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Former Bolivian President Evo Morales left the country Monday amid worsening political violence in the aftermath of disputed elections.
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Negative and zero interest rate policy (NIRP and ZIRP) are becoming a new global norm. Endless printing of paper money is said to make economies stronger, while everyday individuals are seeing their savings worth less and less. These policies were traditionally viewed as last ditch, temporary measures to save economies, but are now increasingly being praised with smooth talk from central banks and policymakers as the answer to the world’s problems, paving the way for the next global downturn–possibly even a major economic meltdown.
Sticks and Stones May Break My Bones But Words Make It Less Painful
In George Orwell’s classic dystopian novel 1984, the political language called Newspeak existed “not only to provide a medium of expression for the world-view and mental habits proper to the devotees of Ingsoc [the novel’s dystopian political system], but to make all other modes of thought impossible.” Politicians today employ the same techniques.
Euphemism is designed to make unpalatable realities sound inoffensive or even pleasant. Economic terms like “quantitative easing” and “NIRP” don’t sound particularly threatening or bad. The underlying realities successfully obfuscated, however, and central bankers are able to proceed with impunity in economic activity extremely damaging to the finances of the hardworking individuals they govern.
NIRP and ZIRP
NIRP and ZIRP are acronyms for “negative interest rate policy” and “zero interest rate policy” respectively. The acronyms themselves take some of the punch away from the not-so-wonderful meanings, but the expanded terminologies are also misleading. A negative interest rate is commonly known in the real world as a “fee.” If interest is a payment one receives for lending money to another person, business, or financial institution, negative interest would be a charge for doing so.
With politicians and global financial advisory groups saying things like “Over in Europe and Japan they have NEGATIVE RATES. They get paid to borrow money” (Donald Trump), or “Without cash, depositors would have to pay the negative interest rate to keep their money with the bank, making consumption and investment more attractive” (the IMF), the reality of what is being advocated is hidden.
How Does NIRP Work?
Negative interest rates are set by a country’s central bank. They spur spending and discourage saving. Banks cannot afford to leave excess reserves being eaten away in the central bank at these rates, and are thus incentivized to provide more affordable loans. Some retail banks absorb this cost to keep their depositors from moving savings into cash; other banks charge their customers. The low rates and increased loans mean that more people borrow and spend, and the now stimulated economy is thus viewed as “strong” (more newspeak), juiced up on the speed-like drug of increased easy lending. The printing of more money can then justified under this pretext. At some point, however, the chickens of these policies come home to roost, as sound assets and resources are limited, no matter how much paper money a government prints.
ZIRP is the only slightly more conservative cousin of stimulus-addicted NIRP, and is a zero interest rate policy set by a country’s central bank. Unlike NIRP, zero is the limit as to how low nominal rates can be set, and so other measures such as quantitative easing are often implemented.
When zero interest rate policy fails to stimulate an economy adequately, QE, or quantitative easing, may be employed in conjunction. QE is the creation of more money by a central bank, temporarily easing the stress on a given economy. In QE, central banks create more reserves to buy debt and securities from their governments and sometimes even private entities. As finance website thebalance.com notes:
No funds change hands but the central bank issues a credit to the banks’ reserves as it buys the securities. QE has the same effect as increasing the money supply.
With the domestic money supply increased, economic activity is expected to be stimulated. Like the NIRP and ZIRP policies detailed above, however, it’s akin to taking an aspirin for a serious disease, or buying more credit cards to pay off the pile of old, already maxed-out plastic in one’s wallet.
An increased money supply means higher inflation and the resultant loss of purchasing power. In case QE fails to provide a shot in the arm to a given economy, a phenomenon known as stagflation can also occur where inflation continues in the absence of economic growth. It may seem surprising to consider many world leaders, central banks and financial planners are now praising and implementing policies designed to make money weaker in the name of progress, but that’s the reality.
“Over in Europe and Japan they have NEGATIVE RATES. They get paid to borrow money. Don’t we have to follow our competitors?” @Varneyco Yes we do. The Fed doesn’t have a clue! We have unlimited potential, only held back by the Federal Reserve. But we are winning anyway!
— Donald J. Trump (@realDonaldTrump) October 29, 2019
The NIRP Zeitgeist
In its Global Banking Annual Review 2019, management consulting firm McKinsey & Company claimed that “60 percent of banks destroy value” as they are not economically viable. From 2009 to 2018, most banks studied showed a return on equity (ROE) less than their cost of equity (COE). In other words, they are not making ends meet and in the case of another crisis like the global downturn sparked in the late 2000s, may not survive.
Global trends toward negative rates and easing are nevertheless touted by policy makers as necessary. According to research by the Federal Reserve Bank of San Francisco, “Central banks that have yet to introduce negative rates may take some comfort from this evidence as there appears to be room below zero for additional economic stimulus.” The media is complicit in being the megaphone for these concepts of endless easing and low rates as well, with even respected financial publications praising such moves. None of the pretty language, of course, changes the stark reality underneath.
Rearranging Deck Chairs on the Titanic
To see where all this is potentially heading, one only needs to look back at the long list of countries where inflation has already spiraled out of control, and the current talk from global monetary policymakers and central banks. While many countries have suffered independently before, the timing now suggests a broader, more global financial meltdown could be on the horizon.
Leadership at the European Central Bank continue to praise and advocate for the extension of NIRP and ZIRP policy. Japan, Sweden, Switzerland and Denmark don’t look like they’ll be escaping their deepening, respective NIRP sloughs anytime soon. The U.S., Australia and New Zealand’s rates are all rapidly approaching zero, and New Zealand’s central bank is even considering taxing cash to force people to spend and discourage saving.
The International Monetary Fund (IMF) maintained in February 2019:
Severe recessions have historically required 3–6 percentage points cut in policy rates. If another crisis happens, few countries would have that kind of room for monetary policy to respond.
As rates are already so low globally, another recession could spell real disaster. One of the IMF’s proposed solutions was to even eliminate cash, another emergent global theme.
At the end of the day, central bankers appear to be playing a board game. When the colorful strips of play money run out, the banker just writes some numbers on blank pieces paper and the game goes on. In Monopoly, this is all for the sake of fun and leisure. In reality, it’s a game being played with people’s very livelihoods, by saccharine-tongued politicians and central bank governors who have nothing to lose by gambling your money away.
What are your thoughts on NIRP and QE in the context of the global economy? Let us know in the comments section below.
Image credits: Shutterstock, fair use.
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The post Do You Know the Newspeak of the Looming ‘NIRP’ Economic Meltdown? appeared first on Bitcoin News.
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With the rise in price and the growing adoption of cryptocurrencies, more governments worldwide have been ramping up efforts to tax them. Some countries are using extreme measures to get their hands on this new source of untapped revenue, but there are also tax-friendly countries that are not taxing crypto transactions. Furthermore, many tools exist to help crypto owners.
Know How Your Government Taxes Crypto
Each country, state, or even city has its own set of rules when it comes to determining which crypto transactions are taxable. However, few have clear guidelines as cryptocurrency is still a nascent area for governments to tackle.
The U.S., for example, first released guidance for crypto taxation back in 2014, but left out many issues. Five years later, on Oct. 9, the country’s tax agency, the Internal Revenue Service (IRS), published follow-up guidelines that answer many questions but also raise some unanswered ones. Besides, the tax agency seems to be confused about some key concepts such as how hard forks and airdrops work.
As a taxpayer, it is important to understand what is taxed in your country. In the U.S., the IRS explained:
The sale or other exchange of virtual currencies, or the use of virtual currencies to pay for goods or services, or holding virtual currencies as an investment, generally has tax consequences that could result in tax liability.
Furthermore, anyone who received cryptocurrency “from an airdrop following a hard fork,” will owe taxes “provided you have dominion and control over the cryptocurrency so that you can transfer, sell, exchange, or otherwise dispose of the cryptocurrency,” the new IRS guidance details. Meanwhile, some crypto transactions are nontaxable such as donating cryptocurrency to qualified tax-exempt organizations.
Those Probing Questionnaires
As more governments realize cryptocurrency’s potential for generating tax revenue, they are also aware that they are missing out by not finding all crypto owners and taxing them. Some tax authorities worldwide have attempted to obtain information on taxpayers’ crypto holdings and activities through probing questionnaires.
The Indian Office of the Deputy Director of Income Tax has been mailing crypto owners a long list of questions, ranging from sources of income to the names of the cryptocurrencies traded and details about hardware wallets. The Canada Revenue Agency has also sent a detailed questionnaire to the citizens it believes to own cryptocurrency. Another example is the tax agency of Denmark, Skattestyrelsen, which has been authorized by the country’s tax council to obtain information about cryptocurrency trades conducted on some local exchanges.
On Oct. 11, the IRS published a draft of the new 1040 tax form which contains a question on cryptocurrency: “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” This form is the main U.S. tax form used by over 150 million taxpayers.
More Aggressive Tactics
If tax authorities believe that a significant number of people are not reporting and fulfilling their tax obligations, they may employ various tactics to convince them to do so. The IRS, for example, has tried to remind crypto owners to pay taxes by mailing letters to more than 10,000 of them. It followed up with a video about another tax notice which seeks to rectify recipients’ tax reporting discrepancies. While these letters may seem like a big deal, some people believe that they are more of a phishing campaign since the agency simply does not have enough manpower to go after all crypto owners.
Tax agencies may also use more aggressive measures to boost their revenue. An IRS cybercrime presentation shows alarming recommendations on how tax agents should deal with crypto tax evaders, including questioning their friends and family, analyzing their social media posts, and issuing subpoenas. For Americans with more than $ 52,000 in overdue taxes, the agency may even revoke their passports until their tax bills are settled. Recently, the Turkish tax authority froze the bank accounts of over 3 million people for nonpayment of taxes.
Some Countries Are Much More Tax-Friendly
Each jurisdiction applies different tax rates and rules to crypto transactions. For example, Romania imposes a 10% tax on crypto earnings, Venezuela taxes up to 15% of crypto remittances, and one Swedish trader expected to pay 300% of his crypto profits in taxes. Japan, often hailed as one of the most crypto-friendly countries, taxes crypto income as high as 55%. However, a proposal is already in place to lower this rate in four different ways. India presently has no legal framework for cryptocurrency, but income from crypto assets can be taxed in three different ways. Portugal, on the other hand, has emerged as a crypto haven due to its policy to exempt cryptocurrency from capital gains tax and VAT. A local tax expert detailed:
The appreciation of cryptocurrencies or any gains on the direct sale of cryptocurrencies are not taxed in Portugal.
Knowing how other countries treat crypto assets for tax purposes can be beneficial, such as when choosing a more crypto tax-friendly place to move to. With some jurisdictions taxing crypto earnings and gains significantly less than others, some crypto investors have renounced their citizenship and relocated in order to lower their tax obligations.
There Are Tools to Help
If you want to file taxes and pay as little as possible, there are many tools to help you. Many software programs can help track your cryptocurrency transactions, calculate your tax liabilities, prepare and even file your tax returns. Some allow you to download your transaction data directly from exchanges and wallets. News.Bitcoin.com recently published a list of 10 useful tax tools for crypto owners.
Some People Are Still Not Paying
Despite intense efforts by tax authorities, many people in and around the crypto community strongly believe that taxation is a form of theft, and flat out refuse to pay them. A survey by personal finance firm Credit Karma shows that an increasing number of people would not declare their crypto income. One prominent tax evader is former antivirus tycoon and cryptocurrency advocate John McAfee. After fleeing the U.S. and declaring war on the IRS from his boat, he exclaimed:
I have not paid taxes for eight years and I have made no secret of it.
Resources: Top Posts on Crypto Taxation
- IRS Issues New Crypto Tax Guidance – Experts Weigh In
- IRS to Require 150 Million Filers to Disclose Crypto Activities
- 10 Tax Tools to Help Crypto Owners
- 10,000 American Crypto Owners Will Receive Warning Letters From IRS
- Why Portugal’s Tax-Free Crypto Trading Matters for Bitcoin
What do you think of how governments try to tax crypto transactions? Let us know in the comments section below.
Disclaimer: This article is for informational purposes only. It is not an offer or solicitation of an offer to buy or sell, or as a recommendation, endorsement, or sponsorship of any products, services, or companies. Bitcoin.com does not provide investment, tax, legal, or accounting advice. Neither the company nor the author is responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods or services mentioned in this article.
Images courtesy of Shutterstock.
Did you know you can buy and sell BCH privately using our noncustodial, peer-to-peer Local Bitcoin Cash trading platform? The local.Bitcoin.com marketplace has thousands of participants from all around the world trading BCH right now. And if you need a bitcoin wallet to securely store your coins, you can download one from us here.
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