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ANALYZE YOUR ASSETS, THEN DECIDE
The first step is to analyze each of your assets and categorize them according to both their volatility and their exposure. Volatility denotes the amount of legal risk associated with each asset. Exposure denotes how easily the asset can be attacked.
The volatility classification of every asset you own is either Dangerous or Safe. Dangerous assets include businesses, professional practices, rental houses, apartment buildings, office buildings, hotels, restaurants, nightclubs, or any other building where many people work or gather. They can also include high-ticket vehicles such as super-luxury automobiles, yachts and airplanes. Safe assets include bank and brokerage accounts, collectibles, and passive investments in publicly traded or offered stocks, bonds, etc.
The exposure classification of every asset you own is either Exposed or Covered. Exposed assets include businesses or professional practices, all U.S. real estate, bank or investment accounts in your own name or the name of your business, business accounts receivable, IRAs and many other retirement funds, collectibles, and virtually any other assets insured or registered in your name or that of your company. Covered assets include bank and investment accounts, and passive investments in publicly traded or offered stocks, bonds, etc. when these assets either are held outside the U.S. or in the name of a non-U.S. owner. Most exposed assets can be converted into covered assets by utilizing advanced equity stripping techniques.
Having done this, you will be in a position to decide how badly you need an asset protection structure. Once you have made that decision, you can decide which structure or structures are best for you. These can range from simple incorporation, to family limited partnerships, to more complex domestic trust and/or LLC structures, to extremely advanced international structures. My advice is to choose that structure that makes the most sense to you, and with which you are most comfortable, provided it is not some crackpot solution sold by a snake oil salesman based on a novel constitutional theory. Above all, avoid cheap quick fixes like Nevada Bearer Share Companies – they simply do not work and require you to commit perjury for them to afford much asset protection at all.Link here.
CAN YOU TRUST A TRUST?
The trust is the oldest of all of the entities currently used in international financial planning. Some say it dates back to Roman times, but it certainly dates back at least to the time of the Crusades, when it was used to protect the estate of the knight or Lord who went to fight in the holy land at a time when wives were considered legally incompetent to manage such an estate. In its simplest form a trust is a contract among three parties – the settlor or grantor, the trustee and one or more beneficiaries. Under common law the trust does not have a separate persona from the trustee; however, in some jurisdictions, especially the newer international financial centers (IFC) statutory provision has been made creating the trust as a separate persona. In a simple trust the settlor or grantor places assets in the trust fund in the name of or under the control of the trustee who is required to manage those assets on behalf of one or more named beneficiaries.
Modern trusts usually include another fiduciary known as a protector, who at the very least, has the power to remove the trustee and appoint a new one in his stead. In many jurisdictions trusts can also be established on behalf of purposes rather than stated beneficiaries, e.g., for the advancement of religion. Almost all modern trusts include strong asset protection provisions which would effectively prevent the creditors of a beneficiary from gaining access or enjoyment of the assets within the trust held on behalf of the beneficiary. Another layer of asset protection is provided by a flight clause, which allows or requires the trustee or protector to remove the situs of the trust to another jurisdiction. In many cases this movement can be done secretly, which by itself adds another element of asset protection.
The big problem with the trust, is that for it to be effective, the grantor must genuinely give up control of the assets to the trustee. This causes two problems: (1) is the trustee trustworthy and, (2) will the trust survive the scrutiny of the courts. The trustee should have enough money that he is not interested in stealing yours. As such, a big bank or trust Company is perfect. A second consideration is that the trustee, which is presumably a corporate trustee, has no offices, branches or subsidiaries in the home country of the settlor. This is necessary in order to protect the trustee from undue legal pressure being brought against it. For example, a foreign bank with U.S. offices could be pressured into compromising a trust under its trusteeship by huge daily fines levied against its U.S. subsidiary.
In order to survive the scrutiny of U.S. courts the establishment and independence of the trust in question must be believable! This means that the settlor must still have substantial assets under his control and outside the trust. No judge will find it easy to believe that someone has given away all their assets to a foreign trustee without retaining some control. However, if the trust sets aside a substantial portion of the settlor’s estate in order to preserve it for his or her heirs, such a trust becomes substantially more believable. Many thought that the famous Anderson case was the death knell of trusts – but the courage and perspicacity of the courts of the Cook Islands ultimately upheld their integrity even in the face of a massive onslaught by the U.S. government.
In my opinion, the biggest downside to foreign asset protection trusts for U.S. persons is that they are highly suspect, and their reporting requirements exacting and extensive. In some cases, the creation of such a trust can even require the payment of gift tax. Nevertheless, a foreign trust established by a well qualified professional with in-depth understanding of both trust law and U.S. tax law can be a powerful asset protection and estate planning tool. But, under no circumstances is it a tool for tax reduction! If anyone tells you that it is, run from this fast as you can. If they will lie to you they will steal your money too!Link here.
MIRROR, MIRROR ON THE WALL, WHO IS THE BIGGEST TAX HAVEN OF THEM ALL?
The Cayman Islands? Switzerland? The Channel Islands? “No,” “Nein,” and “Not bloody likely,” said the mirror. “It is me of course,” barked the U.S.! And the mirror said, “YES! But only for non-U.S. Persons!”
Imagine an offshore jurisdiction where a person can form a tax-free company over the phone in minutes using a credit card. Imagine in that same country that non-residents could receive bank and insurance company interest tax free. Imagine in that country that non-residents could buy and sell securities with tax free profits? How could such a wild place be allowed to exist these days?
It gets more egregious. Tax-free companies who have no U.S. owners can conduct business everywhere else in the world tax-free. They can even have a U.S. corporate tax ID number, and they do not have to ever identify their beneficial owners. Such a place ought to be sanctioned by the OECD and black listed for “unfair tax competition”!
But that will not happen because that place is the United States of America – the world’s largest tax haven! Delaware and Nevada alone have more companies organized there than all the top foreign tax havens combined. This is great news if you are a non-U.S. citizen who wants to take advantage of such enlightened laws, but less great when you are in a tiny international financial center trying to better the lives of the people in your small nation and the U.S. attacks you for doing exactly what it does in its own offshore sector!Link here.
U.S. EXPATS LOOK TO HOME AS TAX CHANGES BITE
A substantial number of U.S. expats living in Singapore are considering returning home as a result of changes to income tax laws passed by the U.S. Congress earlier this year, according to a survey conducted by the American Chamber of Commerce in Singapore. The survey found that almost 40% were thinking about returning home to avoid being hit by increased tax. Half of the sample also believed that the tax changes would prompt employers to hire less U.S. workers abroad.
The Tax Increase Prevention and Reconciliation Act (TIPRA), signed by President Bush in May 2006 increased the amount that can be earned free from U.S. taxes to $82,400 from the previous level of $80,000. However, income earned by expats above this threshold is now typically subject to higher tax rates. Furthermore, high housing costs, much of which previously could be excluded from the computation of U.S. tax, will now be treated as a taxable benefit and taxed often at 30% to 35%, making many individuals worse off, or leaving the employer to pick up the extra bill. The legislation is retroactive to January 1, 2006.
“These tax changes are disastrous for Americans abroad and for American business. No other developed country imposes such onerous taxation on the earnings of its workers abroad and our members are seriously concerned about the financial impact on them and whether it is worth remaining overseas selling American goods and services,” stated AmCham Executive Director, Nicholas de Boursac. “For many the true impact of the tax changes has not yet even begun to sink in. Some will only realize the full impact as 2006 personal tax returns are completed in March and April 2007. Many companies possibly do not yet realize the impact either as over 90% of our surveyed members indicated that their companies had not yet issued any guidance to them on the tax changes.”
AmCham says that the financial impact will be felt most by those American expatriates who are not tax-equalized and whose employers do not absorb the additional tax impost. 66% of those surveyed are not tax-equalized, and of this group, 30% expect a tax increase of between $5-15,000, while a third expect increases of more than $15,000. AmCham warned that even those U.S. expats who are not directly financially impacted by the changes will still be affected because companies will hire less expensive employees. “Basically, employers will hire Australians, Canadians or Europeans who do not cost as much as Americans,” noted de Boursac.Link here.
WHY CHOOSE ARGENTINA?
At the moment Argentina is probably not on the radar of most second home seekers, but from what I have seen in the last two years of selling property there, this is beginning to change. When you compare it to a country like Spain 40 yeas ago, when Spain really was a bargain, it really took a while for attitudes to change – that it really was a legitimate place to invest in. Argentina is in this situation now. Slowly but surely it is being discovered by those seeking to buy second home, have a change of life style or simple as a serious country to invest in.
Let us start with probably the only negative. Argentina is a long way from Europe (it is a long way from most places). However, for those of us here, that distance is a big positive. Particularly if you are looking to get away from some of the holiday ghetto lands of Spain, Cyprus, and the like. You will not find any “Belly Busters” restaurants selling “full English breakfast” here, just the odd, vaguely-Irish Pub in the center of Buenos Aires. Move out to the countryside and it is tradition all the way, with friendly people, clear fresh air and some of the biggest blues skies in the world. Argentina is cheap to buy land or holiday homes in and that is a major attraction for those of us who have already invested. With most of properties being valued in US$ and the fact that most major currencies are strong against the US$ (particularly the pound) your (non-US$) money goes a long way there. For instance, I am buying a traditional Estancia (Estancias are the stately homes of Argentina) with a beautiful 8-bedroom house built in 1870, two further small houses, a swimming pool, outbuildings and spectacular park, and 120 acres of very fertile land for $360,000, and the house comes fully furnished!
When I came to Argentina in 2003 as a tourist, other tourists and those who were considering buying a home here were hard to find. Prior to the political turmoil at the end of 2001, and the financial collapse in early 2002, it was just too expensive to come here to visit, let buy property. Immediately after the crisis the country was getting too much bad publicity with daily mass protests, and unemployment running at around 50% (now down to less than 15% and improving daily). Three years later, stability has returned, the country’s financial affairs seem to be in order, and people are visiting. And many of those are deciding to buy a holiday home here, and even deciding to live there permanently.
The reasons why they are coming vary. Some cannot resist a bargain, and there is no doubt that land and property is cheap. Others say it is because it is a country where family values and good manners still matter. In Argentina they find this in abundance. Others come because they love the vastness and diversity of Argentina and its wide-open space where they can ski, swim in the sea, watch whales and seal colonies, go big game fishing go to see top class theatre and opera and ballet and eat in top restaurants at prices that have not existed in Europe for decades. Argentina is a country with room to breathe in. Argentina is the size of India, but with a population of only 38 million people. Others come because here they can live their dream. The can afford to own a beautiful property and live a lifestyle that they could never do in their home country.
Argentina has something for everyone. Some are lured by the thrill of dancing the tango and living in the center of one of the most spectacular cities in the world. Real estate is about a tenth the price of London and Paris. Others are more interested in the wine growing area of Mendoza with its proximity to the major ski areas of the Andes. You can find an up-an–running finca, for around $100,000, and make a living selling grapes to the local wineries. Some are attracted to the wide open spaces of the Pampa, which wraps around BA and stretches for 300-400 kilometers in all directions. It is an area of peace and tranquillity, where you will find the grain belts and cattle ranches that produce enough food to sustain the country 10 times over. Here you find the beautiful houses with land to buy where you can create your own world. And of course we cannot forget Patagonia – the lands to the south of BA with their mountains, lakes, glaciers and forests. It is probably the last place on earth where you can buy your dream, if this is the type of landscape you love.
With a strong economy (currently growing at 8-9% per annum) and a strong president the future looks bright for Argentina. Many foreign investors are now active in the property market here and the number is expected to grow. Further growth looks like a forgone conclusion. Most major airlines fly here so accessibility is no problem.Link here.
NO REFUGE IN THE HERD
My 4-year-old daughter heard the Rolling Stones song “You Can’t Always Get What You Want,” to which she added, “This song is a truth I already know.” Yes, we all learn pretty fast that we can’t always get what we want. And most of the time, bargains are hard to find. Like now. In times like this, I like to look back.
Investors, as with practitioners of other trades, are guided by precedent. And so I spend a good bit of time poring over old books and looking over nuggets of market history, like a geologist picking up bits of rock. In those layers of sediment lie answers. In this history, you will find ballast for those times when the rest of the market seems to go nuts. The historical record reminds us that common sense ultimately prevails. Herds, as a rule, make for poor investors.
Take the stock market of the 1960s, a maddening maelstrom of a market. All in all, it was not so different from the raging tech bubble of the late 1990s. National Student Marketing was the poster child of the era. Here was a company designed to capture the “youth market”. The company bought everything and anything that might aid it in this quest. At its great height, it was selling for 150 times earnings. Yet look who owned National Student Marketing. Bankers Trust and Morgan Guaranty, as well as General Electric’s pension fund. Also the endowments at Harvard, Cornell and the University of Chicago. These are the people to whom the uninitiated turn for trusted advice. In 1970, National Student Marketing went from $36 to $1. There were many others just like it.
In 1970 David Babson, our protagonist, was speaking at a conference. Babson, then turning 60, ran the 6th-biggest investment counseling business in the country at the time. Babson started his firm in 1940. He was bullish then. Babson recommended buying growth stocks, a move that made him a radical in those days when the memories of the Great Depression were still fresh. He bought all the right stocks, it seems. By the 1960s, though, Babson was no longer bullish. The feisty New Englander was blunt and outspoken in chastising his peers for behaving like tape-watching speculators. He was a trenchant critic of the market at the time, which was a swirling stew of gimmicky malfeasance and excessive speculation. He called the stock market a “national craps game”. As in the 1940s, he found himself out of step again in the 1960s.
When Babson took the stage at the conference, he was asked if the blame should go to the professionals for the ‘60s bubble. Babson said yes, unequivocally, in so many words. “What should be done about this?” Smith asked. And that is when Babson, peering over his glasses, gazing down at the audience, delivered his knockout blow: “Some of you should leave this business.” Then Babson practically named names and launched into an accusatory tongue-lashing, lambasting the folly and incompetence of his peers. The audience sat in stunned silence.
Babson could say what he did because he did not own any of the nonsense stocks. He also solidified his status as an investment folk hero for his courage and independence. Not to mention the gratitude of his clients, who escaped the 1960s with their money still intact.
The current surging market surely will provide sins for future confessionals. What investment adviser could possibly justify putting his clients’ money into something as unsound as Research In Motion? The maker of the BlackBerry device posts slowing growth rates, faces numerous competitors and trades for more than 10 times sales and 60 times trailing earnings. Research in Motion is of a type that is fairly common in the thin air of speculation these days. Look at Google, at 16 times sales and 62 times trailing earnings, or the NYSE, at 10 times sales and 119 times trailing earnings. Yet these stocks find votaries among the pros. Look at who owns them. All the big houses – Fidelity, Barclays, Wellington, banks and trusts of various types. What are their investors paying them for?
So far, these stocks keep going up. One day the caffeine will wear off, and with it the temporary illusion that these stocks are worth these prices. It seems only a matter of time. Markets, though, are notoriously hard to read. People see what they want to see. Bulls will find reasons why these stocks will go higher. Bears will find reasons for them to go lower. The seldom-admitted truth is that most of the time, the market exists in some indeterminate state, like the muddled cherry of a whisky sour.
I think the main lesson from Babson is that you cannot trust consensus. You cannot rely on the “establishment”. You cannot find refuge in the herd. And you must resist the urge to join the crowd. “Passion of the moment,” as writer J. P. Donleavy observed, “a disaster over the years.” Babson’s firm, by the way, still lives on. Recently, it published a letter describing five essential truths the firm follows, laid out by its founder years ago. They are:
Not a bad set of self-explanatory truths. They are not sexy, but the best investment advice seldom is. Investors would do well to remember them – and remember Babson – when considering whether or not they should plunge in on the hot stocks of the day.Link here (scroll down to piece by Chris Mayer).
HOW I WOULD HAVE BLOWN A HOUSING BUBBLE ... IF I HAD DONE IT
Or: A former Fed Chairman’s confession.
People are always asking me about bubbles. Like do I believe in bubbles? And how do you blow them? Well, I am not sure I have all the answers on bubbles. I am just a former central banker who spending his twilight years playing bridge and looking at the correlation coefficients of economic variables. Typical retirement stuff. So when it comes to bubbles, I don’t know. A few years ago Beannie Babies got a little out of hand, but you know, the market is the market and who is to say what’s a fair price?
Back in the day, some people thought I had the power to make things happen, you know, like I was Bono or something. If you want to know the truth, I spent a lot of time sitting around a big table shuffling boring academic papers and wondering why the hell we could not get some decent coffee. But if I were to think about it, I guess I could come up with some ideas about how to make a bubble. ...Link here.
TAX TRAPS AWAIT UNWARY U.S. INVESTORS OR COMPANIES WHO VENTURE OFFSHORE
There are a number of good reasons for U.S. investors or companies to venture offshore. But the U.S. tax rules relating to various offshore transactions are ambiguous, punitive and vague beyond belief. Penalties for a mere failure to file a form on or before the due date are typically $10,000 for each late form. And these penalties can be imposed by the IRS regardless of whether any profit has been realized and regardless of whether all the offshore transactions have been reported on a U.S. income tax return. More information about the potential penalties that can be imposed may be found here.
For example, say a U.S. corporation owns 100% of a small foreign corporation and requests an automatic extension of time to file its corporate Form 1120 until September 15th, which also extends the time required to file the Form 5471 for the foreign subsidiary. Due to some unanticipated computer problems, the company files its Form 1120 a few days late. Since the company has a loss, there is no penalty for a late filing of the corporate income tax form. However, there is a potential penalty of $10,000 for a late filing of the Form 5471 for the foreign subsidiary – even though that subsidiary also has no profit. Taxpayers can request a waiver of such penalties for reasonable cause, but the waiver is entirely at the discretion of the IRS. A failure to file a timely return for a foreign trust can cost the taxpayer 35% of the assets in the trust. [Ed: Not all foreign trusts incur filing requirements. See Appendix 1 of Introduction to International Asset Protection.]
Problems associated with foreign mutual funds, known in the tax law as passive foreign investment companies (PFIC) can lead to obscene results, wherein the tax and penalties can exceed the total income and/or gains from the PFIC. The reason is because gains from such funds are allocated to all of the years the fund has been owned. Then a tax is computed for each year based on the highest rate in the tax tables – without regard to the marginal tax bracket of the taxpayer. To add insult to injury, a non-deductible interest charge is added to the amount of tax and compounded on a daily basis. Because gains can not be reduced by losses, the tax and interest can easily exceed the total net gain from the investment. For more information on the U.S. tax treatment of U.S. investors in foreign mutual funds, see this page.
The U.S. tax system imposes a tax on the worldwide income of any U.S. citizen, permanent resident or any entity formed in the U.S. The U.S. system also taxes the U.S. owners of any foreign entities such as foreign trusts, foreign corporations, and various foreign investments. When income is earned or realized in a foreign country that imposes an income tax, the U.S. tax system permits taxpayers to claim a credit against their U.S. tax for the taxes paid to the foreign country. But there are numerous restrictions and limitations on the foreign tax credit that are being changed nearly every year by the tax writing committees in the Congress. An example of a limitation is that a U.S. corporation can claim a credit for foreign taxes paid by a foreign subsidiary. But if a foreign corporation is owned by an individual (or a partnership), the credit is not permitted. Another example is that if a value added tax is imposed on the profits earned in a foreign country, the VAT is not allowed as a credit against the U.S. taxes on the same income. Why? Because the VAT is not deemed to be an income tax.Link here.
AVOIDING FORCED HEIRSHIP IN CIVIL LAW COUNTRIES USING TRUSTS AND LLC’S
Forced heirship rules in many civil law countries are an ongoing source of family problems which have frustrated proper estate planning and divided families into warring camps for generations. While there are a number of very good solutions for this problem, one of the most popular is the use of a foreign trust structure to hold the assets indefinitely without ever triggering heirship rules since a trust can be perpetual.
A trust is a common law vehicle that was first used during the Crusades. Though it has many variations of form and exists in many jurisdictions, trust law is universally considered to be well-settled – stable and predictable. Were this the only consideration, a trust could be created in any one of dozens of jurisdictions. However, because of increasing concerns with issue of money-laundering, tax-evasion and terrorism, the choice of a jurisdiction becomes increasingly important. As such, creating such a structure in a jurisdiction that is neither generally considered to be tax haven nor on international black lists has its virtues.
With these concerns in mind, a New Zealand Trust structure which owns subsidiary Delaware-U.S. limited liability companies, is such a solution. Neither the U.S. nor New Zealand are considered to be tax-havens, though they both offer considerable tax and asset protection advantages for those who are not citizens or residents. Properly organized, a NZ Trust is entirely tax-free for non-residents of New Zealand. Furthermore, a tax-free private NZ trustee company can be established to operate the NZ Trust.
However, since civil law jurisdictions generally do not recognize trusts, the NZ Trust cannot actually own the assets. Instead a different vehicle, wholly-owned by the NZ Trust, will legally hold title the assets. The perfect vehicle for this is the Delaware LLC. A properly set up Delaware LLC which does no U.S.-based business will not only be tax-free, but will not be required to even file a U.S. tax return, even if it has a tax ID number. Such a structure might look like this.
Of course, every detail must be properly handled in order to ensure that the entire structure functions as the client intends, without triggering any adverse tax or heirship issues.Link here.
THE LLC CHAMELEON
The IRS classifies every non-trust company as either a partnership, corporation, or disregarded entity. This applies to both domestic U.S. LLCs and foreign LLCs. While there are default rules for the classification of both foreign and domestic LLCs, one has the option in both cases of selecting a different classification simply by checking the box on IRS form 8832.
Under the default rules, a domestic LLC is considered a partnership if it has two or more members and a disregarded entity if it only has one member. Under those same rules a foreign LLC is considered (1) a partnership if it has two or more members and at least one of the members does not have limited liability, (2) a corporation (in tax law language, it is actually called an “association”) if it has two or more members all of which have limited liability, and (3) a disregarded entity if it has a single member who does not have limited liability. Again, that can be changed by checking the box on the form 8832. Thus, any LLC – foreign or domestic – can choose to be considered either a corporation or partnership for tax purposes. And if it only has one member, even if that member is another legal entity, it can choose to be considered a disregarded entity for tax purposes.
One could have a Delaware LLC owned by a foreign company that could be a disregarded entity for U.S. tax purposes. Such an LLC could still have a U.S. tax number, bank accounts, and even brokerage accounts. If it were indeed owned by a foreign company, under the rules governing the use of IRS form W-8 BEN, the beneficial owner of the LLC would be the foreign company. So long as that Delaware LLC had no U.S. income except bank interest and capital gains, it would not be required to file any U.S. tax return nor be liable for US taxes. Indeed, it could operate businesses throughout the world, and so long as they were not effectively connected with the U.S. there would be no tax or tax return due.
The LLC act of the Republic of the Marshall Islands is almost word for word copied from the Delaware act, which means the two can be made to fit perfectly together. In this example, the U.S. LLC and the Marshall Islands LLC could mirror each other in every respect except that the U.S. LLC could be treated as a disregarded entity for U.S. tax purposes, while the Marshall Islands LLC could be treated as a foreign corporation for U.S. tax purposes. As such, the Marshall Islands LLC would be the beneficial owner of the U.S. LLC. Which would legally shield the identities of the owner of the Marshall Islands LLC.
One could go further and set up a Delaware series LLC owned a by a mirror image Marshall Islands series LLC, in which case the Marshall Islands LLC would own a the Delaware LLC, and each series within the Marshall Islands LLC would own the complementary series within the Delaware LLC. This provides major asset protection alongside tax simplification, or in the case of foreign persons, major tax efficiency.Link here.
THE FOREIGN DEFERRED PRIVATE ANNUITY
One of the most powerfulk estate planning tools available to the modern international financial planning practitioner is the FDPA. An FDPA is a contract between an individual (the “Annuitant”) and a foreign entity that is neither an insurance company nor in the business of selling annuities (the “Company”). The Annuitant transfers cash or other property to the Company in exchange for the Company’s contractual promise to make payments to the Annuitant for a specific number of years, usually for the remainder of the Annuitant’s life.
Contributed assets may be “Appreciated Property” and the recognition of any taxable gain (capital gains or ordinary income) inherent in the asset may be deferred even though the assets may be “cashed in” and the funds invested elsewhere. The annuity payments may be deferred until the Annuitant turns 70. So that the Annuitant can defer paying taxes on the exchange for many years, and then pay them on a pro-rata basis as annuity payments are received over the course of many more years.
The foreign company which issued the FDPA may invest anywhere in the world, including the U.S., and has investment advantages that are not offered to U.S. investors. For example, there are various tax provisions only available to foreign persons that the U.S. has enacted to encourage investment in the U.S. and the use of U.S. banks and savings institutions. As a result, the FDPA Company may invest tax-free in U.S. stocks and financial accounts. The Company may sell appreciated stocks utilizing an FDPA with no tax recognition and reinvest the funds back in the U.S. on a private and tax-free basis. The FDPA offers a wide range of benefits that no other single business and estate planning device can match.
Similar to the taxation of installment sales, an FDPA permits the Annuitant to defer gain – and taxes on gains – on the sale of any type of property by spreading it ratably over the life expectancy of the Annuitant and, in the case of an FDPA subject to a term, over a stated term rather than reporting the entire amount of the gain in the year of sale. However, the Tax Reform Act of 1986 made installment sales much more difficult, and in many cases impossible. For example, installment sales are not allowed for certain assets, such as publicly traded stock. In contrast, an FFDPA permits the Annuitant to receive a tax deferral on any appreciated asset. Appreciated assets may be transferred to the Annuity Company and converted into investment funds without payment of any income tax on capital gains or ordinary income.
An FDPA also allows the removal of the transferred property from the Annuitant’s gross estate without triggering any U.S. gift tax. Upon the death of the Annuitant, the transferred property as well as any future appreciation in such property will not be included in the decedent’s gross estate. If the annuity is an FDPA based on a single life, as opposed to two lives, the annuity payments are also excluded from the Annuitant’s gross estate for estate tax purposes. With appropriate estate planning, appreciated foreign investments may be passed to heirs without estate tax consequences.
Furthermore, since property that is properly transferred in an FDPA transaction is no longer considered owned by the Annuitant, the transferred property is beyond the reach of creditors and lawsuit or bankruptcy judgments. As long as the present value of the annuity is equal to the fair market value of the property transferred for the annuity, the transfer will not be overturned under the fraudulent conveyance laws. An FDPA holds property away from U.S. jurisdiction, thus providing asset protection against future creditors, ex-spouses, and governments. The FDPA can usually be used to allow a client to exchange these assets while avoiding disqualification for federal or state assistance for medical or institutional costs. Generally, the transferred assets will not be included in the annuitant’s estate for Medicare purposes.
Since property in an FDPA can be used to earn greater investment returns. There is no reporting of the interim growth or U.S. tax payable at any time on FDPA investments. Since taxes may be paid at some time in the future, when and if the Annuity is activated and funds flow back to the U.S., this investing is best called tax-advantaged. Well planned, investments may result in tax-free returns. Foreign investments can grow tax-free and in privacy. An FDPA may invest anywhere in the world without the oversight of the U.S. Government. In contrast, U.S. Persons are not allowed to invest internationally unless the investment has been approved by the SEC. A high percentage of the most successful mutual fund and bank investments are outside North America and not available to U.S. Persons.
An FDPA can be structured to operate an international business venture, with indefinite life, and yet the business profits are not taxed in the U.S. unless they are “effectively connected” to business activity there. An FDPA can generate a fixed income for life while still retaining control of the asset or business within the family. By transferring property to a family member utilizing an FDPA, the Annuitant is able to shift management of the property to descendants rather than waiting to bequeath it subject to the possible burden of estate taxes. The annuity could be be structured so that the fixed payments provide a minimum threshold income while allowing for reinvested profits from the investments to increase the annuity’s value and payments.
The FDPA is NOT a loophole! The IRS originally determined that certain transactions would be treated as private annuities in 1969. Since that time, while the IRS has attempted to reduce the opportunities to abuse private annuities it has never suggested eliminating private annuities as a whole. U.S. tax law changes are very rarely made retroactive, so any future changes will likely not affect pre-existing FDPAs. Furthermore, there is nothing in the transaction that should cause an audit flag, but if there is an audit, it should be remembered that the transaction is 100% legal. Lastly, unlike the 401(k) program there are no limitations on the amount of assets transferred to the FDPA Company in exchange for the Annuity without causing a taxable event. This makes the FDPA an excellent choice for establishing what can be considered and treated as a private pension plan or retirement account.
If the FDPA is issued in conjunction with a legally non-controlled foreign company structure, the FDPA’s benefits noted heretofore are additionally enhanced, because the Annuitant will participate in the management of the foreign company structure that acquires the FDPA and owns the assets. The Annuitant will then be able to pass his ownership interest and management rights in that structure to his heirs on a virtually tax-free basis. The heirs can choose to continue the structure and enjoy the asset protection, tax reduction, estate planning and investment benefits it provides, OR, after waiting one year, can liquidate it and repatriate the assets as long-term capital gains income.
Note that since the FDPA is not secured, you could lose everything invested in it if you deal with the wrong people. The usual caveats apply, and then some.Link here.
GAZA STRIPPED: WHATEVER HAPPENED TO ARAFAT’S BILLIONS?
November 11 marked two years since the death of PLO chief Yasir Arafat. His memory is not widely mourned. On a good day in Gaza City, only 40% of the last night’s sewage gets dumped into public beaches along the Mediterranean coast, where gaunt Palestinian kids build sand castles out of thick brown sludge. One and a half million Gazans, mostly children, live overwhelmingly in poverty amid a gutted infrastructure and a dysfunctional democracy. Meanwhile, the First Lady of Palestine, Yasir Arafat’s widow Suha, has been living large in Paris, among other places, at the palatial Hotel Le Bristol. She and her baby daughter left Gaza for France in 2000, during the second intifada and Israel’s reoccupation of Palestinian lands – and reportedly occupied an entire floor of the 5-star hotel, at approximately $16,000 per night.
Israeli and American intelligence officials say Suha Arafat’s Paris hotel bill would be little more than chump change for the glitzy heiress, whose late husband might just have been the most flagrant embezzler of public funds since Louis XVI. During Arafat’s rule, the U.S., World Bank, E.U., and Arab governments poured $7 billion into the Palestinian Authority to try and help forge a viable Arab-Israeli peace. As much as half that sum is reported to have gone AWOL, with only a small fraction recovered to date. And Suha has proved to be only one of several big-time beneficiaries. “There was never a complete public reckoning of corruption during the Arafat years,” says Ramallah-based Bir Zeit University professor Mudar Kassis, who teaches philosophy and heads the university’s institute of law.
Two years after Arafat’s funeral, an international scavenger hunt continues for the revolutionary leader’s far-flung riches. A motley assortment of investigators ranging from Israel’s security establishment to the Palestinian Islamist group Hamas, which now rules in Ramallah, maintain an ongoing interest in every lost stash. “The only man who knows the whole story is dead,” says a senior Israeli military intelligence official who agreed to answer questions on condition of anonymity. “But the deeper you go into it, the more it stinks.”
Arafat’s money trail leads far beyond the smelly sands of Gaza Beach, to a rainbow coalition of shady figures – Jewish, Christian, and Muslim – and as far west as New York’s Greenwich Village, where the militant chieftain once secretly bought a stake in a trendy bowling alley. You might say the closest the world ever came, in fact, to harmony and peace between all three monotheistic faiths was in the sleazy international campaign to siphon off Palestinian grant aid. It may be too early still to tell the full Where’s Waldo-like tale of where the cash went. But several all-stars of Arafat’s money laundering network have come to light – and the legacy of their greed still has grave repercussions across the Middle East.Link here.
AMERICA’S INJUSTICE SYSTEM IS CRIMINAL
The Christmas season is a time to remember the unfortunate. Among the most unfortunate people are those who have been wrongly convicted and imprisoned. The U.S. has a large number of wrongfully convicted. There are many reasons for this. One is that the U.S. has the largest percentage of its citizens imprisoned of all countries in the world, including China. One of every 32 U.S. adults is behind bars, on probation or on parole. The U.S. has 5% of the world’s population and 25% of the world’s prisoners. The American incarceration rate is seven times higher than that of European countries. Either America is the land of criminals, or something is seriously wrong with the criminal justice (sic) system in “the land of the free.” Given a wrongful conviction rate, the larger the percentage of citizens in jails, the greater the number of wrongfully convicted.
In the U.S. the wrongful conviction rate is extremely high. One reason is that hardly any of the convicted have had a jury trial. No peers have heard the evidence against them and found them guilty. In the U.S. criminal justice (sic) system, more than 95% of all felony cases are settled with a plea bargain. Before jumping to the conclusion that an innocent person would not admit guilt, be aware of how the process works. Any defendant who stands trial faces more severe penalties if found guilty than if he agrees to a plea bargain. Prosecutors do not like trials because they are time consuming and a lot of work. To discourage trials, prosecutors offer defendants reduced charges and lighter sentences than would result from a jury conviction. In the event a defendant insists upon his innocence, prosecutors pile on charges until the defendant’s lawyer and family convince the defendant that a jury is likely to give the prosecutor a conviction on at least one of the many charges and that the penalty will be greater than a negotiated plea.
The criminal justice (sic) system today consists of a process whereby a defendant is coerced into admitting to a crime in order to escape more severe punishment for maintaining his innocence. Many of the crimes for which people are imprisoned never occurred. They are made up crimes created by the process of negotiation to close a case. This takes most of the work out of the system and, thereby, suits police, prosecutors, and judges to a tee. Police do not have to be careful about evidence, because they know that no more than one case out of 20 will ever be tested in the courtroom. By coercing pleas, prosecutors can prosecute every case and boast of extremely high conviction rates. When prosecutors had to decide which cases to prosecute, they had to examine the evidence and to investigate the defendant’s side of the story. No more. The evidence seldom comes into play. In place of a determination of innocence or guilt, prosecutors negotiate with lawyers the crimes to which a defendant will enter a plea.
Prosecutors have lost sight of innocence and guilt. What we have today is a conveyor belt that convicts almost everyone who is charged. Every defense attorney knows that today prosecutors can purchase testimony against a defendant by paying a “witness” with money, dropped charges, or reduced time to testify against the defendant. Many prosecutors become highly annoyed at any disruption of the plea bargain conviction process. A defendant that incurs the prosecutor’s ire is certain to be framed on far more serious charges than a negotiated plea.
Going to trial is no guarantee that an innocent person will be acquitted. Prosecutors routinely withhold exculpatory evidence and suborn perjury. Generally, jurors trust prosecutors and are unaware of their inventory of dirty tricks. Few jurors can tell the difference between bogus evidence and real evidence. Prosecutors who are meticulous about their cases and fair to defendants – and there are still a few – show poor results compared to the high convictions attained by prosecutors who run plea bargain mills and frame-up factories. Today’s criminal justice (sic) system is results orientated, not justice orientated. In the past judges could give light sentences to people they believed had been wrongfully convicted. But “law and order conservatives” have taken sentencing discretion away from judges. Today prosecutors hold all the cards.
Prosecutors are like President Bush. They absolutely refuse to admit that they ever make a mistake and have to be forced to disgorge their innocent victims. Nothing makes a prosecutor more angry than to have to give back a wrongfully convicted person’s life. Lt. William Strong and Christophe Gaynor are two of the hundreds of thousands of wrongfully convicted Americans whose lives have been ruined by an irresponsible and corrupt criminal justice (sic) system. Virginia’s governor could pardon Strong and Gaynor. But feminists and “child advocates” would scream and yell, as would prosecutors and “law and order conservatives”. Nothing matters to these groups but their own single-issue, and justice is not part of it. In America justice cannot be done unless a governor is prepared to sacrifice his own political career in the interest of justice. What kind of people are we when we exercise no oversight over a criminal justice (sic) system that destroys the lives of innocent people with lies?Link here.
PRAGUE: EXPATRIATION CHEAP AND FREE
Let’s face it. In the opinions of a great many people, there is simply no convincing reason to stay in the United States right now. Based upon a variety of motives, political objections, social dysfunction, or simple curiosity, a great many Americans these days are looking to make the Big Move. A significant portion of these are folks who would love to leave, and who would be well-suited to the expat lifestyle, but who do not have the money, education, experience, or connections to do it in the usual ways. Things like second citizenships and holidays in Majorca seem beyond their abilities. Even getting the money together for a plane ticket can be daunting.
This article is for those folks. This is meant to serve as a general-purpose guide to getting out of the U.S. for less than ten thousand dollars. I have done it on $5,000, but it was sometimes uncomfortable to do so. A total investment of $10,000 would be able to provide quite a nice living during the crucial first 90 days in-country. This article is about how to get things done as cheaply as possible, as easily as possible, and as freely as possible. It is a general overview which may be further developed in the future. It is not a one-size-fits-all method of expatriating, and for some people this may be a good working description of Hell. However, for those who do not mind doing things in a slightly unconventional way, and who are willing to put up with the trouble, this is a workable method. I should probably warn you that this approach is not for the faint of heart. But it works, and it is also a LOT of fun.
In a moment, you are either going to love me or hate me. You are going to Prague. Right now, about half of you are saying to yourself “He’s got to be kidding. I can hit Prague for five grand?!” The other half are saying “Oh no, not Prague ... lousy tourists, drunken football hooligans, legions of prostitutes and corrupt officials ...” Well, I am afraid you are both right. However, the information with which I am about to provide you will allow you to experience the good parts of living in Prague, which are considerable and varied, while largely negating the less positive points.
The first thing that makes Prague so attractive to the on-the-cheap ex-pat is cost. The cost of living in Prague is much lower than in much of Western Europe, but it still has sufficient modern conveniences and services. Prague is also much cheaper to get to than most of the other super-cheap ex-pat destinations. It is important to note, however, that “cheap” does not mean “dirt cheap”. Certain things are going to be more expensive, as a percentage of income, than you are used to. But the savings in other areas, notably transportation and food, will more than make up for it. Secondly, work in Prague is easy to get. Especially the kind of work you will be getting. You are going to be an English teacher. Yes, I know it is a cliché ... but it works, it pays the bills, and employment is virtually guaranteed.
For the on-the-cheap ex-pat, Prague fits the bill. It is easy to get to, cheap to live in, easy to find a job in, and most importantly, it is very easy to live here anonymous and free, if you play your cards right.Link here.
E-GOLD SURVEILS CUSTOMERS FOR CRIMINAL ACTIVITY, HELPS FEDS
The founder of e-gold has grown tired of the government characterizing his business as a haven for money launderers, terrorists, child pornographers and credit card thieves. So a year after the Department of Justice raided his offices, Douglas Jackson, president of Gold and Silver Reserve (GSR), which operates e-gold, has been wading deep into his customer transaction logs to identify and fight back against people who misuse his system. In the last month, he has blocked about 2,000 accounts from his system, and voluntarily turned over detailed account and transaction histories to federal law enforcement.
In the process, Jackson says he has exposed an illicit and previously invisible economic underground. “It’s like discovering an undisturbed tomb in Egypt where you’ve got this archaeological thing,” Jackson says about the wealth of data he has uncovered. “There will never be another crack like this one where all of these people have left their footprints with memos that sometimes give us clues as to what they’re doing.”
E-gold is a privately issued digital currency backed by real gold and silver stored in banks in Europe and Dubai. Jackson says about 1,000 new e-gold accounts are opened daily, and the system processes between 50,000 and 100,000 transactions a day. With a value independent of any national legal tender, the electronic cash has cultivated a libertarian image over the years, while drawing the ire of law enforcement agencies who frequently condemn it publicly as an anonymous, untraceable criminal haven, inaccessible to police scrutiny.
Jackson says the image is false. Although a user can open an account using a fraudulent name and a proxy server that shields his or her IP address, a permanent record of every transaction remains in the e-gold system, which can help law enforcement agencies track criminals. Jackson says he first became aware that credit card thieves were laundering money through e-gold from 2004 news stories about a Secret Service bust of Shadowcrew, a website where carders congregated. He contacted the Secret Service and pleaded with them to work with him to catch the carders, but the agency inexplicably rebuffed him.
Last December, the Department of Justice raided the Melbourne, Florida, office of GSR, and seized more than 100 boxes of paper records in a move dubbed Operation Goldwire. “They basically raped our computers and also took us offline for 36 hours, took all the paper out of our office,” Jackson says. The government also froze GSR’s U.S. bank account. The company survived, Jackson says, only because its euro, British pound and yen accounts are maintained outside the U.S. The criminal affidavit, filed under seal, accused Gold and Silver of aiding terrorists and child pornographers. But prosecutors later dropped the criminal claim, replacing it with a civil complaint charging GSR with operating as an unlicensed money-transmitting business. Jackson’s lawyers say the charge is bogus because Gold and Silver is not a money transmitter, since GSR does not accept cash from customers, only wire transfers. That case is on hold until April.
Rather than attack him, the DoJ and Secret Service should have been working with him, says Jackson. Because all the while they were trying to build a case against e-gold, he was gathering evidence that could help them battle the real criminals. Jackson’s staff developed a method for doing global searches in e-gold transactions, so he decided to see if he could find carders in his system by searching the “memo” field, where – like the memo line on a check – the sender can note the reason for the transaction. Jackson says some carders, apparently so convinced of their invisibility, do not try to hide the nature of their activity. Jackson says some culprits that authorities deemed “unfindable” were easy to track through e-gold. He identified a core group of accounts that appeared to involve carding, and made lists of accounts that exchanged e-gold with them. Patterns emerged. By matching other data, like time stamps, IP addresses and hashes of passwords, Jackson could sometimes identify when one person controlled or used different accounts.
Jackson decided that law enforcement needed to know about what he had found. He had received and complied with hundreds of subpoenas in the past – from FBI, Secret Service, Drug Enforcement Agency and international law enforcement agencies. But this time he had trouble finding someone to work with him. Since the Secret Service had already dismissed him, he approached the FBI and U.S. Postal Inspection Service, but got the runaround. He ultimately began assisting postal inspectors and other agents voluntarily.
In November, Jackson began running an automated script to blacklist accounts he identified as suspicious. The digital funds are not frozen, and the account holder can conceivably get the money out by transferring it to another account he controls, or to a different e-gold customer. But then those accounts get blocked, too. “They can log into the account and send payment to someone who’s willing to accept payment from them, but at that other person’s risk,” says Jackson. But the aggressive policing is chafing some users, who say they did nothing wrong and were improperly banned. One such user says the block has not hurt his business but he will never use e-gold again and is considering legal action to get his funds. “I no longer trust the e-gold integrity,” he says.Link here.
HOW ARE TAX SHELTERS LIKE ICEBERGS?
Answer: The 10% on top is glistening and gleaming and looks wonderful, and 90% of it that is hidden is filled with unknown dangers. The history of tax shelters in the U.S. has at best, been dubious, and at worst disastrous. The biggest problem with a tax shelter is that it is intrinsically self-destructive. For a tax shelter to work it has to be a reportable item on one’s tax return – in the form of a credit, a reduction, an offset, etc. As such, it is easily quantifiable by the IRS. As soon as any tax shelter really become popular, and starts to cut into the revenue collected by the IRS, they act to destroy it. In virtually every case, except for the sacrosanct home mortgage interest deduction, Congress agrees with the IRS that the tax shelter in question is an abuse and must be wiped out.
This would not be so bad, except that tax laws are often changed retroactive to the beginning of the current session of Congress, which could be as long as two years ago. A taxpayer will have made a whole series of decisions based upon a law that was changed well after he/she made those decisions. As such those who participate in tax shelters become very easy targets for the tax collectors. I still remember when people invested in minks as a tax shelter.
To be very specific, and perhaps very contrarian, let me name names. The Roth IRA is the biggest con job since the invention of paper money! If anyone really believes that a future Congress strapped for cash is going to honor the “no-tax on withdrawal” promises made by a Congress from years before, then there is some riverfront property in the Amazon forest that I would like to talk to you about.
There are two ways to protect oneself. (1) Never use a tax shelter. (2) Move one’s investments beyond the reach of the domestic taxman.Link here.
AMERICANS ABROAD TURNING IN PASSPORTS
She is a former marine, a native Californian and, now, an ex-American who prefers to remain discreet about abandoning her citizenship. After 10 years of warily considering options, she turned in her U.S. passport last month without ceremony, becoming an alien in the view of her homeland. “It’s a really hard thing to do,” said the woman, a 16-year resident of Geneva who had tired of the cost and time of filing yearly U.S. tax returns on top of her Swiss taxes. “I just kept putting this off. But it’s my kids and the estate tax. I don’t care if I die with only one Swiss franc to my name, but the U.S. shouldn’t get money I earned here when I die.”
Historically, small numbers of Americans have turned in their passports every year for political and economic reasons, with the numbers reaching a high of about 2,000 during the Vietnam War in the early 1970s. But after Congress sharply raised taxes this year for many Americans living abroad, some international tax lawyers say they detect rising demand from citizens to renounce ties with the U.S., the only developed country that taxes it citizens while they live overseas. Americans abroad are also taxed in the countries where they live. So far this year, the IRS has tallied 509 Americans who have given up their citizenship, said Anthony Burke, an IRS spokesman in Washington.
Andy Sundberg, a director of the Geneva-based American Citizens Abroad, has been tracking renunciations dating back to the 1960s through annual Treasury Department figures. He considers recent numbers low compared with some stretches in the past, like the early 1970s. But he has also noticed a recent increase in interest among Americans in renouncing their citizenship. “I think the cup is boiling over for a number of people living abroad,” Mr. Sundberg said. “With the Internet and the speed and the ubiquity of information, people are more aware of what’s happening.” With the changes in the tax laws, he said, some Americans living abroad fear “they’re heading toward a real storm.” He cited a survey by the American Chamber of Commerce in Singapore, which polled its members in October and November and found that many were considering returning to the U.S. because of the higher taxes.
Concern about taxes among Americans living abroad has surged since President Bush signed into law a bill that sharply raises tax rates for those with incomes of more than $82,400 a year. The legislation also increases taxes on employer-provided benefits like housing allowances. The changes, enacted in May, apply retroactively to January 1, 2006. Matthew Ledvina, an international tax lawyer in Geneva, said demand for legal counsel on the citizenship issue was coming largely from American citizens who held second passports and who had minimal ties to the U.S. “There are incentives to do it before the end of the year so that you can minimize your future reporting,” he said.
Mr. Ledvina said the waiting period for appointments at the American Embassy in London had increased from a few days to more than three and a half months. He said he had recently approached embassies in Vienna, Bern, London, Paris and Brussels before finally getting an appointment in Amsterdam for a client’s renunciation application. The legal ritual of renunciation is largely unique to the U.S. because other countries base taxation on residency, not citizenship, according to Ingmar Dörr, a tax lawyer with Lovells in Munich. “We don’t have that issue,” he said. “We only have the problem that rich people who don’t want to pay taxes in Germany just move to a lower-tax country in Switzerland.”
For some Americans abroad, motivations for renunciation are mixed and complex, involving social concerns, political displeasure with their government and other reasons. But it is clear that taxation plays a large role for many, even though few are willing to admit that because of penalties enacted a decade ago. In 1996, Congress tried to address a wave of tax-driven expatriation by the wealthy by requiring former citizens to file tax returns for a decade and forbidding Americans who renounced their passports for tax reasons from visiting the U.S. But in practice, the government is mainly interested in wealthier ex-citizens with a net worth of more than $2 million – few of whom pay further U.S. taxes because they generally avoid making American financial investments after giving up citizenship, Mr. Ledvina said. As for the rule barring entry to tax refugees, he said, it has not been enforced by the authorities.
Still, that possibility prompts ex-citizens to tread carefully and remain discreet about their choices. “I didn’t give up my citizenship with a sense of hostility,” said an importer in Geneva who renounced her citizenship as President Bush was taking office in 2001. “I gave it up with a sense of fairness.”Link here.
CLOSING THE “COLLAPSE GAP”: THE USSR WAS BETTER PREPARED FOR COLLAPSE THAN THE U.S.
Good evening, ladies and gentlemen. I am not an expert or a scholar or an activist. I am more of an eye-witness. I watched the Soviet Union collapse, and I have tried to put my observations into a concise message. I will leave it up to you to decide just how urgent a message it is. My talk tonight is about the lack of collapse-preparedness here in the United States. I will compare it with the situation in the Soviet Union, prior to its collapse. The rhetorical device I am going to use is the “Collapse Gap” – to go along with the Nuclear Gap, and the Space Gap, and various other superpower gaps that were fashionable during the Cold War.
(Slide ) The subject of economic collapse is generally a sad one. But I am an optimistic, cheerful sort of person, and I believe that, with a bit of preparation, such events can be taken in stride. As you can probably surmise, I am actually rather keen on observing economic collapses. Perhaps when I am really old, all collapses will start looking the same to me, but I am not at that point yet.
And this next one certainly has me intrigued. From what I have seen and read, it seems that there is a fair chance that the U.S. economy will collapse sometime within the foreseeable future. It also would seem that we will not be particularly well-prepared for it. As things stand, the U.S. economy is poised to perform something like a disappearing act. And so I am eager to put my observations of the Soviet collapse to good use.
I anticipate that some people will react rather badly to having their country compared to the USSR. I would like to assure you that the Soviet people would have reacted similarly, had the United States collapsed first. Feelings aside, here are two 20th century superpowers, who wanted more or less the same things – things like technological progress, economic growth, full employment, and world domination – but they disagreed about the methods. And they obtained similar results – each had a good run, intimidated the whole planet, and kept the other scared. Each eventually went bankrupt.
(Slide ) The USA and the USSR were evenly matched in many categories, but let me just mention four. The Soviet manned space program is alive and well under Russian management, and now offers first-ever space charters. The Americans have been hitching rides on the Soyuz while their remaining spaceships sit in the shop. The arms race has not produced a clear winner, and that is excellent news, because Mutual Assured Destruction remains in effect. Russia still has more nuclear warheads than the U.S., and has supersonic cruise missile technology that can penetrate any missile shield, especially a nonexistent one. The Jails Race once showed the Soviets with a decisive lead, thanks to their innovative GULAG program. But they gradually fell behind, and in the end the Jails Race has been won by the Americans, with the highest percentage of people in jail ever. The Hated Evil Empire Race is also finally being won by the Americans. It is easy now that they do not have anyone to compete against.
(Slide ) Continuing with our list of superpower similarities, many of the problems that sunk the Soviet Union are now endangering the U.S. as well. Such as a huge, well-equipped, very expensive military, with no clear mission, bogged down in fighting Muslim insurgents. Such as energy shortfalls linked to peaking oil production. Such as a persistently unfavorable trade balance, resulting in runaway foreign debt. Add to that a delusional self-image, an inflexible ideology, and an unresponsive political system.
(Slide ) An economic collapse is amazing to observe, and very interesting if described accurately and in detail. A general description tends to fall short of the mark, but let me try. An economic arrangement can continue for quite some time after it becomes untenable, through sheer inertia. But at some point a tide of broken promises and invalidated assumptions sweeps it all out to sea. One such untenable arrangement rests on the notion that it is possible to perpetually borrow more and more money from abroad, to pay for more and more energy imports, while the price of these imports continues to double every few years. Free money with which to buy energy equals free energy, and free energy does not occur in nature. This must therefore be a transient condition. When the flow of energy snaps back toward equilibrium, much of the U.S. economy will be forced to shut down.
(Slide ) I have described what happened to Russia in some detail in one of my articles. I do not see why what happens to the U.S. should be entirely dissimilar, at least in general terms. We should certainly expect shortages of fuel, food, medicine, and countless consumer items, outages of electricity, gas, and water, breakdowns in transportation systems and other infrastructure, hyperinflation, widespread shutdowns and mass layoffs, along with a lot of despair, confusion, violence, and lawlessness. We definitely should not expect any grand rescue plans, innovative technology programs, or miracles of social cohesion.
(Slide ) When faced with such developments, some people are quick to realize what it is they have to do to survive, and start doing these things, generally without anyone’s permission. A sort of economy emerges, completely informal, and often semi-criminal. It revolves around liquidating, and recycling, the remains of the old economy. It is based on direct access to resources, and the threat of force, rather than ownership or legal authority. People who have a problem with this way of doing things, quickly find themselves out of the game.
These are the generalities. Now let’s look at some specifics.Link here.
SILENT NIGHT, HOLY NIGHT: THE 1914 CHRISTMAS TRUCE
The Year was 1914 and the Great War was under way. Christmas season was upon the participants of war, and the scene was set for one of the greatest Christmas stories of all time. For two days, the fighting stopped, the guns fell silent, and men who had been enemies days before, came together in the spirit of brotherhood, peace, and goodwill. The soldiers came together to bury their dead, sing hymns, hold worship services, exchange gifts and play soccer. It was the spirit of Christ, the Prince of Peace that moved these soldiers to act in complete opposite of how soldiers should act. They looked beyond the propaganda, and saw in each other humanity and likeness.
This story is not new, but it has never been told in a more beautiful and stirring way than by Walter Cronkite at Temple Square with the Mormon Tabernacle Choir and Orchestra. The narrative concludes with the most beautiful rendition of Silent Night I have ever heard. It begins with two soldiers from opposing sides singing the sacred hymn, alternating stanzas. The choir then comes in at the end of the first verse to finish the remaining two verses. I have never been more inspired.
This magnificent story needs to be told over and over again. Not only to ourselves, but also to our children and grandchildren. I cannot think of a better way to spend Christmas Eve, sitting around the lit Christmas tree, telling the story of those brave men, who for a brief moment, followed the example of Christ, and proclaimed peace. This is available in hardcover book and companion CD or DVD.Link here.
MEXICO: FOUR YEARS ON
When my husband Dan Prescher and I arrived in Mexico in late 2002, we had no idea how this country was about to affect our lives. In December of 2002 we started our 3-month driving odyssey. We left our dog in short-term care with family in Arkansas and drove from the U.S. across the border at Laredo, Texas, and into our new homeland. We headed for the shores of Lake Chapala, where our first stop was Casa Flores, in Ajijic. Walt and Jean Smith, the owners of the B&B we chose, have since become good friends. They were the first to introduce us to a warm new way of life in Mexico. We spent many happy hours on their beautiful, flower-filled terrace.
We did not stay long that time, though. We found a storage facility and packed away all the things we had brought from the States (and could not live without ... or so we thought), and we got back into our little Toyota Tacoma and hit the road. This was our true indoctrination to Mexico. We wanted to find the ideal spot in this country to settle. We started with a little apprehension ... at least Dan did. He likes to plan things, and I prefer spontaneity. He prefers to stick to the plan (and the main highways) and I like to seek out those out-of-the-way places, and figure out how to get there as we are getting there – the road less traveled and all that.
Our trip ultimately took us to Cancún, on Mexico’s Caribbean Coast, where we explored Isla Mujeres and Isla Cozumel, the island we had visited many times in our pursuit of the world’s best scuba diving destinations. These islands are easy to get to, popular with tourists, have terrific infrastructure and amenities, and yet remain relatively inexpensive as far as Caribbean property prices go. Although Cozumel has changed drastically over the past several years, thanks to its popularity as a cruise ship destination, it still offers great value for anyone seeking a Caribbean island getaway.
Next up, we set sights on Puerto Escondido. Located 240 miles south east of Acapulco, Puerto Escondido – “the hidden port” – is still one of the best-kept secrets along the Mexican Pacific. Primarily known as a world-class surfing mecca, this city of about 50,000 inhabitants keeps its small-town charm while offering a diverse, international atmosphere with breathtaking ocean vistas and miles of wide sandy beaches. For anyone looking for really beautiful Mexican Pacific Coast property at still reasonable prices, this is the place to look. But prices have doubled since we were there three years ago. We spent three weeks in Puerto Escondido, thinking this might be the place for us. Before long, though, we were feeling the heat. We were tired and grouchy and generally out of sorts. We were second-guessing our decision to live outside the U.S.
As we drove north back to Jalisco we decided to quit our jobs and go back home. We composed our letter of resignation and as soon as we got to Ajijic sent it off. We returned to Casa Flores in Ajijic, where we received a warm reception from Walt and Jean. That night, we went to dinner at Bruno’s, one of the best lakeside restaurants. After a nice steak dinner and a few margaritas, things were looking better. The next day, we walked to Ajijic’s pretty plaza. It was February, and the weather was perfect – not the oppressive heat we had experienced on the coast. We got a fast Internet connection at one of the local Internet cafés, and we sent an email rescinding our resignation of the day before. We decided to put down roots. We rented a beautiful home in Ajijic for $800 a month and started researching and writing in earnest about living and investing in Mexico. It was there that the idea for Mexico Insider was kindled. There is a lot of information out there about being a tourist in Mexico, we reasoned, but no one was writing in detail about what it was like to live and buy property here. We launched Mexico Insider in August 2003.
A year later, wanderlust struck again. We pulled up stakes in Ajijic and headed east to San Miguel de Allende. There, we bought a home, and learned about remodeling the Mexican way. It took some time, and lots of patience on our part – but it was worth the wait. Our home in San Miguel became a blissfully tranquil place to live and work. It is not a stretch to say we fell in love with San Miguel. And who wouldn’t? This is a place where dawn still finds burros with milk cans making deliveries along cobblestone streets, yet it also offers the latest in modern conveniences. Located between the Sierra Madre mountain ranges in the central highland state of Guanajuato, San Miguel is in the geographic center of Mexico and is considered one of the best-preserved colonial towns in all of the Americas. And we think it is one of the most beautiful.
Dan and I both compiled our list of the top 10 things we have learned from our time in Mexico ...Link here.
ARGENTINE SUPREME COURT ORDERS BANKS TO MAKE CUSTOMERS WHOLE
The Supreme Court in Argentina has ordered the country’s banks to repay in full savings that were frozen during the economic crisis of 2001-02. The government had frozen U.S. dollar accounts held by some 50,000 depositors then forcibly converted them to devalued pesos.
With this ruling, the Supreme Court hopes to help lay to rest the years of anger and financial hardship caused by the economic crisis. At that time, investors were caught up in a series of government decisions. Firstly, it froze bank accounts and then forcibly converted any accounts held in dollars into devalued pesos. Until the financial crisis, Argentina had pegged its currency at a rate of one to one to the U.S. dollar. In the midst of the economic meltdown, it dropped that peg, and the Argentine peso went into freefall and eventually settled at about three pesos to the dollar. Account holders effectively lost 2/3s of their money and they have been campaigning ever since for its return.
In their ruling, the justices say those dollar account holders will get their money back in pesos at an equivalent rate to the peso’s current exchange rate with the dollar. In that sense, the ruling stops short of giving the savings account holders what they wanted – to have had the dollars they had deposited returned to them as such. As the justices also point out in their ruling, their decision is not just about returning lost savings deposits, but also about protecting property rights and helping the country find social peace – which has yet to fully return to the streets of Argentina some five years on from the crisis despite the economic recovery the country has enjoyed in recent years.Link here.
GRENADA PREDICTS BUDGET SURPLUS IN 2007 AS RECOVERY FROM HURRICANES CONTINUES
Grenada Finance Minister Anthony Boatswain recently presented his government’s budget for 2007, predicting a 10% increase in revenues and a 6% fiscal surplus as a result of strengthened revenue collection techniques. Mr. Boatswain said that it was important for Grenada to demonstrate self-reliance to the international community after the devastation caused by two hurricanes. He said that the current account surplus would be used to finance capital programs.
For the fiscal year 2007, current revenue is estimated to be EC$441 million, with current expenditure at EC$350.7 million, up 6.9% on 2006. The economy grew at 1.3% in 2006. “The rise in current expenditure is largely explained by higher anticipated outlays on wages and salaries, interest payments and current transfers. Notwithstanding these increases, the Ministry of Finance will continue its effort to exercise control on discretionary recurrent expenditure on goods and services,” Boatswain said.
Earlier in the year, Grenada’s Prime Minister said that the country would likely delay its entry into the CARICOM Single Market because of fears that the economy could not withstand the new tide of competition that the liberalised trading environment would bring. Hurricane Ivan struck Genada in September 2004 and caused total estimated damage in excess of EC$2.4 billion, more than 200% of Grenada’s 2003 nominal GDP. Nearly 90% (apx. 28,000) of the houses in the country were damaged – about 30% so badly that they required complete replacement.
Just 10 months later, on July 14, 2005, Hurricane Emily, with sustained winds of 90 miles (145 kilometers) per hour, passed directly over Grenada. Emily exacerbated the severe losses from Hurricane Ivan and struck the few areas left relatively undamaged by Ivan. Total damages inflicted by Hurricane Emily are estimated to be approximately EC$140 million, or more than 12% of Grenada’s 2004 nominal GDP.Link here.
AUTOMATED TARGETING SYSTEM
If you have traveled abroad recently, you have been investigated, and been assigned a score indicating what kind of terrorist threat you pose. That score is used by the government to determine the treatment you receive when you return to the U.S. and for other purposes as well. Curious about your score? You cannot see it. Interested in what information was used? You can not know that. Want to clear your name if you have been wrongly categorized? You cannot challenge it. Want to know what kind of rules the computer is using to judge you? That is secret, too. So is when and how the score will be used.
U.S. customs agencies have been quietly operating this system for several years. Called Automated Targeting System, it assigns a “risk assessment” score to people entering or leaving the country, or engaging in import or export activity. This score, and the information used to derive it, can be shared with federal, state, local and even foreign governments. It can be used if you apply for a government job, grant, license, contract or other benefit. It can be shared with nongovernmental organizations and individuals in the course of an investigation. In some circumstances private contractors can get it, even those outside the country. And it will be saved for 40 years.
Little is known about this program. Its bare outlines were disclosed in the Federal Register in October. We do know that the score is partially based on details of your flight record – where you are from, how you bought your ticket, where you are sitting, any special meal requests – or on motor vehicle records, as well as on information from crime, watch-list and other databases.
Civil liberties groups have called the program Kafkaesque. But I have an even bigger problem with it. It is a waste of money. The idea of feeding a limited set of characteristics into a computer, which then somehow divines a person’s terrorist leanings, is farcical. Uncovering terrorist plots requires intelligence and investigation, not large-scale processing of everyone. Additionally, any system like this will generate so many false alarms as to be completely unusable. In 2005 Customs & Border Protection processed 431 million people. Assuming an unrealistic model that identifies terrorists (and innocents) with 99.9% accuracy, that is still 431,000 false alarms annually. The number of false alarms will be much higher than that.
The odds of this program being implemented securely, with adequate privacy protections, are not good. Last year I participated in a government working group to assess the security and privacy of a similar program developed by the Transportation Security Administration, called Secure Flight. After five years and $100 million spent, the program still cannot achieve the simple task of matching airline passengers against terrorist watch lists.Link here.
The real purpose behind the terror screening system.
I am bewildered over all the fuss surrounding the recent revelations that every international traveler entering or leaving the U.S. for the last four years has been given a “terrorism risk” assessment. And this assessment will reside in a secret file for 40 years after the border crossing. I am not disputing that this is an outrageous and unacceptable invasion of privacy, and that 40 years is far too long to keep this information on file. But come on now, people, what do you expect?
We have accepted the “no fly” rules like sheep. How do you think the government has decided who to put on the no-fly list? Through the secret terrorism risk assessment system, of course. I have long maintained that the “no fly” rules have very little to do with security and are in fact designed to identify political opponents to the Bush administration. This may sound like a paranoid fantasy, but consider. According to the Homeland Security Administration (HSA), about 400 million people enter or leave the U.S. each year. HSA will not say how many of these people it considers terrorists, but there are about 44,000 on the no fly list, as of late September. We know the overwhelming number of these people are NOT terrorists. But let us say that 1% of the people on the list are, in fact, terrorists. That means that for each terrorist the HSA’s super-duper data-mining software correctly identifies, it misidentifies 100 people as potential terrorists.
The HSA surely knows this. Yet it persists in its data-mining program, ostensibly to find terrorists. They persist in spite of the number of falsely identified terrorists vastly outnumbering real terrorists, not to mention having numerous dead and incarcerated real terrorists on its no-fly list. So then what is the real purpose of the HSA program?
It turns out that looking for other types of people who are not as rare as terrorists is much more plausible using data-mining technologies. For instance, there are a lot of international travelers who do not like George Bush. Some of them may subscribe to anti-Bush publications, make phone calls to other people who do not like Bush, etc. Since all of these records are “mined” by the National Targeting Center, it would be easy for the HSA to use this information to identify Bush political opponents. In other words, while the HSA program is almost useless for identifying terrorists, it is an extremely effective way for the government to engage in mass political intelligence gathering. And that is what I think it is being used for.Link here.
HOW TO DISABLE YOUR PASSPORT’S RFID CHIP
All passports issued by the U.S. State Department after January 1, 2007 will have always-on radio frequency identification chips, making it easy for officials – and hackers – to grab your personal stats. Getting paranoid about strangers slurping up your identity? Here is what you can do about it. But be careful. Tampering with a passport is punishable by 25 years in prison. Not to mention the “special” customs search, with rubber gloves. Bon voyage!
THE VIRTUAL TAXMAN COMETH
Virtual worlds are now producing real millionaires. Two weeks ago, Ailin Graef announced that her avatar inside Second Life had amassed virtual-property holdings worth $1 million in U.S. funds. She started 2 1/2 years ago with a $10 account in the online 3-D world – then parlayed her design skills to amass in-game capital. Graef owns 36 square miles of Second Life property, a couple of virtual shopping malls and several in-game brands.
That is not bad pin money for online play. It has made many online gamers wonder if they could become the next in-game Donald Trump. But it has got tax lawyers wondering when the IRS will show up. If you make a boatload of profits inside a game – will the taxman soon want his cut? This debate has simmered for years, but it has now come to a boil because in-game economies have become worth so much in real money. Indeed, you do not even have to be a Graef-like mogul to profit from online play.
Say you have been playing World of Warcraft for the last year and you have got a few level-60 characters. Well, according to the going rates on IGE or eBay, you have created an account that could be worth more than $1,000. And then there is all your gold – according to the rates currently posted at IGPlace.com, a piece of WoW gold is worth 18 cents. Every time you go online and kill monsters, you are creating value as surely as if you were working a shift at Starbucks. A few years back, the economist Edward Castronova stunned the game world by deducing that people playing Everquest made more than $3 an hour in real-world value by playing the game – which gave Everquest a per-capita GDP nearly as big as Russia’s. WoW’s economy is easily as big as that now, or larger. Things are even more intense in a world like Second Life, because publisher Linden Labs explicitly lets you own in-game property and create new in-game objects to sell to others.
Almost everyone agrees these days that if you “cash out” – and sell a valuable avatar or big stash of gold on eBay, exchanging virtual goods for real greenbacks – you owe taxes on the profit. But what about stuff that stays inside the game? If you played WoW for three years and racked up $4,000 worth of avatars and gold, but never cashed out – should you still be paying annual taxes on your increased value, as if it were income? This is where the rubber hits the road, because the profits currently locked up inside these worlds are becoming big enough – hundreds of millions at least, and maybe billions – that they are a juicy target for the IRS.
Could they tax this stuff? Is there a tax argument in favor of it? Many tax experts say yes. Bryan Camp, professor of Law at Texas Tech University School of Law says it would be easy for the IRS to argue that in-game profits have real-world value even when they are locked up. What is more, in-game trades of valuable virtual goods could qualify as barter – and the IRS already taxes barter. Mind you, if the IRS ever did tax this stuff, it could seriously harsh the mellow inside these games. Dan Miller, a senior economist for the Joint Economic Committee, a congressional think tank that recommends policy to lawmakers – who is a gamer himself – thinks taxes would be ruinous, and argues against them. They would alter the geopolitics of online worlds, as pissed-off gamers would flee to games hosted in countries like China or Korea, where the IRS could not reach. “If we start slapping taxes on these worlds, we’re going to inhibit the growth and development of these places, and other countries would simply pick up the slack,” he says.
But set aside the question of whether the feds could tax in-game economies. Will they? Predictions range over the map. Miller is worried, and so is Bryan Camp, professor of Law at Texas Tech, who suspects Second Life might be particularly in danger, because its players constantly insist “it’s not a game. ... The more they say that, that’s like painting a big target on you.”
Predicting the IRS is a black art. A precedent could be set in many ways. Maybe a local tax official in Spokane audits a guy and discovers he amassed $40,000 in in-game items – then hits him with a judgment. Or maybe a top IRS official has decides to make a career by pushing for in-game taxation. Either way, online worlds are growing up fast. You could soon see your Form 1040 including a deeply weird line, “In-Game Income”. Welcome to the real world.Link here.
EMBRACE THE U.S. TRADE DEFICIT?
Views that should be dismissed as bullish tripe are instead accepted by top policymakers and academics.
Financial historians will reflect back on this period’s prevailing complacency, especially with respect to the massive U.S. trade and current account deficits, with astonishment and disbelief. Yet for now years of credit and asset inflation – parceling out unimaginable financial rewards along the way – have Wall Street reassured that “There is Simply Not an Imbalance Not to Love.” The Street now appreciates that massive and intractable trade deficits provide the fountainhead of global liquidity overabundance. Moreover, the markets keenly recognize that the Bernanke Fed (like Greenspan’s) is content to acquiesce to deficit and liquidity excesses. There is today no constituency for reining in the bubble(s).
This week’s release of a record quarterly current account deficit ($225.6 billion in Q3) garnered little attention from the media and even less in the markets. This despite the deficit having now reached $900 billion annualized, or 6.8% of GDP. For perspective, the deficit for all of 1998 was $229 billion. Bear Stearns’s chief economist David Malpass provided commentary this week to The Wall Street Journal – “Embrace the Deficit”. Mr. Malpass did a commendable job articulating Wall Street’s dangerously flawed analysis of credit bubble-induced imbalances.
The 2006 backdrop has been noteworthy for the continued rapid expansion of the U.S. current account deficit despite the marked economic slowdown at home coupled with continued overall robust growth abroad. This outcome should provoke recognition and alarm with regard to our economy’s deep structural shortcomings. But with stocks up double-digits and the economy plugging along, the “analysis” will naturally propound that deficits are in fact constructive. I can understand why Wall Street would hope to convince us that demographics and “sound” U.S. growth are the principal factors, although in reality they have very little to do today’s runaway global trade imbalances. Look instead to the credit bubble.
This protracted credit bubble would be much less perilous if our nation was expanding debt to finance sound investment. Or, if our mounting foreign borrowings were funding wealth-creating capacity our current standard of living would not be so susceptible to the whims and fragilities of finance and global financial markets. Instead, we are the subprime borrower living beyond our means, yet for now luxuriating in our competitive advantage in issuing AAA securities in exchange for endless imports. These days, the vast majority of new debt liabilities issued to our foreign creditors are collateralized by inflated asset market prices (chiefly real estate and securities). This creates a Ponzi bubble dynamic where the perceived soundness of the underlying debt issued is dependent upon unrelenting credit and speculative excess (and resulting asset inflation).
It is a safe bet that trade deficits will grow until our foreign creditors and/or global markets impose some discipline on our credit system. The U.S. bubble economy has been sustained in 2006 only through the massive expansion of credit – more than last year but less than next. The trade deficit has evolved to become one of the prevailing unavoidable consequences of the credit inflation required to hold the downside of the credit cycle at bay. Of course, Wall Street, politicians, and the Bernanke Fed will work in earnest to avoid the downside of credit excess. And, the way these credit booms work, things tend to run amuck on the upside when they are turning most susceptible to faltering to the downside.
As difficult as it is for me to accept, “they” really have come to embrace the trade deficit. I guess “they” have no choice. As is often said, “people will believe what they have to believe.” All the same, it has been stupefying to witness over the course of many years the seed of this spurious notion mature into a full-fledged national self-deception – ripening to the point of achieving ratification from top policymakers (including our Fed chairman), affirmation from the financial markets, and acceptance throughout. Students of economic history are all too familiar with the repeated bouts of turmoil, wreckage and revulsion – the legacies of absolutely ridiculous notions that somehow came to be readily embraced in the heat of intoxicating booms. Reading Mr. Malpass’s piece, and knowing that his views would be anything but dismissed as bullish tripe, left me again with that uncomfortable feeling that we are living today in one of those extraordinary periods that will be studied and contemplated for many decades to come.Link here (scroll down to last heading in the left/content column).
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