Endgame 1: Chess and Taxes   (January 19, 2009)

The endgame of the global financial meltdown is the complete repudiation of existing debt, policies and financial structures. This week's series will examine various parts of the endgame in more detail.

"Endgame" is getting tossed around frequently, but not always correctly. I greatly respect and admire analyst John Mauldin and his free distribution of a variety of smart analysis via his email newsletter, Thoughts from the Front Line, but his recent missive The Endgame (January 17, 2009), seems to have used "endgame" a bit too freely.

The term comes from the world of chess, and refers to the point in the game where for one side winning becomes impossible; the remaining few pieces can move about, prolonging the struggle a bit, or perhaps in the best case scenario, bringing the match to a draw. Chess endgame (Wikipedia).

(Contributor Fred R. is a chess expert and could shed further light on the term. I am only an amateur in chess--and everything else--though an enthusiastic one. I bought one of the first computer-chess games back in the early 1980s and wore the device out.)

Mr. Mauldin described three possible outcomes of the current recession: a relatively quick rebound (i.e. a victory), a muddle-through period of slow growth (another kind of victory), and lastly, a continued deterioration with no visible end. Victory is not an endgame; only the last option is an endgame.

I believe "victory" i.e. a return to 1998 or 2006 or even 1988 is no longer possible. We are truly in the endgame. The best that can be hoped for is a draw, that is, a limit/end to the losses.

Today I would like to address two parts of the larger endgame: political skill and taxes. (The rest of the week will be devoted to examing other aspects of the endgame.)

As longtime readers know all too well, I am too direct to be politic. Were I to run for public office in my town (a horrific thought, to be sure), not only would I receive no votes, I would be run out of town by increasingly popular demand.

Even when I "clean up" my opinions for family members, I still end up alienating them for months at a stretch. (Without the sterilization, the alienation would stretch into years.) I think construction tends to attract people with low tolerances for blah-blah B.S. and "meetings" in general--that's why they left school/corporate cubicle Hell/retail sales, etc. in the first place. And once in the rather rough Darwinian world of construction, those who can take guff move on to other careers, leaving those who can only live in a no-guff world.

All of which is to say that President-Elect Obama clearly has high political skills. The real trick in politics is to tell people they're going to get less and put it in such a way that they accept it. It may be that Ronald Reagan ("stay the course") was the last president to have the skills and courage to do this. Thus it is no coincidence, I think, that P.E. Obama has reportedly studied Reagan's presidency extremely closely.

There are few issues trickier than race in America--think of a slippery hand grenade with the pin out-- and Obama did a better-than-average job of addressing it in his "reply to the Wright controversy" campaign speech. Yes, his back was against the wall, but he was forthright in a way that virtually no other politician has been--and I say that as someone with a mixed-race family and as a political junkie who would have caught wind of any other politico's speech on the topic had it been anything other than the usual P.C. blather.

Thus it is easy to conclude that if any politico can get the American public to accept they they're about to get a lot less than they expected, it is Obama. If he has the skill and courage to tell them that inconvenient fact, and if they can stop focusing on "what I was promised" long enough to listen, then maybe the U.S. economy can move from complete collapse to a draw, i.e. a reduction of expectations and obligations to what the economy actually produces.

But the situation is far more dire than in Reagan's time, whan all that was needed was to lengthen the qualifying age to collect Social Security by a few months, a modest tax increase and a stupendous ramp-up in Federal borrowing/deficits. (Click your heels together and repeat after me: "Deficits don't matter! Deficits don't matter!")

Let's move on to April 15--tax day. As another sole proprietor recently told me, "The government is in for a shock on April 15." Why? Because he and a few million other sole proprietors/small businesspeople will be reporting losses instead of profits, which means the gummit is going to collect zip, zero, nada in the way of FICA (self-employment tax, 15.3% of net income) or income tax.

The endgame of taxes is this: the more you raise them, the less you'll collect as small businesses close and the self-employed are driven into the informal economy. Business is like a marriage in many ways, and as I never tire of stating: nobody has to operate a business, any more than they have to stay married. Nobody can force you to throw everything you've got into opening a small business, but they can surely raise the disincentives so high that only a trust-fund baby or someone with a desire to lose all their money will start a small business (i.,e. one that doesn't qualify for a Federal bailout of some sort.)

I am always astounded by the talking-head pundits on television who glibly refer to small businesses as "the engine of jobs creation" in a blithe way which proves they have no idea of the pressures being placed on small businesses with regulations, junk fees, high rents, mandated employee benefits and taxes.

What irks me is they all assume the stalwart entrepreneur is just itching to ignore the abundant signs of Depression everywhere and throw his/her capital in a high-risk gamble, just so the government can suck off the immense profits (heh) spun off by the new venture.

(Their cluelessness is as painfully obvious when they speak of the U.S. Military as well.)

Endgame prediction number one: the entrepreneur/small business founder will be M.I.A. in this Depression. It's all very well to sit in the studio and pontificate on the irrepressible energy of the American entrepreneur and wax eloquently about how many hundreds of thousands of new jobs will be created by these wonderful new small businesses, but guess what: the bar is too high, the odds too long, the restrictions too plentiful and overlapping, the rewards too meager.

The top-heavy, feedback-free structure of mindless regulations, junk fees and high taxes has strangled the small-business golden goose. Those foolish enough to pursue their dreams in this environment will soon enough smash up on the rocks of regulations, junk fees, high taxes and a declining debt-based consumer economy; once their capital and energy have been drained, then the ranks of willing gamblers behind them will vanish like rain in midsummer Death Valley.

That mythical garage in Silicon Valley where some young firebrands will launch the next U.S. technological wave of wealth? The neighbors closed it with complaints about non-residential useage, the city demanded a business-zoned office and multiple fees, and the firebrands couldn't afford rent in Palo Alto or the fees. So they either gave up and moved away or sold their souls to vulture capital, who soon sold their idea for peanuts and a quick return on investment.

All those with experience with startups in the Valley--can you refute any of this? And while we're on the subject, let's look at the "hot" new Silicon Valley Web 2.0 startups--gee, they're all social networking sites, mostly interchangeable, none of which actually create new products, software or real wealth, except to the vultures who funded them just long enough to exit via an IPO (initial public offering) or second round of financing.

Lest you think this is exaggeration: please read Whatever Happened to Silicon Valley Innovation? (BusinessWeek). The article does not address regulatory strangleholds or other daunting realities, but it does have some key quotes from former Intel CEO Andy Grove (an immigrant to the USA, as you recall):

But some of the Valley's old guard are skeptical they'll grow big and important enough to deliver sizable productivity gains for business and the nation or to produce an upswell in new core technologies. Today's startups "give us refinements, not breakthroughs," says Andy Grove, former chief executive of Intel.

For more than 40 years, Silicon Valley has been the world's most prolific laboratory for information technology innovation. But Estrin, Grove, and others are growing concerned that the vitality of the Valley, and, indeed, that of the entire U.S. tech industry, is at risk. That could have huge consequences for the future of American productivity, job growth, and national competitiveness. These problems have been brewing for years, but they've been amplified by the economic downturn.

Grove launches directly into a diatribe against what he sees as the shortsightedness and shortage of ambition on the part of today's Valley-ites. He regrets that the U.S. ceded the market for computer batteries to Japan in the 1970s. Now it's way behind in the race to invent improved batteries for electric vehicles—something he thinks Silicon Valley companies should be working harder on.

What really infuriates him is the concept of the "exit strategy." That's when leaders of startup companies make plans to sell out to the highest bidder rather than trying to build important companies over a long period. "Intel never had an exit strategy," he tells me. "These days, people cobble something together. No capital. No technology. They measure eyeballs and sell advertising. Then they get rid of it. You can't build an empire out of this kind of concoction. You don't even try."

The "engine" of taxes and job creation is busted, crippled, leaking oil out of every gasket; that's something no speech by P.E. Obama can fix because it's systemic. You won't be able to pin it down with statistics or charts; it's like the limbic system of the economy is fatally damaged, and the causes are subtle, intertwined and ubiquitous.

So watch the tax collection stats on April 15. Watch the pundits express surprise that tax revenues are plummeting, and expect state and local politicos and their special-interest masters to demand higher taxes to make up the shortfall. Gee, the more we tighten our grip around the goose's neck, the more labored its breathing; I don't get it.

You will; it's called the endgame.

What's for dinner at your house? has been updated with four new recipes.

New chapter in Operation SERF: Chris Sullins' "Strategic Action Thriller" is fiction, and contains graphic combat scenes.

Operation SERF, Part 7.

"This guy is THE leading visionary on reality. He routinely discusses things which no one else has talked about, yet, turn out to be quite relevant months later."
--An anonymous comment about CHS posted on another blog.

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