Thursday, May 13, 2010

Former Plunge Protection Team Member: Governments Are Going to Tax Everything That Doesn't Move

I previously posted a short profile on Philippa Malmgren and the remarkable list of clients she has gained since leaving government. There is no question that word is out among insiders that she is an up and coming player.

Today, she provided a briefing to financial executives in Australia. Paul Benson was there and provides notes on her latest thinking:
* At best, Greek citizens can expect 3 years of depression followed by 10 years of recession as a consequence of the bailout package and the conditions attached.

* Given this, will citizens accept that peacefully? No in Philippa’s opinion. Governments will get thrown out, not just in Greece, but globally, as citizens wake up to the fact that the debt’s their governments took on to get them out of the global recession have to be paid back, and that means higher taxes, less money for services, less money for pensions, etc.

* She noted that default on government debt could happen in several ways – One is via inflation, which is the way she expects the US and UK to dig themselves out. In this instance the lender get’s all their money back, it just doesn’t buy what it used to. More traditionally a default involves the lender not getting all of their money back. Taking a “hair-cut”. She felt this was inevitable for some countries and felt this wouldn’t be so bad – the lenders would get most of their money back, and the countries in question could still offer their citizens a reasonable quality of life. She observed that Russia went through this process with little long term detrimental effects.

A third option, which she discussed specifically with regards Greece, is that they could drop out of the Euro and revert to Drachma. In this way the currency could adjust to reflect Greece’s specific economic circumstances. Philippa noted that this was a key advantage the UK had compared to it’s European neighbors.

* Inflation is coming. Food inflation has already been significant, as has commodity inflation. Inflation in China now exceeds bank interest rates, meaning it costs you money to leave your money in the bank. As a consequence she expects stagflation, similar to that which occurred in the 70’s although not as extreme.

* In an inflationary world, business margins will be squeezed, unless they have a strong enough brand/market position to be able to pass on the rising costs.

* More strikes are likely as workers battle to have their incomes keep pace with inflation.

* China is especially afraid of inflation as it hits the poor the most, leading to the potential for civil unrest. However economic growth is also required to maintain a happy citizenry. As such they are hitting the accelerator and brake at the same time. Currently they are trying to contain the property market, but the money will just pop-up somewhere else.

* Government’s around the world, faced with massive debts, will tax everything that doesn’t move – mining and property as examples. The likes of [Austrailia's] Resources Super Tax will become common.

* Corporate bond rates for Shell and Warren Buffet’s Berkshire Hathaway, are lower than US government bond rates. This is the new world. Quality corporates with strong cash flows are less risky than governments with on-going deficits.

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