No country has ever imposed itself on prosperity
Violent protests erupted in the streets of Bogota, Cali and other cities in Colombia. The immediate cause? Proposed reforms to the South American country’s tax system that would have lifted taxes on everything from wages and dividends to fossil fuels, single-use plastic items and more.
According to reports, the protests have involved citizens from all walks of life, including truckers, taxi drivers and healthcare workers. Overworked doctors, nurses and paramedics have quit their jobs to draw attention to late pay.
In response to the unrest, Colombian President Ivan Duque announced on Sunday that he was withdrawing the tax reform proposal. The country’s finance minister resigned the next day.
But protests continue, just as they did in Hong Kong in 2019 and 2020 after a controversial extradition bill was overturned. At least 24 Colombians have reportedly lost their lives to date in clashes with police.
Money flows where it’s most respected
It is against this incendiary backdrop that US lawmakers have their own debate on tax reform.
President Joe Biden is seeking to make a number of adjustments to the tax code, including increasing the top income rate to 39.6%. The capital gains tax, currently 20%, would be doubled. And corporate taxes, which were lowered to 21% in the 2017 Tax Cuts and Jobs Act, would rise between 25% and 28%.
Prior to 2017, the highest U.S. corporate income rate was 35%, making it one of the highest rates in the world, even higher than Mexico, France, and Brazil. . Most of the other leaders and I celebrated this change because it made the United States much more competitive as a place to do business. As I have said many times, money flows where it is most respected. As the tax bill was signed, private business investment in the United States picked up quickly, before stagnating at the end of 2019 as the global economy slows and articles of impeachment against the president Donald Trump seemed more and more likely.
Now, as domestic investment finally begins to return after the worst of the pandemic, the United States risks scaring money again by raising corporate taxes.
To make matters worse, Treasury Secretary Janet Yellen said last week that she and a number of other finance ministers were actively negotiating a global minimum corporate income tax. If implemented, the ruling would be another example of unelected bureaucrats imposing anti-capital and anti-competitive policies on the rest of us. Obviously, I do not tolerate the violence we are seeing in Colombia right now, but I do see it as a cautionary tale of what could happen when people are faced with the real possibility of being denied even more of their hard money. won. .
One of my all-time favorite quotes comes from Winston Churchill, who was just as witty as he was a great leader: “We argue that for a nation, trying to tax yourself in prosperity is like a man standing in a bucket and trying to lift himself by the handle.
On the contrary, countries have found prosperity in eliminate the taxes. Take China. In 1978, Deng Xiaoping established special economic zones (SEZs) along the coastline in cities like Shenzhen, which invited millions of dollars in foreign investment to flow. It is difficult to imagine that China would become the second largest economy if this decision had not been made. .
Net short bets on the rising dollar. Time to grab some gold?
It may not be a coincidence that the value of the US dollar fell more than one percent last week against a basket of international currencies. It comes as hedge funds and other speculative investors have increased their net short positions against the greenback in recent weeks. Additionally, the International Monetary Fund (IMF) reported that the share of US dollar reserves held by global central banks fell to 59% in the fourth quarter of 2020, a 25-year low down from 71% since. the beginnings of the euro. in 1999.
What does this mean for assets priced in US dollars, like gold? As you might expect, the yellow metal climbed above $ 1,800 an ounce for the first time since late February. Gold rose more than 3.5% for the week, beating its digital counterpart Bitcoin, which remained broadly stable.
The US dollar index is currently at 90.2. I believe if it trades below 90 it could trigger technical gold buys as inflation concerns escalate.
This is precisely the reason why legendary investor Sam Zell finds gold attractive right now. The founder of Equity Group Investments told Bloomberg Television last week that he sees inflation “everywhere.”
“You’ve read about lumber prices, but we see it in all of our businesses,” Zell said. “Obvious bottlenecks in the supply chain arena are driving prices up. It is very reminiscent of the 1970s. ”
Commodities at their highest for six years, copper at all-time high
Indeed, one of the most obvious signs of inflation is the rapid expansion in commodity prices, which reached their highest level since 2011 last week. For the 12-month period, the Bloomberg Commodity Index returned nearly 70%, one of the best cycles for commodities in recent memory. Meanwhile, copper, an indicator of economic growth, hit a new record high of over $ 10,400 per metric tonne.
I do not see any decline in asset prices in the short term, given the continued risk of inflation and the depreciation of the US dollar. Copper could very well cost $ 13,000 or more, so stick around for a long time.
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