Monday, August 19, 2013

The use of CFDs to avoid taxation - the threat of market failure

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There is news here that the US debt is not $17 trillion, but actually $200 trillion. This I assumes is public debt. But I'm more interested actually in the nature of private debt. It occurred to me that its very easy for institutions to use debt to avoid tax. The strategy that they can apply is simply 'to just never sell a security', or at least to defer the sale as long as practical to defer any tax liability. This strategy would entail using 'Contracts for Difference' because the cost of capital is lower than options, and they are as liquid as the underlying security. The strategy involves using CFDs to avoid a tax liability by buying a 'contrary' short position (i.e. a new offsetting position) rather than selling the original security. Now, you are paying interest on that debt, but its such low interest rates at present.
The bad news is that if this is a popular strategy for 'profit-driven' institutions, then I fear govt has actually got itself in a pickle where it will cause the collapse of the financial system. The implication is that it will not bel able to let interest rates rise. It has in fact placed itself in a position where it is 'by default' actually managing the economy. I think if you examine the folly of any autocrat like Hitler; you realise that they did not articulate a plan to arrive at autocracy; they simply manage to get themselves into a delusional pickle of arbitrarily making decisions to get themselves out of an old pickle. This as I see it is the type of situation we are in now. Of course this is not new; and not just in global finance, but across every area of government. This is of course why government needs to be 'wound back' to simply 'facilitating a legislature'. Give it a budget of $1 million a year, and it will not have any power. Politicians as private persons contributing at their discretion in a private meritocracy.
So how bad is this crisis going to be? Well, we must remember that these CFDs net off. The problem is that you'd expect them to sell the 'short' positions in a rising market to realise any losses to offset against some of their gains. After all, you would expect that to reduce liabilities (or their interest expense and tax liabilities as much as possible). That's a problem. It also creates a threat of market failure because investors will be fearing that the govt will attempt to recoup unpaid taxes because this is  blatant 'tax evasion'.
Hehe I saw the tax evasion opportunity some time ago...but the opportunity for 'arbitrary govt policy (tax) to precipitate a financial crisis has just become apparent to me.
Why am I laughing? Well I guess because I hold a share of 4-5 million oz of gold in the ground....and I'm sure there is a lot more there. Since its underground, no brute will be able to get it. More importantly, its in a poor country where they are used to being poor, so they are not going to riot when they are 'still poor'. Whereas you suckers are going to be saying 'what about access to my super'. You have fallen under the spell of 'sanctioning arbitrary government', and look where they have taken you.
When the Roman Empire collapsed, intellectuals looked to 'emerging' poor markets for security. I wonder whether Western intellectuals will look to the 'secular' Asian markets in this fashion. It remains to be seen how these alliances will shape up, but there is destined to be a lot of angry people in years to come. The fault will be everyone's in general, but no one in particular. But really, the fault will be everyone's except the intellectual libertarians. Paradoxically, they will be the most spurned for being 'pro-market'. The reality however is that they were the only one's that did not sanction government intervention in the economy. The closest defender of their values in the US Congress was Ron Paul. He is 'compromised' by his position, but he wanted to abolish the Fed Reserve.

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