World View: Germany's Economic Experts Consider Wealth Tax to Fund Bailouts

This morning’s key headlines from GenerationalDynamics.com

• Greece to lay off old people, hire ‘young, capable’ replacements
• How margin accounts work today versus 1929
• China’s local government debt is ‘out of control’
• Germany’s economic experts consider a wealth tax to fund bailouts

Greece to lay off old people, hire ‘young, capable’ replacements

Antonis Samaras – Greek Prime Minister

Greece’s prime minister Antonis Samaras has confirmed that the latestdeal with the “troika” of organizations bailing out Greece — theEuropean Commission (EC), the European Central Bank (ECB) and theInternational Monetary Fund (IMF) — calls for 15,000 layoffs of civilservice employees. There will be 4,000 layoffs in 2013, and 11,000more layoffs in 2014, violating the provision in Greece’s 1911constitution that civil servants have lifelong job security.

Ordinarily this news story wouldn’t be that big a deal — justdescribing one more Greek commitment that probably won’t be met. Buthere are the two paragraphs in the news story that made my eyes bulge:

“The premier also confirmed that a total of 15,000civil servants would be dismissed before the end of 2014, with4,000 to go this year, but he stressed that each departure wouldbe replaced by a new recruit. ‘The same number of new people willbe recruited in their place,’ he said.

Poul Thomsen, the head of the International Monetary Fund’smission to Greece, struck a similar note at a conference in Athensorganized by The Economist, saying that public sector staff ‘willnot be eliminated but replaced by young, capable people.’ He didnot confirm explicitly that the one-hiring-to-one-firing ratiowould apply.”

Huh? Are we really being that explicit about tossing out the oldergeneration to make way for the “younger, more capable” generations? Iguess we are. Kathimerini

How margin accounts work today versus 1929

In yesterday’s column, “16-Apr-13 World View — Forced selling hits gold, commodities and stocks”, I described how the 1929 crash was not caused byan emotional panic, but was caused by forced selling — a cycle ofmargin calls, forcing investors to sell, pushing down prices, causingmore margin calls.

There’s a commercial from Interactive Brokers that seems torun a zillion times a day. The announcer says the following:

“Central banks are flooding the world with cheapmoney.

Interactive Brokers will lend USD 1 million at 1.3% for every USD200,000 in a portfolio margin account.

See our high dividend scanner for the many hundreds of stocks thatyield over 5%.

Trading on margin is only for sophisticated investors with highrisk tolerance. Dividend yields can change and stocks may losevalue. You may lose more than your initialinvestment.”

YouTube – Interactive Brokers commercial

And so, if you’re in the 99%, then you can’t borrow any money at all,certainly not for anything so mundane as paying salaries or buyingequipment to build a business. That’s why all these trillions ofdollars pouring out of the Fed and other central banks don’t causehyperinflation.

But if you’re in the 1%, then you can borrow millions of dollars fromInteractive Brokers at 1.3% and use the money to buy stocks (and,presumably, gold) at only 20% margin. The stocks are supposed toyield over 5%. Sounds like a good deal.

From 1926 to 1929, the amount of margin credit grew from $2.5 billionto almost $10 billion. After the 1929 crash, the amount ofmargin debt fell, along with the stock market. Even as lateas 1959, margin debt was only $3.4 billion.

Margin debt in 1990 was about $30 billion. It started taking offrapidly in the 1990s, at the same time as the tech bubble. Today,margin debt is $366 billion. It was $289 billion just one year ago.The reason that it grew so rapidly in the last year is because the Fedis “printing” $86 billion per month in new money liquidity, and a lotof that money is being loaned to investors by companies likeInteractive Brokers, creating huge margin debt accounts.

John Kenneth Galbraith, in his 1954 book The Great Crash -1929, defines margin as follows:

“Margins — the cash which the speculator must supplyin addition to the securities to protect the loan and which hemust augment if the value of the collateral securities should falland so lower the protection they provide — are effortlesslycalculated and watched. The interest rate moves quickly andeasily to keep the supply of funds adjusted to the demand. WallStreet, however has never been able to express its pride in thesearrangements. They are admirable and even wonderful only inrelation to the purpose they serve. The purpose is to accommodatethe speculator and facilitate speculation. But the purposescannot be admitted. If Wall Street confessed this purpose, manythousands of moral men and women would have no choice but tocondemn it for nurturing an evil thing and call for reform.Margin trading must be defended not on the grounds that itefficiently and ingeniously assists the speculator, but that itencourages the extra trading which changes a thin and anemicmarket into a thick and healthy one. At best this is a dullby-product and a dubious one. Wall Street, in these matters, islike a lovely and accomplished woman who must wear black cottonstockings, heavy woolen underwear, and parade her knowledge as acook because, unhappily, her supreme accomplishment is as aharlot.”

This shows the problem that the Fed faces. The Fed has created a truePonzi scheme, where more and more money has to pour into the system tokeep stock prices up. If the Fed lets up on the $86 billion permonth, then customers of Interactive Brokers and similar firms who arecounting on new stock market highs are going to be stuck. Once stocksstart falling, and the margin calls start, then there’s nothing toprevent a major panic and financial crisis. And that’s exactly whatGenerational Dynamics predicts is going to happen.

New York Stock Exchange Market Data Factbook

China’s local government debt is ‘out of control’

Zhang Ke, a senior Chinese auditor, and head of leading Chineseaccounting firm ShineWing, is refusing to sign off on further bondsales by local governments in China because local government debt isUS housing market crash, according to Zhang

“We audited some local government bond issues andfound them very dangerous, so we pulled out. Most don’t havestrong debt servicing abilities. Things could become veryserious.”

It is rare for a figure as established in the Chinese financialindustry to make such stark comments. FT Blog

Germany’s economic experts consider a wealth tax to fund bailouts

Germany’s council of economic experts, known as the “FiveWise Men,” is considering a plan to raise bailout money bylarge increases in real estate taxes on property. The Europeanshave been looking for ways to fund bailout programs, and inCyprus it was done by confiscating 60% of bank accounts above100,000 euros. But many consider that unsatisfactory, becauserich people can easily transfer their money out of a countrywhen it appears that the country is headed for a bailout.However, rich people cannot transfer real estate out of acountry, and so taxing real estate seems the best way tomake the rich pay.

The idea of a wealth tax has gained support after publication lastweek of the European Central Bank (ECB) report that found that Germanyhad the lowest median net household wealth in the eurozone, whilecountries like Cyprus and Spain had much higher values. ( “11-Apr-13 World View — Is Germany the poorest country in Europe?”) The non-intuitiveresult is attributed to the fact that Germany has much lowerhome ownership than other countries, and home ownership isthe biggest contributor to household wealth. Telegraph (London)

Permanent web link to this article
Receive daily World View columns by e-mail