Offshore News Digest for Week of August 27, 2007

CENTRAL BANKS PLAY “WHACK-A-MOLE” IN CREDIT FREEZE

As global credit markets petrify, central banks are playing “Whack-A-Mole” with the hammer of overnight funds to bash down short-term interest rates. At least the ridiculous claims that the subprime crisis is confined to the U.S. mortgage market have subsided.

The Federal Reserve and the European Central Bank are trapped between the devil of inflation and the deep blue sea of the global money markets. The waves that carry billions of dollars and euros between financial institutions every day have been becalmed by concern about, well, take your pick from a laundry list of worries, all of which signal fear ousting greed.

If there is one takeaway from recent events, it is the reminder that the potency of global capital can leave central banks powerless. Bank of America’s $2 billion investment in Countrywide Financial, the biggest U.S. mortgage lender, may have done more to stabilize financial markets than the hundreds of billions of dollars of short-term funds supplied by the Fed and the ECB.

The ensuing dilemma is simple to enunciate, much harder to resolve. Bow to pressure at next month’s policy meetings, with the Fed cutting and the ECB holding fire, and central banks risk accusations of bailing out bad lenders. Keep U.S. rates on hold and raise euro rates, and they will be charged with fiddling while securities burn. The Fed is under the most pressure to prioritize the needs of borrowers and lenders.

The Fed does not want to be bullied into changing course. It must also be acutely aware that a policy response would stoke concern the situation is even worse than it appears – not to mention guaranteeing that Chairman Bernanke would be known as “Helicopter Ben” for the rest of his career.

The ECB has a more immediate problem, though its solution is likely to be different. President Jean-Claude Trichet has boxed himself into a corner by presaging each of the eight increases in the current tightening cycle with the words “strong vigilance”, a phrase he repeated earlier this month. Expectations are justifiably high that its key one-week rate of 4% will increase when policy makers next meet on September 6. And the ECB, sired as it was by Germany’s Bundesbank, will be even more reluctant than the Fed to be perceived as pandering to the interests of the market rather than serving the needs of the economy.

The trouble is, money-market rates are already punitively high, with the cost of borrowing euros for three months climbing to 4.78%, the most expensive since May 2001 and up from just 4.23% a month ago. The ECB’s likely path is to enforce a higher one-week benchmark rate next month while continuing to feed the money markets with longer-dated funds.

The modern rules for central banking are still being crafted and honed. There is no guarantee that their evolution will keep pace with the turbocharged rate of change in financial markets where the prospect of fabulous riches motivates insane levels of creativity and entrepreneurship.

The recent turbulence suggests one big change may be needed. Ignoring house values and the stock market when setting monetary policy looks increasingly unsustainable when they play such a vital role in determining the economic outlook. So when central bankers hold the equivalent of their annual picnic at Jackson Hole, Wyoming, at the end of the month, the topic of asset prices should be high on the agenda.

HOW PHYSICS CAN EXPLAIN WHY SOME COUNTRIES ARE RICH AND OTHERS ARE POOR

If economics can tell us something useful about crime, marriage, or carpooling – as I believe it can – then other academic disciplines should have something to tell us about economies. Last month, Science published an example that may turn out to be important. Two physicists, Cesar Hidalgo and Albert-László Barabási, and two economists, Bailey Klinger and Ricardo Hausmann, have been drawing unusual pictures of economic “space” that promise a deeper understanding of the biggest question in economics – why poor countries are poor.

There are many explanations, but some are easier to test than others. One very plausible account of why at least some poor countries are poor is that there is no smooth progression from where they are to where they would be when rich. For instance, to move from drilling oil to making silicon chips might require simultaneous investments in education, transport infrastructure, electricity, and many other things. The gap may be too far for private enterprise to bridge without some sort of coordinating effort from government – a “big push”.

That is an old and intuitive idea in economics, but as an informal argument it leaves a lot to be desired. For a start, while plausible, it might not be true. If it is true, it might be far more so for some kinds of economy than for others. And if there is to be a big push, in which direction should it go?

Testing the idea took three steps. First, economists at the NBER broke down each country’s exports into 775 distinct products. Next, Hausmann and Klinger used that data to measure how similar each product is to each other product. If every major apple exporter also exports pears, and every major pear exporter also exports apples, then the data are demonstrating apples and pears to be similar. For the third step, Hausmann and Klinger called upon Hidalgo and Barabási, who specialize in mapping and analyzing networks. The result was a map (PDF) of the relationships between different products in an abstract economic space. Apples and pears are close together. Oil production is a long way away from anything else.

The physicists’ map shows each economy in this network of products, by highlighting the products each country exported. Over time, economies move across the product map as their export mix changes. Rich countries have larger, more diversified economies, and so produce lots of products – especially products close to the densely connected heart of the network. East Asian economies look very different, with a big cluster around textiles and another around electronics manufacturing, and – contrary to the hype – not much activity in the products produced by rich countries.

African countries tend to produce a few products with no great similarity to any others. That could be a big problem. The network maps show that economies tend to develop through closely related products. A country such as Colombia makes products that are well connected on the network, and so there are plenty of opportunities for private firms to move in to, provided other parts of the business climate allow it. But many of South Africa’s current exports, diamonds, e.g., are not very similar to anything. If the country is to develop new products, it will mean making a big leap. The data show that such leaps are unusual.

None of this is proof that other development prescriptions – provide financing, fight corruption, cut red tape, and lower trade barriers – are useless. Nor is it a green light for ham-fisted industrial policy. But it is a big step forward. Policy-makers should take note, and economists, too.

CHINA BLESSES HONG KONG

Last week, Beijing announced that it would permit mainland Chinese citizens to invest in the Hong Kong stock market. The proposal allows Chinese citizens to open accounts at the Tianjin branch of the Bank of China, and then sell renminbi (RMB) and buy Hong Kong dollars without limit for the purpose of buying shares in Hong Kong. The news sent the index of Hong Kong-listed shares in mainland companies up by 8.74%, their biggest one-day rise since May 2000. This should also go a long way in easing speculative pressure on the Shanghai A-share market.

This is probably the most important financial development in China since their entry into the WTO in 2001. The announcement was delegated to page six in the Financial Times. Once again, the cover story focused on the U.S. liquidity crunch. If you are looking for liquidity, there is arguably no better place to turn than China.

China had accumulated foreign exchange reserves in excess of $1.33 trillion at the end of June. Total national household savings in China are estimated to be roughly $2.2 trillion. With regards to the “bigger picture”, releasing capital account control is the next step towards the eventual flotation of the RMB. This move should allow many on Capitol Hill to take a deep breath.

For lack of a better description, the current account is the difference between a nation’s total exports of goods, services and transfers to its total imports of the same. Liberalizing the current account has allowed Chinese manufacturers to feed American consumers. Thus far, this has been primary fuel feeding the Chinese economy. A current account deficit occurs when a country’s total imports of goods and services are greater than the country’s total exports. This situation makes a country a net debtor to the rest of the world. See the U.S. A current account surplus is just the opposite. See China.

The next natural step in liberalization is the capital account. Once again, for lack of a better description, the capital account is the net result of public and private international investments flowing into and out of a country. Allowing mainland Chinese citizens to invest in the Hong Kong stock market signifies the most significant move to date by Beijing officials to liberalize the country’s capital account. This policy will allow the roughly $2.2 trillion conveniently stashed underneath one billion or so mattresses to find a better home with a better return.

But do not go expecting the Chinese to float the RMB anytime soon. They are firm believers in gradualism. It has taken more than 10 years to get from current account liberalization to this point. I would suspect it is going to take many more before we reach full floatation. But let us forget the currency issue for a moment. The real winner here is undoubtedly the Hong Kong market, especially H-share companies that do not have either a Shanghai or Shenzhen listing. As Zhao Xiao, a professor of Beijing’s University of Science and Technology, said, “Remember, if all Chinese money can go to Hong Kong, then many global firms will favor listing in Hong Kong.”

According to our friends at CNBC, an official at Bank of China in Tianjin said the scheme was due to be up and running by September – next week. The time is now.

RUSSIAN BANKS “BORROWED TOO HEAVILY”

Country’s consumer lending boom at risk.

Russian banks have borrowed too heavily on international markets, Russia’s top bank supervisor warned, raising potential risks for the country’s consumer lending boom amid a global credit crunch. Many Russian banks “have stuffed their vaults to the maximum with loans in foreign currencies,” said Gennady Melikyan, first deputy chairman of Russia’s central bank. “They could face certain difficulties” if the dollar continued to strengthen. But, he added, “We have about five times more [reserves] than we need to ensure the stability of our monetary system.”

Russian bank borrowing on international markets has risen rapidly to total $110 billion as of April 1 this year – more than double the level of the previous year. Overall foreign borrowing by the Russian banking system stands at 15% of total assets, far lower than debt levels in other emerging markets. But several of Russia’s top consumer lenders have raised more than 60% of financing on international capital markets, while lending to their customers in rubles. They risk currency mismatches as the dollar strengthens. Mr. Melikyan’s remarks were made as Russia’s financial system faces the first test of its resilience to external shocks, with foreign investors fleeing its money markets to seek safer havens.

Russia’s economy was reckoned a safe place to invest because of high oil revenues that have helped fill central bank reserves to record levels. But the lifting of capital controls last year and increasing international borrowing by Russian companies have left it vulnerable to the global market turmoil. The central bank was forced to pump a record Rbs169.7 billion ($6.6 billion) into the banking system last Thursday as banks faced monthly tax payments and an exodus by foreign investors. “The situation is getting worse and worse,” said Alexei Yu, trader at the Moscow brokerage Aton. “There is still a long queue to get out of this market.”

Russia’s central bank reported the country’s hard currency reserves fell by $5.5 billion last week to $414.7 billion after the central bank was forced to halt a sell-off of the ruble. “If this continues for another three to four months, we will be in a full-blown crisis,” Mr. Yu said. Most traders and analysts reckon the liquidity crunch will last until at least the month’s end while monthly tax payments continue.

Russian Standard bank, Russia’s main consumer lender, has faced scrutiny after complaints about double-digit commissions it has charged on unsecured loans. Russian prosecutors have ordered it to scrap the commissions. It is one of the Russian banking sector’s biggest foreign borrowers with more than 60% of its financing from international markets, while just 5% comes from private deposits.

RUSSIAN OIL BILLIONAIRE WANTED FOR TAX EVASION, IN CASE PARALLELING YUKOS AFFAIR

Russian oil firm, Russneft and its former chief executive Mikhail Gutseriyev have been accused of major tax evasion, in a case that has strong parallels with the Yukos affair. Gutseriyev, who says that political pressure forced him out of the company he founded in 2002, has been accused by the Russian authorities of “illegal entrepreneurship” by exceeding oil sale quotas, and of evading $800 million in taxes.

According to the Moscow Times, the Russian Federal Tax Service has brought a total of eight lawsuits against 11 companies that are or have been shareholders in Russneft, and some of its shares and all of its assets have been frozen. In late July, a Moscow court upheld a 3.4 billion ruble ($134 million) lawsuit against the firm on tax evasion charges, and earlier this month a Moscow arbitration court upheld a further 17 billion ruble ($665 million) tax evasion lawsuit. Then, on July 31, Moscow’s Lefortovsky District Court issued a ruling blocking Gutseriyev’s from selling or transfering his stake of approximately 70% of the company.

A warrant is now out for Gutseriyev’s arrest, after reports indicated that he has fled the country, breaching the terms of an order that he remain within Moscow while the tax evasion charges were being investigated. In an attack on the government of President Vladimir Putin, Gutseriyev published a letter shortly before he left Russneft which claimed he was “bullied” by the Kremlin to sell his share in the company to a businessman with strong links to the Putin administration. “I was invited to leave the oil business ‘on good terms.’ I refused. Then, to make me more compliant, the company was subjected to unprecedented hounding,” Gutseriyev wrote.

The case has echoes of Yukos’s downfall from Russia’s largest private oil firm to bankruptcy last year. Yukos’s jailed former chief executive Mikhail Khodorkovsky was also said to have evaded taxes, while Yukos itself was crippled after being saddled with almost $30 billion in back tax debts. It is said that this was punishment for Khodorkovsky’s funding of opposition parties in parliamentary elections, but Gutseriyev reportedly kept a low political profile. Other observers suggest that the Kremlin is using such tactics to exert more state control over the key oil sector, and consolidate it into one state-run company. Russneft’s purchase of Yukos assets at auction may also have been a factor, it has been suggested.

DECIDED TO MOVE TO PANAMA? HERE IS WHAT YOU NEED TO KNOW

You are in a foreign country! You are a guest here! Their laws are not stupid or odd ... they are just different. Think of the difficulties of moving here as just a game. Their game! Their rules. If you want to play it will be much easier if you play by their rules and not try to impress some governmental official or quasi-governmental person with your outstanding knowledge about the way things should be, or the way things are in the States.

Be kind, be considerate, be patient, and people will be helpful. Some of the things necessary to do are a pain in the butt but you have to do them. Imagine, if the shoe were on the other foot - you are trying to enter the U.S. as a resident alien. It is a huge pain. American ways are far more difficult than are Panamanian ways. If you are a foreigner trying to immigrate to the States, you can count on a 5-7 year wait unless you are a foreigner opening a business. Then there is a huge amount of paperwork and the fees are huge. Trust me, their ways are easier, just play by their rules, and you will not have difficulty. Once in, and you have your pensionado visa this is the easiest place in the world to get along. I have been everywhere in the world and I can assure you you will love it if you understand what you are doing.

I believe it is essential you get a pensionado visa. It will make you essentially a citizen with all the rights any other citizen has except voting. It also gives you discounts on everything from airfares, food, dentist bills, drugs and everything you can think of. Nearly as important is the fact that you are entitled to be treated like an honored retired citizen. You do not have to keep your passport with you at all times. Your pensionado card will suffice for everything except opening your bank accounts. It is worth the effort.

In order to get your pensionado visa you need to do some things. You need a copy of your passport. You will need a copy of your police report. You accomplish this by going to your local police department in your country of residence) and asking for one. You will need a copy of your birth certificate and if married a copy of your marriage certificate. Some one told me you now need a health certificate. You only need to see your physician and have him give you a letter saying you are in good overall health and are HIV/AIDS negative. You need an attorney here in Panama for this effort. I would strongly suggest you get one in Panama City rather than here in Boquete because of the fact that there are many less than scrupulous attorneys here.

When you have collected the documents I just described you will have to have them “apostilled”. That means basically, notarized, but, by their consulate in Coral Gables, Florida. Do not send them to their Miami consulate. The Coral Gables branch is very efficient and very fast and if you send them in a Fedex envelope with a self addressed Fedex envelope enclosed along with $15/page you should get your documents back in 3-4 days at most. Include a letter that says “my attorney suggested I forward these documents to you for apostillation, would you please be kind enough to do so and return them to me in the enclosed self addressed Fedex envelope as soon as possible? Thank you!”

Corporation or Foundation?

Do not bother with forming a corporation unless you will be starting a business on arrival. My strong suggestion is that you form a foundation to protect your assets. (Corporate officers and directors are now responsible for the debts of the corporation should the corporation go bankrupt! Who needs that?) Foundations protect your assets from prying eyes from anywhere, including the IRS, they protect your assets in the event you should have a terrible accident and, for instance, run over a child, from lawsuits. It is an indispensable tool.

You should buy any bank Certificates of Deposit and at least one savings account in the name of the foundation. We have another bank account in our names in which we keep about $5000. That is just for anything that might be needed. When that account needs replenishing we just transfer money from our foundation checking account to our personal checking account. This way there is never much money to attack should anything happen. We did not put our car in the foundation. Maybe we should have. Our foundation has only our land, CDs and one checking account.

Moving household goods and car.

You are currently allowed to import $10,000 dollars of used household goods tax-free if you have your pensionado visa. New goods will be assessed a sales taxes. We packed all new appliances in the front of the container and they were therefore essentially invisible to the customs officers as long as the container remains unopened until it arrives in David (the 3rd largest city, population 300,000). If you do not watch and direct your packers where to put new items, you are in for a headache – delays for sometimes as much as two weeks, fines and a general pain.

Here is the secret. Hire your container company and have the shipper schedule the destination for delivery to Boquete via David. There is a customs office in David. They will not unload the whole container there – only the first 10-20 feet. If you hire Panama Packers, a firm that operates in the States, thinking it will make your move easier ... it would be a huge mistake. They will unload your furniture in Colon in front of a customs officer and your broker and reload it onto a moving van for transport to Boquete. Panama Packers then charges you an “extra moving fee” of about $900. It is very important that the container company delivers the container to David, you go through customs there and then have it delivered to your home in Boquete. I had friends that had to pay an extra $300 to move the goods to Boquete from David. I have friends that had their goods unloaded in Colon with some new stuff in it – who had to pay $2000 under the table rather than $5000 in duties and fees on new stuff they imported.

Unless, you are in love with your car, and just must have it, then I suggest you sell your car in the States. Rent a car for a couple of weeks before you arrive here if necessary. Then buy an Asian 4wd. Asian because, they are very popular here and easy to get parts and repairs done. I recommend a 4wd, especially an automatic (where you do not have to get out and adjust the hubs) only because Panama is an interesting country to explore and there are many places where you will need the power.

If you buy a car here your dealer will do all the paperwork for you. If you have your pensionado visas already it will go very nicely. We have a friend who just bought a Toyota Prado turbo-diesel 4wd SUV, only a 2 door and the rear hatch. Pretty much loaded from Panama City for $20,000. That is cheaper than you could bring it in. You cannot make a good deal on a car in David. But you can make a deal in Panama City. It is worth buying there.

Living Here

Once here and settled in you will find it a really lovely experience. I admit I fell in love with the weather, the people, and the country in general. No one cares what you do, no one bothers you. Be prepared to be ignored, and left alone. Panamanians assume you have money because you are a gringo. However, that does not effect the way they treat you. If you are a nice person, they will help you. If you act arrogantly, they will ignore you, or when you ask for something to be done they will say “manana” and that does not mean “tomorrow”. It means not today and maybe not at all.

Don’t get me wrong. There is a culture here that is not hurried. Manana, sometimes does mean later and most things do not happen on a timely basis. We have learned that the best thing to do is just do not plan too many things to be done too quickly. We just plan to get one or two things done on any particular “mission”.

Insurance

Health insurance will surprise you with its low cost by U.S. standards. There are two local hospitals. Every medical service is provided here except brain or heart surgery. If those are required you will be sent to Panama City. There are Johns Hopkins associated facilities and in general the most up to date health care available anywhere.

The largest hospital is the Chiriqui Hospital. They offer an insurance program that when you include the special cancer coverage costs about $800 per year for two. A lady friend of ours had hip replacement surgery. She and her husband were not in the hospital’s health care program. The surgery was done and with all the accompanying care cost the couple $10,000. If they had had the program it would have only cost them $3,000. My mother in law had the same surgery in Naples, Florida about a year earlier and the cost was $85,000!

Another example, I had three kidney stones “blown up” with an ultra-sound system of some sort. The procedure and cost me $1400, or half of the $2800 fee because it was a non-surgical procedure. An uncle of mine had it done in Orlando, Florida and it cost him $12,000. So, the program is a pretty good deal. Everyone that we know that has been to the hospital raves about the care. Without exception they all say better care than you get in the hospital in the States. Their program covers to a maximum of $40,000 in any one year. That, with local prices is a lot of medical care. Their program has a 2 year pre-existing condition exclusion. So, we enrolled before we moved here so that we would have almost no time left on the pre-existing condition situation.

Car insurance is very much like the U.S. We have a Hyundai Santa Fe with about 30,000 miles on it and we pay about $650 per year. We are insured by a company, one of the largest auto insurers in the country, called Generali. Home owners insurance is very inexpensive when compared to the States. Our annual premium on our 4000 square foot home for everything, including earthquake and fire, is only about $240.

Shopping and Entertainment

In Chiriqui Province where we live there is almost nothing you cannot buy in terms of brands that you are familiar with in the States. Here in the Boquete area you may have to go to more than one supermarket to get everything you want. Fresh vine ripened vegetables and fruits are plentiful year around. The filet of beef is the equal of any anywhere. Some of the other cuts tend to be tough. Pork, and chicken here are as good as any.

Since this is a totally casual society and no one ever dresses up here, there is little need to mention clothing shopping. However, I do not believe my wife feels under privileged in that area. Casual is the theme. Be comfy, happy, casual and cool. Furniture shopping will be largely found in Panama City. The shipping rates are very cheap from Panama City to here.

There are community players that put on plays. Occasional, tours of musicians, both of a local variety and jazz are around. Movie rentals are pretty much up to date and there is a theatre in David (16 miles) in English with Spanish subtitles. Mostly, I think you will find yourself chatting with friends and enjoying television. There are all kinds of hiking possibilities. Also, white water rafting, sliding through the tree tops on a cable, and in general exploring the country. Fishing in the Pacific is outstanding ... every bit as good as Costa Rica.

My strongest suggestion for those of you who might decide to come here is find a creative hobby that you enjoy. Painting, sculpting, sewing, knitting, photography, pottery, whittling, writing, learning a new musical instrument ... something creative is an absolute essential to a happy retirement, in my opinion. These things will chew up a lot of time and you will find them very fulfilling. It is not important that you develop “saleable” skills. It is just important that you have fun.

COSTA RICA RESORT RAISING FUNDS FOR REFORESTATION

Just over a year ago, we purchased a 26 acre dairy farm in Monterrey, Costa Rica. We built 3 cabins and opened to guests in January 2007. A vacation at Leaves and Lizards is an ecological and cultural experience. Guests may learn about the Meso-American Biological Corridor, the consequences of deforestation, spend the day with a Costa Rica family, become informed about the circle of life in the rainforest by their expert guides, and eat food cooked with methane gas produced from the manure of their pigs and cows Many of the guests enquire about reforesting opportunities. Some have even purchased farms in need of reforesting and others just want to not do nothing about deforestation. Proper reforestation takes planning and follow through (more information here). These are the steps necessary for a successful reforestation plan:

1. Clean-up and soil preparation – if the farm has natural grass, clean-up is done once before planting. If the farm has exotic grasses like Brazilian or Gigante, it will take several clean-ups.
2. Designing the new forest, ordering and careful transport of trees to the planting location. The design includes a variety of native trees. Teak, not native to Costa Rica, is commonly used as the pioneer forest.
3. Making sticks for tree supports, digging holes, planting and organic fertilizing of trees.
4. Eliminating weed competition and pruning – once a month for the next 24 months. It is possible to just let the land “go back to nature”. However, that takes longer and the new forest will have less biodiversity.

Rainforests are complexly biodiverse. They cover only about 2% of the land mass on the earth, but contain 50% of all life on the planet. In 2.5 acres of primary rainforest there may be as many as 480 different species of trees. A good reforestation plan includes ways for the new forest to support itself. For example, two trees are growing side by side, but in nature only one of those trees will reach old age. The smaller tree can be harvested and the wood used to provide funding for the farm upkeep, and further reforestation projects.

The reforestation project at Leaves and Lizards offers people a chance to buy trees for reforestation as a gift, memorial or as part of a vacation package. One package gives the supporter the opportunity to plant and care for the baby trees. Supporters receive yearly photographs, documenting the growth of the trees they sponsored. We work with Hector Ramirez from Reforest Costa Rica. Hector’s knowledge and expertise and his community connections make this program a great success. He is educating farmers about the need to protect their remaining forests and reforest to protect water sources.

Monterrey is a tiny, close knit community, perched in the mountains above La Fortuna. La Fortuna sits in the shadow of the Arenal Volcano and has experienced rapid growth as numerous tourists flock to the area hoping to get a glimpse of one of the most active volcanoes in the world. The community of Monterrey has watched Fortuna outgrow its resources and since the opening of Leaves and Lizards, Monterrey has looked to us for guidance in planning for future tourism.

We believe tourism should be a support to the community, but not take over the community. Local leaders are taking proactive measures to ensure the preservation and continuation of the quality of life in this tranquil hamlet. Many of the tours offered at Leaves and Lizards promote rural tourism. Farmers and other locals show off their farms, waterfalls and forests to the guests. Monterrey residents have helped plant native trees and plants that produce fruit to attract wildlife to the resort for guests to enjoy.

ADVANTAGES AND DISADVANTAGES OF URUGUAY AS A RETIREMENT DESTINATION

A reader asked me to compare retirement incentives offered by the Uruguayan government versus incentives offered by other countries such as Costa Rica, Panama, Belize, Nicaragua, Honduras, etc. Since I do not know much about those countries, I decided instead to write more generally about the advantages and disadvantages of Uruguay as destination for retirees. Even though the incentives offered by the Uruguayan government to foreign retirees are not many, there are several other factors that may be just as important when comparing countries.

The advantages of Uruguay as a retirement destination:

• You can apply for permanent residency as a rentista (i.e., person who lives off non-wage income), and you only need to show foreign income of $500 per month and a clean criminal record (plus assorted paperwork).
• If you show foreign income of $1500 per month and you purchase a property or make an investment valued at $100,000 or more, you are entitled to Uruguayan citizenship for you and your family, after the residency is approved. Otherwise, you would need to wait 3 to 5 years to become eligible.
• All permanent residents can bring their household goods tax-free, excluding cars and motorcycles. However you will need to put some money in escrow, equivalent to the import tax on those goods, until your residency is approved. Then you get your money back.
• No limitations on outright ownership of property by foreigners.
• If your non-wage income comes from abroad you are not subject to the Uruguayan income tax. In many cases, even wage income from abroad is also exempt from Uruguayan taxes.
• Cost of living can be 50% lower that the cost of living in Europe or North America.
• Real estate in choice areas is significantly cheaper than in most equivalent places in Europe and North America.
• Inexpensive health care. The quality of the health care treatment a retiree will mostly likely need, i.e., chronic care, will probably be much better and a fraction of the cost compared to back home.
• Uruguay is a country that is still fairly tolerant of gringos, even though some resentment exists, especially toward Americans. Compared to some other countries, the degree of resentment is small and will most likely happen behind your back.
• In Uruguay, you will be safe from terrorism and kidnappings.
• Uruguay is one of the least corrupt countries in Latin America.
• Uruguayans are friendly and highly educated.

The disadvantages:

• A decent knowledge of Spanish is needed in day-to-day life.
• The expat community, if that is important to you, is small and mostly concentrated in Montevideo. (This may be considered an advantage by some.)
• Uruguay is geographically far from Europe and North America, so a quick jaunt back home is not only expensive but also impractical.
• While the weather is much milder than what most Europeans and North Americans are accustomed to, Uruguay has a winter. If one is looking for a Bermuda shorts and flip flops year-round type of place, this ain’t it.
• Uruguay is not a culturally diverse country. Some foods and other items you may be accustomed to back home will either be expensive or not available.
• Cars and gasoline are very expensive, about double what you would pay back home. Car insurance and taxes are also expensive.
• Uruguay has an asset tax that applies to large, expensive properties.
• The fees associated with buying and selling a property are high, almost 15% round trip. Recent tax changes created a new 12% home equity appreciation tax that adds to the expense of selling a home in Uruguay.
• The real estate market lacks sufficient liquidity in most areas. This fact combined with the high cost to flip a property means one needs to be very careful before buying a property.
• House break-ins are fairly common. Security measures may be needed to avoid surprises.
• If you choose to live in more remote areas, the quality of local medical care will be wanting. Emergency care may not be available.
• Uruguay is not a good destination for retirees with disabilities. Few places are handicapped accessible.

ANOTHER GERMAN SUBPRIME HEDGE FUND CASUALTY

The U.S. subprime loan crisis claimed a further European scalp earlier this week when German bank Sachsen LB was rescued by another state-owned bank, Landesbank Baden-Württemberg, which provided an immediate €250 million in liquidity, and will acquire Sachsen for a consideration of up to €600 million, although the deal may yet unwind if Sachsen uncovers further liabilities.

Like companion German credit institution IKB, which was bailed out by German public-sector bank Kreditanstalt Fur Weideraufbau to the tune of €8 billion earlier in the month, Sachsen had invested in what are known as “SIV-lite” funds, which specialize in selling short-term commercial paper in order to buy mortgage securities. Sachsen’s problems centred on Irish affiliate Synapse, which is said to have invested as much as €27 billion in high-risk securities, including many based on U.S. subprime loans. British bank Barclays investment banking arm, Barclays Capital, which set up funds for Synapse, pulled the plug on Synapse and Sachsen last week when they could not meet cash calls, reclaiming collateral.

Edward Cahill, Barcap’s head of European CDOs, who is said to have helped design the SIV-lite debt structure, resigned last week, and Barclays is thought to be facing a loss in the low hundreds of millions of Euros as a result of Sachsen’s demise. UK law firms, like their counterparts in the U.S., are reporting inquiries from hedge fund investors who believe that the funds may have failed in their duty of care towards investors, and possibly have been outright negligent.

U.S. law firm Morrison & Foerster, prominent in investor class actions, warned clients recently that out of today’s 9,000 hedge funds, as many as 2,000 are perceived to be vulnerable to “run on the bank” investor redemption pressures. Suspect asset classes, said the firm, include credit default swaps, CDOs, CLOs, LBOs, and other distressed debt and exotic categories. Knowing what is coming, the firm says that investors should consult relevant experts soon, while there is still time to plan a defensive strategy.

IRELAND TOPS EUROPEAN HOUSE PRICE VALUE LEAGUE

House prices in the UK have growth faster than every country in the eurozone except Spain over the past five years, according to new research by Bank of Scotland International. But average house prices are higher in Ireland and the Netherlands.

Since 2001, house prices in the UK have risen 90%, compared with a 40% increase for the eurozone as a whole over the same period. House prices in Spain have increased 100%. In the past year, Belgium experienced the largest rise in house prices of 18%, followed by France at 15%, Spain at 14%, and the UK at 13%. Of the 12 eurozone members included in this analysis, Germany is the only country to have experienced a fall in house prices, with a fall of 5% over the past five years. Ireland saw a 71% increase in the last 5 years, with Luxembourg clocking up 58%.

Despite rising faster than the UK over the past five years, house prices in Spain are lower. The average price in Spain stood at £150,200 at the end of 2006, compared with an average of £187,100 in the UK. The average house price in Ireland was £209,300. The Netherlands’ was £190,900. Outside the eurozone, house price growth in the UK has outperformed Australia, Canada and the U.S. over the past one, two and five years. The UK also has a higher average house price than Australia, Canada and the U.S.

The owner-occupation rate in the UK is currently around 70%. Spain has a significantly higher owner-occupation rate of 82%, whereas the Netherlands’ was only 55%. In Germany, the rate is even lower at 45%. UK owner-occupation is the same as in Australia, and slightly higher than the U.S. (69%) and Canada (66%).

U.S. COURT TO RECONSIDER WHISTLEBLOWER TAX CASE

Last week attorneys for whistleblower Marrita Murphy asked a U.S. court to reconsider its decision that her award for emotional distress should be taxable, itself a reversal of an earlier decision in her favor. Ms. Murphy’s attorneys David Colapinto and Stephen Kohn have asked the full U.S. Court of Appeals for the District of Columbia Circuit to reconsider a July decision by a 3-judge panel that held that the IRS can tax damage awards based solely on compensating victims who suffer personal injuries, claiming that Congress intended to amend the tax code “by implication” to tax personal injury damages under its authority to create an excise tax on people who use the courts to vindicate their rights. But a year earlier, the same panel in the same case held that such taxes were unconstitutional, as compensation for a documented “loss” was not “income” subject to the tax code.

“The Court’s reversal stands reality on its head,” said Mr Colapinto. “This case marks the first time that a court has interpreted the gross ‘income’ statute, 26 U.S.C. § 61(a), to be amended ‘by implication’ to create a tax not expressly enacted by Congress. Additionally, this is the first time that any court has construed the tax code to imply an ‘excise tax’ on the ‘privilege’ of utilizing the ‘legal system’ to vindicate a federal statutory right.

“When whistleblowers suffer retaliation, they do not ‘sell’ their mental health. If people are injured in a car accident, they do not ‘sell’ their arms and legs. These are real human losses, and compensation to restore that human loss was never intended to be ‘income’ under our Constitution or the tax code,” Colapinto said.

Stephen M. Kohn, the President of the National Whistleblower Center and co-counsel for Ms. Murphy, stated, “This decision is a terrible setback for all victims of civil rights abuses. Congress did not pass a special tax demanding payment from people who use the legal system to prevent retaliation against whistleblowers. It was error for the Court to imply such a tax. This decision threatens fundamental human rights, including access to the courts.”

U.S. HOUSE TO HOLD “TAX FAIRNESS” HEARING

House Ways and Means Committee Chairman Charles B. Rangel (D-New York) has announced that the Committee will hold a hearing next month on fairness and equity in the U.S. tax code. The hearing will focus on a number of fairness issues, including the tax treatment of investment fund managers and the impact of the alternative minimum tax on working families. It will also examine the reasons why investment funds are being organized offshore.

Rangel revealed that the hearing will also analyxe the claims by the Bush administration that the 2001 economic stimulus package “erases inequities in the tax code or eases inequities in the tax code.” Rangel added that there are also other aspects of the U.S. tax laws that are “worthy of examination,” including provisions related to investment funds such as private equity funds and hedge funds. Concerns have been raised regarding the manner in which investment fund managers are able to structure their compensation. Others have observed that current tax rules force investment funds to form outside the U.S.

House Democrats have already introduced legislation that would ensure that investment fund managers who take a share of fund profits as compensation for investment management services, known as carried interest, would be taxed at the ordinary income tax rate. Currently, the managers of private investment partnerships are able to receive compensation for these services at the much lower 15% capital gains tax rate, rather than the ordinary income tax rate, by virtue of their fund’s partnership structure.

The legislation would ensure that any income received from a partnership, capital or otherwise, in compensation for services would be seen as ordinary income for tax purposes. The capital gains rate would continue to apply to the extent that the managers’ income represents a reasonable return on capital that they have actually invested in the partnership.

BLACKSTONE LOBBIES AGAINST U.S. PARTNERSHIP TAX TREATMENT PROPOSALS

Blackstone, one of the word’s largest private equity firms, has taken its fight against a proposed change in the U.S. tax laws direct to Congress, in a letter which argues that it would achieve little in terms of revenues and would have the double whammy of discouraging IPOs.

In a letter to Democratic Senator John Kerry, Blackstone said that its tax bill would triple to $525 million a year if the proposals were enacted, based on its latest results. However, the letter pointed out that the Senate proposals would mean that individual partners would pay $175 million a year less in taxes, but more crucially, they would diminish Blackstone’s market capitalizsation by $10.5 billion of the firm’s $25 billion market value.

“In our opinion, the Baucus-Grassley bill would actually result in a significant net loss of tax revenues by dramatically decreasing the number of firms willing to access the public markets,” stated the letter, which Kerry has refused to release but a copy of which has been seen by Bloomberg. Kerry has queried the need for a change in the tax law, which could penalize the private equity industry, and could be seen as an ally for venture capitalists in Congress.

The bill introduced by Senate Finance Committee Chairman Max Baucus and ranking Republican Chuck Grassley aims to prevent limited partnerships such as private equity funds from using the tax code to benefit from an exemption from corporate tax when going public. Baucus and Grassley insist that this is not so much a revenue raising measure as an attempt to iron out a loophole in the tax code which discriminates against other forms of companies which must pay corporate tax. However, Blackstone’s letter argues that the Baucus-Grassley proposals themselves are discriminatory because they are not concerned with other types of publicly traded partnerships such as real estate investment trusts and oil and gas pipelines. According to Blackstone there are political reasons for this omission.

U.S. SENATORS INVESTIGATE ID THEFT AND TAX FRAUD

Senate Finance Committee Chairman Max Baucus (D-Montana) and Ranking Republican Member Chuck Grassley (R-Iowa) are asking the Government Accountability Office (GAO) to investigate the growing problem of tax fraud related to identity theft, and how it contributes to the tax gap. The Senators’ letter to David M. Walker, Comptroller General of the GAO, is aimed at identifying what procedures the IRS currently follows to curb identity theft and subsequent tax fraud, and how these measures can be improved.

Portions of the closing-the-“tax gap” strategy crafted by the Treasury at Baucus’s request include efforts to fight tax fraud. The Senators said that tackling identity theft must be an integral part of the Department’s effort to stop legally owed taxes from going unpaid. “Like all Americans, the IRS needs to be aware of the dangerous consequences of identity theft,” observed Baucus. “Innocent taxpayers who are victims of identity theft should not be burdened with delayed refunds and red tape while the IRS is sending fraudulent refunds to the thieves who have stolen their identities. The IRS should be taking all possible precautions to ensure that it is not refunding false tax claims. Federal dollars should be used to pay for priorities like education and health care, not sent to identity thieves by the IRS.”

IRS warns of new e-mail scam.

The IRS has issued a consumer alert regarding a new, two-step e-mail scam that falsely promises recipients they will receive $80 for participating in an online customer satisfaction survey. In the scam, an unsuspecting taxpayer receives an unsolicited e-mail that appears to come from the IRS. The e-mail contains a URL linking to an online “Member Satisfaction Survey”.

The e-mail notifies the recipient that he or she has been randomly selected to participate in a survey. In return, the e-mail says that the IRS will credit $80 to the taxpayer’s account. There are references to the IRS in the “from” line and the “subject” line of the e-mail. The link to the survey and a copyright statement at the bottom of the e-mail also reference the IRS. The survey form features the IRS logo.

In addition to standard customer satisfaction survey questions, the survey requests the name and phone number of the participant, and also asks for credit card information. Once the fraudsters have a name and phone number, they will presumably call the participant and attempt to retrieve other financial information.

The apparent objectives of this scam are to use the participant’s name and financial data to withdraw funds from the taxpayer’s bank account, run up charges on a credit card or take out loans in the taxpayer’s name. Tricking victims into revealing private personal and financial information over the Internet, telephone or other means is a practice known as “phishing”.

The IRS stressed that it does not send unsolicited e-mail. Additionally, the IRS never asks taxpayers for PIN numbers, passwords or similar secret access information for credit card, bank or other financial accounts. Recipients of questionable e-mail that appears to come from the IRS are urged not open any attachments or click on any links, and to forward the dubious e-mail to phishing@irs.gov.

The IRS and the Treasury Inspector General for Tax Administration work with the U.S. Computer Emergency Readiness Team (US-CERT) and various Internet service providers and international CERT teams to have the phishing sites taken offline as soon as they are reported. Since the establishment of the mail box last year, the IRS has received more than 30,000 e-mails from taxpayers reporting almost 400 separate phishing incidents. To date, investigations by TIGTA have identified host sites in at least 55 different countries, as well as in the U.S.

Other fraudulent e-mail scams try to entice taxpayers to click their way to a fake IRS Web site, and ask for bank account numbers. Another widespread e-mail scam tells taxpayers that the IRS is holding a refund for them – frequently $63.80 – and seeks financial account information. Still another email claims that the IRS’s “anti-fraud commission” is investigating their tax returns.

U.K. FREELANCERS CALL FOR DUTY OF CARE ON TAX INSPECTORS

The Professional Contractors Group (PCG), which represents UK freelancers, is calling for a legal duty of care to be placed on HM Revenue and Customs. In its formal response to HMRC’s consultations on safeguards and compliance checks, the PCG argued that HMRC’s risk assessment and other systems should mean that it does not launch rogue investigations, or that when it does, they are swiftly closed, and at minimal cost. Where this does not happen, there should be strong safeguards available.

PCG’s Policy Officer John Kell observed, “Freelancers and other small businesses have very little trust in HMRC so it’s high time that HMRC was put under a legal obligation not to harm peoples’ commercial interests. Many of our members have costly and distressing experiences of dealing with HMRC, even when they owe no tax and it’s quite wrong that HMRC can just walk away. There’s currently no mechanism for compensation for the stress and loss of earnings that a lengthy Revenue investigation can bring. PCG believes that must change.”

PCG’s formal response argued that if HMRC is functioning as well as it claims, there is nothing to fear from such a legal duty of care, which would in fact help improve the relationship between small businesses, freelancers and HMRC. This call comes only weeks after the judgment in the Arctic Systems case, in which HMRC were found to have issued a wholly incorrect tax demand for £42,000, and the owners of Arctic Systems, Geoff and Diana Jones, were pursued to the House of Lords after several years and hundreds of thousands of pounds spent in legal fees. Despite HMRC’s repeated denials that Arctic was a test case, the Government announced its intention to change the law as soon as it lost the case.

A recent survey by PCG showed that 73% of freelancers questioned said that they felt HMRC was out to extract as much money as possible, and 69% saw tax inspectors as viewing them as “guilty until proven innocent”.

U.K. GOVERNMENT DEFENDS BUSINESS TAX REGIME

HM Revenue and Customs has issued a strong defence of the country’s business tax regime, after a National Audit Office report showed that 1/3 of large businesses paid no corporate tax. In a statement, HMRC argued that it was “ridiculous” to suggest that business does not pay its fair share of tax, and pointed out that these businesses pay many other taxes, not just corporate tax. “Businesses are using the capital allowances and deductions that government has put in place to stimulate investment, create jobs and build economic stability. These are not loopholes – these are properly policed business reliefs,” the department stated.

The Treasury has been forced to react, after the NAO analysis of the corporate tax paid by the 700 largest companies handled by HMRC was reported widely in the media. According to the NAO, 220 of these companies paid no corporate tax in the 2005-06 tax year, while a further 210 paid less than £10 million. The figures have prompted an outcry from trade unions, with Unite, the UK’s largest trade union, demanding that the government “urgently” address the “inequality when those at the top are not shouldering their share of the burden.”

However, tax experts and business representatives, while critical of the complexity of UK business tax legislation, have sided with the government by noting that these large companies paid a multitude of other taxes, such as VAT, National Insurance contributions and local business rates. Many of the companies may be investing heavily in research and development projects, which also reduces corporate tax liability, they argue. Furthermore, UK-based multinationals are generating much of their profit internationally, they averred.

MEXICO CLOSER ON TAX REFORM

A key Mexican lawmaker has indicated that the national assembly will approve an important tax reform before this year’s budget deadline. According to a report in the Financial Times, Ricardo Rogríguez, deputy head of the lower house’s finance committee and a member of President Calderon’s PAN party, all technical details of the long-awaited plan have been “sewn up” and the stage is now set for the legislation to be approved by September 3 and then passed on to the Senate for final consideration.

The reforms, seen as crucial for shoring up the Mexican government’s finances while giving the business sector certainty on the tax laws, must be approved by September 8 to go forward into the next budget, or they will face a delay of another year. According to the document sent to lawmakers, the reforms propose a flat tax on business income, a 2% tax on monthly cash bank deposits of more than 20,000 pesos ($1,850), and a 20% levy on gaming, as the administration attempts to raise the revenues it need to address poverty and social inequality, and reduce its dependence on oil revenues.

Under the business tax plans, a flat rate of 19% will be phased in, but companies will have the option of paying the flat tax or their income tax, whichever is the highest. Calderon hopes the reforms will tempt small cash-in-hand businesses into the tax system to help achieve the government’s target of increasing tax collection as a percentage of the Mexican economy, which currently stands at 10% – one of the lowest in the Americas – by about 3%. Approximately 40% of Mexico’s revenues are collected in taxes paid by the state oil monopoly Petroleos Mexicanos.

SOUTH AFRICAN BUSINESS TAX AMNESTY DEADLINE NEARS

The South African Revenue Service (SARS) has reminded business taxpayers which have applied for the Small Business Tax Amnesty that the deadline for the submission of their 2006 tax return and financial statements is 31 August 2007.

Originally the deadline for the amnesty, which began in August 2006, was May 31, but the government chose to extend the deadline after SARS received a rush of last minute applications. These followed a campaign in conjunction with other government enforcement agencies to persuade companies operating in the informal economy to regularize their tax affairs. By the end of April 2007, SARS had received about 16,000 application forms from business owners, but by June 2 this had risen to well over 275,000. Now, however, SARS said that it had “done all it can to reach and encourage small businesses to take advantage of the amnesty opportunity.”

SARS announced that its offices throughout the country would extend office hours to provide assistance to amnesty applicants with the completion of their outstanding documents, but warned that businesses which do not submit their documents before the expiry date may not receive amnesty from the tax department. After the deadline, SARS will commence with “vigorous” enforcement actions against taxpayers who have either not applied for amnesty, or have submitted an incomplete application.

INDIA CONTEMPLATES THE APPROPRIATE TAXING OF CONTROLLED FOREIGN COMPANIES

Credit the USA for conceiving the brilliant idea of parking investment assets and routing investments through offshore companies incorporated in tax havens until it is repatriated. Such tax deferral led to substantial loss of revenue to the U.S. Treasury, and sometime in the 1960s the IRS woke up to this, and changed the laws to make passive or notional income receipts for U.S. holding entities taxable. But the IRS faced an uphill task in trying to obtain information from these jurisdictions, and only post 9-11 has the IRS been able to conduct an effective and successful witch-hunt.

An offshore entity is regarded as a Controlled Foreign Corporation (CFC) in the U.S. if more than 50% is owned by U.S. investors, and persons owning 5% or more stock in a CFC are potentially liable to U.S. tax. Following the U.S., the UK and the various EU and OCED nations have enacted special laws to make CFCs tax compliant, imposing tax liability on the worldwide income of resident taxpayers. CFC rules apply to foreign companies controlled by residents, but some nations have extended it to foreign permanent establishments as well.

India has been considering introducing CFC regulations since 2000, when the income tax authorities issued show-cause notices to some FIIs operating in India, on the grounds that these were shell companies which acted as conduits, resulting in a pullout of funds. The finance ministry was constrained to issue a circular clarifying that revenue officers had no power to go beyond the resident certificate issued by the Mauritian Authorities in this regard.

The perception of the reality has convinced the government to introduce a Direct Tax Code, which express misgivings about conduit companies as well as certain financial instruments on treaty provisions being misused and manipulated for money laundering. Concern is also perceived on account of outbound M&AS as many are routed through low-tax offshore vehicles to buy out companies of far larger scale, with all profits presumably eluding the domestic tax net. Hence the intention to introduce the CFC regime to curb revenue losses from outbound and inbound investments.

But is that the global practice among developed nations? For one, most developed nations offer participation exemptions, i.e., exemptions to foreign investments falling below minimum participation or holding levels in the entity located in their tax jurisdiction. The Dutch participation exemption is as popular a product as the country’s tulips and cheese, with some value added for EU members. Participation exemption is extended to a foreign holding on certain conditions or combination of rules being satisfied, which could vary from minimum capitalization level, long-term investment plan, sectoral considerations, etc., and cover a range of gains from dividends, capital gains, interest thereon, deductions etc.

But India to date does not offer partial exemptions, which go hand-in-hand with CFC regulations. And an overriding provision in the Income Tax Act may not be legally sustainable, unless replicated in DTTAs and could adversely impact genuine investment in India. It would also inevitably lead to double taxation, which goes against the intent and spirit of DTTAs. As India still does not have capital account convertibility and the outbound investments are not comparable to those nations who have abolished exchange control, the best bet is to negotiate and incorporate anti-abuse provisions in all DTTAs as in the Indo-U.S. treaty.

THE HIGHWAY TO SERFDOM

Anastasio Prieto, a truck driver from El Paso, Texas, does not trust banks and prefers to carry his savings with him in cash. While this is a dangerous way to manage one’s money, a cursory glance at recent headlines tends to validate Prieto’s concerns about the stability of the fractional-reserve banking system. During a stop at a weigh station in New Mexico on August 8, Prieto made a critical mistake. He cooperated with the police, assuming that as a law-abiding individual he had nothing to fear from them.

Never make that assumption.

A New Mexico state trooper asked Prieto for permission to search his truck for contraband, such as needles or cash in excess of $10,000. Displaying an ingenuousness that breaks my heart, the truck driver consented, informing the officer that he was carrying nothing illegal – but admitting that he had $23,700 on board.

Never consent to a police search, for any reason. Never admit to a police officer that you are carrying large amounts of cash. Always assume that a police officer would make the same use of that information that would be made by any other armed and potentially violent individual: He would find some way to steal your money.

And that is exactly what the officer did to Prieto, with the help of comrades from the federal Staatspolizei – agents from the Drug Enforcement Administration and the Border Patrol. Over his objections, Prieto was detained for several hours, photographed, and fingerprinted, while his truck was searched by agents with drug-sniffing dogs. As Prieto had explained, his truck was devoid of contraband. So the police apologized profusely, returned his money, bought him a cold drink and sent him away with a friendly smile and a wave.

Oh, stop it! You’re killing me! What country do you think we live in, anyway?

The police “forfeited”, i.e., stole, Prieto’s savings. The DEA agents who presided over the theft “told Prieto he would receive a notice of federal proceedings to permanently forfeit the money within 30 days and that to get it back, he would have to prove it was his and did not come from illegal drug sales,” reported the Houston Chronicle. You see, under existing laws and recent legal decisions, “possession of a large sum of money” by a motorist “is ‘strong evidence’ of a connection to drug activity.” So ruled the U.S. Court of Appeals for the Eighth Circuit in a decision handed down almost exactly a year before Prieto was robbed at gunpoint in New Mexico. The case was entitled United States of America v. $124,700 in US Currency (PDF).

You see, it is not necessary to find the owner of the money guilty of anything. The money itself can be “convicted” of involvement in criminal activity and “punished” by being permanently taken into government custody. Prieto has been told it will take a year for him to recover his stolen money, should the regime condescend to give any portion of it back. Meanwhile, he is apparently left penniless, with no funds to maintain the truck that is the source of his livelihood. The collectivist State ruling us treated Prieto in much the same way the Soviet state treated Ukrainian kulaks – at least those kulaks who were permitted to live, anyway.

If our money can be seized from us simply because some agent of the State wants to, in what sense is it our property? Summary seizure and “forefeiture” of property – including cash – by police is one of the larger gifts bestowed on our society by the murderous fraud called the “war on drugs”. Ten years ago, Congress enacted a “reform” measure intended to rein in the practice, but as we see it is pointless to attempt to reform a practice that should be abolished outright. Invariably, “forfeited” cash and goods are depicted as the ill-gotten gains of narcotics trafficking. It is never explained, however, how those supposedly dirty proceeds are magically cleansed once they are handed over to the police. The bounties seized by police are often used to buy the latest in tyranny tech, such pimped-out SWAT vehicles and other goodies for the jackbooted pests who are deployed to bring in the loot.

This makes a nicely self-sustaining system of official corruption. In fact, asset forfeiture has made it possible for corrupt police departments (or do I repeat myself) to cut out courts and juries and get straight to the business of plunder.

SWISS EXTEND FREEZE ON DUVALIER ACCOUNTS

The Swiss government has announced that assets held in Swiss bank accounts by the former Haitian dictator Jean-Claude “Baby Doc” Duvalier will remain frozen for an additional year. In an announcement after a meeting of the 7-member Swiss cabinet, government spokesman Oswald Sigg confirmed that the federal government “has decided to extend the freeze by 12 months.” In June, the Swiss government had extended the temporary freeze on the CFH7.6 million contained in the accounts ($6.3 million) by three months, which was due to expire on September 1.

Duvalier and his followers have been accused by Haiti’s new government of siphoning off state funds during his reign, but the money in question has been caught up in legal wrangling ever since the Duvalier regime was ousted in 1986. Duvalier now resides in exile in France.

The original request for the freeze was lodged on behalf of two Haitian individuals, a priest and a taxi driver, who were persecuted under the Duvalier regime. The plaintiffs are trying to have a 1988 U.S. court ruling, which ordered the Duvaliers to pay them $1.75 million in damages, recognized in Switzerland. They also want the money in the Swiss accounts returned the the Haitian people and not to Duvalier.

According to the Associated Press, Swiss Foreign Ministry spokesman Jean-Philippe Jeannerat said that the extension followed assurances by Haiti that proceedings against Duvalier would be launched “in the near future,” which is a necessary step for Switzerland to confiscate the funds.

Marc Henzelin, lawyer for the plaintiffs, has said that most of the money is held in one account with the Geneva branch of UBS, in the name of the “Brouilly Foundation” in Liechtenstein. The Brouilly Foundation is owned by a Panama-based company, which in turn is owned by members of the Duvalier family. It is believed that another account is held by Duvalier in the Swiss city of Lausanne, but a lack of information has prevented Henzelin from mounting a legal challenge there.

SWISS COURT BLOCKS HANDOVER OF YUKOS FILES TO MOSCOW

Switzerland’s highest court has blocked a request by the Russian authorities for the handover of documents relating to bank accounts held by the defunct Russian oil company Yukos. The Lausanne-based Federal Tribunal said in its legal explanation that cooperation with Russian prosecutors “must be refused” because according to human rights observers the proceedings in Russia were politically motivated. “The political and discriminatory character of the procedure in Russia is underlined by the infringement of human rights and of the right to defence which have apparently been committed throughout the procedure,” the court said.

In issuing its ruling the court upheld the appeals lodged by six plaintiffs, two of which are thought to be former Yukos chief executive Mikhail Khodorkovsky and his associate Platon Lebedev, who are both serving prison sentences for fraud and tax evasion related to the running of Yukos.

Yukos itself has been effectively run into the ground after the Russian tax authorities imposed back taxes of almost $30 billion. The company was declared bankrupt in August 2006 and its main assets have been sold off to help pay these debts. Many questions have been raised about the way in which the Russian government handled the Yukos affair, and it is widely believed that both the jailing of Khodorkovsky and Lebedev, and the breaking up of Yukos were politically motivated and directed by the Kremlin. Khodorkovsky was a notable political opponent of President Vladimir Putin.

In January 2006, the Federal Tribunal rejected a similar request from Russia for judicial assistance relating to the handover of documents in relation to the Yukos case, saying that it could “not agree to collaborate with what looks more like a never-ending search for evidence.” The judges also noted at the time the Council of Europe’s reservations over the trials of Khodorkovsky and Lebedev. However, Swiss prosecutors have released the estimated $200 million of the remaining frozen assets related to Yukos held in Swiss bank accounts. This is all that remained of the $5 billion originally frozen by the Swiss in 2004 – the largest amount of money ever frozen by Swiss authorities.

BURNING THE LAW IN A RIOT OF TREASON

“As nightfall does not come at once, neither does oppression. In both instances, there's a twilight where everything remains seemingly unchanged, and it is in such twilight that we must be aware of change in the air, however slight, lest we become unwitting victims of the darkness.” ~~ Supreme Court Justice William O. Douglas

The departure of Alberto Gonzales from the Attorney General’s Office brings America to a place of definitions, and hanging in the balance is the very idea of the nation itself. The basic concepts and fundamental principles of our republic now stand as the only legitimate considerations going forward, for they have been tested almost to annihilation already, and will not endure much longer if we continue on this path.

It is the mythology within the Declaration of Independence we speak of, the fiction that tells us we are endowed with rights, and that those rights are unalienable. This falsehood has been vividly exposed in the last several years, and it has been a harsh lesson indeed. All the rights we hold dear and believe to be our greatest strength are, in fact, only words on old paper with neither force nor power. The next line – “That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed” – is the muscle behind the myth, the core that has endured a withering assault.

Matters are so much worse than our national political dialogue lets on. The resignation of Gonzales has unleashed a torrent of hard words and harsh criticisms aimed at the deplorable nature of his tenure, but the truth of it continues to elude mention. They call Gonzales an incompetent, a crony, a loyalist, a disgrace, leaving off the one word necessary to fully explain who he is, and what he was engaged in before he stepped down.

Alberto Gonzales is a traitor. That is the only word to explain it.

He is not the only one. There are many more traitors like him in the Bush administration, criminals joined in an act of treason so vast and comprehensive that it beggars comparison. Nothing quite like this has ever before been attempted in America, and if they are allowed to succeed, there will be nothing of what defines America left to be seen.

Gonzales and his Bush administration collaborators have committed their treason against the rule of law itself, a crime so absolute that it is technically not illegal. There is no code, ordinance or law specifically forbidding the total ruination of all our rights and protections. The act is neither felony nor misdemeanor, because nobody ever considered the black-letter necessity of making it illegal to destroy the rule of law.

But there is no America without that rule of law – no rights, no protections, no Constitution. There is nothing. And if you destroy the rule of law, you destroy the idea that is America itself. The only word for a crime like that is treason, and those who would dare commit it are traitors. Gonzales and his Bush administration collaborators have done more than dare. They have been pursuing it, with deliberation and intent, throughout each moment of their tenure.

Americans have only the rights they are able to protect and defend. Rights are nothing more than ideas ... only theory and argument on parchment all too easily burned to ashes. The power of those rights is only found in our collective submission to the rule of law, and submission to that rule of law is all that stands between our freedoms and the conflagration of tyranny. Without the rule of law, there is no America.

That is the treason of Alberto Gonzales, and the treason of the Bush administration entire. They have attacked and undercut the rule of law by refusing to submit to it, and in doing so have brought us to the edge of appalling infamy. Theirs is a crime without peer, and we will be fortunate beyond measure if we are able to recover from it.

The fact that Alberto Gonzales has left is meaningless in the main, because the treason he participated in continues in his absence. If the damage is to be repaired, he must be replaced by someone who will submit to the main imperative, someone who will submit to the rule of law, someone with real independence and unbending respect for the idea that is America. Gonzales was more than a poor steward of this trust. He was a traitor among traitors. If the rule of law is to stand, the treason he helped commit must be ended, and a patriot must take his place.

LEGAL POSITIVISM, RELATIVISM, AND NOMINALISM, AKA “JUDICIAL ACTIVISM”

When the legal history of the 20th century is objectively spelled out at some distant time, it will be remembered as the age dominated by the anti-concepts of legal positivism, relativism and nominalism, which are listed under the pop culture tag of “judicial activism”. Indeed, how can judges not be “active” when they are asked to apply words, concepts, and constructions – which under the current jurisprudential framework of belief have no inherent constraints or meanings – to concrete, real-life occurrences. The movers and shakers of the American bench are repulsed by the notion of natural law and have taken seriously Nietzsche’s admonition, “I am afraid, that we are not free from God, because we still believe in grammar.” Their free-style method of interpretation and abandonment of the age-old “plain meaning” rule for reading law is nothing more than a frantic attempt to escape their greatest fear – the concept of natural law.

Yet in that century which saw such a flurry of innovations in the law through notable case law, it is ever so peculiar that the Supreme Court only heard one Second Amendment case during the 20th century – United States v. Miller. There is a legal maxim that “bad cases make bad law.” “Bad cases” are those cases with fact patterns which are distorted from the norms of everyday life and lead to absurd results. However, oftentimes “bad cases” are exactly the kinds of cases which are sought to be brought before the Court, so that questionable, but highly desirable, legal results can be foisted upon the people. Such was Miller.

The backdrop of the Miller case is the late 1930s. Amongst FDR’s usurpatious New Deal legislation was The National Firearms Act, which made illegal certain types of firearms (relevant here is a shotgun with a barrel less than 18 inches) without a stamp purchased from the Federal government. The stamp for the shotgun cost $200, while a shotgun at that time cost around $20. (I will refrain from exploring the utterly delicious irony that this country was founded by individual gun owners who revolted against having to pay outrageous taxes to the government in the form of stamp purchases.) What made the case “bad” was that two men with extensive criminal backgrounds, Jack Miller and Frank Layton, were the defendants in the case.

Miller and Layton claimed that The National Gun Act was violative of the Second Amendment and the Federal District Court for the Western District Arkansas agreed. The Feds appealed to the Supreme Court. While this was a “bad case” in that it featured putative gangsters claiming a right to firearms, what makes it worse is that the case was decided, 1930s show-trial style, without an appearance by Miller and Layton before the Court or even a brief submitted by their lawyers. Even with the scales thus tipped in their favor, the best the Feds could get from the Supreme Court was a ruling that there was no evidence presented by the (absent) defendants that a “sawed-off” shotgun was the type of weapon which would be used in a militia. Therefore, as the Second Amendment protections had as their predicate “a well regulated militia”, Congress was free to regulate this weapon which was not shown to have a militia purpose. All this despite the fact that the shotgun had had a prominent place in the Civil War and additionally that the federal government had purchased 19,600 shotguns as late as World War I.

The rule established by Miller would seem to be that if a weapon has a military application, then the right to possess such an arm should not be infringed upon. But, needless to say, it was not interpreted in that way. Instead Miller was read as an imprimatur for gun control which reached its zenith in 1976 when the District of Columbia passed the most restrictive gun control law in the nation – a law which a young Congressman from Texas, Ron Paul, stated was “flat-out illegal” and would “be thrown out” when challenged in the court system. While Paul’s prediction has yet come to pass, it may yet come to fruition in the case of Parker v. District of Columbia.

Parker represents a test case with normative facts – a run-of-the-mill citizen with no criminal record who merely wants to have a gun in his home. As a result of these “good facts”, a 3-member panel of the U.S. Court of Appeals for D.C. struck down the District’s gun control law on Second Amendment grounds. The District plans to appeal to the Supreme Court. The case was developed and funded by Cato Institute scholar Bob Levy as one which would hold the Supreme Court’s feet to the fires of liberty. However, the case has been a target for jurisprudential sabotage on two fronts – from Republican members of Congress, and from the National Rifle Association.

The current state of Second Amendment jurisprudence is an exemplar of much of constitutional jurisprudence today. The plain meaning of the Constitution is first whittled away by cases so factually flawed that they lie far outside the normative existence of most Americans. Once “bad law” is made by the “bad case”, the holding is enshrined via the concept of stare decisis (courts going with precedent) and extended in application. While this pattern may seem to make about as much sense as training medical students using the anatomy of the severely deformed, it is not without a purpose. Cui bono? Without fail, the bad cases that make bad law consistently extend the power and scope of government entities at the expense of individual citizens, the People.

All of this is not happenstance. This is tyranny, the tyranny of relativism. Judicial relativism naturally and inevitably leads a tyrannical Court which is incapable of issuing opinions, only imperial decrees. Until the people themselves embrace the idea of liberty as a real, possible and desirable condition for their lives, liberty will not come. The Parker case may or may not affect that body of writing called American Constitutional Law, but the right to self-protection vis-à-vis gun ownership ultimately transcends mere positive law. However, Americans will never rise to the heights of freedom envisioned by our founders until not merely our persons are armed, but more importantly our minds.

WHAT IS ACTUALLY GOING ON IN U.S. HEALTHCARE?

What is actually going on in healthcare is often never brought to the public’s attention. Few people recognize, that while Medicare is doomed to go bankrupt in the next few years, that the entire Medicare budget could easily be funded if the U.S. government stopped spending 50% of every tax dollar on war. Oh, the pie chart that displays the U.S. budget says defense costs 16%, but government hides the real costs. (see War Resisters League’s pie chart.) The latest estimate is that the war in Iraq will cost $2 trillion. $54 billion a year would eliminate starvation and malnutrition globally by 2015, while $30 billion would provide a year of primary education for every child on earth.

Recognize that the money you have in savings accounts is slowly being siphoned out (stolen) by the Federal Reserve which engineers inflation and the devaluation of your money. A U.S. dollar in the year 1900 is worth about 3 cents today. Does anybody recall when OPEC was formed because there was a glut of oil and the price for a gallon of gas was dirt cheap? Now they say there is a shortage of oil.

Gasoline prices have risen to the point where the public has so little money left to spend that retail store sales have fallen. As the cost of gasoline rises, so does the cost of living, and hospitals will have to raise their rates, which will then bring on universal health care (free for all), which will attract more illegal immigrants and lead to the long rationing lines for care seen in Canada and Great Britain.

Few understand that health insurance and Medicare are all about getting doctors and hospitals paid, not about delivering quality health care or preventing disease. Decades ago trolley cars in the Los Angeles metropolitan area were abandoned as automobile manufacturers paid politicians to eliminate public transportation. Big business has learned how to manipulate the marketplace. The same is true in medicine. Ratcheting down the level of nutrients in fortified foods (folic acid, vitamin C, vitamin D) ensures a certain level of disease in the population that then requires treatment. Phony studies are published to scare the public away from vitamin pills.

Healthcare now faces a special challenge. Breakthroughs in nutritional science, particularly vitamin D, will soon be announced, which will vanquish the two leading causes of mortality, cancer and heart disease. Other discoveries with vitamin C, resveratrol, magnesium, garlic, probiotics, folic acid, if implemented, could result in the downsizing of American medicine. But will the public catch on? Will health authorities and politicians even let this happen? Technology now exists that would make it possible for Americans to live 120 years in great health. Tom Johnson, a University of Colorado geneticist, thinks people could soon live to 350 years old, spanning the ages like Methuselah and the other Biblical patriarchs. Will the public catch on? Will their doctors lead the way (and put themselves out of business)?

Extreme-drug resistant TB.

A man with extreme-drug resistant TB travels twice between Europe and North America, possibly exposing others in the confines of an airplane to this deadly form of mycobacterial lung infection. An infectious disease expert in India says 1/3 of the blood samples of TB patients he has examined there are of the extreme drug-resistant variety which carries a 40% mortality rate.

Politicians respond by saying new vaccines and antibiotics are in the making and more money is being directed toward research. These efforts are too late and would only be marginally effective. The plea to eradicate TB is futile. The more man-made antibiotics that are employed, the more drug-resistant strains of this mycobacterial infection arise. Humanity is in a box canyon. Its “magic bullet” antibiotics are increasingly useless against this and other infections. The drug and vaccine approaches to treat TB dominate, rather than efforts to improve natural immunity (vitamin D, vitamin C, selenium, fish oil) and natural antibiotics that do not induce drug-resistance (allicin from garlic, oleuropein from oil of oregano).

The public should be forewarned, this is just the beginning. A third of the world has lung TB, some of these people have undiagnosed drug-resistant TB, and obviously some travel on airplanes, to spread the disease across the globe. A pandemic is brewing and it will likely arise out of hospitals, where TB is treated with antibiotics, and spread from there. The most likely contact with a person who had TB will be foreign immigrants – barbers, hotel and restaurant workers, gardeners, children of immigrants will carry the disease into our schools, workplaces and homes. If you are treated with antibiotics, as you must be, you are at risk to develop drug-resistance. The world is in a fix. It is only a matter of time.

SECOND-RATE VISTA HAS WINDOWS FANS LOOKING TO LINUX

The year is 1993, and I am at the Spencer Katt party at Fall Comdex, back when Comdex was the technology show of technology shows. There, I, a freelance technology journalist, meet Jim Louderback, then the director of PC Weeks Labs. We end up talking about operating systems. He rather liked Windows for Workgroups for the desktop. I sang the praises of SCO Open Desktop 2.0. It was the beginning of a beautiful friendship, even though we completely disagree about operating systems.

Now, almost 15 years later, Jim and I are still friends. I am now editor at large for Ziff Davis Enterprise, which means I get to stick my nose into just about any technology that interests me, and Jim has just left being the editor in chief of PC Magazine to take over Revision3, an Internet television network focused on developing programming for the on-demand generation. When it comes to operating systems these days, I am now using SLED (SUSE Linux Enterprise Desktop) 10 SP 1 and MEPIS 6.5 on my work desktops. Jim is switching back from Vista to XP on his workday machines.

Yes, that is right. A loyal Windows user of more than 15-years is throwing in the towel on Vista. You can read his story for why he finds Vista so annoying, but I will sum it up for you. Vista sucks. The drivers do not drive, running programs will not run or will not stop running, applications do not apply and networking will not net. I feel his pain.

I keep two copies of Vista Ultimate up so that when I want to compare Vista with a Linux desktop I am able to actually use Vista so I can make a fair comparison between Vista and its Linux competition. Vista just does not cut it. I will take any up-to-date desktop Linux – SLED, MEPIS, Ubuntu, Xandros, Mint – over Vista. Why? Because while some of them may not able be to play Windows Media Files or the like, they all do what they are supposed to do and do it without throwing a fit while doing it.

I do a lot with networking. Long before I was writing about computers, I was managing networks. In short, I know networks. When it comes to Vista, though, I feel like I am back in the ‘80s and no one has invented NetWare or TCP/IP yet. It is like trying to drive a race car with oven mitts on my hands. With Linux, I can do anything I want when I want to without any trouble. With graphical programs like mnetwork, networkmanager, and SWAT, if you can set up an XP box on a network, you can set up a Linux box on a network.

I am not anti-Microsoft software. I am not really pro-Linux. I am pro software and operating systems that work. Vista, as Louderback knows all too well now, simply does not work. Linux does.

At the end of his column, Louderback wrote, “If Microsoft can’t get Vista working, I might just do the unthinkable: I might move to Linux.” Louderback, it is not unthinkable. To make it as easy as possible, I recommend you check out Lenovo’s new line of SLED-powered ThinkPads.

LEW ROCKWELL’S 30-DAY PLAN

When Eastern Europe broke free in 1989, we all realized just how little thought had been given to the transition from socialism to capitalism. Mises had told us the collapse was coming, and we should have been prepared. As America comes to resemble a command economy, we need a transition plan here too. Yuri Maltsev proposed a “One-Year Plan” for the U.S.S.R. We are not in that bad a shape (yet), so we could do it in 30 days.

DAY ONE: The federal income tax is abolished and April 15th is declared a national holiday. The 40% reduction in federal revenues is matched by a 40% cut in spending. The budget is still almost twice as big as Jimmy Carter’s.

DAY TWO: All other federal taxes are abolished, including the corporate income tax, the capital gains tax, the gasoline tax, “sin” taxes, excise taxes, etc. Businesses boom, and the few legitimate federal functions are funded with an inexpensive head tax. People who choose not to vote need not pay it. (Note: This was a mainstream view in the 19th century.)

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DAY 29: The Defense Department is reoriented towards defense. American troops come home from all around the world. We adopt a policy of armed neutrality, remembering the Founding Fathers’ teaching that we could not have an empire abroad and a constitutional republic at home.

DAY 30: All tariffs, quotas, and trade agreements are put through the shredder. Americans can trade with anyone in the world, without barriers or subsidies. Japanese car prices drop an immediate 25%.

In just 30 exhilarating days, we have established the outlines of free market. Radical? Maybe so. Me, I can’t wait until Month Two.

AN ACID TRIP GONE BAD

I have just returned from two weeks in Washington and find myself almost giggling with despair, or perhaps chortling at the madness. I need a bottle of Padre Kino, maybe laced with Haldol. I figure the whole country must be smoking dope, because they have all got the fears. Or so it appears at first. In stations of Metro, the city’s subway, a recording told us over and over that Metro had new secure trash cans and – I think this is verbatim – “You can now put your trash where it belongs without fear.” Yes, brethren and cistern, you can throw away that newspaper in a state of calm.

We are afraid of trash cans? What would Davy Crockett think? As best I can tell, Homeland Security thought, or pretended to think, that a wily terrorist might put a bomb in the trash cans. So they built blast-proof cans after taking out the vulnerable old cans. Some company made a fortune supplying them, Homeland Security being a richly flowing monetary teat. Personally I feel much safer.

The city is like an acid trip gone bad. On electronic signs on overpasses one sees that the Threat Level is Orange – kind of scared, but not yet with the screaming shaking gollywoggles. What does that mean? What do you do in Condition Orange that you don’t do in Condition Green? (Actually Green seems not to exist. The point appears to be to keep people in a constant state of moderate anxiety.) At National Airport, my plane had minor maintenance problems and the repair crews had the engines opened. The announcer or whatever you call him repeatedly told us “not to panic.” I am going to panic because they are putting a new valve in the de-icing generator?

I looked for indications that anyone was paying the slightest attention to this twaddle and could not find any. I half expected people to approach a trash can on tiptoe, from behind, so that it Wouldn’t Suspect. No. They just stuffed things into it.

A lot of people think that all this fearaganda springs from some closely calculated plot to make people support the wars, or give the feds unlimited power so they can protect us. Well, it looks that way. Perhaps a few in government take it seriously. You know, eternal vigilance is the price of freedom, rather than a good way to lose it. I don’t know. But it is a bureaucratized terror, coated with a sort of Madison Avenue inanity. Terror by Disney. I get the impression that it is a response more to boredom than to peril. The Homeland Security people, not exactly a scintillating crew, get to feel important, have a sense of mission and maybe even be noticed. In a meaningless life, the chance to go mano a mano with bin Laden, even if only by tilting at trash cans, is better than nothing.

On this trip I spent several hours at Walter Reed Army Hospital, where guys with one leg hobbled around on crutches. Having passed a year as a patient at Bethesda Naval Hospital as a consequence of another witless war, I knew what I would find should I visit the wards at Walter Reed: the blind, the faceless, the hopelessly gutshot, and the quadriplegics who would spend the rest of what cannot quite be called a life being turned at intervals to avoid bedsores.

I do not know today’s soldiers, having left the military beat midway through the ‘90s. How many of them know they were suckered as we were, and how many still buy the patriotic hoopla favored in small towns, I do not know. Theirs is a very different world from that of the intimate blues bars of Upper Connecticut Avenue. I wonder what the spindly milquetoast hawks of National Review would think if they saw the human wreckage of the military hospitals, which they won’t.

Washington is a curious city, separated from most of the rest of the United States by a gaping cultural chasm. It is probably the nation’s best-educated town, and it is certainly a place where people know the score. The population consists of politicians, reporters, beltway bandits attached to Uncle Sucker’s well-worn mammaries, wonks from policy shops, or outfits supplying all of them with one thing or another. In a country that does not, they travel.

It does not make them better people than others. It means that they know it is all a game, a matter of whose rice bowl gets filled by what contract and who gets reelected how. Things are dirty and rigged and one either hides things from the public or misrepresents them to gull the rubes. This of course is no secret. It does not have to be. It works anyway.

One night I sat in the Zoo Bar, across Connecticut Avenue from the entrance to the zoo, with friends just back from Yemen. At the next table two guys were talking of some contract with DoD, talking in detail of RFPs and set-asides and who on what committee on the Hill had to be sold. That’s DC. Meanwhile the subway reassured riders about the safety of trash cans and, only a few stops away, soldiers from other worlds learned to use their wheel chairs. An acid trip gone bad.