The meaning of opaque liberty in Croatia

In todays column of Business.hr, finance minister Slavko Linić demonstrated his lack of knowledge concerning the “free – enterprise” system.

After a brief spatter regarding the nominal yield on newly issued government bonds (which are by the way higher than in Spain at moment) that went to American investors, the all important tax question reared its ugly head.

This time, it was about taxing real estate and uncultivated agricultural land. The rough google translation is as follows:

"The goal of property tax are not villas, but they are the property of their accumulated wealth," said Linic, adding that the biggest problem is that the mass of them have agricultural land and do not cultivate on them.
"If their assets are not managed in the interests of Croatian citizens, in the interest of job creation, we must take the taxes because you're rich and you give. And you are rich because they do not contribute to the cause (economic growth), "says Linic.

Let’s for a moment set aside the implications on civil liberties and just look on the economic logic behind this argument. If for instance, a rich individual has amassed personal wealth and has a piece of land, he, according to our finance minister has a moral obligation in using this land.

The first question that pops to mind is: Why isn’t this land used? Well, it could be due to a lot of personal and market factors that allow this piece of land to be unused. What if so happens that the piece of land can’t be used for agricultural purposes? If it is located in such a climate zone (Croatia has different regions that differ dramatically regarding the amount of rain fall, sunny days, fertile soil etc.) that doesn't allow agriculture, that land will remain unused.

The second thing that comes to mind is: Is it worth it? What new culture will be grown on that area that would allow the capital investor to make a return? Will there be demand for the new product? Government is already heavily involved in the agricultural domain, granting massive subsidies to individuals that in most cases don’t even have the know-how to create a profitable business. There is no futures market, so there is no risk and reward system in place.

What so if the government decides to tax the land of the “wealthy” that is unused? The probable response would be a selloff of the taxed land. Why would anyone keep a piece of property that has a negative cash flow attached to it? Probably no one. And if those individuals wish to sell, where is the buyer? What would be the associated price for an acre of land if the government decided to purchase the land? To entice the seller to get rid of the land as soon as possible, he would probably demand a premium over what ever the market price is. The government would be explicitly subsidizing the former land owner.

The gig gets even greater if the land is fragmented, unfertile and the cost per acre is greater than the net benefit of the culture grown on it.

The latter part of his assessment is that these people don’t contribute to Croatian citizens.

How on Earth would he know this??

Surely if our Finance Minister new what the people demanded, he wouldn’t have gone into government, he would have become a farmer. The very last sentence doesn’t have to be commented on at all. Where does he think the necessary capital comes from to finance such massive projects as farming;

Or any other commodity venture for that matter.

Keynesian Stimulus the Croatian Way

Just like everywhere around the globe, the Croatian government has decided to embark on a spending spree in an apparent attempt to boost domestic aggregate demand.

According to the web portal www.business.hr, 15 billion HRK will be allocated through public – private enterprise programs to rebuild Croatia’s ailing public infrastructure. This plan would rebuild and build new schools, hospitals and other infrastructure. It is not mentioned which firms will get a shot in the arm through this spending plan and in what parts of the country, we just know that it will happen.

The problem with all of these stimulus programs is its financing and distributive effects. Usually, when entrepreneurs get a business idea, they have to figure out the cost of doing business. The business (whatever it may be) can be financed through equity or debt. The price of the borrowed funds are determined through the supply and demand of the same on the market. Assuming a certain level of generated savings in the economy and the term structure of thereof, capital projects of this magnitude are brought about a reduction in consumption as resources are freed up and diverted in these lengthy endeavors. But, this is not the case.

These projects are funded through government borrowing, or taxes or inflation. Depending on the source of the financing, each intrusion by the government will have a negative side effect on the broader economy. It is true that certain companies will generate accounting profits in the medium term, depending on the accounting techniques they employ or a certain tax shield they might enjoy in the form of deferred taxes. But, will these projects really lift the welfare of the country in general?

It will create employment for the now unemployed construction workers as well as all the indirect employment in other industries. But cash flow generation probably won’t occur, nor will the required rate of return on capital that the free market would require. This plan will create a short boost of the so-called GDP aggregate and nothing more. The funds appropriated to these projects will be syphoned off from other parts of the productive economy and wasted on these that we don’t need. Even if the government can calculate the cost of these projects (using different valuation techniques) the same way the market would calculate from them, the funds are just not there to support these projects in the present environment. Austrian economist Ludwig von Mises showed that the inability of government to micro manage the economy comes from its innate inability of economic calculation and the price system.  How does fixing a battered wall on a government building lift the wealth of the economy?

The same way I supposedly decide to smash a window and than repair it. My bashing of the window provides demand for the window maker, which in turn buys a new suit with that new money, the tailor receiving that money buys a loaf of bread from the baker and so fort, lifting the national income. French economist Frederic Bastiat already solved this “broken window” fallacy a while back and it shows that while the window maker does receive the income,  the society, however, in aggregate, is suit or a par of shoes or a wrist watch less off.

Enter Silver

A small Croatian audience was treated today at the Mimara Museum by Thorsten Schulte, known as the “Silver Boy” from Germany, and his presentation on why silver must represent a significant part of everyone’s portfolio going forward.

Due to all the negative news we are getting from everywhere in Europe(by Europe I mean the periphery), it is not surprising that people would want a hedging instrument to counteract Mario Draghis’ printing presses. Real “stuff”, such as valuable precious metals and other industrial commodities have a long bull market and according to Thorsten there is still time to jump onto the silver bandwagon.

Underpriced and manipulated

It was pretty amusing to see a room of bankers and financiers closely listening to a former Deutsche Bank commodity supervisor as he basically called for an end to the current monetary order. Strange enough, he expressed his view that he didn’t expect any deflation in the future, but rising inflationary pressures. This definitely goes in line with statements made at last years Cheviot’s Sound Money Conference and David Morgan’s speech regarding the subject. Others, such as Peter Schiff, Marc Faber and Max Keiser also stress the fact of wealth preservation through the ownership of silver and other precious metals.

The case for silver being underpriced is more of an investment argument, than an industrial one. The total market cap of all the mining stocks is less than the market worth of one or two juggernaut companies, and the representativeness of silver and gold in portfolios around the world are miniscule to say the least. The investor demand isn’t there yet; coupled with a massive fractional based silver and gold market such as the NYMEX in New York provide artificial downside pressure on these commodities.

Unlimited amounts of liquidity are also a source of manipulation from the banking sector because by using as I like to call shadow derivatives (naked shorts), they can artificially suppress the price of these commodities. And if they get a certain trade wrong, its OK, because an unlimited credit line will be extended to the bank from the largest and over bloated GSE’s on the planet. (O yeah, they are called central banks).

Isn’t it also convenient that in Croatia, these forms of investments are classified as luxury goods are charged with excessive import duties and taxes? The government doesn’t seem to realize that the populace would also like a certain mechanism which would allow them to preserve purchasing power and to generate a store of value.

After all, it’s only fair if the government goes on a spending binge  through credit creation, that the “average Joe” has a fighting chance to survive in this debt constructed fiat prism.

Also check this video post from the Keiser Report a couple years back on silver manipulation, to see where we stand today. Among silver, Max explains rigged markets, a falling market, well…..a lot of fun stuff. Enjoy

Inaugural Blog Post

 

For all my future readers, I would like to thank them for taking the time in reading and commenting my posts regarding movements in the broader economy. My commentary will be focused on Croatia and the world, and will be written on English in an attempt to draw in a greater audience.

Since I have only recently graduated and searching for employment opportunities, this is a great way to express my views and share them with the community at large.

I hope you will find this blog interesting, as I find it writing it.