January 27, 2012 by Scott.

I have been listening to the Republican debates and reading all about the Presidents plans for Tax reform and the Millionaires tax.  I have some savings but do not consider myself ‘Rich’ by any definition.  I work hard, save and try to spend wisely.  The Millionaires tax would most likely not have any affect on my tax bill so why do I care?

I care because I have been thinking a lot lately about the relative values of Capital and Labor.  It has troubled me for a very long time that there seems to be such a great divide in thes country between those that believe in placing a higher value on Capital then on Labor.  A long time ago I was a student of Economics and Finance and learned all about the premises of Capitalism, Socialism, Communism and all the other ‘isms’ used to describe different socioeconomic arrangements for society.

 Yes, it is important to understand that Capital has a value.  That is why when we go to the bank we expect to earn some interest on our savings.  Conversely if we borrow money we expect to pay interest.  The price of that Capital, the interest rate is supposed to be a mathematical representation of the value of money.  The price of Money if you will.  And the value of that Capital should fluctuate based on a number of things such as the supply of Capital, the Demand for it and the chances of it getting repaid (Risk).  That is all well and good but there is also a price for Labor, it is called a wage.  So the price of Capital is called the interest rate and the price of Labor is called the wage rate.

Now for taxes.  We pay our government taxes to provide various services and that is all well and good I suppose.  It is a system that works I guess.  Taxes are levied on two things.  Income derived from Capital and Income derived from Labor.  I know there are other distinctions like Dividends and Commissions but for the sake of this piece I believe all income can be grouped as income from Capital (earned interest, Capital gains, Dividends etc.) and income from Labor (Salary, Bonus, Commissions, etc.).

As it turns out, our government taxes Income from Capital and Income from Labor differently.  Why?  Could not tell you.  So if I earn say $100,000 by dragging my sorry you know what out of bed every morning for a year and going to a job and busting that same you know what for 8 hours a day 5 days a week I pay the government a percentage of my wages as tax.  If on the other hand I earn the same $100,000 because I had Capital invested, I might pay a lower rate.  If I had say $5,000,000 invested at 2% (nice and safe) I could do that.  But I would not have to drag my sorry you know what out of bed and go to work.  In fact the hardest thing I might do is get up every morning and see if my check arrived.  I could spend the rest of my day sleeping or playing tennis or even traveling.

Does that seem fair to you?  Does not to me.  Should income from Capital be treated differently then income from Labor?  Should one be more valuable then another as it relates to taxes?  Actually I think that income from Labor should be considered more valuable then income from Capital and people should be encouraged to work.  Our system of taxes actually disincentivises people to work because wages are taxed more than similar income from Capital.  This is a fundamental flaw in our tax system and it needs to be corrected.

This is an economic discussion, not a political one.  I do not think that politics should come into play here.  People work they should get paid and pay taxes.  People invest and make money on those investments they should pay taxes.  A dollar is a dollar and I do not think it matters how it is made.  It should be taxed at the same rate.  Now if I had a lot of Capital, I might be a little greedy and want to pay less taxes.  Of course with money comes power and over the years those with power in this country have been able to skew the tax laws in their favor.  Yes the rich do get richer.  When you control the game, you generally win the game.

This is an issue of fairness not politics.  The arguments go on and on and many will argue that without Capital we can not have investments and build things like factories and explore for new energy sources.  But let’s be real.  That Capital is deployed to pay the people who do the work (Labor) to build the factories or the machines used to do the exploring.  Labor and Capital go hand in hand, and they should be treated equally under our tax code.  Otherwise those that have Capital have an advantage.  An advantage no doubt they would like to keep.

Something to think about!

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November 18, 2011 by admin.

I have spent the last 32 years of my life working on and around ‘Wall Street’.  Specifically, for companies who primarily trade and clear what are known as financial derivatives.  I am not certain if this makes me an expert in anything but I do think I have some knowledge about how the derivative markets work.

First, what exactly is a derivative?  In it’s simplest form a derivative, at least in Wall Street financier language, is any product who’s value depends or ‘derives’ from the value of something else.  I spent a lot of time trading Gold and Silver Bullion so I will use them as an example.  The price of Gold fluctuates in the open market.   I can go down to the corner coin shop and purchase a Gold coin and I will pay the price of Gold and probably some markup so the guy can run his store.  The value of that coin is what the market says it is.  I go home put that coin under my mattress or in my bank vault and I can be secure in knowing the value it has will be related to the price of Gold in the fair market.  I can take that coin out and hold it in my hand anytime I want to.  Pretty isn’t it?  It is mine I paid for it and I am free to do what I will with it.

But there are other ways to invest in Gold.  I could call up my friendly broker and open up a futures account and buy something known as a futures contract whose value ‘derives’ (there’s that word again) from the price of Gold.  I could even hedge my coin by selling a futures contract, assuming they represented the same quantitiy of Gold.  Wait it gets better, I could tell my broker to purchase a put or call option on a futures contract and be exposed to the price movement of Gold.  So that option would be a derivative on a derivative.  I could buy an ETF that tracks Gold, I could sell short that ETF or I could buy or sell puts or calls on that ETF.  I could do a combination of all these things.  I could trade Gold in the Spot and Forward OTC markets.  I could trade options on those contracts as well.  And I am just scratching the surface here.  By now you probably are getting the point.  There are many ways to get exposure to the movement in the price of Gold, either up or down.  Depending on how leveraged I am the Gains or losses will be magnified.

This is how the derivatives markets work.  It is legalized gambling as only a tiny percentage of the folks who are placing these bets actually either produces the stuff (miners, refiners) or uses the stuff (jewelers, electronics makers etc.)   The rest of the folks are just speculating on the price movement.  While this creates a whole industry which employs thousands of people which is good, it also magnifies the price movements and leaves the price discovery mechanism at risk to manipulation.  And manipulation happens! That is the point.

What does all this have to do with the EuroZone Crisis?  I am getting there, bare with me.

I have benefitted from the markets in derivatives for all of my adult life and for the most part the people who do this for a living are decent, caring honest people who work hard, love their families and are by and large responsible citizens.  But greed does exist, and the bigger the prize the greater the incentive to do bad things.  Leverage in the wrong hands is like a nuclear bomb in the wrong hands.  Bad things can and do happen.

The same way a derivative market exists in Gold and Silver and Corn and Wheat and on and on, derivatives markets exist for fixed income investments.  Soverign debt is a type of fixed income investment.  All the US debt trades, all the debts of pretty much all the countries trade.  So what is the problem you may ask?

Well as I see it, when you allow the Debt of a Soverign country to trade in a derivative market, subject to manipulation due to excessive leverage you might find that certain traders have an interest in seeing the price move one way or another.  This may be all well and good for markets of Gold and Silver and Corn and Wheat (it probably is not but that is a different article) because those markets do not underpin economies and money supplies. And in most cases producers and consumers in those markets are free to realocate resources based on the price fluctuations of those commodities.

In the case of Soverign Debt the story is much much different.  The capital markets at the very core exist to do one thing and one thing only:  permit the free flow of capital from the folks who have excess capital (those that earn more then they spend) to the folks who are in need of capital (those that spend more then they earn).  In the case of Soverign Debt we are talking about countries who borrow money because they spend more then they earn (tax).  Allowing speculation in the market for Soverign debt is not like putting the fox in charge of the chicken coup, it is more like inviting the fox for dinner in the chicken coup! What do you think is going to happen?  Precisely what is happening.  The speculators are raiding the markets and while creating wealth for themselves, perhaps destroying the capital markets for many generations to come.

I could go on and on but where I am going is simple.  The answer to the Eurocrisis is not for the ECB to buy more soverign debt, the answer is to disallow the trading of derivatives on the soverign debt.  Let the markets do what they are good at, which is to efficiently allocate capital.  If the market sees fit to raise the rates on certain countries debt because it is viewed as more risky relavant to some other asset so be it.  But allowing the speculative interests to undermine the economic system is absolutely suicidal!.  The result could be a worse recession then the one we just came out of.

It is time for the Central Banks of the world to demarketize the soverign debt markets. NOW.

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February 23, 2011 by Scott.

In the public sector, employee unions collect dues involuntarily from the public workers.  Then the Unions bargain for better pay, benefits (Health care and Pensions) with the politicians.  The Unions take the dues they collected involuntarily from the members and donate to the same politicians who they are negotiating with.If that is not a conflict of interest then nothing is.  This should be tried in a court of law once and for all.  The Taxpayer is being totally ripped off and the Politicians and there buddies in the Unions are laughing all the way to the bank.  Except it is not funny anymore and the States will go bankrupt.  Actually going bankrupt would be a great way to renegotiate these ILLEGAL UNION CONTRACTS!

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February 18, 2011 by Scott.

I have been reading with interest all the interesting things that are happening through out the land.  The States are trying to get the the Public employees to pay (relatively) minuscule amounts for things like Pensions and Health Care.  Imagine that the Public Employees in places like Columbus do not like this?  Well you would not like it either it is like taking a pay cut. But the real problem, the one that not one State seems to want to talk about is how these crazy Union contracts got signed in the first place. I have written in these pages that I think we should prosecute the politicians that negotiated and agreed to these ridiculous contracts under breach of fiduciary responsibility.  I still believe that.  But sour grapes is not getting me anywhere so I thought I would offer up a solution and it goes something like this. Since the politicians clearly can not be trusted to negotiate the Taxpayers interest in good faith due to the conflicts of interest inherent in the relationship between the Unions and the elected, I am suggesting that we take the negotiating responsibility away from them.  I am advocating for the creation of Citizen boards to be responsible for directly negotiating with the Unions.  These boards would be filled with Business leaders from around the State and would be unpaid positions.  Expenses could be reimbursed but no ther form of renumeration would be allowed.  These leaders from Business must be respected in there fields and be beyond reproach.  How would we choose these Board members?  I think the best way is to create an application process and have the Governor make selections based on a criteria agreed in an open forum and debate within the respective States Legislative bodies.  Under no circumstance would political lobyists or operatives be allowed.  I am talking about CEO’s, CFO’s and other Business executives of Private companies who make there homes in the respective State.These Boards should bring the taxpayers interest with them to the negotiating table and a fairer contract negotiation should ensue as there could be no tit for tat involved between the two sides. What do you think? 

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October 25, 2010 by Scott.

I just had to write something.  I really can not hold back anymore.  I am so frustrated and angry with the way the State of New York is run.  The whole system is so corrupt and it seems like there is no way to fix this!  The Unions own the Politicians and the Politicians really could care less about the tax payers.  In case you do not know by now, which means you have probably been spending the last decade vacationing on Mars, I will summarize it for you.  Our legislators, (Senators, Congress) are interested in one thing.  They would very much like to keep being re-elected so that they can continue to spend other peoples money. They know that only a very small percentage of the eligible voters actually vote and a good percentage of those that do vote are members of the public work force and thus members of the public Unions.  So all they have to do is give the Unions what they want and Viola they get to go back to Albany year after year and spend other peoples (your and mine) money.   Not a bad gig if you can get it .  Particularly when you consider that every raise, perk and Pension benefit that they are signing into law will acrue to themselves. Thats right folks the Fox is really watching the Chicken Coup in Albany! So rather then just rant I would like to propose a solution.  Here it is.  Pay close attention because I am only going to sy this once.  Someone will probably find me and do away with me when they get a load of this!In the world that I live in, it is called the U.S. of A, there are laws against conflicts of interest and fraud.  Generally speaking one can not negotiate when one is in a position to personally gain from those negotiations.  So I am advocating for a dismissal by our courts of every Union contract ever agreed to by the Senate of the State of New York under the grounds that they are illegal.  Negotiated by Senators who directly benefited from them to the detriment of the Taxpayers of the Great State of New York.That’s right, we are being asked to foot the bill for Billions of Dollars of Benefits (Pensions, Raises, Health Care Etc) that were agreed to by Men and Women who were supposed to be negotiating on the Taxpayers behalf.  Instead they were negotiating on behalf of the Unions and themselves with the Unions.  That is a fraud, a scam, a travesty of justice or whatever else you want to call it but it is certainly ILLEGAL under our laws and should be recognized as such. So it time for a Class Action Suit to be filed by the people of the State of New York against its elected officials using some of the logic above.  We need to stop being asked to pay for illegal contracts before there is nothing left! Any lawyers out there interested in a fight?  Please let me know. 

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August 16, 2010 by Scott.

I have already talked about my feelings on the illegality of the current Pension systems.  The Politicians figured out many decades ago that if they agree to these outrageous benefits they can garner the votes of the union members.  It is a symbiotic relationship.  The Politician agrees to outrageous benefits for the public unions and the Union leadership looks great to the membership.  The Politicians get re elected year after year because the Union membership will come out to vote in droves while the rest of the voting public stays home during most elections.  It is a credit to the Union organizations but is surely sucking the life out of the American dream. The taxpayers get to foot the bill and the problem now is that these bills are coming due.  The Union members, for the most pat are decent people.  Ask them if they think that the pension/disability benefits they can receive are really fair and the general response is that they know that the benefits are outrageous but they are entitled to them.  The fact that they are unsustainable is not the issue for them, just the fact that they are available legally.  This is why the only way to stop this lunacy is to tackle the legality of the contracts that have been signed.  One way is for the State/local governments to simply declare bankruptcy and let the Bankruptcy judge negate the contracts.  If the government wants to operate like a business then they should be subjected to the same rules.  In a bankruptcy, it is relatively easy to dissolve the contracts with the Unions and simply fire and rehire under a different set of rules.  I know this sounds a little far fetched but we are dealing with a crisis that will need to be dealt with in a very agressive and unprecedented way.  Otherwise, do the math.  It will not be long before tens of millions of our public employees are collecting fat pensions and golfing or sunning themselves while the rest of us struggle to make ends meet.  We can not let this stand.

 I invite and appreciate any comments.

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August 5, 2010 by Scott.

Spent some time in Woodstock over the weekend.  What a cool and wonderful place to spend some time.  We sat by the Mill Stream and listened to the water running at night.  The woods are really noisy at night but it is a calming noise.  One of the best nights I can remember, relaxed and easy.  I think I want to come back to Woodstock.

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July 30, 2010 by Scott.

I would love for an ambitious Attorney General  to stand up for the Taxpayer.  If you are receiving taxpayer dollars on a disability pension and you are not in fact disabled, then you are simply committing a fraud on the taxpayer.  Criminals generally go to jail.  Why is it different in the Union contract?  If you rob a bank you go to jail.  Berny Maddoff, he is in jail.  How is it a guy who runs marathons or competes in Triathlons can receive a TAX FREE pension for being disabled?  It is a fraud, very simple.  If I did that I would be thrown in jail.  Someone needs to stand up for the taxpayer who is being cheated left and right by those who are cheating and lying by collecting Pensions on a lie!  Same goes for the workers who work massive overtime in the year before retirement.  Then the pension they receive is based on this inflated income.  I know the argument is that it is written into a valid contract.  But how is this a valid contract?  Who are the politicians who negotiated this contract?   Don’t they have a fiduciary responsibility to the taxpayers?  If they have broken the public trust and worse committed a crime by completely disregarding their fiduciary responsibility then they should be held accountable.  Additionally, these contracts should be contested by the Taxpayer in court.  There is no way these would stand up under scrutiny in a fairness to taxpayer suit.

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July 30, 2010 by Scott.

Going to see the kids at camp this weekend then spending time upstate.  I think I will bring my instrument so I can keep practicing.  That is the nice thing about having an electric/acoustic.  You do not have to have the amp, just the Guitar.  Speed drills hurt but really help.  No pain no gain!@#$%

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July 28, 2010 by Scott.

Wow, what a great night at the Jones Beach theater with Laura.  Sting was their with the Royal Philharmonic Orchestra and it was excellent.  Sting is losing it a little in the high register but the man can definetely still croon.  And croon he did.  I would have liked to hear more of the old stuff but that probably would not have been the same anyway without Sting playing the Bass which he did not.  My favorite was Field of Gold.

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