Space Colony Libra

This video is from the same people that brought you the Chickenomics video I showed last week, but don't hold that against it! This is much better. 

I remember reading a lot about space colonies not long after this video was made. The science is completely sound, but alas we humans do not do well in low gravity, in fact it destroys the bones. Solar radiation is a big hazard. But that is not the point of this dystopian short video. 

Is the future depicted in the video in our future? To a degree it already is. 

LIFO vs. FIFO

Join me deep in the weeds of accounting! The last time I went this deep in the weeds the beloved editor of the Prophecy Podcast blog commented that the post was mind-numblingly boring. This is even more deep into things as it discusses a rather obscure part of accounting. Yes, accounting. Ugh.

I had a discussion about this over coffee at the Cambridge House Conference I attended. The two other coffee drinkers were talking about the conference and I mentioned how inflation affected the profit and loss of a business. Since they are expecting inflation, what I said was shocking to them. 

LIFO and FIFO are two different accounting methods used for allocating inventory to the profit and loss for the business. (Sorry to have to slog through this.) 

Here is how Wikipedia describes the two accounting methods. 

FIFO and LIFO Methods are accounting techniques used in managing inventory and financial matters involving the amount of money a company has tied up within inventory of produced goods, raw materials, parts, components, or feed stocks. These methods are used to manage assumptions of cost flows related to inventory, stock repurchases (if purchased at different prices), and various other accounting purposes.

FIFO stands for first-in, first-out, meaning that the oldest inventory items are recorded as sold first but do not necessarily mean that the exact oldest physical object has been tracked and sold.

LIFO stands for last-in, first-out, meaning that the most recently produced items are recorded as sold first. Since the 1970s, some U.S. companies shifted towards the use of LIFO, which reduces their income taxes in times of inflation, but with International Financial Reporting Standards banning the use of LIFO, more companies have gone back to FIFO. LIFO is only used in the U.S.

I am expecting moderate inflation in the 10 to 20% range for a couple of years. Others are expecting deflation; others are expecting hyperinflation. But for discussion purposes let’s talk about how a 33% inflation rate would affect a business. 

Let’s say that there is a retail business with an inventory of $750,000 in widgets. This is a C Corp that pays 35% in taxes. (Yes, I am aware that the rate varies.) The corporation pays any wages that are due to shareholders. The corporation is able to keep the same number of widgets as before with great effort through the year, but now has $1,000,000 in inventory. But in terms of cash flow, the business is in the same situation it was before. What is the taxable income of the Corporation? If you said zero you would be right, if the corporation is using the LIFO accounting method. But if the FIFO method is being used, then the taxable income is $250,000. 

At 35% this is a tax of is $87,500. Where is this money supposed to come from? The business has barely managed to break even with the heavy inflation rate of 33%. This is why many corporations now use the LIFO method. 

So what is the big deal? Obama, in his never-ending search for new taxes, is proposing to abolish LIFO accounting. While this is an old proposal, it will continue to be offered until it is passed. Under normal circumstances this will just be a modest increase in taxes for most businesses. But for those with inventory that has a volatile price surge history, like say the lumber that I sell, it can be a major tax increase in a year. To be fair it can also result in a tax decrease if prices drop. A smaller inflation rate would be survivable for a business, but for many businesses it would be the proverbial straw that broke the camel's back. With hyperinflation and FIFO accounting every retail business in the US would close. 

Coming soon to a business near you. I can see a business surviving with high inflation and forced to FIFO accounting and the resultant tax for a year, maybe two, but then businesses will start closing. A tax on the phantom income due to inflation has the potential to close retail stores—remember that Safeway is a retail store. 

This is what was shocking to my coffee companions. The effect of this stealth tax could be extremely destructive and it is not on anyone's radar right now. It should be.

CORPORATE TAX RATES

TAXABLE INCOME	RATE
Up to $50,000	15%
$50,001 – $75,000	25%
$75,001 – $100,000	34%
$100,001 – $335,000	39%
$335,001 – $10 million	34%
Over $10 million – $15 million	35%
Over $15 million – $18,333,333	38%
Over $18,333,333	35%
ALTERNATIVE MINIMUM TAX*	20%

* The corporate AMT exemption of $40,000 is phased out with alternative minimum taxable income between $150,000 and $310,000. 

This chart is the technicalities of Sub C Corporation Taxes.   

Risk, Risk and More Risk

I made some suggestions recently on ways to preinvest. There are in fact no good investments right now. Thus I concentrated on reducing debt and having cash reserves in several places and in several forms.  Having a large pantry might be the best "investment" you can make. Not because the zombies will attack, but because inflation or unemployment may be coming. I would not even think zombies attacking as impossible. 

The following video shows why investment is so difficult. There is little to invest in as the risk gets higher and higher if you chase high returns. The presenter suggests gold. Maybe. But gold was confiscated in 1933, and this could happen again. Most of us are better off with our money in a major bank, ... nuts that won't work either. 

In any event this video sums up why I am so nervous about the future. 

Magic Monetary Theory

I hope you figured out my post on April 1st was an April Fools Joke. I do not think that printing money is a solution. It might end up being a part of the solution, but if that is the only solution offered to the crisis I see coming in 3 to 7 years, we are doomed. 

Money is whatever I say it is! But there is a truth to modern monetary theory that "hard money" types like me can be blind to. Fiat money, as long as it is not excessively created, can work. This was the position of Milton Freedman and the Chicago School. He advocated a set increase in the money supply every year of 3%. The idea is to set the increase in money to the traditional rate of productivity increase. Sounds reasonable at first. But there are several downsides. First it was the government capturing the entire productivity of the nation every year forever as the increase in money would be a tax. But will the Central Bank limit the increase in money to a set number? No American Central Banker has done this for 30 years. 

Another problem is one of measurement. It is similar to the question I asked recently, "What is Money?" What figure do you use for your base? Here is Mesh Shedlock's suggestion as to what "money" might be. 

• Base Money Supply: $2.9 Trillion
• M1: 2.4 Trillion
• M2: 10.4 Trillion
• Total Credit Market Debt Owed: $56.3 trillion

As you see the base has a large amount of possible variations. If you or I make a mistake, we can live with it. But a national whoopsie is not a good thing. Just ask Zimbabwe. 

We may soon be able to ask Japan if Modern Monetary Theory, or as I like to call it Magical Monetary Theory, works. As John Mauldin said, "Japan is a windshield in search of a bug." I predict that it will work as long as Japan does not cross the tipping point and cause inflation. Such a tipping point does exist, but we lack the ability to calculate it. Thus the risk of a whoopsie is very very high. 

What does Modern Monetary Theory say about Japan? 

What does Kyle Bass say? (Note that I have used Bass in a video before. This is not a great video because you cannot see his charts, but it is still illustrative of his point. I am troubled by his suggestion to buy semi-junk bonds.) 

Watch World News... er, Watch Japan. A crisis in Japan will probably increase the value of the dollar. It will serve as a warning to those who are looking.  

Chickenomics

This may be the strangest video I have ever posted. It attempts to explain free market economics, but I kept laughing at the wrong parts.  I couldn't help it...it stars the famous San Diego Chicken and is narrated by cowboy singer/movie star Rex Allen. This looks and sounds like something we would have watched in Jr. High. Enjoy!