Do Industrialized Economies Support Growth?
The book "For Good and Evil: The Impact of Taxes on the Course of Civilization" by Charles Adams is a must read for those interested in learning how taxation has both created and destroyed civilizations. Over the course of history, governments have tried every tax strategy and tax rate imaginable from flat income taxes to taxes based on how many windows a building has. Students of history will find a clear pattern. Low and fair tax rates have fueled the creation of massive expansive empires, and repressive unfair tax rates have destroyed countries to the point at which they are no longer recognizable.
During the Pyramid age, Egyptian peasants paid 20 percent of their crops to the Pharaoh. Historically, medieval serfs and farmers revolted when tax rates exceeded 30 percent. European empires such as France and the Netherlands collected tax rates between 15 and 20 percent during the 1600's and prospered. However when those rates increased, it led to French Revolution in the late 1700's. The Roman Empire began as a free trade state, in which revenue was collected from 1 to 3 percent in property or sales taxes. However, in the last years of its decline, tax rates and inflation were so repressive that many peasants welcomed barbarians.
Although capital is often taxed at capital gains rates, global economic activity is largely defined by income derived from labor. In this spirit, it can be argued that capital will tend to flow into countries with low income tax rates and enough perceived economic and political freedom to conduct business transactions in the pursuit of happiness.
One reason why economies are able to grow is because workers are able to specialize in a particular skill and trade that skill for other services or products. This concept, known as division of labor, enables increased productivity because producers can focus on what will create the most economic value. For example suppose apples and oranges cost the same amount, but farmers are specialized in growing one or the other and can produce twice as much product in their field. The apple farmer can produce two apples and trade one with the orange farmer who produced two oranges so both would end up with more value than they could individually produce. However, if tax rates exceed 30 percent then this division of labor breaks down because the apple farmer wouldn't produce enough apples to pay the tax and trade for an orange. If tax rates exceed 50 percent, then the farmers would have to be 300 percent more productive in their specialization to make it worthwhile.
It is not a coincidence that the three largest economies have effective tax rates higher than 50 percent (including social security and other income taxes), zero economic growth, near zero interest rates, and are past the point of no return in insolvency.
The three largest economies in the world are in structural decline and represent 61 percent of the global economy, measured by GDP estimated at $58 trillion. Their currencies also account for 71.5 percent of the global foreign exchange market. The Swiss Franc, and British pound account for an additional 9.65 percent of the market which leaves only 20% of the remaining foreign currency market from a long list of countries.
Currency "investors" and traders are really just gamblers unless they are only seeking to hedge another business transaction. There is no fundamental basis for 80 percent of the market, and no reason why Jim Sinclair or others will be right that the US Dollar index will fall to 50 or below because all major currencies are priced against each other. However, compared to any tangible asset a severe decline in currencies is inevitable. If hyperinflation does occur, it will likely be in all major fiat currencies and be witnessed in all countries except those with a completely closed economy.
With virtually every major industrialized nation insolvent, using repressive taxation and unsound fiat currencies the implication is clear. No matter how bullish the prospects are for emerging economies – they are not large enough to sustain positive global economic growth nor do they have an alternative currency that could be used to replace foreign exchange at current levels. The reality of peak oil and other resources will cap emerging economy growth as well.
Because these global imbalances are structural, capital will continue to flee industrialized economies in favor of higher returns and lower taxes. The result will be overnight boom towns, and planned cities, but it's arguable whether much of this money will be misallocated. Precious metals could also undergo a historic revaluing as holders of majors currencies seek alternatives. It is unlikely that capital, or people anywhere in the world will be left unaffected by the ongoing and inevitable devaluing of all major currencies.
During the Pyramid age, Egyptian peasants paid 20 percent of their crops to the Pharaoh. Historically, medieval serfs and farmers revolted when tax rates exceeded 30 percent. European empires such as France and the Netherlands collected tax rates between 15 and 20 percent during the 1600's and prospered. However when those rates increased, it led to French Revolution in the late 1700's. The Roman Empire began as a free trade state, in which revenue was collected from 1 to 3 percent in property or sales taxes. However, in the last years of its decline, tax rates and inflation were so repressive that many peasants welcomed barbarians.
Although capital is often taxed at capital gains rates, global economic activity is largely defined by income derived from labor. In this spirit, it can be argued that capital will tend to flow into countries with low income tax rates and enough perceived economic and political freedom to conduct business transactions in the pursuit of happiness.
One reason why economies are able to grow is because workers are able to specialize in a particular skill and trade that skill for other services or products. This concept, known as division of labor, enables increased productivity because producers can focus on what will create the most economic value. For example suppose apples and oranges cost the same amount, but farmers are specialized in growing one or the other and can produce twice as much product in their field. The apple farmer can produce two apples and trade one with the orange farmer who produced two oranges so both would end up with more value than they could individually produce. However, if tax rates exceed 30 percent then this division of labor breaks down because the apple farmer wouldn't produce enough apples to pay the tax and trade for an orange. If tax rates exceed 50 percent, then the farmers would have to be 300 percent more productive in their specialization to make it worthwhile.
It is not a coincidence that the three largest economies have effective tax rates higher than 50 percent (including social security and other income taxes), zero economic growth, near zero interest rates, and are past the point of no return in insolvency.
| Country | GDP | Currency | % of Currency Exchanged Market | Unfunded Liabilities as Percent of GDP |
| EU | $16.4 Trillion | Euro | 42.45% | 434% |
| US | $14.2 Trillion | Dollar | 19.55% | 854% |
| Japan | $5 Trillion | Yen | 9.5% | 227% |
| Total | $35.6 Trillion | 71.5% | 574% |
The three largest economies in the world are in structural decline and represent 61 percent of the global economy, measured by GDP estimated at $58 trillion. Their currencies also account for 71.5 percent of the global foreign exchange market. The Swiss Franc, and British pound account for an additional 9.65 percent of the market which leaves only 20% of the remaining foreign currency market from a long list of countries.
Currency "investors" and traders are really just gamblers unless they are only seeking to hedge another business transaction. There is no fundamental basis for 80 percent of the market, and no reason why Jim Sinclair or others will be right that the US Dollar index will fall to 50 or below because all major currencies are priced against each other. However, compared to any tangible asset a severe decline in currencies is inevitable. If hyperinflation does occur, it will likely be in all major fiat currencies and be witnessed in all countries except those with a completely closed economy.
With virtually every major industrialized nation insolvent, using repressive taxation and unsound fiat currencies the implication is clear. No matter how bullish the prospects are for emerging economies – they are not large enough to sustain positive global economic growth nor do they have an alternative currency that could be used to replace foreign exchange at current levels. The reality of peak oil and other resources will cap emerging economy growth as well.
Because these global imbalances are structural, capital will continue to flee industrialized economies in favor of higher returns and lower taxes. The result will be overnight boom towns, and planned cities, but it's arguable whether much of this money will be misallocated. Precious metals could also undergo a historic revaluing as holders of majors currencies seek alternatives. It is unlikely that capital, or people anywhere in the world will be left unaffected by the ongoing and inevitable devaluing of all major currencies.