliates constitute a legal nexus for taxation.

But, no matter how dubious that theory, at least it’s used to enforce sales tax collection, which is Constitutional. What seems to skate beneath notice are use taxes, which are not. All states that have a sales tax also have a use tax. A resident from one of those states who purchases something from a vendor in another state is legally obligated to pay the use tax, which is invariably calculated at the same rate as the sales tax, and is simply a transparent attempt to violate the Constitutional prohibition on taxing interstate commerce.

North Carolina goes further than most states. Every year, when I do our state income tax return, I have to fill out a section on use tax. North Carolina offers residents a choice. Other than for major purchases, which always require paying use tax on the actual purchase price, we can either pay use tax on actual purchases or on estimated purchases as a percentage of adjusted gross income. That percentage is small enough and we buy enough on-line that it always makes sense for us to use the estimated method. In effect, we usually end up paying something like 1% or 2% use tax rather than the nominal 7.75%. Still, it’s perfectly legal for us to choose the estimate method.

It’s also perfectly unconstitutional for North Carolina to impose that tax, intended as it is to get around the Constitutional prohibition on taxing interstate commerce. The problem, you see, is that North Carolina charges use tax only for purchases that did not incur sales tax.

For example, if I buy a $100 widget in a local store, I’m charged $7.75 sales tax. If I buy that $100 widget on-line from an out-of-state vendor, I am (at least in theory) required to pay a $7.75 use tax. So far, so good. The problem is, when I buy that widget at the local store, I’m charged only the $7.75 sales tax, rather than the $7.75 sales tax PLUS the $7.75 use tax. Because the use tax is not charged on in-state sales, it is discriminatory and a violation of our Constitutional right not to be taxed on interstate commerce.

I keep hoping that someone will pursue a case against a state government and take it all the way to SCOTUS, because use taxes as currently implemented are prima facie not Constitutional.