August 2004 Selected Offshore News Clips

(Especially noteworthy articles’ headings highlighted in gold.)

GOOGLE ME NOT: KEEPING SECRETS OFF THE WEB HAS BECOME A BIG BUSINESS

Type the right words into Google and up comes a trove of files documenting an acrimonious divorce between two business executives in San Diego. Support payments are calculated based on a $450,000 income. The husband accuses the wife of being a “shop-a-holic”. He lists all her possessions, including furs worth $15,000. He is eager to finalize the divorce, because, as he writes, he was to marry again in June. All this is personal, private information, no longer even up on the original Web site, yet stored by Google for everyone to see, including friends, family and business associates who enter in the divorced couple’s names.

As Web pages pile up like garbage in a landfill -- 1 billion will go up this year -- sensitive, defamatory, confidential or embarrassing information is increasingly finding its way into search results. The search industry is raging, with $1.5 billion in revenue expected this year, up 150% from 2003. Search engines can store results in their “cache” for between a month and forever. As archiving improves, it will get harder to clean up what has been revealed. Rarely are leaks intentional -- somebody at work might post a file on a server to download at home, a wrongly configured server might make too much of a hard drive searchable or a Web site’s password-protection might be flimsy enough to be accessible to search engines.

Google recognizes the Web’s power to publicize and offers Web masters a simple interface to remove their own pages from its index. (Type “remove” into Google to get started.) Foundstone, an Internet security company, has developed a tool called SiteDigger that piggybacks on Google to point up information leaks. Point it at a site or an entire domain, such as .edu, and it generates a list of e-mails, log-in screens, database errors and source code, all of which are classic ways to gain entry onto a server. The free tool is a nice way to attract business for Foundstone, and also a scary reminder of how much information is out there. Systems integration company Science Applications International offers a product called Open Source Monitoring that scans the Web, newsgroups, Listservs and any other public forums for names and trademarks. Companies use it as an early warning system for hackers, stock manipulators, disgruntled employees and bad-mouthers.

THE GREAT TRUST REBELLION

Do you plan to keep secret from your children how much they stand to inherit? Would you like to make sure your money supports your descendants and not their ex-spouses? Do you want to cut estate taxes? If so, do not set up a trust in Kansas, Maine, Missouri, Nebraska, New Hampshire, New Mexico, Tennessee, Utah, Wyoming or the District of Columbia, says Denver asset-protection lawyer Mark Merric. If you already have a trust in one of those locales, move it, he adds. That is because these states have adopted in whole or in large part the new Uniform Trust Code.

The UTC was released in 2000 after six years of work by the National Conference of Commissioners on Uniform State Laws -- a group of lawyers, judges, legislators and law professors that makes recommendations to the states on statutes covering such areas as contracts and family matters. The document aims to replace the current muddle of state-specific trust law (most of it common law ad-libbed over the past two centuries by judges) with a consistent, comprehensive and up-to-date code. It covers everything from common “living” trusts to trusts for pets. Some lawyers consider the UTC a huge advance. But Merric and other renegades say the code compromises families’ privacy, endangers their estate plans and favors their creditors. The rebels are winning some battles. The UTC requires trustees to notify current and probable future beneficiaries of irrevocable trusts, including charities and even teenagers, about the existence of the trust. A current beneficiary has a right to find out exactly how much is in the trust.

In an effort to be flexible, the new code says a person who sets up an irrevocable trust, if acting in conjunction with all of the beneficiaries, can modify it later -- say, by changing the trust to let the kids take out more money at a younger age. Sounds reasonable. But the IRS might argue this means the person creating the trust retained so much power over the trust that its assets are part of his estate at his death. And because the new code gives certain creditors more ability to settle claims against beneficiaries by going after their trust assets, it could sabotage the tax planning behind multigenerational trusts.

THE INTERNATIONAL MONEY TRANSFERS MARKET NEEDS A SERIOUS JOLT

The situation with Paypal and the other money-transfer alternatives for local customers throughout South America and Asia is so bad -- e.g., the Paypal requirement of having a local USA-based bank account to withdraw the money -- that it is no wonder that friendlier alternatives are appearing to give the services that these local communities are craving. The perfect service, however, has yet to appear, as hundreds of posts on the Paypalsucks.com forum seem to imply, showing shortcomings of just about every one of the mentioned services.

“OUT OF THIN AIR”: HOW MONEY IS CREATED -- A SECRET ALL INVESTORS SHOULD KNOW

Money is created in two ways: First, money creation comes from borrowing it and spending it. (Money is literally borrowed and spent into existence.) Second, it can simply be printed up “out of thin air” by a central bank. The U.S. economy and other modern economies have central banks and fiat currencies. Central banks have two major powers. They can 1) “peg” the nominal level of short-term interest rates, and 2) purchase assets such as government debt, with newly printed money. When the central bank pegs short-term interest rates at a low level, it greatly encourages corporate and individual borrowing and spending.

For the past decade, most money has been created through private sector borrowing and spending. However, the day is fast approaching when the private sector’s new borrowing will not create enough new money to keep servicing the already massive level of old debt. Central banks will need to step up their efforts to “print money out of thin air”. Central bank printing of new money is accomplished by purchasing government debt or other assets.

There has been substantial money growth since 2000. Neither the crash of the NASDAQ stock market nor the last recession has slowed down money growth. The fact that the Fed cut interest rates 13 times since 2000 -- reducing them to a 46 year low -- has a lot to do with the massive amount of borrowing that has taken place in the United States. The amount of net borrowing in the United States is quite impressive, particularly when you consider the old economic model when borrowing was limited to simply recycling savings. In 2003, the savings rate was 2 percent of GDP, while net credit market borrowing was well in excess of 20% of GDP. There has been a whole lot of borrowing and spending of new money going on!

Certain asset classes, such as financial assets and housing, have benefited the most by this credit and money creation. For instance, because the mortgage market has been willing to finance any and all mortgages, the credit creation process has allowed both new mortgage debt and the ability to pay for higher housing prices. These higher housing prices have, in turn, allowed for the funding of larger mortgages. Money creation in the private sector tends to concentrate in certain asset classes that facilitate the creation of new credit. This new credit lends itself to new spending, leaving behind new money as the residual, and a growing mountain of debt. To say that this process has been left to run wild is an understatement.

YOUR HOME, THE MOTHER OF ALL TAX SHELTERS

You can deduct mortgage interest and property taxes. And almost always, you can keep the gains when you sell your home. Now, thanks to rules made permanent in 2002 and some provisional rules, the IRS has gone and made your home potentially an even greater tax shelter than it was before -- especially if you use your home for your business. Let’s look at all the deductions and benefits you get when you pay homage to the mortgage gods and go into more debt than your parents earned in their lifetimes. We will start with the bread-and-butter breaks, and then hit the new wrinkles.

WEB OPENS DOOR TO REAL ESTATE FOR SALE ABROAD

The dream of escaping America has been around as long as, well, the American dream itself. Now, however, with real estate prices at an all-time high and America locked into an endless war on terrorism, the prospect of escape is more appealing than ever. Add to the picture job layoffs and spiraling deficits, and the idea of moving somewhere cheaper makes increasingly good sense. Whether you are an overworked wage slave who cannot afford a two-bedroom hovel, or a penny-pinching suburban mom or a glinty-eyed trust-fund baby, it might seem that buying foreign property could solve a host of divergent and sometimes contradictory problems.

In countries that disagree with American policies (i.e., most of the globe), for instance, you can feel as if you are no longer condoning American imperialism abroad. In poor nations, your American dollar can allow you to live like royalty. In places where English-speaking white culture does not rule, you can bask in cultural difference. And, all the while, you can become the proud homeowner of a property you could never have afforded back inthe United States.

It used to be that buying a property in another country wasonly for salty, do-it-yourself adventurers or jet-setting internationalists. You had to have contacts in the country where you wanted to buy, and you had to travel there (often repeatedly) to find a property and track down a native real estate agent. But now, thanks to a few savvy homegrown entrepreneurs, the dream of offshore living is only a click away.

In searching for international real estate, I discovered two great sites, each representing a different end of the financial spectrum. Unique Global Estates.com offers the largest database of U.S. and world properties worth in excess of $1 million, while EscapeArtist.com provides an encyclopedic research center to enable any regular Jane or Joe to buy in to the expat dream.

A DIFFERENT SORT OF OLIGARCH

Having got rich in Russia, Georgia’s new economy minister Kakha Bendukidze now wants to be the world’s most capitalistic politician.

Mr. Bendukidze, 48, made his name and fortune as an industrialist in neighboring Russia, putting together the country’s biggest heavy-engineering group, OMZ, before returning to his native Georgia in June of this year with a mandate to reverse more than a decade of post-Soviet decay. He insists that he was taken by surprise when Georgia’s president, Mikhail Saakashvili, and prime minister, Zurab Zhvania, offered him a ministerial job. But having said yes, he is cracking ahead, doing everything that businessmen must dream of making governments do. He says that Georgia should be ready to sell “everything that can be sold, except its conscience.” And that is just the start.

Next year -- if not sooner -- he will cut the rate of income tax from 20% to 12%, payroll taxes from 33% to 20%, value-added tax from 20% to 18%, and abolish 12 kinds of tax altogether. He wants to let leading foreign banks and insurers open branches freely. He wants to abolish laws on legal tender, so that investors can use whatever currency they want. He hates foreign aid -- it “destroys your ability to do things for yourself,” he says -- though he concedes that political realities will oblige him to accept it for at least the next three years or so.

As to where investors should put their money, “I don’t know and I don’t care,” he says, and continues, “I have shut down the department of industrial policy. I am shutting down the national investment agency. I don’t want the national innovation agency.” Oh yes, and he plans to shut down the country’s anti-monopoly agency too. Good luck, and he will need it. Mr. Saakashvili’s new government has taken over a country where half the population lives on less than $2 a day, relations with Russia are tense, and rebel regimes control two provinces. He insists that Georgia is a more “individualistic” place than Russia, and thus more receptive to reform. Georgians may take some persuading.

A PARALLEL UNIVERSE?

In what might be called the “Financial/Political/Economic/Masters of the Universe/Conventional Wisdom Universe”, a fascinating Garden of Eden universe populated by all acolytes of published financial wisdom, U.S government minions, anyone remotely connected with Wall Street or the various elements of money and banking domestic and international and, seemingly, most of the population of the U.S. along with a plethora of Central Bank heads abroad. This universe has a global economic expansion of considerable vigor underway, led and driven by the resurgent U.S. entrepreneurial miracle, aided and abetted by a deity-ized Fed Head and bolstered by a New World/Age financial system itself bolstered by the twin miracles of structured finance and derivatives. Through Alchemy inflation remains (reportedly) modest, job growth is soaring (with a small hiccup), equity markets expect a continuing bull market in new age of price/earnings ratios historically high but new age warranted, and debt markets respond joyously to Fed-Head direction. Virtually all media, telecom and internet providers of financial information seem to completely or partially subscribe to and live in this universe!

Barely noticeable, ephemeral contrary manifestations are situated in the “Perverse/Cultist/Pessimistic/Anti-cultural/Alarmist/Unconventional Wisdom Universe”. As an entrée into this universe, we would initially mention the net international deficit position of the United States to the “rest of the world” increasing year over year as of 2004-03-31 to $5.2 trillion. The rate of expansion in this number continues to increase. It receives virtually no attention. Some day, some time, it may become more noticeable since a sizeable portion of the foreign net position is invested in debt instruments. Only in the recent past has this grown to the point that the U.S. not only has the net deficit position but also now has a net payable of income to foreigners. This will continue to compound, exacerbated by any increase in interest rates. Not only will the seemingly impossible to diminish trade deficit contribute to the increasing net deficit position, but also now an increasing net income payout. The amount of the net negative is now approaching the combined GDP’s of Japan, China and India as an illustration of the magnitude!

In this other universe the reported inflation numbers in the U.S. are regarded as fictitious and “real” numbers in the 5-7% range are bandied about. The insurrection economists and commentators purporting such numbers argue that the measured future rise in rates from the current 1.25% will never bring about the “neutral” position the Fed is traveling towards but simply inflame an already serious inflation problem. Other rowdies argue that the expansion is flawed by malinvestment, particularly in residential. A pitiful few see potential for a massive increase in bad loans, particularly in the consumer arena. A minority believe equities at present P/E’s would be an abomination to Benjamin Graham. Collectively, this fringe population is little noticed.

If, after perusal of the above, the reader accepts the concept of these two antithetical universes, arrival at the question of their ability to persist becomes of paramount importance.

IMPORTANT QUESTIONS TO ASK BEFORE ESTABLISHING A TRUST

Thousands of trusts have been settled by clients of private banks in Asia during the past 10 years. There is nothing like market uncertainty, a low interest rate environment, political instability, and even, war, to focus the minds of investors on protecting their assets. But thousands of new trusts have also brought significant change. Trust-related litigation is growing fast. New decisions continue to flow from international courts. And governments and tax authorities continue to restrict benefits previously enjoyed by trusts. International bodies chasing laundered money, and governments seeking to prevent tax evasion, have become increasingly suspicious of the use of trusts. So what are the pitfalls for new users? What questions should we ask ourselves?

LEFT AND RIGHT IN THE SAME SORRY RUT

The country is polarized, we are told. Bush-haters versus Clinton-haters. Mel Gibson versus Michael Moore. Red states versus blue states. Liberals and conservatives read different books, watch different networks, go to different churches. But liberals and conservatives have more in common than you might think. Both believe in government magic. And they want you to believe in it too. They want you to believe the president can be Superman, Santa Claus and Mother Teresa all rolled into one and that he can cure poverty and racism, keep kids off drugs and keep families together. Magical thinking is cute among children. But adults should know that the world is complicated and that legislative actions often fail, or backfire, or have unintended consequences or disappear into bureaucratic sinkholes.

Both ignore history. Liberals look at the 20th century’s grand experiment of capitalism versus socialism and somehow conclude that what the U.S. needs today is more socialism. National health insurance, a more centralized educational system, government regulation for our most dynamic industries -- in every case ignoring the historical triumph of competition and freedom. Conservatives think government can restore the world of the 1950s, ignoring the most basic lesson of history: Things change. Both respond to special interests. Both involve the nation in unnecessary wars. And the No. 1 way liberals and conservatives are alike: Both think they can run your life better than you can.

BIG BUSINESS BECOMING BIG BROTHER

The government is increasingly using corporations to do its surveillance work, allowing it to get around restrictions that protect the privacy and civil liberties of Americans, according to a report released by the ACLU. Data aggregators -- companies that aggregate information from numerous private and public databases -- and private companies that collect information about their customers are increasingly giving or selling data to the government to augment its surveillance capabilities and help it track the activities of people. Because laws that restrict government data collection do not apply to private industry, the government is able to bypass restrictions on domestic surveillance. Congress needs to close such loopholes, the ACLU said, before the exchange of information gets out of hand.

“Americans would really be shocked to discover the extent of the practices that are now common in both industry and government,” said the ACLU’s Jay Stanley, author of the report. “Industry and government know that, so they have a strong incentive to not publicize a lot of what’s going on.” The ACLU released the Surveillance-Industrial Complex report in conjunction with a new website designed to educate the public about how information collected from them is being used.

The report listed three ways in which government agencies obtain data from the private sector: by purchasing the data, by obtaining a court order or simply by asking for it. Corporations freely share information with government agencies because they do not want to appear to be unpatriotic, they hope to obtain future lucrative Homeland Security contracts with the government or they fear increased government scrutiny of their business practices if they do not share. And a 2002 survey found that nearly 200 colleges and universities gave the FBI information about students. Most of these institutions provided the information voluntarily without having received a subpoena.

CHINA STATE COUNCIL CHANNELS SPIRIT OF MISES, BELITTLES CENTRAL PLANNING

On July 25, the State Council released the Decision on Reform of Investment System. It not only marked the most significant step in economic reforms since the 16th National Congress of the Communist Party of China (CPC), but also was a turning point from a planned economy to a market economy. Since enterprises were given the right of decision-making in setting prices on output and labor and selecting raw materials in the late 1970s, they have become mostly independent businesses. However, three decades later, enterprises, State-owned, State-held or private, still have to follow government instructions and obtain the government’s approval in their choice of investments.

Under such circumstances, the State Council’s decision to relax administrative controls over investment has removed the last boundaries of the State over specific decision-making for enterprises and economic reforms have overcome the last obstacle of the planned economy. According to economics theories, investment is a decision that reallocates resources. Under the planned economy, investment projects from various industries all over the country have to apply for licences from the central government. The central government chooses those they think proper in line with an overall plan for the national economy.

To realize high efficiency, such decision-making processes have several preconditions that can hardly be fulfilled in reality: the cost of information accumulation, investment plans and enforcement are close to zero; the different levels of local government have the same interest as enterprises; and all officials in charge of the investment selection are knowledgeable, honest and insightful. These preconditions are proven to be false in practice. As a result, the economy is obsessed by many problems resulting from such central-controlled investment systems.

INDIA A MIXTURE OF OLD WAYS AND NEW TECHNOLOGY

Dump trucks carry construction crews and equipment to sites in Hyderabad, where futuristic buildings reach skyward. Cows wander in their midst, and barefoot delivery boys lug pots of tea and lunch tins to and from makeshift cafes to builders and office workers. Then there are the sightseers. A stream of locals comes by foot, motorcycle and car to gaze at the tangible evidence of India’s rising stature in the world.

Yet not all of India is feeling the benefits of the soaring economy and surging technology industry. The contrasts are jarring between ancient and modern India, its rich and its poor, its triumphs and its challenges, especially in cutting-edge cities like Hyderabad. And despite their pride in the country’s rising stature, Indians are divided over whether the new prosperity is trickling down to the masses. They recently voted out of office the business-oriented leaders who took credit for the country’s growth.

Hyderabad is playing catch-up to Bangalore, a city to the east that emerged as India’s Silicon Valley in the 1980s. While the U.S. tech workers fret about competing with Indians for jobs, cities in India are competing among themselves for their share of the tech boom. Foreign investment and companies are pouring in, and cities across the country are in a beauty contest similar to Texas, Alabama and Washington state’s competition for Boeing’s 7E7 project last year. In some ways the change in Hyderabad is similar to Seattle’s transformation in the late 1990s.

FAHRENHEIT FBI

The Federal Communications Commission voted 5-0 last week to prohibit businesses from offering broadband or Internet phone service unless they provide police with back doors for wiretapping access. Formal regulations are expected by early next year. But the commissioners did not give the FBI and its allies at the Justice Department and the Drug Enforcement Administration everything they wanted. In the police agencies’ original request they asked the FCC to force surveillance back doors into instant-messaging programs and voice over Internet Protocol (VoIP) applications that do not use the traditional telephone network. The FCC politely declined, with Chairman Michael Powell saying those services were exempt from the Communications Assistance for Law Enforcement Act (CALEA) and that it was “unnecessary to identify future services and entities subject to” mandatory wiretapping requirements.

So what happens next? Here are some questions that could be asked of Attorney General John Ashcroft and FBI Director Robert Mueller.

THE WALL STREET SELF-DEFENSE MANUAL

Former dot-com bubble star, the now-disgraced Henry Blodget, was asked by Slate online magazine to write a Wall Street User’s Guide -- aka a “Self-Defense Manual”. We walks the would-be customer through the experience of consulting a financial advisor, dissecting the claims made, and coming up with a realistic set of expectations on what one might hope for in the way of returns on your investment. Finally, he has some recommendations on what to look for in a good financial advisor and what is the most approach way to using their services.

ANTI-TERROR SUGGESTION: HOW ABOUT ENFORCING EXISTING VISA LAWS?

Though it sounds simple enough, the State Department has yet to reform meaningfully this crucial component of the war on terror. The backbone of visa policy for temporary travelers, a category that included all 19 9/11 hijackers, is a law known as 214(b). Enacted in order to limit temporary visas to legitimate travelers, it states that a visa applicant is considered ineligible until proving his own eligibility. To overcome the presumption, an applicant must show sufficient ties to his home country, such as a house, spouse or secure employment, to convince the consular officer he will return home. How does this work to keep out terrorists? The people most likely to be refused under 214(b) are those most likely to be terrorists: young, single, unattached males. Which is exactly what happened before September 11 -- but for the most part only to non-Saudis.

The September 11 commission connected the dots, revealing in their report that properly enforced visa policy dealt a severe blow to al Qaeda’s plot: Eight of Khaled Sheikh Mohammed’s 27 handpicked operatives were effectively prevented from entering the United States. Six were denied entry because of 214(b), and two Yemenis personally chosen by Osama bin Laden also never reached our shores, because as the commission noted in a previous staff statement, “It soon became clear to KSM that the other two operatives, Khallad bin Attash and Abu Bara al Taizi -- both of whom had Yemeni, not Saudi, documentation -- would not be able to obtain U.S. visas.”

Had visa policy been enforced uniformly for all 27 operatives, however, potentially at least 23 of them would have been denied entry. The visa applications of 15 of the hijackers (those of the other four had been destroyed pursuant to standard procedures) were so deficient that none cleared the hurdle set by 214(b). All contained significant errors and omissions, as the commission found. Even if the applications had been completed properly, notes former consular officer Nikolai Wenzel, “each applicant fit the profile of a classic overstay and should have been refused on the merits.” It was no coincidence that all but one of the 15 were Saudis. The General Accounting Office (GAO) found in an October 2002 report that the red carpet shown them was par for the Saudi course: 99% of Saudi nationals applying for visas before September 11 were approved.

This open door was provided despite abundant evidence of pre-September 11 al Qaeda activity in Saudi Arabia. With 15 of the hijackers hailing from the Kingdom, such evidence is now sadly tangible. The continual al Qaeda bombings there only provide further proof that the terrorist outfit is alive and well in Saudi Arabia. Yet the State Department’s approach to Saudi visas has changed only marginally. Enforcing 214(b) in Saudi Arabia as is done elsewhere, though, might be a blow to diplomacy. Therein lies the basic problem.

DOING BUSINESS IN DANGEROUS PLACES

Dangerous places can be hugely profitable, as many small mining firms have long known from staking claims to mines in unstable countries and hanging on to them until larger and only slightly less daring businesses buy them out. South African firms are especially deft at judging risks in their continent: MTN, a big telecoms firm, makes almost as much money in Nigeria as in South Africa. Risk-taking wins markets. Peter Singer of the Brookings Institution has written a book on private military firms. “For firms that are second or third in a market, taking risks is a way to get ahead,” he argues.

Until the invasion of Iraq, most operations in dangerous places were of two kinds. If a country had oil or minerals, it attracted energy and mining firms; if it had none, aid agencies were often still there. Both bring work for other businesses, such as in telecoms and air transport. Iraq, and the outsourcing of many support activities once performed by soldiers, has changed things. For a start, the scale there is immense and circumstances are changing constantly. For private security firms, in particular, soaring demand has turned Iraq into a bonanza.

Managing staff in dangerous places brings special challenges. Richard Fenning, chief operating officer of Control Risks Group, a British business-risk consultancy, employs lots of ex-military folk and ex-journalists (“they are resourceful and self-sufficient,” he says). The most difficult employees to cope with, says Will Geddes, boss of ICP, a London “threat-management” group, are those who want to work in a hostile country in order to boast about it when they get home. Also problematic are staff who go to nasty places without warning their company security department -- especially if they are then abducted or locked up. To reduce such risks to their home-country staff, some operators employ lots of local staff.

WASHINGTON IS TURNING INTO A FORTRESS OF FEAR

Washington, D.C., as designed by the French artist and engineer Pierre L’Enfant, was meant to be a city of grand open spaces, with wide, tree-lined avenues flowing into graceful circles. In 1899, the U.S. Congress restricted the height of buildings in the city to keep its skyline of national memorials intact. The city’s splendid parks reinforce its quality of physical openness. But today, Washington’s open spaces -- symbolic of unfettered democracy -- are under attack in the “war on terrorism”. The capital’s public areas have been ambushed, victims of security measures that are destroying the fabric of the city.

On Aug. 1, Homeland Security Secretary Tom Ridge announced that the threat alert level for the financial services sector in Washington and two other cities had been raised from yellow (elevated risk) to orange (high risk). He cited new and unusually detailed intelligence regarding targets that al-Qaida planned to attack, including the headquarters of the International Monetary Fund and the World Bank. Under an orange alert, federal departments and agencies “should take additional precautions at public events” and restrict “threatened facility access to essential personnel only.”

The result of these and other guidelines is that in downtown Washington, site of America’s most important monuments, it is becoming increasingly difficult to live a normal urban life. The tightening of security looks set to continue. Ordinary Washingtonians are reacting with confusion, irritation and frustration to the security measures, the logic of which, starting with the color code itself, is not clear to most folks. “Alert fatigue” is an increasingly common psychological condition in Washington. Current city leaders are outraged at what the federal security apparatus is doing to the city.

KILLING YOU SOFTLY WITH THEIR LIES

The U.S. government’s budget deficit this fiscal year will be in the range of $450 billion. If we assume an $11 trillion economy (GDP), the deficit is in the range of 4.2%. The figure for GDP is deliberately misleading. It counts government expenditures as part of the productive output of the nation. If we are comparing the burden of the national deficit on the productivity of taxpayers who actually produce something of value, the deficit’s burden is much higher. Governments at all levels extract about 40% of the output of the nation. If we reduce the GDP estimate by, say, 80% of 40% (32%), we get a GDP of a little under $7.5 trillion ($11 trillion x 0.68). The deficit this year will be in the range of 6.2% of total productive output. The official federal debt is over $7.3 trillion. You can monitor this on the U.S. national debt clock. Your personal share of this is a little under $25,000. If you are married, add another $25,000. This is the per capita burden, which includes children. Like the GDP, this figure is misleading. It does not count off-budget programs, most notably Social Security/Medicare. Add another $50 trillion for Social Security/Medicare.

When interest rates rise -- as they surely will -- the economic burden imposed by these growing deficits will increase. The stock market will be in even worse shape than it is today. Corporate debts must be repaid. Rising rates will be bad news for holders of bonds, because existing bonds fall in price when long-term interest rates rise.

No one in Washington is willing to tell us how they can cut taxes, increase benefits, and get out of Iraq. Kerry gave assurances, but his assurances are not backed up by numbers. Bush will either follow suit at the Republican convention or just avoid giving assurances. Voters do not want to hear the economic truth. The economic truth, even more than Medicare, is the third rail of American politics. Here is the economic truth: “If you ain’t got any, you can’t re-distribute it.” The government has only one thing left, the illusion that it can and will pay its bills with money that is still worth what it is worth today. It cannot. It will not. Do not be on the receiving end. Neither a borrower from the government nor a debtor be.

DEBT AND DELUSION

Since the last serious outbreak of inflation in the 1970s, central banks have conquered this pestilence and have practiced a responsible stewardship over national monetary systems ever since. Due in no small part to the benign inflationary environment that has followed their victory, stocks and bonds have outperformed historical averages. This reflects a high degree of confidence in future monetary stability and prosperity. Or so we are constantly told.

That this consensus view is a twisted mirror of reality is the theme of an undeservedly obscure work of financial economics, Peter Warburton’s Debt and Delusion: Central Bank Follies that Threaten Economic Disaster. Warburton’s story begins in the aftermath of former Federal Reserve chairman Paul Volker’s triumph over inflation in the early 1980s. The conundrum facing governments at the time was how to enable governments to continue to live beyond their means, without suffering inflationary consequences? In this climate, a new outbreak of inflation would have contained the seeds of its own demise, as having recently been burned by inflation, bond buyers would have resisted any signs of rising prices by insisting on higher bond yields.

Central bankers offered a program to solve this dilemma, the centerpiece of which was a change in the method of financing government debt. Deficit finance bonds would be sold to private investors through existing financial markets. This would place the bonds in the hands of investment funds, rather than on the books of commercial banks as would have been the case had they returned to the old style of monetization. The subsequent explosion in the size and breadth of bond markets is illustrated by a few snapshots of gross issuances: less than $1 trillion in 1970; $23 trillion by 1997; and nearly $43 trillion by 2002.

A second part of the central bankers’ program was to reign in government deficits so as to reduce the need for borrowing. This advice has been mostly ignored. Borrowing to fund government deficits exploded under Reagan, continued to soar in spite of the phony “surpluses” of the Clinton years, and has reached stupefying levels under George W. Bush. It is the interaction between this explosion of debt and what Warburton calls “the capital markets revolution” that has produced a new and deceptive form of inflation. Warburton wryly notes that, “Periodic bouts of price inflation, the tell-tale signs of a long-standing debt addiction, have all but vanished. The central banks, as financial physicians, seem to have effected a cure. ... Few have bothered to ask how the central banks have accomplished this feat, one which has proved elusive for more than 20 years. As long as inflation is absent, who really cares exactly what the central banks have been up to.” The solution to this puzzling anomaly is to identify the source of demand for government bonds. For this, we must examine “what the central banks have been up to.”

THE THOMAS JEFFERSON OF CYBERSPACE REINVENTS HIS BODY, AND HIS POLITICS

John Perry Barlow is one of those fascinating figures that American culture regularly produces to our great benefit and occasional consternation. Born in 1947 in Wyoming, he ran his family’s cattle ranch for 17 years. Unique among Equality State ranchers, his words filled the ears of millions, because he wrote lyrics to the music of his childhood buddy, Bob Weir of the Grateful Dead. In the 1980s, Barlow became fascinated by the new world opening up through personal computers, and he helped popularize the term and concept of cyberspace. Barlow took his way with words -- and his aversion to authoritarianism -- and launched the Electronic Frontier Foundation in 1990. EFF is a San Francisco–based political advocacy and legal action group dedicated to preserving and extending liberty in cyberspace. Barlow is currently its vice chairman. EFF has played a vital role, through legal action and political agitation, in fighting attempts to mandate government access to all encrypted computer communications, stymieing efforts to restrict the free sale and export of cryptography, and battling laws such as the Communications Decency Act, which would have restricted speech on the Internet.

In 1996 Barlow became the Thomas Jefferson of the wired generation by authoring the document forwarded ‘round the world, “A Declaration of the Independence of Cyberspace”. In it, he famously declared to all governments that cyberspace was “naturally independent of the tyrannies you seek to impose on us. ... Your legal concepts of property, expression, identity, movement, and context do not apply to us. They are based on matter. There is no matter here.”

Barlow no longer runs that Wyoming ranch, and these days he calls himself “a free agent and peripheral visionary”. His 1994 Wired essay on the future of copyright in a digital world, “The Economy of Ideas”, is taught in many law schools. Barlow recently surprised many of his libertarian friends by announcing that merely living a bohemian libertarian lifestyle was no longer sufficient. He believes that the combination of George W. Bush and the rise of “plutocratic” corporations requires direct political engagement, and that getting rid of Bush overrides any other personal or political concerns. “There are libertarian wings in both the Democratic and Republican parties, and in the past I found it most effective to be inside the Republican Party acting as a libertarian. But I’ve switched,” he says in a very interesting interview from this past March, the rest of which follows.

THE ARROGANCE OF AMERICA

If you step back in awe and get a good whiff of it, you will notice three main scents of pure pompousness: cultural, political, and financial, which the U.S. emits voraciously with vigor and gusto. Culturally, Americans seem to think the whole world should bow down to them, speak their language, practice their predominant religion, and worship their extravagant way of life. Exhibit A: Pat Buchanan.

Moving on to the political realm -- Most U.S. citizens today think of “freedom” as the freedom of the government to do whatever it darn well pleases, and the freedom of “society” to vote as a mob to increase the wealth of special interest groups by stealing from productive, prudent individuals through forcible redistribution. Furthermore, Americans also believe that an invisible guy in the sky has endowed them with the collective divine right to rule the world. Just ask Jerry Falwell if you don’t believe me. Not only are Americans a bunch of busybodies at home -- trying to tell everyone from coast to coast what they can and cannot do, but they also wish to dictate to the whole population of the world on how to live, too. Americans have deployed a million of their troops in more than 100 countries -- propping up dictators who support the economic special interests of politicians in Washington -- in a way that would make ancient Rome and the Mongol Empire envious. And then, Americans wonder why much of the global population hates them, and why terrorists threaten them more and more often. (Keep in mind that since 1782, the federal government either provoked every war that the U.S. has fought, or that Americans’ individual liberty simply was not at stake to begin with.)

Finally, the third and most deadly scent of pure pompousness emanating from America is the financial form. U.S. inhabitants seem to think that their illustrious economic prosperity is permanent, and that they have a natural right to success in life, simply because they are Americans. They think the business world automatically owes them high-paying jobs and cheap goods and services, and that deficits do not matter because these have been occurring since the early 1980s with no ill effects. Never mind the fact that U.S. citizens have been enjoying their extravagant privileges because the U.S. dollar has been the world’s “official reserve currency” since 1944. The Federal Reserve can create an unlimited amount of inherently worthless fiat money, and then ship this money to foreign countries in exchange for real goods & services! Anyway, because of all this financial arrogance, the U.S. debt-to-GDP ratio is at its highest level in American history, and appears to be on the verge of collapse. Another Great Depression appears to be written in stone -- no matter how the politicians and central bankers try to avoid it. And unlike the last one, which occurred during the 1930s and ‘40s, the U.S. dollar is not backed by gold in any way whatsoever. And unlike Japan, there is no large trade surplus to keep the fiat currency afloat.

If there is a time to be “bearish” on America, that time is now. The arrogance of America will soon be headed straight down a nightmarish slippery slope of painful ruin and disgrace. The Arabs (and other foreign U.S. loathers) do not have to defeat America. America will defeat itself. The U.S. will fall on its own sword of monetary inflation and debt, and will suffocate on the smell of its own arrogance, just as every empire did throughout history. What goes up must come down... and the bigger they are, the harder they fall!

KARL MARX WOULD NOT RECOGNIZE THE PLACE: FREE MARKETS BLOSSOM IN VIETNAM

Americans think of the Vietnam War as the first armed conflict in our history that we lost. Tanks and troops from the communist North captured the South’s capital of Saigon on April 30, 1975, renamed it Ho Chi Minh City, and ended decades of war. Who can forget the scenes of the last frenzied evacuation of Americans and Vietnamese by helicopter from atop the U.S. embassy just hours before? In a military sense, the communists achieved their primary goal of subjugating the South and uniting the two sections of Vietnam under one flag. But nearly 30 years later, Karl Marx would not recognize the place, and neither would Ho Chi Minh and his comrades whose dream was to fashion a unified Vietnam into a model of socialism. In many ways, the country’s economy is getting freer by the day.

The outlines of this story follow a pattern now almost monotonously familiar. Marxists come to power and promise a socialist paradise. They collectivize, nationalize and terrorize. Central planning, they promise, will replace the “chaos” of the marketplace. In no time at all, everything falls apart. In their quixotic attempts to create omelets of society, statists of all stripes never produce much more than a lot of broken eggs. Sooner or later, they or their successors turn to the market to rescue them.

Since 1986, Vietnam has been trying liberty, or at least a notable dose of it. The Communist Party still imposes a one-party political monopoly, but for the past 18 years it has been beating an economic path to free enterprise. It abolished price controls, legalized private property, sold off many state-owned enterprises and encouraged free-market entrepreneurship. Labeled “Doi Moi” (meaning “new changes”), Hanoi’s program for revitalizing a moribund, socialist economy by de-socializing it is clearly working. In February of this year, I saw it firsthand during a fact-finding visit to Hanoi and Ho Chi Minh City.

Good morning, Vietnam!

FIVE OFFSHORE INVESTMENTS YOU CAN LEGALLY KEEP SECRET

Most major countries, including the United States, require that residents pay tax on their worldwide income. If you are a U.S. citizen or resident, you face an additional obligation—to report the existence of all “foreign bank, securities or ‘other’ financial accounts” if their aggregate value exceeds $10,000 at any time during the year. If you fail to do so, you face a fine up to $250,000, imprisonment up to five years, or both. Penalties are doubled if you violate any other U.S. law.

There are actually two separate reporting obligations: 1.) You must acknowledge foreign accounts each year on Schedule B of your federal income tax return, and 2.) File Form TDF 90-22.1 (the “foreign bank account reporting” or “FBAR” form) with the Treasury’s Financial Crimes Enforcement Network (FinCEN). Just what is “reportable?” Instructions for the FBAR make it clear that you must report and of a set of relationships that, in aggregate, exceed the $10,000 threshold. At first glance, these rules might seem impenetrable. But, buried within the legalese are some opportunities.

But first, you may be thinking, “Why bother? I’m not evading any taxes… and besides, this is my tax return, so the information in it is available only to the IRS. Right?” Wrong. The FBAR is not a tax return. Unlike a tax return, the information a FBAR contains is not subject to the stringent disclosure restrictions that apply to tax returns. Indeed, the information in a FBAR may be shared with any other federal agency in any “criminal, tax or regulatory investigation or proceeding.” It may also be shared with “state, local, and foreign law enforcement and regulatory personnel in the performance of their official duties.” In fact, through FinCEN’s “Gateway” initiative, local, state and even foreign law enforcement officials have direct online access to the agency’s “Bank Secrecy Act” database (including the nearly 200,000 FBARs filed each year). There are also numerous examples where information available through Gateway has been disclosed to the press. In addition, FBAR filings may be disclosed during a lawsuit.

Now convinced that if you legally can do so, you might wish to hold your offshore investments in a non-reportable form? Several types of investments appear to be legally excluded from reporting if they are purchased without opening a “bank, securities, or other financial account” or using such an account to maintain custody.

SINGAPORE’S MAN WITH A PLAN

Singapore, one of the first Asian economies to be called a tiger, is roaring again. In the second quarter of this year its GDP was 12.5% higher than in the same period in 2003 -- when, admittedly, SARS took its toll on an already lackluster economy. The government is now forecasting growth this year of up to 9%, perhaps second only to China in Asia. Much of this growth is due to manufacturing exports, above all of pharmaceuticals -- second-quarter output of which was 51% higher than a year earlier. Drug-making is the latest industry to blossom thanks to the country’s unique cocktail of state planning and capitalism -- though some no longer blossom as they once did (see article).

In the past decade, the city-state has turned itself into one of the world’s leading pill producers, helped by strong intellectual property laws, an educated workforce and lengthy corporate-tax breaks. Most of the world’s leading drug firms make products in Singapore for global consumption. Revenues of $7 billion are expected from biomedicine this year -- some 8% of its total manufacturing revenues -- and its all-powerful government has ambitious plans to generate $12 billion from the sector by 2010. If that happens, it will ease the pain as jobs in electronics and petrochemicals move to China and other lower-cost neighbors.

The man who is trying to bring about this transformation is Philip Yeo, head of A*Star, a government agency in charge of co-ordinating Singapore’s plunge into biomedicine. He also co-chairs the Economic Development Board, which is in charge of developing high-value industry in the country. His main challenge is to turn Singapore into a center of biomedical innovation, moving upstream from merely making drugs to inventing and testing them. Singapore has little tradition of academic research in biomedicine and few private investors schooled in the risks of biotech, yet Mr Yeo is undaunted. “[W]hat choice do we have?”, he asks. Indeed, Mr. Yeo’s own career is a tale of moving up the value chain, from manufacturing to more lucrative activities.

FOOTING THE BIG BROTHER WEBTAP BILL

On 9 August 2004, the US Federal Communications Commission (FCC) took a major step toward mandating the creation and implementation of new Internet Protocol standards to make all Internet communications less safe and less secure. What is even worse, the FCC’s ruling will force ISP’s and others to pay what may amount to billions of dollars to ensure that IP traffic remains insecure.

The FCC ruling comes pursuant to a request by US law enforcement agencies to extend the reach of a decade old federal statute, the Communications Assistance for Law Enforcement Act, or CALEA, to broadband Internet service providers including cable companies, DSL providers, satellite providers and even electric companies that provide inline Internet access. The ruling, if it becomes final, may require such ISPs to create and deploy new and expensive technologies that would ensure that communications carried over broadband were deliberately insecure and capable of being intercepted, retransmitted, read, and understood by law enforcement. Of course, whatever law enforcement can do, hackers will be able to do easier and faster. What this means is that IP protocols may have to be adjusted, and the future of encryption may also be in doubt.

Essentially, the FCC concluded that CALEA cannot force website operators to design their systems to reveal the IP addresses or identity of people who visit the site, but could force ISPs not only to reveal the identical information, but also to design the system to enable law enforcement to reveal the information. It is important to note that this expansion of CALEA was not needed to compel the ISPs to comply with a lawful subpoena. ISP’s and everyone else must already comply under existing law. But a subpoena can only compel a recipient to turn over documents or records that exist.

The FCC’s ruling goes well beyond the extensive subpoena authority of the grand jury and the Foreign Intelligence Surveillance Court, and even the USA-PATRIOT Act. By making ISPs the electronic equivalent of the phone company, and therefore subject to CALEA, the FCC opens the door to mandating that all future TCP/IP technologies -- possibly even encrypted ones -- be designed at the outset to be tapable. After all, it would do the cops no good to receive a mass of encrypted packets. And all of this would be done on your dime.

ALL STATES EVERYWHERE WANT TO BE TOTAL

The extent to which they are not is due to the inability of the state to get away with it, or to the unwillingness of people to tolerate it. To understand this, consider a criminal syndicate. It would like to enjoy the untrammeled right to loot, kill, and accumulate power, but it also knows that it takes risks with every crime it commits. If its activities anger too many, it risks losing what power it has. So too with states: they desire total power, but take only what they can get away with.

As for acculturation, it is a fact that people are more or less likely to tolerate despots. Americans, for example, would only recognize a tyrant in the White House if he had a mustache the width of his nose. Even the most cynical among us have been astounded at what the public has put up with since 9-11: a brazen attempt to seize control of the entire economy and culture in the name of protecting us, even though the main lesson of 9-11 is that the government cannot protect us but rather invites act of vengeance through its imperial foreign policies.

No amount of evil is considered out of bounds for those who hold power. All states everywhere want to be total. Remember that and you will not be fooled by the US government’s attempt to distract you from its power grabs with scary tales of foreign tyrannies. What is to be truly dreaded is homegrown.

DINAR BROKERS BOOM IN IRAQ CHAOS

From the safety of a computer terminal halfway around the world from battle-weary Baghdad, Bill Burbank is betting that political and economic stability will reign in Iraq some day in the not-too-distant future. He has a lot riding on that hypothesis. Since October, when Iraq began circulating a new currency to replace its old bills, most of which contained images of Saddam Hussein, Burbank has spent close to $200,000 buying up new Iraqi dinar bills. Through a website based in Alpharetta, Georgia, the day trader and former Navy Seal runs a side business selling the new currency to the public. “It’s just so cheap at a tenth of a penny (per dinar),” he said. “If it just goes to a penny you make a thousand percent. I think there’s not too much downside in owning the currency and just holding.”

While most are betting far more modest sums on the hopes of economic recovery in Iraq, droves of investors are following a similar logic in buying up dinars. In response, a host of websites have cropped up to cash in on demand, most selling the currency at a steep markup to dinar street prices.

Marshall Donnerbauer, owner of the website Investindinar.com, says his biggest customers are U.S. soldiers and employees of Kellogg Brown & Root, a subsidiary of the contracting firm Halliburton that has a large workforce in Iraq. Still, no one is calling the dinar a risk-free investment. Given that the Iraqi dinar is not yet traded on major global currency exchanges, there is no guarantee that buyers of the bills will be able to easily sell them. History does provide examples of economies and currencies rebounding in the wake of turmoil, such as Kuwait and the Kuwaiti dinar following the 1991 Gulf War and Germany and the Deutschmark following World War II.

9/11 AFTERMATH: SOME THINGS NEVER CHANGE

Most people alive in the early thirties will recall, if only from hearsay, many of the events in Nazi Germany prior to the belated realization by Britain and France that the little man with the funny mustache really meant what he was saying and writing. Adolf Hitler wrote Mein Kamf (My Struggle), wider reading of which just might have alerted the world to the dangers he would pose to peace in Europe and to the Holocaust that he would pursue so vigorously. Just after he took power in 1933, the SA (Sturmabteilung or Storm Troopers) cordoned off the main courtyard of Berli’qs Humboldt University, stacked high piles of books by Jewish, communist, and other so-called “degenerate” authors, and then set light to them. The burning included such authors as Albert Einstein, Bertold Brecht, Franz Kafka, Vladimir Mayakovski, to name but a few.

Heine or Brecht (the saying has been attributed to both) said that if you burn books today, you burn people tomorrow. Few at the time realized how true that statement was about to become. The man in charge of such activities, Dr Josef Goebbels, was officially Minister of Propaganda and National Enlightenment. As such he had two main tasks. Firstly, to ensure that nobody in Germany could read or see anything that was hostile or damaging to the Nazi Party, and secondly to ensure that the views of the Nazis were put across in the most persuasive manner possible. The assumption being that, if most people believed what they were told, then opposition would be insignificant and practiced only by those on the very extreme fringes of society, who would be easy to catch.

The above all came flooding back when, at the end of July, the US Department of Justice issued instructions to the Government Printing Office Superintendent of Documents to instruct depository libraries to destroy five publications the Department has deemed not weappropriate for external use”. The documents to be removed and destroyed include: Civil and Criminal Forfeiture Procedure, Select Criminal Forfeiture Forms, Select Federal Asset Forfeiture Statutes, Asset Forfeiture and Money Laundering Resource Directory, and Civil Asset Forfeiture Reform Act of 2000. The topics addressed in the named documents include such information as how citizens can retrieve items that may have been confiscated by the government during an investigation. Readers may be puzzled to learn that these documents have been in the public domain for as long as four years. Quite possibly, the action is simply another part of the effort to keep all US citizens in a state of suspended apprehension.

INVESTING IN ART: SEEING PAINTING BY THE NUMBERS

Is art a good investment? Despite the stratospheric prices recently achieved by some paintings, notably Pablo Picasso’s “Boy with a Pipe”, which sold for a record $104 million in May, many art market advisers concur that the answer is, regretfully, “No.” That is despite some evidence of a number of well-publicized art market indexes, notably the Mei Moses all art annual index, which tracks 6,000 artworks, including old masters, 19th century masters, Impressionists and pre-1950 American paintings. The index has recorded an annualized compound return of 12.6% over the past 50 years, compared with 11.7% for the Standard Poor’s 500-stock index.

The indexes are misleading, investment professionals say, in part because they typically fail to take transaction costs into account. And in the art market, transaction costs, whether levied by dealers or auctioneers, can be very high. Works of art sold at auction normally attract both buyers’ and sellers’ premiums of 10% or more, and dealers can charge as much as 50%. Money is almost always convertible into art, but the reverse convertibility -- art into money, or at least more money than you paid for it -- can rarely be predicted with confidence.

The narrower the collecting category, the more volatile the returns over time. An even bigger problem with the broad art market price indexes like Mei Moses is that they represent the aggregate performance of an array of art categories. Individual works by equally respected artists can fare very differently at auction. “Boy with a Pipe” earned a 16.05% compound return, once the auction house’s commission had been deducted, from 1950, when it was acquired for $30,000 by Betsey and John Hay Whitney. But what of Vincent van Gogh’s “Portrait of Dr. Gachet”, which was bought by a Japanese collector for $82.5 million in 1990 and has since been sold again for an eighth of that price?

IDEA OF IMPLANTING RADIO FREQUENCY ID TAGS RAISES ORWELLIAN FEARS

Advocates of technologies like radio frequency identification tags say their potentially life-saving benefits far outweigh any Orwellian concerns about privacy. RFID tags sewn into clothing or even embedded under people’s skin could curb identity theft, help identify disaster victims and improve medical care, they say.

Critics, however, say such technologies would make it easier for government agencies to track a person’s every movement and allow widespread invasion of privacy. Abuse could take countless other forms, including corporations surreptitiously identifying shoppers for relentless sales pitches. Critics also speculate about a day when people’s possessions will be tagged -- allowing nosy subway riders with the right technology to examine the contents of nearby purses and backpacks. “Invasion of privacy is going to be impossible to avoid,” said Katherine Albrecht, the founder and director of Consumers Against Supermarket Privacy Invasion and Numbering, or CASPIAN.

But on top of civil liberties and other policy issues, such technologies face visceral objections from many people who frown on the idea of being implanted with tags that can track them like migrating tuna. Complaints have led several companies to abandon plans to use RFID technologies in products, much less in human bodies.

MATHEMATICIAN ARGUES MARKETS MORE DANGEROUS THAN INVESTORS KNOW

A key message of Benoit Mandelbrot’s book The (Mis)behavior of Markets (co-written by Richard L. Hudson), is that investment markets in general and the stock market in particular are riskier and more dangerous than people know. Investors should therefore be more cautious. Indeed, the last sentence in his book is: “Like the weather, markets are turbulent. We must learn to recognize that, and better cope.” His argument runs counter to the popular view that stocks long-term are not just the most profitable investment, but the safest -- a view given prominence several years back in the best-selling book Stocks for the Long Run by Jeremy Siegel.

Mandelbrot, 80, is a mathematician at Yale and the creator of “fractal” geometry, which focuses on the regularities in various irregular systems, from wind tunnels to coastlines. If mathematicians received Nobel Prizes, he probably would be first in line. His book is difficult. Sometimes I had trouble understanding him, especially when he is writing about fractals and not about investing, which is much too often. But he is not afraid to argue that the emperor has no clothes, that most of the leading financial theories accepted today are -- if not exactly hogwash -- badly flawed.

His arguments are persuasive, and sometimes, he expresses himself in memorable prose. The stock market, he says, is more dangerous than people know because it is not stable and peaceful, but turbulent. (Think of the bear markets of 1987, 1997 and 2000.) Think of all the investors who lost their shirts, and their early, comfortable retirements, when the Internet bubble burst because they were not sufficiently aware, as Mandelbrot is, of how treacherous the stock market is. Too many people, Mandelbrot argues, think that the “bell curve” is found everywhere in nature, that most things congregate in the middle, and that the relatively few exceptions peter out on the left and the right. (Hence the shape of a bell.) But the bell curve, Mandelbrot argues, does not apply to the stock market, the cotton market or to markets in general. “The seemingly improbable happens all the time in financial markets,” he writes.

KILLING OFF THE DEATH TAX

It sounds surprising at first blush, but the people working the hardest to save the federal estate tax, or “death tax”, are some of the country’s richest. Indeed, the membership of the pro-death tax Committee for Responsible Wealth reads like a Who’s Who for a Vanderbilt birthday party. There are reasons for that. For example, famed investor and outspoken death-tax proponent Warren Buffet makes money by selling “death tax insurance” to small businesses. He also makes money by buying small businesses (at fire-sale prices) when they have to be sold to pay taxes because their founder died without such insurance. Much to Buffet’s chagrin, as things stand now, the death tax is, well, expiring. It will be completely phased out by 2010.

However, unless Congress takes action, it will rise from the grave in 2011. That means if someone dies in 2010, his estate will pay nothing in inheritance taxes, but if he survives until January of the following year, the estate will have to turn over more than half its assets to Uncle Sam. Because this would provide a perverse incentive for wealthy individuals to die during 2010, economist Paul Krugman has jokingly called this the “Throw Momma from the Train Act of 2001”.

So why maintain a death tax at all? ...

WHEN SHOULD THE GOVERNMENT BE ABLE TO DEMAND OUR PAPERS?

John Gilmore, whose legal fight against airline identification requirements was detailed in a Reason cover story, is claiming that the airlines’ often contradictory demands for ID before they let you fly -- connected to federal mandates that are so secret the Justice Department’s lawyer would not even tell them to the judge in Gilmore’s original suit -- constitute a violation of his right to travel, peaceably assemble, and be free from unwarranted searches and seizures. He further argues, among other things, that the secret directive violates due process and is inherently void due to vagueness. His appeal brief provides an impressive array of arguments and past precedent for these assertions, too long to summarize adequately here. One touches on the “no-fly” lists, made recently famous when they snared Teddy Kennedy. Gilmore claims that, “A No-Fly rule directed at a specific group of people is equivalent to a bill of attainder unless with each person there is an associated judicial warrant or conviction. Yet judicial involvement in maintaining the lists is highly unlikely...”

When Gilmore started this fight, he was a lone wolf on a far frontier of privacy. No more. What has changed in the meantime? For one, there was the Supreme Court’s Hiibel decision in June, which upheld a widespread right of cops to ask you to identify yourself on pain of arrest. But what Hiibel did not do -- because even the five Supremes insensitive to Mr. Hiibel’s privacy rights realized this would hit a tripwire in the American political consciousness -- is demand that that ID had to be state issued. They refused to extend too far the areas in which a citizen must have a government-issued ID.

As Gilmore has argued, real security does not often have a great deal to do with knowing who someone is, or who a card says he or she is. (Even the most biometrically sophisticated of modern ID documents will be potentially forgeable for those with a strong incentive to do so.) Real security has much more to do, in Gilmore’s airline context, with making sure people, whatever their card says, do not bring weapons or bombs on planes -- or making sure that trustworthy people on planes, whether pilots or air marshals, are empowered to resist miscreants. (After 9/11, normal citizens have almost certainly gotten the message to resist at all costs.) The government still does not want to allow the good guys to defend themselves on planes effectively, and thus are all the more insistent on the security theater of showing an ID card.

FROM JOHN ASHCROFT’S LIPS TO GOD’S EAR: KISS YOUR RIGHTS GOODBYE

Iraq is a catastrophe, bloodier by the hour. Our Afghan proxy controls a full 10 yards of sovereign territory around his office in Kabul. The only successful war Bush has waged from the comfort of his ranch thus far has been an unremitting attack on the U.S. Constitution. The First, Fourth, Sixth, and Eighth Amendments in the Bill of Rights have already sustained serious injury. The usual method of redressing constitutional grievances is through the court system. But well in advance of the fait accompli, Bush’s fans in Congress derailed most of President Clinton’s judicial nominations. No member of the Senate was more fanatical in excluding qualified people from the federal bench than our current attorney general, John Ashcroft. The vacancies imposed by Ashcroft and other Senate evangelicals have now been filled by right-wing ideologues, who dominate seven of 13 federal appellate districts.

It is a small, telling measure of G.W. Bush’s contempt for the electorate that after Missouri voters chose to elect a deceased candidate rather than give Ashcroft another term, Bush promptly installed him as the country’s chief law enforcement officer. When sworn in, Ashcroft was, appropriately, anointed with oil by Justice Clarence Thomas. Ashcroft is, not to mince words, a lunatic. This would have been universally recognized at almost any other moment in American history. In the looking-glass world of “the war on terror”, however, Ashcroft’s religious manias have not excited even mild censure from anyone in government. By all reports, Ashcroft runs the Department of Justice like a Pentecostal revival meeting, enjoining his staff to raise their voices in righteous hymns of his own composition.

A curious feature of the Patriot Act is that it authorizes virtually nothing that would effectively prevent terrorists from hitting American targets. Like other “emergency” measures since 9-11, it attacks Americans. Naturally, putting these and similar “tools” in the hands of intelligence agencies and police officers guarantees their rampant misuse. Inflating ordinary misdemeanor crimes into “terrorist acts” does nothing to enhance security; it is a standard practice of police states, and will only benefit the corporatized prison racket. If “the war on terror” were serious and not a bait-and-switch operation to squash dissent and push an agenda long preceding 9-11, legions of “intelligence” personnel and presidential advisers would have been out of work on 9-12. Nobody in this administration has lost a job for failing to uphold the Constitution, ignoring the public interest, or exhibiting limitless incompetence.

The Justice Department would have it that numerous “sleeper cells” have been ambushed since 9-11. Fat chance. Plea bargaining, a judicial travesty designed to relieve our court system of its onerous duty to give defendants jury trials, and mandatory sentencing, which voids the discretion of judges to tailor sentences appropriate for individual defendants, have placed the fate of anyone charged with a crime in the total control of prosecutors. A probable cause hearing in most of the cases might have concluded that the defendants’ rights had been violated. It is more likely that these people are innocent than guilty. In the rare cases in which a defendant’s lawyer has managed to compel production of the state’s “secret evidence”, it proved so flimsy that charges were drastically lowered by the courts or simply thrown out.

What should have been a disaster for G.W. Bush’s presidency, then, has instead served as a pretext for conducting it like a dictatorship, with John Ashcroft’s Justice Department as its secret police.

DOMINICAN REPUBLIC’S SWIFT STEP INTO CRISIS

The country has been transformed from the envy of Latin American economies into a nation in the midst of its worst economic crisis in decades. Analysts here trace the fall largely to a single event: a banking scandal that last year cost the government $2.2 billion, or about 15% of the country’s GDP, which sent inflation soaring and severely devalued the peso, the national currency. The result has been an almost overnight reversal in fortunes in this steamy Caribbean country, a top U.S. tourist destination just east of Cuba that shares the island of Hispaniola with Haiti. What was until recently a dependable bright spot in a region of economic and political uncertainty is now another vulnerable nation on the U.S. front porch.

So many Dominicans are trying to flee the desperate conditions that the U.S. Coast Guard is intercepting far more Dominicans at sea than Cubans or Haitians. After a decade of strong growth, the Dominican economy shrank in 2003 for the first time since 1990. Joblessness is soaring and inflation has averaged 56% in the past year, according to the central bank. The peso has lost more than half its value against the dollar, causing deep pain in a nation that imports most of what it consumes. Prices have more than doubled in the past year for food, milk, propane gas for cooking and other daily necessities. Worker strikes and fuel shortages are adding to the sense of paralysis.

The government inherited by President Leonel Fernandez, who was sworn in Aug. 16, is hobbled by nearly $6 billion in foreign debt, making it nearly impossible to provide even the most basic services, from medical supplies at public hospitals to trash pickup.

BIG BROTHER IS ALWAYS WATCHING IN BRITAIN

The teenagers who stabbed wealthy Joao Da Costa Mitendele to death before burgling his home were careful to conceal the crime. They used a pretty girl to gain access to his apartment, where they wore rubber gloves while committing their crimes. What they had not counted on was the phalanx of video cameras that silently watched and recorded them leaving the local subway station, buying those gloves and approaching 45-year-old Mitendele’s apartment in suburban north London. The same cameras caught their hasty return journey to the station half an hour later. The tapes sealed the fate of the so-called “Honey Trap” gang when played in court.

An estimated 4.2 million closed-circuit TV cameras observe people going about their everyday business, from getting on a bus to lining up at the bank to driving around London. It is widely estimated that the average Briton is scrutinized by 300 cameras a day. The phenomenon is enabled by the arrival of digital video, cheap memory and sophisticated software. And Britain is acknowledged as the world leader of Orwellian surveillance -- perhaps because it has the experience of Irish terrorism, and is on guard for even worse today.

Authorities maintain the cameras deter crime, and despite some claims to contrary and the outrage of civil libertarians, the public seems willing to accept the constant monitoring for the greater good.

PATRIOT ACT DEBATE CONTINUES

The 342-page USA PATRIOT Act, a sweeping piece of legislation passed by Congress one month after the Sept. 11, 2001 attacks, has increased the government’s intelligence-sharing capability and expanded its surveillance powers. The prescribed intent of the act is clearly expressed in the words behind its acronym -- Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorists -- but its swift passage and subsequent implementation has created a muddy debate with skepticism and outrage coming from one side, endorsement and praise from the other.

Opponents such as ACLU of Connecticut executive director Theresa Younger say the act authorizes law enforcement to trample individuals’ civil liberties by lowering the burden of proof previously needed for wire-taps, home, business or library record searches and other surveillance operations. Advocates of the act, such as U.S. Attorney for Connecticut Kevin O’Connor, say it contains ample court oversight provisions, that the Department of Justice needs increased power during the ongoing war against terrorism. “About 90 percent of the act, not even its harshest critics take issue with. The most significant thing is that the PATRIOT Act broke down the wall between intelligence agencies and law enforcement agencies,” ’qConnor said.

Seemingly refuting O’Connor’s claim that there is a sufficient amount of government oversight within the PATRIOT Act is the recently completed 9/11 Commission’s report on the intelligence failures that led up to the Sept. 11 attacks. While the report is mostly favorable of the act, on page 412 it states, “There is no office within government whose job it is to look across the government at actions we are taking to protect ourselves to ensure that liberty concerns are appropriately considered.”

LIVING IN A FOOL’S PARADISE

Oil down several days in a row, the stock markets in robust shape, interest rates low, the dividends keep lobbing in your bank account, the sun is shining and the living is easy. Hold that thought -- then consider a few less palatable ones. And hope that the US economy does not fall over -- if that happens, China will find its exports piling up in warehouses, and we will find that Chinese factories do not need so many Australian mineral exports. Warren Buffett thinks the US economy is heading for a fall. This month his Berkshire Hathaway investment group lifted its foreign currency holdings to $19 billion. Buffett is betting that the US dollar will plummet.

China is doing fine now, but this week the IMF warned that the Chinese economy was at risk from a potential banking crisis. Debt is everywhere. In the week to last Monday, the US public debt reached $7.34 trillion. Nearly $7 billion was added in one week, according to the Bureau of Public Debt. At another level, 22% of people in Shanghai, Beijing and Guangdong have credit cards. The global personal debt mountain just keeps growing. But underpinning this mountain are foundations of questionable strength.

At the end of 2003, according to the Bank of International Settlements, world derivative contracts totalled more than $234 trillion. Those derivatives represent many enormous bets and nothing more. Add to this the fact that currencies, commodities, debt and stocks are heavily influenced by more than 19,000 secretive hedge funds and you start to sniff a hint of trouble waiting to happen. Bill Gross, who heads Pimco, one of the world’s biggest fixed-income managers, warned this month that because of hedge funds “the world’s economy is unstably founded on a base of cheap money used as leverage to support asset prices of dubious value.” It will take one crisis -- the US dollar, inflation, foreigners selling US Treasuries, increasing budget deficits -- to expose the flaws of the leveraged economy, Gross says.

WHAT EXACTLY IS FREEDOM?

Everybody loves freedom. Everybody wants it. At least, that is a common assumption. But a lot of questions need to be answered. For example: What is freedom exactly, and can it be accurately defined? Is freedom the same as democracy? Is freedom the the right to do anything I want -- regardless of the impact on anyone else? Is there any received moral code that can answer such profound moral questions unambiguously?

In our technologically advanced, but socially backward societies, the answers are usually provided by religious or traditional belief systems. And as such, such issues often end up in a mess of contradictions. If you subscribe to Proudhon’s statement, “property is theft”, then you would obviously think your freedom entitled you to take other people’s money. If you are a welfare-statist, you probably do not consider a person to have the freedom to take drugs, not when the taxpayer has to pick up the tab. And if you are a fundamentalist Christian, it would be safe to say you would not agree that you have the freedom to kill someone, even if they asked you to.

The truth is, all existing systems of belief and morals are simply not up to the task of clearly defining personal freedom and its limits. That is why we have such a moral and legal mess where the issue of freedom is concerned. The question is always, “At what point does my freedom impinge on another person’s freedom -- and therefore nullify such freedom?” If this “point” could be nailed down, unequivocally, then there would be a rock-solid point of reference for dealing with such thorny issues. Fortunately, there IS such a “point of reference” -- property rights.

FEDS ADMITS ERRORS, ASK TO TOSS TERROR VERDICTS

Citing prosecutorial misconduct, the Justice Department asked a federal judge to throw out the convictions of three men charged with supporting terrorism and document fraud. The filing raises serious questions about the conduct of FBI agents and the former lead government prosecutor, Richard Convertino, who is now the subject of a criminal investigation for his conduct during the trial. “In its best light the record would show that the prosecution committed a pattern of mistakes and oversights that deprived the defendants of discoverable evidence ... and created a record of misleading inferences that such material did not exist,” the filing said. “The government believes that it should not prolong the resolution of this matter pursuing hearings it has no reasonable prospect of winning.”

The stunning decision to toss the terrorism charges is the latest in a string of embarrassments for the Justice Department and Bush administration, which had touted the first post-September 11 terror convictions as an important victory in the war on terrorism. In March, The Detroit News disclosed that prosecutors had repeatedly ignored rules intended to ensure a fair trial and withheld numerous documents from defense lawyers.

Two of the North African immigrants were convicted in June 2003 of providing material support or resources to terrorists following a raid of a Detroit apartment six days after the September 11 terrorist attacks. A third man was acquitted of terrorism charges, but was convicted of document fraud. A fourth man was acquitted of all charges. The government is not seeking to retry the two men convicted on terrorism charges, but will pursue charges over phony immigration documents for all three.

REPORT SAYS BLACK AND OTHER TOP EXECUTIVES AT HOLLINGER DODGED CANADIAN TAX

Top executives at the Hollinger newspaper empire, including Conrad Black and his wife, avoided paying millions of dollars in Canadian taxes by funnelling management fees through offshore tax havens, a special committee of the Hollinger board alleges. The scathing allegations in the report prepared by the Hollinger committee have attracted worldwide interest and are expected to catch the attention of Canadian tax officials. According to the Hollinger report, Barbados was the country of choice for the Blacks and their colleagues David Radler, Jack Boultbee and Peter Atkinson. The allegations are unproven.

The committee report alleges that the individuals evaded taxes by receiving part of the management fees they collected from Hollinger International Inc. through two shell companies in the Caribbean island. The shell companies had no employees and did nothing to earn the fees, the report asserts. Paying fees to them on the “pretense” that they performed services allowed the recipients to transform a portion of the fees that would have been taxable in Canada into tax-free dividends received in Barbados, the report alleges.

The committee has determined that the Blacks did nothing meaningful through these shell companies. “Thus, in the special committee’s view, the purported ‘management fees’ were fraudulent in nature,” the report alleges.

LASTEST OFFSHORE PILOT QUARTERLY IS OUT

Some readers have asked about Panama’s position with regard to the OECD’s -- so far floundering -- tax harmonization program. After all, it did sign a letter of commitment with the OECD, so is the situation not clear? Not really, but what is very clear is that the gap between commitment and compliance remains huge.

The problems encountered by the EU with its Savings Tax Directive gives a strong indication of the difficulties facing the OECD’s larger project. After all, the EU has 25 members plus some participating third countries to deal with whereas the OECD has, perhaps, around 60 countries that must reach a consensus. Four leading OECD members, Australia, Canada, the United States of America and the United Kingdom have created a joint tax avoidance task force (note “avoidance” now seems to have the same connotation as the word “evasion” -- how times have changed) which illustrates the wider problem.

Criticism has come fast and furious from tax professionals. The complaints include a failure to provide adequate information about the project, a lack of consultation with the tax industry, being hypocritical in their approach and having an attitude which will surely alienate tax industry professionals and lead to the quarrelsome quartet being seen as the enemy. Those who have followed the OECD’s own tax initiative will find those complaints to be all too familiar.

EU Commissioner for Taxation Frits Bolkestein, has declared that he was “delighted EU Member States have finally been able to agree after fifteen years of negotiations on the date of application of a Directive to ensure the effective taxation of savings income within the EU”. He sees it as a “remarkable achievement” whereas I see his optimism as being the only thing that is remarkable at this point in time.