The Entire World is Facing a Currency Crisis

EUROPE:

European Union financial leaders say they are ready to do whatever they have to do to save the euro but they are not willing to add to the already existing bailout fund. Germany has defeated every attempt to expand the rescue mechanism in place for fiscally troubled countries. Other country leaders wonder if the rescue fund would weather a collapse of Portugal and Spain, currently on the closely watched list. In the meantime, Moody’s has downgraded Hungary’s credit rating putting the Hungarians at odds with the European Union and the International Monetary Fund. Some circles report that Germany is considering abandoning the euro altogether.

Ireland is attempting to enforce a personal income tax on 2.2 million workers who historically have paid no taxes. This is causing severe political unrest in Ireland. Observers have said that the euro as a currency is a mess and will continue to be throughout 2011.

All of these financial worries come in the midst of an economic slowdown throughout Europe. Unemployment is rising, tax revenues are diminished, all of which is linked to the slowdown. Pressure to cut public spending is building as the government debt grows. Central governments in many European countries are being cut drastically.

UNITED STATES:

The financial woes of the United States are well known and the quantitative easing or bond buying program announced by Ben Bernanke to purchase up to $600 billion of bonds through next summer only makes foreign investors wary of a weaker dollar if that is accomplished.

President Barack Obama says that there is “broad agreement” on global economic policy between the G20 nations but there are other leaders that fear that the conflict between China and the United States may threaten global growth.

While Washington officials maintain that the Chinese currency is held artificially low (which allows Chinese exporters an unfair trade advantage and allows China to accumulate huge amounts of foreign reserves) China argues that it has a commitment to reform its currency values but is waiting for global economic stability before making any significant adjustments.

MIDDLE EAST:

Thomas Erdbrink reported in The Washington Post that new sanctions against Iran implemented by the United Arab Emirates have led to a sharp drop in the value of Iran’s currency, the rial. This is causing confusion in Iran’s markets and has resulted in a loss in trading value against both the dollar and the euro. The situation has become so tense that no foreign currency is being sold by currency exchanges. Even the gold merchants have closed their doors.

ASIA:

The dollar has fallen to a 15 year low against the Chinese Yuan and a record low against the Swiss franc. Officials in Asia were warning against an expected flood of foreign currencies as America moves ahead with its $600 billion asset purchase plan. Already Asian currencies are enjoying new trading positions. The Thai baht is up 11%, the Korean won is up 6% and the Philippine peso is up 8%. A major oil refiner in the Philippines just issued a bond yielding 7%, and this rate of return compared to the puny near zero rates of United States Treasuries is very attractive to foreign bond buyers.

Inflation fears abound in many countries, especially those who have a negative trade balance and are forced to import most consumer goods, food, and other staples. Experts believe that the extension of the Bush tax cuts by the Obama administration and recently approved by Congress may be positive in the short term but will do nothing to help the poor fiscal situation with budget deficits of about 10% expected in each of the next two years. Even Moody’s is warning that it may have to downgrade the United States’ AAA credit rating. This scares many of our trading partners.

Meanwhile, gold is enjoying a rapid rise in value as countries keep interest rates low in order to stimulate their economies and central banks are buying gold as a hedge against the unknown.

It is still a world-wide concern. The eight hundred pound gorilla is still the United States. In this currency scenario, the gorilla is walking a very fine tight rope and the fall could be fatal.

The Flat Tax – The Time Has Come

Steve Forbes, in his excellent book How Capitalism Will Save Us, urges the adoption of a flat tax to replace the cumbersome IRS code we currently have to struggle with every April 15^th.

He points out the obvious advantages:

1.     Every type of income, both personal and corporate, is taxed at the same rate.   He suggests a rate of 17% (currently the tax ranges from 10% to 35%).

2.    He would eliminate all other special taxes.  (currently we pay 15% for capital gains in addition to city, state and local taxes).

3.    He advocates a personal and family exemption schedule.

Forbes has a lot of company with the flat tax concept.

Another advocate is Daniel Mitchell of The Heritage Foundation.  Mitchell says that our present system has to be reformed.  He notes that many nations around the world are lowering their tax rates with positive results to their economies as

jobs and capital flow

to those nations

with the most favorable tax laws.

Even nine countries of the former Soviet Union bloc are implementing flat tax policies.

The flat tax treats all taxpayers equally, lowers the penalties for productive behavior, work, risk-taking and entrepreneurship.

Mitchell parts company with Forbes on exemptions as he is not infavor of any exemptions and eliminates all deductions, credits and other loopholes in his proposal.

All proponents of a flat tax stress that there is no double taxation on capital formation, savings, dividends or other investments.  There would be no death tax, capital gains or other taxes to contend with, either.

The Heritage Foundation uses Albania as a prime example of the advantages of a flat tax:

Albania now has the lowest taxes in Europe

and their GDP has shown the greatest increase in the world

with a 42% jump (since 2007).

This former Communist country instituted a flat tax when they adopted a Capitalist Democracy in the late 1990’s.  Since that time, they have operated with a 10% flat tax and have seen their unemployment drop, their poverty rate has declined, their infrastructure has undergone extensive repairs, corruption in government has been reduced and organized crime has become increasingly controlled. Albania is experiencing great increases in trade activities, improvements in property rights and increased foreign investment as well.  In June 2006, they took the first step towards joining the European Union by completing the formal application.

Albanian billionaire Sahit Muja says that the United States and the European Union should move to a flat tax. Tax revenues in Albania now generate 23.3% of GDP while government spending is only 29.3% of GDP.  Even with less bureaucracy, most of the government spending has been on education and infrastructure.  Albanians think that the United States and the European Union waste money on worthless social programs.

Our annual skirmish with tax forms consumes countless hours of time and great expenditures of our incomes which could be put to much more positive use with the introduction of the flat tax.  This is not to mention the savings at the federal level by the dismantling of the most despised government agency:  the Internal Revenue Service (all 115,000 agents and their staffs) – not to mention the elimination of thousands of lobbyists whose only reason for being in Washington is to influence the members of the Ways and Means Committee and the structure of the tax code.

Forbes sums it up best:  “The flat tax would allow the United States to once again become a business-friendly environment.  Nations around the world that have instituted a flat tax: from Lithuania and Romania to Mongolia and Russia, have seen their economies roar almost immediately.”