Are some people really so dense that they don't understand why high taxes for businesses are a bad thing?

[Kal-El1998]

There is always an owner / founder / ceo at the top of a business and at the end of the day, they have to look out for their money and their interests. That means job cuts and chain effects for the rest of people. How hard is that to understand at a basic level?

 

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[SteveO]

Most people don't understand what it takes to run a business. I have a lot of customer interaction with my business. Many think that my decisions are made with greed in mind. But, they are always decisions for the long term health of the company.

 

[lowtek]

The simplistic answer is: yes. However, there is much more nuance to the discussion, and in fact the motivation behind the desire to tax some businesses more is justified, IMO.

We have to define our terms, though. There is a vast gulf between even a 7 or 8 figure business run by a small team of scrappy entrepreneurs, and the Global Mega Corporations™.

Clearly, the idea of taxing smaller businesses is going to be insane. These will just get passed on to the customers or employees and defeat the overall purpose of the tax. Suggestions that we should tax small business should be dismissed without a second thought.

On the other hand, Global Mega Corporation™ has emerged as a power center that rivals that of many governments, and indeed works hand in hand with many of them to commit a number of blatant crimes. Mass surveillance, mass incarceration, and mass suppression of free speech are just a few of the abuses that go on unchecked. All this is done under the guise of "that's just capitalism, bro. They're private companies, they can do what they want!".

Many of these corporations serve as feeders for the government bureaucratic agencies that are supposed to regulate them, resulting in an orgy of incestuous relationships that further muddy the distinction between Global Mega Corporation™ and Big Government™. Let me be clear, the issue here isn't one of a failure to properly regulate large corporations. Regulations only serve as a mechanism to keep smaller companies from competing, since Global Mega Corporation™ can easily put up a facade of compliance, the cost of which would bankrupt their smaller competitors. The issue is in the existence of the corporation itself.

The practice of allowing a company to be a front that shields those in control from the consequences of their wrongdoing is the root of the problem. Fines are a joke, and only paid by shareholders, employees, and customers. How many people went to prison for their role in defrauding the pension funds, and indeed the whole world, with shoddy housing securities back in 2007? Not a single one.

Something has to be done about the merger of state and corporate power. Those that are calling for their taxation are merely responding to their understanding that something is wrong. They don't know a better way of fixing it, so taxing them seems like an appropriate response. This is why I say the motivation is justified. Taxation doesn't go far enough, and breaking them up within the current system will only lead to even greater monstrosities in the future. The entire corporate system needs to be abolished and replaced with something more sane.

 

[Deleted50669]

The simplistic answer is: yes. However, there is much more nuance to the discussion, and in fact the motivation behind the desire to tax some businesses more is justified, IMO.

We have to define our terms, though. There is a vast gulf between even a 7 or 8 figure business run by a small team of scrappy entrepreneurs, and the Global Mega Corporations™.

Clearly, the idea of taxing smaller businesses is going to be insane. These will just get passed on to the customers or employees and defeat the overall purpose of the tax. Suggestions that we should tax small business should be dismissed without a second thought.

On the other hand, Global Mega Corporation™ has emerged as a power center that rivals that of many governments, and indeed works hand in hand with many of them to commit a number of blatant crimes. Mass surveillance, mass incarceration, and mass suppression of free speech are just a few of the abuses that go on unchecked. All this is done under the guise of "that's just capitalism, bro. They're private companies, they can do what they want!".

Many of these corporations serve as feeders for the government bureaucratic agencies that are supposed to regulate them, resulting in an orgy of incestuous relationships that further muddy the distinction between Global Mega Corporation™ and Big Government™. Let me be clear, the issue here isn't one of a failure to properly regulate large corporations. Regulations only serve as a mechanism to keep smaller companies from competing, since Global Mega Corporation™ can easily put up a facade of compliance, the cost of which would bankrupt their smaller competitors. The issue is in the existence of the corporation itself.

The practice of allowing a company to be a front that shields those in control from the consequences of their wrongdoing is the root of the problem. Fines are a joke, and only paid by shareholders, employees, and customers. How many people went to prison for their role in defrauding the pension funds, and indeed the whole world, with shoddy housing securities back in 2007? Not a single one.

Something has to be done about the merger of state and corporate power. Those that are calling for their taxation are merely responding to their understanding that something is wrong. They don't know a better way of fixing it, so taxing them seems like an appropriate response. This is why I say the motivation is justified. Taxation doesn't go far enough, and breaking them up within the current system will only lead to even greater monstrosities in the future. The entire corporate system needs to be abolished and replaced with something more sane.

I agree, there isn't an obvious answer to suppress the megacorps' power. One of the other issues is that as soon as someone does start to succeed, if the megacorp can't push them out, they will just buy them. That makes them virtually unstoppable. No founder is going to say no to a multi-billion dollar buy out. That is the megacorps' last line of defense before having to actually face competition.

Couple that with the fact that the megacorps have countless PR arms in their back pockets to glamorous the acquisitions, and you an inevitable coalescence into corporatacray.

https://seekingalpha.com/article/4394712-salesforce-exceptional-company-made-even-stronger-slack-acquisition

Microsoft finalizes its $7.5 billion GitHub acquisition

Microsoft's acquisition of GitHub has passed regulatory approval and is now official.

www.zdnet.com

 

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[Kak]

There is always an owner / founder / ceo at the top of a business and at the end of the day, they have to look out for their money and their interests. That means job cuts and chain effects for the rest of people. How hard is that to understand at a basic level?

Yes. People are that dense.

 

[Guest-5ty5s4]

Some of this discussion is good, and some is not so good. The important thing here is that businesses are different.

Some businesses receive a lot of help from the government.

Some businesses receive zero help from the government - or, in fact, are hurt by the government.

Yes, there are global mega corporations and there are “small” businesses.

But do you know who pays the corporate tax rate? The small business!
Do you know why?

Because Global Mega Corporation has an endless supply of top notch lawyers and CPA’s, as well as billions (if not trillions) of dollars at their disposal. They, like Apple for instance, can easily set up a holding company with 100+ subsidiaries, each based in a different country doing a different role for a different tax advantage!

Global corporations take advantage of the diverse global tax situations.

Small businesses (including a manufacturing company with 200 employees that churns $40 million per year - yes, that is considered “small” by the IRS) get stuck with the shitty a$$ domestic policies.

Don’t take out your anger and frustration towards “global mega corporations” by punishing the little guys who hire Americans, work in the USA, are based in the USA, and actually pay US taxes.

And certainly don’t assume that since your business benefits from government-ran companies like Fannie Mae and Freddie Mac + favorable regulations + subsidies and more, that every other business should pay more in taxes too!

Do you see what I’m getting at?
In many ways, the United States has priced itself out of important industries of the world economy. The tax policies (and many other policies) in the USA are a problem, not a benefit.

Do you know what “unskilled” laborers need? Places to work! Do you know where these are going? Other countries. Do you know why? Because our country is pricing itself out of doing the most basic functions.

 

[Tom H.]

Some of this discussion is good, and some is not so good. The important thing here is that businesses are different.

Some businesses receive a lot of help from the government.

Some businesses receive zero help from the government - or, in fact, are hurt by the government.

Yes, there are global mega corporations and there are “small” businesses.

But do you know who pays the corporate tax rate? The small business!
Do you know why?

Because Global Mega Corporation has an endless supply of top notch lawyers and CPA’s, as well as billions (if not trillions) of dollars at their disposal. They, like Apple for instance, can easily set up a holding company with 100+ subsidiaries, each based in a different country doing a different role for a different tax advantage!

Global corporations take advantage of the diverse global tax situations.

Small businesses (including a manufacturing company with 200 employees that churns $40 million per year - yes, that is considered “small” by the IRS) get stuck with the shitty a$$ domestic policies.

Don’t take out your anger and frustration towards “global mega corporations” by punishing the little guys who hire Americans, work in the USA, are based in the USA, and actually pay US taxes.

And certainly don’t assume that since your business benefits from government-ran companies like Fannie Mae and Freddie Mac + favorable regulations + subsidies and more, that every other business should pay more in taxes too!

Do you see what I’m getting at?
In many ways, the United States has priced itself out of important industries of the world economy. The tax policies (and many other policies) in the USA are a problem, not a benefit.

Do you know what “unskilled” laborers need? Places to work! Do you know where these are going? Other countries. Do you know why? Because our country is pricing itself out of doing the most basic functions.

Yes. And to answer @404profound - there is an obvious answer to limit the power of global mega corps, it's just not one that is easy for most people to understand or accept: get rid of government.

They problem is not big business, it is collusion between government and big business.

As long as we have big governments, we will have these same kind of problems, whether it's American style "capitalism" or communist Chinese "businesses"... If big governments are around, the little guy will get F*cked.

Without government intervention, all of these mega corporations would have to start actually competing in a free market.

 

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[Tom H.]

Inflation is not good for business. The price of money should be set by the free market, not central planners.

When central planners cause inflation by lowering interest rates (loans increase the money supply and cause inflation), they are perverting the price signals entrepreneurs need to make good decisions, which leads to malinvestment which eventually must be liquidated.

 

[Kak]

@Tom H. You really speak my language. Nice posts!

 

[Guest-5ty5s4]

Every business is helped by the government to some degree.

One example (among many) is inflation. The government intentionally implements fiscal policy that targets and drives inflation. Specifically, the Fed goes out of their way to drive inflation at at-least 2% per year, and in some cases (like the next several months/year), even higher.

Why does the government attempt to drive inflation?

Because it's good for businesses (and the economy as a whole). Conversely, deflation (or too little inflation) is bad for businesses (and the economy as a whole).

But, inflation isn't good for consumers. It's bad for consumers. It reduces their spending power.

In other words, the government implements policy that is EXPLICITLY bad for consumers in order to help businesses.

In return, the government expects businesses to return the favor to consumers by paying taxes, which improves infrastructure and all the things that government provides.

It's a quid pro quo, and when businesses don't keep up their side of the bargain, consumers suffer at the hands of an unlevel playing field.

I disagree.

Inflation is fantastic for people who hold debt. In your industry, real estate, that is pretty much the name of the game.

Yes, pretty much all businesses hold some form of debt.

But there are instances where deflation would actually be better for business and consumers!

Like businesses with very high cash reserves, or businesses that rent their locations, or (this is going to sound kind of crazy but think outside of RE world) - businesses with little debt!

Most of the debt held by businesses is done so because they are aware of how this works.

If our currency wasn't being massively devalued, businesses would not *need* massive amounts of leverage to grow.

The fact that our government basically punishes responsible financial decisions is troubling.

And I never once said there should be "no taxes," so don't think I'm arguing against paying taxes.

The point is there is not an on/off switch between "taxes / no taxes."

There can be way too much taxation. That is possible.

It's a sliding scale. And all businesses are different, which people here should know.

And many of them are important, otherwise they wouldn't exist. Giving people jobs and producing things like food, housing, energy, raw materials, technology, machinery, tools, clothing... I mean, does the government make that for you? No...

I just don’t see how inflation is a service that you would pay more in taxes for...

 

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[socaldude]

When central planners cause inflation by lowering interest rates (loans increase the money supply and cause inflation),

LOL The federal reserve is basically a hedge fund that legally manipulates interest rates and the markets.

If me and you did that we would go to jail for fraud. Instead they get a Pat on the back by our government and college textbooks. Lol

 

[BizyDad]

But do you know who pays the corporate tax rate? The small business!

Most small businesses aren't C corporations. Most are pass thru entities which pay the individual tax rate, not corporate tax.

You got to be a company of a decent size or a specific type for a C corporation to actually make sense. These aren't mom and pop "little guy" businesses paying double taxes.

And the 200 person 40 million dollar revenue business, even if the IRS labels them small, have CPAs to bring down their tax bill too.

I just don’t see how inflation is a service that you would pay more in taxes for...

Because a decrease in prices across the board tends to weaken consumer confidence, which weakens spending, which contracts the economy, which weakens consumer confidence even more, etc.

It's harder to conduct business if deflation leads to depression.

Since most businesses and most consumers hold debt, your dream of a deflationary period to benefit the savers only benefits a small segment of the actual population. The overall effect of deflation would be a negative.

food, housing, energy, raw materials, technology, machinery, tools, clothing... I mean, does the government make that for you?

Food, housing, energy, technology, raw materials, yeah the government has nothing to do with ensuring the proper functioning of any of those industries...

If our currency wasn't being massively devalued, businesses would not *need* massive amounts of leverage to grow.

Leverage is leverage.

Wall St punishes stock prices that don't utilize debt.

My point is, whether you have a strong currency or a weak currency, you'll still have businesses, Wall St, and MBA types extolling the benefits of leverage. You can't put that on the government.

And I never once said there should be "no taxes," so don't think I'm arguing against paying taxes.

The point is there is not an on/off switch between "taxes / no taxes."

There can be way too much taxation. That is possible.

I think we agree on this. For me, this is always the more interesting conversation. What is the optimal level of taxation?

If you believe there can be way too much taxation, do you also think there can be way too little taxation? I'm guessing the answer is yes, since you said you don't want zero taxes, but I'm interested to hear your thoughts on what the right level of taxes is.

The price of money should be set by the free market

Interesting. I'd like to hear more.

On some level, I've seen the free market tank Latin American currencies, amongst others. But that's not a true free market.

True free market, I think about something like Bitcoin which sees wild swings in value. What does this do to price signals? How is this a benefit to a well-functioning economy?

Businesses like stability and predictability (as much as anything can be predictable anyways). A volatile currency would be one more risk they would have to mitigate.

Lastly, isn't this just implausible idealism? Sure even if you get some countries to buy into this thought, how do you get all countries to allow their currency value to float with the free market? Talk about something that would require a great reset...

 

[Kak]

Economists disagree with you. And it's not even controversial among them.

Keynesian economists. Which is basically now a requirement in government. No one would dare take the printing press away from the dumb asses in power. They would have the blood on their hands when the bubbles stop getting support from the Fed.

Getting off the drugs the fed is selling would be extremely difficult, which supports their keynesian system.

You comment ignores economists from the Austrian tradition.

Controlled monetary policy creates malinvestment because demand can be classified as permanent which is backed by production of other participants, and temporary which is backed basically by "yesterday's" value of the dollar. Distinguishing between the two sources of demand is impossible for producers.

Inflation makes producers overinvest in capital goods based on temporary artificially created conditions.

 

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[Raja]

Small businesses (including a manufacturing company with 200 employees that churns $40 million per year - yes, that is considered “small” by the IRS) get stuck with the shitty a$$ domestic policies.

Don’t take out your anger and frustration towards “global mega corporations” by punishing the little guys who hire Americans, work in the USA, are based in the USA, and actually pay US taxes.

exactly, I was just now researching for opening business in Canada or in the US (Canada preferred), and there are fu*k ton of tax(that's fine) and requirements for a non-citizen.


EDIT: if anyone knows how or loopholes around it please do tell me(talking about work permit also)

 

[Kak]

I think we agree that Austrian economic theory is superior to Keynesian.

But, given our reality (the fact that we have a central bank that is massively influencial in our economy), why would I apply Austrian economic theory to our situation?

It's simply not applicable, except to understand why things break in our system. (And you and I clearly already understand that.)

If you're arguing that a central bank is bad, I agree with you. And if you're arguing that we should change things here, I agree with that as well.

But, pretending that our central bank doesn't exist doesn't change the fact that it very much does exist.

We've been dealt a hand that we can't change. The only thing we can do is play that hand.

I'm not pretending that the central bank doesn't exist, it clearly does.

Now an understanding of economics from an Austrian perspective does help us as individuals understand, respond to, and plan around decisions made by the Keynesians for our own personal business and investment planning.

So it is applicable in terms of our personal response, albeit, policy will continue to tow the Keynesian line and when they break things they will say they "didn't do enough."

 

[Guest-5ty5s4]

Most small businesses aren't C corporations. Most are pass thru entities which pay the individual tax rate, not corporate tax.

You got to be a company of a decent size or a specific type for a C corporation to actually make sense. These aren't mom and pop "little guy" businesses paying double taxes.

And the 200 person 40 million dollar revenue business, even if the IRS labels them small, have CPAs to bring down their tax bill too.

Because a decrease in prices across the board tends to weaken consumer confidence, which weakens spending, which contracts the economy, which weakens consumer confidence even more, etc.

It's harder to conduct business if deflation leads to depression.

Since most businesses and most consumers hold debt, your dream of a deflationary period to benefit the savers only benefits a small segment of the actual population. The overall effect of deflation would be a negative.

Food, housing, energy, technology, raw materials, yeah the government has nothing to do with ensuring the proper functioning of any of those industries...

Leverage is leverage.

Wall St punishes stock prices that don't utilize debt.

My point is, whether you have a strong currency or a weak currency, you'll still have businesses, Wall St, and MBA types extolling the benefits of leverage. You can't put that on the government.


I think we agree on this. For me, this is always the more interesting conversation. What is the optimal level of taxation?

If you believe there can be way too much taxation, do you also think there can be way too little taxation? I'm guessing the answer is yes, since you said you don't want zero taxes, but I'm interested to hear your thoughts on what the right level of taxes is.


Interesting. I'd like to hear more.

On some level, I've seen the free market tank Latin American currencies, amongst others. But that's not a true free market.

True free market, I think about something like Bitcoin which sees wild swings in value. What does this do to price signals? How is this a benefit to a well-functioning economy?

Businesses like stability and predictability (as much as anything can be predictable anyways). A volatile currency would be one more risk they would have to mitigate.

Lastly, isn't this just implausible idealism? Sure even if you get some countries to buy into this thought, how do you get all countries to allow their currency value to float with the free market? Talk about something that would require a great reset...

The $40MM business with 200+ employees is my family’s business.

We pay a ton of taxes.

We do in fact hire a CPA, but taxes are still quite expensive.

We are a C corporation.

You don’t have to be Tesla or Microsoft to fall into this category.

There are many companies like ours. And most of them are struggling because of bad government policies that discourage production here in the states.

 

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[Guest-5ty5s4]

First, I think we agree on most stuff (see below). But, on a few things we disagree. Including this point...

Have you noticed how many businesses have suffered during Covid?

Why is that?

It's because there are essentially no businesses that voluntarily keep large cash reserves, except for intended expenditures.

Small businesses don't do it because they often can't. Large businesses don't do it because it hurts shareholders and penalizes their stock prices.

Currently, about 70% of small businesses hold debt. And I imagine the percentage for larger businesses is even higher (I didn't look up the data, though). Most businesses in this country finance their growth -- it's good for owners and it's good for shareholders.

Controlled inflation benefits nearly every business in this country not only with respect to debt, but also with respect to driving demand (see my post above).



Deflation destroys economies.

I'm not saying that a decrease in prices of things like food and energy can't have positive short-term effects, but extended periods of deflation -- even low levels of deflation -- is often catastrophic.

Just look at Japan over the past several decades. Or Greece over the past 5 years...




Most businesses use debt to finance growth.

That's why it's called "leverage"...



I agree with you on this.

In a purely capitalistic environment, the government wouldn't be tilting the playing field. Unfortunately, we don't have pure capitalism in this country. We have corporatism. The government essentially chooses winners and losers by unleveling the playing field.

Encouraging debt -- which is more readily available and better managed by larger companies -- is one way of doing this.

There's a reason why people say the first million is the hardest. Because it is. The playing field is tilted in favor of those who already have money.

I can speak from personal experience here.



100% agreed. And I'm not saying that all businesses should be taxed equally (or at all).

I'm just saying that the idea of "TAXES ARE EVIL!!!" is ridiculously simplistic.



Big businesses love inflation because it gives them more benefit than it does their smaller competitors.

Yes, CPI inflation drives up worker costs and inventory costs, but who do you think can better leverage the increase in prices -- Walmart or the family-owned convenience store on the corner?

We both know the answer. The fact is, the government helps choose winners and losers, and they favor big business over small business.

From a long-term economic standpoint, this makes no sense. But, most politicians don't think long-term and don't really care about the broader economy.

So we do basically agree, we’re just kind of talking about different things.

The selection of winners and losers is bad, and the system favors mega corporations over small (and medium!!!) businesses.

People seem to think you are either a trillion dollar mega corporation or a hole in the wall mom and pop company.

This is not the case. This is kind of my soapbox, so I’m sorry.

My family owns and runs a $40 million revenue manufacturing company. It’s very difficult and revenue does not equate to profit. We have tons of expenses that people on this forum have probably never heard about, because we have so many employees, safety requirements, environmental requirements, not to mention overseas competition.

The government policies really do not go our way, except for a few bones they threw us since Trump took office (that will change soon).

I think it’s important to consider all the different industries that make up the economy. I totally think real estate is extremely important too.

Also sorry if I came off as too aggressive, like I said, I have firsthand experience here and I’m just very passionate about explaining my position!

Mad respect for your books and what you’ve done.

 

[Guest-5ty5s4]

Just my $.02, but... My personal opinion is that people overthink these things, and the key to low-risk wealth is much more simple than worrying about the monetary or fiscal minutiae that most people worry about...

The government sets the rules, and as business owners and investors, our job is to navigate those rules. But, it's the BIG rules we should care about, not the little ones.

So many people focused on taxes going up or down a few percent, but in the scheme of things, this is a little thing.

So many people focused on tax law changes, but in the scheme of things, these are little things.

So many people focused on regulation, but in the scheme of things, these are little things.

Etc...

Here's the BIG thing: INFLATION.

The government wants it, so we're going to get it. And not just CPI inflation. But, asset inflation as well.

If people paid no attention to anything other than that fact above (the government wants inflation and will get it), they would do the following two things:

1. Buy cash-flowing hard assets.

2. Leverage them (take debt against them).

Take any reasonable period in recent American history (at least 5 years), and if you followed just those two rules above, you would have made money.

Take any 10-20 year period of following those rules, and you likely would have made a lot of money.

Personally, I hate real estate. With a passion. I do everything I can to avoid being active in my real estate business, as I don't enjoy it.

But, I recognized a decade ago what many other people realized many decades ago: Cash flowing hard assets with leverage is the lowest risk way of getting wealthy in this country.

I spend very little time focused on my effective tax rate. I spend very little time focused on tax law changes. I spend very little time focused on regulation. (I do hire professionals who focus on these things for me, but I don't spend time thinking about or stressing over them. They are what they are.)

Instead, I focus on buying cash-flowing hard assets with leverage.

And then I spend my extra time doing the fun stuff -- entrepreneurship, angel investing, book writing, etc.

Again, just my $.02... But, if anyone wants to get wealthy, my recommendation is to stop focusing on saving or earning a few extra percent, and instead focus on the BIG things you can do to build wealth over 5, 10, 20 or 30 years.

Not only will you not stress about whether Trump does this or Biden does that with the tax code, but you'll have the entire federal government creating policy (i.e., inflation generating policy) that practically ensures that you'll get wealthy.

And if you prefer to focus on being a business owner, that's great. Use your company profits to purchase cash flowing assets with leverage. It's not an either/or thing... You can do both!

Also, I am absolutely 100% on board with using the strategy above to make money, because it works.

I’m just not so sure it’s good for the USA, but we can’t really tell since we only have about 100 years to compare it to. Where will inflation lead the country after 200, 300, 400 years? Do we care? Keynes didn’t seem to.

Oh, and to you and BizyDad (who have experience in finance but maybe not in the type of biz we do), we do in fact keep large cash balances.

Large cash balances are critical in a business like ours because we do huge projects, work with contractors, are paid in installments, have tons of employees, and a lot of other variables.

If your cash falls too low, you could literally have a surprise million dollar expense in our industry lol

Basically, our revenue is not recurring. We have to grind for more work. We pay employees year round, work or no work.

We get a project and immediately need to buy hundreds of thousands in materials - sometimes before we even get paid (we have receivables).

We don’t get a rent check on the first of the month.

Our company builds infrastructure from scratch.

 

[Kid]

"Tax the businesses more but keep my Amazon prices low!"

 

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[Guest-5ty5s4]

"Tax the businesses more but keep my Amazon prices low!"

“We want $15/hour, but it’s totally okay if a kid in China makes $1/hour”

reference: List of Goods Produced by Child Labor or Forced Labor | U.S. Department of Labor

Scratch that, many of them are working as slaves according to the US department of labor. They are not paid.

Historically, most economies don't last more than a couple hundred years.

It's possible that the US economy (at least as we know it) is coming to an end.

But, that's just another reason to avoid holding large chunks of cash (more than necessary), and instead own hard-assets. Currencies will fail before countries do.

Again, just my $.02...



We definitely agree. I'm an advisor to two 8-figure businesses and one 9-figure business, and my guidance on cash reserves tends to be tremendously conservative.

Leverage is growth fuel, but is also a double-edged sword. I always prefer reasonable leverage, slower growth and lower risk over high leverage, fast growth and high risk.

I'm too old to start over...

Thank you, agree. We do use leverage but it’s mostly for the long term value growth. We would only see the benefit if we ever sold the whole thing. Never know when the bank could just call it, either, which would be very very bad.

The Roman Empire lasted for what, 1000 years? I don’t see why the USA couldn’t last that long, unless we speed up its destruction.

 

[lowtek]

“We want $15/hour, but it’s totally okay if a kid in China makes $1/hour”




Thank you, agree. We do use leverage but it’s mostly for the long term value growth. We would only see the benefit if we ever sold the whole thing. Never know when the bank could just call it, either, which would be very very bad.

The Roman Empire lasted for what, 1000 years? I don’t see why the USA couldn’t last that long, unless we speed up its destruction.

Slightly off topic, but here's my $0.02.

The Roman empire lasted so long, in part, because it took months for news and ideas to traverse the empire. In the modern world this process is practically instantaneous. Virtually everything in the modern world happens on much faster time scales. I'm betting that includes collapse as well.

I stand by my prediction in another thread: The United States, as we know it, isn't going to survive the 2020s. From what I'm seeing now, we'll be lucky to make it 2025.

 

[Tom H.]

But, given our reality (the fact that we have a central bank that is massively influencial in our economy), why would I apply Austrian economic theory to our situation?

Austrian economics, i.e actual economics, is not an artificial construct that only applies if we follow certain rules. These are true logical statements about the economy that apply no matter what kind of policies we are operating in: socialism, Keynesianism, Chicago school... no matter what the policies are, praxeology explains what is actually happening.

No matter what Keynesians say about savings or inflation, the truth is the truth, wealth is produced by capital investment and capital investment is made possible by savings. And capital must be invested intelligently/productively, otherwise it simply leads to a boom-bust business cycle, which leads to the price of money.

Interesting. I'd like to hear more.

By the price of money, I mean the interest rate on loans. Think of the supply and demand of money for loans.

Imagine you live in a town and you have $100k to loan out for a project. One person wants to borrow the money to build a church, one person wants to build a bridge, one person wants to build boats, and one person wants to remodel their house.

Who do you give the money to?

A central planner would choose the project that they predict will have the impact they're looking for. A Keynesian will just give money to everyone out of an artificially created money supply. But on the free market, the correct answer is to give the money to whoever is willing to pay the highest interest rate.

The business that is able to pay the highest interest rate is the business that is going to create the most profit. Creating the most profit means that they are creating the most value.

Say the boat maker is willing to pay 9% on a $100k loan. You think it's dumb because the town is landlocked, but they have a business plan to manufacture boats and sell in another area. That business owner knows he can pay the 9% and still make a profit.

Now say the bridge builder can only afford to borrow the $100k if you loan at 1%. The bridge is a risky investment because there are already several bridges in the town, and it is not certain that the project will be profitable. But at a super low interest rate, the builder is willing to take the risk.

Thus the low interest rate makes it appear like there is more economic activity taking place: bridges are getting built all over the place. In the short-term this looks good, people are employed and shit is getting done. But in the long-term, you have a ton of money that went into risky projects that didn't actually create that much value. Eventually that bridge is too expensive to operate, it falls apart, people lose their jobs maintaining and operating the bridge.

If the bridge builder had to pay 9% on the $100k, they would've been a lot more conservative about taking on the project.

On the free market, people with savings channel capital to the entrepreneurs willing to pay the highest interest rates, and this "price of money" is extremely valuable for entrepreneurs making decisions about where to invest. With a central bank setting interest rates, the entrepreneurs have no real visibility into actual market conditions and end up investing in bad businesses that eventually need to be shut down.

 

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[Kak]

Savings Are Critical to a Prosperous Economy | Frank Shostak

It is held by most mainstream economists that spending is the heart of economic activity. Economic activity is depicted as a circular flow of money. Spending by one individual becomes part of the earnings of another individual, and vice versa.

mises.org

 

[Tom H.]

@JScott so tell me about mortgages, student loans and the dotcom bubble...

Should we not prefer giving loans to home buyers and students and business that actually have a chance at being successful?

Or should we just provide cheap money for all?

I'm not talking about high interest rates as a representation of risk. I'm saying that in a free market, prevailing interest rates will reflect the amount of savings available for capital investment. Instead of interest rates reflecting the decisions of a central planner.

 

[BizyDad]

But on the free market, the correct answer is to give the money to whoever is willing to pay the highest interest rate.

Ok, that's a different direction than I thought you were going. I thought we might get into a discussion about proper backing of currency and the merits (or lack thereof) of fractional banking.

Anyhoo, I definitely am not a fan of this proposal. In this "true free market", how would a farmer ever be able to compete for loans?

Let's set aside the poorly worded nature of the phrase. Willing to pay and able to pay are 2 separate things, and surely you mean the second. (Maybe you don't as JScott's critique points out).

But in this example of yours, the companies who are most able to pay the highest interest rates, and therefore most willing to, are the industries who inherently have the highest profit margins.

These companies would inflate the cost of the money to a level that those industries with razor thin margins cannot expect to reach. And forget about personal loans. How does the farmer or supermarket owner or small church or school or student ever get a loan in this idealistic free market scenario?

Imagine you live in a town and you have $100k to loan out for a project. One person wants to borrow the money to build a church, one person wants to build a bridge, one person wants to build boats, and one person wants to remodel their house.

In this true free market, the person with 100k to lend wants the biggest return on their money, but more important than that they want to lend it to whomever is most likely to pay the loan and interest back in full. So they don't limit themselves to the people/companies in that town. (Why does your free market example limit the loan to the same town?) They lend the money to the biggest company that promises the highest rate of return, because the biggest companies inherently are perceived as less risky and therefore are most likely to be able to pay back the loan.

Of course, since this discussion about the price of money isn't being tied to what backs currency, just the cost of lending it, you are leaving in place the government system of the valuing the currency through their means. And since a government can just print more, the government will be the one who can "afford" to pay the highest rate. Government debt would still be the safest debt. And in this true free market, everyone would just lend it to the biggest/least risky governments in the world.

So the money supply contracts. How is this different/better than what we have today?

 

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[Tom H.]

Willing to pay and able to pay are 2 separate things, and surely you mean the second. (Maybe you don't as JScott's critique points out).

Correct, I was leaving our lots of technical details. I'm assuming the recipient had the ability to pay.

But in this example of yours, the companies who are most able to pay the highest interest rates, and therefore most willing to, are the industries who inherently have the highest profit margins.

Yes. The highest profits means the money is being put to the greatest use, it is helping the largest number of people.

How does the farmer or supermarket owner or small church or school or student ever get a loan in this idealistic free market scenario?

They might not. Maybe only engineering students are able to take student loans. Maybe small churches aren't putting money to very good use and should instead fund themselves. Maybe small family farms are out dated unless they have some unique competitive advantage.

Egalitarianism isn't helping anyone. Better to let businesses sink or swim.

you are leaving in place the government system of the valuing the currency through their means. And since a government can just print mor

The government "prints money" through lending in a fractional reserve system. By saying that lending should be tied to actual savings, I am taking away the government's means of increasing the money supply.

You lost me. Your points in this post are completely orthogonal to your points in the last post.

My points are not orthogonal.

1. You say high interest rates represent risky investments. I'm saying that student loans, mortgages and tech companies have been very risky investments that did not carry the high interest rate warning. It's just a counter-example.

2. I agree with you that chasing the highest rates is not smart, but like @BizyDad observed, that is not the point I'm making, I was assuming ability to pay, and though my example was for one loan, that was for simplicity. I am talking about the prevailing interest rates across an economy.

 

[Kak]

@BizyDad you mentioned student loans, I am pretty passionate about this...

There is a good reason why college is so expensive and it is explained by supply and demand.

With the total removal of risks to initiating lenders for student loans, the ultra low cost money available to spend on college is nearly unlimited. The initiating lenders just sell the loans to the government and pocket a risk free arbitrage prize. All of that money available to anyone that wants to fill out an application increases demand relative to supply of school/classrooms/teachers/whatever...

Essentially a bull market for what they produce, schools have no shortage of applicants due to price. No one shops for a deal, nor will they find one.

In a free market system, a student wanting a loan would have to make a case to a private lender why he/she has a likelihood of paying it back. That lender would basically decide what interest rate makes sense for them, knowing the student can shop other lenders. A useless major would be almost impossible to finance or carry a very high interest rate to compensate for the risk. On the other hand, a lawyer or business degree might be a lower interest rate, albeit higher than today, because without government eliminating the risk, it is still riskier than today.

The reduction of almost free money available for college would reduce the demand for college. Colleges would be forced to then compete for the business of the fewer students, they would also be forced to expand useful programs and shrink useless ones... The price of school would have to come down.

The other cool thing is that the market then shapes the education system... Less kids graduating with useless degrees and the hiring market is getting more of what they actually want out of college graduates.

All of this is kind of moot though, college is about to be disrupted. They don't have the monopoly on "higher education" in the purest sense of the meaning "higher" and the market is beginning to realize that.

All of this to say, that the road to hell is paved with good intentions. I have so much sympathy for the young people that have been corralled into this disaster by their clueless parents and "the script."

 

[Kak]

But in this example of yours, the companies who are most able to pay the highest interest rates, and therefore most willing to, are the industries who inherently have the highest profit margins.

These companies would inflate the cost of the money to a level that those industries with razor thin margins cannot expect to reach. And forget about personal loans. How does the farmer or supermarket owner or small church or school or student ever get a loan in this idealistic free market scenario?

Lenders don't act collectively unless they are in a cartel or collusion arrangement. They are individual businesses too.

Your example leaves out the competitive factor on the lending side of the equation. While, yes, the most profitable companies have the ABILITY to pay higher interest rates, they won't. Why? Because they are also they most creditworthy and therefore least risky.

If there was only one lender, or a cartel, the lender may charge them an excessive rate and all of their money could be deployed in that fashion, but they don't have a monopoly on lending, therefore they have to consider the market competitive rate for such a company.

If there were 10 lenders, and 9 of them wanted to charge between 4-5% and the 10th lender wanted to charge 7%... The 10th lender is irrelevant and the creditor would choose the lowest rate of the 10.

It would be easier for a church, farmer, or supermarket owner to get a loan in this scenario than in our current system where rates are artificially low and inflation is high. Traditional lenders aren't compensated for their risk to an actual market level. So they REALLY make it difficult to initiate a loan.

As @JScott alluded to, the true equilibrium for interest rates on a lot of this stuff is a LOT higher than bank rates would suggest. This is why I would wish someone good luck trying to get a business loan from Chase or Wells Fargo unless they clearly don't need it.

 

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[Tom H.]

As for tech companies, I'm not sure what you mean about low rates and risk on debt?

Sorry for not being a lot more specific in my posts. I was trying to provide examples of excess money going into malinvestment, e.g. tech stocks in late 90s, real estate in 2000s, and education for the past 30 or so years.

These are cases where an economy based on unsound money facilitates malinvestment.

Eg. student loans carry low interest rates, so a student is more likely to take on a loan to obtain a degree that may not be profitable.

 

[Kak]

As an example, I do a decent amount of mortgage lending at market rates. What's my typical rate these days?

About 10% plus 2-3 points upfront.

I like this action a lot actually. Totally collateralized and you probably are what 80% ltv? Hell, you make more money if they go delinquent than if they pay and the only real risk is high inflation and a paying customer.