Sad but true. You're being taxed at more than 100%

Sep 10, 2010

In this issue:
» FDI in real estate up 70 times in 4 years
» China and Russia trying to murder the dollar
» Spending one's way out of slowdown is not a good idea
» Silver is looking more and more like real money
» ...and more!!

------------------------------ Don't Miss ------------------------------
We are delighted to offer you our latest publication - The Definitive Guide To Derivatives.
This guide will empower you with all the necessary knowledge you need to take your first steps to investing profitably in derivatives.
The best part, dear reader, is that this guide is Absolutely Free Of Any Charge. Just reconfirm your subscription to The 5 Minute WrapUp and claim your FREE copy Now!

Would you like your income to be taxed at more than 100%? This is ridiculous you would say. How can such a situation possibly exist in a properly functioning democracy? But trust us, it could well be true. We are not talking about explicit taxes. The ones that the Government collects in its various avatars such as income taxes, corporate taxes etc etc. We are instead referring to an indirect tax and the one that answers to the name of inflation.

You see, one year Government bonds are currently yielding in the range of 6%-7% whereas the inflation is running close to 10%. And please bear in mind that we are not even talking of CPI here which could be even higher. Simply put, you are lending to the Government of India at the rate of around 6% whereas your expenses are rising by 10%. Thus, if your income consisted solely of interest income from Government bonds, you are being taxed to the tune of- hold your breath- 167%. In other words, out of Rs 6 that you are earning on every Rs 100 invested, Rs 10 is being taken away by way of higher inflation.

The only way out of this mess is to take interest rates higher than 10%. But for a Government deep in debt, it would mean significantly higher interest rates on its borrowings. Thus, it is trying extremely hard to bring inflation under control and bring it closer to the 6% mark. Sadly, the longer it takes for the Government to fill up the gap, the more inflation will continue to eat into common man's savings. It is time the RBI started taking a serious look at the interest rate levels.

If the central bank does oblige, there are chances that such a step could hurt stocks as well. Hence, sticking to good quality stocks that have proven long term record and do not have a very leveraged balance sheet becomes more important than ever.

 Chart of the day
It's not just stocks that are on fire in India these days. Pricey real estate is also grabbing as much news space, if not more. The similarity though does not end here. FIIs are being seen as playing a pivotal role in taking the stock market indices to new highs. Similarly, the role of foreign money in shoring up our realty prices is only getting stronger by the day. As today's chart of the day shows, FDI in real estate in India is up a whopping 70 times in the four year period between FY06 and FY10. Looks like interest in any asset that is Indian is very much the flavour this season!

Source: The Times of India

How do you jump start a slowing economy? This is a trillion dollar question that many economists have pondered over the decades. The consensus among policy makers seems to be - increase spending. And that's the route most countries took after the global financial meltdown. An interesting article in Fortune argues otherwise. It says savings, in the short term, have precisely the same impact on GDP as spending. Simply because savings translate into investments.

After all, people don't keep their savings under the mattress. Now, GDP has four components - consumer spending, government outlays, surplus of exports over imports, and private investment. So draining investment (by choking savings) to lift consumption has a zero impact on the GDP. That's right - zero. Ironically, in the long term, savings is far more beneficial than spending. They end up building capital goods and enhance productivity. Clearly then, chanting the mantra of spending doesn't solve economic malaise. If only the solutions to life's problems were so simple.

China has large holdings in US Treasuries. But given the slump that US has been in, the dragon nation has grown increasingly edgy about the dollar in recent times. And it has not refrained from hinting that it may shift to other currencies. Now in its latest move, China, the world's second biggest energy consumer is planning to team up with Russia, the world's largest energy supplier to start trading in each other's currencies. And thereby diminish the role of the dollar in global trade. Moreover, the two economies are concerned that increased volatility in currencies is putting global recovery at risk.

So far the dollar has enjoyed the undisputed status of the world's reserve currency. This is despite its economic fundamentals not supporting the fact. One reason is that the euro is also in a precarious position with many European countries being saddled with huge debt. But China and Russia also have their own set of problems. Nevertheless, the US cannot afford to take its position for granted. Unless and until it cleans up its act, the dollar being dislodged from the top cannot be entirely discounted.

We haven't come across a stronger criticism in recent times. But noted economist Andy Xie's reference to financial institutions as 'gigantic parasites that are not needed anymore' indeed brought us closer to the truth. Xie has been a strong critic of investment banks and institutional investors. And he believes that they are doing a disservice to the economy. Charging a heavy sum for intermediating between savers and users of money, the institutions have not displayed an enviable performance.

Xie also states that retail investors have as much right to information as institutional investors do. And when that becomes a reality, financial services may decline structurally. Until then they will act as a parasite on the real economy. We believe that Xie's comments on financial markets are reality check for economies like the US that are thriving on them. Probably, India too should take some lessons before it is too late.

Gold has long been considered as 'real money' given that it is the only currency in the world that had not lost purchasing power. And now the yellow metal has company. Silver, the way it is moving now, is starting to look a lot like real money. The metal has soared in the past few months, even when global stock markets and crude oil prices have languished. The metal has climbed 9% over the past two months to reach its highest level since March 2008.

The case for a further rise in silver's prices can be made here. The amount of silver out there in the world is just 20% of the gold. And secondly, silver due to its best in class heat and electrical conductivity and versatility, could be used into a lot of applications. This makes it far more useful than just being a storehouse of value. In view of these factors, silver definitely needs to be considered seriously if one has to diversify away from fiat currencies.

The stock market rally which started last week continued this week for most of the world's markets. India (up 3.2%) was the biggest gainer for the week on strong FII inflows. US down 0.3% was the biggest loser as fears of a double dip recession made US investors risk averse.

In Europe, Germany and France were up by 1.4% each while UK was up by 1.2%. Among the Asian markets Japan (down 0.2%) closed the week in the red. However, China, Hong Kong and Singapore were up by 1.5%, 0.9% and 0.7% respectively. Brazil closed the week in the red down 0.1%

Source: Yahoo, CNN, Kitco,

Note: There will be no issue of the wrap up on Saturday, 11th September on account of Ganesh Chaturthi holiday. Readers are request to take note of the same.

 Weekend investing mantra
"Everyone tends to see the same things, read the same newspapers and get the same data feeds. The only way to arrive at a different answer from everybody else is to organize the data in different ways, or bring to the analytic process things that are not typically present." - Bill Miller

Today's Premium Edition.

Recent Articles

All Good Things Come to an End... April 8, 2020
Why your favourite e-letter won't reach you every week day.
A Safe Stock to Lockdown Now April 2, 2020
The market crashc has made strong, established brands attractive. Here's a stock to make the most of this opportunity...
One Stock that is All Charged Up for the Post Coronavirus Rebound April 1, 2020
A stock with strong moat is currently trading near 5-year lows.
Sorry Warren Buffett, I'm Following This Man Instead of You in 2020 March 30, 2020
This man warned of an impending market correction while everyone else was celebrating the renewed optimism in early 2020...

Equitymaster requests your view! Post a comment on "Sad but true. You're being taxed at more than 100%". Click here!

9 Responses to "Sad but true. You're being taxed at more than 100%"


Sep 12, 2010

gold having run most of its course, i fully agree that silver has got a very good potential upside. I have been chasing the mutual fund wizards as to why are they all launching similar gold ETFs and not one of them is coming out with silver ETFs. Why not quantum take a lead in this.


Hasit Hemani

Sep 12, 2010

This newsletter is sent through Yahoo. Please make it Yahoo compatible in breadth.


m p choudhary

Sep 11, 2010

it should be in hindi also to hindi area viwer. hindi area viwer takes 10 mints in place of 5 mints


J Thomas

Sep 11, 2010

Inflation is a tax on the fixed income group and on lenders. That includes people who lend money to a bank. Fortunately for us in India, the electorate has always punished governments that failed to keep inflation in single digits.


Heer singh

Sep 10, 2010

Seems to be realistic view and right approach in the economic scenario doing round the corner.
Heer Singh


Ashok Balakishnan

Sep 10, 2010

Yes I agree fully on the prospects of Silver. Unfortunately in India there is no Silver ETF. New Gold EFT are coming up, but not a single silver ETF. In fact recently there is Lithium ETF abroad.


sunilkuamr tejwani

Sep 10, 2010

The solution lies in "Destruction for reconstruction" The Fed & ECB have been working overtime to save those very institutions & people who have broght the malaise to the world economy. Instead of punishing them, the financial system regulators & the governments have been rewarding them with fat pay cheques & filthy bonuses, comparable with Nero fiddled when Rome was burning.
It is well known that wall street & treasury & fed are inseparable. And that is precisely what's harming the U.S. & raising fears of a double dip recession in the U.S & European countries.
The solution lies not in printing more money, but to stop doing it, & additionally tightening monetary policy to make cost of money dearer. This will make users of money careful about using the money. Keeping interest rates low to suit some vested interests isn't wise.
What I suspect, that hot money of the U.S & other european countries is finding its way to emerging asian countries stock markets & commodities to speculate & create another bubble, especially in the Indian stock market. We should be wary about our stock markets roaring while the world economy is still not out of the woods yet.


patient investor

Sep 10, 2010

Silver could well end up beig real money in some financial scenarios. However, a key difference between silver and gold is that silver has important industrial uses.

If a sudden flight toward gold and silver occurs, how then will these industrial applications suffer ?

One of two things could occurr - either the cost of those industrial applications will skyrocket along with the silver price, or silver will lose out to gold as the storhouse of "real" value.. and could actually lose value.

Comments ?



Sep 10, 2010

Savings Vs Spending.
See my appended article sent to NY Times.

Mr.Robert B Reich has outlined his views on how best to revive the economy. He recommends the post 1930 initiatives, when middle class consumption of goods and services boosted the economy. Advocating a similar action in the current situation seems a text book solution devoid of any proper analysis.
Today’s scenario is diametrically opposite to the one that prevailed in the 30s of the last century. Look out of the book and you will realize that the present malady is over consumption, beyond the realistic needs. This is proven by the fact that the western world is affected much more than the east.
In the US the per capita consumption of goods, utilities and services, have been rising in the last 5 decades. Presently it is estimated to be not less than 30% above the optimum for a good quality of life. This excess goes as waste. Water, food, clothing, power, living space / accessories, fuel, paper, power assisted entertainment and not to forget cosmetics and medicines, all of these are over consumed. None of these can be produced and provided without use of energy and human effort. Obviously these excesses amount to garbage in and garbage out. Similar is the case for the disposal of the waste products of the excess consumption.
The situation in Europe is a shade better. It could be a waste of around 20% on an average. South America, Africa and the Asia-Pacific regions are catching up very fast, where urban / semi urban waste could be around 12% on an average.
The energy and human resource employed for the production, distribution and disposal of the products related to over consumption do not contribute to economic development. It is a drain on the economy.
The other fall out of this over consumption is global warming.
Till the 50s of the last century global warming was not a concern. The emissions due to the human actions were getting neutralized by the natural forces. There was a balance which has got slowly disturbed and reached today’s precarious levels of environmental degradation. The obvious reason for this is the increasing rate of over consumption. Any further increase will lead to a catastrophe. Already this year is facing major climate changes and natural disasters across the globe, all attributed to global warming. The probable consequences are Geo-political in nature. Climate shocks will cause loss of lives, vegetation (food), infrastructure, diversion of communities and political aberrations. The world economy will be affected adversely.
The reasons for the over consumption are; consumer ego to keep up with the Jones, expanding production of goods and services beyond the optimum sustainable levels and power selling techniques to force the excess produce on the gullible customers. Easy finance and credit card facilities gave an impetus to this phenomenon. Exchange offers enticed people to buy the replacement goods much before the useful life of the ones in use, resulting in unmanageable generation of scrap. The resultant debt trap which was building up erupted like a volcano and we ended up in the recent downturn.
GDP is considered as a measure of the economy. But it now needs redefining. Real GDP is one which concerns useful wealth production, strictly contributing to the betterment of the quality of life. Hence the GDP concerning over consumption and disposal of waste needs to be considered as a negative factor and should be subtracted from the GDP to make it Net DP(NDP) or Real DP(RDP).
Once NDP becomes the measure of the economy things will fall into place. Radical policy decisions will be required, since we have to dismantle the processes producing waste (over consumption). The redundant human resource needs to be redeployed in activities like organic food production, education / research, health / disease prevention, backward area development, conservation of nature, production of green energy and international disaster management. Funding such initiatives, unlike funding debt, will gradually enhance the quality of life while stabilizing the economy. It will also promote de-urbanization, helping the urban zones to become economically viable.
These measures would gradually convert easy money to real money. It will be money making tangible wealth, equitably distributed across geographic zones and communities. Prosperity will be more widely shared leading to a stronger and sustainable economic growth, with virtually a miniscule chance of a recessionary trend. There will be hope in the future for all of us to work at a healthy phase, with sufficient time devoted to mind and body.

Equitymaster requests your view! Post a comment on "Sad but true. You're being taxed at more than 100%". Click here!