Posts Tagged ‘euro’


The evidence is growing.

Take the IMF, for example. According to its latest report on currency reserves, developing countries rid themselves of $45 billion worth of dollars last year. Since Q2 2011 they have sold $90 billion dollars. Over the same period, the developed world has been a net buyer of dollars, and in 2012 was even a net buyer of sterling.

See: Currency Composition of Official Foreign Exchange Reserves (COFER)

Meanwhile, Bloomberg quoted Hans- Guenter Redeker, the head of global currency strategy at Morgan Stanley, who has predicted that within two and half years the euro will be back to parity with the dollar. Capital Economics cited data from the US Commodity Futures Trading Commission which showed that speculative “long futures positions against the euro, sterling and yen combined have topped 200,000 for the first time since last May and are not far off a record high.”

So what’s next? The recent movements in favour of the dollar can’t go on without interruption. Capital Economics predicts some kind of correction in the next few months, but says that looking further ahead to the end of this year and beyond, the dollar is likely to rise further against the euro.

No prizes for guessing why. Following the Cypriot debacle, there is now speculation that Slovenia will be the next Eurozone country to suffer a crisis, and the markets have become scared of the Eurozone. There is a good reason for this. But what about the yen and the good old pound? Central banks in the UK and Japan are expected to hit the QE button hard this year. But so what? Japan’s prime minister and arch dove Shinzo Abe has warned that achieving a 2 per cent inflation target in Japan may not prove possible.

There is an irony here. In the UK, the Bank of England has failed to get inflation even close to target. In Japan, the central bank may fail likewise but in the opposite direction. In Japan, the challenge is getting inflation up. Later this year, rises in commodity prices may lead to a temporary lift in Japanese inflation, but it is far from certain that this will last, and the central bank may yet prove to be impotent.

In the UK we have had £375 billion of QE so far, and while the initial burst may have kicked some life into the economy, subsequent rounds have done very little. The truth is that at a time when banks are being forced to raise capital levels, and the government is afraid to borrow the money, the markets want to lend to it at such cheap rates, QE is about as effective as a leadless pencil. In short, the Bank of England may be impotent too.

For that reason, Capital Economics reckons that while the dollar may well rise against the euro, against the yen and sterling it thinks the rises against the US currency are behind us. Against the euro, of course, it is a different story.

©2013 Investment and Business News.

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Woe is us. The pound is crashing. You would need to rewind the clock back all the way to October 2011 to find the last time the sterling euro exchange rate was so low, or so was the case at 9.30 am 25 February 2013. Come to think of it, October 2011 wasn’t actually that long ago. But hey, let’s not ride against the tide, the media says the pound is crashing; that this is bad, so let’s run with the crowd.

Except before we do that, let’s turn to the minutes from the Bank of England’s MPC published a few days before Christmas last year. The minutes stated: “The gradual appreciation of sterling between mid-2011 and mid-2012, as prospects for the euro area had deteriorated, had been unwelcome.” Errr what was that? The appreciation of sterling has been “unwelcome.”  Can you say that a rise in the pound is bad, and a fall in the pound is bad? Does that add up?

The minutes continued: “Although the nominal effective exchange rate remained well below its pre-crisis level, some measures of sterling’s real exchange rate provided a less comforting view of the improvement in UK competitiveness. In particular, a measure  based on relative manufacturing unit labour costs was now only 10 per cent below its level in 2007, and just  5 per cent below its average in the decade prior to the depreciation. It was therefore possible that the real exchange rate consistent with current account balance might be lower than its current value.”

Let’s put it this way, back in December, the MPC had a wish for a Christmas present. Their letter to the man in Lapland said: “Dear Santa, please may I have a cheaper pound”.  Their wish was not granted in one go. But it has been granted in stages. Sterling fell in January, stayed pretty static for the first half of February, then – after Moody’s cut the UK’s triple A credit rating – fell some more.

From the point of view of UK plc we may be getting the best of both worlds. Because of all that talk of currency wars at the recent G20, neither the UK government nor the Bank of England are allowed to deliberately push the pound downwards. Well there is no need. Moody’s is doing the job instead.

All praise be to the credit ratings agencies.

Some say that this shows the UK is bankrupt; on the road to ruin. Why can’t we do things like Japan, which lost its triple A credit rating years ago, or the US, or France, both of which lost their top notch rating some time ago.

It is embarrassing for poor old George. Mr Osborne invested a lot of political capital in saying he had to follow the policies he was adopting in order to avoid the disaster of the UK losing its triple A rating. Now that rating is lost, it is quite hard for him to say: “it doesn’t matter.” Although in truth it probably doesn’t.

In part sterling’s fall is down to the view that other economies are picking up. The Fed has hinted that QE may be drawing to a close; China’s central bank is tightening monetary policy. The markets still seem to think, somewhat inexplicably, that the euro is past its worst.

Talking of inexplicable, some economists think the key to the UK’s recovery is lower inflation, so that wage growth outpaces growth in consumer prices. Others think the recovery lies with a cheaper pound giving exporters a lift. But since a falling pound will lead to inflation, you can’t have both.

The trouble with the UK exporting its way out of trouble is that such a strategy can only work if firstly, UK exporters combine their terms of trade advances with investment and productivity improvements, and secondly if demand abroad is growing.

The first condition requires more investment – something the banks seem unable to promote. Unless QE is directed more precisely, and targeted in the form of investment in companies, especially exporters and innovators, the first condition probably won’t be met. As for the second, there is nothing, absolutely nothing, that either the Bank of England or George Osborne can do about that.

©2012 Investment and Business News.

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Growing demand and growth in productivity are a bit like a horse and carriage. You can’t have one without the other. At least you need both, if you want sustainable economic growth.

In an ideal world, over time we want to produce more output for every hour we work, and we want our hourly pay to go up in proportion to our extra productivity. Multiply that across the economy and we get more output, and more demand to meet the extra supply.

In the UK, we have a double problem. Wages are not going up with inflation. In fact in the three months to December average pay including bonuses rose by just 1.4 per cent. Annual inflation back in December was 2.7 per cent. So once again, average workers were worse off during the period in question. If you compare wage growth with inflation as measured by the RPI index, the picture looks even worse. Inflation by this index was 3.1 per cent in December, and has, in fact, been greater than wage inflation every month since March 2010.

RPI inflation versus average wages

But that is just half of the UK’s problem. The other half relates to productivity. That too has been awful. According to the ONS, output per hour in the UK is 21 percentage points below the average for the G7. Look at the big picture. The UK economy is either in recession or very close, yet employment is rising. How can that be? Answer: because productivity is declining.

In other words, in the UK we have the precise opposite of the ideal world. We have falling wages and falling productivity. Sure employment is at a record high, unemployment at 7.8 per cent is surprisingly high considering where we are with the economy, and yet the price we seem to be paying for jobs is a declining economy.

In the troubled regions of the Eurozone, the problems at face value are quite different. But perhaps the end result is very similar. The story for the Eurozone takes a slightly different view. The focus this time is on unit labour costs. That is to say the cost of labour for every unit produced.

First let’s look at some history. From the moment the Euro was launched to the point when things went pear shaped in 2008/09 the so called peripheral economies – that’s  Portugal, Ireland, Italy, Greece and Spain – saw their growth in unit labour costs race ahead of the growth seen in France, and even more so relative to Germany.

Since 2009/09 the gap has closed. In fact with Ireland and Portugal, the gap with France has closed and gone into reverse, so much so that growth in unit labour costs in Ireland and Portugal since 1999 is now lower than the equivalent for France. Spain is not far behind. Greece has a bit more work to do. Look at the figures and official data indicates that since 2008/09 unit labour costs have fallen by 14.7 per cent in Greece, 14.1 per cent in Ireland, 7.6 per cent in Spain, and 2.4 per cent in Portugal. They have risen 1.1 per cent in Italy, however. There are doubts over the accuracy of this official data, but you get the point. The gap has been closing.

The markets are chuffed. They see falling unit labour costs in these countries as evidence that the slow march to recovery is well on its way.

But is that right? As you know, unemployment in these countries is much higher than in the UK, and indeed in Greece and Spain – where more than a quarter of the working population is out of work – this is at a level one can only call terrifying.

Sure unit labour costs are falling, but given the massive level of unemployment, is that surprising?

The Eurozone really needs exactly the same development we require in the UK: rising productivity and rising wages. Perhaps, because of their lack of competiveness with Germany, and because – unlike the UK – they are not tied into a fixed exchange rate with Germany, they need productivity growth to slightly exceed wage growth.

This is just not happening.

The markets may love the data, but just like a bad marriage, when truth dawns, things may unravel badly.

©2012 Investment and Business News.

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Did you know that Diego Maradona, most famous as for his prowess as a football player, was also a top economist?

Maybe we can go further than that and say he was an economist first, but used football merely to illustrate his theories.

Take the world cup match with England in 1986. First of all there was that goal; the one in which Maradona rose above the rest of the players on the pitch, his hand held aloft and deftly patted the ball into the net. That had the effect, as it were, of putting the fear of God up the England players.

Such was this fear that later in the match, Maradona was able to sort of dribble past five or so England players, and score one of the most memorable goals in the history of the World Cup. It is just that if you were to plot the trajectory of his run you will find that the Argentinean footballing legend actually ran pretty much in a straight line. The England players, in anticipation of Madonna’s magic, sort of fell away. If instead the English defence had not moved and stayed put, Maradona may not have got past his first marker.

It all boils down to expectations. If you are expected to act in a certain way,  others change their behaviour accordingly. The result is that by doing nothing, but creating the impression of doing something, you can affect behaviour.

So let’s apply the Maradona model to the markets. For the markets, expectation is crucial. So let’s say you are a central banker, and – for the sake of picking a name out of thin air – let’s say you are called Mario Draghi, and you are the President of the European Central Bank.

You want to see confidence return to the markets, you want investors to buy Italian and Spanish bonds, and you are worried about the strength of the euro. But you have a problem. Some of your colleagues within the ECB, some very powerful colleagues at that, are what you might call hawks. They don’t like quantitative easing, and like to see a strong currency. So what do you do?  Answer: absolutely nothing, other than talk. You say things such as: “I will do what it takes.”  And hope that simply saying you will do that is enough.

Somehow, the strategy appears to be working. Last week the ECB voted to do nothing again. There would be no change in monetary policy for another month, but the feeling that Mario is there, pulling strings, and orchestrating recovery was enough to get the markets buying bonds and selling euros.

And that is where Maradona comes into it. Back in 2005, Mervyn King came up with what he called ‘The Maradona theory of interest rates.’ He said that the markets are a little like those England players in the match with Argentina. He said: “Market interest rates react to what the central bank is expected to do.  In recent years the Bank of England and other central banks have experienced periods in which they have been able to influence the path of the economy without making large moves in official interest rates.  They headed in a straight line for their goals. How was that possible?  Because financial markets did not expect interest rates to remain constant.  They expected that rates would move either up or down.  Those expectations were sufficient – at times – to stabilise private spending while official interest rates in fact moved very little.”

What has that got to do with the here and now? Last week Jonathan Loynes at Capital Economics said: “The ECB president appears to have become the undisputed champion of the ’Maradona theory’ of monetary policy, in which market expectations of policy changes relieve the need for those changes to be implemented.”

So there you have it: Maradona economics.

But of course this begs the question: in today’s times do we need a new theory, perhaps a Lionel Messi theory of fiscal policy.

©2012 Investment and Business News.

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So what do you think will happen in 2013?

Setting aside Galbraith’s comment about the only redeemable benefit of economic forecasting being that it makes astrology look respectable, here are some thoughts for you to ponder.

Zombies may be in the news in the summer. A new film is coming out called World War Z, starring Brad Pitt. It is about zombies. In 2012 zombies were in the business pages too. There are households, many of whom are stuck in forbearance; around 5.8 per cent of home owners, according to the FSA. There are zombie businesses kept alive by rock bottom interest rates, and banks terrified to value their assets in accordance with what the markets think they are worth. If banks did revalue their assets in accordance with market values, and applied what’s called mark to market accounting, we could see another banking crisis. So either the markets are wrong, and banks are merely refusing to let their hysteria reflect valuations, or banks are pretty close to becoming zombies – if they are not already, that is.

Meanwhile, the poor old can is already starting to look very beaten up. Yesterday, US members of the House of Representatives kicked the can down the road. They voted to raise some taxes, but delayed deciding about spending cuts for two months. Next, they have to agree on the US debt ceiling. If they don’t, the US government will have to default. They probably will, and it probably won’t, but the wire will get a visit as the US economy goes down to it, and the can will get kicked some more.

In Europe, politicians will do much the same thing – that is to say at the last minute agree to various rescue schemes, but only as temporary measures while they consider at their leisure what to do to fix underlying challenges. They will never decide of course, but they will have lots of late night emergency meetings.  The German Constitutional Court will have to decide whether various new schemes are legal under German law, and will finally announce provisional approval of the latest German backed rescue scheme, but say it needs more time to decide for sure.

So is there a word to describe US and EU governments that just delay the real decision making process, and apply sticking plasters? Well how about this word: zombies.

One prediction for the year ahead is that as World War Z is released we will see a barrage of media comment, and indeed cartoons, comparing the economy with that film.

Also in 2013, governments and central banks in the US, Japan and the UK will decide it is time to target nominal GDP rather than inflation. The result will be more QE. Sterling may come under pressure, especially against the euro, although the Bank of England may well say this is a good thing. Holiday makers won’t be too chuffed, however.

Many will forecast a return to double digit inflation, a or even hyperinflation, but in reality, QE will lead to modest rises in inflation, and by the end of 2013, despite more QE, UK inflation will be lower than at the end of 2012. (CPI Inflation was 2.7 per cent in November 2012).

On the back of QE, gold will probably do well, and oil will oscillate. But there are signs that China may be getting over its so-called soft landing, and growth may be higher in 2013. This may be enough to push up oil.

Finally, in the world of tech, LinkedIn will see profits double again as they did last year, Facebook will see its shares pick up and return to the IPO price, as the company begins to find ways to monetise its huge user base. Apple may take a knock in the smart phone business as the likes of Samsung and HTC see sales rise.  But it will announce its iTV player, and this will prove to be as big a deal as when the company revealed the iPhone. Shares will surge and Apple will be the world’s first company to be valued in excess of one trillion US dollars.

Sales at Amazon will rise, as new owners of its Kindle Fire start buying more from Amazon and less from traditional retailers. Amazon will appear to be on course to become the world’s largest retailer. And finally, IBM will see its best year in terms of share price growth, for many years.

©2012 Investment and Business News.

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If you are a journalist, the French are great. They provide the juiciest copy, which can transform the driest topics into cannon fodder for xenophobes, and realists alike.

This time the task of ramping up Anglo/Gallic prejudices has fall to the Governor of the Bank of France Christian Noyer.  Talking to the ‘FT’, he suggested that the City of London should be stripped of its position as the financial hub of euro trading. So that’s bonds, derivatives, equities – in fact just about everything. If it’s finance and involves the euro, then London holds the position that should belong to Paris.

Mr Noyer said: “We’re not against some business being done in London, but the bulk of the business should be under our control. That’s the consequence of the choice by the UK to remain outside the euro area.”

The funny thing is, however, that Mr Noyer might be right – or at least partially right.

He is wrong about stripping London of its pre-eminent position. It is not up to governments to decide which centres should be hubs. You can’t wake up one morning, and say let’s rid London of its status as a financial capital.

But the markets can decide to do this. And there are signs that this is happening, and this is the price the UK pays for not being in the euro. It has nothing to do with the wishes of politicians, just the reality of markets.

But it doesn’t seem very likely that Paris will take over from London, however, not as long as France insists on anti-market friendly policies. A recent survey from the Conference Board in the US recently forecast that France will be the worst performing economy in the world over the next ten years or so.  The report may or may not prove to be right, but even if there is only a miniscule of truth in the report, it is hard to see Paris taking over from London in anything. See: Is France really set to be the worst performing economy in the world over the next ten years?

Moving away from France and the UK, there is the issue of tax avoidance. We hear about the evils of Amazon, Google, Starbucks and co avoiding tax, but the truth is that they are multinationals, and an advantage of being a multinational is that you can channel profits into countries where tax rates are lower. There is only one possible solution and that is to have some kind of minimum worldwide corporation tax rate (either that or have no corporation tax, at all).  Getting international agreement for such as idea is probably impossible, but a reasonable half-way measure might be an EU-wide corporation tax. Alas, the UK’s influence in the EU is such that it is unlikely to get such an idea through, even if it wanted to. This is another disadvantage of the UK’s EU cynicism.

On the other hand, a new series on ‘Sky News’ is set to expose the way the UK’s economy’s woes are focused on certain regions. As Ed Conway, the presenter of the TV series, said in the ‘Telegraph’: “It transpires that London and the South East of England never experienced a double-dip recession at all, they simply did not shrink through 2011 and 2012. The economic contraction that led to the national ‘double dip’ happened exclusively in the North, the Midlands, Northern Ireland, Scotland and Wales.” See: Prosperity across the South is hiding a recession in much of Britain

Here is the irony. While some may lament the disadvantages of not being in the euro, the UK suffers from its own single currency.

Truth is that the success enjoyed by the City has pushed up the value of the pound so much that regions outside the South East struggle to compete.

So should London and the South East have their own currency, let’s call it the Boris? Maybe an independent Catalonia needs its own currency too.

You may think this is a daft idea. You may be right.

It is probably the case that if indebted European countries left the Eurozone, their economies would, after an initial shock, enjoy a strong economic recovery.

But if you accept that the idea of London having its own currency is daft, this would suggest you believe the euro must survive, at any cost.

©2012 Investment and Business News.

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Catalonia is Spain’s wealthiest region. In a way it is to Spain what California is to the US. And like California, Catalonia has major debts. Unlike California, it has recently gone cap in hand to central government asking for a bail-out. But, and here is the curious thing, it has imposed terms on the bail-out. Yes that’s right, the troubled debtor, desperate for money, has said: “Okay, I will take some money, but only if…”

In fact the only if relates to it not being required to impose too much austerity.

As the richest region in Spain, one assumes that if it did indeed have independence, and then received 100 per cent of taxes paid by its citizens, its debt crisis might prove to be a good deal less serious. One also assumes that Madrid’s tax receipts would fall quite considerably.

This publication is not qualified to comment on the details of the issues that lie between Catalonia and the Madrid government, but sometimes an outsider can see things that those too tied up in the minutia of details don’t spot.

It is certainly curious that when the clear lesson of the euro is that single currencies don’t work without political union, some regions in Europe are calling for political independence but want to stay in a currency area. So that’s the euro area for Catalonia, and the sterling area for Scotland.

Mind you, something could be said for going in the opposite direction of the euro, and going for more and more currencies. Certainly if London had its own currency – let’s call it the Boris – then it would surely surge in value, and Londoners would find their Boris’s would stretch a lot further, and could buy a lot more stuff from abroad. What was left of sterling – let’s call it the Cameron – would fall in value, giving non-London based manufacturers a massive terms of trade advantage, probably leading to an export-led recovery in the UK’s regions.

Likewise, Barcelona’s new currency – let’s call it the Mas – may surge and Spain’s Rajoy may crash.

The thing about freely trading currencies is that they can help ensure countries with strong exports import more, and give the big importers the price advantages in selling their wares. They can cut though imbalances like a knife through butter. And by the way, Martin Wolf – the FT’s economics guru – recently argued that the German people are worse off thanks to the euro. Paraphrasing an argument from Charles Dumas – an economist from Lombard Street Research – he said: “Euro membership has encouraged Germany into a costly mercantilist strategy at the expense of its people and the productivity of the economy.” He continued: “Germany’s real personal disposable incomes have risen remarkably little since 1998.”

So there is one fix: end the euro and give London, Catalonia, the Flemish part of Belgium, Wales, Cornwall, and every other region in Europe its own currency. There is a less radical solution however.

Also see the following related articles:

Is there hope for the euro? Catalonia’s rift with Spain
Spain’s woes are not down to debt
Catalonia’s strife; currency’s knife
Political shenanigans in Europe
The fix to the euro crisis

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here

There is a just a hint of good news for supporters of the English football team. In fact it could be construed as good news for the supporters of every national football team, except one: Spain. But as far as the economy is concerned the news is not so promising.

Next month the Spanish region of Catalonia is to hold an election, and it is being presented as a referendum on independence. It is too soon to say how the vote will turn out, and whether the eventual result will indeed be a break-up of Spain, but there is something tragically ironic about this affair. After all, the euro was meant to be a kind of guarantee of peace in Europe, of unity. The reality is that it may be achieving the precise opposite.

The German football team may benefit from a break-up of Spain – at least one assumes that some of the footballers who make up Spain’s superb side come from Catalonia – so if the country breaks-up, its national team will be weaker. But for Germany as a whole, this is yet another example of how policies it is pursuing may ultimately cause the occurrence of the one thing it fears more than anything else.

Sticking with the football analogy, the problem in a nut shell is that it is not possible for all teams in the Premiership, or Serie A, or la Liga or Bundesliga, to win all their matches. It is a mathematical impossibility. Alas, it is not possible for every country to export more than it imports. And as far as growth is concerned, it is not possible for every country to impose austerity, and secure growth; indeed it may be the case that growth cannot occur if all people across the world start saving more.

Also see the following related articles:

Is there hope for the euro? Catalonia’s rift with Spain
Spain’s woes are not down to debt
Catalonia’s strife; currency’s knife
Political shenanigans in Europe
The fix to the euro crisis

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here

It’s been a busy week for QE. Japan hit the virtual printing press again. This time it was QE7. The latest minutes from the Bank of England’s interest setting committee implied more QE is on the cards. And you will no doubt recall that the US Fed released its latest version of QE recently. This time it said it is going to spend  $40 billion a month buying up assets, for… well it has not said for how long, just for as long as necessary.

Finally the ECB has revealed its own version of QE.

Now this may come as something of a shock, but apparently central bankers in Germany are not so keen.

And last week, Jans Weidmann, top man at the Deutsche Bundesbank, was quoting Johann Wolfgang von Goethe. That’s the German author who wrote about Faust, and pacts with devils. In one of the stories from ‘Faust’ the devil disguised himself as a fool, and persuaded the emperor, who was suffering from too much debt, to solve his problem by printing more money. The result, of course, was runaway inflation.

Now the media are paraphrasing Mr Weidmann sayng that he has called QE the work of the devil.

Meanwhile, as if to prove the German central banker right, there is a growing consensus that some extra inflation may be exactly what we need to pay down debts, without creating one mother of a depression.

It is just…

First of all, evidence that QE leads to inflation is pretty feeble. We live in a world of fractional banking, which means banks create money through their lending. For reasons we are all familiar with, banks are not keen on lending at the moment, not at all. This all means that there is a danger of the money supply contracting so fast that deflation will descend on the global economy like a giant hammer, beating down green shoots wherever they appear.

Central banks may wish to create inflation, but whether they can do so is another matter entirely.

For an individual country there is evidence that QE can be mildly inflationary, because it pushes down the value of a currency. But you can’t have all currencies falling at once. When Japan, the UK, the US and the Euro area all unleash QE at the same time, while China keeps to its policy of maintaining a link between the yuan and the dollar, the currency effect of QE pretty much gets cancelled out.

The real problem is not so much that QE leads to inflation; it is that all it really does is try to get things back to what they used to be like.

It does push down on interest rates, driving up the price of government bonds, making all other assets look cheap, forcing them to either rise, or at least not crash. Those encumbered with huge debts (or most of them) find that, thanks to low rates, they can manage to pay their way.

As a result the economy is on a kind of hold. The underlying problems that caused the crisis in 2008 are not being fixed, and so it drags on, and on.

QE’s snag is that it is it not accurate. It is the bluntest of instruments, and right now, any stimulus measure needs to be targeted.

Part of the problem is demographics, and there is no easy fix to that one.

Part of the problem is that for decades, savers have been risk averse. Money has gone into assets that do not create wealth, and not enough money has gone into supporting the ideas of entrepreneurs.

But there is another point, and that really does take us to the crux of the issue. Read on. See: In the 21st Century, taxes may need to be much, much higher.

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here