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IS THE GRASS GREENER?
A tour of Nicaragua and Honduras fails to make Isla Margarita natives envious.
A few months ago I decided to check the merits of Panama vs. Isla Margarita where I am now living. This time in my wanderlust and never ending quest for the perfect affordable retirement and vacation destination I checked out Central America, specifically Nicaragua and Honduras. Roy, one of my business partners, decided to join me on my journey.
We flew from Isla Margarita to Managua with a change of planes in Panama City that got us into Managua in the early evening. Then we searched for a hotel. The taxi driver recommended a couple that we flatly refused at $50 per room. We finally found one on our own for $65. Hotels that were under that price were real dumps and situated in areas that did not appear to be safe. The next morning we went to the Regency – a 5-Star hotel located a few blocks away. As were we were preparing to leave the restaurant after a very good breakfast and only so-so coffee.
We decided to rent a taxi to begin our information gathering in the city of Managua. The tour was interesting but unexciting. There are still many reminders of the Sandinista era that tore Nicaragua apart in the late ‘70s. Lake Managua is dead. It is extremely polluted. In one area there are lakeside restaurants and a small park. Why anyone would want to dine near a cesspool was beyond our imagination. The odor from the lake is not pleasant. Luckily the city water supply comes from the nearby mountains and reservoirs. Later in the afternoon Roy and I went to the bustling Artisan’s Market. We found a good variety of handicrafts for sale for reasonable prices.
After several days spent exploring Managua it was time to move on. Everyone we met said Grenada was very popular, so we hired a taxi for a trip there. It is one of the oldest cities in the Americas and on the edge of Lake Nicaragua. It is an almost universal fact that taxi drivers will try to over-charge you if possible. As it turned out we paid about $15 too much for the 45 minute trip. Now I have to admit that Grenada is pretty. It is a restored Colonial city and many of the huge old Colonial buildings have been turned into hotels, B&Bs, shops, restaurants and other businesses. The focal point of downtown Grenada is the plaza or the Parque Colon. It is the pride of the city and very clean. Everyone we encountered was very pleasant and not “pushy”. A variety of hotels and restaurants line the square. We found these to be adequate for a tourist city, and several were very good. Most seem to be run or owned by expats from all over the world.
As luck would have it, we “stumbled” on a great source of local information for Gringos – Wayne’s Zoom Bar (Locally called Wayne’s World). Wayne is an American expat who is a veritable font of information, and a nice guy, too. He knows everything from real estate prices to what the taxi fees should be. Roy and I spent many pleasant hours drinking cold Tona beer and learning about Nicaragua from Wayne and his customers. It seems the days of any “bargains” in real estate are over. Anything in Grenada is priced pretty high for Central America. A two story 3 bedroom house on the edge of town in a “borderline” neighborhood that needs lots of work was $140,000. A very large Colonial house in the center of the tourist area needing complete restoration was $600,000.00. Of course, those are asking prices, and cash talks.
While these prices might not be too high for some, our mission was to investigate affordable options for middle income people. One major problem we found was the cost of electricity. To air condition a house the size of mine – 3 bedroom, 2 bath – on Isla Margarita (cost for central air, water heater, electric stove, fans, 2 refrigerators and small washer dryer) is about $65 a month). In Nicaragua it would be $300 or more. That is why most hotels, restaurants, and businesses there have no air conditioning and use florescent or low watt light bulbs. Add that to the price of gasoline @ $3.50 a gallon and living starts to get expensive. We checked out a couple of local supermarkets. Prices on some specialty products were comparable to those in the U.S., but most prices were considerably lower.
Eventually we made it to San Juan, and it was almost worth the trip. San Juan del Sur is charming in a ‘40s-‘50s kind of way. It reminds me of Key West back in those days with the brightly painted clapboard houses, corrugated tin roofs and narrow streets. San Juan is popular with tourists, retirees and “snow birds”. As usual, the retirees are making the price of real estate rise rapidly. We were told that about 300 “foreigners” owned property there. The bay is beautiful. It is very picturesque and surrounded by some very expensive homes. We talked to several people and everyone mentioned the frequent power outages and other infrastructure problems that private developers were “working on”. To be fair this place will probably boom in the next few years if they ever fix the roads.
After 10 days in Nicaragua we decided that there was no comparison between our Isla and this country. We just about have it made on Isla Margarita. So on to Honduras ... We arrived in Tegucigalpa around noon. The airplane descent into the mountains is something else! At times it looks as if the wings will hit the treetops. We found a nice hotel in the central area of the city for $70 a night. Next day we set out to explore the city. After the heat of Nicaragua the temperatures in the 80’s were very welcome. There is what could be a beautiful river running through the city, but it is full of trash and garbage.
Tegucigalpa is an interesting city because it is built on hills and mountainsides. There do not seem to be any building regulations at all. If you look at the nests of phone and power lines along the streets it looks like a ball of snakes. We contacted a realtor and he showed us 3 properties. One was a 2 bedroom furnished apartment with no pool for $90,000. It was not bad. The two other properties were new townhouses (3 bed, 3 bath) and the construction was some of the worst I have ever seen in all my travels. The price was insane – $175,000 for each. After we pointed out just a few of the construction flaws to the realtor, he did not want to show us any other properties.
The traffic in Managua was bad, but was nothing compared to Tegucigalpa! Driving is a nightmare there and trying to cross the street was downright scary. We got the impression that they were actually aiming at us. They will lay on their horns if you try to cross, but no way will they slow down. Horns are blowing continuously and the resultant noise is even worse than Panama City!
We had plans to visit the Bay Islands but after talking to some people in the hotel who were from there, we decided to give it a pass. They recounted several stories about going without power for days at a time and the infrastructure damage that resulted from Hurricane Mitch still has not been completely repaired. We learned that one American recently bought a 1.5 acre lot for $300,000 – just the lot, no electric, water, sewer, etc. It did have an ocean view. One man who has owned a small (8 room) hotel on Utola for 18 years said he pays 35 cents a kilowatt hour for electricity. On Roatan it is about 30 cents per kilowatt hour. He said he would go elsewhere, but he owns about 65 acres there and is waiting for the island to become more developed. Phone service is sometimes nonexistent, same with internet. Most people have generators, but fuel is over $3.00 a gallon. Considering these drawbacks, we both decided that we would not want to give up what comforts we have on Isla Margarita to live there, and as an investment opportunity we thought the Bay Islands were already overpriced.
The bottom line is, we actually have an extremely good life on Margarita. The infrastructure is very good and we see efforts to improve even more. The roads are good all over the island and we have the cheapest energy in all of the Americas, and the cheapest gasoline and diesel at about 10 cents a gallon. Drivers are more courteous here and the traffic is manageable. Liquor is inexpensive here. A bottle of decent Rum is $2.50 and beer is about 23 cents a bottle. Excellent shopping malls and food stores, real estate prices are still reasonable, no volcanoes, no hurricanes, and the most beautiful women in the world.Link here.
MEXICO: A NATION-STATE DISSOLVES?
In my annual new years predictions, I said that the most significant, and surprising, development of 2007 would be the collapse of both Mexico’s economy and its very existence as a viable Nation-State. While there has not been a spectacular, single event confirming my prediction, there has been a steady erosion on all fronts.
With five months left in the year, I am not yet willing to push back my prediction of Mexico’s “collapse” to 2008. The decline of the Mexican Nation-State is a bellwether for the massively complex network of geopolitical influences sometimes termed above-ground factors. It provides some insight into how symptoms of oil scarcity already being felt in poorer parts of the world will increasingly spill over into our own back yard. (After I wrote this story, things took a serious turn for the worse with a series of rebel attacks on Mexican oil infrastructure.)
Before I highlight the specific events that are undermining Mexico, let me talk first for a moment about what it means for a Nation-State to collapse, an important topic as it is an experience that will become increasingly common over the next decade. When a Nation-State collapses, the cities do not all catch on fire simultaneously while roving hoards pillage the countryside and the population starves. Nation-State collapse is not the apocalypse – it is exactly what it suggests to be: The collapse of the notional union of Nation and State under one central, viable government.
Nation-State collapse also does not suggest that there will no longer be Nation-States. It is my prediction that there will be a Mexico, an Iraq, etc. for quite a long time. What collapse does mean is that the importance of Nation-States will decline sharply, as they become increasingly ineffectual both domestically and internationally. Nor will the Nation-State’s decline mean the decline of Nationalism and similar identifying sentiments. Quite the opposite. As States increasingly fail to care for their constituent nations, those nations will become increasingly susceptible to the black shirts and brown shirts of history, but these movements will be increasingly dissociated from States, more similar in organizational model to al-Qa’ida than to Nazi Germany. (See “The New Map” (PDF), a paper that I presented at the 2006 Yale International Law Conference, for an overview of this notion of the end of the Nation-State.)
The core proposition of a Nation-State is that the boundaries of the Nation and the State will coincide, allowing the State to effectively provide for the security and welfare of the Nation, and leading in return to the Nation giving their allegiance to the State. While no Nation-State is a perfect example of this ideal, Mexico’s proximity to enticing U.S. labor markets, and the resulting massive emigration of Mexicans, is increasingly distorting this overlap. While “Mexico” remains a powerful cultural concept, that concept is increasingly dissociated with the geographic borders of the Mexican state. People can be wholly “Mexican” in Los Angeles, or, increasingly, Alabama.
While the dissociation of the boundaries of a Nation with the borders of a State makes it more difficult for a notional Nation-State to provide for that part of its Nation outside its State borders, Mexico is also failing to provide for its nationals inside its borders. Recent protests over tortilla prices are just one example of the extreme poverty suffered by much of the nation. Similarly, while the average Mexican’s wealth is increasing, there are shadow factors at work – people like the Mexican businessman Carlos Slim, now the richest man in the world at $68 Billion net worth, are skewing the statistics. Without remittance payments from emigrants, Mexico’s poverty situation would be far worse. When a State can no longer provide for its Nation, there is no longer any incentive for that Nation to voluntarily give allegiance and support to their State. The only remaining tool to exert control is coercion through a State’s theoretical monopoly on violence, and in Mexico even that is breaking down.
Not that Mexico was ever a poster-child for civic safety and effective policing, but the situation has grown considerably worse in the past year. There are mass desertions among the federal police. Outright infantry battles between crime organizations and the government are becoming a common occurrence. Hundreds, perhaps thousands, of police, judges, government officials, and reporters have been assassinated over the past few years. What control the federal government continues to exercise in states such as Sonora, Sinaloa, and Nuevo Leon is mainly due to the fact that crime organizations do not want to actually take over the territory – they already experience the benefits of acting as a sovereign government without the burdens, and they are happy to leave those burdens to the “official” government.
Mexico’s military and police forces have, to put it mildly, not demonstrated much competence over the past decades. The same corruption, desertion, and competing interests that are causing the Mexican state to lose its monopoly over violence will prevent Mexico from effectively protecting its oil infrastructure. The simultaneous (and partially resulting) financial crunch will further degrade their ability to respond. How long until we hear that “oil rose in New York today on news of continued attacks on oil facilities in Mexico”?
Individually and in combination, all relevant factos act as positive feedback loops. Collapsing oil production decreases available revenues to reinvest in exploration and delays bringing new fields to production. The comparative success of Mexicans outside of Mexico drives further emigration. Failure of the Mexican government to provide for its people drives more economic activity to the black market, erodes the tax base, and makes taxes more difficult to justify at election time. And failure of the government to provide for fundamental security compels the population to turn to primary loyalties for protection – corrupt local governments, criminal organizations, etc. These factors in combination erode the foundation of the rule of law and the viability of Mexico’s infrastructure network, which in turn puts the brake on foreign investment, tourism, and the ability of legitimate businesses to produce and export goods and services from within Mexico. To the extent that Mexico uses central banking to prop up the peso, it drives a wedge between actual, local economic production and the monetized economy.
Is Mexico a unique case or a bellwether?
In “The New Map”, I argue that these same factors are eroding the viability of the Nation-State everywhere. The situation in Mexico is exacerbated by reliance on declining oil revenues and proximity to the U.S. However, the Mexican Nation-State enjoys many advantages. With significant exceptions, indigenous populations are well integrated into Mexican culture. There is a strong, shared Catholic identity, and a rich and relatively long history as an independent nation. Nigeria, Iraq, and other fragmenting Nation-States would be lucky to have even one of those advantages. The broader forces undermining the Mexican Nation-State are shared around the world. The decline of the Mexican Nation-State is most visible because of the impact of symptoms of this decline on the U.S., and the resulting media coverage of these symptoms.
The collapse of the Mexican Nation-State will have serious, negative impacts on global oil markets, on the U.S. economy, and on xenophobia and anti-immigrant sentiment in the U.S., not to mention its impacts inside Mexico. It might not happen in 2007, and it certainly will not occur in one sudden “bang” that can be easily marked on a date in history. But the process is already well under way. On a broader trend, the decline of the Nation-State as a mode of social organization will have profound effects in a post-peak world. In one sense it will cement the inability of Nation-State governments, and international coalitions of governments, to act effectively to address Peak Oil. In another sense, it may facilitate exactly the kind of localization that will be necessary in a low-energy world. Of course, this is not a suggestion that the transition will be peaceful, enjoyable, or brief.Link here.
U.K. TO HAVE CONSTITUTIONAL DISCUSSION WITH ANGUILLA
A first round of discussions will be held in Anguilla from 23-25 July between Anguilla and the UK on reform of Anguilla’s Constitution. A team of five officials from the UK Foreign and Commonwealth Office will hold meetings with an Anguillian team consisting of elected members of the House of Assembly, legal advisers, and other community representatives.
The review of Anguilla’s Constitution is part of a process being undertaken with a number of the United Kingdom’s Overseas Territories. There have been a series of public meetings in the lead up to this first round of talks to enable people to voice their views on the changes proposed. It is likely that more than one round of discussions will be needed before final agreement is reached on a modern constitution that is acceptable to both the people of Anguilla and the UK.
Anguilla, the most northerly of the Leeward Islands in the Lesser Antilles, is an internally self-governing overseas territory of the UK. The territory’s existing constitution is defined by the Anguilla Constitutional Order 1 April 1982 (amended 1990). A chief minister is appointed by the governor (nominated by the Queen) from among the members of the House of Assembly. The cabinet of ministers, the Executive Council, is appointed by the governor from among the elected members of the House of Assembly. The UN Committee on Decolonization includes Anguilla on the UN list of Non-Self-Governing Territories.Link here.
IMF LAUDS GRENADA’S “REMARKABLE” ECONOMIC RECOVERY
Grenada’s economy has made a “remarkable recovery” after the unprecedented devastation caused by Hurricanes Ivan and Emily, led by reconstruction activity, Cricket World Cup (CWC) preparations, and the recovery of the tourism sector, the IMF said in its review of the jurisdiction’s economy. The IMF report stated that Grenada’s real GDP growth averaged 7% per year during 2005-06, while inflation has fallen markedly, from a high of 5.8% annualized in late 2005 to only 2.2% by April 2007.
Nancy Wagner, head of an IMF staff mission to Grenada, said in a statement, “In the aftermath of the hurricanes’ destruction, the government recognized that public debt was unsustainable and initiated a collaborative debt restructuring process (now largely completed). They also launched a home-grown comprehensive medium-term reform program, with the key objectives of sustaining high economic growth, restoring fiscal and debt sustainability, reducing vulnerabilities, and alleviating poverty.”
However, the IMF cautioned that “substantial challenges” remain, particularly on the fiscal and debt fronts. “The 2006 fiscal outturn was worse than expected. Spending on goods and services was greater than projected, reflecting higher utility costs and transfers to households. Government investment reached 20% of GDP, about 5 percentage points higher than envisaged, on the back of higher-than-expected costs for reconstruction and preparations for the CWC. These expenditure overruns led to a primary deficit almost 7 percentage points of GDP higher than targeted. As a result, the debt-to-GDP ratio increased from 121% at end-2005 to 126% by end-2006.”Link here.
HONG KONG REMAINS A FAVORITE FOR FOREIGN INVESTORS
Hong Kong’s Chief Executive, Donald Tsang has thanked investors from mainland China and further afield for their continued vote of confidence in the territory’s economy. He made the remarks at a reception for about 200 chief executive officers and senior representatives of overseas and mainland companies which had recently established a business presence or expanded operations in Hong Kong. “This year, Hong Kong is celebrating the 10th Anniversary of our return to China,” Tsang observed. “What a milestone. And what better way to highlight just how wrong all the doomsayers of yesteryear were.”
He noted some changes during the past decade, especially Hong Kong’s impressive economic development, while highlighting the city’s continued advantages for overseas and Mainland investors. “Just as important as the things that have changed are the things that remain the same,” he noted. “The rule of law, civil rights and freedoms, the free flow of information, capital, people and goods. We remain a multi-cultural, multi-faith, multi-national community. All of you here today are testimony to that.”
Since Invest Hong Kong was established in 2000, the Department has assisted over 1,200 foreign, Mainland and Taiwan companies to set up or expand operations in Hong Kong. These projects have created more than 40,000 jobs for Hong Kong. Initial investment by these companies topped HK$37 billion (US$4.75 billion) in total. As at the end of June, Invest Hong Kong had assisted 147 companies to invest or expand in Hong Kong, achieving more than half of its annual target of 250.
Mainland enterprises have increasingly recognised Hong Kong’s strategic role as the springboard to expand regionally and globally. About 16% of the completed projects in the first half of 2007 involved Mainland investments. The latest statistics show that Hong Kong remains a highly preferred destination for foreign direct investment (FDI). During the first quarter of 2007, FDI inflows to Hong Kong reached HK$120.2 billion (US$15.4 billion). Total FDI inflow during all of 2006 was HK$333.2 billion (US$42.9 billion).Link here.
WOMAN CONTENT LIVING IN 84-SQUARE FOOT DREAM HOME
Talk about down-sizing! One woman is living in a house that you really have to see to believe. “It’s 84 square feet, so roughly the size of a parking spot. Actually, smaller than a parking spot,” says Dee Williams, who decided it was time to move. She was living in a 1,500-square foot home in Portland, Oregon but decided the house was not small enough. Yes, small enough.
Dee built the tiny cabin herself out of salvaged material. She picked the door out of a dumpster and retrieved the floors from a house fire. Dee’s new tiny home sits in her friend’s backyard. “In exchange, I do work on their house,” she says. It takes Dee five steps, sometimes four, to get from one end of her house to the other. “Two steps through the kitchen and you are in my living room. Two steps into the living room, you bang into the wall.”
Two solar panels provide electricity. A tiny propane tank allows Dee to cook in her $10,000 home on wheels. Do her friends think the 44-year-old hazardous waste inspector is crazy? “[W]ell, they had some questions for me!” she says.
The obvious question is, why? “A simpler life, time, more money. I don’t have a mortgage. I don’t have a big utility bill,” Dee says. Her monthly heating bill in the winter is $6, less in the summer. “I’m able to offer money to my family if they need it, (and to) my friends if they need it,” says Dee.
To get to her bedroom, she walks up a step ladder to her loft. “Every night I look at the stars and watch it rain over and over again. So this is it. Not much to it,” says Dee. And that is the point. Not much to it. Simple. Small. A dream house tinier than a parking spot. “Right now there is nowhere else I want to be!”Link here.
U.S. IS LEFT STANDING IN GLOBAL CORPORATE TAX CUT RACE
With Europe currently on a corporate tax cutting “binge”, America is falling far behind in the global race to cut corporate taxes, according to free market think-tank, the Cato Institute. Writing in his latest Tax and Budget Bulletin, Daniel J. Mitchell, Senior Fellow at the Cato Institute, warned that the U.S. will soon have “the most unambiguously punitive business tax regime among the advanced economies” unless it begins to close the growing corporate tax gap with its competitors, particularly in Europe.
“According to a recent survey by KPMG, the average corporate tax rate in the EU has fallen from 38% in 1996 to 24% in 2007. Data from the European Commission confirm the cutting trends in the EU’s 27 member nations,” said Mitchell, adding that this trend shows little sign of slowing, with corporate rate cuts being implemented in Germany, Estonia, Spain, and the U.K., and rate cuts being discussed in the Czech Republic and France. He also noted that in Asia, New Zealand seeks to cut its corporate tax to match Australia’s 30% rate, while Singapore is readying a 2% corporate tax cut to 18%. Canada is also planning a 2% corporate tax cut, and Russia is mulling a 4% cut.
By contrast, Mitchell points out that America’s corporate tax burden has remained static since the tax reform enacted under the Reagan administration in 1986. “Our corporate tax advantage has become a big liability,” he wrote. “Indeed, U.S. policy moved in the wrong direction in 1993 when President Bill Clinton pushed the federal corporate rate up to 35%. With the addition of state-level corporate taxes, America’s average corporate tax rate is 40%.” Mitchell added that all European countries now have lower corporate tax rates and generally better corporate tax systems than the U.S. – “even the bloated welfare states of France and Sweden.” The average corporate tax rate across Europe has dropped by 14% since the mid-1990s, meaning that the European average is now 16% lower than the U.S. corporate tax burden.
Mitchell pointed to a number of studies which have shown that the U.S. tax code is “hostile to investment”. A 2006 study by tax scholar Jack Mintz for Canada’s C.D. Howe Institute concluded that U.S. investments faced the second highest effective tax rates, while a World Economic Forum study claimed that the U.S. languished in 107th place out of 117 nations in terms of tax efficiency. “The US corporate tax system is an anachronism that discourages growth and undermines job creation. High tax rates are driving jobs and investment abroad,” Mitchell argued. “The good news is that other nations are providing valuable reform lessons for American policymakers. Places such as Ireland, Estonia, Hong Kong, and Switzerland illustrate that lower tax rates boost growth and improve tax compliance.”Link here.
IRS CHANGES TAX-EXEMPT REPORTING REQUIREMENTS
The IRS has announced that it began mailing educational letters this month to more than 650,000 small tax-exempt organizations that may be required to submit a new annual notice. With the enactment of the Pension Protection Act of 2006 (PPA), the majority of small tax-exempt organizations are now required to submit the new “e-Postcard”. Previously, tax-exempt organizations with gross receipts of $25,000 or less were not required to submit information returns. The first e-Postcards are due in calendar year 2008. The IRS intends to have an option available for free electronic submission of the e-Postcard.
“The new e-Postcard reporting requirement is simple and straightforward, but organizations shouldn’t ignore it, or they risk losing their tax-exempt status,” explained Lois G. Lerner, director of the IRS Exempt Organizations division. Any organization that fails to meet its annual reporting requirement for 3 consecutive years automatically loses its tax-exempt status under the new law. An organization that wants to regain its exempt status will then have to reapply for recognition as a tax-exempt organization.
The e-Postcard requires small organizations to provide a legal name and mailing address, any other names used, a Web address if one exists, the name and address of a principal officer and a statement confirming that the organization’s annual gross receipts are normally $25,000 or less. In addition to sending out educational letters, the IRS is encouraging individual volunteers, tax practitioners and larger organizations to spread the word about the new e-Postcard reporting requirement.Link here.
U.S. JUDGE DISMISSES CHARGES AGAINST KPMG DEFENDANTS
Rules that the federal government deprived defendents of their constitutional right to counsel.
U.S. District Judge Lewis Kaplan has dismissed charges against 13 former senior executives of accounting firm KPMG. Judge Kaplan ruled that he had little choice but to dismiss the charges because the government had denied them their constitutional right to counsel by pressuring their former employer to cut off payment of legal fees.
While Judge Kaplan stated that his ruling had been made “with the greatest reluctance,” he decided that the Justice Department had “foreclosed these defendants from presenting the defenses they wished to present and, in some cases, even deprived them of counsel of their choice.” ... “This is intolerable in a society that holds itself out to the world as a paragon of justice,” Kaplan wrote. The case will proceed against against three other former KPMG staff who were not entitled to have their legal fees covered by the firm, and also against two lawyers who did not work for KPMG.
In August 2005, KPMG agreed to pay $456 million in penalties to cover former clients who participated in tax shelters known as Blips, Flip, Opis and Short Option Strategy. Under the agreement, prosecution was deferred, with the government agreeing to drop charges after 31st December 2006 if KPMG submitted to outside monitoring and discontinued some types of tax-related activity. The withholding of legal fees to the defendants was a condition of this settlement. The former KPMG employees and two others were accused of helping to structure and sell the tax shelters, which were deemed abusive by the IRS.
The government has said that the case is the largest criminal trial in U.S. history, and the ruling will be seen as a setback in its fight to stamp out abusive tax sheltering. Prosecutors have admitted that Judge Kaplan had little choice but to throw out the charges, but this could clear the way for the government to reinstate the charges on appeal. Michael J. Garcia, the U.S. Attorney for the Southern District of New York, revealed that he “respectfully disagrees” with Judge Kaplan as to whether there was any constitutional violation in this case.Link here.
U.S. PRIVATE EQUITY AND HEDGE FUND AND OTHER PARTNERSHIPS TAX HIKE MAY COME IN 2008
Senate Majority Leader Harry Reid (D - Nevava) revealed in an interview with Bloomberg that Senators will not take up the issue of the tax treatment of certain limited partnerships, such as private equity and hedge funds, until next year. Reid also told Bloomberg that he favoured more wide-ranging legislation than that currently being proposed, in order to include partnerships beyond private-equity firms, such as those that invest in commercial real estate and oil and gas pipelines. Any new measures “shouldn’t apply just to the private-equity groups, it should apply to all that are similarly situated,” he stated.
Legislation proposed by Senate Finance Committee Max Baucus and ranking Republican Chuck Grassley would clarify the U.S. tax code so that publicly traded partnerships directly or indirectly deriving income from investment adviser or asset management services would not be entitled to an exemption from corporate tax available to firms whose income is at least 90% passive – derived from dividends or royalties, for instance.
Broader legislation proposed in the House attacks the controversial “carried interest” issue, and is designed to ensure that investment fund managers who take a share of fund profits as compensation for investment management services would be taxed at an appropriate ordinary income tax rate up to 37.9%, and not at the investment income rate of 15%. The proposals have been criticized by senior Bush administration officials, who fear a reduction in U.S. competitiveness, and President Bush has hinted that he would be prepared to veto such measures.Link here.
PRESSURE MOUNTS ON LABOUR TO SCRAP U.K. NON-DOMICILE TAX STATUS
A cross-party committee of MPs is, according to one member, “certain” to look into the issue of wealthy foreigners claiming non-domicile tax status in the UK, but the government appears to remain reluctant to change the rules, for fear of being seen as hostile towards wealthy investors. Jim Cousins, a Labour MP and a member of the Commons Treasury Select Committee, told lawmakers last week that, “It’s absolutely certain the committee will look at tax domicile. ... We can’t run the tax economy of this country as a large-scale version of the Chelsea Football Club.”
Cousins’s comments were made as the Treasury revealed how much tax was paid by the 110,000 individuals claiming non-domicile tax status in the UK. According to Jane Kennedy, a Treasury Minister, this group earned £9.8 billion and paid £3 billion in tax in 2004-05. She was however, unable to tell the Commons how much tax might be being lost to the Treasury as a result of the scheme, which excuses claimants from UK income tax on foreign earnings.
While the Treasury has been reviewing non-domicile tax status since 2002, it has yet to propose any changes to the system, and Kennedy has reportedly indicated that the government would be reluctant to alter the status quo because this could harm the status of London as Europe’s pre-eminent financial center. However, the Labour government could come under increasing pressure from within its own ranks in the run up to the next pre-Budget announcement to iron out perceived loopholes in the tax system, which seem to benefit only the wealthy, with non-domicile tax status and the taxation of carried interest earned by private equity fund partners topping the current agenda.
According to a recent report in the Observer, the number claiming non-dom status in the UK has risen dramatically since 2002 and could hit 200,000 in 2006/7. The paper claimed that the upsurge in non-dom claims is being fuelled by the government’s ever-harder line on offshore tax avoidance.Link here.
U.K. IMMIGRATION AMNESTY COULD REAP £1 BILLION IN TAXES, SAYS THINK TANK
New Home Secretary, Jacqui Smith should back a plan to allow almost half a million people who are currently living illegally in the UK to stay in Britain and pay taxes, according to think tank the Institute for Public Policy Research. The IPPR’s research shows that regularizing the people who currently live and work illegally in the UK could net the Treasury around £1 billion a year, compared to the £4.7 billion that it would cost to deport them forcibly.
“The simple truth is that we are not going to deport hundreds of thousands of people from the UK. Our economy would shrink and we would notice it straightaway in uncleaned offices, dirty streets and unstaffed pubs and clubs. So we have a choice: make people live in the shadows, exploited and fearful for the future; or bring them into the mainstream, to pay taxes and live an honest life,” Dr. Danny Sriskandarajah, IPPR Head of Migration and Equalities commented.
Similar measures are currently being considered in the U.S., where the Agricultural Job Opportunity, Benefits and Security Act of 2007 proposes a mechanism for irregular immigrants who have been working regularly in the U.S. for a minimum of two years in agricultural industries, to obtain temporary legal resident status for themselves, spouses, and dependent children that may be extended to permit permanent residency. Spain’s latest regularization program resulted in around 700,000 workers being allowed to stay, increasing Spanish tax revenue by an estimated €750 million per year.Link here.
E.C. TELLS GREECE TO RECOVER €200 MILLION IN AID FROM ILLEGAL TAX EXEMPTION BENEFICIARIES
Next time, you will check with us first!
The European Commission announced that under EC Treaty state aid rules, certain sector-specific tax breaks granted under Greek law are incompatible with the Single Market and need to be recovered from the beneficiaries. Under the legislation in question, approximately €200 million of incompatible aid has been given to thousands of companies.
The EC explained, “Article 2 of Greek Law 3220/2004 reduced the tax base of companies in certain specific sectors by 35% of their profits, thus giving them an unfair advantage. The sectors included among others the production of textile materials and basic metals, manufacturing, energy production, mining, intensive agriculture and fishery and certain tourism activities. The measure was never notified to the Commission and is therefore illegal. ... [T]he Commission has now decided that the aid is also incompatible with EC Treaty state aid rules ...”
Competition Commissioner Neelie Kroes added, “When a Member State distorts competition with incompatible state aid, the prior situation has to be re-established. This means that such aid needs to be fully recovered, including interest.”Link here.
AUSTRALIA ANNOUNCES OFFSHORE TAX AMNESTY
“If you do not contact us, we will contact you ...”
Australian Tax Commissioner Michael D’Ascenzo announced an initiative encouraging taxpayers to come forward and make disclosures of unreported income from offshore activities. “We are increasing our audit activities in cases where people may try to conceal income and assets offshore in tax havens,” explained D’Ascenzo. “Taxpayers who contact us before they are the subject of an audit and make a full and true disclosure will have reduced shortfall penalties. ... There is nothing wrong with holding an offshore account or investing overseas as long as you pay any Australian tax due.”
In a pilot project with some Australian financial institutions, the ATO has asked their overseas subsidiaries or branches in Vanuatu to write to their Australian customers and encourage them to make a voluntary disclosure of any unreported income. Other approaches include sending a letter to people identified as having an offshore debit or credit card in Jersey, Guernsey or the Isle of Man, or identified through AUSTRAC data as having dealings with those jurisdictions. “I urge people to review their tax returns and if they have undisclosed income to contact us before we contact them,” D’Ascenzo added.Link here.
MALAYSIA TO CONTINUE CUTTING CORPORATE TAX
A one percentage point reduction in Malaysia’s rate of corporate tax will go ahead as planned next year, Second Finance Minister Nor Mohamed Yakcop revealed. The reduction is part of a rolling programme of corporate tax cuts announced last year by Prime Minister Abdullah Ahmad Badawi, which has seen the rate fall by 1% to 27% this year, and will bring about an additional cut to 26% in 2008. “Although this measure will result in a significant reduction in revenue, the government is confident that it will have a positive overall effect on the economy,” the Prime Minister stated.
Until this year’s cut, Malaysia’s corporate tax rate had remained static at 28% since 1998, as the government placed a higher priority on balancing its books. Although it is Asia’s 3rd largest economy, Malaysia’s corporate tax rate compares unfavorably to other economic powers in the region, particularly Singapore and Hong Kong, and the tax cut goes some way towards addressing this.
Last year, Abdullah also announced a number of other tax breaks designed to encourage investment in the private sector. These include incentives to promote growth in tourism, biotechnology, Islamic banking and real estate investment trusts (REITs). Islamic banks conducting business in foreign currencies were also to be granted a 10-year tax holiday. The government is however, coy on the subject of personal income tax, which stands at 28%, and has refused to say whether there will be cuts in income tax to match the corporate tax cuts when the next budget is announced in September.Link here.
SURFING FINANCIAL CYCLES AND TRENDS TO SUCCESS
Recently, as I sat on the beach enjoying the warm southern California sun watching the surfers play in the waves, I began thinking how much surfing seems related to financial investing. The surfer, after paddling into the water, sits on his or her board and begins to study the waves coming in from the ocean. Knowing the large waves come in sets, the surfer is soon paddling down the face of a building wave. Once up on the board, the surfer surfs back and forth using the energy of the wave to maximize their potential. Then, as the wave begins to lose its energy, the surfer glides over the top and quickly paddles back out to catch the next big wave. Successful investing is in many ways very similar. It all comes down to understanding how investment waves work, which ones to catch, when to catch them, and when to get off.
This article is the third in a series aimed at providing thoughtful perspectives on protecting one’s self when it comes to investing and retiring either at home or abroad. The information is not designed to advocate investment strategies but provide educational information designed to assist readers in better understanding the financial world and making good decisions. The following discussion will explore two important aspects of investing and long-term financial success. First, the topic of financial cycles will be discussed using a historical perspective as a method of understanding how markets operate in cycles rather than in a linear fashion. The discussion will then move on to understanding current and future trends and how they can be used as a tool for positioning ourselves to succeed financially in the future. Finally the article will briefly reflect on the current cycles and trends and how they may affect us going forward.
The importance of understanding cycles.
The importance of understanding cycles can not be understated for the typical investor. If you asked the average investor, “what were the investment cycles of the past 50 years?” few if any would be able tell you. Our educational system does not teach this important information just as it often fails to prepare any of its students for the real financial world. In fact, much of the economic education we receive presents us with a linear view of the investment world. We are taught to believe that if we just keep investing “for the long-term” that in the end all will be fine and our portfolios will have been fruitful and multiplied. This mantra, designed and marketed by Wall Street and its brokers is great for assuring profits for themselves in good and bad times, but is it true for the average investor on the street?
The market is not linear but is in fact very cyclic. That the market is much like the seasons of the year with seasons of growth (Bull) and seasons of loss (Bear). It is by understanding the market as a cyclic entity that the investor can then act proactively to maximize and protect their financial nest egg. Much like the surfer who knows how to use the energy of the wave to maximize their ride and exit so as to not be crashed onto the shore. It is also important to remember that each of us have our own investment cycles as it relates to our life cycle.
By studying the markets from a historical perspective there seems to be about a 17 year cycle where particular strategies or investment classes will rise or fall. In the 50’s to mid 60’s stocks were king. From the 60’s to early 1980’s commodities became king and stocks tanked. In the late 70’s and through the 80’s the Nikkei became king as commodities crashed. Then from the 80’s through 2000 the stock market became king again. As you can see, understanding these cycles can greatly help you in maximizing investment returns. It can also help you to avoid being on the wrong side of a particular investment cycle as it relates to your life cycle.
Understanding cyclic downturns.
It is important to make a point about the nature of cyclic downturns and the common belief they are fast and hard – an event similar to the crash of 1987. The reality is Bear Markets tend to be long in duration with many deceptive upturns and downturns. This misunderstanding has led many an investor to stay in the market longer than they should have as it seemed (and they were told) the market had finally bottomed and was bouncing back. The bear market from 1966 to 1976 is a perfect example of a time when many investors stayed in stocks believing a bottom had been set and a new Bull was about to begin. Many investors lost 60% or more of their portfolio as they rode the bear all the way to the bottom. The commodities market of the early 1980’s is the same.
Trends are your friends ... maybe.
Even though the understanding of trends is important, it is not something many of do as part of our regular investment planning. When was the last time your financial advisor discussed the impact of Peak Oil on your portfolio? Or how the retiring of the Baby Boomers will affect stocks, bonds and real estate? Over the past few years I have posed similar questions to friends and family and found few have thought about such issues. Even fewer have ever had their financial advisors or brokers broach the topic. Generally, people rely on recent history in projecting forward their investment strategies. Having read the above section on cycles you can see how this might not be the best strategy.
Most of us are familiar with the old saying, usually offered up at the top of a bubble, that “this time it will be different.” We heard it in 2000 with the tech bubble when people said the stock markets would continue to rise a 20% a year for years into the future. Again, we heard this in 2005 with the housing bubble. The following discussion on trends will be presented under the caveat that this time it really is different. Each of the trends covered below are very different as we have never faced these issues in the history of mankind. We have never faced a world with 6.5 soon to be 9 billion people. We have never faced living with the truly finite resources of a small world with a huge population. We have never faced a world addicted to and dependent on an energy source that has peaked where demand will quickly outpace supply. We have never faced global warming or the ecosystem collapses we are now experiencing. And we have never faced a world in which our lives are dependent on a fragile global network where the failure of one link in this daisy chain can result in millions of people dying. As investors, and members of the web of life currently hurling through space on this little planet of ours, it is important to fully understand that things are really different this time. Unlike in the past (with the exception of nuclear war) this is the first time in history that our actions will affect both the planet and the lives of our children’s children.
The following trends are best described as macro in nature. Meaning they are very large scale and will impact the world not just for years but decades. By understanding these trends you can plan for the future both in making good investments and in protecting yourself and family. Many investors make the mistake of looking at trends over the short-term losing sight of the more powerful macro trends. A perfect example are those who purchased gold and silver early in this bull run. After watching the daily ups and downs many sold in fear as soon as the market jumped way up or way down. The daily, weekly or monthly volatility drove them crazy. By understanding the larger trends and looking at long-term charts, others saw the volatility for what it was and have continued to ride the metals bull to its current high. The moral of the story is to keep a focus on the big picture. So let us look at a number of important trends.
The trends are quite ominous and foreboding yet within them are a lot of great opportunities for those of us who are willing to take the time to educate ourselves to the cycles and trends and then position ourselves to benefit from them. It is not rocket science but mostly common sense. You probably already possess a streak of contrarian spirit so the fact that this will likely conflict with the information handed out by the mainstream financial world should not be a problem. It might be for family and friends.
I hope you will sit down and think about each of these trends as well as explore where we are at when it comes to cycles. I believe it will be obvious that as things move forward there will be much greater focus on true, real assets. Where in the past 20 years paper assets were king, a new cycle has now begun and, if the trends mentioned above have anything to do with it, should last for many years into the future.Link here.
BRITISH VIRGIN ISLANDS CUTS COMPANY FEES FOR CAPCOS
The BVI’s financial regulator has announced a reduction in fees for companies registered under the Companies Act, to level the playing field with companies registered under new legislation. At the same time, the BVI Financial Services Commission also announced a fee structure in anticipation of new private trust companies regulations coming into force.
Legislation passed last year increased the fees payable by companies registered under the Companies Act (Cap.185) (“CapCos”) to a minimum of $350. This was intended to put CapCos on a par with companies registered under the new BVI Business Companies Act (BVIBCA). However, the Government has decided that CapCos which had not re-registered under the BVIBCA when their annual fee was due (30 April 2007) should not be required to pay an increased fee in 2007. The Executive Council has therefore reduced the 2007 annual fee for local companies to the same level as it was in 2006, and directed the Registrar of Companies to refund all overpaid fees.
The annual fee payable by a CapCo for this year will, as it has always done, depend upon the value of its assets. Where the value of a CapCo’s assets is less than $10,000, the annual fee will be reduced from $350 back to $25. There is no need for companies to apply for the repayment of any overpaid fee. The Companies Registry has commenced an exercise to identify all overpayments made, and will notify all companies that are eligible for a refund. This process is expected to take a few weeks. The Commission also expects regulations enabling the establishment of private trust companies to come into force during the course of the month. The Order made by the Executive Council anticipates this by setting the fees that will be payable by private trust companies. The incorporation fee and annual fee for a private trust company will be:
SPY TOWERS ON THE U.S. BORDER
Boeing has enlisted the aid of Elbit Systems, Israel’s major defense contractor, to construct high-tech surveillance along the border of the U.S. and Mexico. So far, the high-tech fiasco is not working and Arizona residents are organizing a lawsuit to halt government spying on U.S. citizens.
Arivaca resident Margaret Keoppen is among those opposing the 98-foot spy tower in her community, part of Project 28 of the Secure Border Initiative. With a spy viewing range of 10 miles, the spy tower is pointed at the good folks of Arivaca. “This system is entirely experimental with unknown results and I don’t wish to be used as a guinea pig with resulting harm to me, my family, my animals, area wildlife,” Keoppen told Project 28.
In Tucson, the search for the biggest joke in town – the environmental assessment of the spy towers – began at the public library. “That’s odd,” said a research librarian, “there are no copies of it here.” The librarian plowed through the web and made a phone call. A copy of the environmental assessment for the new high-tech border surveillance was finally located at the Arivaca library.
In Arivaca, the draft copy of the assessment arrived on a Saturday in April, with no public notice. A typed cover letter from U.S. Customs and Border Protection said residents had four days to respond, April 14-18. The library was closed two of those days. Without phone calls from the librarians, no one would have known it was there. Few people had a chance to even read it. Driving down from Tucson, the earth is scorched from the 114 to 118 degree temperatures. A stop at a bird walk near Arivaca proves more desolation. Two men with hunting dogs arrive in separate vehicles. One man takes off quickly for another site, both men wearing plain clothes. In this no-man’s land, strangers are assumed to be undercover border agents or Minutemen.
In Arivaca, residents are fighting mad about the spy tower, which was built without consulting them, less than a mile from town. “You can not see the border from that spy tower, because of the mountains. The only thing you can see is Arivaca,” says one woman living in this community of 2,500. Arivaca is 12 miles north of the border and the desert mountains are a fortress that the spy tower camera can not penetrate.
The spy tower has the people of Arivaca in clear sight. It is a community of artists and ranchers, popular with birdwatchers and nature lovers. The people here savor their privacy. They have selected Arivaca because it is off the beaten track and ensures a quiet life, far from the prying eyes of anyone. Now, without any consultation, there is a spy tower on the edge of town, with its camera pointed at them. Worse, the Boeing equipment list for Project 28 calls for radar, infrared, lasers, microwave, iris biometrics and facial biometrics.
The environmental assessment concludes Project 28 will have “no significant impact.” However, the assessment lists many endangered, threatened and sensitive life forms. Arivaca is the territory of migrating bats, including a large population on the move from the nearby ghost town of Ruby. In the white wash of the environmental assessment, it says, “Tower radar is not expected to impact echolocation of lesser long-nosed bat because recent studies determined that some species of bats avoided the frequencies of radar to which they were exposed.” The environmental assessment is clearly a joke. No one could have manufactured this document with serious intent. Wildlife, it says, is “expected to stay away.”
The assessment talks much more about grasses and birds than it does of spying on U.S. citizens, which it does not address. Unwarranted spying on U.S. citizens can have dangerous, even deadly consequences. With the spy towers, Border Patrol agents will be able to sit in their cars and watch local residents on their laptop computers, if and when the spy towers begin functioning. Arivacans have asked Homeland Security about privacy. However, no one in Homeland Security can assure them that normal citizens will not be spied on.
Border residents ask, what about the occasional Border Patrol agent who is a pedophile, stalker, rapist or murderer? Border Patrol agents are now charged with the crimes of rape and murder. What would prevent an agent from keeping tabs on the young man or woman they are attracted to with their spy apparatus? With thousands of border agents, and new recruits arriving constantly, there are no guarantees.
In other areas of the Arizona border where spy towers are planned, including the Douglas/Naco area, residents are also organizing to halt spying on community members. All along the border, residents point out this fact – once they have got the photos or the video on you, what is to stop them from using it against you in any way they please, including for political reasons. There is another point they are quick to point out. Even if they worked, the spy towers would not stop border crossers. Migrants headed north would find a way to cross.Link here.
BIG BROTHER IS WATCHING GEORGE ORWELL’S HOUSE
The Big Brother nightmare of George Orwell’s 1984 has become a reality – in the shadow of the author’s former London home. It may have taken a little longer than he predicted, but Orwell’s vision of a society where cameras and computers spy on every person’s movements is now here.
According to the latest studies, Britain has a staggering 4.2 million CCTV cameras – one for every 14 people in the country – and 20% of cameras globally. It has been calculated that each person is caught on camera an average of 300 times daily. Use of spy cameras in modern-day Britain is now a chilling mirror image of Orwell’s fictional world, created in the post-war ‘40s in a 4th-floor flat overlooking Canonbury Square in Islington, North London. On the wall outside his former residence – flat #27B – where Orwell lived until his death in 1950, a historical plaque commemorates the anti-authoritarian author. And within 200 yards of the flat, there are 32 CCTV cameras, scanning every move.
Orwell’s view of the tree-filled gardens outside the flat is under 24-hour surveillance from two cameras perched on traffic lights. The flat’s rear windows are constantly viewed from two more security cameras outside a conference center in Canonbury Place. In a lane, just off the square, close to Orwell’s favourite pub, the Compton Arms, a camera at the rear of a car dealership records every person entering or leaving the pub. Within a 200-yard radius of the flat, there are another 28 CCTV cameras, together with hundreds of private, remote-controlled security cameras used to scrutinise visitors to homes, shops and offices.
The message is reminiscent of a 1949 poster to mark the launch of Orwell’s 1984: “Big Brother is Watching You”. In the Shriji grocery store in Canonbury Place, three cameras focus on every person in the shop. Owner Minesh Amin explained, “They are for our security and safety. Without them, people would steal from the shop. Although this is a nice area, there are always bad people who cause trouble by stealing.”
This week, the Royal Academy of Engineering (RAE) produced a report highlighting the astonishing numbers of CCTV cameras in the country and warned how such “Big Brother tactics” could eventually put lives at risk. The RAE report warned any security system was “vulnerable to abuse, including bribery of staff and computer hackers gaining access to it.” One of the report’s authors claimed the numbers of CCTV cameras now being used is so vast that further installations should be stopped until the need for them is proven.
One fear is a nationwide standard for CCTV cameras which would make it possible for all information gathered by individual cameras to be shared – and accessed by anyone with the means to do so. The RAE report follows a warning by the Government’s Information Commissioner Richard Thomas that excessive use of CCTV and other information-gathering was “creating a climate of suspicion”.Link here.
OPEN SOURCE FILTERING SOLUTIONS AND THE SPAM PROBLEM
Let us face it, modern e-mail communication relying on SMTP is fundamentally broken. There is no sender authentication. There are lot of countermeasures in form of filtering and add-on authentication, but neither of them are proved to be 100% successful (that is 100% hit ratio with 0% of false positives). Spammers always find new ways of confusing filters with random noise, bad grammar, hidden HTML code, padding, bitmap-rendered messages etc. Our world is becoming an overloaded and unusable mailbox of spam. This article will nevertheless try to cover some of the spam problems and possible solutions, but bare in mind that all of these are just no more than a temporary fix.
Product spam, financial spam, frauds, scams, phishing, health spam, Internet spam, adult spam, political spam, you-name-it spam. Despite Bill Gates’s brave promise in 2004 (“Two years from now, spam will be solved”) e-mail spam has significantly increased worldwide in the last two years in both volume and size, making over 70% of total e-mail traffic. According to the First MAAWG Global Spam Report from Q1 2006, around 80% of incoming e-mail was detected as abusive. A bit later in Q3 2006 various Internet service providers in the world have reported an alarming increase of unsolicited e-mail in a very short period due to the range of new spamming techniques involved. At the end of 2006 an estimated number of the world’s total spam is around 85 billion messages per day (obviously this number is rather approximate). And it is exponentially increasing. We all know how much it is going to cost (quick spam calculator here).
Spammers have undoubtedly adapted and evolved. Up to now they used a single IP setup for delivering their unwanted e-mail, usually hopping from one dialup to another. They have used open proxies, open mail relays and other similar easy-to-track sources. Unfortunately, it has changed. Current spamming methods now include huge networks (called botnets) of zombie-computers used for distributed spam delivery and Denial of Service attacks. Various new viruses and worms are targeting user computers, making them eventually into huge spam clusters. Not only Microsoft Windows PCs are hacked, more and more Unix and Linux servers are affected too. And it is not for the fame and the glory, but to enable crackers to install and run scripts for the remote controlled spamming. In the meantime, nobody knows how many spambots are currently harvesting the Web in search of new e-mail addresses, their new victims. There is nothing sophisticated in their attacks, only brute force and numbers. Spammers earn a living by making and delivering spam and they do it darn well.Link here.
MICROSOFT WINDOWS PATENT WILL SPY ON PC USERS FOR ADVERTISERS
If you thought advertizements on the web have become more offensive and more intrusive than ever before, then it might be time to find alternatives to using software from Microsoft. Microsoft has filed a patent that threatens to breathe life into Bill Gates’s and Ray Ozzie’s Frankenstein-like Windows Live “vision”, unveiled in November 2005, for putting annoying, in-your-face internet adverts inside your most important Windows applications.
Microsoft has claimed what it calls an “advertizing framework” that would suck “context data” from your PC so advertiszers can display ads on the client, and to split revenue with the advertizer and the owner of the application supplying the data. According to the patent, any application such as – oh, say – a word processor or email client – may “serve as both a source of context data and as a display client.” Microsoft’s framework would also stipulate “acceptable” advertizing “restrictions on use of alternate display clients” (so no money for you, Linux), and “specifying supporting media”. So forget Real Player and QuickTime, the future is Silverlight. The patent, filed with the US patent and trademark office, would allow for more targeted, relevant and context-sensitive ads, according to Microsoft.
Aside from the usual competitive concerns of the dominant supplier of PC operating systems further integrating its applications, this time with the internet to drive online ad revenue, Microsoft’s patent is packed with the usual thorny knot of security and privacy concerns. These include spying on, storing and streaming data from personal files stored on a PC plus information on the users’ computing activity to advertisers, plus the potential for hackers to attack machines by cracking both the data store and data stream.
Sun Microsystems former chief executive Scott McNealy once lectured us long and hard on losing our online privacy to the internet. Looks like you can kiss farewell to the anonymity of using a PC, too.Link here.
U.S. FEDS USE KEYSTROKE LOGGER TO THWART PGP, HUSHMAIL
A recent court case provides a rare glimpse into how some federal agents deal with encryption: by breaking into a suspect’s home or office, implanting keystroke-logging software, and spying on what happens from afar. An agent with the Drug Enforcement Administration persuaded a federal judge to authorize him to sneak into an Escondido, California office believed to be a front for manufacturing the drug MDMA, or Ecstasy. The DEA received permission to copy the hard drives’ contents and inject a keystroke logger into the computers.
That was necessary, according to DEA Agent Greg Coffey, because the suspects were using PGP and the encrypted Web e-mail service Hushmail. Coffey asserted that the DEA needed “real-time and meaningful access” to “monitor the keystrokes” for PGP and Hushmail passphrases. The aggressive surveillance techniques employed by the DEA were part of a case that resulted in a ruling by the 9th Circuit Court of Appeals, which primarily dealt with Internet surveillance through a wiretap conducted on a PacBell (now AT&T) business DSL line used by the defendants.
The DEA’s pursuit of alleged Ecstasy manufacturers Mark Forrester and Dennis Alba differs from the first known police use of key-logging software, which snared reputed mobster Nicodemo Scarfo in 1999. In the Scarfo case, the FBI said in an unclassified affidavit (PDF) at the time, a key logger that also was planted in a black bag job was disabled when the Internet connection became active. Not much more is known about the DEA’s key logger in the Forrester-Alba case. There is no evidence the DEA used the FBI’s keystroke logger known as Magic Lantern, which reportedly can be installed remotely by taking advantage of operating system vulnerabilities without having agents physically break into an office.
Key loggers are hardly unusual nowadays, of course. Recent surveys indicate that plenty of workplaces are infected by spyware with key-logging abilities. The use of key loggers by police, however, seems to be uncommon. When used by police, they raise novel legal issues. It is not entirely clear in what circumstances they are permitted under the U.S. Constitution and wiretap laws (which is why, in the Scarfo case, the FBI cleverly ducked this issue by, according to sworn testimony, disabling the key logger when the modem was in use).
Scarfo’s defense attorney claimed that a key logger is akin to a “general warrant” permitting the DEA to seize “any record, including e-mail, simply because it was typed on a computer.” General warrants are prohibited by the Fourth Amendment, which requires that warrants specify the “things to be seized.” Another potential legal obstacle is whether wiretap laws apply – including their requirement of minimizing the interception of irrelevant conversations. A federal judge eventually ruled that the unique design made the Scarfo logger permissible. But in the Forrester-Alba case, because Alba did not challenge the key logger directly, the 9th Circuit never weighed in.
Instead, the 9th Circuit spent much of its time evaluating whether government agents can eavesdrop on the Internet addresses Americans visit and the e-mail address of their correspondents without obtaining a search warrant first. The judges’ concluded that federal agents did not violate the Fourth Amendment when spying on the Escondido DSL line without any evidence of criminal wrongdoing on his behalf, a legal standard known as probable cause. All the feds must do is prove the information is “relevant” to an ongoing investigation.
According to the DEA, only IP addresses of Web sites and e-mail headers are captured, and not the rest of the communication stream. That, they argue, makes it akin to existing precedent dealing with pen registers, which capture telephone numbers dialed and are permitted without any proof of probable cause of wrongdoing. The 9th Circuit agreed, ruling that “e-mail and Internet users have no expectation of privacy in the To/From addresses of their messages or the IP addresses of the websites they visit because they should know that these messages are sent and these IP addresses are accessed through the equipment of their Internet service provider and other third parties.” This follows the lead of a Massachusetts judge who said much the same thing in November 2005.Link here.
FBI SECRET SPYWARE TRACKS DOWN TEEN WHO MADE BOMB THREATS
FBI agents trying to track the source of e-mailed bomb threats against a Washington state high school last month sent the suspect a secret surveillance program designed to surreptitiously monitor him and report back to a government server, according to an FBI affidavit. The court filing offers the first public glimpse into the FBI’s long-suspected spyware capability, in which the FBI adopts techniques more common to online criminals.
The software was sent to the owner of an anonymous MySpace profile linked to bomb threats against Timberline High School near Seattle. The code led the FBI to 15-year-old Josh Glazebrook, a student at the school, who this week plead guilty to making bomb threats, identity theft and felony harassment. In an affidavit seeking a search warrant to use the software, FBI agent Norman Sanders describes the software as a “computer and internet protocol address verifier,” or CIPAV.
The full capabilities of the CIPAV are closely guarded secrets, but here is some of the data the malware collects from a computer immediately after infiltrating it, according to a bureau affidavit: IP address, MAC address of ethernet cards, list of open TCP and UDP ports, list of running programs, operating system type and serial number, registered user (and company name, if any) of the operating system, current logged-in user name, and the last visited URL. Once that data is gathered, the CIPAV begins secretly monitoring the computer’s internet use, logging every IP address to which the machine connects. All that information is sent over the internet to an FBI computer in Virginia.
The CIPAV then settles into a silent “pen register” mode, in which it lurks on the target computer and monitors its internet use, logging the IP address of every computer to which the machine connects for up to 60 days. The FBI has been known to use PC-spying technology since at least 1999, when a court ruled the bureau could break into reputed mobster Nicodemo Scarfo’s office to plant a covert keystroke logger on his computer. (See article summary immediately above.) But it was not until 2001 that the FBI’s plans to use hacker-style computer-intrusion techniques emerged. A report described an FBI program called “Magic Lantern” that uses deceptive e-mail attachments and operating-system vulnerabilities to infiltrate a target system.Link here.
THE REAL SUPREME COURT: UNELECTED, UNACCOUNTABLE, POLITICALLY CONNECTED LAWYERS
The Supreme Court’s 5-4 decision in the Louisville and Seattle schools cases exposed one of the unspoken truths of American “constitutional law”, that there is no law in this area. Instead, there are only the justices’ naked political opinions.
Since 1954’s decision in Brown v. Board of Education, the Court has taken upon itself the task of superintending school assignment policies touching on race. Yet, as the Court had said before 1954, the Equal Protection Clause was not intended to ban race discrimination in school assignment – even racial segregation of schools. In fact, the Congress that passed the Fourteenth Amendment established segregated schools in Washington, D.C. The justices who wrote Brown, and thus “constitutionalized” the ban on school segregation, recognized this fact. One of them, Justice Robert Jackson, called Brown “new law for a new day.” The author of the Court’s opinion, Chief Justice Earl Warren, said the Court could not be bound by the intentions of people who had lived in 1868.
But if the Court is not going to interpret the Fourteenth Amendment according to the intentions of the people who added it to the Constitution, how is it going to interpret it? This is one of the great fault lines in modern “constitutional law”. Most conservative judges favor holding the Equal Protection Clause to be a general ban on race discrimination, with only limited exceptions. Thus, Chief Justice Roberts said in this latest opinion that, “The way to stop discrimination on the basis of race is to stop discriminating on the basis of race.” Roberts here is not applying an originalist interpretation. He is applying the understanding of Brown v. Board of Education that is current in conservative circles. He is behaving, in other words, as if Brown itself were a constitutional amendment.
Liberal justices, led in this case by Clinton appointee Stephen Breyer, generally hold that Brown and its progeny committed the Court and the country to racial integration. Ever since 1971’s Swann v. Charlotte-Mecklenburg Board of Education decision, the Court’s liberal wing has supported race discrimination aimed at fostering integration. (Beans must be counted before they can be sorted, that is.) The liberal wing considers discrimination of this kind, whether in the form of busing, of racial exclusion, or of any of numerous other race-conscious policies, “benign”. Thus, Breyer lamented that, “To invalidate the [school-assignment] plans under review is to threaten the promise of Brown.” Not “of the Fourteenth Amendment,” but “of Brown.” Why? Because Brown had nothing to do with the Fourteenth Amendment. Brown was an innovation, and the integrationist current in constitutional law is traceable to that decision, not to the Fourteenth Amendment – to the judges, not the people.
In this latest decision, Justice Anthony Kennedy followed former Justice Lewis Powell in holding to a middle view that would allow racial discrimination in the name of “diversity”. As Kennedy put it, “A district may consider it a compelling interest to achieve a diverse student population. Race may be one component of that diversity.” What legal argument did Kennedy offer in support of this pronouncement? None. In fairness, however, none was all he had.
In fact, none of these three views makes any mention of the original understanding of the Equal Protection Clause. The reason for that is simple. It is that Brown was an instance of judicial legislation, plain and simple, and none of the three positions staked out by the current justices has any relationship to the Equal Protection Clause’s actual meaning.
In a governmental system in which judges did not feel free to overturn the constitutional intentions of the people, the Equal Protection Clause would be held to be, as Jackson and Warren conceded it was intended to be, irrelevant to school assignment. The Fourteenth Amendment, in other words, does not ban racial segregation. It simply does not speak to this issue. In case the Court made this honest proclamation, the political process would soon yield a new amendment banning segregation of schools. Then, instead of being subject to the moral ruminations and political preferences of appointed justices, Americans would be governed by constitutional law of their own creation. If elected officials resolved this issue, in other words, Americans would have republican government in this area, and not arbitrary government by unelected, unaccountable, politically connected lawyers called Supreme Court justices.Link here.
U.S. TO FREEZE ASSETS OF “THOSE THREATENING IRAQ”
George W. Bush has issued an order empowering the U.S. government to freeze the assets of people who threaten Iraq’s stability and its government. Bush’s executive order authorizes the U.S. Treasury and other government agencies to freeze the property of persons who have committed or may mount acts of violence in Iraq. The measure also targets individuals seeking to disrupt reconstruction efforts in the war-ravaged country or harm humanitarian workers.
A White House official, who requested anonymity, said the order generally applies to terrorist or insurgent groups, including those aided by Syria and Iran. High-ranking U.S. military officers have criticized both countries for failing to stop what they claim are flows of insurgents, weapons and munitions across their borders into Iraq.
The Treasury Department, which already manages wide-ranging global programs blocking the assets of individuals and entities deemed to be a threat to U.S. interests, has not yet targeted any particular individuals or entities in respect to Bush’s new order. However, a Treasury spokeswoman said the department would likely be drawing up such a list in the coming weeks and months.
An existing Treasury blacklist, available from the department’s website, includes former high-ranking Iraqi officials who served in the government of the late Iraqi dictator Saddam Hussein prior to the U.S.-led invasion of the country in 2003. Targeted individuals or entities can find it harder to transfer cash and other assets and also see themselves cut off from the U.S. financial system, depending on a range of options available to the Treasury. Bush’s order calls for U.S. officials to freeze all property and interests of persons deemed a threat to Iraq within the U.S. or which come under the control of Americans. The measure also bars a U.S. bank from opening or maintaining a bank account for any individual blacklisted by the Treasury, and from enabling money transfers of designated targets.Link here.
NETELLER FOUNDER PLEADS GUILTY TO PROMOTING ILLEGAL GAMBLING
John Lefebvre, the founder and former president of payment services company Neteller, has pleaded guilty to charges that he conspired with others to promote illegal gambling by providing payment services in the U.S. to offshore internet gambling businesses. According to Michael J. Garcia, the U.S. Attorney for the Southern District of New York, the NETeller Group provided payment services to internet gambling businesses located outside the U.S., so those businesses could take bets from gamblers in the U.S., where such betting is now illegal. Lefebvre and fellow co-founder Stephen Lawrence, both Canadian citizens, were arrested in connection with the charges in January.
Neteller PLC, formerly known as Neteller, Inc., is an internet payment services company that was founded by Lawrence and Lefebvre in 1999. Neteller is based in the Isle of Man and its shares are listed on the London Stock Exchange, although trading in the company’s stock has been suspended. Internet payment services companies like Neteller allow gambling companies to transfer money collected from U.S. customers to bank accounts outside the U.S. According to Neteller’s 2005 annual report, Lawrence and Lefebvre, through Neteller, provided payment services to more than 80% of worldwide gaming merchants.
Neteller has said that as of 18 January 2007, U.S. customers were no longer able to transfer funds using its services to or from any online gambling site. The company’s board made the decision in the light of the passing of the Unlawful Internet Gaming Enforcement Act of 2006 (UIGEA) by Congress last year, and the attendant. In 2005, it is said that Neteller processed over $7.3 billion in financial transactions, and prosecutors alleged that 95% of the firm’s revenue was derived from money transfers involving internet gambling companies.
Lefebvre, 55, pleaded guilty to a number of charges, including conducting illegal gambling businesses, engaging in international financial transactions for the purpose of promoting illegal gambling, and operating an unlicensed money transmitting business. Lefebvre faces a maximum sentence of 5 years’ imprisonment and a fine of $250,000, or twice the gross gain or loss from the offense. In a related case, Lawrence pleaded guilty on June 29, 2007 to participating in the same conspiracy and also admitted to a forfeiture allegation of $100 million, for which he is jointly responsible with Lefebvre.Link here.
RECORDING INDUSTRY ASSOCIATION OF AMERICA FORCED TO PAY DEFENDANT’S LEGAL BILLS
The RIAA has had to pay a woman it alleged shared music on a P2P network over $68,685.23 in lawyerish fees and costs. In this case they threatened Debbie Foster when it appeared that the person who was file-sharing was her daughter Amanda. But rather than call off the hounds, the RIAA carried on with the case against the mother.
The case in Oklahoma, has proved to be a rout for the RIAA and its methods proving that a person did any file-sharing. When it became fairly clear that the file sharing was nothing to do with Debbie Foster, and there was a huge amount of negative publicity, the RIAA wanted to just walk away from the case, saddling Ms. Foster with a hefty legal bill. The RIAA wanted Foster to be stuck with paying her own legal costs because it technically dropped the case against her. However Judge Lee R. West said that was “disingenuous” and that the RIAA’s factual statements about the settlement history of the case were “not true”. He found the RIAA’s case against Foster “untested and marginal”. He found its “motives to be questionable in light of the facts of the case.”
It is the first time that the RIAA has had to cough up in a case of this kind.Links here and here.
U.S. CONS ATTEMPT COPYRIGHT-BASED PRISON BREAK
Four inmates of Oklahoma’s El Reno federal prison were indicted for what must rate as the most audicious prison break scheme in history. They are alleged to have copyrighted their names and then “demanded millions of dollars from prison officials for using the names without authorization.” Specifically, the four “sent demand notices for payment” to the prison warden and filed liens against his property. They then hired someone to “seize his vehicles, freeze his bank accounts, and change the locks on his house.”
Believing this had been done, the quartet of master criminals told the warden he would not get his property back unless they were released. Sadly, they did not know the guy they had hired was an undercover FBI agent, and they now face a possible six (more) years in prison and a $250,000 fine on a “conspiring to impede the duties of federal prison officials” rap, plus up to 10 years in prison and a $250,000 fine on a charge of “mailing threatening communications with the intent to extort.”Link here.
THE SHIFTING RATIONALES FOR EMPIRE
So the Democrats caved. They voted for Bush’s war spending, minus the request for a timetable for withdrawal. Nancy Pelosi claims the debate will continue, as if there has been much of one on the Hill. The Senate approved the spending by an overwhelming margin. All it took was some political pressure and some logrolling, and now we have bipartisan madness in Iraq with no end in sight. This all comes with the news that Bush plans to double American combat forces in Iraq by year’s end.
Now, what is going on? According to a poll in May, 72% of Americans disapprove of Bush’s handling of Iraq. This includes 40% of Republicans. 61% of Americans say the U.S. should have never started the war. Despite the compromise in Washington, 63% of Americans think the U.S. should get out by sometime next year. Have the tides changed? Unfortunately, the need to educate people on the follies of empire is as pressing as ever.
The fact that most Americans are sick of this war is, in itself, wonderful. After all, as terrible as the Iraq war and occupation have been, there is a sense in which Americans are responding to the horrors and futility of war better than in the past. Americans are upset about it, as they should be. The biggest proponents of an all-out global jihad against radical Islam are quite disappointed by the public opinion. Shortly after the Afghanistan invasion began, neoconservative Max Boot complained that Americans just are not willing to take as many casualties as we used to. Today, the more bloodthirsty hawks lament how quickly Americans have shied away from this war over what they see as a mere few thousand casualties.
On the home front, the U.S. government should, according to these serious warmongers, take off the kid gloves, censor the media, abolish dissent, round up seditionists, impose loyalty oaths, and make life hell for all Muslims in the country. As far as money is concerned, so-called defense spending is a fraction of what it was during World War II, which consumed about 40% of the nation’s income. Some people regret all this, but I think we are fortunate that Americans have become a little more wary of total warfare.
Why have Americans become so sick of Iraq, in particular, despite what the neocons would say are, given the crucial mission, relatively low body counts and relatively few setbacks? Part of it, ironically, is because this war has done so much to discredit the American empire. This is largely why everyone from Carter’s national security advisor, Zbigniew Brzezinski and Reagan’s NSA Director William Odom to that great advocate of American imperialism, historian Niall Ferguson, considers the Iraq war such a disaster. It has weakened our international standing, our diplomatic relations, and our military establishment.
Well, insofar as the American people suffer from this, from a weakened national security, from international resentment, this is indeed quite regrettable. In terms of the human cost, the hundreds of thousands of Iraqis who have likely died because of this war should never be swept under the rug. This Iraq war has its particularly egregious aspects to it. It was unbelievably stupid from a strategic point of view. Yet I will say if there is any silver lining to the Iraq quagmire, it is exactly that it might make it harder for the U.S. empire to wage war in the future.
Right now, most Americans would not support a war on Iran. But that can change, and to see why, we need to back up a bit and consider the different arguments for and against the American empire, and what their true implications are for a future of peace and freedom for our country.Link here.
WHY THEY WILL NOT IMPEACH
Why do the Democrats, with control of both the House and Senate since last year’s elections, continue to twiddle their thumbs over the policies and practices of a corrupt president. Yes, they did spearhead a bill through the House that requires a withdrawal of troops from Iraq by April, 2008, a measure that media propagandists dutifully offered as having some significance. But those who take the time to carefully read legislation realize that this was but another empty, cynical gesture. The latest expression of “bipartisan” meaninglessness designed solely to placate an increasingly disgruntled booboisie. Even in the unlikelihood of the bill being signed by the president – assuming a similar proposal passes the Senate – there does not appear to be sufficient Congressional support for it to override his veto. But Mr. Bush’s signing or non-signing of such legislation would not restrain his continuing the mayhem and slaughter visited upon Iraqis who do not fully appreciate their “liberation”. This bill would leave the president in precisely the same position he now enjoys, with the added benefit that he could rationalize his policies in terms of carrying out the express will of Congress!
Serious critics of both Mr. Bush and the Democrats ask why the latter do not undertake the impeachment of the former. Nancy Pelosi, whose every word and gesture belie the allegedly oppositional role of the Democrats, announced, immediately after the 2006 election results, that the impeachment of Mr. Bush was not a matter the Democrats would pursue with their newly-gained power. “Why not?”, many asked, particularly since Congress had been eager to impeach Bill Clinton for his far-lesser offenses. Should a man who lied America into an unprovoked, criminal attack that has thus far produced a million deaths, be more favorably treated than a man who lied about his sexual behavior in the White House? The few intelligent minds remaining in this intellectually benumbed society continue to ask this question.
If one takes the trouble to examine the matter from the perspective of the machinations that dominate all political behavior, the answer becomes apparent. Though Republicans and Democrats have their personal and minor policy differences, they are in agreement on one basic point – their “bipartisan” support for the preservation and aggrandizement of the power of the state. They understand, as do members of the mainstream media, that their principal obligation is to serve the well-being of the political power structure that long ago laid uncontested claim to the ownership of modern society.
The thought of impeaching Mr. Bush thus poses a major dilemma to all members of the political establishment. If the deceit, corruption, criminality, and downright stupidity of his administration have so embarrassed the system as to endanger its continued approval, is it possible to rehabilitate its image by any means short of impeachment? But since his impeachment would necessarily implicate the over-grasping for power that the rest of the political order would love to exercise on behalf of their own ambitions, dare any such hearings be undertaken?
Thomas Jefferson got it right when, in 1819, he observed, “Experience has already shown that the impeachment the Constitution has provided is not even a scarecrow.” Those who seek or want to hold onto their existing power are not about to condemn the man who has done so much to extend its reach.Link here.
Libertarians are divided on the issue of immigration. On the one hand, there is the notion that anyone should be free to present themselves upon property to which they have been invited. That notion is held by all the leading libertarian thinkers. It is a simple fact, however, that there is no purely private immigration. Frequently, immigrants to this country trespass on private property to enter, then utilize various public (government) services such as welfare, public schools, and free medical care once they have settled into an area. This use of government is of particular concern to many libertarians. Some say the U.S. government must stem the tide of illegal immigration before any meaningful rollback of taxes and welfare can take place. While I do understand and to some degree sympathize with this argument, the commonly proposed state solutions to the immigration problems are fraught with problems of their own.
It is my firm conviction that, whenever there exists a problem which is both persistent and widespread, the hand of the state may be found, either actively causing the problem, or preventing its speedy resolution. So when we see a problem, it is crucial to not only treat the symptoms, but also to fix the underlying problem. If I have intestinal pain and the diagnosis is stomach cancer, the solution is not morphine. As Thoreau wrote, “There are a thousand hacking at the branches of evil to one who is striking at the root.” I would add that there are many more than that who are wholly uninterested in horticulture, and a not insignificant number liberally spreading fertilizer.
It is easy to forget what government is really all about. The state is an entity which engages in what I call entrepreneurial evil. Entrepreneurs are opportunists. They see people in need of something, and take risks to offer them goods and services for a profit. It is a win-win situation. The state also employs its opportunists. They wait for legal openings to expand their own power and influence, and consequently the power and influence of the state. It seems apparent to me that the legal and social climate which would allow for a serious illegal immigration crackdown would also be one which would allow for various other things, such as raids on businesses suspected of employing such immigrants, a national ID system to effectively exclude illegal immigrants from employment and public services, and random traffic stops in areas suspected of being havens for illegal immigrants. These areas need not be limited to those areas near the border with Mexico.
A serious immigration crackdown would likely require nothing less than the intrusion of the federal government into every private transaction involving housing, employment or licensing. Eventually, of course, as companies move jobs outside of the U.S. to less regulated areas, the economy would sour, and this country would no longer appeal to immigrants. For those supporting a war on immigration, this would be a Pyrrhic victory indeed. To return to my earlier comparison to cancer, the problems associated with immigration are but symptoms caused by the cancer known as the state.Link here.
A WAKE-UP CALL THAT WE ARE ABOUT TO HAVE ANOTHER 9/11-WMD EXPERIENCE
The wake-up call is unlikely to be effective, because the American attitude toward government changed fundamentally seventy-odd years ago. Today, Americans are more likely to give the benefit of the doubt to government than they are to family members, friends, and those who would warn them about the government’s protection.
Intelligent observers are puzzled that President Bush is persisting in a futile and unpopular war at the obvious expense of his party’s electoral chances in 2008. Bush’s dismal approval rating implies a total wipeout of the Republicans in 2008. A number of pundits have concluded that the reason the Democrats have not brought a halt to Bush’s follies is that they expect Bush’s unpopular policies to provide them with a landslide victory next year.
There is a problem with this reasoning. It assumes that Cheney, Rove,and the Republicans are ignorant of these facts or are content for the Republican Party to be destroyed after Bush has his warmonger-police state fling. “After me, the deluge.” Is it not more likely that Cheney and Rove have in mind events that will, once again, rally the people behind President Bush and the Republican Party that is fighting the “war on terror” that the Democrats “want to lose”? Such events could take a number of forms.
The Democrat’s strategy assumes that Cheney, Rove, and their neoconservative allies have lost their cunning and their manipulative skills. It is difficult to imagine a more dangerous assumption for Democrats and the American people to make.Link here.
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