Bentzen’s Blog

According to the New York Times, Iran has admitted that during the presidential election, the number of votes in 50 cities was 3 million greater than the number of voters.  The margin of victory was 11 million in a country of approximately 65 million people. 

Like all people, the Iranians are lovers of freedom.  I hope the Iranian people are able to peacefully obtain the election they deserve.  Any suppression of freedom is tyrrany.

The Nature of Money
by Brian Bentzen

Money is both an abstract concept and a physical representation.  We exchange, earn, spend, save, invest, measure, or steal money almost every day.  Money is a means to achieve goals and sometimes an end in itself.  This previously taboo topic has become much more commonplace in recent months.

Defining Money

We live in a specialist economy.  In order to get your food at the local grocery store, you rely on any number of specialists.  The food is grown by a farmer, but he receives his seeds from a retailer, plants them with a tractor built by a factory worker and designed by an engineer. The tractor is powered with gasoline which came from a gas station, and before that a refinery and an oil field.  Once the food is grown, it is delivered by rail or road, processed, labelled, stocked, sold at the checkout, bagged, and finally delivered to your door.  At every step the goal is to efficiently provide either a service measured in time, or a product.  Money serves as the medium of exchange in all of these transactions.  It is the means of payment.  Otherwise, the farmer would have to barter for seeds, and trade food for a tractor.  This would be inconvenient, to say the least.

Money is a store of value.  The farmer buys his seeds at the appropriate time.  He sells his crops after the harvest.  His farm is only productive during part of the year.  The rest of the year, he can hold onto his money without unreasonable fear of it losing value.  Over the winter, he expends what is necessary and repeats the process.  In order to be a store of value, the money must still be useful when retrieved for use.  The current fiat-currency system, or government backed paper currency system, can be argued not to be a store of value.  Land, some commodities and precious metals can also store value but lack the liquidity of cash.

Money is a measure of value.  You can add, subtract, multiply and divide money.  The value of money can be measured in agreed upon units of account such as dollars and cents.  This allows for accurate accounting methods when the value of money is stable.  This also allows for the measurement of accumulated wealth.

Production and Consumption and Creation of Wealth

Whether you work in a service industry or manufacturing, you are a producer.  If you provide a service, you probably receive an agreed upon hourly or yearly rate.  You exchange money for your time and effort.  If you own the business, however, you no longer receive a rate.  You organize a system that produces more than you can produce on your own and make a profit on the exchange.  As a result your potential earnings increase exponentially.

Everyone is a consumer of resources.  Choice of consumption is up to the individual.  You decide, for the most part, how to spend your money and how much you want to spend.  If you want to save, you place your cash in the bank and earn moderate interest which helps you to maintain your money’s stored value.  If you place your cash under the mattress, you risk theft and are almost guaranteed loss of value over time due to inflation.  You create a small amount of wealth with this moderate saving.

It takes money to make money.  In order to become wealthy you must produce more than you consume.  The key to wealth creation is accumulating exponential profit from business endeavors over time.  Whether you own and operate a business, buy a part of a business in the form of shares, or lend your money in the form of bonds, the choice is up to you.  All have their risks.  If you are risk averse, you can consider investing in land for lease, livestock or precious metals.  Discuss buying bonds or stocks with an independent financial advisor and talk to your HR department about tax deferred retirement accounts.

The Root of All Evil

What you do with your wealth is up to you.  Retire early.  Travel the world.  Learn a language.  Take five years off and change careers.  You’ve earned it.  Now protect it.  There are people who want to get their hands on your cash.  Some of them carry guns, some carry pens, and the most dangerous carry both.  Money is not the root of all evil.  Evil is the desire for unearned wealth and the subjection of victims from whom it is taken.  Evil is the desire to take that which does not belong to you by force or deception.  Only a criminal can take your wealth without your consent.  Be careful.

About Gasoline
by Brian Bentzen

It’s summer time and gasoline prices are rising again.  Hopefully we won’t see $4.00 a gallon gasoline anytime soon, but prices are already over $3.00 in California.  I fill my tank about once a week.  If I spend $30 a week on gas, that adds up to $1500 a year.  That is quite a significant portion of my salary so I set out to determine where exactly the money is going.

Oil refineries obtain their oil at the market price.  If a company does both exploration and refining, the oil still must be sold to the refinery at market cost.  Regardless of where the oil came from it gets sold at market cost.  In Saudi Arabia, it is cheap to lift oil, costing probably less than $10 a barrel.  To lift oil from the Gulf of Mexico, the costs are at least double.  (1)  Oil exploration is where the money is made.  Selling $10 or even $20 worth of product for $70 will make a country like Saudi Arabia rich.  It’s a good deal for a corporation like ExxonMobil as well, although ExxonMobil has to pay royalties and taxes on their production.  Of Exxon’s 2008 profit of $45.2B, $34.5B was from production of oil and gas.  Once in the refinery, one 42 gallon barrel of crude oil is refined into a variety of products.   About 45% become gasoline and 26% becomes diesel.  9% becomes kerosene jet fuel.  3% winds up as asphalt. There is a wealth of data available on refinery products from the Energy Information Administration (2).

Today at Rutter’s I payed $2.65 per gallon for regular.  Back in March of 2009, Rutter’s would have bought gas for $1.376 and resold it for $1.473, a profit of $0.097 a gallon. Prices then would have been closer to $2.26 (5)  I usually pay with my credit card, so the gas station probably was charged about 3 percent, or $0.0795 in fees today and would have been charged $0.678 in March.  After paying the credit card company the gas station would only make $0.0292 per gallon.  This explains why everything is so expensive inside a Rutters.  They have to make their money somewhere!  Pennsylvania charges a tax of $0.323 per gallon.  (find your state here)  Uncle Sam charges $0.184 per gallon, which is more reasonable than I thought it would be.  This adds up to $0.507 in taxes or 19.1% at todays prices.  As gas prices increase the government gets the same nominal amount, so the percentage tax will decrease.

Gasoline Taxes by State (from factsonfuel.org)

Refining, distribution and retailing costs $0.48 a gallon according to the American Petroleum Institute.  (4)  This price has come down significantly over the past 25 years from a inflation adjusted $0.99 per gallon to $0.48 in 2005.  I suspect this cost is now lower than it was four years ago.  This decrease is cost results in a decreased real cost of gasoline at the pump as shown below.  The spike in price is impressive.  If oil returns to its trend, it will become less expensive.  Demand for oil is back on the rise and worldwide there is very little capacity for increased production.  With increased demand from China, the near-term price of oil and gasoline is unpredictable, but last time I checked, increased demand will mean increased price.

Real vs Nominal Cost of Gasoline (Energy Information Administration)

According to Exxon’s annual report, in 2008, they had $477.36B in sales, $81.75B in profits before income taxes and $45.2B in profit after paying taxes.  They payed $36.55B in income tax, but also payed $34.5 in other taxes related to production and $41.2B in other taxes and duties for a grand total of $112.25B in taxes last year.  Their profit margin was 10.56% after taxes, which isn’t bad considering the government collected 2.48 times that amount in taxes.

What can I take away from this?

Gas prices probably aren’t going to go down.  There is increased demand from China and the supply of oil is not increasing.  Saudi Arabia and Canada are the largest remaining oil reserves, but they don’t have much room to increase production.  The federal government is considering adding additional taxes to gasoline.  Prices are going to go up!  If this concerns you, or if you think that our oil based economy is going to suffer, you are in my corner.  There is a solution.  The solution is the same as we’ve known for decades.  Reduce consumption.  Increase efficiency.  Discover alternative sources of fuel and energy.  As a nation we’ve increased efficiency but increased consumption.  You can decrease your own consumption and save money in the process.  We’ve discovered alternative sources for fuel, but they are not yet economically viable.  We are in a period of limbo.  We know oil is limited, but haven’t found a viable solution.  In time, the solutions will be available.  Companies like Valcent, which uses new technologies to more efficiently grow algae and harvest them for oil may provide for our energy needs in the future.  Wind or solar might alternatively be the answer.  When these growing technologies surpass oil, expect to see some big changes.

Until then, continue pumping.

Hey Mr. Taxman
by Brian Bentzen

“Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it.  If it keeps moving, regulate it.  And if it stops moving, subsidize it.” — Ronald Reagan

This is my pledge.  I will pay as little tax as possible.  This will be my mission for the rest of my life.  I will endeavor to contribute as little as I can to my government’s coffers while creating as much value as possible in the real world.  This year, I will max out my retirement account and live frugally.  I will donate my old stuff to charity.

Unfortunately, I can’t avoid FICA or state and local tax, or real estate tax, and my share of corporate tax, and the taxes on the gas used to transport my goods and so forth.  And I can’t get into the 0% tax rate unless I refuse to pay altogether.  This would put me in prison and cost taxpayers $50,000 a year.  I don’t want to contribute to the problem.  I just want to not contribute more than required.

But what about going one step further?  What if I were to go after tax credits?  I could install solar panels on the roof for $25,000.  Uncle Sam would give me 30% and Pennsylvania 35%.  That’s quite a tax credit.  The solar power would reduce my bill to approximately $0 a month, and PPL would pay me for any excess power generation at the retail rate.  With rate caps expiring this seems like quite a deal.  But there are some problems.

In a free society, government does not interfere with the free market capitalist economy.  Solar incentives, like all tax incentives, help the government to control the economy.  In this case, the solar subsidy will increase the supply of energy while decreasing demand.  The cost of electricity should theoretically decrease.  Demand for solar panels should increase and supply should increase as well in response to the increase in demand.  What does this accomplish?  The goal may be to make more green energy.  It might be to reduce dependence on foreign oil or coal.  It might be to decrease greenhouse emissions.  The result, however, is a solar industry that is artificially inflated.  When the subsidy goes away, if the subsidy goes away, what will happen?  The solar producers will have lower demand, increased supply and as a result they may have difficulty turning a profit.  Meanwhile, your tax dollars are being invested in businesses that should be investing in themselves.  Your money is being spent on my rooftop accessory.

While I agree that a new set of solar panels on my roof would be likely to greatly increase my cashflow, why should you give that to me?  I would like to increase my cashflow, but everyone who doesn’t have solar panels will have decreased cashflow due to my desire to save a few bucks.  Likewise, your tax dollars might go to the development of a solar power plant.  The cost of this power plant may already be less than the cost of providing electricity from a coal burning plant.  The solar technology is sitting on the edge of profitability now.  At $1/w production cost, solar energy becomes cheaper than coal.  Nanosolar and First Solar are among the few companies who can produce cost efficient solar paneling.  Nanosolar reports that it has already sold its next 12 months worth of production and is working to increase production capacity.  If the electric company can already make a greater profit from buying solar panels, why should the government subsidize their investment?

The free market best allocates resources.  When government intervenes, resources are redistributed according to those who are sitting in power.  In this case taxpayer resources are being transferred to me and to electric companies.  The system is designed so I can get solar panels on my roof at your expense.  The programs are designed so your electric company can increase their profits at your expense.  If this is just, why is it so repugnant?