Arshad Bahl

Bahls company grew as organically as the ingredients in his health bars. It started eight years ago when his then 2-year-old son was diagnosed with autism, and the gastrointestinal problems that so often afflict children on the spectrum. His pediatrician recommended treating the gastrointestinal problems first, so they took him off gluten, soy, and dairy. Within three to four months, he started feeling better, Bahl says. His mood got a lot better; he could sit through speech sessions a lot longer.

The more they stuck to clean, whole-foods-based nutrition, Bahl says, the better his sons condition became. But then his son entered school, and it wasnt very easy for him to be taking rice and chicken to eat, Bahl explains. The health bars they packed him for lunch contained soy and gluten, so Bahl began to make his own bars instead. Because the school had a nut-free policy, he made them with chia and sunflower seeds, mixed with different fruits, using his son and two younger children as taste-test subjects. The kids dictated the taste and texture, says Bahl.

Bahl didnt think about selling the bars until about two years ago. An avid cyclist, he started giving the bars to cycling friends, who not only enjoyed the taste, but also found them effective snacks. From there, Bahl set up a stand at Hartsdales farmers marketand the bars became an instant hit. One happy customer from the farmers market was a representative from Whole Foods in White Plains, and that, Bahl says, was the genesis of retail.

It took him nearly four months to create all the packaging necessary for retail, which he funded through his own personal savings. But eventually, one Whole Foods called another to tell them about the product, and so on, until Amrita was in 16 local stores. Today, Amritas seed-based, soy-, gluten-, and dairy-free nutrition bars (which come in mango coconut, cranberry raisin, apricot strawberry, apple cinnamon, pineapple chia, and chocolate maca flavors) are available in 250 stores, with the goal to be in 400 stores by the end of the year.

Looking back now, it doesnt look like such a gamble to turn down the comforts of an executive position at IBM. But, says Bahl, who expects to close the year at $400,000 in revenue, Theres always that fear of the unknown, especially after 13 years of being at the same company. I had to have the faith that I can persevere.

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The global financial system has come unglued. Everywhere the real world evidence points to cooling growth, faltering investment, slowing trade, vast excess industrial capacity, peak private debt, public fiscal exhaustion, currency wars, intensified politico-military conflict and an unprecedented disconnect between debt-saturated real economies and irrationally exuberant financial markets.

Yet overnight two central banks promised what amounts to more monetary heroin and, presto, the Samp;P 500 index jerked up to 2070. That is, the robo-traders inflated the PE multiple for Samp;Ps basket of US-based global companies to a nose bleeding 20X their reported LTM earnings.

And those earnings surely embody a high water mark in a world where Japan is going down for the count, Chinas house of cards is truly collapsing, Europe is plunging into a triple dip and Wall Streets spurious claim that 3% escape velocity has finally arrived in the US is soon to be discredited for the 5th year running. So it goes without saying that if price discovery actually existed in the Wall Street casino, the capitalization rate on these blatantly engineered earnings (ie inflated EPS owing to massive buybacks) would be decidedly less exuberant.

In truth, nothing has changed about the precarious state of the world since yesterday. Except... except the Great Bloviator at the ECB made another fatuous and undeliverable promise - this time that he would do whatever he must to raise inflation and inflation expectations as fast as possible; and, at nearly the same hour, the desperate comrades in Beijing administered another sharp poke in the eye to Chinas savers by lowering the deposit rate to by 25 bps to 2.75%.

Lets see. Can it possibly be true that European growth is faltering because it does not have enough inflation? Or that Chinas fantastic borrowing and building boom is cooling rapidly because the People Bank of China (PBOC) has been too stingy?

The answer is not on your life, of course. So why would stocks soar based on two overnight announcements that can not possibly alleviate Europes slide into recession or the collapse of Chinas out-of-control investment and construction bubble?

It cant be a case of debatable data. Europes real GDP is no higher today than it was in the third quarter of 2006. Self-evidently, the temporary slowdown in consumer inflation during recent months owing to plunging oil prices and the transient impact of exchange rates cannot possibly explain this long-standing trend of going nowhere.

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Indeed, during this same period, Europes CPI has risen by nearly 20%. Where is it written or proven that an average of 2% annual inflation causes economic growth to grind to a halt? There is not a shred of evidence for that proposition - so Draghis pledge to restore 2%/year shrinkage in the value of the wages and bank accounts of European households cannot possibly mean more growth, more profits and more Samp;P market cap.

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In fact, the whole clamor about deflation and Draghis overnight pledge to do whatever it takes to get inflation rising quickly has to do with a transient blip in the price index during the last 12-18 months. But is this the first time that a shift in the global commodity cycle and the euro exchange rate has caused a temporary dip in short-run consumer price trends? The historic data indicate a resounding no.

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In fact, the only manner in which weakening inflation could possibly impact short-run real GDP growth is if European consumers were to sharply raise their savings rate, waiting for lower prices tomorrow. This is the hackneyed claim of the Keynesian money printers, of course, but wheres the evidence? After a temporary surge in Europes personal savings rate during the Great Recession, it has regressed to its recent historical average, and has remained on the flat line, even as inflation rates have decelerated since 2012.

The idea that the hard pressed households of France, Italy, Spain and even Germany have gone on a buyers strike and are hoarding cash is a flat-out lie. But it is one that suits the convenience of the desperate Keynesian apparatchiks pulling the levels in Brussels and Frankfurt. And, yes, it also makes for the kind of headline policy announcements that robo-traders can snatch with blinding dispatch.

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No, the problem in Europe is not too little inflation in the short-run; it is staggering levels of taxes, public debt and interventionist dirigisme that represents a permanent, debilitating barrier to growth. Draghi already has driven deposit rates through the zero bound at the ECB deposit facility, and now its spreading rapidly through the banking system to businesses and consumers.

So, precisely who will finance this soaring mountain of public debt at negative real returns when the fast money is flushed out of the ECBs now plummeting euro? The algos, needless to say, didnt get to that question during this mornings frenzied buying.

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Likewise, last nights signal from China was a warning to take cover, not to get all giddy in the casino. The Peoples Printing Press of China has been on a rampage for this entire century, and has expanded its balance sheet by an incredible 9X since the year 2000.

Now, even the hapless masters of red capitalism taking shelter in Beijing recognize that this colossal money printing spree has fueled fantastic levels of over-building, over-investment and mind-boggling real estate speculation throughout the land.

The fact that - despite their better judgment - they have had to once again open the monetary spigot is evidence that Chinas addiction to the printing press is terminal, and that a hard landing is only a matter of time. No one told the algos that, either.

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The real downward trajectory in China is tracked by the canary in the iron ore pit. Like almost everything else, Chinas iron and steel industry is massively overbuilt. It has 1.1 billion tons of capacity, but in the order of 600 million tons of sustainable sell-through demand. That is, need for steel for use in consumer products and capital replacement, not the current one-time construction binge.

Stated differently, Chinas excess steel capacity is greater than the combined output of the US, Japan and the EC combined. Accordingly, when its real estate and construction bubble finally collapses, the world market will be inundated with cheap steel and every manner of goods made from it, including automobiles. During the current year alone, China will export more steel than the US industry will produce, and it is just getting started on the greatest dumping campaign the world has ever seen.

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In short, there is a tidal wave of industrial deflation coming down the pike - owing to two decades of world-wide central bank financial repression that has fueled vast malinvestments in mining, manufacturing, transportation and trade. That, in turn, will trigger a monetary race to the bottom by the central banks - a race that is already underway owing to Japans Halloween Massacre of the yen. Soon the rest of East Asia - and especially China - will have to join the exchange rate plunge or find their export based economies hitting the shoals.

Then will come more desperate maneuvers from the ECB, as even the German export machine falters in the face of collapsing growth in China and competitive devaluation all around the world. Stated differently, last nights central bank announcements were the starting guns for a monetary implosion that will soon shock financial markets and real production, trade, employment and incomes on a world-wide basis.

Someone should reprogram the algos. Otherwise, one of these days they will snatch a headline which says sell, sell, sell!



One-third of Americans have nothing saved for retirement, according to a study published in August by the financial data aggregator Bankrate. That grim factoid joined a growing chorus of reports highlighting Americans dismal savings habits. In 2013, the National Institute of Retirement Security (NIRS) determined that 84 percent of Americans are falling short of reasonable retirement savings targets. Data from the Center for Retirement Research at Boston College reflect a similar trend, and a recent PBS poll found that 92 percent of Americans believe we face a retirement crisis and that government should act now.

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The reality is not quite as grim as these reports suggest. The American Enterprise Institutes Andrew Biggs took a hard look at the NIRS numbers and concluded that the substance of the NIRS study should give pause to anyone considering drastic policy actions. One reason is that the study uses savings guidelines outlined in a 2012 Fidelity Investments report. But Fidelity suggests that people have enough money saved to enjoy 85 percent of their working income, while the Social Security Administration says most financial advisors recommend a lower 70 percent pre-retirement earnings target. The study also ignores that lower-income earners receive larger Social Security payouts, so their savings do not need to be as high.

Still, theres plenty of bad news to go around. Americas personal savings rate is a fraction of what it once was. According to data from the Federal Reserve Bank of St. Louis, personal savings rates fell from a high of 17 percent in April 1975 to a low of 2.2 percent in September 2005. Since September 2007, there has been a noticeable increase in savings-probably because the experience of watching assets melt in the crisis triggered an impulse to pay down debts. But if history is our guide, this uptick in savings is likely to be short-lived.

This is problematic, because low savings means less capital accumulation, without which economic growth slows and well-being stagnates. A long list of academic papers documents the connection between the decline in savings over the decades prior to the recession and declines in things like domestic investment and real wage growth.

At the Brookings Institution, economists Ian Hathaway and Robert E. Litan recently released a paper showing that American business is increasingly dominated by older firms. That finding has troubling implications. The literature shows that young firms are the engine of job creation in America-not small businesses, despite what you read in the press and hear from the politicians-so fewer new businesses means fewer new jobs. And one reason for the decline in the number of new businesses, says the Cato Institutes Mark Calabria, is the decline in the personal savings rate. According to the Census Bureaus Survey of Business Owners, the number one, by a long shot, source of capital for new businesses is the personal savings of the owner, he has written.

Faced with this evidence, progressives would like to beef up Social Security. But the program already faces a $10 trillion funding shortfall, and economists have found that its existence creates disincentives to work and save. In other words, a bigger Social Security program could make a serious problem worse. Workers payroll taxes are used to fund Social Security benefits, and some studies have estimated that every $100 of Social Security wealth crowds out $40 in private saving, says Jason Fichtner, an economist at the Mercatus Center and former Social Security administrator. Fichtner also noted in testimony before a House Ways and Means subcommittee in May 2013 that Social Securitys current design offers substantially negative incentives to work, especially for younger seniors and for secondary earners. Exiting the labor force earlier does not just decrease the individuals income security; it decreases the net output and productivity of the economy as a whole.

Fichtner thinks the government should give people incentives to save more. For those in lower-income brackets, tax credits could be expanded to provide better incentives for saving, he wrote. Even something [like] encouraging auto-enrollment whereby employees would automatically be enrolled in a retirement savings plan (with the option to opt out) could go a long way toward increasing personal savings.

Not everyone agrees. Matthew Mitchell, also of Mercatus (where I work), is opposed to the government creating incentives to save. People often talk as if saving is always objectively better than consuming, he says. But that is like saying beer is objectively better than wine. The truth is that value is subjective. I may think that right now in my life, it makes sense to save the next dollar I earn rather than to spend it. But just because that is the right choice for me does not mean it is the right choice for you.

Fichtner wants to increase private saving so that taxpayers are not asked to foot the bill for peoples bad decisions. A reasonable concern, but when government tries to encourage people to do one thing over another, it usually leads to malinvestment. Resources artificially flow to certain goods above and beyond the point where any real value is created. That leads to bubbles, and when they pop, as the Great Recession has shown us, the loss of wealth can be disastrous.

If people are saving too little but incentives to save more could lead to malinvestment, what should be done? Lets start by eliminating policies that penalize savings or artificially boost consumption. Replacing our current tax system with a consumption-based tax would create a more level playing field between consumption and savings. Ending the Federal Reserves zero-interest policies would eliminate their large disincentive to defer consumption. And eliminating efforts to buoy homeownership would get us out of the business of encouraging people to take on more personal debt in exchange for an investment that, thanks to the Feds monetary policy, offers weak returns.

Replacing Social Security with private accounts would help as well. In a 1997 paper for the Federal Reserve Board of Governors, economist Julia Lynn Coronado looked at the quasi-privatization of social insurance in Chile. Its effect, she found, was an increase in national savings of 2 percent of GDP.

Social Security is broken. Future seniors already face a 25 percent cut to their benefits when the trust funds dry up in 2033. We might as well put the program out of its misery and, in the process, remove one of the biggest disincentives to save.



This blog first appeared on Richards blog at Tax Research UK, and can be read here

The personal tax statement announced by the government this month continued to bug me, so I did some more analysis.

First I used data on the break down of benefits payments tweeted by Jonathan Portes and apparently from this web site - although I admit I cant see it there. It looks reliable, although I had to allow for rounding (which is fair).

Then I assumed a number of quite reasonable things, all based on the fact that although there were explicit spends in 2013/14 of £726billion there are additionally what are called tax spends, which are money not collected as a result of reliefs and allowances within the tax system, and there are also some implicit subsidies the government supplies not even included within those totals.

Of the latter I included just one, which was the mid point of the annual cost of implicit subsidies supplied by the government to the banking sector which the IMF estimates as being in a range from $20billion to $110billion a year and which I took to be $65billion or £41billion.

Then I used HMRC data on the costs of allowances and reliefs excluding pensions, which I took from the HMRC estimate here. I included a range of these allowances and reliefs. So, personal allowances for income tax and NI are in the list as they are provided as of right to anyone who qualifies, just as benefits should be, and so are completely analogous with them.

Then I looked at all tax reliefs for savings and investments of various sorts from ISAs, to capital gains tax allowances through to enterprise incentive schemes. These are all reliefs for those with investment income. This is an explicit subsidy to some people that seemed directly comparable with many benefits payments in that sense (alone, I stress), so they were included to.

After that I also looked at VAT exemptions on spending that is largely by those well off, which was that relating to private education and health. I could have included UK domestic transport too as much of this is a subsidy to commuters but decided not to: these things are, eventually subjective.

I also included capital gains tax relief on housing as a specific category since this is as much a subsidy for housing as is housing benefit.

The overall workings are here: I wont reproduce them in this blog as they clutter things.

Then I reduced the data by categorising it to ease presentation, which included grouping all non-unemployment related benefits, all savings reliefs, tax and NIC allowances and VAT exemptions as the results would have been unreadable and not useful otherwise.

And then I turned it all into this pie chart (click on it for a bigger version):

This looks very different from the impression George Osborne wants to give. The third largest category of spending is now allowances and reliefs from which everyone benefits (even the highest paid via national insurance) whilst the seventh largest category of UK spending is pension tax relief and the eighth is implicit subsidies to banks. The data is here.

Add together the cost of subsidies to banks, the subsidy to pensions and the subsidy to savings (call them together the subsidy to the City of London) and they cost £103.4billion a year - more than the cost of education in the UK.

There are other absurdities that also become apparent. For example, unemployment benefits cost only half the amount used to subsidies personal savings and investments.

Its also no wonder house prices are so distorted when the implicit tax subsidy for home ownership is £12.6billion a year.

This is the statement George Osborne would not want you to see because it makes clear that subsidies, allowances and reliefs extend right across the UK economy. And they do not, by any means, appear to go to those who necessarily need them most. The view he has presented on this issue has been partial, to say the least, and frankly deeply misleading at best.

I do not mind having a debate about tax. I relish such things. But it has to reflect facts. This data much better reflects those facts. And I did not even include tax lost in this data. The cost of cheating makes things look even stranger still:

The tax gap of £119.4billion comes in at a cost almost identical to pensions, to put it in perspective.

I leave you to decide which one to choose, but whatever it is, George Osbornes version is wrong.