Why Eliminating The State And Local Tax Deduction Is A Terrible Idea

Authored by Ryan McMaken via The Mises Institute,

The tax "reform" currently being discussed in Washington is mostly a political exercise for politicians who can use the process to extract more campaign contributions from supporters, and punish non-supporters. The actual tax burden imposed on Americans overall will change little.

The proposed elimination of the deduction for state and local taxes (SALT) is an excellent illustration of how the tax reform is really about playing political games. Forever in pursuit of "revenue neutral" tax reform, the GOP is simply turning to the elimination of the SALT deduction so it can raise federal revenues, and this allows for a tax cut for some other well-heeled special interest group. Using bizarre "logic," supporters of the deduction's elimination claim that an increase in the federal tax burden will somehow lower state and local taxes — some day. Why? They imagine that if they raise federal taxes for people in states with high taxes (i.e., California, New York) then the majority of voters in those states will then be clamoring for a cut in state and local taxes. The GOP also relies on the tired claim that that a tax deduction (e.g., the home mortgage interest deduction) "subsidizes" those who claim the exemption. But only in the Orwellian world of Washington doublespeak is a tax break a "subsidy."  Moreover, given that states like California and New York are among the least reliant on federal funds, claiming that taxpayers there are "subsidized" by the rest of the country is an odd claim indeed.

There are several problems with this approach…

First of all, the SALT  deduction — like all federal tax increases —  will drive ever more tax revenues to the federal government, putting more power, both in relative terms and absolute terms, in the hands of the federal government. This is one reason federal tax increases are even worse than state and local tax increases. They skew political power in the US ever more toward the federal government. By increasing the federal government's share of all tax revenues collected, the federal government will also then be in a better position to manipulate state governments and state policymakers with federal grants. The federal government does this today by using federal highway funds. As the old saying goes, "he who pays the piper calls the tune." 

An additional problem is that the elimination of the deduction is specifically aimed at increasing federal power at the expense of state and local power. There is no doubt that some conservatives and libertarians will cheer this. For many of them, the federal government and the county government are pretty much the same thing. In their minds, a Congress of out-of-touch millionaires 2,000 miles away is more or less the same thing as — or maybe even preferable to — a cash-strapped local government headed by middle-income part-time legislators.

This naive attitude is totally understandable for those who have never witnessed the very real differences between Washington politics and the politics of the local city council. But, there is a reason that subsidiarity and decentralization in politics have long been foundational elements of libertarian ideologies. Decentralization weakens political institutions, increases options for taxpayers, and contributes to a more vibrant private sector. 

The GOP's efforts at eliminating the state and local tax deduction works in the opposite direction. The reform's likely effect will be to further federalize the tax burden while making states more reliant on federal programs and federal grants. 

Americans Pay Most of their Taxes to the Federal Government 

At the core of the GOP's drive to eliminate the SALT deduction is the assumption that state and local taxes are "too high" while federal taxes are apparently either just right, or even too low.  

But, it's hard to see how anyone could come to the conclusion that the federal tax burden is the more harmless piece of the puzzle. The federal government already — by far — receives the largest share of the tax revenue pie.


If we look at how much Americans pay to each level of government, we find that the federal government receives approximately two-thirds of all tax revenue, while only one third goes to state and local governments — combined.

In 2016, the federal government collected more than $3.4 trillion dollars in revenue via income taxes, customs duties, fees, and revenues from federally-owned lands. 

State governments, on the other hand, collected only $1.1 trillion in revenues. Local governments pulled in even less, with under $800 billion in revenues.

What the GOP is now telling us is that the federal government's huge share of the pie is too small, and federal revenues ought to be increased further via elimination of the deduction. This, we're then told, will lead to declines in state and local taxes. 

The GOP doesn't mention, naturally, that state and local governments are already falling in their share of overall tax collections. 

During the current economic expansion, the share of local tax collections — as a percentage of all tax collections — dropped from 17 percent to 15 percent. State tax collections meanwhile dropped from 22 percent to 20 percent. The federal government's share of the pie, however, increased from 60 percent to 64 percent. 

The federal government now controls nearly two-thirds of all revenues paid into governments in the United States, and if current trends continue, we may soon see the feds in control of 70 percent, or maybe even three-fourths of all tax revenue. 

If this is the GOP's plan, this is a rather odd position to take for a political coalition that claims to be in favor of "local control" and decentralization and federalism. In reality, the outcome of this war on the SALT deduction is to make the American political system even more dominated by federal power. 

Federal Revenues vs. State Revenues 

Even in high-tax states, the federal government plays a disproportionately large role in tax collection.

If we compare state tax collections to IRS collections in each state, we find that taxpayers pay much more to the federal government than they pay to the state government. 


In California, for example, the federal government collects $405 billion from California taxpayers. The state government, meanwhile, collects $155 billion. Federal revenues in California are more than two-and-a-half times as large as state-level revenues. 

In many states, of course, the results are even more lopsided. 

In Minnesota, for example, federal revenues are more than four times the size of state revenues. In Colorado, federal revenues are more than three times the size of state revenues. 

We don't have data on specific local revenues here, but given that local revenues make up only 15 percent of tax collections nationwide, its a safe bet that federal taxes are considerably larger than local revenues in most cases. 

And yet, to hear the GOP tell it, its state and local taxes that are imposing the real burden on Americans. Their solution? Pay more taxes to the federal government! 

Decentralize the Taxes 

None of this is to say that state and local taxes are a good thing. There is no shortage of waste, corruption, and cronyism at the state level — but compared to the federal government the dollar amounts are tiny in state-level boondoggles. 

Nevertheless, the diversity of tax regimes across states and localities has long been one of the good things about the relatively decentralized political system in the United States. 

As we've already been seeing, this reality has allowed countless productive Americans to vote with their feet and to move from high tax jurisdictions to low tax ones. This phenomenon thus imposes pressure on many jurisdiction to keep taxes low compared to other nearby jurisdictions. This is known as "tax competition" and it results only when states and localities have considerable autonomy over their tax rates.

Unfortunately, tax competition is restrained by the fact that tax revenues in the United States are primarily a federal matter. Taxpayers thus have far less power to change their tax fortunes by moving across state lines that would be the case in a truly decentralized system. 

The downside to local autonomy, of course, is that some states and localities will have especially high taxes. The solution to this, of course, is to avoid investing in those areas until tax competition is sufficient to force more restraint on tax rates. 

Raising federal revenues via eliminating the SALT deduction — as the GOP seeks to do — is hardly any sort of solution at all. Indeed, Congress should be moving in the opposite direction. Instead of eliminating the deduction, Congress should substitute a tax credit instead. Every dollar that state and local taxes increase would lead to an equal drop in federal taxes. Then, we might start to see some real diversity in tax burdens across the United States. 

In reality, we're seeing quite the opposite. Our current situation is made worse as federal taxes make up a larger and larger share of the overall American tax burden. This leads to greater homogenization of tax rates across the United States, which makes it even harder to escape from especially bad tax policy. If the tax burden is ever "equalized" across all states, then taxation will all simply be equally bad nationwide, and moving across state lines will bring no relief.

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Russia Plans First-Ever Sale Of Yuan Bonds

As Russia braces for further sanctions from Washington D.C. over their alleged role in “meddling” in the 2016 U.S. election, they are reportedly prepping a $1 billion yuan-denominated bond issuance in an effort to preemptively diversify financing risks away from the West.  According to Bloomberg, the sale will total 6 billion yuan and could come as early as next week.

Russia hired Bank of China Ltd., Gazprombank and Industrial & Commercial Bank of China Ltd. to arrange investor meetings for the sale of 6 billion yuan ($907 million) in five-year notes, according to people familiar with the plans. The issuance is slated for the end of this year or beginning of 2018, they said, speaking on condition of anonymity because the deal isn’t yet public.


The sale has been under discussion since U.S. and European sanctions in 2014 over the takeover of Crimea blocked many state-owned Russian companies’ access to Western capital markets. A report due next quarter from the U.S. Treasury on the potential consequences of extending penalties to include Russian sovereign debt has increased pressure on the Finance Ministry to seek out alternative means of borrowing.


“It would be wise of Russia to tap the yuan market now,” said Vladimir Miklashevsky, a senior economist at Danske Bank A/S in Helsinki. “China remains Russia’s biggest trade partner, China’s enormous financial system has lots of buying potential, too.”

While Bank of Russia Governor Elvira Nabiullina has said there will be “no serious consequences” from U.S. sanctions on new domestic government debt, economists in a Bloomberg survey estimated the move could add 50 basis points to 150 basis points to borrowing costs.

The Yuan-denominated bonds, known as dim-sum bonds, would be listed on the Moscow Exchange and available for investors to purchase via the Moscow branch of ICBC.

Of course, in addition to advancing Russian diversification interests, a successful sale of yuan-denominated Russian debt would also advance China’s interests in the internationalization of the yuan. 

If Russia goes through with the sale, it would be the first sovereign issuance of a yuan-denominated bonds outside of China since 2016, according to Dealogic, with prior issuances in Hungary, Mongolia, the U.K. and the Canadian province of British Columbia.

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Tax Reform Is on Track to Add $1 Trillion to the National Debt, Even After Accounting for Economic Growth

It’s not yet a fait accompli, but Thursday was a good day for supporters of the GOP tax proposal. The bill, however, still doesn’t come close to paying for itself.

Sen. John McCain (R-Ariz.), considered a crucial swing vote on the measure, said he will support the bill. House leaders are reportedly preparing for a vote on Monday to go to a conference committee to iron out differences between their version of the tax bill (passed earlier this month) and the Senate bill. All that comes less than 24 hours after the first vote on the Senate tax bill—a motion to proceed to debate, a procedural step that’s been anything but simple on other major GOP initiatives this year—including a drama-free “aye” from all 52 Republican senators.

The only thing that slowed the tax bill’s momentum was a new analysis from the Joint Committee on Taxation (a number-crunching cousin of the better-known Congressional Budget Office) showing, once again, that the GOP proposal will add about $1 trillion to the federal debt. This, even after accounting for increased economic growth from cutting corporate income taxes.

Here’s how the JCT spelled it out:

All of those minues show the one glaring flaw in the plan. Republicans mostly seem willing to ignore the defect, claiming increased economic growth will cancel out an estimated $1.4 trillion blow the plan will deal to the federal budget. The JCT report shows clearly that is not going to happen. Increased economic growth cancels out about $400 billion, leaving a $1 trillion shortfall.

That’s roughly in line with other estimates. When forecasted economic growth is factored in, the Republican proposal will cost about $500 billion, according to The Tax Foundation, a nonpartisan think tank. A separate analysis by the Wharton School at the University of Pennsylvania says the cost, including projected growth, will exceed $1.3 trillion.

Here’s a neat summary of various estimates, compiled by the Committee for a Responsible Federal Budget, which opposes the current tax plan because of how it will add to the debt.

Projections are tricky things, with lots of moving parts. No one knows for sure what dynamic effects the tax changes will have on the economy, or what outside factors could drive growth—or trigger a recession—in the coming years. There are, however, no estimates, even from Republican sources, showing that tax bill cuts would fully pay for themselves.

Instead, Republicans have responded to the estimates much the way Sen. John Cornyn (R-Texas) did today after the JCT analysis was released.

In other words, close your eyes and wish really hard for the Economic Growth Fairy to make everything okay. It’s a vision that you’re tempted to believe in because it means you get all the benefits with none of the costs—which, in this case, are the tough political decisions about cutting spending—but it’s not one that tracks with the real world or the economic and political history of the last 30-plus years.

This isn’t new. It’s the same thinking that drove the passage of the Reagan tax cuts, properly understood as “tax deferrals,” since the debt has to be paid back someday, as National Review’s Kevin Williamson wrote in a memorable 2010 piece. The same thinking that drove the passage of the Bush tax cuts. Correcting this view, as Williamson wrote at the time, requires equating “spending” and “taxes” so that every dollar spent today means a dollar in taxes must be raised, either today or tomorrow.

Unfortunately, that’s not where we are right now.

When the Bush tax cuts passed in 2001, the nation’s debt-to-GDP ratio was 31 percent. Today, it’s 77 percent. And Congress is about to add another $1 trillion to future Americans’ tab.

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“We Fought Hard But Did Not Deliver”: $2.2BN Hutchin Hill Is Shutting Down

With several months having passed since the last prominent hedge fund closure, the recent narrative that the 2 and 20 community was doing exceedingly well to close out the year (with long/shorts piling into tech names with record leverage), was starting to gain traction. That may have changed this afternoon, when Reuters reported that well-known hedge fund manager Neil Chriss announced he is liquidating his $2.2 billion firm Hutchin Hill Capital LP after three years of poor performance. The firm lost roughly 5.5% in the January-November period after having been up 4.7% in 2016. At one point, Hutchin Hill managed more than $5 billion in assets.

Chriss, whose firm is, or rather was, made up of various trading pods like Millennium and SAC, sent a letter to clients that the best way forward is to “proactively return capital as expeditiously as possible.”

We fought hard, but did not deliver the performance that you expected from us,” Chriss wrote in the letter dated Nov. 30 and seen by Reuters on Thursday.

In the video below, recorded roughly a year and a half ago, Neil Chriss sat down at the Milken Conference to discuss the evolution of hedge funds. Liquidation was not one of the topics covered.

As Reuters summarizes, Hutchin Hill, founded in 2007, is the latest high-profile casualty in the ravaged hedge fund industry, and follows one-time icons Eric Mindich and Richard Perry who likewise made headlines when they shuttered their firms over the past two years.

“This decision is not about one year of performance, which has been disappointing,” Chriss wrote. “We have not delivered on our performance goals for three years in a row.”

Chriss had for some time tried to salvage the firm by cutting costs and refocusing resources.  Earlier this year, he began shuttering the firm’s credit portfolio and shifted resources to trading stocks. He also focused more on macroeconomic and quantitative investing. A year ago, Chriss shut the firm’s Hong Kong office.


Despite the efforts, Chriss wrote that it does not make sense to continue with a smaller team and less money under management. He said he expects all investors to get their money back by the end of the first quarter of 2018.

Chriss, who earned a doctorate in mathematics from the University of Chicago – and who probably should have just run a profitable frontrunning HFT operation or better yet, some smart beta contraption or quant fund – previously worked for Morgan Stanley, Goldman Sachs and SAC Capital, where he headed SAC’s quantitative strategies division.

In the letter he discussed Hutchin Hill’s legacy and said he was “extremely proud” of the 83.2% net cumulative return his firm returned and its 6.6 percent annual returns.

Ironically, as noted above, Hutchin Hill is shutting down just as the hedge fund industry “breathes a cautious sigh of relief as many managers are performing better and taking in new money after years of lagging behind stock market gains and taking criticism for high fees.”

It remains to be seen how the industry will be breathing once the handful of tech stocks which every hedge fund is invested in, crash.


The HFRI Fund Weighted Composite Index, which tracks hedge fund performance, has gained 7.2 percent in the first 10 months of 2017, marking its best return since 2013, data from Hedge Fund Research show. Even so, in 2017 hedge funds will underperform not only the average mutual fund, but also the broader market for the 7th straight year.


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How Open-Access Journals Are Transforming Science: New at Reason

Michael Eisen’s goal is to change the way scientific findings are disseminated. Most research papers today are locked behind paywalls, and access can cost hundreds of dollars per article. The general public, and most scientists, don’t have comprehensive access to the most up-to-date research, even though much of it is funded by U.S. taxpayers.

“It’s a completely ridiculous system,” says Eisen, an acclaimed biologist at UC Berkeley, an independent candidate for Senate in California running against Sen. Dianne Feinstein (D), and a co-founder of the Public Library of Science, or PLOS, which publishes some of the largest and most prestigious academic journals in the world. These publications stand out for another reason: They’re open access, meaning that anyone with an internet connection can read them for free.

PLOS seeks to break up the academic publishing cartel, and it’s a leading force in the so-called open science movement, which aims to give the public access to cutting-edge research and democratize scientific progress.

Click here for full text, a transcript, and downloadable versions.

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White House Says It Is “Monitoring The Bitcoin Situation”

In the past few days two Federal Reserve presidents have discussed cryptocurrencies and concluded they are "niche" and "don't matter today."

The total market capitalization of the entire cryptocurrency space is around $300 billion – smaller than the Top 10 names in the S&P 500.

In the last three years, Bitcoin has gained a similar amount of market cap as Nvidia…

A de minimus percentage of Americans are exposed to Bitcoin and crypto-currencies.

But it appears the last few days of turbulence in Bitcoin  – which saw total losses of around $3 billion yesterday, compared to $60 billion lost in FANG stocks alone – has 'triggered' the world's media into a frenzy..

Which led to today's White House Press Briefing and an unusual question from one reporter…

"Has the president been following cyrptocurrencies at all? Specirfically the major run-up in it…


Does he have an opinion on it, and does he feel it is now something that needs to be regulated?"

The answer was, perhaps, somewhat surprising…

"The [Bitcoin situation] is something that is being 'monitored' by our team…


Homeland Security is involved."

Which made us wonder…

Is Homeland "monitoring" FANG stocks and how dangerous they are?


Is The White House aware of the billions of dollars bing slammed through precious metals paper markets every morning?


Does President Trump have opinion on the massive spike in EONIA this week?

Did Bitcoin just make it to the big show?

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Obese Millennials Jeopardize America’s Future: Study

A new study from the New England Journal of Medicine indicates the current obesity epidemic trends in the United States are much worse than thought. The study was published on Wednesday and already has demographers, government officials, and scientist alarmed. The sobering report finds 57.3% of the nation’s children and teens will be obese by the age of 35 if the model continues.

America’s empire is now cracking under the weight of the millennial and the homeland generations’ poor eating habits.

This study is unique and goes beyond any previous research suggesting unhealthy childhood weights leading to adult obesity, exclaimed USA Today. Further, the article suggests the millennial and homeland generation children may have just ushered in a “world where obesity could soon be the new normal”. 

Here is how the scientist calculated these scary findings,

We pooled height and weight data from five nationally representative longitudinal studies totaling 176,720 observations from 41,567 children and adults. We simulated growth trajectories across the life course and adjusted for secular trends.


We created 1000 virtual populations of 1 million children through the age of 19 years that were representative of the 2016 population of the United States and projected their trajectories in height and weight up to the age of 35 years. Severe obesity was defined as a body-mass index (BMI, the weight in kilograms divided by the square of the height in meters) of 35 or higher in adults and 120% or more of the 95th percentile in children.  

Zachary Ward, a researcher at the Harvard T.H. Chan School of Public Health, who was the lead author of the study, offered a sobering remark for the need to increase prevention efforts from infancy through young adulthood.

He said, “study is the first to make precise predictions for today’s generation of children.” And so far, the health of America’s future generations has never looked more bleak. 

Models from the study predict that a majority of today’s children (57.3%; 95% uncertainly interval [UI], 55.2 to 60.0) will be obese at the age of 35 years. Full results below, 

Given the current level of childhood obesity, the models predicted that a majority of today’s children (57.3%; 95% uncertainly interval [UI], 55.2 to 60.0) will be obese at the age of 35 years, and roughly half of the projected prevalence will occur during childhood.


Our simulations indicated that the relative risk of adult obesity increased with age and BMI, from 1.17 (95% UI, 1.09 to 1.29) for overweight 2-year-olds to 3.10 (95% UI, 2.43 to 3.65) for 19-year-olds with severe obesity. For children with severe obesity, the chance they will no longer be obese at the age of 35 years fell from 21.0% (95% UI, 7.3 to 47.3) at the age of 2 years to 6.1% (95% UI, 2.1 to 9.9) at the age of 19 years.  

Overall half of the people who will be obese at 35 already are obese at 20, Ward said.

And of course, scientist blame the obesity crisis ravaging America’s younger generations on “profound changes in physical activity and diet”. Millennials are sitting in their parent’s basements too broke to afford avocado and toast, while binge-watching Netflix. Nevertheless, their unconscious minds are too clouded with show Mindhunter (Netflix) or Alias Grace (Netflix) that they miss the point their well-being is critical for the overall survivability of the nation.

The study is based on “a sophisticated statistical analysis technique that relies on certain assumptions, and those assumptions can be challenged,” said Stephen Daniels, chairman of pediatrics at the University of Colorado School of Medicine.  “But I think the assumptions are pretty reasonable and their conclusions are pretty reasonable and, unfortunately, pretty scary.”


Daniels, who was not involved in the study, said the findings reflect “profound changes in physical activity and diet” that are hard to address. We live in a world, he said, where it’s easier for kids and parents to choose “high calorie, low-nutrient” foods and drinks than healthy ones. Meanwhile, he said, kids are often glued to screens that keep them immobile for many hours a day.


Potentially helpful policy changes, such as taxes on sugary drinks, need more research, he said. Beverage makers dispute any possible link between obesity rates and soda consumption.


“We have to figure out how to change our environments,” Daniels said. “We spend a lot of time talking to parents about changes we want them to make, but it’s an uphill climb for them.” 

The study concludes and offers a grim outlook on the health of the United States all thanks to the millennials’ eating problem. Nevertheless, the study fails to mention the other can of worms plaguing millennials such as opioids epidemic, students loans, and wealth inequality. 

On the basis of our simulation models, childhood obesity and overweight will continue to be a major health problem in the United States. Early development of obesity predicted obesity in adulthood, especially for children who were severely obese.

* * *

So which states are harboring the largest Americans?  As it turns out, the fried delicacies of the American South aren’t so great for the waistline…

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Critical Data Is Missing From The FBI’s Annual Crime Report And Researchers Want it Back

Criminal justice researchers are alarmed at missing data from the FBI’s latest annual crime report and say it will hamper efforts to study drug arrests and violent crime, two of the Trump administration’s biggest priorities.

The new outlet FiveThirtyEight first reported in October that the FBI’s annual Uniform Crime Reports (UCR) for 2016—the first year it was released under the Trump Administration—were missing many key fields from previous years. The report is the most comprehensive annual survey of crime in the U.S. and an invaluable tool for researchers and public policy experts.

In a letter to U.S. Attorney General Jeff Sessions and acting FBI Director Christopher Wray on Tuesday, the Crime & Justice Research Alliance, a Washington, D.C. organization representing roughly 5,000 criminologists, urged the Justice Department and FBI to re-issue the report with the old data fields intact.

“The unnecessary and surprising removal of the majority of the data tables does not reflect the FBI’s stated commitment to meeting the needs of the users of these data,” the group wrote. “Given the administration’s public statements about addressing violent crime, victims’ rights, the opioid epidemic and terrorism, it is unfortunate that the 2016 report removes key data about these topic areas.”

According the organization, the removed data fields include such information as the relationship between homicide victims, their killers, and the circumstances of the crime. The removed fields, the group argues, will prevent researchers from gaining insight into family and intimate partner violence, as well as gang and drug-related homicides.

Also missing are data on arrests related to specific drug types, making it hard for researchers to track trends in law enforcement efforts to combat drugs such as heroin and opioids, a major focus of the Trump administration.

The Justice Department referred a request for comment to the FBI, which did not immediately respond.

This week, the White House announced it was appointing Jeffrey Anderson, a former political science professor at the U.S. Air Force Academy and fellow at the conservative Hudson Institute, to head the Bureau of Justice Statistics, the federal agency tasked with collecting and analyzing national crime data.

In May, five former directors of the BJS sent a letter to Sessions urging him to appoint someone to head the agency who had “scientific skills; experience with federal statistical agencies; familiarity with BJS and its products; visibility in the nation’s statistical community.”

Anderson has no relevant experience in criminal justice statistics, although the White House did note in its announcement that he “co-created the Anderson and Hester Computer Rankings, which were part of the BCS formula to determine college football’s annual national championship matchup.”

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Cops Mistook Colostomy Bag for Gun, Tased and ‘Maliciously’ Charged Man, Lawsuit Alleges

A lawsuit accuses police in Euclid, Ohio, of mistaking a colostomy bag for a gun, pulling the bag’s owner out of his car, tasing him, and then maliciously charging him with obstructing official business, resisting arrest, and criminal trespass.

It took seven months before the charges against Lamar Wright were dropped, but don’t expect anyone to be punished for what he endured. Even if Wright prevails in his suit—via a jury or, more likely, through a settlement—the prosecutors who abetted the cops by dragging the charges out for more than half a year are highly unlikely to be held accountable themselves.

Wright says he pulled his rental car into a driveway to use his cell phone “safely” when two armed men approached him. After he realized they were plainclothes cops, he says he put his phone on his dashboard, and then one of the officers grabbed him by the arm through the window. The cop yelled at Wright to show his hands, then pulled him out of the car and tased him just as Wright was trying to explain his colostomy bag.

“I told you I got a bag on,” Wright yelled at the cop. “What’s a bag?” “A shit bag, man!”

The interaction was caught on body camera:

In his lawsuit, Wright claims he was not released from custody after posting bond, instead remaining in detention. He says he was taken to the county jail and searched with a full-body x-ray scanner and not released until four to five hours after posting bond. He also alleges the cops laughed at him being in pain.

“I filed this case to stand up against police brutality, and to stand with other victims of senseless attacks by officers from the Euclid Police Department. These officers’ illegal treatment of people in the city must stop,” Wright said in a statement. “We need justice for all the victims of the EPD.”

The Cleveland Scene notes two other recent police incidents in Euclid. One is the fatal police shooting of Luke Stewart, in which no charges were brought. (The family has filed a wrongful death lawsuit.) The other is a violent traffic arrest that did in fact lead to the firing of a police officer—an outcome that could lead to some hope here that, at the very least, some incompetent cops might be removed from their jobs.

Scene also provides a kicker: The department announced last week that it had won a AAA Platinum Award for community traffic safety.

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This Time Is Different – Part I: What Bitcoin Isn’t

Authored by Mark Jeftovic via Medium.com,

[Bitcoin] won’t end well, it’s a fraud…worse than tulip bulbs…[but] if you were a drug dealer, a murderer, stuff like that, you are better off doing it in bitcoin than U.S. dollars,”

— Jamie Dimon: CEO, JP Morgan


Headline: JPMorgan Guilty of Money Laundering, Tried To Hide Swiss Regulator Judgement

— via Cointelegraph

Given the current, latest successive series of spikes to all time highs for Bitcoin, the detractors are working overtime to make the case that the crypto-currency is a Ponzi, a scam, a phantasm or at the very least, a bubble.

Oddly, many of these same detractors spend a lot of time cheerleading “the other bubble”, that everything-bubble, stocks, bonds, real estate, even ETFs of ETFs, you name it.

It’s easy to make superficial apples-to-screwdrivers comparisons about why Bitcoin is doomed to fail. Until you really take some time to look into it. When first was exposed to the idea back in 2013 and researched it, I realized that “this really is different”, and the reason why was because of something John Kenneth Galbraith had once written which (until then) had invariably held up as true. In “A Short History of Financial Euphoria” Galbraith said:

“The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version. All financial innovation involves in one form or another, the creation of debt secured in greater or lesser adequacy by real assets.”

(emphasis added)

When one looks at the history this accurately maps every financial bubble from Tulipmania (which we will debunk as a suitable metaphor for Bitcoin shortly) right up to 2008 and beyond.

However one place where it isn’t applicable, is to the phenomenon of Bitcoin. Crypto-currencies, at least at present, have no leverage and are near impossible to purchase on credit. In other words, if asset bubbles get that way largely through leverage, and there is comparatively no leverage in Bitcoin, then something else has to be driving it.

That said…

The Price of Bitcoin is a Side Show.

Granted, at the moment it’s a very exciting sideshow for those who are on the train. A long time customer emailed me as I was writing this asking “at what point has easyDNS’ profits from accepting and holding bitcoin exceeded the actual operating profits of the company?” I had never considered that but some quick math revealed that even after cashing a chunk out to buy gold (not my greatest trade), that happened last year.

But the price action around this isn’t what is exciting about Bitcoin and the crypto-currency revolution. What is exciting is that the centralized, bankster controlled monopoly over the issuance of money itself is finished. It’s over. Even if they successfully manage to co-opt some major crypto-currencies or issue their own, Gresham’s Law will assert itself as capital managers will select a truly decentralized crypto-currency wherein they control, or have the option to control, their own private keys to safely store their wealth while they’ll use the government version to pay taxes, etc.

Whatever state issued “digital cash” comes out in the near future, I’m suspecting it will be centralized with mandatory private key custody or escrow. When that happens it shouldn’t even be called crypto-currency, call it something else like “pseudo-crypto” or “fauxcoin” to differentiate.

Given the mostly bad analogies and unfounded criticisms being levelled at Bitcoin, let’s first take a serious look at what Bitcoin isn’t. Then in Part II we’ll look at what it is and why its different.

What Bitcoin Isn’t

“Backed by nothing”

This is the goto criticism for people who simply don’t understand that crypto-currencies are based upon mathematics, zero-trust, open-source and consensus. They think that bitcoins can simply be created “at will” and are backed by nothing.

They also say that as if the world’s reserve currency, the US dollar, isn’t, literally, “backed by nothing” and hasn’t been since 1972; and as if it can’t be created at will, which it most certainly has, with a vengeance.

Source: St Louis Fed

Indeed as Galbraith continued in our earlier passage:

“This was true in one of the earliest seeming marvels: when banks discovered that they could print bank notes and issue them to borrowers in excess of the hard-money deposits in the banks’ strong rooms”.

All fiat currencies today really are backed by nothing and can be created at will (that’s what the word “fiat” actually means), and perhaps unbeknownst to many we are right now in a protracted, global currency war. Every nation is “racing to the bottom”, trying to devalue their currency against their trading partners so they can:

  1. give their exporters a competitive advantage

  2. pull stronger currencies in to make money on the exchange, and

  3. service their ever expanding debts back with devalued, cheaper currency

This is why everybody’s purchasing power is going down despite tenured academics and central bankers incessantly complaining about “low inflation” and political spokesmodels always talking up a “strong currency”.

Bitcoin isn’t: “Backed by nothing”


What is? The USD and every other fiat currency in the world.

“Bitcoin is a ponzi”

The idea that Bitcoin or most crypto-currencies are “a Ponzi” is easily debunked by understanding what a Ponzi actually is.

As observed in CryptoAssets (Burniske & Tartar, 2017), it’s very simple: new investors pay old investors.

It is important to realize that in a Ponzi, the earlier investors are literally paid with funds being injected by the new investors in a “flow through” fashion (as distinct from later investors having to pay higher prices to earlier ones to induce them to part with an asset).

As long as the number of new investors and thus the influx of funds is growing at a rate faster than the payouts to the earlier investors, the Ponzi scheme thrives. When the expected payouts exceed the rate of input, it dies.

One doesn’t have to look very far to find mechanisms that fit the definition exactly: Social security programs are all classic ponzis. The demographic reality today is that with the entry of the “Baby Boom” generation into retirement, given that the subsequent generations are so much smaller in size, additionally penalized by falling real wages, rising or multiple taxation, decaying purchasing power on their money and returns on any savings they can eek out suppressed into negative nominal yields; this Ponzi is in its terminal phase.

(Given that these exacerbating headwinds which face later generations can be summed up with the phrase “financial repression”, it is only logical that capital would “flee” to some asset or currency which appears resistant to them.)

Granted, the current ICO craze probably includes some ponzis. The Cryptoassets book describes the OneCoin Ponzi as well as how to spot a ponzi in crypto-currencies. I would have been hesitant to even call OneCoin a crypto-currency at all. It wasn’t open source and had no public blockchain.

In Bitcoin or other true crypto-currencies, early holders are not receiving bitcoin from later entrants. In fact, quite the opposite is happening. Later entrants must entice earlier ones to part with their bitcoin. Since Bitcoin cannot be created at will, it must be mined at a rate that drops over time (this year approximately 640K new bitcoin will be mined, about 3.8% of the total supply).

Demand for bitcoin is simply outstripping supply of new coins being mined (for reasons we will discuss in Part II). If said price action rises dramatically (like for example, Bitcoin suddenly became the highest performing asset class in the world) then a feedback loop would occur. Ever higher prices would be required to induce earlier holders to sell.

Bitcoin Isn’t: A ponzi


What is: Social Security


What is described above is the same dynamic that occurs in any “bull market”, as buying begets more buying, and “fear of missing out” kicks in. It is said one of the most accurate gauges of “happiness” correlates closely to how much wealth one has when compared to one’s brother-in-law. Alex J Pollock describes it in “Boom and Bust: Financial Cycles and Human Prosperity”, as “The disturbing experience of watching one’s friends get rich”.

The trick would be to have some understanding of when a strong bull market has crossed into Bubble territory. One of the more popular analogies for Bitcoin is Tulipmania: the financial bubble that occurred in 1630’s Amsterdam with none other than tulip bulbs. Bitcoin is compared to Tulipmania so often I decided to take a closer look at Tulipmania to see if the comparison was valid.

What I found was that it most of what we know today about Tulipmania is superficial and self-referential, deriving primarily Charles Mackay’s chapter on Tulipmania in his seminal “Extraordinary Delusions and the Madness of Crowds” (1841). It is a scant 9 pages and is purely anecdotal, describing ridiculous prices paid by the otherwise pragmatic and level-headed Dutch and then it all just blew up like all bubbles do.

Finally I found Anne Goldgar’s Tulipmania: Money, Honor and Knowledge in the Dutch Golden Age, which is the most in-depth investigation to the rise and subsequent fall of Tulipmania extant today. In it we learn about the circular references that went on to inform our present time about Tulipmania:

“If we trace these stories back through the centuries, we find how weak their foundations actually are. In fact, they are based on one or two contemporary pieces of propaganda and a prodigious amount of plagiarism. From there we have our modern story of tulipmania.”

She traces the lineage of MacKay’s chapter:

“Mackay’s chief source was Johann Beckmann, author of Beytrage zur Geschichte der Erfindungen, which, as A History of Inventions, Discoveries and Origins, went through many editions tions in English from 1797 on. Mackay’s chief source was Johann Beckmann, author of Beytrage zur Geschichte der Erfindungen, which, as A History of Inventions, Discoveries and Origins, went through many editions tions in English from 1797 on. Beckmann was concerned about financial speculation in his day, but his own sources were suspect.


He relied chiefly on Abraham Munting, a botanical writer from the late seventeenth century. Munting’s father, himself a botanist, had lost money on tulips, but Munting, writing in the early 1670s, was himself no reliable eyewitness. His own words, often verbatim, come chiefly from two places: the historical account of the chronicler, Lieuwe van Aitzema in 1669, and one of the longest of the contemporary pieces of propaganda against the trade, Adriaen Roman’s Samen-spraech tusschen Waermondt ende Gaergoedt (Dialogue logue between True-mouth and Greedy-goods) of 1637. As Aitzema was himself basing his chronicle on the pamphlet literature, we are left with a picture of tulipmania based almost solely on propaganda, cited as if it were fact.”


(emphasis added)

Goldgar helps the reader in pursuit of truly understanding Tulipmania by rewinding to the late 1590’s, when there were no tulips in what is now Holland, or in fact Europe. Gardens were purely functional, for growing food, herbs or medicinals. Then tulips and other curiosities began coming into the country and Europe from merchant vessels trading in the Mediterranean and Far East.

The “flower garden” arose for the first time, and it was spectacular?—?giving rise to an entire movement of collectors and aficionados, whom in the early days were as a rule well-to-do and affluent. In later years, more people sought out, and then speculated in the tulip trade to not only profit, but to lay their own claims on what they perceived to be a higher economic class or status.

At the risk of over simplifying her work, the Tulip trade became intertwined and inseparable from, art.

“The collecting of art seemed to go with the collecting of tulips. This meant that the tulip craze was part of a much bigger mentality a mentality of curiosity, of excitement, and of piecing together connections between the seemingly disparate worlds of art and nature. It also placed the tulip firmly in a social world, in which collectors strove for social status and sought to represent themselves as connoisseurs to each other and to themselves.”

The more I delved into understanding Tulipmania, the more I couldn’t escape thinking that the analogy was much more applicable to a different “asset class” which did enjoy a momentous bubble in recent times, but it wasn’t bitcoin or crypto-currencies. To belabour my point, Bitcoin was impelled not by art, beauty or any semblance of collectibility but emerged primarily as a resistance to financial repression.

Something that was driven by uniqueness and fostered an aristocratic in-club all it’s own and until recently enjoyed stratospheric price action, was the aftermarket in domain names. This isn’t the place to conduct a post-mortem on that bubble, but suffice it say that the distinct characteristics of domain names more closely resembled that of tulip bulbs than Bitcoin does. (For the reader interested, I have written at length about the domain aftermarket here and here).

Bitcoin isn’t: Tulipmania


What was like Tulipmania? Domain names.

*  *  *

If Bitcoin isn’t a digital fiat backed by nothing, nor a ponzi nor Tulipmania, then what is it? Why has this come out of literally nowhere to become the strongest performing and fastest growing asset / currency in the world?

When I started writing this post I wasn’t sure myself. I had to go back through my library and look at history and try to find some historical antecedent for what was happening. After looking back through the origins of money itself and working forward I still wasn’t any closer to a mental model that “worked”.

Then around 2am the other night I woke up with the idea that I was looking in the wrong place, and it hit me with such force that I had a hard time getting back to sleep?—?even though I had made an “off the cuff” tweet that captured the basic idea of it a few weeks earlier (which I can’t find now).

I’ll take you through it in Part II. (Hope to have it up soon). But in the meantime, I’ll leave you with another megabank CEO who’s take on all this is very different from Jamie Dimon’s. Goldman Sachs’ CEO Lloyd Blankfein here muses on why it’s entirely plausible that money may evolve from being based on fiat to being based on consensus. Some truly extraordinary remarks coming from a man in his position.

via http://ift.tt/2zCWQch Tyler Durden