Wealth International, Limited

August 2007 Selected Offshore News Clips

(Especially noteworthy articles’ headings highlighted in gold.)


Considering the U.S. economy’s future, Crash Proof offers steps to avoid diminishing your standard of living.

The Austrian Business Cycle Theory posits that business cycles are caused by the central bank intervention in the economy. In America, the Federal Reserve creates too much money, a boom is engendered, characterized by malinvestment in stocks or real estate or commodities or fine art or whatever. But, a bust ultimately follows, wreaking havoc on the economy.

Although he is no academic, Peter Schiff, President of Euro Pacific Capital, faces off against mainstream economists like Diane Swonk and Mark Zandi frequently, articulating the case that the U.S. economy is a house of cards built on excess money creation from the Fed, and that while all looks well for the moment, economic disaster is just around the corner. Schiff recently discussed the themes of his new book, Crash Proof: How to Profit from the Coming Economic Collapse.

The book is an easy-to-read crash course on what is wrong with the American economy, why it will crash, and how to protect your assets. Point by point, the author debunks the common wisdom spewed forth by Wall Street talking heads. The large trade deficit is not a sign of our credit-worthy economy. It reflects a country that under-produces and over-consumes, ultimately leading to disaster. Inflation is not under control. The real inflation rate is much higher than what is being reported. There are no real productivity gains, like ex-Fed chief Alan Greenspan and current Fed head Ben Bernanke tell us there are. And the GDP numbers are full of fluff and aren’t an accurate measure of this country’s economic health and growth.

As the federal government goes into hock, so has the U.S. consumer. Ultimately, these debt problems will catch up to us, according to Schiff, with the result being a substantial reduction in the American standard of living. Except for those following Schiff’s advice laid out in three steps that are the last three chapters of Crash Proof.

The first step is to “rethink your stock portfolio.” Given a falling dollar, Schiff believes U.S. investors should trade in their U.S. shares for investments in foreign companies. U.S. stocks are overvalued, while many foreign stocks are not. Plus, investors will get the tailwind benefit of rising currency values with stocks denominated in foreign currencies. Schiff offers a number of tips for investing in foreign stocks, with the primary one being to use his firm to execute these trades.

Step two is to begin investing in gold. Schiff believes the price of the yellow metal may go to $5,000 per ounce. Why? Private citizens will reinstitute a gold standard on their own. Troubled currencies may tie to gold rather than dollars. Central banks are becoming buyers of gold, instead of sellers. Mining companies are buying back short positions, which will cause gold to rise. Wall Street will rediscover gold. And there is much more paper money to be created by central banks to pay for wars and expanded entitlement programs such as Social Security and Medicare.

The last step is to stay liquid and turn adjustable-rate loans into fixed-rate ones.

So when is the manure going to hit the fan? Schiff does not know, but “when the bubble is this big, there are just so many potential pins that it is impossible to guess which one it will find first.” Ignore Mr. Schiff at your financial peril.

Link here.


I am never comfortable with the idea of “yelling ‘fire’ in a crowded theater.” But Jim Cramer already did as much late last Friday afternoon on CNBC. His “We’re in Armageddon” tirade was made moments after Bear Stearns’s CFO Samuel Molinaro offered a disconcerting assessment of market conditions during the company’s hastily called conference call: “I have been out here for 22 years, and this is as bad as I have seen it in the fixed-income markets.” A highly-aroused Mr. Cramer, volunteering to speak on behalf of Wall Street, called for the Fed to aggressively cut rates and “open the discount window.”

The credit market has dislocated, liquidity has evaporated, and our academically-inclined new Fed chairman is in store for a historically challenging real world first test. Wall Street has been conditioned over the years to expect “bailouts”. Only months on the job, Alan Greenspan stepped up and assured the markets that the Fed was ready to add liquidity after the 1987 stock market crash. The Greenspan Fed acted aggressively during the LTCM crisis and, later, Dr. (“Helicopter”) Bernanke played an instrumental role in the Fed talking the risk markets higher in late 2002. To be sure, Fed “reliquefications” played a conspicuous role in fostering ever greater and more unwieldy bubbles – and this will remain in the back of FOMC members’ minds. The Bernanke Fed today would likely prefer to maintain a “hands off” approach for as long as possible – which has already been too long for an acutely fragile “Wall Street”.

And let us not forget the (unsung hero) GSE “backstop bid”. The GSEs ballooned their balance sheets $150 billion to absorb speculative de-leveraging during the 1994 de-leveraging and bond market rout – about double 1993’s expansion. The GSEs are definitely in no position these days to aggressively create marketplace liquidity by expanding their (money-like) liabilities to aggressively purchase MBSs – in the process stabilizing market prices (especially for the leveraged speculators). Wall Street must all of a sudden feel short of friends.

Larry Lindsey called upon Fannie and Freddie to loosen lending standards to help ameliorate the rapidly accelerating mortgage credit crunch. I was immediately reminded of how Washington nurtured the S&L bailout from what should have been resolved years earlier at a fraction of the cost to taxpayers. The GSE tab is today running out of control. Keep in mind that Fannie and Freddie already have combined “Books of Business” (MBS holdings and guarantees) of almost $4.0 trillion supported (in the best case) by stockholders’ equity in the neighborhood of $60 billion (current financial statements not available!). The thinly-capitalized Federal Home Loan Bank System has another $1.0 trillion of assets. Before all is said and done, taxpayer GSE exposure will likely reach the trillions – to add to other untenable ballooning federal contingent liabilities.

Last week, the unfolding financial crisis reached a problematic stage on several fronts. For one, illiquidity hit the gigantic “AAA” market for “private-label mortgage-backed securities”. The booming market for non-agency MBS has played an instrumental role in ensuring abundant cheap mortgage credit – on the one hand filling the liquidity void created by the constrained GSEs and, on the other, providing virtually unlimited inexpensive “jumbo” mortgage finance to inflate upper-end housing bubbles in California and the most desirable locations and neighborhoods across the country.

While the subprime implosion was a major marketplace development, in reality only a small segment of the mortgage marketplace was actually impacted by significantly tighter credit conditions. Today, we are in the throes of a dramatic, broad-based and momentous tightening of mortgage credit. Importantly, key players and sectors throughout the mortgage risk intermediation process are increasingly impaired and now in full retreat. This includes hedge funds such those that failed at Bears Stearns and many more, the broker/dealer community and the expansive mortgage derivatives market generally. There is also the issue of exposed mutual funds, money market funds, pension funds and the banking system in general. Just like NASDAQ went to unimaginable extremes, and then doubled during a fateful “blow-off” – total mortgage credit doubled subsequent to the Greenspan Fed’s reckless post-tech bubble “reflation”. Risky mortgage exposure now permeates the (global) system.

The process of transforming risky mortgage loans into coveted perceived safe and liquid credit instruments has broken down on several fronts. Not only is the risk intermediation community impaired, marketplace confidence and trust in the quality, safety, and liquidity of mortgage (and mortgage-related) securities is being shattered. There are apparently serious problems developing throughout the massive marketplace for (“repo”) financing MBSs. And it is precisely the market for financing the top-rated mortgage securitizations – where the perceived risk was minimal – where I suspect the greatest abuses of leverage occurred. The marketplace is now experiencing forced de-leveraging and a liquidity dislocation – with major systemic ramifications.

I mostly downplayed the marketplace liquidity and economic impact of the housing downturn last fall and the subprime implosion this past February. For the system as a whole, the credit spigot remained wide open. My view of current developments is markedly different. I cannot overstate the dire ramifications for the unfolding credit market dislocation. There is today serious risk of U.S. financial markets – distorted by years of accumulated leverage and derivative-related risk distortions – of “seizing up”. A system so highly leveraged is acutely vulnerable to speculative de-leveraging and a catastrophic “run” from risk markets. At the same time, the bubble economy and inflated asset markets – by their nature – require uninterrupted abundant liquidity. The backdrop could not be more conducive to a historic crisis, yet most maintain unwavering confidence that underlying fundamentals are sound.

I am unclear how the enormous ongoing demand for new California mortgage credit will be financed going forward. With the market having lost all appetite for “jumbo” MBS, mortgages must now be priced generally in accordance with the standards of increasingly cautious loan officers willing to live with these loans on their banks’ balance sheets (a radical departure from pricing set by originators selling loans immediately in an overheated MBS market). And, let there be no doubt, the prospective credit tightening will hit grossly inflated and highly susceptible “Golden State” housing prices hard – a scenario that will force lenders to incorporate significantly higher credit losses into their loan pricing terms (perhaps Cramer was speaking to California homeowners when he jingled house keys in front of the camera and suggested it was perfectly rational to mail your keys to the bank). Furthermore, I expect the pricing and availability of credit required to refinance millions of rate-reset mortgages in California and elsewhere to turn prohibitive for many. And the home equity well is about to run dry – from a combination of sharply tightened credit conditions and accelerating home price declines.

A severe tightening in mortgage credit is in itself sufficient to pierce a vulnerable U.S. bubble economy. But there is as well an abruptly brutal tightening in corporate credit. The junk bond market has basically closed for business. The leveraged loan marketplace is in turmoil and scores of debt deals have been pulled. And, more ominously, the previously booming ABS and CDO markets have slowed to a crawl. Perhaps not immediately, but it will not be long before the economy succumbs to recession.

Credit market dislocation now dictates the assumption that Federal Reserve liquidity assurances and rates cuts are on the near horizon. And while they will likely incite the expected knee jerk response in the equities market, I do not expect they will have much lasting effect on our impaired credit system. Current issues are much more complex and serious than 1987, 1998, 2000, or 2002. The dilemma today is that confidence in “Wall Street finance” has been shattered. The manic bubble in credit insurance, derivatives, and guarantees is bursting. The manic bubble in leveraged speculation is in serious jeopardy. The currency markets are a derivative accident in waiting. Fed rate cuts risk a dollar dislocation and/or a further destabilizing (for spreads) Treasury melt-up.

A focal point of my macro credit analysis has for some time been the grave risks posed to markets and economies commanded by the seductive elixir of speculative liquidity. I have compared the current backdrop to that of 1929. For too long our bubble economy and bubble asset markets have luxuriated in liquidity created in the process of leveraging speculative securities positions. We are now witnessing how abruptly euphoric boom-time liquidity abundance can transform to a liquidity crisis.

I apologize for appearing overly dramatic. But I have nagging feelings that for me recall the disturbing emotions following the terrible 9-11 tragedy. I know the world has changed and changed for the worse – yet I recognize that I do not know how and to what extent. I fear for our markets, our economy, our currency and our system. We have been sickened by what has transpired during the late-stages of this senseless credit and speculative orgy. The Great Credit Bubble has been pierced, and there will now be a very, very heavy price to pay. And, as always, I hope I am proved absolutely wrong.

Link here (scroll down).


A few years ago, I read Christopher Reich’s massive novel, Numbered Account, billed as an inside look at the “anonymous” world of offshore banking. While the book is definitely a page turner, it is not a particularly accurate portrayal of the Swiss banking industry. The book portrays Switzerland as place that provides dictators, narcotics kingpins, and terrorists completely anonymous access to global financial markets and electronic funds transfer networks.

One of the book’s biggest faults – and of most works in this genre – is that that it blurs the distinction between an anonymous account and a numbered account. An anonymous account is exactly that. The bank that holds the account has no identity for the customer. While it was once possible to open truly anonymous accounts using attorneys or other intermediaries in Switzerland, Liechtenstein and other offshore centers, no major financial center still offers them. Switzerland, for instance, abolished anonymous accounts in 1991. Liechtenstein and Austria did so in 2000.

Unlike an anonymous account, with a numbered account, you must disclose your identity to a bank, and fully comply with the bank’s due diligence and know-your-customer requirements. However, only a few officers at the bank know your real name. All other bank employees know you only by a number or a code word. Transactions are carried out in your pseudonym or number plus a password, not your real name. Bank statements show only your pseudonym or number. Even your personal banking representative does not know your real name.

The main benefit of a numbered account is that it avoids the possibility that a lower level bank employee might be coerced or bribed by an outside party to reveal information about your account. These techniques are well known to kidnappers, for instance. Another advantage is that bank statements will not actually contain your name. No one can prove with a stolen bank statement that the account actually belongs to you.

Numbered accounts are available in a number of offshore banking centers, including Austria, Liechtenstein and Switzerland. Because administrating a numbered account is more expensive than dealing with an ordinary account, the charges are often several times higher. Only you can decide if the privacy and security advantages are worth the additional costs.

Link here (scroll down).


It is almost impossible to avoid spam. Your email address is precious to you. Anyone who gets their hands on it can use or abuse it. Every time you give your email address to someone, you run the risk of being spammed. Every time you post to a newsgroup, or use a discussion board, the same applies. And, once you get onto a spammer’s list, it is very hard to get off. You cannot just keep your email address a secret either. What is the point of having email if nobody can write to you?

mailexpire is designed to help you keep your inbox spam-free. The system allows you to create a free email alias. For a period you choose, from 12 hours to 3 months, anything sent to this email alias will be forwarded on to you at your actual email address. You can then give the alias to that party you are not sure of. If you get appropriate email from him, great. If you start receiving spam, you know where it came from, and you only have to put up with it until your alias expires. YOu have the option to extend your mailexpire alias, or kill it instantly.

Link here.


Cell phones today are much more sophisticated than those manufactured only a few years ago. Using them to make telephone calls is only the beginning. You can also use them to send and receive e-mail, browse the Internet, take photos, etc. All these functions leave a trail that may be difficult to securely erase. What is more, the legal status of these records is, to put it mildly, uncertain. At the very least, these records carry less legal protection than the content of cellular conversations themselves. It is not uncommon for police to seize cell phones and retrieve email messages, photos, text messages, etc., all without a search warrant.

Ask yourself, what information in your cell phon–rs memory would you prefer not to be in the hands of police? Of a business competitor? Or, for that matter, of your spouse or partner? If the answer is “plenty”, then you need to take steps to securely delete information from your cell phone’s internal memory. If the information you need to do so is not in your cell phone’s operating manual, check out a free service from wirelessrecycling.com. This website lets you choose the brand and model number of your cell phone, and then displays the exact commands you need to delete every piece of data from it.

When you replace your cell phone, repeat this process. Also, remove the phone’s SIM card, if it has one. Your SIM card is uniquely tied to you, and if ends up in the wrong hands, you could be falsely tied to a crime committed by someone else. Once you have deleted the data in your phone and removed the SIM card, double-check to make sure your address book, call logs, and other data stores really are empty. Then you can sell your old phone on eBay, or donate it to a charity, with confidence that any information on it cannot come back to haunt you.

Link here (scroll down).


The war in Iraq is about to get worse. Much worse. The Democrats’ decision to let the war run its course, while they frantically wash their hands of responsibility, means that it will sputter and stagger forward until the mission collapses. This will be sudden. The security of the Green Zone, our imperial city, will be increasingly breached. Command and control will disintegrate. And we will back out of Iraq humiliated and defeated. But this will not be the end of the conflict. It will, in fact, signal a phase of the war far deadlier and more dangerous to American interests.

Iraq no longer exists as a unified country. The experiment that was Iraq, the cobbling together of disparate and antagonistic patches of the Ottoman Empire by the victorious powers in the wake of World War I, belongs to the history books. It will never come back. The Kurds have set up a de facto state in the north, the Shiites control most of the south and the center of the country is a battleground. There are 2 million Iraqis who have fled their homes and are internally displaced. Another 2 million have left the country, most to Syria and Jordan, which now has the largest number of refugees per capita of any country on Earth. An Oxfam report estimates that one in three Iraqis are in need of emergency aid, but the chaos and violence is so widespread that assistance is impossible. Iraq is in a state of anarchy. The American occupation forces are one more source of terror tossed into the caldron of suicide bombings, mercenary armies, militias, massive explosions, ambushes, kidnappings and mass executions. But wait until we leave.

It was not supposed to turn out like this. Remember all those visions of a democratic Iraq, visions peddled by the White House and fatuous pundits like Thomas Friedman and the gravel-voiced morons who pollute our airwaves on CNN and Fox News? They assured us that the war would be a cakewalk. We would be greeted as liberators. Democracy would seep out over the borders of Iraq to usher in a new Middle East. There are probably about 10,000 Arabists in the U.S. – people who have lived for prolonged periods in the Middle East and speak Arabic. At the inception of the war you could not have rounded up more than about a dozen who thought this was a good idea. And I include all the Arabists in the State Department, the Pentagon and the intelligence community. The war was not doomed because Donald Rumsfeld and Paul Wolfowitz did not do sufficient planning for the occupation. The war was doomed, period. This is not to deny the stupidity of the occupation. But Iraq would not have held together even if we had been spared the gross incompetence of the Bush administration. Saddam Hussein, like Josip Broz Tito in the former Yugoslavia, understood that the glue that held the country together was the secret police.

Iraq, however, is different from Yugoslavia. Iraq has oil. Lots of it. It also has water in a part of the world that is running out of water. And the dismemberment of Iraq will unleash a mad scramble for dwindling resources that will include the involvement of neighboring states. The Kurds, like the Shiites and the Sunnis, know that if they do not get their hands on water resources and oil they cannot survive. But Turkey, Syria and Iran have no intention of allowing the Kurds to create a viable enclave. A functioning Kurdistan in northern Iraq means rebellion by the repressed Kurdish minorities in these countries. The Kurds, orphans of the 20th century who have been repeatedly sold out by every ally they ever had, including the U.S., will be crushed. The possibility that Iraq will become a Shiite state, run by clerics allied with Iran, terrifies the Arab world. Turkey, as well as Saudi Arabia, the U.S. and Israel, would most likely keep the conflict going by arming Sunni militias. This anarchy could end with foreign forces, including Iran and Turkey, carving up the battered carcass of Iraq. No matter what happens, many, many Iraqis are going to die. And it is our fault.

The neoconservatives – and the liberal interventionists, who still serve as the neocons’ useful idiots when it comes to Iran – have learned nothing. They talk about hitting Iran and maybe even Pakistan with airstrikes. Strikes on Iran would ensure a regional conflict. The occupation of Iraq, along with the Afghanistan occupation, has only furthered the spread of failed states and increased authoritarianism, savage violence, instability and anarchy. It has swelled the ranks of our real enemies – the Islamic terrorists – and opened up voids of lawlessness where they can operate and plot against us. It has scuttled the art of diplomacy. It has left us an outlaw state intent on creating more outlaw states. It has empowered Iran, as well as Russia and China, which sit on the sidelines gleefully watching our self-immolation. This is what George W. Bush and all those “reluctant hawks” who supported him have bequeathed us.

What is terrifying is not that the architects and numerous apologists of the Iraq war have learned nothing, but that they may not yet be finished.

Link here.


When the music stops, in terms of liquidity, things will get complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” ~~ Citigroup CEO Chuck Prince, July 2007

How things have changed in the short space of a month. For, right up to the second half of July, world equity markets were still raging ahead in utter denial of the spreading cracks in the credit boom, with both the S&P and the emerging markets indices making new highs in that time. This was despite the fact that all the technicals were signaling the need for caution – elevated sentiment readings, record-high margin longs on the NYSE, record-low mutual fund liquid asset percentage holdings, a turn in the breadth of the market (that for the Nasdaq has, indeed, since hit multi-year new lows), volatility indices climbing with – rather than against – the rise in stocks.

More crucially, there was still an attempt to downplay the magnitude of the problems finally coming to boil in what has arguably been the most spectacular mass hysteria in the whole sorry history of financial market manias – the $multi-trillion Ponzi scheme of credit we have created since the collapse of the Technology frenzy.

We have long told anyone arguing that commodities have occasionally displayed bubble-like behaviour that they were no more susceptible to this kind of infection than any of a number of other asset classes – both conventional and “alternative” – and that this was unlikely to pass until we had removed the cause of all this mischief, namely, the credit bubble which had continuously been inflating prices everywhere you looked (though, ironically, everywhere the central banks were choosing not to look, at the same time).

The real bubble, we maintained, was in credit: all others – whether in copper futures, LBO targets, Patek Philippe watches, or Modern “art” – were ancillary to what the woefully uncomprehending ex-Fed Chairman once called a “conundrum”, but which was, in reality, all too understandable a phenomenon. In saying this, we would be assailed on the one side by starry-eyed mining promoters who would insist on telling us that our caution was misplaced. We “didn’t get it” because we did not understand China’s influence on the supply/demand dynamics of the metals concerned.

On the other hand, we have been haughtily dismissed by institutional investors who could very well scoff that, say, nickel might be overstretched in the near term, but who were still perfectly content to buy yet another gallimaufry of dubious, rag-tag credits from their over-eager investment bank account managers, each secure in the belief that the hocus-pocus which purported to value these baskets afforded him a wide margin of safety. As the events of the past few weeks have begun to reveal, however, this last presumption has proved just as fatal as all of its many less-than-illustrious predecessors in the perpetration of mathematical hubris.

Indeed, it is a compelling testimony to our capacity for pseudo-rational self-delusion that so many could still cling to the idea that something as intensely self-reinforcing as the financial markets – institutions in which those highly non-linear and inherently unquantifiable actors known as “human beings” are at play (and largely with Other People’s Money) – can ever yield to the same statistical calculus as a laboratory vessel full of inanimate gas particles.

Did no one stop to think that if their model was supposed to be so hot, then so, in all likelihood, was everyone else’s? Had they done so, they would have realized that not only must buying assumptions have become claustrophobically crowded (i.e., very efficiently irrational!), but that – far worse in its implications – once the market turned, all these blessed computers would be revealed to be disastrously mispriced in one horrible unison. After all, if everyone was running much the same CDO-analytical version of Deep Blue, did no one ever ask themselves whether there were really enough Gary Kasparov’s out there on whom to unload the junk once the models all began to flash “Sell!” at the same time?

Obviously not. And yet, even now there is a current of denial still insidiously at work in the minds of people who do not wish to acknowledge that their own deeds, as members of the undiscerning Herd, have given rise to what they insist on misconstruing as just one more “six sigma event”. Apart from “the problem is fully contained” school of hopeless little Dutch boys and the usual crowd of “buy the dips (preferably from me)” chancers, the air is filled with the dreary strains of that eternal Chorus intoning “the economic fundamentals are sound,” even as all manner of high-falutin’ investment schemes implode around us.

Has anyone noticed the strange fact that when asset prices are rising, their ascent is the inescapable consequence of a solid “fundamental” underpinning – no matter how unrealistic the valuations of the assets the pundit is touting have become. But when the same market suffers one of its periodic bouts of vertigo, then far from being an unbiased reflection of disembodied knowledge, the reversal can now only be ascribed to an access of the vapors on the part of a few ill-informed neurotics! What is more, this asymmetrical mental ratchet effect (parts the “model arrogance” discussed above, wishful thinking, and cynical salesmanship) misses the fact that just as financial market conditions exert a clear and undeniable influence on the real economy in the upswing, they can hardly fail to do so in the downleg as well.

We have lived through, these past few years, nothing less than the genesis of a Category Five, super-credit-cyclone – one whose terrifying eyewall is a screaming vortex of collateral-debt-derivative feedback. Once such a storm breaks, our asset-liability bind will be seen to be the critical weakness, the Mississippi levee whose failure could well swamp us all. Granted, it is the case that every debit has somewhere a corresponding credit, but this also means that everyman’s fate is intimately bound up with that of his neighbor.

As Fritz Machlup pointed out in the 1930s, if A lends to B who lends to C, who in turn lends to A, it is indeed the case that – at the aggregate level – everything seems to match up. But this does not mean that it also cancels out. If C encounters difficulties and informs B he is broke, B will default on A and A will then be unable to meet C’s call for the cash with which he hopes to disembarrass himself. All will be ruined together.

Therefore, even if we personally have not been knowingly playing the ragged edges of the credit game, the fact that the mighty hurricane which looms above us made its first landfall in the sprawling, plasterboard suburbs of subprime is no reason for complacency for, as is just beginning to be glimpsed, subprime is itself no more than a particularly indefensible subset of the far more widespread dangers we all now face. The world is not going to go into a tailspin because of the travails of 50-odd thousand poor fools whose painful desire to make a fast buck flipping condos met a none-too-choosy lender with similarly short-sighted motives.

The plain fact is, however, that Hurricane Cassandra (so named because no one would heed the many warnings given, instead of carrying on frenetically dancing the Chuck Prince Charleston) never limited herself to such a low-rent corner of the world. Rather, the whole colorful motley crew of hedge fund gunslingers, private equity barons, bond insurers, CDO traders and fixed-income investors ... the whole, out-of-control business of M&A, of vast share buybacks, and hence of main market equity outperformance, as well as emerging market re-rating ... the whole self-aggrandizing swagger of the Bulge Bracket bonus bonanza ... all of it – every last red cent of it – has been, in turn, cause and effect of the build-up of the storm system which now threatens to sweep this Big Easy of false prosperity away, leaving little but the matchwood of shattered dreams and disabused expectations in its wake.

If all of the foregoing does not strike a cautionary enough note to give you pause, when you hear the Siren whispers telling you to dive back in now that things are “cheap”, there is one last sobering question to contemplate. In the Austrian vision of the world, the business cycle is the credit cycle. Overeasy credit encourages too much investment in too many false projects. Financiers become reckless and entrepreneurs are mislead en masse to see real opportunity where there is only the shimmering mirage given off by hot money.

And the cycle tends to manifest itself in a lengthening of the productive structure, in undertaking investments increasingly removed from the immediate provision of consumer goods, and especially of consumer staples. Another crushing asymmetry comes to bear here. It is far easier to lengthen the structure – to use easy money and expensive shares to build plant, lay pipelines, and fill the factory with banks of gleaming, new, highly-specialized machinery – than it ever is to shorten it again – retooling the assembly line for a different use, bringing a different ore out of the mineshaft, even breaking the equipment profitably up for scrap – when the premises on which these bold steps were taken prove to be mere falsehoods spun amid the prevailing mood of financial incontinence.

If, therefore, the credit cycle really has turned here – and this is surely the best candidate for marking that decisive change of phase we have had for some years – we cannot fail to reckon with serious, real world implications as the squeeze progresses, as returns on investment falter, as orders are canceled and jobs begin to be lost.

Accordingly, as we try to extricate ourselves under from the falling masonry of financial foolhardiness, what we must be asking ourselves is which company (or, indeed, which resource) has received the greatest short-term boost from the recent asset inflation and has therefore become the most overextended and vulnerable to its subsequent evaporation.

Conversely, we must also try to identify those who have been conservative enough, or who will hence react sufficiently rapidly (or for which resource we will still find the matching of physical supply to genuine, end demand a considerable challenge) and who or what will therefore best weather the onrushing tempest, offering real, long-term value, no matter how beaten down the traded price becomes in the interim.

We suggest you draw the lesson from subprime and start by looking for the corporate equivalents of those who took out – as well as those who looked like geniuses for extending – larger and larger chunks of “NINJA” loans (“No Income, No Job or Assets”), even as the ship was visibly heading for the rocks. If you do, you are sure to find more than enough candidates to keep you out of mischief for some good while to come.

Link here.


Amid the recent stock market weakness, the pundits are virtually unanimous in their claims that good underlying economic fundamentals are being trumped by irrational fear. However, if investors understood just how bad the fundamentals for the U.S. economy really are, they would dump stocks even faster. So, contrary to the rhetoric, it is not that investors are being too fearful, but that they are being too complacent.

During the recent stock market rally investors ignored some very disturbing underlying economic fundamentals. Therefore, the current weakness in the market is not in conflict with the fundamentals, but completely consistent with them. Unfortunately for the overall economy, the re-assertion of fundamentals is not exclusive to the stock market. Here is a look at what will likely happen to other asset classes and our economy should investors refuse to blindly follow the Pied Pipers of Wall Street:

  1. Gold and gold stocks. Rather than trading in tandem with other assets (as they recently have), gold and gold stocks will diverge, registering their largest gains on days when general stock prices fall. Currently, liquidity is driving all markets simultaneously. However, when those seeking liquidity realize that gold is its ultimate form, they will embrace it and shun paper alternatives. When that happens, gold stocks should shine even brighter than the metal itself.
  2. The dollar. Once foreign and domestic holders of greenbacks understand the severity of the risks facing the U.S. economy, they will dump dollars hand-over-fist. As the value of the dollar falls, interest rates and consumer prices will rise. This will compound the problems in the housing and mortgage markets, as well as for the overall U.S. economy, engendering even more dollar selling.
  3. Bonds. For now, U.S. Treasury bonds have benefited from the so-called “flight to quality”. Once investors realize that Treasuries can not protect them against the falling dollar, safe haven money will flee Treasuries as well. As interest rates rise, the problems for our economy will only intensify. If the Fed reduces short-term rates to cushion the blow, Treasuries will come under even greater selling pressure. In effect, any attempt by the Fed to reduce interest rates to bolster housing will backfire, as rising long-term yields will put additional nails in the housing coffin.
  4. Real Estate. When reality sets in, housing prices will collapse. Wells Fargo’s announcement that it is raising rates on prime jumbo mortgages, a significant percentage of California homes fall into that category, to 8% from 6 7/8%, will help accelerate this process. As potential home buyers will once again be required to fully document their incomes, provide 20% down payments, and pay 8% annually on fully amortized mortgages, home affordability will be out of the question unless prices fall sharply.
  5. The U.S. economy. When real estate prices collapse, trillions of dollars of home equity will be wiped out, with disastrous repercussions for an American economy addicted to consumer spending. Though many consumers will see their home equity vanish, their mortgage debt, much of which will become more burdensome once adjustable rates reset higher, will remain. Broke and facing rising mortgage payments, as well as higher gas and food prices, consumers will severely pull back on discretionary spending. As millions lose their jobs as a result of this retrenchment, the recession will kick into high gear, causing more damage to the real estate market, the dollar, bonds, and the economy, and resulting in further safe haven purchases of gold.
Link here.


Do not be fooled by the ambrosial pastries, the omnipresent bottle of red wine, and the hordes of impossibly slim women sipping an espresso and cradling their Louis Vuitton. French is not the language of Buenos Aires. Those who love the “Paris of South America” know that although its broad avenues, stylish inhabitants, and mouthwatering cuisine may look to Europe for inspiration, its unique charm can only be described as 100% Argentine.

The birthplace of tango and the heir of gaucho (Latin cowboy) endurance and pride, Buenos Aires enjoys worldwide fame – and rightly so – for its exquisite leather goods, superb Malbec wines, savory steaks, inexpensive plastic surgery and (draw your own conclusions) beautiful women. However, those are only a few of the reasons travelers are suddenly flocking to Argentina ... and in some cases, never going home.

Spaniard Pedro de Mendoza founded Buenos Aires in 1536, and it became a thriving port, inspiring the nickname Porteños for the residents of the growing city. By the 1920s, it was a favored destination for European immigrants, who were mostly Spanish and Italian, but also German, Irish, Portuguese, Polish, Irish, French, Croatian, English, and Arab, all seeking a fresh start in the city of “Good Air”. My own motivation for heading to Argentina was the desire to immerse myself in the language and culture. After minimal research, I arrived in the city I would soon affectionately refer to as “B.A.” with a vocabulary almost as miniscule as my budget. Of the 13 million residents, I knew not a soul.

Sipping a glass of wine in San Telmo on my second day, I received an unexpected invitation to join a nearby Argentine couple. “Buenos Aires – and wine – must be shared with friends,” they insisted. Instead of reminding them that we were not friends, and that in fact, I was a lowly American with a horrific accent and an embarrassing dislike for cow intestines (a delicacy in Argentina), I gratefully accepted. Five hours later, after sharing several bottles of wine, a delectable dinner, and a leisurely boat ride along the Rio de la Plata, I realized why Buenos Aires is experiencing a tourism renaissance.

It is not the enticing new restaurants, the exceptional shopping, the stimulating art scene, or even the swinging nightlife. It is the manner in which Argentines go out of their way to share their culture with foreign visitors. In Buenos Aires, even complete strangers are treated like old friends.

Buenos Aires is about more than bacchanalian delights. A vibrant cultural scene permeates the city. Begin with the remarkable MALBA, which showcases a menagerie of Latin-American art, before heading to the lovely Decorative Arts museum, housed in the former mansion of the prominent Alvear family. Gallery fiends will encounter plenty of alluring spaces to peruse, and antique lovers will adore the narrow streets of San Telmo, which are a veritable treasure cove, especially on Sundays.

Sophisticated sports fans can don their whites for a day of equestrian delights at the Hippodrome or an outing to watch polo – the national sport, as well as an elite social event. However, for a glimpse of insight into mainstream South American mentality, a visit to one of the hallowed fútbol (soccer) fields is a must. Boca Juniors and River Plate are the two main rival teams, and a match between them combines all the elements of a carnival and a street fight, with the results affecting the national psyche to an alarming degree.

Before flying home, discerning shoppers should spend a day in Palermo. This hip neighborhood began as an inexpensive bohemian enclave, and has now become the in vogue place to find everything from homemade paper to designer clothes, with a sprinkling of alluring restaurants and chic corner cafes nestled in between. Since the financial crisis of 2001, prices have plummeted, meaning that you can revamp your wardrobe without having to refinance your house. (Of course, by the end of your trip you may be ready to sell your house altogether and relocate to Buenos Aires ...)

If you do have more than a long weekend, the rest of the country is a wonderland of natural attractions – from the Salt Flats in the North to the wilds of Patagonia in the South. From the verdant Mendocino vineyards to the vast traditional estancias (ranches). From the most spectacular glacier in the world (the Perito Moreno) to the magnificent lguazú Falls. You will not find the Eiffel Tower in Argentina ... but after your first unabashedly epicurean evening of Malbec wine and tango, you probably would not feel like climbing all those steps anyway.

Link here.


It is not that often that we can say with perfect confidence that a judicial ruling will lead directly to the needless agonizing deaths of innocent people. The U.S. Court of Appeals for Washington, D.C. handed down just such a ruling (PDF) in a case brought against the FDA by the Abigail Alliance for Better Access to Developmental Drugs.

Bobbing in the porridge of intellectual perversity served by the court is this particularly unpalatable morsel: “[C]reating constitutional rights to be free from regulation based solely upon a prior lack of regulation would undermine much of the modern administrative state, which, like drug regulation, has increased in scope as changing conditions have warranted.” From this single observation we can extract the logic (if that word can be tortured into applying here) of the entire ruling:

Not surprisingly, the court tried to buttress this argument by invoking that all-purpose exterminator of liberties, the “War on Drugs”. If there is a “deeply rooted” right to experimental drugs and other treatment, the court sneers, should there not likewise be a “deeply rooted” right to use marijuana and other narcotics, which were not subject to federal regulation until 1937? Well, now that you mention it, the constitutional case for regulating drugs of any kind is thin enough to make Keira Knightley look zaftig by comparison. Operating on such a slender pretext, the State has grown obese and murderous. And the war on narcotics, predictably, has expanded into a war on non-sanctioned medical treatment.

For the D.C. Appeals Court, the default setting is “paternalistic authoritarianism”, which is why sees nothing amiss in decanting lines such as this: “A prior lack of regulation suggests that we must exercise care in evaluating the untested assertions of a constitutional right to be free from new regulation.” The only way this can make sense is if one assumes, – contrary to the text and history of the Constitution (particularly the Ninth Amendment), the commentaries of those who drafted it, the recorded debates of those who ratified it, and the common sense invested in each of us by our Creator – that individual rights, rather than grants of government power, must be specifically enumerated.

In that mental universe, it is freedom, rather than power, that must be justified. The candor with which the court emits such collectivist nostrums is amazing. And undergirding them is the tacit but unmistakable understanding that from the court’s perspective, the State owns each of us, and as slaves, we must defer to the State’s power to do as it sees fit – no matter what needless cruelty results.

In a dissent that is as intellectually taut as the majority opinion is flaccid, Judge Judith Rogers italicizes the obvious – namely, that the “right of a person to save [his] own life,” which was entirely ignored in the decision, is the fundamental human liberty. An illustration of the court’s alienation from reality is found in the fact that Rogers considered it necessary to fortify this “Well, duh” proposition by supplying quotes from Blackstone and Samuel Adams on the subject.

Rogers’s dissent is already justly famous for its meditation on the lethal irony of contemporary judicial doctrine regarding “rights”: “In the end, it is startling that the oft-limited rights to marry, to fornicate, to have children, to control the education and upbringing of children, to perform varied sexual acts in private, and to control one’s own body even if it results in one’s own death or the death of a fetus have all been deemed fundamental rights ... but the right to try to save one’s life is left out in the cold despite its textual anchor in the right to life.”

Link here.


Consider the plight of Raymond Przybilinski. He saved $521,000 from a lifetime of driving trucks, working overtime when he could, and playing the piano or accordion late into the evenings at weddings, hotel bars, and social clubs. More than half of the family nest egg disappeared on February 2 as state banking regulators seized the bank in which he had deposited his savings, citing “unsafe and unsound” operations. When Mr. Przybilinski tried to take his money out, the man in charge of the bank’s assets informed him that there was only $200,000 left to withdraw – the amount protected by the federal government. Here are some school-of-hard-knocks lessons from Mr. Przybilinski’s misfortune:

  1. If a bank is offering above market rate interest on CDs and deposits, there is a reason behind it. That reason is risk. And with excessive risk comes eventual disaster.
  2. With credit spreads widening, margin calls being issued, and absurd lending to build condos in Florida and other places smack in the face of record inventories, there are going to be more bank failures like this.
  3. Know and understand the FDIC limits, or your life savings can be wiped out.
  4. If you have money in a bank in excess of the FDIC limits, do something about it now, while you can.

Individual investors need to examine the safety of the investments that they believe to be safe. They need to read the fine print on their “guaranteed” investments. They need to read (or, at least, to understand) the statements on their money market accounts that stipulate in their prospectus very clearly that they can LOSE money and that NAVs (net asset values) can fall below a dollar. Unfortunately, most folks do not care about “the fine print” until it is too late.

Free tips:

Link here.


Mass migration has spawned an underground economy of staggering proportions.

TIRANA, Albania: Josif Poro pats his new sofa, points with pride to his carpets and runs a wrinkled hand over a gleaming white refrigerator. He and his wife barely scrape by on their $220 monthly pension. They would have to do without many of the items in their cramped apartment if their son, a factory worker in Greece, did not faithfully send home part of his earnings.

Around the world, millions of immigrants are sending billions of dollars back home. One sweaty wad of bills or $200 Western Union moneygram at a time, they form what could be called Immigration, Inc. – one of the biggest businesses on the planet. Experts tracking the phenomenon say they have gotten a much clearer picture since the 9-11 attacks, when authorities trying to cut the flow of cash to jihadists began taking a harder look at how immigrants move their money around. Mass migration, they say, has spawned an underground economy of staggering proportions.

Globally, remittances (the cash that immigrants send home) totaled nearly $276 billion in 2006, the World Bank says. Remittances have more than doubled since 2000, and with globalization increasing the numbers of people on the move, there is no end in sight. If these guest workers incorporated as a company, their migrant multinational would rank #3 on the Fortune 500 list, trailing only Wal-Mart and Exxon Mobil in annual revenue. And unlike the conventional economy, more cash tends to change hands in an economic downturn, political crisis, natural disaster, famine or war.

Counterterrorism officials say al Qaeda and other groups are financed in part through informal money transfer networks called hawalas. Governments and the IMF have been working to regulate those. Other baggage includes fears of brain drains and a vast permanent army of economic exiles, and the untaxed earnings flowing out of host nations. Switzerland watched $13.2 billion trickle out of the country that year. But Giuseppina Iampietro, a Swiss Economics Ministry spokeswoman, says little can be done. “Immigrants have no obligation to invest their money in Switzerland.”

Meanwhile, from Poland to the Philippines, remittances are throwing lifelines to families combating poverty and helping to keep some national economies afloat. “Without the money we get from our son, who lives and works in Austria, my family and I would simply starve to death,” said Jovana Acimovic, a housewife struggling to make ends meet in Belgrade, Serbia. In impoverished Tajikistan, the National Bank says migrant laborers sent home $1.1 billion last year – more than the country’s GDP. Filipinos working overseas sent home a record $13.6 billion in 2005. So much cash is flowing that mobile phone operators make it possible to transfer money over a cell phone.

In Albania, where the average monthly wage is only $250, a third of the population of 3.2 million have left for better jobs in the U.S., Britain, Greece, Italy and elsewhere. Many have no plans to return. But some, underscoring a trend also emerging in other countries – Latvia and Mexico for example – are coming back to buy homes and open businesses. Nearly one in three Albanian real estate transactions involves an expatriate buying property back home. Nazmi Ajazi, 52, spent a few years working in Greece and returned to set up an Internet cafe and a small grocery store on the dusty outskirts of Tirana, the capital.

But some see drawbacks. Much of the world’s migration is illegal, and although many immigrants work at menial jobs, some are doctors, engineers and other professionals. Their departure can mean a brain drain of highly trained personnel and create an immigration culture. Elvin Meka, secretary-general of the Albanian Association of Banks, offers a blunt warning. “We export human beings, and they send us cash,” he said. “Young people are addicted to the idea of leaving. That is the biggest crime in this country. The government is killing their dreams.”

Others do not see a problem. Mugur Stet, spokesman for Romania’s central bank, denies that remittances – which hit $7.3 billion last year – are artificially propping up the ex-communist country’s economy. “We see new homes, new businesses,” Stet said. “When they come back, it is with a capitalist mentality. These Romanians may turn out to be better citizens than those who stay home.”

Link here.

Labor Dumping

There is little chance of stemming migrant inflows, as long as the countries supplying immigrants embrace policies that effectively mandate labor dumping. Today Mexico is the world’s largest labor dumper and the source of much of the contentious U.S. immigration reform debate. Surprisingly, the political combatants on both sides of the debate fail to mention the source of the problem: Mexico’s statist economy. Rather than modernize the economy, Mexico’s politicians dump their excess labor across the border. Mexico’s 47 consulates in the U.S., more than any other country has, facilitate the sweeping by issuing passports and offering assistance when Mexican immigrants run into trouble. Thus 30% of Mexico’s labor force is working in the U.S., and in 2006 they sent home $23 billion, 12% of Mexico’s exports.

Turkey has a similar story, as is Poland. In Indonesia, says the Doing Business 2007 report, firing a worker costs the employer 108 weeks of wages. As a result, Indonesian companies are extremely reluctant to make legal use of the country’s labor supply, forcing an estimated 70% of the labor force to work in the informal sector of the economy and 10.3% to remain unemployed. As in Mexico, Turkey and Poland, politicians in Indonesia mindlessly favor the same policy – the broom. In addition to enforcing U.S. laws, we must encourage foreign governments to respect their workers and reform their labor markets.

Link here.


China has been spared the recent turmoil convulsing global markets because of its strict capital controls, local economists say – but it will eventually be forced into a painful adjustment of bubbly asset prices driven by excess liquidity.

China has seemed a mirror image of the developed world in recent weeks, with a soaring local stock market attaining record highs and a central bank draining liquidity from the financial system while their offshore counterparts deliver emergency injections of cash. The stock market has now risen 5-fold in slightly more than two years. Residential property prices in large cities have increased in advance of the rate of growth in economic output for the best part of the last decade. Shares and property have benefited from the wealth generated by China’s economic boom and the privatisation of the housing market during the last 10 years. With few other investment options and only limited ability to place money offshore, both asset classes have also attracted speculators flush with cash trapped inside the country by capital controls.

China has gradually eased capital controls, announcing this week a plan to allow individuals to buy shares overseas, in Hong Kong, for the first time, through the Bank of China. But even if this helps to drain some of the froth from the local market, the underlying credit conditions in China remain weak, says Yi Xianrong, of the Institute of Finance and Banking at the Chinese Academy of Social Sciences. “The quality of housing loans is much worse than the subprime loans in the U.S., because there is no real credit-check system in China,” he said. “The bubble will burst sooner or later, and it is necessary for the bubble to burst as soon as possible.”

Dan Rosen, of China Strategic Advisory, in New York, says the country is “essentially all subprime, in terms of the technical quality of investments and the institutional structure around them. ... But the macroeconomic fundamentals surrounding those investments are very strong, and the ability of government to guarantee the medium-term functioning of the system is robust.”

China’s state investment, however, does not have a substantial direct exposure to the sub-prime market in the U.S. China has more than $250 billion invested in mortgage and asset-backed securities in the U.S. – but all apart from about $10 billion of this money is in highly rated agency and agency-backed securities, says Wachovia, the U.S. bank.

Link here.


Amanda Ajuluchuku sought $5 billion in damages when she sued Bank of America in North Carolina in 2005. Her claim? The bank lost a $200 check, causing her to suffer “panic and anxiety attacks, severe dizzy spells, headaches, and cold chills.” Her rambling complaint described, among other things, her fiancé’s marriage proposal, her love of hotels and her intent to use the proceeds of the lawsuit “to cater to the needs of the underprivileged children globally.”

The bank made the mistake of failing to respond to the suit promptly, opening it to an adverse judgment. So it settled for $3,000. But Ajuluchuku did not go away. She sued the bank three more times in three different states – claiming that when she tried to cash the settlement check, she was thrown out of the bank and subjected to other “acts of discrimination, contempt and terrorism.” Ajuluchuku has filed at least 219 suits in federal courts around the country over the past four years. Ambulance-chasing lawyers are not to blame for this. She represents herself.

Some 27% of all federal suits, and 54% of appeals, are filed by people representing themselves. In the early 1990s cases in which the plaintiff acted as his own lawyer (“pro se”, in courthouse lingo) accounted for 21% of suits filed in 10 federal district courts. In California state courts the number of self-represented litigants has tripled over the past 20 years, according to HALT, a legal reform organization.

Some pro se litigants have solid claims, some do not. A significant fraction of them are nuts. In a study of pro se suits brought between 1995 and 1999 in the federal district court in Manhattan, attorney Jonathan Rosenbloom found that a “disturbing” number of pro se cases were dismissed for asserting claims that were “delusional” or “wholly incredible”. Their filings tend to be voluminous with densely packed writing, full of irrelevancies and liberal use of underlining, capitalization and exclamation marks. And conspiracies exist everywhere to thwart them. You do not want to be in their path. In 2005, 57-year-old Bart Ross killed the husband and mother of Chicago federal judge Joan Lefkow, and later himself, after she had dismissed his pro se suit stemming from a malpractice case against an Illinois medical center.

Eli Lilly has spent close to $1 million defending claims brought by serial pro se plaintiff Holli Lundahl. Lilly had to hire nine litigators and five law firms to draft dozens of briefs, attend multiple court hearings and handle appeals all the way up to the U.S. Supreme Court. In a 22-page handwritten letter, Lundahl says that Lilly targeted her for being a whistleblower and contends she has been “horribly abused through the legal system, not the other way around.”

Defending loony cases can be a financial strain for a small business, says Theodore Frank, head of the American Enterprise Institute’s Liability Project. He cites the infamous $54 million pro se suit (filed by a judge, no less) over a lost pair of pants. It cost Washington, D.C. dry cleaner owners Jin and Soo Chung more than $100,000 to fight the claim.

Often a pro se claim costs more to contest than a lawyer-filed claim because the complaint is incoherent and vague, says New York litigator Steven Cooper. So the defense lawyer has to guess what the plaintiff is getting at, addressing every conceivable argument. Judges tend to bend over backward to ensure that pro se plaintiffs get their day in court. Filing fees are waived in hardship cases. Courts have set up pro se offices to help people file and prepare paperwork. Chrysler assistant general counsel Steven Hantler says these kinds of lawsuits tend to linger on dockets because of judges’ sympathy for pro se plaintiffs, particularly those who are delusional. Corporations, as a result, often make the tactical decision to settle rather than litigate.

Settlements, alas, merely encourage the many pro se plaintiffs who are repeat filers. What might work? Susan Stefan, an expert in mental disability law, suggests that companies apologize for any wrongdoing that may have triggered the plaintiff’s obsessive behavior (20 states now have laws that let doctors apologize for bad outcomes without fear that their words will be used against them in court). Pro se offices could also benefit from training to deal with the mentally ill, says Stefan.

Link here.
A sampling of more outrageous pro se suits – link.


Ruling asserted that damages award was a taxable “gain”.

The full U.S. Court of Appeals for the District of Columbia Circuit has been asked to reconsider last month’s decision by a 3-judge panel that reversed itself on a key civil rights tax case. On August 22, 2006, 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. In a major reversal, the panel held that “make whole” compensation to restore personal injuries losses are taxable.

The case arose as a result of the Department of Labor ruling in the whistleblower case of Marrita Murphy. In that case, the Labor Department held that Ms. Murphy suffered substantial damages to her health and reputation, and awarded her $70,000 in compensatory damages strictly related to her losses. The IRS taxed Ms. Murphy’s damages and she asked for a refund of the tax on the grounds that her damages were not income.

In an August 22, 2006 decision, Chief Judge Douglas H. Ginsburg, writing for the 3-judge panel, agreed with Ms. Murphy, and found that compensation for actual documented personal injury losses were not subject to an income tax. The IRS argued that the decision was wrong, and the panel agreed to vacate its original decision and rehear the case to consider issues that were never timely raised on appeal by the IRS.

Rather than overrule its prior decision (Murphy v. IRS) holding that taxing Murphy’s damages was unconstitutional, the panel simply held 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. No court in the history of the U.S. has ever upheld such an implied tax. In a remarkable ruling, the Court held that compensation for damages for emotional distress suffered by a whistleblower were not paid to make the employee “whole”, but were instead paid as part of a “forced sale” which Congress could tax under its excise tax authority. The Court reasoned, “Murphy’s situation seems akin to an involuntary conversion of assets; she was forced to surrender some part of her mental health and reputation in return for monetary damages.”

Attorneys for Marrita Murphy have asked the full U.S. Court of Appeals for the D.C. Circuit to reconsider the panel’s holding because it conflicts with Supreme Court and other legal precedent, and it raises questions of exceptional importance. “The Court’s reversal stands reality on its head,” suggested David K. Colapinto, who argued on behalf of Ms. Murphy. “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 argued.

Links here and here.


The First Total War is a study of how France abandoned fraternity to celebrate the art of armed conflict.

Enlightenment thought, conceiving a society built on reason and justice, saw war as barbaric and exceptional. It dreamed of perpetual peace. In the early heady months of the French revolution, this fantastical ideal seemed possible. Robespierre, in a speech to the National Assembly in May 1790, saw “fraternity” as natural and France as the leading exponent of pacifism. Yet, within two years, his country had triggered one of the longest military bloodbaths in history – and, according to David A Bell, the fons et origo of “total war”. To be raised to this dubious rank, war has to mobilize a country’s entire resources, use industrial quantities of hardware, and define the enemy as criminal or sub-human, worthy only of “extermination” (Danton’s word). Bell’s thought-provoking epilogue suggests that George Bush’s self-perpetuating “war on terror” borrows the rhetoric to make virtually anyone the potential enemy.

Like the participants in the Congress of Vienna in 1815, Bell is nostalgic for the ancien régime and its tendency to salute the opposite chaps before galloping at them in silk stockings. Making war was as normal, in the gallant 18th century, as making love. It was still “an indescribable bloody horror,” but kept on a leash. Rather than lose their costly professionals when the odds were poor, generals withdrew them. Civilians were decently treated. If musket, saber or cannonball made the usual mess of soft flesh, there was none of the rabid bloodlust of the previous century’s religious conflicts.

All this, Bell reminds us, was pulverized by the revolution and its sunny faith in humanity. The “military” became separated from the “civilian” sphere. Conscription meant not only an endless cheap supply of cannon fodder but the subordination of civilian values to a superior “militarism” (a new concept). And war was revered as an individual test of worth – most vividly in the person of Napoleon, but also in the memoirs of ordinary soldiers now pouring from the presses. A super-size conflict might even end war itself, it was thought. More controversially, Bell ascribes the revolution’s embrace of perpetual warfare to cultural rather than geopolitical causes (the need to defend itself, for instance).

The Enlightenment regarded warfare as “fundamentally irrational”, with Voltaire calling it “a million assassins in uniform”. It was a primitive “remnant” of barbarism, a social pathology to be eradicated in a Europe where all were brothers – at least in commerce. Bell notes how Immanuel Kant disagreed, seeing the goal of peace as better conforming to moral laws rather than to historical inevitability. Meanwhile, the advocates of war were finding a shadow argument based on classical models: civilization as a disease, war as a vaccine. For these powerful currents of thought to become embodied in political reality, where the pacifist line would undergo a kind of double-helix twist into horror, all that was needed was the destruction of the aristocratic system. In 1789, the French obliged.

However loaded his general thesis, Bell’s account of the early, epoch-changing debates in the stuffy air of the National Assembly’s converted riding arena is clear and gripping. The tumultuous assembly of May 1790 concluded with a declaration of peace, but with the proviso that if France had to fight it would “defend itself with newly righteous fury.” “Out of a toxic mixture of ignorance, wishful thinking and pure, naked ambition,” writes Bell, “the Girondins were pushing France toward wars that would last for 23 years and take millions of lives.”

War was imagined as bringing about, in Bell’s words, “an extraordinary break in human history.” With it came delusional fantasies of romantic self-expression that condemned hundreds of thousands to grisly ends. Total war, as opposed to “limited” war, was born. It was now in the hands of glacial types like Saint-Just, whose savage methods, coupled with France’s demographic advantage, led to the republic’s astonishing string of victories. In 1793, when the Catholic and royalist Vendée area rose up in internal rebellion, the republic’s response was certainly total. An estimated 250,000 men, women and children perished “out of a principle of humanity,” as General Carrier put it during the mass drownings at Nantes. The “hell columns” anticipated the SS by a century and a half – yet Bell points out that the names of some of the worst butchers still adorn the Arc de Triomphe. For Bell, it is the place where total war “was first revealed to its full, gruesome extent.”

The second half of the book is devoted to Napoleon himself, a much more familiar story. Millions died as a direct result of this ruthless little genius. Bell makes clear that the total war that set his career in motion, and which he in turn encouraged and expanded to unique and grisly proportions, had its own infernal logic. In reaction, the trampled German powers were converting the idea of warfare into a sublime act of regeneration – a fantasy that stuck. As Bell reminds us, in his vivid description of the 1812 retreat from Moscow, “Total war ends with an army transformed into a starving, skeletal, lice-ridden, barely human mass, covered in motley rags, its eyes blank and hopeless.”

Link here.


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”.


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.

Link here.


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.

Link here.


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.

Link here.


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.

Link here.


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 1: 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 2: 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.)


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

Link here.
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