Offshore News Digest for Week of November 17, 2003

GORE VIDAL SKEWERS BUSH, ASHCROFT AND THE WHOLE DAMN LOT OF US

It is lucky for George W. Bush that he was not born in an earlier time and somehow stumbled into America’s Constitutional Convention. A man with his views, so depreciative of democratic rule, would have certainly been quickly exiled from the freshly liberated United States by the gaggle of incensed Founders. So muses one of our most controversial social critics and prolific writers.

THE AMERICAN EMPIRE: EASY COME, EASY GO

Empires are noted for military strength at the beginning and fiscal weakness at the end. The military budget grows as a percentage of the total budget. This will not be true of the American empire. The expenses of the welfare system for the aged will swamp the military budget long before there is a significant military threat to the United States. It will not be enemies at the gates who overwhelm the American empire. It will be the army of politically armed economic dependents inside the gates.

Private Asian investors and central banks have been buying dollar-denominated assets in order to keep their currencies from rising against the dollar. The decision-makers do not want their export markets to fade. But, in effect, when governments and their central banks follow a policy of debasing their currencies for the sake of their export markets, they have adopted a foreign aid program for America. By the end of 2003, according to JP Morgan Chase, the combined countries of Asia are expected to hold an astonishing 70% of the world’s currency reserves. Updating Senator Everett Dirkson’s comment, “a trillion here, a trillion there, and pretty soon we’re talking big money.”

For many years, America’s strong-dollar policy served the world and chiefly the United States very well. But America’s strong-dollar policy has been matched step for step by Asia’s weak-currency policies. Asian central banks insist on subsidizing exports to Americans. This policy comes at the expense of Asian domestic consumers and American manufacturers. It cannot go on indefinitely. In the immortal words of the late Herb Stein, when something cannot go on, it has a tendency to stop.

On the fringes of opinion from the fringes of Asia has come a remarkable prognostication: Christopher Wood, global emerging-markets equities strategist for Credit Lyonnais Hong Kong (a company that makes money by advising clients, not selling newsletters), predicts that by the end of the decade there will no longer be a possibility that the world’s central banks can control the situation, and there will be a truly massive devaluation of the US dollar. “The view here is that the US dollar will have disintegrated by the end of this decade. By then, the target price of gold bullion is $3,400 an ounce.”

Introducing “The BED Spread”

Technically speaking, the TED spread is the difference between interest rates on the 90-day U.S. Treasury and the 90-day Eurodollar deposit contract. The spread measures of systemic risk. It is premised on the belief that the U.S. bond market is the financial world’s safe haven of last resort. But what, to borrow a phrase from Michael Moore, if that’s a big fat lie? If the U.S. bond market is not as safe as you have been told, how would you know? How can you actually measure how close we are to the day of gloom and doom and $8,000 gold?

You would begin to have an idea that the world was going to hell in a hand-basket if you could measure the spread between U.S. debt (which we know to be risky) and debt that the market considers risky, namely baseline emerging market debt (BED). A BED spread, you say? To get it, I established a spread between emerging market debt and U.S. government debt. If I am right about the U.S. bond market losing its gold-standard reputation, the spread should converge over time.

TOUGH QUESTIONS FOR DEFENDERS OF THE NEW DEAL

This year marks the 70th anniversary of the launching of Franklin Delano Roosevelt’s New Deal, so it is a good time to debate his policies, which have had an immense influence and which remain controversial. As I report in FDR’s Folly, dozens of economists, including two Nobel Prize winners, have evaluated the consequences of New Deal policies, and empirical research at leading universities raises tough questions. It is ironic that political historians give FDR credit for handling the political crisis of the 1930s, even though the most important factor in the crisis was double-digit private sector unemployment prolonged by FDR’s misguided policies.

7 million died in the “forgotten” holocaust in the 1930s.

For Jews and Armenians, the genocides their people suffered are vivid, living memories that influence their daily lives. Yet today, on the 70th anniversary of the destruction of a quarter of Ukraine’s population, this titanic crime has almost vanished into history’s black hole.

CONSERVATIVE CRACK-UP: WILL LIBERTARIANS LEAVE THE COLD WAR COALITION?

The combination of libertarian and traditionalist tendencies in modern American conservatism was due in part to the need to gather together that ragtag band of intellectuals lingering outside the New Deal consensus who were opposed to the rising tide of left-liberalism. An alliance made out of political necessity, it drew some measure of intellectual consistency from the efforts of the late National Review senior editor Frank Meyer. He argued for the compatibility of innate individual freedom with transcendent morality, emphasizing that liberty has no meaning apart from virtue, but virtue cannot be coerced. Meyer saw libertarianism and traditionalism as two different emphases within conservatism, neither completely true without being moderated by the other. In fact, he held either extreme to be “self-defeating: truth withers when freedom dies, however righteous the authority that kills it; and free individualism uninformed by moral value rots at its core and soon brings about conditions that pave the way for surrender to tyranny.”

“Fusionism” was the name for Meyer’s synthesis. Yet a growing number of libertarians no longer think they are getting much out of the fusionist bargain. Jeffrey Tucker of the Ludwig von Mises Institute has argued that “conservative” as a term for those who love liberty has gone the way of “liberal” -- hijacked by statists so that it now means precisely the opposite. The rift between conservatives and libertarians is not merely an esoteric debate between dueling pundits; it has also has concrete political ramifications. Some libertarians have begun contemplating support for a Democratic presidential candidate to oust the Bush-Ashcroft Republicans.

Libertarians fight PATRIOT Act.

Most criticism of the controversial act is associated with the ACLU and other liberal groups, but more often than not in the West, it is conservative libertarians like Janine Hansen, president of the anti-feminist Nevada Eagle Forum, who take the lead.

For a growing number of conservative libertarians, the Patriot Act and the Bush administration’s “big government” war on terror are becoming wedge issues that threaten to separate them from the Republican Party and President George W. Bush. Those worried about this include Paul Weyrich of the Free Congress Foundation, Grover Norquist of Americans for Tax Reform, David Keane of the American Conservative Union, Phyllis Schlafly of the Eagle Forum, former Republican House Speaker Newt Gingrich and the Gun Owners of America.

One sign of disaffection among conservative libertarians is their ability, even eagerness, to join coalitions with libertarians from the left, and even unions and environmentalists, to fight the Patriot Act.

NOVEMBER ISSUE OF ESCAPE FROM AMERICA MAGAZINE IS OUT

Sample articles from this issue include:

From Chicago To Xalapa, Mexico: “When we first started talking about moving to Mexico, my husband, Fred and I knew the first thing we had to do was select an area to live in. We planned to live in more than one place in the country, but our first place was the most important, as that would set the tone for our stay. We started doing research, and read in a very few books about Xalapa... sometimes spelled “Jalapa”, the origin place of the jalapeno pepper. What we discovered was intriguing to us -- that there are very few Americans living in the area. The real clincher was the mild weather in Xalapa. It is at an altitude of about 4,500 ft. and is set into lush hillsides with the Sierra Madre mountains in the distance. You can see Mt. Orizaba which is the third highest mountain in North America, at over 18,000 ft.

A Night At The Cantina, Pavones, Costa Rica: For laid back mood, beaches and fun, few countries can touch Costa Rica. Everyone takes shots at the country -- too expensive, too trampled on, too difficult to live in. It’s all crap. And, by the way, there have been no recent squatter incidents or “land invasions”, and the few remaining conflicts are being settled peacefully, in court.

Anti-American sentiment in Latin America: I am often asked if I encounter anti-American sentiment in my travels. Yeah, you bet! See photo. It seems like more and more lately. But it has never been directed at me personally. People seem to be smart and kind enough to distinguish between a country’s government and its citizens. In the eyes of foreigners, our war on terror has made us into terrorists ... I just read a book by Academy Award winning muckraker Michael Moore: Dude! Where’s My Country? I would not presume to ask you to plunk down a twenty for the book, nor would I even ask to read the whole book. I will ask you this: Go to the mall, go to the bookstore and peruse the first chapter. You’re on your own from there.

Restrooms And Toilets: I am not a connoisseur of restrooms and toilets. I have used some nice restrooms in my time of course; even ones with an attendant present to hand you a towel. I have used toilets with phones attached, or with that oh-so-nice extra padding in the seat. But as a first-time visitor to Korea, and the orient, I gave no thought to restrooms. Why would I? I just assumed everyone in the world had the same type of facilities. Wrong, wrong, WRONG! And let me tell you, such ignorance of the world does not go unpunished.

NIGERIAN EMAIL CONMEN FALL INTO THEIR TARGETS’ NET

It has been described as the internet’s first blood sport and is fast becoming one of the web’s favorite pastimes. Fed up with having their inboxes clogged with emails from Nigerian fraudsters promising untold riches, the victims are finally hitting back. Scam-baiting -- replying to the emails and stringing the con artists along with a view to humiliating them as much as possible -- is becoming increasingly popular with more than 150 websites chronicling the often hilarious results.

Mike, a 41-year-old computer engineer from Manchester, runs the scam-baiting site 419eater.com, which started two months ago. “Almost always the scammer will think you are a real victim and try their best to extract money. It started because I used to get a few emails, and although I knew it was a scam I never knew how it worked. I did some research, found out about scam baiting and decided to have a go.”

FREE TRADE AREA OF THE AMERICAS CONFERENCE COMMENCES IN MIAMI, THEN ENDS EARLY

Miami looks to FTAA to revive bank industry.

Sluggishness in South America’s largest economy, Brazil, and debilitating financial crises in the continent’s second- and third-largest economies, Argentina and Venezuela, have taken their toll on Miami’s once-vibrant international banking industry. Deposits, assets and jobs have plummeted at the banks, which have traditionally been a relative haven for investments by wealthy Latin Americans. Now Miami’s bankers are quietly pinning their hopes for a rebound on the establishment of the FTAA, an arrangement intended to reduce tariffs on imports throughout the hemisphere. Trade ministers from 34 countries are meeting here this week for talks aimed at creating the free trade area by 2005.

The negotiators will also be discussing where to establish the headquarters of the Free Trade Area of the Americas, a prize that Miami is pursuing with at least a half-dozen other cities from the Western Hemisphere, including Atlanta and Panama City. Economists have estimated that establishing the headquarters would create 15,000 jobs for white-collar professionals including diplomats, lawyers and accountants, in the host city.

U.S. and Brazil end talks.

The United States and Brazil abruptly called an early end on Thursday to talks aimed at creating a 34-nation trade agreement in the Western Hemisphere after concluding there was little left to discuss here aside from a vague framework that allows officials to continue negotiating. The talks had originally been scheduled to end on Friday.

A collapse similar to the one two months ago at a meeting of the WTO in Cancún, Mexico was avoided. But in several ways, the conclusion of the negotiations laid bare the difficulty United States negotiators had in making concessions sought by Brazil and Argentina on agricultural tariffs and subsidies. Such changes would have put President Bush in a difficult situation in critical electoral states like Florida, which has large sugar and citrus industries, and in several states on the Plains and in Georgia, where beef production is important.

Bahamas trade minister pessimistic over FTAA negotiations.

Leslie Miller has expressed doubt that the negotiations for the FTAA will be concluded on time in January 2005, citing wide differences between some of the 34 nations involved. One of the major stumbling blocks as far as Miller is concerned is the desire by the United States government to see its firms compete on an equal footing for private and public contracts within the FTAA area. “When you take into consideration the large corporations that operate out of Florida alone, how do you expect the small construction conglomerates here in The Bahamas to compete on that scale?” he asked.

The Minister also referred to the gulf that exists between the US and other members in terms of agricultural subsidies, and criticized the trade bloc’s wide definition of what constitutes a “developing nation”, which puts large countries such as Brazil alongside small Caribbean states. Mr. Miller argued: “We are supposed to be on par with each other as developing countries; nothing could be further from the truth.”

Report finds few benefits for Mexico in NAFTA.

As the North American Free Trade Agreement nears its 10th anniversary, a study from the Carnegie Endowment for International Peace concludes that the pact failed to generate substantial job growth in Mexico, hurt hundreds of thousands of subsistence farmers there and had “minuscule” net effects on jobs in the United States. The independent, Washington-based, research institute issued its report to coincide with new trade negotiations in Miami aimed at the adoption of a Nafta-like pact for the entire Western Hemisphere.

The report seeks to debunk both the fears of American labor that Nafta would lure large numbers of jobs to low-wage Mexico, as well as the hopes of the trade deal’s proponents that it would lead to rising wages, as well as declines in income inequality and illegal immigration. Though sorting out the exact causes is complicated, trends are clear. Real wages in Mexico are lower now than they were when the agreement was adopted despite higher productivity, income inequality is greater there and immigration has continued to soar.

OFFSHORE LEGAL ACTION THREAT TO YUKOS SHARES FREEZE

Western lawyers are gearing up to launch legal challenges before the end of this month in two offshore jurisdictions challenging a freezing order by Russian prosecutors on a 44% stake in the embattled oil group Yukos. They will bring actions in the Isle of Man and Cyprus, the locations respectively of Yukos Universal and its subsidiary, Hulley Enterprises, the companies through which the contested shares are owned.

They will argue that the shares no longer belong to Mikhail Khodorkovsky, the former Yukos chief executive and largest shareholder, who was arrested last month. The litigation could pave the way for restarting negotiations by the core shareholders in Yukos for the sale of their majority stake to a US major. Any deal would be contingent on political approval from the Kremlin, with divided views on whether President Vladimir Putin would allow the sale to a foreign group.

The adviser to Mr. Khodorkovsky stressed that under the terms of a trust deed, Leonid Nevzlin, his partner and Yukos’s second largest shareholder who fled Russia in August for Israel, had become the beneficial owner of Mr. Khodorkovsky’s shares before his arrest and had full authority to negotiate a sale. That would reduce fears by any purchaser that Mr. Khodorkovsky might claim that the deal was invalid.

Editorial: Who lost Russia?

The news from Moscow last week went beyond the familiar theme of democracy eroding. When authorities denied bail to oil billionaire Mikhail Khodorkovsky, barred reporters and parliamentarians from his hearing and kept two of his American lawyers from even entering the country, Russian President Vladimir Putin was doing more than trampling on the rule of law. He was grinding it gleefully underfoot and saying he does not care who sees him doing so. He was revealing his calculation that he can do just about anything inside his country and pay no price with “allies” such as President Bush. Sadly, there is little reason to think that Mr. Putin has miscalculated.

If there are antibodies to dictatorship inside Russia, the greatest favor Mr. Bush could do for them would be to speak the truth. In 2000, shortly before taking office as national security adviser, Condoleezza Rice criticized Clinton administration policy toward Russia: “As the Russian reformer Grigori Yavlinsky has said, the United States should have ‘told the truth’ about what was happening. Now we have a dual credibility problem -- with Russians and with Americans.” Mr. Bush should reread her advice.

Switzerland opens probe against another Russian tycoon.

Switzerland has launched a formal investigation into alleged money laundering and membership of a criminal organization by the Russian billionaire, Boris Berezovsky. The accusations against Berezovsky include siphoning funds belonging to the Russian airline, Aeroflot, through two firms in Switzerland. The Swiss authorities insisted the probe was not related to last month’s arrest of Mikhail Khodorkovsky. However, Berezovsky did not believe this: “I don’t believe that it was an independent decision of the prosecutor, and I have direct evidence that the prosecutor got false information from Russia... and used this information to cooperate with Russia.”

Russia’s tax havens may have fueled legal backlash.

Many analysts say they believe that resentment over the low tax bills paid by oil companies Yukos and Sibneft may have helped fuel the legal attack on the father of the YukosSibneft merger, billionaire Mikhail Khodorkovsky, who was arrested at gunpoint Oct. 25 and charged with tax evasion and fraud.

“The line in the snow has been crossed,” said James Fenkner, research director at the Troika Dialog investment bank, who has studied the oil companies’ tax practices. Oligarchs, as the top tycoons here are known, “had a massive windfall. They used this massive windfall to line their own pockets with big dividend distributions and then wanted to play the oligarch game.”

Led by Yukos and Sibneft, Russia’s oil industry has rebuilt itself and recently overtook Saudi Arabia as the world’s largest oil producer. Hoping to get a larger share of the wealth this boom is generating, President Vladimir Putin’s government has moved in the last few days to force oil companies to pay more taxes.

Moscow is the most expensive city in Europe.

Mercer Human Resource Consulting LLC conducts annual ratings of living expenses in the largest cities of the world. Two hundred of the most popular goods and services are compared in price around the globe, among them: accommodation rent, food, clothes, transport and entertainment. Moscow placed second only to Tokyo in this year’s rating, meaning it is the most expensive city in Europe. The second place in Europe belongs to Geneva, London is the third. Life in Moscow is 14% more expensive than in New York, which is the 10th most expensive in the world.

VIRGINIA-BASED CHARITIES DENY BANKROLLING TERROR

The leaders of an intricate web of nonprofit groups and companies in the quiet suburb of Herndon, Virginia allegedly have conspired to support several Islamic terrorist groups, says an affidavit filed in federal court. On one hand, members of the “Safa Group” -- Safa means purity or truth in Arabic -- appear to be hardworking first-generation immigrants who want to promote Islamic education through charity. Through their attorney, they deny any connections to terrorists. But federal investigators allege that the Safa Group has been using charities to “transmit money internationally for the purpose of promoting offenses against foreign nations involving murder or the destruction of property by means of explosives, fire, kidnapping or extortion,” according to the 132-page affidavit.

BIG AMBITIONS IN LITTLE BAHRAIN

Bahrain has been contemplating its future without oil for the last decade or so, and has identified financial services, tourism, and specialist industries such as aluminum. Bahrain Aluminum (Alba) and the downstream extrusion entities such Balexco have been spectacularly successful. Alba is now one of the world’s leading aluminum smelters. Tourism has taken off, though not to the extent Bahrain hoped. Saudis from the Eastern Province coming for the weekend over the causeway have been both a boon and a social burden. The truth is that Bahrain will find it hard to become a mass tourism destination.

Which leaves financial services. And here the policy changes and implementation have taken on a new-found urgency over the last year. Perhaps slow changes in Saudi Arabia have contributed to this. The styles could not be more different. Bahrain has a headstart of over a decade and its approach is market-oriented. Underpinning this is the establishment of a single financial regulatory body, the BMA, which is now responsible for the integrated regulation of the whole financial sector.

WILL REIT’S FINALLY MAKE IT TO LONDON?

The City of London is littered with office space that emptied out during the bear market. Times are hard. So the vision of real estate investment trusts is welcome. As investment trusts, they would be exempt from income and capital gains tax, so long as they paid out most of their income in dividends. The snag is that they do not exist in Britain -- yet. Property gains are taxed twice -- the company pays corporation tax and shareholders pay again on their dividends. Between the companies and a tax-free future stands Chancellor Gordon Brown, who is unlikely to hand out Christmas goodies to a bunch of rich landlords.

Even so, change is in the air. REITs are popping up all over -- the US, France, Germany, Luxembourg and Ireland have allowed them. These can trade property in the UK at an advantage. UK investors are setting up offshore property unit trusts. Revenue is starting to leak away. There are signs that the Treasury is taking this on board.

Australian REITs look beyond Australia for fresh growth, leveraging up to do so.

In Australia, a vast proportion of prime real estate is owned and operated by listed property trusts, or LPTs, the local equivalent of REITs. In fact, more than 40% of investment-grade properties in Australia are held by such publicly traded companies, vs. 10 to 15% in the United States. Listed property trusts represent a relatively large 6% of the capitalization of the Australian stock exchange.

Listed property trusts have returned an average of 10% a year in the past 10 years, with about 80% of the returns arising from cash dividends, the staple of REITs and similar vehicles. The track record of the trusts has attracted the notice of global investors. Recently, non-Australian investors have been net buyers.

LPTs are buying into properties abroad in a search for asset growth and higher yields. But the higher debt levels that have resulted from expansion offshore into more highly leveraged deals worry investors. One sector analyst argued that because Australian LPTs paid out all their operational cash flow to investors, they did not have the means to cope with a balance-sheet crisis, should one occur. “When interest rates do trek up, the only way to repay debt is by raising equity,” he said.

Wealthy Australian expats home in on premium properties.

Expat buyers are coming from London, the east and west coasts of the United States, south-east Asia and the Middle East. In Sydney, the key areas are the north shore, the northern beaches and the eastern suburbs and similarly in Melbourne, the top-drawer suburbs of Toorak, Brighton, East Melbourne and the eastern suburbs attract the most interest. They are looking for “six star” luxury with good security in a flash neighbourhood.

Expatriates have been drawn back home particularly since the September 11 attacks in New York in 2001 and the resulting global political instability. But buyer’s agent Morrell & Koren director David Morrell says currency fluctuations are also drawing expatriates back to the upper end of the Australian housing market in a hurry. Morrell says expats who are paid in American dollars have lost between 5 and 10 per cent of their buying power this year because the value of the Australian dollar has risen so sharply this year.

THE THICKER THE DUST ON A NATION’S GOLD BARS, THE MORE RESPONSIBLE THE POLICIES

“The best way for a nation to build confidence in its currency is not to bury lots of gold in the ground; it is, instead, to pursue responsible financial policies. If a country does so consistently enough, it’s likely to find its gold growing dusty from disuse.” -- Wall Street Journal editorial, July 8, 1969.

The editorial writer implied that dusty gold is a silly thing to pursue. He also implied that a nation does not need a supply of gold if it pursues wise financial policies. What he was really saying is that gold has nothing to do with wise financial policies. A gold standard is therefore irrelevant. It is an anachronism. It gathers dust, like gold itself.

I think otherwise. I think dusty gold is a great thing. I believe that gold bullion is good. I even believe that gold dust is good. But dust on a government’s supply of gold is even better, assuming that the public can legally obtain this gold on demand, as is the case with a gold coin standard. Permit me to explain why I believe this.

WHERE IS THE FISCAL OUTRAGE?

We have just closed the books on fiscal 2003, and all that can be said is: Good riddance. This was one of the worst years for fiscal conservatives in many moons. The federal budget grew by more than $150 billion -- more than twice as much as any year that Bill Clinton was in the White House -- and deficit spending eclipsed $300 billion, a 10-year high. It took Congress 101 years to spend its first $500 billion dollars. But it took just 10 years to spend the next $500 billion; and now just four years to spend the last $500 billion.

A new Institute for Policy Innovation report chronicles the budget orgy. “What we have in Washington today,” it glumly notes, “is a bipartisan fiscal cop-out. No one in Congress or the executive branch has insisted that federal tax dollars be spent judiciously.” Yet, examples of waste and fraud in the federal budget have reached gargantuan proportions.

Republicans have almost all of the levers of power in Washington. They have proven they can cut taxes. But they have also proven incapable of cutting fat out of the budget and of setting spending priorities. Instead we get more -- of everything.

VISA HASSLES FOR US VISITORS

At the moment, the State Department’s reputation abroad is one of an institution that prevents students and other visitors from coming to this country. How fair is that picture? The number of visas issued for all visitors to the United States has dropped dramatically since 2001, from 6.9 million to 4.9 million. While overall student visa numbers have remained flat, the number of visas issued to students from the Middle East, Indonesia and Pakistan has dropped significantly. Anecdotal evidence of unreasonable refusals and delays for legitimate business and academic applicants is also growing.

The financial costs to the country in lost tourist, business and academic revenue are high. The cost to America’s reputation abroad is even higher. Would-be visitors are now put off by elaborate questionnaires, cursory interviews and a $100 application fee that is not refunded in case of refusal, which happens in about a quarter of cases.

Others argue, not illegitimately, that the consular service is only following orders from Congress. What is needed, then, is a deeper, national change in attitudes to foreign visitors. What is also needed is a more reasonable means of distinguishing legitimate visitors from terrorists. Embassies abroad should also look more closely at the atmosphere of their consular offices, which are often crowded, unpleasant places.

EVERY BREATH YOU TAKE, EVERY MOVE YOU MAKE, WE’LL BE WATCHING YOU

There is no one on the road and you are free to put the pedal to the metal. After all, no one is looking, right? Wrong. BANG! You are hit from behind. Embedded processors in the car sense the impact. Inside a “black box”, the size of two decks of cards, a wireless module, which is essentially a stripped-down mobile phone that allows objects to communicate with each other regardless of distance, picks up on this. It uses GSM or GPRS to “tell” your insurance company. Your car is a witness and you can bet your premium will jump. Or, if you are a model “Sunday driver” then your car is a character witness -- and you can expect a better deal on your insurance.

This isn’t the future. This is now. Pay As You Drive (PAYD) is a new M2M (short for machine-to-machine, man-to-machine, and mobile-to-machine communications) concept gaining steam in the mobile space. The most ambitious PAYD pilot is in the UK. According to market research, nine in ten people would prefer their car insurance to reflect how they drive (in every detail). So, there appear to be no major privacy concerns here -- yet.

Governments are also sold on the concept. In fact, a Nordic government is planning to use the technology to monitor how economically drivers drive their cars. If you waste gas, then you will pay a higher price at the gas station. If you drive smoothly and conserve, you can expect to pay a lower price. It is a good deal all around. But the appeal of M2M goes beyond the insurance industry ...

RADIO FREQUENCY IDENTIFICATION TAG USERS SQUARE OFF VS. PRIVACY ADVOCATES

MIT’s RFID privacy workshop pitted privacy advocates against companies planning to replace bar-code labels on their goods with stamp-sized RFID tags. Engineers at the meeting presented proposals for devices that could deny RFID readers access to a tag’s information, or disable the readers by overwhelming them with useless data. They also demonstrated a device that could be used to disable RFID tags at store exits.

Many companies, including Wal-Mart, Metro, Tesco, Procter and Gamble and Gillette, have already started tagging items in stores in the United States and Europe. And the companies making RFID tags still plan to help their customers tag every shampoo bottle, soda can and milk bottle that rolls off the assembly line. No company, however, has deployed devices that will kill the tags at checkout. Wal-Mart has been especially cagey about its in-store tests. It has shunned publicity and notified shoppers only vaguely that they are being tracked. Wal-Mart, P&G and Gillette have also been discovered testing the tags on unwitting consumers outside Tulsa, Oklahoma, and in Brockton, Massachusetts. Privacy activists at the workshop said the companies promoting the new standard for using RFID tags are exaggerating RFID’s limitations in order to assuage consumers’ privacy concerns.

Moratorium on RFID chips urged.

A clutch of consumer, privacy, and civil liberties groups is calling for a voluntary moratorium on Radio Frequency Identification (RFID) tagging. The 30 signatories to the petition are concerned about the privacy implications of RFID tags in consumer products.

FBI MAY COLLECT DNA OF JUVENILE OFFENDERS AND ADULTS ARRESTED (BUT NOT CONVICTED)

DNA profiles from hundreds of thousands of juvenile offenders and adults arrested but not convicted of crimes could be added to the FBI’s national DNA crime-fighting program under a proposed law moving through Congress. The law, if enacted, would be the greatest single expansion of the federal government’s power to collect and use DNA since the FBI’s national database was created in 1992. The FBI says its national DNA database holds genetic profiles from about 1.4 million adults convicted of state and federal crimes.

Proponents, including the Bush administration, say that expanding the number of profiles in the database would greatly increase the number of crimes solved. Keeping DNA profiles on file to solve future crimes, they argue, differs little from maintaining a database of fingerprints, which the FBI also does. The American Civil Liberties Union counters that DNA is different because it contains genetic information that should be kept private. Taking a person’s DNA before he is even convicted, said ACLU Washington lobbyist Jesselyn McCurdy, “removes the presumption of innocence.”

Court limits in-car FBI spying.

In a 2-1 decision, an appeals court put the brakes on an FBI surveillance technique that turns an automobile driver’s on-board vehicle navigation system into a covert eavesdropping device, after finding that the spying effectively disables the system’s emergency and roadside assistance features. The decision is only binding in the 9th Circuit, which covers eight western U.S. states and Hawaii. Other federal circuits have not addressed the issue.

Despite the reversal, David Sobel, an attorney with the Electronic Privacy Information Center, says the ruling is not a victory for privacy. “Although the bottom line is that the surveillance order was rejected, the real effect of it is that this kind of monitoring is permissible as long it does not interfere with the service,” says Sobel. “It underscores the fact that it’s becoming increasingly difficult to escape the reach of surveillance capabilities.”

UK AND IRELAND CLASH OVER NEW IDENTITY CARDS

David Blunkett, the UK Home Secretary, has set out a timetable towards the introduction of hi-tech passports and driving licences that will double as ID cards. Initially, they will be issued voluntarily to British residents but all foreign nationals living in the UK would be required to obtain a card. That has set alarm bells ringing in the Irish Republic. There are fears the move could spell the end of the Ireland Act of 1949, which entitles the one million Irish people living in Britain to freedom of movement and most of the same rights as UK citizens. Likewise, British citizens have freedom to travel to Ireland without a passport.

Mr. Blunkett’s announcement could mean that Irish people would have to apply for a British identity card. It has also left a question mark over the status of people who are living in Northern Ireland. Under the Good Friday Agreement, they are entitled to describe themselves as Irish citizens.

Neither Britain nor Ireland is a member of the EU’s Schengen Agreement, which allows EU citizens to move freely without having to show passports at the Union’s internal frontiers. Traditionally, both nations have argued in Brussels that they need to maintain passport checks on other EU citizens because, unlike most of continental Europe, they do not use ID cards to keep a check on the movement of people.

Scots opt out of ID card scheme.

Two days after David Blunkett told MPs he was proceeding with a plan to place the adult population on to a database to underpin a national ID scheme, the devolved executive in Edinburgh threw the exercise into confusion. There are also questions over whether the scheme would be adopted in full in Wales or Northern Ireland. Jack McConnell, Scotland’s First Minister, said there would be no requirement to do so for matters falling under the Scottish Parliament’s jurisdiction such as health, education and law and order.

New Hong Kong ID card: burden or blessing?

For hundreds of thousands of people who daily take one of the world’s busiest land border crossings at Lo Wu -- dividing capitalist Hong Kong with communist China -- their greatest wish is not having to queue for hours in unbearably hot, cramped conditions. Within the next two years, their wish could come true but at a price the 6.8 million residents in the former British colony may not be ready to pay -- their privacy.

The government kicked off its four-year plan to replace the current, bland laminated identification (ID) card with a smaller version in August that holds only the name and date of birth of each resident and a digital thumbprint. However, a hi-tech chip embedded in the credit-card sized card makes the new one capable of storing far more information including financial, medical and driving records. Hong Kong residents have mixed feelings over the card. While acknowledging convenience they remain apprehensive about including intimate personal details that could be accessed without their prior consent.

Biometric ID cards will “fail to achieve aims”.

Simon Davies, an expert in information systems at the London School of Economics, cast doubt on the reliability of biometrics, which uses fingerprints, face, eyes or voice for identity, because it would not stop people obtaining multiple personas. Earlier this month, Britain said it would introduce personal identifiers like fingerprints and face recognition to passports and driving licenses to help tackle a growing security threat and deter illegal immigrants. Home Secretary Blunkett said most of the population will have biometric documents such as passports or identity cards by 2013.

BIG BROTHER AND BRITAIN’S WAR ON TERROR

Britain recently revealed a highly sophisticated plan to protect London from a terrorist attack. Using the latest surveillance technology and a scheme to reduce downtown traffic, authorities have designed a “ring of steel” around the city. But not everyone is pleased with the heightened security at a potential cost to privacy.

What is amazing about all this surveillance is that a majority of Brits do not seem too worried by it. In fact, the cameras are hailed as the people’s technology. And it is not just the English who are gaga over CCTV technology. Since 9/11, camera surveillance has been rising around the world.

U.K. “Snoopers’ charter” becomes law, with scant objection from the ISPs.

The “snoopers’ charter” -- through which the government has forced the monitoring of every phone call made, website visited and email sent -- officially became law on Thursday. While the almost universal rejection of the data retention orders from the opposition was widely expected to derail the governments plans, last minute political manoeuvring saw it through the House of Lords. The deputy opposition leader had proposed a “fatality motion” -- a way of killing off the Order in an event that happens only a few times in a century -- but it was scuppered when the government threatened to return the favor by nixing every Order that any future Tory government tried to pass. And so the proposals were passed unopposed.

Despite claims from legal authorities that the Order contravenes the European Convention on human rights, the Order will now oblige all communication service providers to keep records of who their customers phoned, where from, who and when they emailed for 12 months, as well as recording what websites they visited. While the government claims that the Act is necessary for purposes of national security, a number of authorities not known for their anti-terrorist activities, including the ministry for gambling, will be able to get their hands on users details.

Simon Davies, head of Privacy International, has vowed to fight the law through the courts and puts its successful political passage through the Lords down to the ISPs themselves: “They have acted in a reprehensible manner all the way through, sitting on the sidelines. They never raised the whole issue of privacy, they just had a fever-like concern to get their costs underwritten by the government. They should hang their heads in shame.”

FLAMES OF LIBERTY LICKING AT FORMERLY BYPASSED CORNERS OF THE WORLD?

The “third wave of democratization”, which has been sweeping the world since the 1970s, has yet to reach swathes of East and Central Asia, North Africa and the Middle East, where billions still suffer under repressive regimes. Is this about to change?

The past year has seen several setbacks in the advance of basic liberties. Nevertheless, Freedom House, an American pro-democracy group, said in its annual Freedom in the World report, in July, that more of the world’s population is now free than at any time since it began its surveys 30 years ago. While 11 countries suffered an erosion of political rights or civil liberties in 2002, another 28 enjoyed improvements. Many countries still have dictatorships, or sham democracies whose leaders go through the motions of holding elections while repressing all dissent. But 65% of the world’s people now live in free or partly free countries, up from 53% in 1972.

GOD, MAN AND GROWTH

If you want to avoid an argument over religion at your next dinner party, you might suppose it safe to invite an economist or two. Or maybe not, if a new paper by Robert Barro, one of America’s best-known economists, and Rachel McCleary, a colleague at Harvard University, is any guide. It explores the influence of religious belief and observance on economic growth.

If there is a link between religion and economic performance, then economists ought to have something to say about it. To test the connection, however, economists need figures, ideally covering many countries and many years. This is where Mr. Barro and Ms. McCleary come in.

OPINION: ELECTRONIC VOTING DEBACLE

Grave concerns over the security of electronic voting machines in the United States means the heart of American democracy is at risk. After the 2000 election debacle in Florida (and actually in plenty of other locations around the U.S.) Congress passed the Help America Vote Act in 2002. One of the functions of the new law was to provide $4 billion for states to use in updating their often antiquated voting equipment. With federal money available, and the cautionary story of Florida as a warning, states began turning in droves to electronic voting machines.

A litany of problems and odd results have shown up in recent elections. In Georgia in 2002 there were six electoral upsets in that election, including one in which the incumbent senator, who was far ahead in the polls, lost by 11 points. Diebold had changed the software used by the voting machines seven or eight times, without anyone examining it, and then after the election the company immediately overwrote the flash memory of all the cards used by those machines, so it is now impossible to know what the vote counts really were.

Problems abound. But it is actually much, much worse. After extensive reading, I have come to the conclusion that electronic voting as a concept needs to be scrapped, or at least placed on hold while basic concerns are addressed. Unfortunately, I am not very convinced that those basic concerns will ever be addressed, and that has me greatly concerned about the trustworthiness of elections in the United States.

ART MARKET: A PRETTIER PICTURE

Christie’S and Sotheby’s are beginning to be more confident about the future. Their recent legal troubles over a price-fixing scandal are now mostly behind them. Their cosy near-duopoly no longer seems threatened by Phillips, de Pury & Luxembourg: the new rival failed to make much impact and has scaled back its operations to little more than a glorified dealership. Most important of all for the big two houses, it looks like art prices may be at the beginning of another boom. This week and last, fast and furious sales of modern and Impressionist art have achieved record prices.

Is investing in art coming back into fashion as an alternative to the equity markets? Institutional investors -- pension and life-assurance funds, and the like -- have not, as yet, come to consider art as a mainstream asset class because of the opacity of the market and the dearth of financial information on which to base investment decisions. Moreover, art produces no income. It is also at the mercy of fickle public taste. Besides, the fun of discovery and the joy of owning a much-coveted object are still the main reasons for buying art. Pension-fund managers are not allowed to buy assets for their own amusement.

The art market’s biggest problem at the moment is illiquidity. Sales of fine art have gone down by 40% since 1998. The shrinking market is forcing the big two houses to compete more fiercely. Neither Sotheby’s nor Christie’s is financially strong enough to take much risk in guaranteeing sellers minimum sales prices. For the boom to continue there needs to be more first-class art coming on to the market. While the guarantees that the houses have recently offered their clients do seem to have brought in some business, the strategy could misfire badly if the next round of sales goes badly.

INTERNATIONAL TAX AND BUSINESS NEWS BRIEFS

Irish Chambers of Commerce supports local levy for new houses. The Chief Executive of the Chambers expressed support for the decision to allow local authorities to impose a service levy on new houses, arguing it will ease the tax burden on businesses who bear the brunt of local taxation -- link here.

Singapore unit trusts hit by tax bombshell. Over $2 billion worth of assets in some of Singapore’s unit trusts that were previously thought to be exempt from income tax may now be liable, after the Inland Revenue Authority of Singapore ceased granting them special tax status -- link here.

Thai prime minister rules out corporate tax cut in short term. The PM expressed support for a cut in the corporate tax rate, currently 30%, and also said that a move to cut tax will be accompanied by tougher tax evasion rules and a widening of the tax base -- link here.

IRS to review executive compensation taxation issues. In order to keep abreast of how executives are compensated, the IRS has set up new compliance teams which are to review 24 sample cases, focusing on eight primary areas of concern. These will include: nonqualified deferred compensation; stock-based compensation; the million dollar cap under Section 162(m) of the code on deductible compensation; golden parachutes; split dollar life insurance; family limited partnerships and transfers of compensatory options to family limited partnerships; a listed transaction that requires disclosure; and fringe benefits.

Most offshore companies are “happy” to go along with a revised and approved Cypress tax regime. The regime will apply a 10% tax rate to all companies, regardless of their status. However, Russians may not be quite as happy to use Cyprus in future given that Russians will have to apply for visas to visit Cyprus once it is part of the EU -- a notoriously difficult process. Then again, if the Russian domestic climate remains challenging, Cyprus may yet re-emerge as the jurisdiction of choice for Russians to invest into the EU in a reasonably tax-efficient way -- link here.

Total investment in South Africa grew by more than 8% in the first half of the year. Finance Minister Trevor Manuel told an investment forum of the OECD private investment expanded by 7% in the same period. Private capital flows are expected to come to $110-million this year, the highest level since the mid-1990s. Manuel said his medium-term budget policy statement last week set out an agenda for fostering high levels of investment, faster growth and lower unemployment -- link here.

Germany rapped by EU commission over budget deficit. The EC finally ran out of patience with the German government earlier this week, and has initiated an excessive deficit procedure against the country for failing to keep its public debt within the guidelines set out by the Growth and Stability Pact, which underpins the single currency -- link here.

French president forms working group to study global taxation for development. Jacques Chirac announced the creation of a new working group charged with studying the feasibility of creating a global tax system to fund development projects. Formation of the group makes good on a pledge dating to August 2002, when Chirac vowed to put the weight of the French presidency behind a wide-ranging study into whether international taxation could provide a counter-balance to the ongoing globalization of the world economy. -- link here.

Barbados central bank releases Economic Review for September 2003. Statistics on new IBCs, offshore financial companies, key domestic economic sectors included -- link here.

Botswana mulls first international bond issue. Baledzi Gaolathe, Botswana’s Minister of Finance, has indicated that the country is ready to issue its first international bond in 2004 after the success of its maiden sovereign debt issue -- link here.

SYRIA (OFF ALL PLACES) ADOPTS MODERNIZED TAX REGIME

Syrian President Bashar Assad signed a law which abolishes the old system of a different tax rate for each trade, including “civil servants”. Under the new system, workers in both the private and public sectors will pay taxes ranging from 5% income between 5,000 and 8,000 Syrian pounds ($100-160) to 20% for income over 30,000 pounds ($600). Military personnel, police officers, firefighters, clerics and domestic workers will be exempted from tax.

BEIJING THROWS LIFELINE TO HONG KONG

When Hong Kong reverted to Chinese rule in 1997, the former British colony was the jewel in China’s crown. It was a major financial hub, stable and absurdly prosperous. Beijing’s Communist rulers were intensely proud that the thriving centre was back in the fold. Since then, however, the jewel has lost a great deal of its luster. Even as China’s economic boom got fully under way in the past five years, Hong Kong failed to get much of a lift. Economists say the regional financial crisis of the late 1990s pricked its property-driven asset bubble. That set the stage for years of deflation, periodic recessions and rising jobless figures.

A political crisis in July brought more than half a million Hong Kongers on to the streets to protest -- successfully -- against a proposed security law. China’s mandarins were rattled and have since decided to throw the city something of a lifeline. A series of concessions from Beijing has lent crucial political support to Hong Kong’s embattled government and, economists say, helped to revive the territory’s fortunes.

While there is dispute about the impact China’s goodie bag will have, observers agree the first round of measures could be followed by others. Economists and laymen also note that the limited assistance has helped to raise Hong Kong’s battered morale -- a benefit not to be underestimated in such a fickle, sentiment-driven town.

Hong Kong banks can to offer Chinese yuan-denominated basic financial services to retail customers in 2004.

The services -- taking deposits, offering credit cards, providing remittances and exchange -- will not be on offer to corporate customers. The new services will be introduced “step by step”, Hong Kong Chief Executive Tung Chee-hwa said. The HK government is eager for more yuan to enter the city, as a first step toward turning the city into a pioneering yuan offshore center and boosting its status as a major financial center. The move is also being seen as a small but significant step towards loosening controls over the highly regulated Chinese currency.

BERMUDA DEPUTY GOVERNOR SAYS REFERENDUM MIGHT NOT WORK FOR DECIDING ON INDEPENDENCE

The PLP Government has said independence will be decided at a general election, but according to Deputy Governor Nick Carter, that might not work. Speaking to the Bermuda Sun, Mr. Carter said that the British Government has to be satisfied that the majority of Bermudians support a move towards independence: “It would be wrong to assume that a narrowly won election in which independence was the major issue, would automatically satisfy British ministers’ criteria.”

Bank of Bermuda CEO: Merger forced by impending banking sector competition.

Why would Bermuda’s largest financial institution allow itself to be sold, especially with 114 years of success under its belt? Speaking with The Royal Gazette this week, bank CEO Henry Smith said the bank had been struggling in recent years as interest rates plummeted and competition increased. It also was concerned that it would not be able to compete against a foreign bank on Bermuda soil, something Government had indicated was imminent.

EDITORIAL: BAHAMAS TAX REFORM -- A NECESSARY IMPERATIVE

In part one of our series, we examined our current system of taxation, which essentially relies on the imposition of customs duties at the time goods are imported. We also examined the concept of a sales tax as an alternative to a current unwieldy system of income taxes. In part two, we examined the value added tax, which has been adopted by our neighbor to the south, Barbados. In part three, we wrapped up our discussion of comparative taxation systems with a look at the most dreaded income tax (and its commonly discussed variant, the flat tax). Today, in our final article, we offer our thoughts on the way forward.

U.S. SENATE PANEL FINDS ABUSES IN TAX SHELTER SALES

A Senate subcommittee investigation has found that some of the nation’s largest and most prestigious accounting firms, along with law firms, banks and investment houses, are “the real engine” of the nation’s tax shelter industry, using their good names to sell complex and abusive schemes, according to the panel’s ranking Democrat.

The investigation turned up internal e-mails from KPMG exhorting partners and others in the firm to “SELL, SELL, SELL!!” the shelters to tax clients, audit clients, and any other likely customer. The firm ran a telemarketing operation in Fort Wayne, Indiana, to help sell the “products” and kept score of sales to impress on partners the urgency of bringing in new shelter business, investigators found.

IRS And Treasury report progress on tax shelter fight, release full report -- links here and here.

INLAND REVENUE IS GETTING SERIOUS ON OFFSHORE BANK ACCOUNTS

The Revenue is carrying out a crackdown on people evading UK income tax by using offshore bank accounts. A number of banks have already complied with the Revenue’s request for co-operation and have forwarded account details to the body. Accountants, financial advisers and credit card companies are likely to follow suit in the near future.

Inland Revenue is using a special £66 million investigation fund to target tax fraud of all kinds. British savers in the Isle of Man, the Channel Islands, Gibraltar, Switzerland and elsewhere are likely to be caught up in the probe.

EU ACCOUNTS FAIL TO PASS MUSTER FOR THE NINTH YEAR IN A ROW

The European Union’s court of auditors has failed to give EU accounts a clean bill of health for the ninth year. The court has criticized the system of accounting used by the EC and the way in which much of the €100 billion annual budget is spent. The auditors can give assurance to less than 10% of the EU’s annual budget for 2002, they say. The news came as the EC President faced a grilling over a multi-million dollar EU fraud.

47 CHARGED IN FOREIGN EXCHANGE TRADING SCHEMES

Federal prosecutors on Wednesday filed criminal charges against 47 traders and brokers, including a former private-sector adviser to the Federal Reserve Bank of New York on foreign exchange, for allegedly taking part in a series of foreign exchange trading schemes that cost banks and investors millions of dollars.

The charges center on two distinct schemes. Under the first traders at large banks, including J.P. Morgan and UBS, engaged in fraudulent trades designed to produce losses for the traders’ firms and profits for the traders’ clients. The traders then allegedly received kickbacks from their clients, sometimes in cash-stuffed envelopes delivered at diners. Prosecutors stressed that the banks were victims of this alleged abuse.

The second set of charges filed Wednesday targeted foreign exchange “boiler room” operations. Prosecutors charged more than a dozen individuals with setting up these fraudulent firms and soliciting money from individual investors, ostensibly to be used for currency trades. Prosecutors said the money was instead transferred to accounts controlled by the boiler room operators.

Separately on Wednesday, the Commodities Futures Trading Commission announced it had filed charges against 31 individuals and entities for allegedly selling illegal foreign currency futures contracts.

WHERE ARE THE CUSTOMERS’ YACHTS?

Forty percent of the purchases of prime properties in the middle of London in the boom years were by City types, though as these have been culled, so prices have dropped off a bit. The same is true of Wall Street, broadly defined, which has generated huge wealth for those who work in it, and helped drive up the price of Manhattan property. But the friction costs of capitalism have been unduly high.

The wealth of those that have handed over their money to be invested by experts seems to have shriveled at about the same rate as it has grown for those that do the investing and the hoards of expensive hired hands that have advised them, worked for them or apparently kept an eye on their activities. The mutual-fund scandals demonstrate, first, that a gluttonous financial-services industry has been more concerned to make money for itself than for those whose capital it looks after; second, that most of this is done entirely legally, by getting clever people to get round outdated rules; and third, that wise investors would have left the casino long ago.

Simply put, the mutual-fund scandal is about one group of active investors trading at old prices at the expense of smaller, more passive investors. Much as Wall Street is keen to draw a line under this latest scandal, you do not need to be unduly perspicacious to find links between this one and other, very recent scandals. For one thing, shareholders have lost out in all of them.

Despite the evidence that fund managers care more about their own finances than those of their investors, the hope that the bull market would continue ad infinitum is intact. In October American equity mutual funds enjoyed a near-record net inflow of $25-30 billion. For anyone tempted by the thought that this means the good times will continue to roll, the record was set in February 2000.

THE PATRIOT ACT LETS THE FEDS SPY ON YOUR FINANCES. DOES IT HELP CATCH TERRORISTS?

Sound familiar?: “While an act conferring such broad authority over transactions such as these might well surprise or even shock those who lived in an earlier era, the latter did not... live to see the heavy utilization of our domestic banking system by the minions of organized terrorism as well as by millions of legitimate businessmen. [I do not] think it was strange or irrational that Congress, having its attention called to what appeared to be serious and organized efforts to avoid detection of terrorist activity, should have legislated to rectify the situation.” In fact the quote concerns the Bank Secrecy Act (BSA) of 1970, with the only change made to this decades-old quote is to substitute the word “terrorist” for “criminal” and “terrorism” for “crime”.

The reason the arguments sound familiar is that the BSA set the precedent for much of the PATRIOT Act, not to mention other government fishing expeditions. The law authorized the government to require bank reports of all transactions over a dollar value set by the Treasury Department, even if there is no reason to suspect a criminal connection. A district court struck down the BSA’s reporting requirement, but its decision was reversed by the Supreme Court. In a complicated majority opinion, Rehnquist said that banks, as businesses, do not have the same Fourth Amendment rights as individuals. The BSA can now be thought of as a 30-year experiment in subverting the Fourth Amendment.

Legal fine points aside, two important questions remain: 1.) Are financial surveillance programs consistent with the principles of a free society; and 2.) Just how effective have they been? Have we gotten more security during the last 30 years in exchange for the sacrifice of privacy? Looking specifically at the BSA and other bank surveillance measures, prominent experts in law enforcement, national security, and technology say the answer is no. The record of FinCEN, the agency that was charged with tracking terrorist financing prior to 9/11, seems to vindicate their arguments. The lack of success with the financial information that the government has long been collecting does not bode well for more-ambitious data dredging plans. Indeed, experience suggests that piling up more data could make it harder to zero in on terrorists.

Health insurance giants asked to scan files for terrorism suspects.

DETROIT: Blue Cross Blue Shield of Michigan and Aetna have scoured the records of millions of patients, employees and health care providers in search of terrorists. Company representatives said Blue Cross Blue Shield has checked 6 million Michigan files and Aetna has checked 13 million nationwide. None of the people whose records were checked was linked to terrorism, the insurers said.

The government says it only demands that companies do not do business with terrorists. Some customers, public policy experts and civil libertarians say health care insurers should not conduct the investigations: “At what point did Blue Cross Blue Shield become an arm of the government, as opposed to a service provider for people?”

US CYBERCRIME PUSH “IMPERILS PERSONAL SECURITY” OF AMERICANS

White House plans to ratify a Council of Europe Cybercrime treaty will be a disaster for the privacy and security of Americans, Privacy International (PI), the human rights watchdog, claims. PI warns that if the Senate ratifies the Treaty, “dozens of countries will have ‘on demand’ access to the personal information and communications records of any American they may wish to investigate.” This data -- including full email logs, phone records and mobile phone location data together with account and financial records -- could be “cherry picked” by investigating authorities in countries that ratify the treaty. The personal details of millions of US citizens would be available “on demand” to Balkan and former communist countries, PI says.

Grounds for refusing to share data are limited. The ratification of the Treaty would make data regarding US citizens available to governments around the world with little oversight or control, according to PI. It warns the treaty will “open the floodgates for overseas government and private bodies” looking for sensitive personal information. Civil liberties organisations have opposed the treaty from the beginning.

THE TRAGEDY OF THE COMMONS AND FRACTIONAL RESERVE BANKING

In his now famous 1968 essay, The Tragedy of the Commons, Garrett Hardin describes how common, i.e., public, property, is overused until it deteriorates or is destroyed. In Dinero, Crédito Bancario y Ciclos Económicos, which will soon be available in English, Huerta de Soto applies the concept of the tragedy of the commons to an analysis of fractional reserve banking.

Huerta de Soto’s application clearly explains why fractional reserve banks, by their very nature, are always tempted to expand credit. He also explains why fractional reserve banks in a free banking system are under immense pressure to introduce a central bank. As he points out, the problem of the tragedy of the commons always appears when property rights are defined improperly. In the case of fractional reserve banking, bankers can infringe on property rights because it is not clearly defined who owns the deposit.

When customers make their deposits, the promise is that the deposit is always available for withdrawal. However, the deposits, by the very definition of fractional reserve banking, are never completely available to all customers at one time. This is because banks will take a part of these deposits and loan them out to other customers. In other words, they issue fiduciary media. By issuing more property titles than property entrusted to them, the banks violate the traditional property rights of their customers. Banks that infringe upon and abuse the property rights of their clients can make very good profits. The temptation to expand credit is almost irresistible. Moreover, they will try to expand credit and issue fiduciary media as much as they can possibly get away with.

The question now concerns how the banks can increase the profits from credit expansion while keeping the risk of bankruptcy low. The solution, obviously, is to form agreements with each other in order to avoid the negative consequences of an independent and uncoordinated credit expansion. Enter a central bank ... a centrally administered cartel with the imprimatur of the government.

SHOULD GOOGLE BE REGULATED LIKE A PUBLIC UTILITY?

The Google search engine is one of the Net’s great success stories, with one analyst projecting possible revenues of $800 million and profits of $200 million this year. Today Google may be king of the hill, yet it is just as easy to imagine a world without it. But jealous rivals and would-be reformers are not always patient. So a Google backlash was almost inevitable.

It is difficult to address such proposals with a straight face, but we will give it a shot. Google does not meet even the textbook definition of a natural monopoly. Switching by consumers is easy, and Google has no government protection from rivals. The idea of an essential facility, even a low-barrier one made of software, unfortunately has no patience for the evolutionary nature of a market and information economy. In fact, treating Google as a public utility may have the perverse effect of locking in Google’s own current generation of search engine technology. That would be a huge mistake.

Clearly those who blithely advocate public utility-style regulation of Google see only benefits and no costs. But public utility regulation typically results in mediocre service quality and limited innovation. Do we really want Google to become just another lazy public utility providing basic, plain vanilla service? If Google abuses its market position, web surfers will quickly flee. But it is hard to make a case for abuse when the service in question is free to the public and millions have voluntarily flocked to it over its many rivals.

UNDER THE POLITICAL PROCESS GOOD INTENTIONS WILL BE DISTORTED AND ULTIMATELY TAKEN TO ABSURD ENDS. COUNT ON IT.

The political process always manages to turn idealistic dreams inside out. For an excellent example, look no further than the civil rights laws passed in the last 40 years. The Civil Rights Act of 1964 did not simply repeal state laws compelling segregation. It prohibited racial segregation -- voluntary or otherwise. Although the activists believed coercion served the noble objective of bringing the races closer together, it was coercion nonetheless. And coercive laws never stand still. No matter what a law’s backers say at the time of passage, the law always stretches in surprising directions. The expansion occurs on at least two fronts: The law almost always is enforced more broadly than intended, and when government benefits one group, other groups are encouraged to seek similar benefits.

Has far has the law been stretched? It has been stretched all the way inside out. The civil rights laws originated to end segregation of the races in the South, but in 1992 a Florida court used these laws to award a white woman permanent disability benefits -- ruling that her employer should have provided a segregated workplace to accommodate her fear of blacks. Although the decision seems absurd, something of the kind was inevitable. You cannot limit coercion to the uses you think are right. Don’t think of this case as an example of a government program gone wrong. It is an example of a government program -- period.

Whatever social reform you may envision, the version the government implements will be something completely different. However lofty your purpose, it will be debased by compromises in the legislature, in the administration of the program by thousands of government employees, and in the settling of the inevitable disputes. You are not a dictator. You cannot control the actions of politicians, bureaucrats, and judges. Please remember that the next time you think some law will solve some great social problem.

BEHIND THE STALEMATE MASK

There are two ways to look at a political stalemate. Theory one is that it was caused by two pretty much equal forces standing up on an issue, on opposite sides, defending what they believed in ... or were paid to believe in. Theory two, a stalemate is really created at a higher level, by an elite which seeks to bury a nation in a quagmire of inaction and endless argument. Both have some merit, but neither tells the whole story.

In the US, political stalemates don’t really imply complete inaction. Things still get done. Laws are passed. Regulations are issued. Budgets are jammed through, releasing hundreds of billions of dollars in government-employee salaries and contracts to the private sector. With the current bog vis-à-vis confirming Bush judicial appointments, we tend to think there is a zero-sum-game here.

But if you go back ten presidencies or so, you can come toward the present and view a few major trends that do NOT get bogged down: Larger federal government -- more employees, more regulations, more intrusion into lives, more contracts; greater acceptance of the program called free trade, in which international capital and goods and corporations are free to roam the planet and intervene in sovereign nations’ economies and set up shop without interference; greater federal debt. You can make your own additions to the list. If we are all arguing about presidential candidates and a hundred other issues, we miss the steadily moving tanker, “the ship of state” that is drifting toward a definite place.

GEORGE SOROS: “THE BUBBLE OF AMERICAN SUPREMACY”

September 11 introduced a discontinuity into American foreign policy. Violations of American standards of behavior that would have been considered objectionable in ordinary times became accepted as appropriate to the circumstances. The abnormal, the radical, and the extreme have been redefined as normal. The advocates of continuity have been pursuing a rearguard action ever since.

To explain the significance of the transition, I should like to draw on my experience in the financial markets. Stock markets often give rise to a boom-bust process, or bubble. Bubbles do not grow out of thin air. They have a basis in reality -- but reality as distorted by a misconception. Under normal conditions misconceptions are self-correcting, and the markets tend toward some kind of equilibrium. Occasionally, a misconception is reinforced by a trend prevailing in reality, and that is when a boom-bust process gets under way. Eventually the gap between reality and its false interpretation becomes unsustainable, and the bubble bursts.

Exactly when the boom-bust process enters far-from-equilibrium territory can be established only in retrospect. During the self-reinforcing phase participants are under the spell of the prevailing bias. Few bubbles reach the extremes of the information-technology boom that ended in 2000. The sooner the process is aborted, the better.

The quest for American supremacy qualifies as a bubble. The dominant position the United States occupies in the world is the element of reality that is being distorted. The proposition that the United States will be better off if it uses its position to impose its values and interests everywhere is the misconception. It is exactly by not abusing its power that America attained its current position.

LIBERTARIAN INVESTMENT GURU AND AUTHOR JIM ROGERS SHARES LATEST THOUGHTS

Rogers went to New York in 1968 with only $600 in his pocket. He retired twelve years later at age 37 a multimillionaire, ready to travel the world. Currently Rogers recommends avoiding U.S. stocks over the next five to ten years. He sees the strong rise of China and predicts that areas of the world with abundant natural resources will provide healthy returns over the coming years, and thus he is bullish on countries such as Canada, Australia, New Zealand, and different nations of Asia. (However, resources alone do not do it -- think Africa.) Rogers is bearish on Russia and the rest of the former Soviet Union.

Dollar falls to all-time low vs. euro.

At its lowest point at 1:00 GMT on Wednesday, one euro bought $1.1978. The dollar also neared a new three-year low against the yen, with one dollar worth just 107.94 yen. The dollar’s fall against most leading currencies, including the pound, started when data showed a huge slump in foreign money coming into the US. News that the US Government was planning to introduce more punitive tariffs, this time on a range of textiles and lingerie products manufactured in China, triggered fears about a return to protectionism and the impact that this might have on the recent recovery in the US economy.

TAKE ADVANTAGE OF THE RICH TRICKS

Certain areas of financial planning are commonly deemed to be the preserve of the rich. There is a popular misconception that only people with millions of pounds lying around hold investments in the Cayman Islands or have sophisticated pension investments in a complicated mix of assets. And what about trusts? Surely they are only for members of the aristocracy with inherited wealth amassed down the centuries?

You may want to think again. In the article is a list of financial options that may be meat and drink to the nation’s wealthy elite, but are actually just as suitable for people of more modest means. Check them -- you could discover something to your own financial advantage. [Note: Targeted at UK taxpayers and asset owners, it nevertheless makes a potentially worthwhile read for everyone.]

10 things you should know about foreign investment.

Advice for South African residents that also contains some worthwhile nuggets for citizens and residents of other countries.

FORMER PROFESSOR ARGUES IT IS TIME FOR VERMONT TO LEAVE THE UNION

Thomas Naylor insists he is serious when he says Vermont should secede from the United States and become a republic. He has founded a political movement, the Second Vermont Republic, to do just that, and now he has published his book on the subject: The Vermont Manifesto. Naylor argues Vermont should rise up, albeit peacefully, “reclaim its soul” and return to the independent republic it was between 1777 and 1791.

Becoming a republic again could be the state’s salvation -- literally, he believes. “The U.S. is not a sustainable economy. ... Do you want to go down with the Titanic? ... The United States is not going to survive as an empire. It’s just fundamentally unmanageable [and] totally out of control.”

Naylor knows most will dismiss his predictions and his drive for secession as ridiculous. But the 67-year-old does have some credentials to back up his positions. After making trips to the Soviet Union in the 1980s, he says, he publicly predicted the changes ahead there.

A LESSON IN ECONOMICS AND MARKETS FROM A BASEBALL TEAM OWNER

Ask Boston Red Sox owner John Henry for his thoughts on the economic landscape in baseball, and you will not get a sound bite in return: “It looks as if it was hard to make deals with everyone trying to unload contracts on one another... People want to unload the contracts that were signed when [General Managers] and team owners labored under the belief that player salaries and franchise values could never go down. That’s what happens at the end of every bubble...

“This offseason, in the aftermath of the bubble, you have most people saying ‘Whoops’. Nothing in what is happening is strange if you have even the slightest understanding of how markets work. There has never been a bull market in history in any sector, in any country that was not followed by a bear market with repercussions...

“So player salary inflation went through the roof, very analogous to the way Tokyo real estate soared before it crashed. Now it is coming back to earth. There is nothing strange, nothing unnatural about that, but whenever a peak is reached in any market no one believes it for quite a while. Most people continue to think for some time it will make new highs in short order. Markets don’t work that way, however. Trees don’t grow to sky and keep growing. Revenues only support a certain payroll. Deficit spending for individual businesses in general stops when debt levels reach a certain proportion of equity.”

SCANDALS OBSCURE THE FACT THAT MOST AMERICAN CORPORATIONS PAY HUGE AMOUNTS OF TAX

Indeed, there is growing concern that because corporations must pay so much in taxes, American companies are at a competitive disadvantage in world markets. Consider that the combined U.S. federal and average state corporate tax rate is 40% -- much higher than the 31% average for the 30 top industrial countries. In recent years, most of our trading partners have cut their corporate tax rates to boost competitiveness. Smart countries, such as Ireland, have recognized that sharp corporate tax cuts will attract foreign investors. Even socialist countries, such as Denmark and Sweden, have lower corporate tax rates than the U.S. While numerous factors affect investment flows, America’s uncompetitive corporate tax drives away domestic and foreign firms whose investments would create U.S. jobs and spur economic growth.

The issue of “tax competitiveness” is finally attracting attention. The House and Senate are considering a response to a World Trade Organization ruling that a $5 billion tax break America gives to exporting companies is illegal. How should the United States respond? Leading bills in Congress would replace that break with a targeted tax break for manufacturing. An across-the-board rate cut would be better. Nonetheless, the House bill sponsored by Ways and Means Chairman Bill Thomas includes many useful reforms and does cut taxes overall.

The reality is that Enron’s tax avoidance and corporate interest in Bermuda’s sunny tax climate represent “canary in the mineshaft” warnings to Congress that the corporate tax code is overdue for a fundamental overhaul. The first step needed to reduce high corporate tax rates is to make tax sheltering less attractive. A longer-term goal should be reducing the corporate tax rate to 20% to make this country a business tax reform leader.

LAWMAKERS APPROVE EXPANSION OF FBI’S ANTITERRORISM POWERS

Congressional negotiators approved a measure that gives the FBI greater authority to demand records from businesses in terrorism cases without the approval of a judge or a grand jury. While banks, credit unions and other financial institutions are currently subject to such demands, the measure expands the list to include car dealers, pawnbrokers, travel agents, casinos and other businesses.

Senator Richard J. Durbin, D-Illinois, introduced a motion to limit the life of the new law, but it was defeated on a party-line vote. The approval came despite 11th-hour concerns raised by five Democrats and a Republican on the Senate Judiciary Committee, who questioned why their panel -- which has responsibility for overseeing the FBI -- was shut out of any discussion on the little-noticed proposal. In a letter this week to the Senate intelligence committee, the senators urged the panel, which does much of its work in secret, not to move ahead with such a significant expansion of the FBI’s powers without further review.

THE CULTURAL LEFTIES HAVE ALMOST SPOILED THE WORD “LIBERTARIAN”

These days, the left-libertarians who have the loudest voice in our political movement cannot seem to make a simple distinction: just because a behavior should be legal does not mean it is good. While I would never use the government to promote morality or crack down on vice, as many conservatives would do, I have no interest in erasing the line between uplifting, civilization-building behavior and depravity.

Barnyard Politics

The left in this country are characterized by their active support for all those failed policies recently shrugged off by wiser people in Eastern Europe. These are not mere “lefties”, kindly old professors with patches on the arms of their tweed jackets, calling for more social programs for the poor. They want us to think that, though, and there is a reason for it -- they want our money, and they want our freedom. Given the track record of these so-called “do-gooders” in other countries, it might be fair to say that they want our very lives. Forty million slaughtered children would agree with that statement. These innocents were the down payment on the coming new order.

Both the left, and what we might call the “other left”; that is, the one that masquerades as the right, prattle endlessly about freedom yet have no real taste for it. For convenience sake, I will refer to them by their formal titles: “democrat” and “republican”. What do either of these parties know or care about freedom? Consider why I called this piece “barnyard politics.” The democrats believe that freedom is somehow linked with sexual license. The animals in the barnyard might by this standard be considered “free”. If they really thought that what other people do in their bedrooms is a private matter, they would not talk about it all the time nor constantly try to push the boundaries of common decency.

Real freedom however, is tied inextricably to the ownership of private property. Stalin knew that, yet we “free Americans” cannot seem to grasp it. The democrats and republicans, working together against freedom launched their ridiculous “War on Poverty” back in the late sixties. It has destroyed economic freedom in this country while not eliminating poverty. For those who believe in big government this was and is a marvelous thing. If you doubt my word, take a close look at the budget of the United States, and the national debt. The cost of that ill fated “war on poverty” is almost exactly equal to the debt, both of which were in the neighborhood of $5 trillion last time I had the stomach to examine the figures. Now look at the yearly budget and you will find how much is simply interest on that debt.

THE RANDIAN COUNTERFEITER: DOES GREENSPAN DESERVE ANOTHER TERM?

To begin with, my answer to the question posed is a resounding “No!” There are two reasons for this negative response. First, the Fed’s performance has been astoundingly bad throughout Greenspan’s tenure as Chairman. And second, and perhaps worse, Greenspan has been a relentless purveyor of economic fallacies designed to obscure and justify this egregious performance.

In an address a few years ago, I gave a detailed analysis and critique of Greenspan’s public utterances on money and the economy. I concluded that they added up to little more than empty rhetoric that served as a cover for the Fed’s cheap money policy of the Clinton years, which had caused massive and unsustainable malinvestments in the real economy and an inflationary bubble in financial markets.

HEARING FOR IRS CRITIC TO BE HELD IN LOCATION NOT OPEN TO PUBLIC

A hearing for IRS thorn-in-the-side Joe Banister is apparently going to be held on a Coast Guard military base that is off-limits to the public and press, “period”. Why would the government not want the public, or even members of the usually IRS-leaning press, to be able to view the inquisition? Read the communication from him and draw you own conclusions.