Income Inequality is a Deadly Misdirection

January 26, 2012

Income inequality has caused wealth inequality. In fact the latter is a natural result and we should not be surprised or angered by this. These are some of the reasons America has been great. Neither issue would be a problem if that income & wealth were redistributed naturally through healthy economic activity. If every billionaire found a way to live paycheck to paycheck the dollars spent would fuel corporate profits and more growth. Unfortunately for society there is a great correlation to savings rates and wealth creation. The guy who make $10mm per year can easily afford to save 50% of his take home pay whereas the guy making 50k has very little room to save anything at all. If the first guy lived more like the second, his spent dollars would find their way through the tax system via sales tax and further wage tax. Economic activity would be supported and companies would hire to fill demand.

Instead the Great Accumulation of the last 30 years has created a conundrum of sleeping capital. The top 1% of wealthy Americans control 40% of the nations wealth. They are rich beyond their capacity to spend (recycle) those dollars. They have built investment portfolios comprised predominantly of investment assets as opposed to operating assets. Many of those investments (I.e. treasuries paying 2%) are simply unproductive to economic activity.

What this country needs to do is to wake up from the dream that some utopia exists if the highest earners are “justly” taxed. This might help mitigate inequality in the future, bit it will not solve the current problem of 1% controlling 40% of wealth. While there may be a need to alter the tax code, most don’t realize that a dramatic overhaul of our current tax system to raise taxes on the new 1% would serve an ulterior if even an unintended consequence.

If you make it harder for new individuals to create substantial wealth then you will seal the doors to a socio economic class of people who will enjoy added protection of their current status. In short taxing the guy like me who aspires to be in the 1% in a manner that the current 1% has not previously been taxed helps ensure that I will not be able to join their ranks. Doing this would close the doors to the American Aristocracy, sealing the entry for would-be wannabes, and ultimately robbing America of one of its best features, the motivation for creativity, innovation, and visionary thinking.

Let’s not forget that no one has asked what we would do with all the hypothetical tax revenue if the Buffet Rule were put into effect. What would happen to the excess revenues into the Treasury’s coffers? Are we to believe that any future politician when faced with the option of implementing austerity or buying votes will not choose to buy votes? Do we need an even larger entitlement system? Do we need government to continue to step into private industry?

My suggestion is that we leave the rules of the game mostly in tact. Don’t penalize the guy who is at the cusp of massive financial success. Sure, maybe make it a little harder for the wealth gap to grow but after all, most people who have made millions or billions have more than likely created jobs. What needs to be done is we need to address the massive amounts of unproductive sleeping capital: wealth that is not getting recycled and will never get recycled until generational dilution forces a fixed pool of wealth into the hands of many generations of offspring.

Personally a major change to the estate tax would hurt me. However, the privilege of being an American is not the result of my winning the “ovarian lottery” as Warren Buffet likes to call it, but rather the opportunity to create and do anything I want to do. The American Privilege is one of being able to dream and execute your own vision regardless if your original circumstances.

An estate tax policy built upon a “you can’t take it with you” philosophy accomplishes a few things. First, it forces more of that first generation wealth to be consumed rather than saved. Second it ensures that the incentives to “win the game” don’t change so much that we alter the great American Experiment of entrepreneurship, capitalism and democracy. Third it will help mitigate the proliferation of an elite dynasty class that could permanently subvert power from the 99% by controlling the vast majority of American wealth. Fourth it helps rebalance the American opportunity with the true cost of the American economic ecosystem. Defense spending, education, public works, science and technology breakthroughs and a host of other foundations for American success need to be funded with the wealth our system currently creates AND that it HAS ALREADY created.

We also ought to rethink our current philanthropic landscape that enables tremendous amounts of capital to be separated from its highest and best use. Tax exempt endowments and foundations often support worthwhile causes and constituencies. However, left unchecked we have parked trillions of dollars with asset managers looking to earn no less than 5% but often times no more either. 5% is the required
Distribution amount for a non profit to keep their tax status, they must spend 5% of their corpus every year. They typically try to earn more to grow the asset base but their boards are generally risk averse focused first on capital preservation. In a country where wealth preservation is the driving motivation for a substantial amount of the capital base it becomes nearly impossible to reinvigorate wealth creation because risk becomes something that is controlled by the few and no longer taken by the many. This may in part explain the growing popularity of crowd sourcing and micro venture funding. Most of those who have “won the game” are now in a “risk-off” mode.

The US is at a crossroads. We must face the reality that the future can no longer mimic the past. Change is going to happen and somehow everyone will be worse off, at least for a period of time. I implore our leaders to think above the policy and above the zeitgeist so that what sits past the pain is a new utopia with new rules and new limits but with the same general sense of opportunity and patriotism that got us this far. If we continue to debate the pain, we are not ensuring that our future can be better. In order to do that we need to first debate the utopia we want to create. From there the changes and sacrifices will be clearer, more palatable to the many, and ultimately the right sacrifices to make.


NYTimes: U.S. to Force Drug Firms to Report Money Paid to Doctors

January 17, 2012

To head off medical conflicts of interest, the companies would be required to disclose what they pay doctors for research, consulting, speaking, travel and entertainment.

NYTimes: Wikipedia to Go Dark on Wednesday to Protest Bills on Web Piracy

January 17, 2012

Wikipedia is the latest Web site to plan a blackout for Wednesday to protest two Congressional bills intended to curtail copyright violations on the Internet.

Is Peace a Ticking Time Bomb?

January 11, 2012

Between Iran’s race for nukes and developing countries race for modern security technology like unmanned drones one must wonder, like the cold war, how this all ends.

Navy Using Northrop High-Altitude Drone to Monitor Persian Gulf

Jan. 11 (Bloomberg) — The U.S. Navy is using its first high-altitude drone, part of a potential $11 billion program, to monitor Iranian military activity and vessel transit in and around the Strait of Hormuz, according to service officials.

The unmanned aerial vehicle built by Northrop Grumman Corp. is providing broad coverage of the strategic waterway from 60,000 feet, Chief of Naval Operations Admiral Jonathan Greenert said yesterday in an interview.

Black-and-white still images from the drone, known as the Broad Area Maritime Surveillance UAV, are beamed to a ground station in Maryland and re-transmitted to 5th Fleet naval vessels in the region within minutes on average, Program Manager Captain Jim Hoke said.

The drone operation, a 24-hour mission every three days, complements the 12-hour sorties flown by manned P-3 aircraft, with the potential to alert the P-3 to focus on specific targets, according to the officials. The drone been used in the region since 2009.

“You get a look at the entire Hormuz swath,” Greenert said. While the BAMS drone currently provides still images, the Navy’s goal is “to get full mission video,” Greenert said in Washington. When airborne, it can survey about half the Gulf, officials said.

The drone’s use demonstrates the importance of unmanned aircraft in the Pentagon’s strategy unveiled last week. The Navy by 2019 wants to base a BAMS drone in five locations, including in the Pacific region, for worldwide coverage.

Resolution, Clarity

“It’s got persistence, it’s got nice resolution and clarity,” Greenert said. “It’s durable and operating very reliably.”

The head of Iran’s army warned the U.S. against sending an aircraft carrier back through the Strait into the Persian Gulf, the state-run Fars news agency said Jan. 3. A week earlier, Iranian Vice President Mohammad Reza Rahimi was quoted by the Islamic Republic News Agency as saying that his nation would block oil shipments through the Strait if economic sanctions are imposed to pressure Iran to abandon it nuclear program.

Iran has the ability to block the Strait “for a period of time” and the U.S. would take action to reopen it, U.S. Joint Chiefs of Staff Chairman General Martin Dempsey said in an interview broadcast January 8 on the CBS “Face the Nation” program.

70 Aircraft

The BAMS UAV is the leading edge of what Falls Church, Virginia-based Northrop Grumman anticipates will be an $11 billion program to produce 70 aircraft. Five demonstration models, such as the one in the Gulf, are on contract.

The Navy plane is part of an international task force that includes aircraft of the U.S. 5th Fleet, which is based in Bahrain.

The drone was first deployed to the Gulf in 2009 on a six- month stint to demonstrate the technology. Navy officials in 2010 extended the deployment a year at the request of the 5th Fleet in Bahrain. The Navy late last year “indefinitely” extended the drone’s Gulf region deployment, said service spokeswoman Jamie Cosgrove.

Defense Secretaries Donald Rumsfeld and Robert Gates pressed the military to make greater use of drones. The Pentagon’s current aviation plan calls for increasing by 2020 the number of high-altitude drones to more than 800 from the 220 today, most operated by the Air Force.

Oil Chokepoint

The Strait, which connects the Persian Gulf with the Gulf of Oman and the Arabian Sea, is a chokepoint for seaborne oil trade, according to the U.S. Energy Department. Almost 17 million barrels a day, or about a fifth of oil traded globally, crossed the waterway last year, the department said in a report Dec. 30.

Northrop Grumman in 2008 beat Chicago-based Boeing Co. and Lockheed Martin Corp. of Bethesda, Maryland, for a $1.8 billion contract to develop and build the first two demonstration aircraft in the Navy program. Northrop will also build three more advanced models under contract.

The Navy will seek Pentagon permission in 2013 to begin building the remaining 65 aircraft, Hoke said.

“The current plan is that Northrop Grumman would be the prime” contractor throughout the program, Hoke said in a telephone interview.

Northrop Grumman spokesman Randy Belote referred all questions to the Navy.

BAMS imagery is beamed via satellite to a ground processing station at the Naval Air Systems Command, Patuxent River Naval Station, Maryland. The black and white images are re-transmitted within minutes to the Gulf and can be accessed with computers by 5th Fleet vessels equipped with the Pentagon’s secure SIPRNET Internet, said Hoke.

“They’ve got it down to minutes from the time something is imaged and customers are ready to look at it — anybody with a SIPRNET terminal would be able to look at product,” he said. The 5th Fleet watch office is also sending out the BAMS images to Navy vessels, he said.

To contact the reporter on this story: Tony Capaccio in Washington at acapaccio

To contact the editor responsible for this story: Mark Silva at msilva34

Will Austerity Help Google and Hurt Microsoft?

January 11, 2012

Or at least this might finally force Microsoft off the desktop and into the cloud. Steve Jobs would be happy.

Google Wins Biggest Enterprise Deal as BBVA Reduces Costs

Jan. 11 (Bloomberg) — Google Inc. won its largest enterprise contract ever from Spanish bank Banco Bilbao Vizcaya Argentaria SA as the owner of the world’s most popular Web search-engine tries to win business clients from Microsoft Corp.

About 110,000 employees in more than 26 countries at Spain’s second-largest lender will start using the Google Apps offering which includes e-mail service Gmail, time-management tool Calendar, data-storage service Docs and Website-creation program Sites, the companies said.

“We are confident we can have more and more larger companies from all over the world because of the benefits we are bringing,” Sebastien Marotte, Google Enterprise vice president for Europe, said in an interview in Madrid. BBVA picked Google over other systems because of a better price, security and experience in the market, said Carmen Lopez, director for BBVA’s Innovation Observatory.

Google, grappling with slowing growth from its traditional online advertising business, is stepping up competition with Microsoft by selling business software as an alternative to Office programs. Google’s programs are accessed through the Web, just as its search engine is. Spanish companies such as BBVA, based in the northern city of Bilbao, need to cut costs and improve productivity amid a weakening economy with the highest unemployment rate in the European Union.

‘Big Name’

“This is a very important deal for Google because BBVA is a big name and it’s a first step to get other contracts from the financial sector,” said Marco Guenther, a Hamburg-based analyst at Hamburger Sparkasse. “As advertising faces more competition, Enterprise is becoming more and more important as it widens prospects for the company.”

Customers at average often save about 50 to 70 percent compared to their previous software solutions as Mountain View, California-based Google only charges for the specific programs used by a client, Marotte said.

BBVA rose as much as 1 percent in Madrid trading and was up 0.8 percent at 6.34 euros as of 11:40 a.m. Google gained 0.5 percent to the equivalent of $624.84 in Frankfurt after rising 0.1 percent in New York yesterday.

Google said the agreement is its biggest enterprise contract win so far based on the number of users. A BBVA spokesman said the contract initially runs for one year and will be automatically renewed until one of the partners wants to end it. Both companies declined to give a value for the deal.

Daimler Mapping Deal

Google Enterprise, which was created seven years ago to deliver Google products to the enterprise world, has now 4 million companies as customers and 5,000 new clients adopt the technology every day, according to Marotte.

Carmaker Daimler AG said today it signed a strategic partnership with Google to work on automotive applications. The Stuttgart, Germany-based company will get access to Google’s technology to offer drivers mapping and cloud-computing services.

Other existing Google Enterprise clients include carmaker Jaguar Land Rover, the University of Washington and the City of Los Angeles.

“Our main goal is to promote innovation and improve our employees’ efficiency and productivity,” Lopez said. “We live in a very competitive and fast-changing environment and we want to operate in a faster and more collaborative way.”

Spanish Prime Minister Mariano Rajoy announced last month 14.9 billion euros ($19 billion) of spending cuts and tax increases as public finances were in worse shape than the previous government and the EU had expected.

BBVA’s operating costs rose 9.9 percent in the first nine months of 2011 from the same period a year earlier. Technology is important to tap growth opportunities, BBVA Chief Financial Officer Manuel Gonzalez Cid said today in Madrid, according to a presentation on the company’s website.

To contact the reporter on this story: Manuel Baigorri in Madrid at mbaigorri

To contact the editor responsible for this story: Kenneth Wong at kwong11

Twinkles Outlast the Baker

January 11, 2012

Ah the pitfalls of buying what you know. You might miss the fact that the product you love is not as popular as it used to be. No worries, we now know that Twinkies will last years past the end of their parent company baker. One day someone will open a time capsule, take a bite and start the business all over again.

Twinkie-Maker Hostess Brands Files for Bankruptcy Protection

Jan. 11 (Bloomberg) — Hostess Brands Inc., the maker of Twinkies snack cakes and Wonder bread, fell back into bankruptcy about three years after completing an earlier restructuring.

The Irving, Texas-based baker ended an earlier trip through bankruptcy court in February 2009 when buyout firm Ripplewood Holdings LLC and lenders took control of Interstate Bakeries Corp., which was renamed Hostess Brands.

IBC Sales Corp., also known as Interstate Bakeries Corp., filed its Chapter 11 petition in U.S. Bankruptcy Court in Manhattan, listing assets of as much as $1 billion and debt of more than $1 billion.

Interstate Bakeries was created through the merger of Schulze Baking Co. and Western Bakeries Ltd. in 1937, and grew by acquiring other baking companies, according to court documents filed in the first bankruptcy case. It acquired its biggest rival, Continental Baking Co., in 1995 for $330 million, according to the company’s website.

The company’s baked goods include Hostess CupCakes, Ding Dongs, Drake’s Devil Dogs, and Nature’s Pride breads. It employs about 20,000 people at bakeries, distribution centers and outlet stores across the country, according to the website.

In September 2004, burdened with declining sales combined with high labor and ingredient costs, Interstate filed for bankruptcy in Kansas City, Missouri. During the case, it closed facilities, cut delivery routes and eliminated jobs.

The company exited bankruptcy in February 2009 with a restructuring plan backed by New York-based Ripplewood and lenders including Silver Point Capital LP, according to court documents. Union workers also agreed to concessions to cut labor costs.

Ripplewood invested $130 million for stock and convertible notes. Lenders also received shares in the company, according to a description of the bankruptcy plan.

To contact the reporters on this story: David McLaughlin in New York at dmclaughlin9 Steven Church Wilmington, Delaware, at schurch .

To contact the editor responsible for this story: John Pickering at jpickering

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(BN) Banks in Europe Resist Draghi Bid to Avert Credit Crunch by Hoarding Cash

January 11, 2012

Does this come as a surprise to anyone? Banks are trying to survive, meet Basel III rules, and avoid the negative feedback loop of selling devalued equity. It’s similar to why happened here and lending in the US while finally happening is a far cry from its old pace at all levels. Given how levered European banks have been, relative to US banks prior to 2008 the pain from this deleveraging and the impact to the European economy is going to be worse. The process will be riddled by bank failures and surprise defaults of issuers who are probably currently sounding silent alarm bells. US banks ought to become beneficiaries with the ability to extend credit and other services at better rates and wider spreads.

Europe Banks Hoarding Cash Resist Draghi Bid to Avoid Crunch

Jan. 11 (Bloomberg) — Banks are hoarding the European Central Bank’s record 489 billion-euro ($625 billion) injection into the banking system, thwarting attempts by policy makers to avert a credit crunch in the region.

Almost all of the money loaned to 523 euro-area lenders last month wound up back on deposit at the Frankfurt-based central bank instead of pouring into the financial system, according to estimates by Barclays Capital based on ECB data. Banks will use most of the money from the three-year loans to meet their refinancing needs for this year and next, analysts at Morgan Stanley and Royal Bank of Scotland Group Plc estimate.

“It’s illusory to think that the measure will translate into credit generation,” Philippe Waechter, chief economist at Natixis Asset Management in Paris, said in an interview. “It will assuage some of the anxiety banks have regarding their liquidity needs. But they’ve engaged into a massive overhaul of their strategy and shrinkage of their balance sheets, which is, coupled with the deteriorating economy, not compatible with increasing credit.”

Governments are urging European banks to keep lending to companies and individuals while requiring them to raise an additional 114.7 billion euros of core capital by June to weather a deepening sovereign-debt crisis. Instead of raising equity, most lenders across Europe have vowed to meet capital rules by trimming at least 950 billion euros from their balance sheets over the next two years, either by selling assets or not renewing credit lines, according to data compiled by Bloomberg.

ECB Deposits

That has stirred concern among policy makers that banks will cut lending and throttle growth in the euro region.

Banks have been parking almost all extra liquidity from the ECB loans back at the central bank. Barclays Capital estimates firms used 296 billion euros of the Dec. 21 three-year loans to replace maturing shorter-term ECB borrowings. That left only 193 billion euros of additional money for the financial system. Overnight deposits with the ECB have jumped by about 223 billion euros since the loans to a record 486 billion euros, suggesting the central bank funds haven’t so far reached customers.

Banks account for about 80 percent of lending to the euro area, making them “crucial to the supply of credit,” according to recently installed ECB President Mario Draghi. By contrast, U.S. companies rely more on capital markets for financing, selling bonds to investors.

Refinancing Needs

The ECB lending, and a follow-up loan offering on Feb. 28, won’t ease the pressure on banks to shrink, say analysts including Huw van Steenis at Morgan Stanley in London.

“The ECB loans will largely be used to pre-fund 2012 and some of 2013’s bank refinancing needs, but it will not stimulate lending,” Van Steenis said. They will “just stop it falling off precipitously.”

Euro-area banks have more than 600 billion euros of debt maturing this year, the Bank of England said in its financial stability report last month. The first ECB loan offering should help cover about two-thirds of that amount, Goldman Sachs Group Inc. analysts say. Morgan Stanley’s Van Steenis estimates banks may reduce assets by as much as 2.5 trillion euros in two years, a process known as deleveraging.

The volume of loans to households and companies in the 17- nation euro area shrank in November for the second consecutive month, the ECB said on Dec. 29. Loans were still up 1.7 percent over the year-earlier period, slowing from a 2.7 percent increase in the 12 months through October.

Merkel, Sarkozy

When granted, loans are getting costlier for borrowers. Since July, interest margins have increased, with investment- grade borrowers in Europe paying an average of 91.6 basis points more than benchmark rates, up from 84.4 basis points during the first half of 2011, according to data compiled by Bloomberg. A basis point is one-hundredth of a percentage point.

“We must avoid a credit crunch for our economies,” European Union President Herman Van Rompuy said on Jan. 9. “The recent measures by the European Central Bank on a long-term lending facility for the banks are welcome in this context.”

The European Banking Authority, which oversees the region’s regulators, asked banks on Dec. 8 to retain earnings, curb bonuses and raise equity to boost core capital before resorting to cuts in lending.

The EBA followed both French President Nicolas Sarkozy and German Chancellor Angela Merkel in urging banks to keep lending. Sarkozy said on Oct. 27 that he had asked firms to shift “almost all” of their dividends into strengthening balance sheets and to make bonus practices “normal.” Merkel said on Oct. 9 she was “determined to do whatever necessary to recapitalize the banks to ensure credit to the economy.”

‘No Credit Crunch’

Bankers have said they haven’t restricted lending and that demand for credit is slowing as growth slows.

“All banks I talk to keep lending to small- and medium- size enterprises and households,” Christian Clausen, president of the European Banking Federation, an industry association, said on Dec. 9. “That part of the bank will keep rolling.”

There is “no credit crunch,” Frederic Oudea, chief executive officer of Societe Generale SA, France’s second- biggest lender, and chairman of the French Banking Federation, said last month. “The reality is that credit is available,” he said in an interview on BFM radio on Dec. 16.

Even so, companies across Europe say credit is tightening.

‘Double Punch’

In France, where credit to the private sector increased by 3.7 percent in November compared with a year earlier, the majority of the country’s company treasurers said they encountered “very strong tensions” in negotiating bank loans, with more than 50 percent of respondents saying the process led to more expensive terms, according to a December survey by the French Association of Corporate Treasurers.

The majority of those polled said obtaining bank financing was “as difficult as at the end of 2008,” after Lehman Brothers Holdings Inc. collapsed.

U.K. banks expect to toughen their criteria on loans to companies and households in the first quarter because of strains in the wholesale funding market, the Bank of England said Jan. 5in its fourth-quarter Credit Conditions Survey.

Belgian credit growth slowed to 3.1 percent in the 12 months to the end of October, from 3.6 percent at the end of September, the country’s central bank said on Dec. 12.

In Italy, some companies with annual sales of 30 million euros to 40 million euros are charged as much as 10 percent interest on loans, Emma Marcegaglia, chief of the country’s Confindustria lobby group, said in an interview on Dec. 20.

Draghi’s Priority

With the ECB’s injection, “deleveraging may happen in a more orderly way, but it doesn’t mean it will be painless,” said Alberto Gallo, head of European credit strategy at RBS. Banks are faced with high long-term financing costs, a deteriorating economy and difficulties raising capital, he said. “It’s what I call the double punch: A combination of negative growth and banks’ deleveraging will affect lending activity.”

Even the ECB’s Draghi, who has made it one of his priorities is to keep credit flowing into the economy, said the central bank’s loan offerings may fail to achieve that goal.

“Monetary policy cannot do everything, but we’re trying to do our best to avoid a credit crunch that might come from a lack of funding,” Draghi said Dec. 19 at the European Parliament in Brussels. “We have to be extremely careful here, because there may be other reasons that create a credit crunch.”

Draghi may be wary of the U.S. experience with multiple rounds of bond purchases. That so-called quantitative easing hasn’t stimulated lending, Natixis’s Waechter said.

‘Kick the Can’

“Lending really picked up when the economy got better,” he said.

The ECB cut its forecast for euro-area economic growth in 2012 to 0.3 percent on Dec. 8 from a September prediction of 1.3 percent. The central bank expects the economy to expand 1.3 percent next year.

In the U.S., almost all categories of bank lending fell in 2009 and 2010 and didn’t start improving until last year, when the Federal Reserve stopped its second wave of quantitative easing, according to data by the U.S. institution. Banks increased their holdings of Treasury and agency securities in 2009 and 2010, showing they were using the Fed’s cheap money to own safe government paper.

Because quantitative easing tends to improve capital markets first, the healing will be even slower in Europe given its reliance on banks for borrowing, according to Gallo.

“The ECB loans are a kick-the-can measure that doesn’t fix the banks’ structural problems,” Gallo said. “Deleveraging needs to happen.”

To contact the reporters on this story: Anne-Sylvaine Chassany in London at achassany Gabi Thesing in London at gthesing .

To contact the editor responsible for this story: Edward Evans at eevans3

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