Bill Bonner

What’s the latest news? The great battle continues… Dow down 53. Gold up $23.

Up vs. Down

Zombies vs. Producers

Inflation vs. Deflation

The feds vs. the market

Expansion vs. contraction

Centralization vs. decentralization

Bull vs. Bear

And no one knows exactly how it will work out. Some are betting on a ‘recovery’ and a new bull market. Others have put their money in gold or cash…expecting more crises and more calamities.

Mr. Market is determined to deflate the debt bubble. The feds are determined to stop him. One destroys paper credits. The other prints more of them. The outcome is still in doubt.

Another way to look at this great battle — it’s a fight between the outsiders and the insiders. The outsiders are unruly…uncontrollable…and unpredictable. They’re the creative destroyers that Schumpeter was talking about, always finding new ways of doing things…and destroying the old ways. But in their chaotic, wham-bam approach…they actually build wealth.

Every new industry is created by outsiders. Henry Ford was the son of refugees from the Irish potato famine… Steve Jobs was a college dropout…who admired Edwin Land, another college dropout who invented the Polaroid film industry. Silicon chips were developed with money from potato farming.

But once the founders are gone, the insiders take over. Tech companies pass out of the control of the techies and into the control of salesmen and accountants. Business school grads take over. Their goal is not to create new wealth, but to preserve and expand their power, their status, and their wealth. They hire lobbyists to get special favors. They support laws to prevent competition. They favor regulation and licensing to keep out upstarts and give generously to politicians of both parties.

Outsiders create new wealth. Insiders protect and redistribute it — mostly to themselves.

In last week’s news was an interesting item. From John McCormack of The Weekly Standard:

General Electric, one of the largest corporations in America, filed a whopping 57,000-page federal tax return earlier this year but didn’t pay taxes on $14 billion in profits. The return, which was filed electronically, would have been 19 feet high if printed out and stacked.

The fact that GE paid no taxes in 2010 was widely reported earlier this year, but the size of its tax return first came to light when House budget committee chairman Paul Ryan (R, Wisc.) made the case for corporate tax reform at a recent townhall meeting. ”GE was able to utilize all of these various loopholes, all of these various deductions — it’s legal,” Ryan said. Nine billion dollars of GE’s profits came overseas, outside the jurisdiction of US tax law. GE wasn’t taxed on $5 billion in US profits because it utilized numerous deductions and tax credits, including tax breaks for investments in low-income housing, green energy, research and development, as well as depreciation of property.

“I asked the GE tax officer, ‘How long was your tax form?’” Ryan said. “He said, ‘Well, we file electronically, we don’t measure in pages.’” Ryan asked for an estimate, which came back at a stunning 57,000 pages. When Ryan relayed the story at the townhall meeting in Janesville, there were audible gasps from the crowd.

Ken Kies, a tax lawyer who represents GE, confirmed to THE WEEKLY STANDARD the tax return would have been 57,000 pages had it been filed on paper. The size of GE’s tax return has more than doubled in the last five years.

The insiders get tax cuts; the economy gets zombified. GE pays an army of lawyers and tax accountants to dig into the tax system. It strikes gold. The economy gets shafted. GE pays no taxes. The lawyers and accountants — presumably smart gals and guys — spend their time doing zombie work. Society is poorer. But the zombies get their meat.

“Wait a minute,” Elizabeth protested. “The accountants and lawyers aren’t zombies. They’re doing real work, protecting GE…which is a wealth producing business from taxes.”

“Yes…they’re honest, decent workers,” we replied. “Like many government employees. And millions of other people. They’re good people doing bad work. They may be doing it well. They may be diligent and hardworking. But they have been zombified.”

As the economy is taken over by zombies, more and more people are needed to do the zombies’ work — shifting more and more of the economy’s output to the insiders.

The insiders rig the system for their own benefit. The rigs — each one of them a form of price-fixing or central planning — weaken the system. In today’s battle, the insiders fight to protect it.

They do not want failed institutions to disappear. Instead, they want them subsidized.

They don’t want failed regulations eliminated. Instead, they want more regulation.

They don’t want to fire the failed managers; instead, they promote and reward them. Tim Geithner was head of the New York Fed. The biggest debt bubble in history grew right under his nose. Now, he’s got the top financial job in the US — Treasury Secretary. Larry Summers advised the Clinton Administration to encourage more debt, speculation, and leverage; now he’s head of Obama’s team of economic advisors.

And in Europe, the Goldman bunch — who might have been hung for sinking banks, pension funds, and sovereign nations under debt — is brought in to ‘solve’ the crisis they caused. They’ve got their men in the top job in Italy and at the European Central Bank.

The insiders’ goal is simple enough — to keep the money flowing to…well…the insiders!

The outsiders, on the other hand, don’t have a goal. They are like the OWS…or the market itself. Wild, disorganized…with unclear intentions and uncertain beneficiaries. You can’t support them…because you don’t know who they are or what they want. They’re outsiders!

The insiders represent the past. The outsiders represent the future.

And how will it all turn out? In the end, the future will come…whether we like it or not.


Bill Bonner
for The Daily Reckoning

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success in numerous industries. His unique writing style, philanthropic undertakings and preservationist activities have been recognized by some of America's most respected authorities. With his friend and colleague Addison Wiggin, he co-founded The Daily Reckoning in 1999, and together they co-wrote the New York Times best-selling books Financial Reckoning Day and Empire of Debt. His other works include Mobs, Messiahs and Markets (with Lila Rajiva), Dice Have No Memory, and most recently, Hormegeddon: How Too Much of a Good Thing Leads to Disaster. His most recent project is The Bill Bonner Letter.

  • just me

    best… essay… ever… as always, BB explains more in 500 words than what most say in 500 pages

  • phelps

    Don’t go out a limb with those predictions Bill. The future always cometh. Some of these old geezers think they will live forever. Their end is approaching much quicker than they realize. There BS is getting older than they are. Time for them to get out of the way.

  • Mircea

    One of the best articles this year; exceptional reading.
    Thank you.

  • Chris

    Thanks for the article Bill

  • The InvestorsFriend

    If only Warren Buffett were available to head Obama’s economic advisors. And maybe Bill too.

    Most insurance companies use reinsurance subdiaries in tax havens to transfer profits to tas haven. Berkshire does not.

    Warren Buffett is a true American hero.

  • The InvestorsFriend

    Warren Buffett is a genius, also he can spell.

  • CT

    this is something anyone with any type of neurons between their ears know and nothing is ever going to change. Knowing all this does not make it change. The time has come to fight or walk away. It will be interesting to see who stays and fights and who walks away to hide under a rock.

  • Warren E. Buffett

    Thanks, Shawn – I’m glad to know that my fawning admirers quickly forgot that Sokol insider trading mess.

    I’m sending you an autographed photo of myself having lunch with Big O. He wouldn’t sign it, though… something about being in charge.

  • mils

    I always enjoy your articles BB, so insightful, so true.

  • KP Chen

    Bill, if insiders are becoming 10% less insiderness every year, and outsiders are becoming 10% more insiderness every year, then in a few years, there will be a rebalance.

  • Anita

    Nice article Bill.

  • et2cetera

    Great insight! Too bad the MSM just repeats tired old drivel. Or is it because their insider masters don’t want the outsiders to know any better?

  • Guido

    One bit of logic that I don’t get. A tax accountant is someone that helps a productive business minimize the bite that zombies (IRS)take from it and they get called zombies too?

    Are they not primary warriors against the zombies? Protectors of the productive?

  • Don

    Wow! Bingo!
    Praise the internet! Praise Bonner!

    I hump your leg in adoration!

  • The InvestorsFriend

    Warren, don’t beat yourself up over that Sokol affair. That was him, not you, of course.

    It’s apparent Warren, no matter how ethical you are how much taxes you pay, how much you donate to charity how much advice you give, there will still always be plenty of idiots who look for some bad in you instead of appreciating you and learning from you.

    ‘…your openly fawning friend always

  • The InvestorsPal

    Is the 3-way project still on?

  • The InvestorsFriend

    We already completed it, you were not invited. Standby for our report and press release.

  • Matt

    Guido you’re not quite seeing his perspective.

    The tax accountants are zombies because their work does not make our lives better. That’s what an economy is supposed to do – be filled with people producing and adding value so that we all enjoy an improved standard of living.

    When we have 37,000 page tax returns it is a clear sign of waste. These accountants only exist because of an overly and unnecessarily complicated tax system. As Bill said, they are honest and decent workers, but plain and simple – they are a product of a zombified economy which ultimately contributes nothing to our standard of living.

    You can think of them as ‘protectors of the productive’ but you have to realise they are merely fighting a never-ending paperwork war which yields a lot of wasted efforts but nothing good to show for it.

  • HJR

    Ditto to just about all the above. BB’s observations ring true to just about every reader. Even so, I’ll offer a personal experience.
    I’ve worked for the same corporation for the past 33 years. I joined the company when it was managed by the founders and striving to become a “mid-sized” company. The company became one of the S&P 500. As a Development Engineer, I used to joke that I was only three steps away from the CEO’s job. By 2000 most of the founders had retired or left. An “insider” took over the CEO’s position. He has added so many well paid bureaucrats, that today, I can’t count the steps. Each new bureaucrat wants to put his “mark” on the corporation. Each mark has added to the “Red Tape” the rest of us have to deal with.
    After numerous acquisitions, today,the company’s stock is valued at less than half what it was in 2000. The CEO’s compensation is more than double.

  • gman

    “One bit of logic that I don’t get. A tax accountant is someone that helps a productive business minimize the bite that zombies (IRS)take from it and they get called zombies too?”

    yes. absolutely. a zombie is anyone who is not working for you or paying you directly. that’s all.

    this whole creative destruction thing is nothing more than happy-speak for change. infestors make their living off of change. any change, constructive or destructive, it doesn’t matter to them. remember, they don’t work. they make their living buying low and selling high. therefore if prices aren’t changing they starve. stable cities with stable industries and stable populations raising their children for generations have no interest for them. none. they need change. they need new industries moving in, old industries being torn down, populations desperately running to and fro looking for a lifeline, any work, to keep a roof over their heads for another night. infestors are always looking for that next lifeline so they can buy low and sell high to those who need it, and always ready to sell that lifeline as soon as it starts to fail. that’s it. that’s all there is to it. that’s all they care about. change.

    change for you.

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