Blog | Entrepreneurship

A Dispatch from the Money War

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For a while now, I've been writing about the money war—how the world's governments are battling to devalue their currencies to boost exports. This week a truce was called. The G-20 nations agreed to a deal to end the currency war in principal.

According to The Wall Street Journal, the deal paves the way for:

  • Ending the competitive devaluation of global currencies
  • Creating a mechanism to examine excessive imbalances in current accounts
  • Reviewing and sign off on financial-sector reform measures
  • Reshaping how the IMF governs
  • Starting work on a "safety net" for developing nations who are victims of the money war

All of these things sound great, but I doubt they'll work. Why? Because as The Wall Street Journal reported, "Unable to agree on a precise metric, as the U.S. proposed, the ministers agreed only to measure compliance by 'indicative guidelines,' still to be negotiated." In other words, they can't even agree on what it means to break the truce. And beyond that, G-20 has no authority to enforce the truce.

In the end, the truce is a straw man that will fall quickly. I'm not holding my breath to see the money war end any time soon.

The War on the Middle Class

In other news, a new front has been opened in the war on the middle class—tax breaks. In an article entitled "Key Tax Breaks at Risk As Panel Looks at Cuts", The Wall Street Journal reports that the deficit commission, a commission charged with making recommendations to reduce the deficit and balance the budget, is considering recommendations to kill off the mortgage-interest deduction, child tax credits, and the ability of employees to pay their health insurance with pre-tax dollars.

In other words, to fund the deficit spending of our government, the deficit commission is talking about cutting the few tax breaks the middle class and employees enjoy.

While these are just proposed ideas right now, the fact that they're even being considered is a travesty. As the middle class continues to shrink, cutting the few tax breaks they enjoy would do nothing to help the economy—in fact, it would hurt it significantly, especially real estate—and will only harm struggling families.

Still, I'm not surprised. As I've written before, the tax code is written to help the rich, not the middle class. That's why it's so important to be on the right side of the CASHFLOW Quadrant.

The CASHFLOW Quadrant

In my book, The CASHFLOW Quadrant, I write about the four kinds of people in the world of money:
  • E - Employees, those who work for others
  • S - Self-Employed, those who work for themselves and own a job
  • B - Big Business, those who own a business and have others work for them
  • I - Investors, those who invest in cash flowing investments and have money work for them

Nearly every tax break in the tax code favors those who are on the right side of the CASHFLOW Quadrant, the Bs an the Is. They make the most money and pay the least in taxes. Those on the left side, the Es and Ss, enjoy few if any tax breaks and pay the most in taxes.

While I'm not happy about the idea of losing my mortgage deduction, I'm not really worried about it. That deduction is one of my smallest. Regardless of what happens to the mortgage deduction, the child tax credit, and the pre-tax insurance deduction, I'll be fine. Why? Because I'm on the right side of the CASHFLOW Quadrant. I can deduct my business expenses. I can depreciate my investments. I can borrow money tax free to invest in real estate. And instead of earned income, the most taxed income, I receive passive income, the least taxed income.

I'll be just fine. The middle class will not. They'll be the losers in the money war as inflation destroys their savings and the government destroys their tax breaks.

It's Time to Switch Sides

If you're on the left side of the CASHFLOW Quadrant, it's time to switch sides. Things will only get tougher for employees and the self-employed as the war on money rages on.

The best way to switch sides is to increase your financial education. If you don't understand why I can make more money and pay less in taxes because I'm on the right side of the CASHFLOW Quadrant, I encourage you to start learning why. If you do understand, but haven't taken action yet, I encourage you to take your first step. Make an investment. Start building your business.

In the end, the only survivors of the money war will be those who are financially educated and those who relied on themselves—not the government—to survive.

Original publish date: October 26, 2010

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