Current Commentary

Baltimore City property taxes

There is a proposal to enact a punitive tax on abandoned and blighted properties in Baltimore City. Presumably, the purpose is to lessen the burden on regular homeowners and to decrease the number of abandoned, derelict properties in the city. Such a plan will do neither.

Baltimore's property taxes are the highest in the state by a factor of two. Anything that brings attention to the injustice of Baltimore's property taxes is a positive, but this is an ineffective plan, and there are better alternatives. The proposed plan would do little more than transfer blighted, abandoned properties from private ownership to public ownership, and the proposed plan runs the risk of increasing foreclosures for property developers thereby discouraging development as has already happened in Washington, DC. It was a little over a year ago when DC began punitive taxes on abandoned property, and DC is now seeing foreclosures on property developers. Better alternatives include making large corporations pay their fair share (the recent $200,000,000 Legg Mason tower comes to mind) and reducing obviously wasteful spending (pensions for clerical government employees come to mind).

Baltimore City has 30,000 abandoned properties. Already the city owns 9,000 of those properties. Of all property in Baltimore, 13% is abandoned, and 25% of residential abandoned buildings are already owned by the city. The city already fails to sell many properties at tax sale for the amount of taxes owed. Raising taxes on abandoned, blighted properties will only exacerbate this and will not lead to a significant increase in taxes actually collected. A punitive rate near 10% also runs the risk of discouraging new development when investors hear horror stories like what has happened in DC -- stories of developers nearing completion and having houses taken from them and losing upwards of 6 figures.

One of the biggest reasons the city holds so many properties is the highly cumbersome sales process. Local activist Adam Meister told me, “The city should make the process of purchasing city property easy. It is very hard and complex now. The city should also be proactively trying to sell every property they own in order to gain revenue from the sales and future property taxes." Meister tried his own version of urban homesteading in his “buy a block” campaign and ran into a web of red tape trying to buy city-owned properties that derailed the plan.

Rather than introduce new tax discrimination, a better alternative would be to eliminate existing tax discrimination -- namely big business corporate welfare. Recently Legg Mason built a two-hundred million dollar waterfront office tower on which they will pay ZERO property taxes for the next 15 years. And they will pay ZERO property taxes on the underground garage for the next quarter century. Ultimately property taxes in Baltimore are so high because the average homeowner ends up carrying his fair share, plus Legg Mason’s fare share, plus countless similar deals. Historic tax credits and tax freezes on new luxury home developments lead to the people of modest means subsidizing the wealthy people. Just taxing Legg Mason at fair market value would bring in an additional 5 million dollars a year. Legg did keep 700 jobs in the city. Would they have left without the tax break? It's debatable. What is not debatable is that the cost of the tax break divided by the number of jobs equals almost $7,000 per job. Many businesses could create new hires for much less incentive than $7,000 per job.

Instead of finding new ways to add more taxes, the city must get spending under control. As an example, city employees currently get something that 82% of the people in the private sector do not get -- a pension. Yes, a person who is in a physically demanding job (e.g., police, fire, garbage) that cannot be performed for his/her entire life should get a pension, but clerical workers should not get pensions. Pensions cost the city an amount equal to 30% of the total property tax revenue collected. Baltimore could reduce its property tax rate roughly 30% (subtracting for police, fire, and garbage) simply by eliminating a perk that 82% of private sector employees don’t receive. Assuming a tax assessment of $200,000, an average homeowner pays approximately $100 PER MONTH just to cover the pensions of city government workers. Before we look at adding more taxes, let's start looking at ways to control spending.

Friday, November 20, 2009

Gold likely won't go back below $1000

For all the talk on where gold is heading, how about some talk on where it will never go.

Gold likely will never go under $1000 for the rest of our lives, and very likely not significantly under $1045.

$1045 is the price per ounce that the Reserve Bank of India paid for 200 metric tons about 2 weeks ago. On Thursday, gold resisted a dollar rally that should have sent gold prices tumbling in lockstep with stocks. There is a lot of money out there right now trying to “buy the dips.”

Why has gold shown a resistance to the stock/dollar inverse inflationista trade? Gold is not expected to show earnings; the only fundamental driving it is money supply, and expectations on money supply. Every other force that might at surface seem like a fundamental -- e.g., inflation, foreign central bank physical delivery purchases, loss of confidence in fiat money -- really stems from money supply. Thus, if money supply is the only fundamental, where is money supply going?

In order to better understand where the money supply is heading, we should understand the thoughts, opinions, and ideology of those in the position of controlling the money supply directly or indirectly, and those who have influence on those in control. Rather than do a Letterman-style count down, I’ll start with the most important and work my way down:

1. Ben Bernanke: One only needs to read the Bernanke Doctrine full of such insightful quotes as "The U.S. government has a technology, called a printing press, that allows it to produce as many dollars as it wishes at essentially no cost." "Under a paper-money system, a determined government can always generate higher spending and, hence, positive inflation."
2. Congress: In recent months, the finger pointing between the Fed and Congress has begun, but debt monetization really does take two to tango. All talks of curtailing spending are laughable accounting smoke and mirrors tricks.
3. Paul Krugman: He recently wrote on his blog that application of the Taylor Rule indicates, if anything, that rates should be negative 6% (charge banks for excess reserves). Members of Congress listen to this man.
4. Presidents of the Dallas and Philadelphia Feds: They recently stated that "with firms increasing neither hiring nor investing, inflation is obviously not an issue." Apparently these two men did not get the memo written by 2006 Nobel Prize winning economist Edmund Phelps that the Phillips Curve is only valid in short term modeling and that there is no empirical evidence of a long-term inverse correlation between unemployment and inflation, as if the period that coined the word STAGFLATION weren’t enough to draw that conclusion.
5. President Obama: With Congress, President Obama is leading the nation on a big spending path at levels that already have necessitated debt monetization and will exacerbate the situation.
6. Wen Jiaibao: March 13, 2009, the Chinese leader said he was “worried” over his nation's holdings of US dollars and debt. The Chinese are loaning us about 3% of our GDP. If they pull the plug, it will take some creative readjusting, with the most likely and politically acceptable scenario being to increase Fed monetization of Treasuries to fill the gap.

Bottom line: Our powers that be think you can pay your bills with a Xerox machine without consequence and that is a hard sell that will push gold prices upward until there is either a major change in policy or a major change in power.

Thursday, November 05, 2009

$1100 is looking like gold's latest ratchet point

Based on sound fundamentals (money supply relative to gold, the new era of debt monetization we have no real exit strategy from, and the absolute rock-and-a-hard space catch-22 of a death trap choice between raising rates and keeping them low) gold and silver are far from reaching their new, higher plateau.

In short, over half of the US national debt is financed at adjustable rates with adjustment periods less than one-year out. This means that when rates go up, interest payments on the debt will go up almost immediately. Given that raising interest rates is about the only way to bring inflation under control, right here, right now we are faced with a choice of either (1) keeping rates low and allowing inflation to run amuck, or (2) raising interest rates to keep inflation under control, but that will necessitate a for all practical purposes politically impossible level of tax increases and spending cuts. Given that option #2 is politically impossible, it leaves no other alternative than option #1 (short of outright default on US securities by the government which, as extreme as it sounds, might actually be better than #’s 1 or 2).

Option 1 will result in a significantly devalued dollar, and significantly higher precious metals prices from the levels we are at today.