Amazon vs. Trump and South Carolina

Amazon and the issue of sales taxes has been in the news lately.

First, there is a complaint against Amazon filed by the state of South Carolina.  The state government is claiming that Amazon owes the state a large tax bill for uncollected sales taxes.  Amazon is vowing to fight the allegations.

Second, Trump chimed in with one of his tweets.  While Trump is pilloried by the media for supposedly supporting white nationalists, colluding with Russia, etc., the establishment seems to stay rather quiet when Trump is on the side of big government.

Trump said in a tweet: “Amazon is doing great damage to tax paying retailers.  Towns, cities and states throughout the U.S. are being hurt – many jobs being lost!”

We are back to Trump’s protectionism and his overall ignorance of economics.  Trump is making the claim that since not all Amazon products are taxed, it is hurting physical retailers.  He is saying that this is costing jobs.

This is a stupid argument, as it is simply an argument for higher prices.  He could say the same thing about any company that comes in with lower prices, regardless of whether it is because of taxes.  If someone shows up to sell quality new cars for $10,000, then this will hurt sales for the big car companies.  It will mean that jobs will be cut from those car companies.

But Trump has probably never heard of Frederic Bastiat or even Henry Hazlitt.  He does not understand basic economics and that you have to look at the other consequences that are often unseen.

If Americans could all of a sudden pay $10,000 for the same new car that previously cost $30,000, then this would be a huge benefit to the consumer.  Sure, it would cost jobs at the car dealerships.  But now more Americans would have extra disposable money to invest or save or spend elsewhere.  This means it would lead to job creation in other areas where there is consumer demand.  This is called advancement.  This is how we increase our living standards.

The issue with Amazon is really a state issue and should be none of the federal government’s business.  It is true that some retailers sell on Amazon and do not always collect the appropriate sales taxes (according to the state governments).  Of course, this is partially the fault of state governments that make it so difficult to do so.

It is very complicated right now with Amazon sales.  There are many private retailers that sell on Amazon, and they use Amazon to fulfill their orders.  This is called “fulfilled by Amazon”, or FBA.  While the seller can include an add-on sales tax on their products, it is up to each individual seller to remit the sales tax back to each state.

If you live in Texas and you sell a product in Texas, then you are supposed to collect sales tax and remit it back to the Texas state government.  The problem arises when you sell in other states.  For example, if you have a presence in another state, such as an employee, then you are said to have “nexus”.  If you have an employee in California, or if you just go for a weekend to California for a trade show, then you are doing business in California and you are supposed to pay sales taxes on sales to California.

It gets even more complicated with Amazon.  If you live in Texas but you don’t travel anywhere outside of the state or employ anyone outside of the state, you may still have nexus in California and other states.  Amazon has warehouses throughout the country now in order to make good on promises of quick shipping to Amazon Prime members.  Therefore, if your product goes from Texas to an Amazon fulfillment center in California, then you would supposedly owe taxes to the state of California.

It is also a problem that Amazon can move its inventory around.  If you live in Texas and ship your products to a warehouse in Florida, Amazon may relocate your products to other states to spread them around, especially for large inventories.  Therefore, it is difficult for sellers to even know where their products have been and where sales taxes are owed.

It is a total mess.  It is especially messy for sellers.  While I am an advocate of federalism and states’ rights over centralization, I acknowledge that federal legislation could actually help Amazon sellers.  It would make it far simpler in terms of collecting sales taxes.

Many Amazon sellers take their chances in owing taxes, even though it is somewhat risky.  Imagine having to get a tax ID in 20 different states.  It can take several hours to fill out the appropriate forms for each state.  On top of that, some states will charge you fees to register, just so you can have the privilege of remitting more money back to the state government.

Maybe federal legislation will come out of this whole thing, but we know how politics in Washington DC goes.  They will find a way to mess it up.

For consumers, it is becoming harder and harder to buy products with no sales taxes on Amazon.  Much of that benefit is gone.  The big mess right now is for sellers.  If Amazon merchants did not have to go through so much hassle with sales taxes (for those that bother), there is an argument to be made that prices might be lower, as lower costs of doing business could spur more competition.

Amazon selling can be quite lucrative for those who know what they are doing.  As a side note, if you want to learn more about selling on Amazon, there is a great podcast hosted by Scott Voelker.  It is called The Amazing Seller podcast.

In conclusion, Trump is wrong to attack Amazon.  It is actually none of his business, and he is getting the economics wrong.  If you want to place blame here, it should go squarely on the state governments that have made a complete mess of the tax code.  If the state governments made it easy, then Amazon would make it easy.

If only Amazon could limit its warehouses just to Alaska, Delaware, Montana, New Hampshire, and Oregon.  These states have no sales taxes.

Walking a Tightrope Between Inflation and Recession

The proponents of Keynesianism believe there is a tradeoff between inflation and unemployment.  If the economy is hot and prices are rising faster than they like, then they might have to sacrifice a little employment to cool things off.  On the other hand, if prices are depressed and unemployment is high, then they advocate for a policy of more government spending and more monetary inflation.

The 1970s basically proved Keynesianism as wrong, but that doesn’t stop them from still advocating it.  During the 1970s, there were periods of high unemployment, high interest rates, high consumer price inflation, and even recession at the same time.

Of course, the reason that Keynesians advocate Keynesianism isn’t because they have read John Maynard Keynes from generations ago.  It isn’t because they have any principles guiding them in economics or otherwise.  Keynesian economics is used as an excuse to justify the policies they want of more government spending, central bank inflation, and economic centralization.

I have said for a long time that if Keynes had never existed, then the statists would have found somebody else to latch on to in order to justify their reckless policies.  The statists can always find some shill for the government that can pose as an expert.

Aside from price inflation and unemployment, most Keynesians will also say there is a tradeoff between recession and price inflation.  After all, recessionary conditions are typically linked with higher unemployment.

To a certain extent, there can be a tradeoff between recession and inflationary policies in the short run.  Inflationary policies can cover up weak economic growth for a while.  The problem is that it is the inflationary policies that ultimately cause the recession.

Easy money and artificially low interest rates lead to a misallocation of resources.  There is typically bubble activity in certain sectors.  When the misallocations are ultimately revealed, there is a bust.  This is the recession.  Then the Fed (or any other central bank) tries to cover it up with more monetary inflation, and the whole cycle starts over again.

In the United States, the early 1980s was probably the last time that malinvestments were allowed to clear.  The Fed let rates rise and stopped inflating, despite a recession (or some would say recessions).  While the Fed did eventually start inflating again, much of the growth of the 1980s was actually real prosperity and not just artificial prosperity created by money creation.

While there can be a tradeoff between recession and inflation in the short run, the tradeoff eventually runs out of room. This is what happened in the 1970s.  Despite a weak economy, the Fed still had to slam on the monetary brakes in order to save the dollar.  If the Fed had just kept on increasing its pace of monetary inflation, there would have eventually been runaway inflation or hyperinflation.

In other words, the Fed can’t maintain its current policies forever without something major happening.  Either we will eventually get higher consumer price inflation or we will get a recession.  Of course, it is also possible to get both eventually.

If the Fed had kept a stable money policy after the fall of 2008, then we would not face such a choice.  But with the Fed approximately quintupling its monetary base from 2008 to 2014, there have to be malinvestments.

We have not seen significant consumer price inflation.  It has stayed around 2% per year, or even a little less at times.  But we can’t say the same for asset price inflation.  Housing is booming in many areas, and U.S. stock markets are hitting all-time nominal highs.  This is actually similar to the late 1920s, just prior to the start of the Great Depression.  Economists largely missed the mark on that one because consumer prices were tame.  But asset prices were in a bubble.

If I had to pick between higher price inflation or recession at this point, I am definitely more on the recession side.  The Fed has had a tight monetary policy since QE3 ended in October 2014.  Unless banks start lending out a lot more money, which isn’t likely given that the Fed is paying higher interest rates on reserves, then we are more likely to see price inflation slow down if anything.  The previous misallocations will be exposed.

If we are going to get significantly higher price inflation, I think it will come after the next major recession.  The Fed will start digitally printing money again, and then we may see prices (aside from just asset prices) take off.  There is no guarantee, but I see this scenario as being the most likely.

Stocks may be able to run higher still, but it isn’t going to go on forever.  In all likelihood, there is going to be some kind of a recession before the next presidential election in 3 years.  It could come quite a bit sooner than that.

The Fed has been enjoying the last several years, as it doesn’t get much blame.  The economy is humming along, even if slowly.  Meanwhile, consumer price inflation, at least as reported by the government, is relatively tame.

The Fed has to do a balancing act between inflation and recession.  The problem is, it is running out of tightrope.  The rope eventually runs out and we inevitably get one or the other.  Or in the case of the 1970s, we can even get both at the same time.

Should You Dollar-Cost Average Into the Permanent Portfolio?

One common finance/ investment question arises when somebody comes into some new-found money.  The question(s) goes something like this:

I just inherited $20,000.  Should I invest all of it right away or wait until a market correction?  Or should I use dollar-cost averaging?

Of course, in most cases, the person asking the question is referring to investing the money in stocks.  If someone had invested a lump sum of money in U.S. stocks in March 2009, they would have done very well up until now.  But past performance is not an indicator of future returns.

I do not advocate investing in stocks except for speculation or as part of a permanent portfolio.  I do not buy the common theme that stocks always go up in the long run.  Tell that to the Japanese person who bought into the Nikkei at its peak in 1989.  They are down 50% nearly 3 decades later.  Just how long are they supposed to hold?  Just how long is the “long run”?

And while people will say that won’t happen in the United States, I am not sure how they can say that, especially given the massive levels of debt and regulation.  The only reason you might be able to make this claim is because the Fed would be more likely to engage in massive monetary inflation.

Still, Japan is not a third-world  country.  We are not talking about Ethiopia or Bangladesh here.  In the 1980s, there were many pundits in the U.S. worrying about Japan taking over the United States, economically speaking.

Stocks have paid well in the U.S. since the 1980s with a buy and hold strategy.  Still, this does not guarantee anything in the future.  And also consider that there have been major booms and busts within the last 3 decades, so it hasn’t been a smooth ride.

I recommend a permanent portfolio for more stability and safety.  The returns have been relatively lousy in the 2010s as compared to U.S. stocks.  But this is a reflection of low interest rates and relatively low consumer price inflation.  You give up some of the big returns in exchange for stability.  When stocks take a hit, as they did in the fall of 2008, the permanent portfolio is a good place to be, even if it declines.  The losses will typically be far less.

To get back to the original question, anyone that comes into $20,000, or any amount of money right now, should stay away from stocks, unless it is in terms of the permanent portfolio.  But that leads to another question.  Should you use dollar-cost averaging for the permanent portfolio?

If there were ever a time to use this strategy, it would be now.  Stocks are hitting new all-time nominal highs on an almost regular basis.  Interest rates are still extremely low by historical standards, which means almost no returns from the cash portion and not that much potential for the bonds.  Gold could still go up, but it is not likely to be significant until we see a return of higher consumer price inflation.

With that said, I wouldn’t hesitate too much to dump a lump sum of money into the permanent portfolio.  By its nature, you are not likely to take a big loss, even if the financial markets change quickly.  The permanent portfolio is designed to withstand virtually any economic environment short of an end-of-the-world scenario.  The permanent portfolio is far from perfect, but I haven’t really found anything that works better at this point.

The one environment that hurts the portfolio is a recession.  Even in this scenario, the long-term bonds are likely to go up in value as interest rates fall further.  This probably won’t offset the losses from stocks (and perhaps gold), but it is still far better than being heavy in stocks.

As Harry Browne wrote in his book, recessions don’t last that long.  It will either turn into a depression (good for cash and bonds), or it will turn into inflation (good for gold), or it will turn back into some form of prosperity (good for stocks).

If you have a good chunk of money ready to invest right now, a good strategy might be to invest the majority of it in the permanent portfolio, and to keep a small percentage (in addition to what is in the portfolio) in cash or a cash equivalent.

For example, if you have $20,000, you could put $16,000 into a permanent portfolio setup and leave $4,000 in a savings account.  You would actually have $8,000 in cash when you include the $4,000 (25%) that is in the permanent portfolio.

This way, if there is a downturn, you can put the additional $4,000 into the permanent portfolio.  I am not predicting an imminent major pullback, but it wouldn’t surprise me.  So if you are concerned about an upcoming recession, this is a strategy that you can use if you are hesitant to dump everything into the permanent portfolio.

It is true what they say: In a recession, cash is king.  Perhaps U.S. government bonds will be king too, but you get the point.

It is tempting to invest in stocks right now as you see your friends looking at their 401k balances grow.  It can be frustrating in a boom time when you are not fully participating in the boom.  But when the bust comes, you will be thankful, and this is the important thing to remember.

The boom may last a while longer.  Nobody really knows.  But when the fall in stocks finally happens, you will be able to sleep at night with your permanent portfolio.

Of course, this is just the investment perspective.  The most important thing is to keep your job or whatever form of income you have.  Your income is your number one priority in terms of finances.  Protecting the assets you already have is secondary.

Trump Endorses Congress Policy of War and Weaker Dollar

Donald Trump has signed into law legislation to increase sanctions on Iran, North Korea, and Russia.  It was passed overwhelmingly by the U.S. Congress.  As Ron Paul likes to point out, sanctions are virtually an act of war.

This legislation is especially egregious.  Iran has abided by its agreement on nuclear weapons, not that it should have been bound by such a thing in the first place.  This is just more bullying of a country that is no threat to Americans.  If anything, Iran wants ISIS destroyed, but it seems the U.S. government would prefer to fund and support ISIS and overthrow Assad in Syria.

The sanctions against Russia are also horrible, as relations are already bad.  This is due to an alliance between the war hawk Republicans (neoconservatives) and the left in opposing Trump.  It is helped along by the leftist media, who would prefer to risk war with a nuclear power than see Trump succeed at something – in this case, peace with Russia.

The crazy thing about this legislation is that Trump has spoken against it, while at the same time actually signing it.  He says he did it for “national unity”.  But this isn’t national unity.  It is political unity in Washington DC.  It goes against everything that he campaigned for prior to his election as president.  The reason Trump was elected was to stop political unity and to bring us some political disunity.

Trump also correctly pointed out the flaw of hampering the executive branch.  Under this new legislation, the president cannot get rid of the sanctions without congressional approval.  In other words, he has no room to do what he is supposedly good at: negotiate.

If we are lucky enough to avoid another major war, this new round of sanctions is only going to contribute to the demise of the U.S. dollar as the world’s reserve currency.  Americans will no longer be subsidized by foreigners, but I think it will be good for Americans in the long run.  It will put a more severe limit on the federal deficits.

Russia now has to avoid dealing with the dollar.  It does not have to use the dollar as a middleman.  Russian officials continue to accumulate gold reserves, and there is also speculation that they are looking more into cryptocurrencies.

With this new round of sanctions, even Western Europe is not happy.  The U.S. government is managing to make virtually the whole world mad in some way or another.  The major powers are realizing that they do not need to use the dollar as a middleman for trade.  This doesn’t mean they will stop trading with the United States.  But if Russia and China are trading (whether it is between governments or businesses), there is little reason to use the dollar any longer.

For this reason, I believe the U.S. dollar will lose its status as the world’s reserve currency.  It will not be replaced by anything, or at least not another currency.  The only realistic replacement is gold.  These new sanctions are not good for world peace or for world trade, but the price of gold in terms of U.S. dollars will likely go higher as a result.