China Starts Spending Some of Their U.S. Cash

China has worked hard over the past few years to build-up a massive treasure chest of US securities, almost $846 billion at last count.

Now, it appears they are trying to spend some of it.

"China's top offshore oil producer CNOOC Ltd agreed to pay $1.1 billion for a stake in a U.S. shale oil and gas field, testing the market for the first time since its 2005 failed bid for Unocal.

Most of the outbound acquisitions by China's oil firms have been in risky areas such as Africa, which Western rivals have avoided, or in locations with aging assets.

Now they are also eying the United States, which was once deemed off limits to the Chinese due to protectionist sentiment."

China's prior attempt to purchase US oil and gas assets (specifically, the shares of Unocal) failed back in 2005, so it is not a given that their latest parlay will be approved by Congress.

Having these US-based assets owned by the Chinese should be no cause for concern to Americans, and should simply be viewed as an attempt by China to diversify their vast holdings of foreign currency.

Frankly, this is going to be a recurring them in the future, as holders of the US debt that is being issued with abundance attempt to swap that investment for real, tangible assets located in the US.

House Votes to Remove Oil Spill Liability Cap

In an important step towards requiring oil companies to properly manage their risk, the House voted to lift the arbitrary $75m cap that oil companies currently face for oil spill costs.

"The House of Representatives passed legislation Friday which would lift the current $75 million liability cap for oil spills while imposing new safety standards for offshore drilling.

The Senate has yet to act, however, so the prospects for final oil spill and energy legislation are unclear.

The measure was pushed by House Democratic leaders as part of the congressional reaction to the BP oil disaster in the Gulf of Mexico. Top Republicans have opposed the measure, arguing that it will further damage an already-reeling Gulf region economy."

Even though the damage to the Gulf of Mexico that resulted from BP's oil spill a few months ago appears to be contained and may have been oversold to being with, it still makes sense for this bill to ultimately pass, be signed by the President, and become law.

If an oil company wants to reap the fruits of drilling for and finding a new oil and gas field offshore, then they must be willing to assume the full economic risk of the drilling going awry.

That's just pure capitalism, where participants should bear the full benefits and burdens of their activities.

The current artificial $75m ceiling on the liability from an oil spill encourages the short-cutting of safety and environmental stewardship. Currently, taxpayers are in effect on the hook for any costs that exceed the cap, unless (like in BP's case) companies voluntarily agree to pay costs that exceed that cap.

If an oil company wants to drill offshore, they should either have the liquid funds necessary to pay for any resulting clean-up, contract with an insurance company that would provide the necessary clean-up in case of a spill, or simply take the risk that they could lose the company to creditors if things really go wrong.

China Gives Pass To Congress

China recently passed up a "golden" opportunity to browbeat the US Congress in to reigning in federal spending and in effect stop forcing the Federal Reserve to monetize the US debt.

"China on Wednesday ruled out the "nuclear" option of dumping its vast holdings of U.S. Treasury securities but called on Washington to be a responsible guardian of the dollar.

In the third in a series of statements explaining its work to the Chinese public, the State Administration of Foreign Exchange sought to allay concerns in the outside world that arise whenever Beijing shifts its holdings of U.S. government debt.

"Any increase or decrease in our holdings of U.S. Treasuries is a normal investment operation," SAFE, the arm of the central bank that manages China's official currency reserves, said.

It said it constantly adjusts its portfolio to maximimise returns, and any changes to its U.S. Treasury portfolio should be seen in that light and not interpreted politically.

In a series of questions and answers posted on its website, www.safe.gov.cn, SAFE asked rhetorically whether China would use its $2.45 trillion stockpile of reserves, the world's largest, as a "nuclear weapon".

SAFE said such concerns were completely unwarranted."

Exercising the "nuclear option" would probably do as much harm to China, at least in the short term, as it would to the US. That is because selling its enormous reserve of US Treasuries would flood the market, causing their overall value to plummet.

However, a plummeting value ultimately to zero is the long-term fate of US Treasuries anyway.

As a result, China would have been better served demanding that Congress get its fiscal house in order and stop running budget deficits, so as to protect its investment in the Treasuries that it currently holds.

Unemployment Benefits Extension Looks Unlikely

The US Senate has been grappling for weeks over a bill sent to it by the US House which, among other things, provides for an extension of unemployment benefits.

"A Republican filibuster appears increasingly likely to kill long-sought legislation extending jobless benefits and a host of other spending and tax measures, despite a new round of cuts to the measure Wednesday that reduced its deficit impact even further.

Failure to pass the bill would mean about 200,000 jobless people a week would lose benefits that average more than $300 a week because they would be unable to reapply for additional tiers of benefits enacted since 2008. Governors denied help with their budget woes are likely to lay off tens of thousands of state workers."

Government-provided unemployment benefits are a mixed bag. Although a (rather weak) argument can perhaps be made that providing these benefits is a proper role of a federal government, it's undeniable that these same benefits should be fairly short-lived and have a declining pay-out ratio to those receiving them. In addition, there should be a means-test employed as well, so those that have assets that could be sold to provide an income aren't provided a stipend from the government when one is not clearly needed.

Back to the issue currently before Congress though - continuing to extend these same benefits sends the wrong message to the recipients - that the government, not themselves, are responsible for their own well-being.

It's time for all Americans to grow up and realize that, given the state of our national finances, there's no such thing as a free lunch. A proper role of a legitimate government is not to redistribute income and property from one group to another. If one group believes another is worthy of their charity, they will freely and willingly give to that other group or person.

Democrats Seeking Oil Tax Increase Mislead Public

Democrats in the House and Senate that are opportunistically seeking to increase the federal tax on a barrel of oil from 8 cents to 41 cents are deceiving the public when they suggest that the money raised will be set aside to fund future oil spill clean-ups.

"The proposed fee increase has become the latest weapon in the political war over oil, as lawmakers made the plan symbolic of larger congressional election-year themes. Republican senators said that the fee hike, which would raise an estimated $15 billion over 10 years, would help pay for a host of programs that Democrats are championing.

The dispute is helping to stall an emergency spending bill that would revive expired unemployment benefits, provide money for summer jobs for at-risk youths and pay for other programs. The oil fee would help reduce the bill's potential deficit spending to about $78.6 billion over 10 years."

It is undeniably true that this proposed tax hike is being used by Democrats to fund their spending objectives, and is not being set aside at all. In addition, you can rest assured that oil companies will ultimately pass the tax increase along to American consumers in the form of higher prices.

So now we have a tax increase proposal (like most others) that rest on two lies: that the tax is being imposed on some giant corporation (and not the American public) and that the money raised will actually be set aside for use in fixing the problem the tax is nominally supposed to address.

The American public would be a whole lot better off if Congress actively sought ways to reduce their intervention in the marketplace, not to increase it.

CA Budget Mess a Harbinger of Future Federal Issues

The massive budget deficit that the state of California currently faces should seemingly be an opportunity for lawmakers in the Golden State to finally face up to the fact that, at some point, chronic overspending needs to be reigned in.

Unfortunately, that's not the way things work in the world that politicians live in.

Consider Democratic lawmakers proposal to "solve" the state's $19 billion budget deficit, which counters the budget cuts that Governor Schwarzenegger had proposed.

"Assembly Democrats weighed in Tuesday with their own state budget plan that relies on borrowing nearly $9 billion from Wall Street and installing a new tax on oil production to pay back that loan over 20 years."

The $9 billion loan from "Wall Street" is basically securitized by the nickels and dimes that roll in over the next 20 years from the state's bottle recycling tax.

And I wonder how much additional tax revenue that new tax on oil production will actually bring in, once producers factor in the new cost into their estimates and decide that, "hey, maybe we should tap those oil rights we have in Texas or Oklahoma instead of bringing anything new on-line in California."

This sort of fiscal recklessness is foreboding for what Democrats in national office will do when it ultimately becomes clear that printing money is not the panacea for exploding budget deficits.

One can only imagine that instead of ultimately trimming costs as they by all rights should do, perhaps Congress will ultimately decide to securitize future gate receipts at the Smithsonian or sell burial plots at the Arlington National Cemetery.

We're a long ways away from lawmakers and their supporters in this country actually facing up to the destructive fiscal policies that they embrace.

Tax Hikes Considered for Hedge Fund Managers

Congress is considering a bill that would see a "loophole" for hedge fund managers closed, and would result in those same managers having their income taxed at higher rates than they currently are.

"The U.S. Senate, seeking funds for jobs bills and other initiatives, will consider adopting a House proposal to more than double tax rates on executives at private- equity firms, said Senator Charles Schumer, a New York Democrat.

The proposal, projected to raise $24.6 billion over a decade, would affect venture capitalists, managers of real- estate partnerships, and hedge-fund managers who make long-term investments. Passed by the House three times, most recently in December as part of a jobs bill, it hasn’t come to a vote in the Senate, where some Democrats have signaled they would oppose it.

Managers of investment partnerships typically are paid 2 percent of fund assets as an annual management fee and 20 percent of the profit earned for investors above certain levels. While the management fee is taxed as income, the share of profit, known as carried interest, is treated at the capital- gains rate, currently 15 percent and slated to rise to 20 percent in 2011."

To be clear, the Tax Reckoning Blog much prefers that Congress spend its time looking for ways to slash taxes (and spending) at the federal level. In this case, however, a bill that would raise taxes actually might make some sense from an equity standpoint. The share of profits earned by fund managers looks a lot less like risk capital (which is deserving of reduced capital gain rates) and more like a return for services that should be taxed as ordinary income.

In effect, we can't and shouldn't expect salaried workers to pay a certain percentage of their wages as tax, and allow other workers' compensation to be taxed at a much lower rate.

In any event, since the management of capital is a truly a portable business that can be largely done from any country on earth, as a response to an enactment of this bill it would not be surprising at all to see hedge fund expatriate from the United States in order to avoid its effects.

If that were the case, once again a bill designed to raise taxes actually would have the opposite effect, demonstrating that human beings (for the most part) are not stupid and will actively organize their affairs in such a way that allows them to surrender as little of their wealth to the government as possible.