12/01/2010 10:52 am ET | Updated May 25, 2011

It's Not Raining, We're Getting Peed On (3): The Scam of the Deficit Crisis

In the last two days, I've written about the phony deficit/debt "crisis" here and here, using excerpts from my new e-book, It's Not Raining, We're Getting Peed On: The Scam of the Deficit Crisis. Today, as the Catfood Commission unveiled its final report, I'll continue by looking at some of the people behind pushing the phony "crisis" within an excerpt from the next chapter, "The Peter Peterson Principle: Pee On The People."

From the book:

We have a national disease. It is highly contagious. It attacks our brains, and sometimes our hearts, making us vulnerable to human parasites -- the kind of parasites who never see a limit to how much wealth they can pocket for themselves.

Most of our elected officials are hopelessly infected by it and are unlikely to ever recover (or, at least, until we have full public financing of elections that ends legalized corruption).

The traditional media -- uninformed, lazy, and always desperate to be part of the insider crowd -- is a widespread carrier of the disease.

And, then, we, the people, exposed virtually every day to the blather by our politicians and media, are then infected by the same disease.

It's called Elititis Expertitis.

We've come to believe that extremely wealthy people know what they are talking about. We assume -- or they assume -- that just because someone figured out how to make a lot of money, then, he or she is an expert on the economy -- rather than an individual whose brain is wired to think in a very narrow-minded way. And, then, they get to use their money to spoil and destroy what is good about America.

Remember, most of these people are the same people -- the financial leaders, aided and abetted by the traditional media and political representatives -- who told us some of the following whoppers:

• Housing prices would never go down!

• IRA's are much better than boring company-provided pensions or, god forbid, the king of all fuddy-duddy investments, Social Security!

• The Dow would reach 30,000!

• Bernie Madoff was an investing genius!

Shazzam! Remember all those predictions? We should never listen to these "experts" again simply because their track record has been so abysmal.

Some of these very people have been the leading voices screaming about the fiscal "crisis."

Peter Peterson: A Wallet Fattened By Misery

As an example, I want to zero in on one of the great scam artists of the past decade: Peter Peterson. I do not think, or at least, I have no evidence, that Pete Peterson is a liar. I think it's something worse -- he believes in the kind of world where Social Security is a crutch for the weak, that debt is a bad thing and that the religion of the "free market" is something to worship more than God.

I'm using Peterson here as an example because he has anointed himself as the savior of the country. Using his huge wealth -- and in a moment we'll look at how he accumulated that wealth -- he is the number one funder of the movement to put the deficit "crisis" on the national agenda.

Peterson is, in fact, fabulously wealthy -- he ranks 149th on the Forbes wealthiest individuals list, with a cool $2.8 billion.

Let's start with the way he made his fortune: climbing over the backs of others and inflicting misery on countless human beings. That is essentially the history of Blackstone, the private-equity firm that, when it went public in 2007, made Peterson a very rich man.

Blackstone is a wrecking machine: buying up companies and immediately trying to wring every penny out of the place, mainly by tossing workers on to the unemployment line.

And how do they do it? By piling up massive amounts of debt!

It's almost impossible to ignore the irony and hypocrisy rolled into one. Pete Peterson robbed companies of their wealth by saddling those companies with crushing levels of DEBT -- but he sees debt as the evil. Stephen Colbert, are you out there? Pete Peterson is your patron saint of hypocrisy.

In fairness to Blackstone, it is not unique. Most of the private equity (PE) industry operates this way: the billionaire private equity leaders made their fortunes by attacking the standard of living of millions of Americans by trashing wages, cutting jobs and tossing people aside like used condoms.

As Josh Kosman explains in his excellent book, "The Buyout of America", "... these faceless PE firms, with names like Blackstone Group and Carlyle Group, were not helping the companies they acquired. Just the opposite -- the PE firms put the companies they acquired under more intense pressure than they would ever feel in the public markets. Their actions hurt the companies they owned, their customers and employees" [emphasis added]


Everyone Should Sacrifice, Except For Pete

Peterson argues that everyone should share in the "sacrifice" to restore "fiscal soundness" to the country. Even the rich.

Except for Pete Peterson. And this brings us to a short explanation of "carried interest".

Private equity firms get a special tax break -- it's called "carried interest" Rather than being taxed at the top rate of 35 percent, the private equity fund managers like Peterson only pay 15 percent through a loophole called "carried interest." To understand carried interest, you have to first understand how money managers get paid in the yacht-sailing, mansion-buying world of private equity.

First, they receive a fee, which is a percentage of the funds they invest. This fee is usually in the range of two percent, and is taxed like your run-of-the-mill wage income.

Second, and far more lucratively, money managers get a fee based on the performance of their fund -- a fee in the range of 20 percent. It's the second fee that is the so-called "carried interest" -- and it's how the money managers of private equity really rake in the big bucks that pay for their Picassos, yachts and mansions.

In the normal world of taxable income (and let me say that nothing in the tax code is simple when it comes to schemes that allow people like Peterson to shelter their money), carried interest is taxed as investment income--at the capital gains level of 15 percent (much lower than the top wage income rate), even though most of these managers invest very little, if any, of their own money.

So, a private equity big shot honcho hauling down millions of dollars in "incentive" is taxed at a 15 percent rate, while the receptionist who works in his office, or the police officer who guards the equity baron's property, probably earn $50,000 or so if they're lucky -- and those average working people pay a 25 percent tax rate on that income (not to mention payroll taxes), a far larger share of their income than the fellow who banks "carried interest."

When this all came to light in 2007, it struck some people as outrageous. In June of that year, Representative Sander Levin, Democrat of Michigan, introduced a bill to correct the loophole that was depriving the government of billions of dollars in tax revenue. In pushing for the change, Levin said, "Congress must ensure that our tax code is fair. We have to be sure that the lower capital gains tax rate is not being inappropriately substituted for the tax rate on wages and earnings. Investment fund employees should not pay a lower rate of tax on their compensation for services than other Americans. These investment managers are being paid to provide a service to their limited partners and fairness requires they be taxed at the rates applicable to service income just as any other American worker."

Peterson's response? "This is a fairness argument... There are so many other partnerships, why pick on this high-growth sector?"

Oh, I get it. It's fair for everyone else to pay proper tax rates (putting aside for a moment the absurdly low tax rates of the rich overall) except for YOU, the self-anointed public scold, who wags his finger at everyone else's perceived financial misdeeds.


Tomorrow, I'll discuss the final chapter of the book: how we can realize a lot of money for the use of the country, without having to get sucked into a "crisis" mode.

If you want the book, you can buy it on Kindle and Nook, with more formats coming in the next day or so (ITunes should be available in the next 24 hours). But, you can also just download it FOR FREE. All the links are here.

The book's Facebook page is here. "Like" it if you are so inclined. It would be much appreciated.

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