Reality Check Q&A, #2

Gary North

Sept. 15, 2009

These are the second set of questions submitted by subscribers. I am doing about half a dozen at a time.

INVESTING

I have physical gold and gold stocks, Swiss francs and real estate (no mortgages, no debt). What more should I do with excess dollars?

You do not say how old you are, what you do for a living, where you live, what your retirement plans are, or what your #1 lifetime goal is.

The best thing you can do with your excess dollars is to start a side business that takes very little money to start. To have your income tied up in any promise of any government is suicidal in the long run.

You have debt-free real estate. You do not say if this is commercial or residential. You will suffer losses. But you will not suffer a complete loss. You would be able to do far better by buying real estate from distressed sellers. But you will not be wiped out with what you own.

I suggest that you continue to accumulate real estate on a distressed sale basis. You already have skills here. Extend your holdings with any excess dollars.

GOLD

Following stocks and real estate, do you think gold is the next "bubble" asset?

No. Gold is an international commodity. The major buyers in the world market are fathers of brides in India. When gold gets too high, they buy less gold. At the margin, this keeps down the price of gold.

China is now encouraging its citizens to buy gold. Ever since 2007, China has replaced South Africa as the largest producer of gold. If the Chinese replace Indian fathers as Asia's gold buyers, this could create a bubble for gold. I do not think China can sustain its growth. The 28% increase in M2 will create mass inflation at some point. If the People's Bank of China stabilizes money, the economy will go into recession. That will reduce China's gold purchases. But, so far, the Chinese have not replaced Indians.

What will create a boom for gold will be gold buyers demanding delivery. This has never happened. When Bunker Hunt did this with silver in 1979, silver shot up. The commodity futures industry then changed the rules. It would not allow any purchases of long silver contracts except to cover existing shorts. That bankrupted Hunt.

They cheated. Keep that in mind when you predict a gold bubble.

A bubble means a boom that cannot be sustained by final demand from consumers. I do not see gold as a bubble yet. I think final demand is based on jewelry, not speculation.

If gold moves rapidly over $1,500, while other commodities do not -- excepting silver -- then gold will be a bubble. It could become a bubble if the commercial banks start lending, thereby converting the Federal Reserves doubled balance sheet into M1. Right now, they aren't.

TAXES

I owe the IRS several thousand dollars (maybe near $75K) due to capital gains. I planned to pay them with proceeds from my buyer, who has now completely defaulted on my balance due to me and loss of other tangible assets involving this person. I have really no way to pay them anywhere that much. CPA advises an offer/compromise to IRS. Your thoughts?

If your CPA has a track record of getting the IRS to settle for 10 cents on the dollar, and he can prove this, I would recommend doing what he says. You must ask for proof of his success in front of IRS claims agents or tax court. If he is your standard bean-counter, find a really hard-nosed CPA. These guys are all over the Web. You want a firm that the IRS knows it cannot get to back down, because it makes money by positioning itself as hard-nosed.

If your CPA thinks he can get 50%, find another CPA. If he says 25%, maybe.

THE CURE!

Kindly articulate the specific steps of action that you would undertake to correct the current economic malaise, and then ensure future prosperity.

Ludwig von Mises was asked this question half a century ago. He had the correct answer: "I would resign."

Why is this the correct answer? Because the power to change the economy overnight is the power to change it for the worse. That power should never be handed to anyone.

But what if I could persuade Congress and the President to make minor changes? I have a suggestion. Actually, I have two. I published these in 2000, in my very first article for LewRockwell.com, over 750 articles ago. The article was titled, "Two Teensy-Weensy Legal Reforms." Here is what I wrote.

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Every American visitor to this Web site probably has a cabinet-level agency that he thinks should be abolished first. I dream such dreams, too. But as I grow older, I become less utopian. So, I'm going to recommend two minor technical revisions of the tax code.

Repeal withholding on all federal income taxes.

Move the date that federal taxes are due to the first Monday of November.

Federal elections are held on the first Tuesday after the first Monday of November.

These are just a couple of minor technical revisions, right? Nothing too revolutionary here! I find it difficult to believe that a critic could go on national television and say, "This strikes at the very heart of the American experiment in liberty!" Would anyone believe him? Would voters rise up in wrath against a President who proposed these reforms?

When, in 1942, Beardsley Ruml came up with a plan to sell Congress on the idea of federal income tax withholding, he understood exactly what it would to for revenues actually collected: multiply them.

Here was the government's problem in 1942: only about five million out of the 34 million Americans subject to the income tax were saving to pay it on March 15, 1943. This presented a big problem for tax collectors, now that wartime taxes had been hiked dramatically.

Ruml, formerly the director of the Laura Spelman Rockefeller Foundation, in 1942 was chairman of the New York Federal Reserve Bank. He was also the treasurer of R. H. Macy & Co., the department store. As Macy's treasurer, he well understood that most people resist saving for known expenditures. He asked: Why not get employers to deduct their employees' income tax liabilities? He recommended this to Congress in 1942, and Congress in 1943 passed a tax collection bill that included Ruml's withholding provision: the Current Tax Payment Act.

Did it work? Beyond their wildest expectations. In 1942, the U.S. government collected $3.2 billion from income taxes. It 1943, before the law was fully operational, it collected $6.5 billion. In 1944, it collected $20 billion. (Historical Statistics of the United States, Pt. 2 (Government Printing Office, [1975], p. 1105.)

The tax was passed as a wartime measure. Naturally, it was not repealed in 1945. This is why the courageous Vivian Kellums quit sending in withholding taxes for her 100 employees in 1948. The IRS never beat her in court. (Someone should put her 1952 book on the Web: Toil, Taxes, and Trouble. Some enterprising grad student should write his Ph.D. dissertation on her. Her papers are in the University of Connecticut library.)

The withholding tax system is popular with the federal government for four reasons. First, the government deliberately over-withholds. This forces taxpayers to file their forms to get their refunds. Second, it creates a "free money from the government" emotional response when the refund check arrives. Third, the government gets to use this money, interest-free, during the taxable year. Fourth, it makes income taxes and Social Security taxes less painful and therefore more acceptable.

If all federal income taxes were due on the same day, this day would become the most feared and hated day of the year, assuming that it isn't already. I ask: Why not have this day fall on the day before federal elections?

Personal income tax forms must be mailed by April 15. Think about this date. Before they vote in November, taxpayers have almost seven months to forget about tax misery day the previous April, and their next form-filing day will not come for almost six months. Out of sight, out of mind.

I say, let every citizen recall his previous day's tax filing and check-writing experience when he steps into the polling booth to cast his vote. Let democracy speak!

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MONETARY THEORY

WHAT IS MONEY?

Right to the point. I like that. Ludwig von Mises answered it in 1912 in his book, "The Theory of Money and Credit." He answered it in four words: "The most marketable commodity."

I have written a mini-book on the implications of this answer: "Mises on Money." It is here for free.

http://lewrockwell.com/north/mom.html

INFLATION

How can inflation possibly increase in the wake of massive - indeed unprecedented -- debt deflation?

Let us get specific. Which holder of a debt will refuse to take money handed to him by the Federal Reserve System at, say, 0..15% per annum?

Who is going to say this? "I'm sorry, but that offer is against my moral principles. I will not, under any circumstances, accept what is obviously a handout. No, I prefer bankruptcy."

One year ago, we got the answer to this question. The five largest investment banks in just 30 days either went bust, got merged by a huge commercial bank, or changed their incorporation papers over one weekend to switch to commercial banks, thereby becoming eligible for Federal Reserve bailout money.

Money does not go to money heaven when a business goes belly-up. Money is always in someone's bank account. As long as the FDIC provides fiat money to save the banking system, borrowing from Congress, there will be no collapse of the money supply.

If the money supply does not collapse, why should consumer prices collapse?