W.I.L. Offshore News Digest for Week of April 21, 2008

MONACO WITH BANANAS

Who needs Liechtenstein or Jersey when we have got Panama?

This useful introduction to the virtues of Panama courtesy of Forbes magazine gives a once-over-lightly on most of the essential points.

In 2005 Alexandre and Aude de Beaulieu, Parisians in commodities trading and public relations, picked up stakes and flew to the Republic of Panama. For $60,000 they bought, renovated and equipped a shop in Casco Viejo, a decrepit Panama City neighborhood that was filled with squatters but so architecturally unique it is a Unesco World Heritage site. Their business: gourmet ice cream, with flavors like cinnamon and basil.

"Everyone told us we were crazy," says Alexandre. By which they meant that the entrepreneurs should set up shop closer to home. But France's thicket of taxes, regulations and restrictions on hiring and firing workers scared them away. "Panama is like California 20 years ago. Everyone I know is building something -- a newspaper, a development. It's very uplifting."

The De Beaulieus's ice cream parlor, called Granclément, furnished with family heirlooms and antique scoopers, has got glowing writeups in the Financial Times and numerous local papers. When Forbes visited the shop in February, a European film crew was shooting Granclément for a travelogue to be aired on KLM flights. Down the cobblestone lane construction workers were restoring a crumbling palace as a 5-star hotel, while the latest James Bond flick was being filmed in a nearby square.

Granclément is busy enough to generate maybe $150,000 a year in revenue, a good take in a country where shop clerks earn $4,000 in salary and benefits. So these 36-year-old self-starters and their four young children are on their way to becoming wealthy. This year the De Beaulieus will add supermarket distribution and a shop among the Miami-style high-rises and malls getting built in the modern banking quarter across the bay.

Panama granted the U.S. "sovereign rights" to a 500-square-mile zone down the center of the country at its independence in 1903. In 1914 the U.S. linked the Pacific and Atlantic oceans with a canal. Poverty festered and the Panamanian military periodically undermined the nation's democratic credentials, most famously in the 1980s when the drug-money-tainted dictator Manuel Noriega was overthrown by the U.S. It was only in 1999 that the U.S. completely relinquished rights to the canal.

America's recent exit was in some ways the real birth of Panama. This lively backwater -- famous mostly for flying maritime flags of convenience and hosting dodgy finance -- seems to have found its voice. Democratically elected governments have clamped down (somewhat) on corruption, signed several free trade agreements (the U.S. Congress has yet to ratify a 2007 deal with Panama) and instituted tax and social reforms.

Meantime, even as the U.S. pulled up its drawbridge to many foreigners after the Sept. 11 attacks, its dollar was the standard for Panama, which (until lately, at least) has found the currency bulwark an additional attraction for some of those same itinerants.

Result: Panama's GDP has been compounding at 7% these last five years. "Something's happened," says Joseph Harari, director of Panama's Credicorp (NYSE: BAP) Bank and an executive board member at the Wharton School in Philadelphia. "We've always had very liberal tax laws. But we also use the U.S. dollar to run our economy. It all helped."

Panama's corporate tax rate is 30% and is levied on local income only. The U.S.'s 35% federal corporate tax burden is, in contrast, the second highest in the world and is applied to global income. Caterpillar, Procter & Gamble and Hewlett-Packard have all recently announced significant investments in Panama. The personal income tax, capped at 27%, is also limited. The De Beaulieus, for example, do not pay Panamanian taxes on their French investments, which face high levies at home.

Between the glass towers of HSBC and BNP Paribas, South Beach-quality apartment complexes emerge from every weed-choked lot, turning Panama City's skyline into a porcupine of cranes. New developments are granted tax holidays for 10 to 20 years. On the seaside Avenue Balboa, famed interior designer Philippe Starck is filling a 56-floor tower. Panamanian and Colombian partners have teamed up with Donald Trump to build the 68-story Trump Ocean Club International Hotel & Tower, financed by a $220 million bond offering.

According to one report 35 towers of over 20 floors are in construction. Besides the danger of overbuilding, there are stress signs of too-rapid growth: brownouts from an overtaxed electricity grid, a Third World sewage system under the First World high-rises. Filth is still pumped into the bay. The government says it is working on sewerage improvements.

Of course, the newly arriving affluent also want high culture and good health care. Frank O. Gehry is designing Panama's museum of biodiversity. Hospital Punta Pacifica is the recently opened affiliate of Johns Hopkins Medicine International.

The old Howard U.S. Air Force Base is a 20-minute drive from downtown Panama City. Dotted with ugly barracks, this 3,500-acre property is still oddly elegant, with rolling lawns and hills, reminiscent of an African savanna, interspersed with flowering rain forest. Europe's London & Regional Properties, with partners, recently won the contract for Howard.

The plan, says Dan R. Marcus, an American developer who just arrived to run the project, is to build 12 million square feet of commercial space alongside 20,000 housing units, all woven together in a "holistic way." Houses will be integrated into the lush forest. On hand, everything from fire stations to chic restaurants. A free trade zone grants Howard-based firms generous VAT to income tax breaks.

Backstopping all this glamor and hype are the canal and related ports. Some 14,000 ships a year make their way through the 50-mile link, paying a fee of up to $313,000. In 2006 Panamanians voted to build an additional set of locks, for $5.3 billion, that in 2014 will double capacity and finally allow modern and much larger container ships to pass through.

Canal revenue has jumped from $500 million to $1.8 billion since Panama took over eight years ago, and even a small cut of all the commerce with Asia coming through the expanded canal is likely to make a nation of 3.3 million quite prosperous over the coming years. "Everyone said that Panama would let the canal go to hell. In fact they've done a very good job maintaining it," says David Wilson, a semiretired California engineer consulting around the ports run by Hong Kong's Hutchison Whampoa.

Of course, below the surface of its newfound glitz, the seedy Panama of lore still flourishes. For $1,100, says Carlos Neuman, a 29-year-old immigration lawyer with slicked-back hair, he can, perfectly legally, set anybody up with a shell company. "If you don't want anyone to know about your money, no one will know," he assures us. The shell's three directors cost only $300 a year each. Neuman adds that he must "know his client." Due dilligence includes one bank reference and an explanation as to where the funds came from.

Panama lacks a tax treaty with the U.S. Its banking sector, while much cleaned up, is still laundering drug money, and, says the CIA, "official corruption remains a major problem."

The CIA does not appreciate the competition.

Still, Panama has juice. At the dated but busy Veneto Casino, South American men line the bar, sipping beer and watching a soccer match. Gamblers pull the slots as hookers work the house. There is a lot of money sloshing around, and there will be more of it.

HOW MANIA PSYCHOLOGY TRUMPED SWISS BANKING

Or, how a European stereotype went “boom”.

The archetypal Swiss banker sits in front of a safe, arms crossed. You want a loan from this guy are you better have a lot of collateral. So why did UBS, with $3 trillion in assets under management become a case study in irresponsible asset management? They must have gotten caught up in the credit bubble mania like everyone else.

You expect this behavior from Wall Street: "What's mine is mine; what's yours is for my bailout." And work-a-day U.S. loan officers are always funding the latest asset mania, using as collateral the inflated values of the assets they have been pumping up. But staid, stolid, conservative Swiss bankers? As the late Howard Cosell would have said: That was some kind of a mania!

Or as Elliott Wave International chief Bob Prechtor put it: "Ultimately, however, a mania and its aftermath have everyone for lunch."

In Heaven: the cooks are French,
the policemen are English,
the mechanics are German,
the lovers are Italian,
and the bankers are Swiss.

In Hell: the cooks are English,
the policemen are German,
the mechanics are French,
the lovers are Swiss,
and the bankers are Italian.

My space here is limited, so let us overlook the line about hellishly bad lovers and consider instead the reputation the Swiss enjoy as divinely gifted bankers. As always, there is a reason for the stereotype. Probably the most recognized case-in-point is UBS, the Swiss bank with $3 t-t-trillion under management. Yes, that makes it the world's largest manager of private wealth.

Although UBS has acquired other distinguished money management firms over the years (including Dillon Read, S.G. Warburg, and PaineWebber), its Swiss banking pedigree dates to 1747. The three keys which comprise the UBS logo stand for confidence, security, and discretion.

Alas, UBS has recently had to report another dollar figure that stands out as "the largest" among lenders: namely, some $38 billion in total writedowns since the subprime debacle began in summer 2007. According to The New York Times, that cumulative loss has effectively "destroyed all the profit that the bank generated since 2004." The greater insult to injury for UBS shareholders is the 56% price decline the company's stock has suffered in the past 12 months.

All this and more was on the mind of some 4,200 of those shareholders, who assembled this week in Bern, Switzerland for UBS's annual shareholder meeting. Sentiment at the gathering was described as "raucous" (which to my mind suggests that if the crowd was anything but mostly Swiss, their emotional state may well have incited an all-out, chair-throwing spasm of violence). Shareholders received assurances that UBS's top executives and board would be repopulated by bankers with more conservative instincts. They were also told that the firm was very sorry and would not do it anymore.

Assurances aside, the plight at UBS begs the question: How could a revered institution -- which represents a centuries-old tradition of "confidence, security, and discretion" in banking -- become a case study in irresponsible asset management?

Put simply, the answer is: Tradition is no match for psychology, especially mania psychology. Bob Prechter explains it this way:

"Ultimately, however, a mania and its aftermath have everyone for lunch. ... Even among prudent professionals who remain in business, the aftermath is no kinder than was the mania itself."

And while Bob acknowledges the strong Swiss banking tradition, he also wrote this in Conquer the Crash: "Nevertheless, do not fall into the trap of choosing any Swiss bank just because it is Swiss. Today's largest Swiss banks, with their fat portfolios of derivatives [including securitized subprime debt], are at immense risk of failure if a depression occurs."

The analysis and forecasts in Conquer the Crash continue to unfold before our eyes.

This last point is perhaps the most important one. Watch what people do, not what they say -- or what someone in the same industry might once have said kinda.

HOW IT WENT WRONG – AND HOW TO MAKE IT RIGHT

Steve Forbes might be an establishment tool -- whether his magazine fits its self-designated moniker as a "capitalist tool" depends on your definition of capitalism -- but he is from the pro-growth, entrepreneurial wing of the Insiders party. Consistently, he loves to light into the loose money, dollar devalution crowd. And with Alan "I Didn't Cause No Bubble" Greenspan out and about mounting a full-time defense of his record, it is a good time for another Forbes riposte against Greenspan's past machinations.

Alan Greenspan is actively defending his record as Federal Reserve chairman, especially for the years between 2000 and 2005. He has given several in-depth interviews to the Wall Street Journal and penned a piece for the Financial Times, "The Fed is Blameless on the Property Bubble." That a man once dubbed "the Maestro" would be so astir is understandable -- Greenspan's reputation has been falling almost as fast as the value of subprime mortgages.

The chief rap against Greenspan is that he loosened money too much after the high-tech bubble burst in 2000-01 and kept it loose even when the economy began to recover vigorously in 2003. The former chairman has also been criticized for the Fed's failure to crack down on growing abuses in the mortgage lending market. But, Greenspan asserts, much of the world experienced a housing bubble between 2001 and 2006 and, therefore, he and the Fed are largely blameless. The cause of the housing frenzy, he says, was an excess in global savings.

While the Maestro's protestations will not eradicate the bear market from his legacy, they might -- just might -- trigger a badly needed debate on the proper role of the Federal Reserve and what guideposts it should use in conducting monetary policy.

Since World War II most countries have regarded monetary policy as a critical instrument (the other biggies being government spending and taxation) in regulating the economy. If economic activity is slowing, so the thinking has gone, the central bank should rev up the printing presses: The extra money will stimulate growth. Conversely, if the economy is growing too quickly, the central bank should tighten up on money creation, slowing things down to avoid the economy's careening off the road in the equivalent of a car wreck. The longest-serving Federal Reserve Chairman, William McChesney Martin Jr., liked to say that it was the Fed's job to take away the punch bowl just when the party really gets going.

This is a misbegotten view of what central banking's main mission should be. The Federal Reserve should have two key tasks -- and only two: preserving the integrity of the dollar and dealing vigorously with financial panics to limit unnecessary damage.

It is a colossal conceit for the Fed to think it could guide something as mammoth, sprawling and diverse as the U.S. economy. Yet even Greenspan, who for much of his life was something of a libertarian, fell prey to this form of governmental narcissism. The Wall Street Journal's long article about Greenspan contains these revealing sentences: "Mr. Greenspan expected his [easy money] policy to boost housing because the rest of the economy was relatively unresponsive to lower interest rates. Based on decades of his own research, he believed a buoyant housing market would spur consumers to borrow against home values and spend more," thus boosting the economy. (The real stimulus to our recovery from the 2000-01 recession was the 2003 Bush tax cuts. The lower rates on personal income, capital gains and dividends, as well as some incentives for business to invest, quickly put the sluggish U.S. economy back on a growth trajectory. Real growth rates soared from almost nothing to between 3% and 4% right through the third quarter of last year.)

This parenthetical remark of Forbes's reveals his propensity towards resolving cognitive dissonance in favor of what he wants to be true. To think that all the consumer borrowing had nothing to do with the (unsound) economic recovery strikes us as ludicrous. Greenspan's analysis was correct as far as it went. However, the result was akin to the pronouncement by the surgeon who said: "The operation was a success, but the patient died." Forbes never saw a tax cut he did not like (he likes some better than others, such as those that cut margin rates), even when the cuts lead to deficits that will have to be covered by higher rates later. And if economic growth follows a tax cut, well, there you go. And when growth slows down, even with no tax increase? Steve will blame some Congressman's muttering about future tax increases putting the kibosh on everyone's grand plans.

The consequences of central banks' trying to guide their economies are routinely disruptive, if not destructive. Inflation is almost always the result. From the 1950s through the 1970s, for example, Britain was burdened with onerous taxes -- the top personal tax rate hit 98%. It never occurred to the authorities in London to lower the rates, until Margaret Thatcher came along. Instead, both Conservative and Labour governments relied on boosting government spending and on printing more pounds to get the economy moving. Inflation would then erupt, the Bank of England would have to tighten up, and the economy would go into a slump. This process was dubbed "stop-go," and left Britain the sick man of Europe.

Greenspan's woes came about precisely because he lost sight of the Fed's prime job: ensuring a stable dollar. In the late 1990s Greenspan inadvertently tightened up. The most sensitive barometer of market mistakes is gold. During that time the yellow metal plunged to a low of $250 an ounce. Other commodities crashed, with oil dropping to nearly $10 a barrel. For a time the dollar became too dear, which contributed to the 2000-01 recession. When it became clear -- just before George W. Bush was sworn in as President on January 20, 2001 -- that the economy was skidding, Greenspan realized his mistake and started to reverse gears. But he stayed too easy, even when the economy was back on track. In 2004 gold began to surge well above its 12-year average, and oil began its long, rapid ascent, as did all other commodities. The dollar weakened not only against gold but also against other currencies, such as the yen, the Swiss franc and the pound. With money easy, the already buoyant U.S. housing market began to go berserk as lending standards started to decline precipitously.

Focused on trying to steer the economy, Greenspan ignored the flashing red lights, as did his successor, Ben Bernanke. In 2006 gold soared above $600 an ounce. After the credit crisis hit last August, the price kept moving up, breaching the $1,000 barrier in mid-March, before settling down to its current $900 range. The Fed has clearly been too loose, but so have other central banks. Hence, we have the beginnings of a global inflation, just as we did in the early 1970s.

So with the price of gold seen as a favored policy tool, Forbes unreservedly endorsed Ron Paul for president, right? Uh, No. He endorsed Rudy Giuliani at "the real fiscal conservative in the 2008 presidential race." (Giulini did bring some fiscal order to New York, but he did not have access to a money printing press.) To be fair, Forbes evidently did help Paul fend off the standard Republican party supported opposition in the 1996 Texas Congressional primary. That was before Forbes decided we needed "Churchillian leadership" in the fight against terrorism.

Greenspan claims the Federal Reserve cannot prevent bubbles, that these excesses of ebullience are part of the natural order of a free economy. He is right -- as far as it goes. But Greenspan/Bernanke fed steroids to the already booming housing market.

U.S. housing prices started growing above the normal 4% per annum in 1998, a result of a change in U.S. tax law that virtually eliminated capital gains taxes on the gains realized on most people's primary residences. This should not surprise anyone -- lower the tax on an asset and the value of that asset will go up. But in 2004 Greenspan's easy money overheated housing. Bubbles do happen, but this one was grossly inflated by the Fed's errors.

A more normal bubble occurred in the personal computer industry in the early 1980s. Everyone suddenly discovered the value of these small machines, and numerous companies jumped in to produce them. Most ended up failing -- remember Atari, Commodore and others? But the excess there pales in comparison to what happened in housing. The difference: In the early 1980s we were reducing inflation, while during this decade Greenspan and Bernanke have been fanning it.

That high tech boom was fueled by IPO money, in the first real bout of post-1982 bull market craziness. Back then no one was crazy enough to lend money to startups in highly competitive markets with no assets of value to serve as collateral. Unlike with housing, there were no delusions that PC component inventory values "always went up." When that mini-bubble popped the shareholders lost money, but not the financial companies. Ergo, no contagion.

The housing markets in other countries? These booms were partly the result of prosperity and lower inflation, which have meant lower interest rates. Banks in numerous countries made mortgages more easily available. Ireland, for example, went from an economic backwater to becoming the Celtic Tiger. Immigrants poured into the country. Locals wanted to trade up on their homes. Mortgages were available. Housing surged. All this is normal and healthy.

Again, the magnitude of what has happened is a result of fundamental errors made by the Federal Reserve and its overly easy monetary policy. These errors were compounded by the Bush Administration's weak-dollar policy (pursued in the hope of improving the U.S. trade balance). The Treasury Department was applauding, instead of fighting, the mistakes of the Fed.

Bottom line: Money should be a fixed measure of value, just as an hour has 60 minutes, a foot has 12 inches and a pound has 16 ounces. Fine-tuning and guiding the economy is a harmful undertaking for a central bank. If policymakers learn that lesson from Greenspan's era and its aftermath, then, perversely, Alan Greenspan's legacy will be a positive one.

Whatever Forbes's quirks, we agree with the main assertion on the table. The Fed -- assuming its lamentable existence is to continue -- should defend the value of the dollar and that is it. (If it actually did that, the need to step in to quell panics would probably never occur.) This would be an impossible charter to fulfill, given the pressure the Fed is always under to inflate. One might hope Forbes would see that and thus advocate for its dissolution, but, alas, no. Some consensus that the Fed's proper role is to maintain the dollar at "a fixed measure of value" would be better than none.

BROTHER CAN YOU SPARE TEN GRAND?

While Steve Forbes (above) thinks the Fed ought to concentrate on stabilizing the value of the dollar, Peter Schiff doubts it will. Why? “Great Depression buff” Ben Bernanke thinks that implosion could have been avoided if only the Fed had printed more money, so guess what he has in mind for today's problems? Schiff thinks this is a recipe for a repeat of Weimar Republic Germany's experience ca. 1923, or the collapse of Argentina's prosperity under Juan Peron.

The grainy footage of Great Depression soup lines and Hoovervilles now in heavy rotation on the major news outlets has been largely counterbalanced by a parade of economists who reassure us that such a protracted downturn is currently inconceivable. Their confidence stems primarily from the belief that government safety nets enacted since the New Deal, together with a Fed chairman who is a self-professed Depression buff, will prevent a replay of the 1930s. As usual, this analysis is woefully optimistic and sidewalk pencil sales may in fact be a growth industry.

Although Bernanke may have spent much time studying the Great Depression, his understanding of it is anything but sound. That epic slowdown resulted from a series of policy mistakes, first by the Federal Reserve and then by the Federal Government. Bernanke's view is that these mistakes were simply not large enough. What the current Fed chairman does not grasp is that the seeds of the Depression were sown during the "roaring" 1920s when the Fed, in an effort to support the British pound, kept interest rates much too low. It was this unnaturally cheap money that fueled a raging stock market bubble. In 1929, when the Fed finally came to its senses and raised rates, the bubble finally popped. In his reading of this history, Bernanke ignores the effects of the overly easy policy and simply lays blame on the tightening.

As the recession progressed, both Hoover and Roosevelt, in politically inspired efforts to ease the pain, repeatedly interfered with free market forces working to correct the imbalances. This ultimately turned what would have been an ordinary, though perhaps severe recession, into what we now call the Great Depression. This time around, the Greenspan/Bernanke Fed blew up even bigger bubbles and both the Fed and the Federal Government now show an even greater commitment in preventing free market forces from rebalancing our economy. As a result, similar to the way that the "War to End all Wars" had to be rechristened after 1939, future historians may need to come up with a new term for the Great Depression.

Rather than acting as safety nets, the programs now being devised by government will act more like snares, further impeding market forces from righting the ship. But for those who insist that a new "New Deal" is needed, it is important to retain a sense of scale. Prior to the massive expansion of Federal programs in 1933, the government was very small relative to the economy of that time. Though I believe that many of the economic policies of the New Deal were unwise and simply prolonged the Depression, at least back then we could afford them. Today of course, the Federal Government is already enormous, and any increase in spending will either have to be financed by further borrowing from abroad or though additional money printing by the Fed.

For his part, Bernanke blames the Depression on the Fed not printing enough money. Had the Fed done precisely what Bernanke now thinks they should have, the Great Depression would have been much worse. Had the Fed tried to reinflate the stock market bubble or keep it from bursting in the first place, it is the dollar that would have collapsed, and Depression-era America would have looked liked Weimar Republic Germany. As bad as the Great Depression was, hyperinflation would have made it even worse.

The good news is that there is still time to alter course and steer clear of both hyperinflation and depression. The bad news is that if we remain on our current course that is precisely where we will end up. Our days of dominating the global economy are clearly coming to an end. The only question is will we follow the path of Great Britain or Argentina?

U.S. TAX HAVEN LEGISLATION GAINING MOMENTUM

Momentum fed by Liechtenstein scandal.

The U.S. Senate has used the publicity generated by the recent Liechtenstein scandal -- where stolen client account data was sold to German and other tax agencies -- as fuel to further flog two anti-offshore bills introduced last year. Read on for details.

Two bills proposed in the Senate last year that take aim at tax havens and the U.S. taxpayers that operate in them have been given greater impetus by the recent European and U.S. probes into accounts in Liechtenstein that were alleged to hide assets from national taxing authorities.

S. 396, introduced by Sen. Byron Dorgan, D-North Dakota, would prevent American companies from deferring the imposition of a second layer of tax on their foreign-source income if they operate in selected low-tax nations. It would amend the Internal Revenue Code to treat certain controlled foreign corporations created or organized under the laws of a tax-haven country as domestic corporations for tax purposes. It sets forth a list of "tax-haven" countries, and grants the Treasury authority to remove or add a country from the list.

As explained here, a U.S. shareholder of a CFC already must include his/her/its prorata share of the CFC's passive income in the shareholder's income. Income from active (manufacturing, trading, etc.) does not have to be included until the income is remitted. The insinuation here is that operations in "tax-haven" countries cannot have substantively active income.

S. 681, the Stop Tax Haven Abuse Act, would establish legal presumptions against the validity of transactions involving offshore secrecy jurisdictions, including foreign tax havens identified in the act, and by the Treasury.

"Clearly, the recent Liechtenstein scandal and GAO investigation in the Caymans should make it easier to move S. 681 and similar anti-tax haven legislation forward than would otherwise be the case," said Martin Tittle, a Washington, D.C.-based international tax attorney.

IRS initiates action against Liechtenstein account holders.

The IRS is currently initiating enforcement action involving more than 100 U.S. taxpayers to ensure proper income and tax payment in connection with accounts in Liechtenstein. The investigations began after Germany's intelligence service obtained a list of foreign account holders from a former employee of Liechtenstein Bank LGT.

The IRS announced that the tax administrations of Australia, Canada, France, Italy, New Zealand, Sweden, the U.K. and the U.S. are working together following the revelations. Meanwhile, the Government Accountability Office is continuing its investigation of potential offshore tax evasion by U.S. companies and individuals in the Cayman Islands.

As a follow-up to requests from the Senate Finance Committee, the GAO sent investigators to the Cayman Islands to check on a 5-story Cayman Islands building listed as the address of thousands of U.S. and international companies. Investigators were also scheduled to meet with the primary tenant of the building in question. Ranking member Charles Grassley, R-Iowa, said that the Finance Committee hopes to use the GAO's findings to gain a greater perspective on the problem of offshore tax evasion.

Sen. Carl Levin, D-Michigan, who introduced S. 681 along with Sens. Norm Coleman, R-Minnesota, and Barack Obama, D-Illinois, said that it targets offshore tax abuses that drain $100 million away each year from the U.S. Treasury.

That number, if accurate, sounds like chickenfeed in the Congressional boondoggle scheme of things. That amount should fund a day or so of the Iraq war.

The bill establishes presumptions to combat offshore secrecy by allowing U.S. tax and securities law enforcement to presume that non-publicly traded offshore corporations and trusts are controlled by the U.S. taxpayers who formed them or sent them assets, unless the taxpayer proves otherwise.

"The main thing that the Stop Tax Haven Abuse Act does is criminalize transactions with particular jurisdictions by creating presumptions that, while rebuttable, could be almost impossible to rebut," said Tittle. "For instance, it says that any money that you have in account in an offshore secrecy jurisdiction is presumed to have not been taxed by the U.S. So if you read How You Can Profit From the Coming Devaluation 30 years ago and put something into a tiny Swiss bank account, it is unlikely that you could ever prove that you paid tax on the money you sent there."

This takes a page from the U.S. forfeiture and tax laws and creates the presumption of guilt. An unrestrained state's rapaciousness monotonically increases over time.

"A taxpayer that does not or cannot rebut these presumptions could be taxed three times on the same income," he said.

"If you read through the Levin bill," said Daniel Mitchell, a senior fellow at the Cato Institute, "there is no 'there' there, just a bunch of hurdles and restrictions that would make it difficult for Americans to compete in the global economy. And the Dorgan bill clearly imposes a burden on American multinationals that other countries do not impose. Every multinational will use subsidiaries in places like the Caymans. ... If U.S. companies are the only ones facing these restrictions, they will be severely hampered in competition."

Or they will decide to cease being U.S. companies, and move corporate headquarters elsewhere.

Guernsey, Luxembourg and the Isle of Man have all petitioned the U.S. Treasury to be removed from the list of "offshore secrecy jurisdictions" in S. 681.

"Although there is nothing wrong with tax competition between countries, it is a good idea to try and cut down on tax evasion using countries that actually promote themselves for that purpose, or whose laws are set up to lend themselves for that purpose," said Tittle. "But S. 681 does this in a heavy-handed way -- it gives the government all the cards."

"Overall, tax havens are good," agreed Dr. Dirk Nitzsche, senior lecturer in finance at Cass Business School in London. "Individuals prefer to invest abroad for all sorts of reasons. As long as all the taxes are paid, there should be no problem with offshore centers."

"The problem is when individuals try to evade taxes," he said. "That is what Germans did in Liechtenstein on a massive scale. When it is a way not to pay taxes in your home country ... it is tantamount to stealing from the state."

Who stole what they have in the first place.

Germany had previously initiated an amnesty to recover some of the projected $5 billion in evaded tax revenue, but got very little response, Nitzsche said. "The Germans who shifted their money offshore must have felt absolutely safe that the authorities would not find out about them," he said. "When the taxing authority was offered information about German account holders, it was too good to pass up."

The developments in Liechtenstein and the current anti-tax haven legislation indicate that we are moving into a new period, according to Nitzsche: "The tax authorities all over the world are changing their tactics and are willing to use information which has been obtained in an illegal way. Investors who are not declaring all their income to the taxman need to re-assess the probabilities of being found out."

Absent bill specifics, we can only guess that the U.S. government is going to be more aggressive still in presuming that any offshore trust a U.S. person interacts with is a trust of which he or she is formally affiliated -- a de facto creator, trustee, or beneficiary. A small amount of form will lead to a presumption of major substance, which if unrebutted will imply reporting requirements and tax payments that otherwise might not exist. Careful documentation will be mandatory if such presumptions are to be overcome. Stay tuned for more on this as details emerge.

Behind all the bluster is the increasing desperation of the politicians to get their hands on whatever they can. As we at W.I.L. have been saying all along, the whole anti-offshore propaganda campaign -- now backed with an increasingly threadbare velvet glove over the iron fist -- is designed to have everyone keep their assets where they can be monitored, taxed, and grabbed. Figure that the more uncomfortable they make it for you to go and stay offshore, the more the reason for doing just that.

U.S. HOUSE VOTES TO END PRIVATE TAX-DEBT COLLECTION

Also votes to start taxing certain unremitted foreign corporate earnings.

This article came out on April 15. The private collection of tax-debts never seemed to gather that much support after its original authorization, and now the House has voted to phase it out. In what sounds like a move similarly motived to a Senate bill mentioned in the article above, an additional bill rider has in mind closing an offshore tax break "loophole".

The Democratic-led U.S. House ... voted to stop the Internal Revenue Service from using private agencies to collect unpaid tax debts. The provision ending the private collection program put in place a few years ago by a Republican-controlled Congress was part of a tax bill that would also require the IRS to notify taxpayers if it suspects identity theft.

The bill, passed on a vote of 238-179, would also close a loophole that allows U.S. companies with foreign subsidiaries to avoid paying some taxes. Rep. Rahm Emanuel of Illinois, the fourth-ranking Democrat in the House, said the foreign subsidiary provision would prevent Iraq war contractors like Kellogg, Brown & Root, a former subsidiary of Halliburton Corp, from avoiding U.S. Social Security and Medicare taxes by hiring workers through offshore shell companies.

"They actually had a modem in the Cayman Islands. They had no employees, no company, nothing, just a computer, no telephone and they set it up so ... they did not have to pay Social Security or employment insurance or other types of taxes," Emanuel said at a press conference.

One can see a form versus substance issue going on here, if one takes Emanuel's claim at face value. No doubt if the loophole is closed, a more substantial arrangement that accomplishes the same tax savings will spring up in the old structure's place.

The bill now goes to the closely divided Senate where Sen. Byron Dorgan of North Dakota and other Democrats have proposed ending the private tax-debt collection program. Dorgan has said the cost of administering the program in 2007 far exceeded revenues raised by private collectors, resulting in a $50 million loss to the federal Treasury.

The program actually lost money? That took some doing. We wonder about the cost accounting behind the $50 million loss, since our understanding is that the private collectors worked on commission.

APRIL 15 BRINGS USUAL CROCADILE TEARS OVER TAX CODES BURDEN’S

The usual tax day faux hair tearing about the burdensome, complex tax code was again in evidence this year. Most of the statements floating out of Congress concerned the code's complexity, not its overall burden, nor the counterproductive ways the money is spent. Putting ourselves in the shoes of the racketeers: One would think they would attempt to conspire to simplify the code, and thereby increase the size of the pie and their take therefrom, while still leaving them enough leeway to hand out the special favors they thrive on. But asking the crooks to be rational in this day and age might be asking too much -- blowback, perhaps, from their efforts to keep the public stupid.

The annual deadline for filing tax returns triggered a fusillade of partisan fire ... as Republicans and Democrats blamed each other for the burdens imposed by the tax code. There was one thing both sides agreed on, however: The tax system has become too complex, and the changes Congress makes almost annually add to the confusion of taxpayers.

Senate Finance Committee Chairman Max Baucus, D-Montana, launched a series of hearings intended to lead to a major effort to overhaul the tax code, probably starting next year. He described a "complexity bubble" that is about to burst. "I don't begin this endeavor with any preconceived notions, any belief, any bias as to what kind of tax code we should have," Baucus said. He said he was open to all ideas, including a change to a consumption-based tax system.

With most of the Bush era tax cuts of 2001 and 2003 expiring in 2010, and with a new president taking office in January, Congress will be forced to reexamine the tax code next year, Baucus said. Baucus noted that since the last major tax overhaul in 1986, Congress "has passed tax bill after tax bill. And that has caused confusion and complexity for taxpayers and the IRS alike."

On that score, Republicans clearly agreed. Speaking on the Senate floor, Sen. John Barrasso R-Wyoming, declared, "Changing the system every year is not good for the economy, and it is not good for taxpayers. ... We need a system that is fair, simple and consistent."

Senate Minority Leader Mitch McConnell , R-Kentucky, took the floor to warn against allowing the 2001 and 2003 tax cuts to spring back to their previous rates. "These cuts have helped tens of millions of American families and seniors," he said. "And Democrats in Washington should relent on their plans to return to the bad old days when 60 percent of them thought their tax bills were too high."

UK PHARMACEUTICAL COMPANY TO MOVE TAX BASE FROM UK TO IRELAND

Tax rate will fall from 28% to 12.5%.

This terse, just-the-facts, story has some content worth examining.

UK pharmaceutical company Shire has announced it is moving its tax base from Britain to Ireland to cut its tax bill. The move will mean Shire will be able to avail of Ireland's 12.5% corporate tax rate on its global earnings, instead of paying 28% in the UK.

Shire will remain headquartered in the UK, but it will create a new holding company in Jersey and pay tax in Ireland. There is no job creation for Ireland associated with the change.

The Confederation of British Industry has said it is worried Britain is losing its attractiveness and that other British firms with international activities may follow suit. Other UK commentators have expressed concern that Shire's move may be the start of an exodus of UK companies to Ireland and other low tax countries.

In a statement, Shire says the vast majority of its revenues are generated from outside the UK and says its new tax strategy is designed to "help protect the group's taxation position." The move is subject to shareholder approval.

The Financial Times reports that Shire's main concern was the prospect of higher taxes on overseas intellectual property and financing operations. Shire is involved in hyperactivity and attention deficit disorder treatments as well as human gene therapy.

This is the meat of the story. The company has a legitimate overseas business, so it might as well keep the profits generated there away from the taxman as long as is possible. The domestic UK subsidiary can license the parent company's IP -- presumably patents -- when the time is appropriate and effectively move profits offshore. The "financing operations" might well feature those transactions so disliked by taxing authorities: having an offshore operation in a tax haven loan money to the onshore entity, generating deductions onshore and no taxes to speak of offshore.

Speaking on RTE Radio this morning, Friends First economist Jim Power said if many more British companies were to follow Shire's example, Ireland was in danger of finding itself labeled a "tax predator". [Oh my gawd!] He also said that Ireland might lose the support of the UK in its lobby in Europe against a common corporate tax rate.

Shire paid £4.2 million sterling in corporation tax in 2006 out of a total tax liability of £8.8 million. The company has an operation in Ireland which employs 55 people. The company says that while there are no jobs resulting from this initiative, as Shire grows and expands staffing levels here should benefit.

SWITZERLAND AND JAPAN TO SHARE CONFISCATED ASSETS ON CONCLUSION OF MONEY LAUNDERING CASE

A rather interesting collaboration and dividing of the spoils between Switzerland and Japan. This should help Switzerland's contention that when it comes to real crimes with real victims, it is not the safe haven it is made out to be.

Switzerland and Japan will receive an equal share of assets worth some CHF58.4 million that were seized as part of money laundering proceedings in Zurich, according to a statement from the Swiss Government late last week. ... The money originates from criminal activity on the part of the Yakuza criminal organisation.

The seizure and division of these assets and the conviction of those responsible in Japan was made possible by close collaboration between the authorities of the two states. As part of criminal proceedings instituted on money laundering grounds, in 2003 the Zurich prosecuting authorities seized around CHF58.4 million from the accounts of Susumu Kajiyama, a leading member of Goryokai, and notified the Japanese authorities accordingly. On the basis of this information, the Japanese authorities submitted a request for judicial assistance, which yielded the evidence they needed for their own criminal proceedings.

Meanwhile, information from Japan permitted the Zurich prosecuting authorities to confiscate the seized assets and prevent them reaching Goryokai. Thanks specifically to the evidence gathered in Switzerland, Kajiyama's conviction for usury and money laundering was upheld by Japan's highest appeal court on 17th November, 2005.

Assets in this case were seized from all over the world, but since the majority were secured in Switzerland, Japan requested that Switzerland enter into negotiations on a sharing agreement. These negotiations were concluded on 29th November 2007, subject to the approval of the competent authorities. ...

The agreement determines that the assets seized in Zurich will be divided in equal shares between the two countries. Switzerland and Japan also assured each other of reciprocal rights in future sharing cases. The Japanese portion of the assets will be paid to the Goryokai usury victims.

COURT: BORDER SEARCH OF LAPTOPS WITHOUT CAUSE PERMISSIBLE BY LAW

Constitutional constaints on federal government power, such as they are, have long been virtually nonexistant (ah, but we repeat ourselves) at the U.S. border. Customs agents can search luggage at will, with no reaonable suspicion type pretense (never mind probable cause) required. Now a "liberal" U.S. appeals court has reasoned that since seaching your laptop PC is substantially the same as searching your luggage then, natch, it follows there is no restaint on conducting a fishing trip on your laptop's contents.

This is: (a) reprehensible, and (b) entirely unsurprising. Look people, encrypt your laptop's files when you take it on a plane flight. This is adviseable even for a purely domestic flight, but is a no-brainer for international flights. And, yes, do it even if you have "done nothing wrong". "Now about those MP3 files there on your hard drive ... you got them where? ... Oh? Show us the receipts for all of them." Also, are you sure your machine has never been compromised while on the internet?

[A] U.S. appeals court said that border and airport security agents can search laptops without cause. Surprisingly, the unanimous 3-0 decision came from the Ninth U.S. Circuit Court of Appeals, which has otherwise been a target of criticism for its alleged liberal bias.

The decision overturns a U.S. District Court ruling stating that agents must have reasonable cause to perform a search of electronic devices. That case was brought by Timothy Arnold, a 43-year old teacher and California resident. In Arnold's case, in 2005, border agents searched his computer after he had returned from the Philippines, finding it to contain child pornography. While he was released at the time, federal officials obtained a warrant for his arrest two weeks later.

Federal laws already allow border guards to search diaries and other personal items without cause. The Justice Department argues that electronic devices are no different, and should still be searchable as a matter of national security. The appeals court argued that the Supreme Court had already ruled that there was no difference between searches of electronic devices and something like luggage, which is regularly done today.

Arnold's lawyers said they would appeal the verdict, which may now either be elevated to the Supreme Court, or stayed pending a petition for a rehearing before an appeals court.

The Electronic Frontier Foundation, which filed an amicus brief in support of Arnold's case, disagreed that laptop searches were any different from other common border searches. "Fourth Amendment law constrains police from conducting arbitrary searches, implements respect for social privacy norms, and seeks to maintain traditional privacy rights in the face of technological changes," EFF civil liberties director Jennifer Granic said. "This Arnold opinion fails to protect travelers in these traditional Fourth Amendment ways."

Corporate business travelers are being warned that laptop computers can potentially be searched and seized at U.S. borders.

This affects both U.S. and non-U.S. citizens.

Global Executive Director of the Association of Corporate Travel Executives (A global business travel organization) Susan Gurley said, "While the incidence of laptop seizure or the confiscation of other electronic devices remains rather small when compared to the numbers of business travelers entering the [U.S.], the implications for individuals who fall into this category can be rather significant."

ACTE represents the global business travel industry and membership consists of senior travel industry executives from 82 countries. A recent survey conducted by the ACTE concluded that a huge segment of travel industry directors, vice presidents, and managers are unaware of the longstanding U.S. policy that allows laptops and other electronic devices to be searched and seized at border crossings.

"Sixty-two per cent of respondents to a recent poll indicated they were unaware that computers and other devices, such as Blackberries, iPhones, iPods, flashdrives and cameras, can be examined, searched, and seized, without warrant or provocation, when crossing a U.S. border," said a press release from [ACTE].

A spokesperson from U.S. Customs and Border Protection said, "It is not the intent of CBP to subject travellers to unwarranted scrutiny. However, unless exempt, all travelers entering the United States, including U.S. citizens, are required to participate in CBP processing. As part of the process, CBP officers are verifying admissibility and looking for possible terrorists, terrorist weapons or narcotics."

She added that laptop computers may be subject to detention for violation of criminal law such as if the laptop contains information with possible ties to terrorism, narcotics smuggling, child pornography or other criminal activity.

Owner of Cayman Islands travel agency, Adventure Travel at Grand Harbour, Gail Duquesnay (and former U.S. Consular agent to the Cayman Islands) said she is aware of the fact that U.S. Customs and Border Protection can search people';s laptops but she had not had any clients who experienced this. ... She said she feels that it is not something the general public should be worried about.

In the ACTE survey, only four of 100 respondents stated they knew of a traveler who had had a device or devices seized. One cited a laptop while two others listed laptops and other electronic devices seized. The ACTE noted that the government is not required to state why a laptop or other device has been seized.

"Further controversy has developed over whether or not an individual is required to provide authorities with passwords to open certain files (doing so may be regarded as waiving rights to require a warrant, as some authorities maintain)" said the release. The spokesperson from Customs and Border Protection said the CBP officers adhere to all requirements to protect privileged, personal and business confidential information.

81% of survey respondents were unaware that laptops and other electronic devices that were seized could be held indefinitely. "The loss of access to proprietary data or personal financial records can be devastating on a number of levels," the release stated.

Susan Gurley stated that ACTE is not advising its members to hide data from the U.S. government or border officials. "Our primary concern is to alert travellers that their laptops and other electronic devices can be seized at a border without explanation, provocation, or even likely cause. Thus informed, they can carry the barest minimum of data they can afford to lose on their laptops."

Sounds like smart advice.

UBUNTU “REAPING LINUX DIVIDEND”

The public perception of open source software is changing fast, said Mark Shuttleworth, who leads distribution of the Ubuntu operating system.

The latest release of leading desktop Linux distribution Ubuntu, version 8.04, has been characterized as "most significant" both for its features and due to Ubuntu's guarantee that the OS will be supported for three years. A quick summary of the features can be found here, where we also find the news that 8.04 is designed to allow a supported upgrade path for users of earlier versions.

The BBC interviewed Ubuntu founder Mark Shuttleworth -- a very interesting character in his own right -- following the release.

A new version of Ubuntu, a version of the Linux OS, [has been released]. Mr. Shuttleworth said the success of the Asus Eee PC and the work of the One Laptop Per Child program had driven awareness of open source.

"There has been a sea change in the way people think of Linux, which is very healthy," he said. "We have seen a real shift in the last six months from folks seeing open source as either a super-specialist thing for people who run data centers or as an enthusiast thing, to something which is energizing a lot of the straight commercial PC industry," said Mr. Shuttleworth.

He manages Canonical software, which is the primary sponsor of distribution for Ubuntu, and a key element in the platform's development. He is also well-known for being the second-ever, self-funded space tourist, traveling to the International Space Station aboard the Soyuz spacecraft in 2002.

Mr. Shuttleworth said ordinary consumers were beginning to turn to Ubuntu, and to Linux more generally, to improve their daily computing experience. "If people think of computing as going to a PC, sitting down and starting Word, then the traditional view, of using Windows and Office, will persist. "But if people think of their daily experience as a sit down on the web, we know that people can have a very compelling experience on Linux. In fact, we know it is a better web experience because they can do it without spyware, without viruses."

Mr. Shuttleworth said he believed there were about 8 to 9 million users of Ubuntu worldwide. "Most of the growth in users is from people buying a device that comes with Ubuntu shipped or wanting something for a second or older computer and are looking to tech-savvy friends for guidance," he said.

He described the latest version of Ubuntu, dubbed "Hardy Heron", as "perhaps our most significant ever." The version will have three years of "long term support" from Canonical, which Mr. Shuttleworth believes will make it more attractive for large-scale roll-outs of machines powered by the operating system.

He said the French police force was currently deploying 50,000 Ubuntu-powered machines, while Spanish education authorities were rolling out 500,000 desktops with the OS. Hardy Heron also has improved support for multimedia, including photo editing, music sharing and video playback, he said.

The version has also been designed to make installation simpler and give users the chance to try the OS without making radical alterations to their current computer set-up. "This is the first version that you can install under Windows. Instead of re-partitioning your hard drive and taking some fairly risky steps, effectively you can now install under Windows without modifying your system." [See article from last week's Digest.]

Ubuntu can be installed on PC and Mac machines and is one of a number of versions of Linux. Mr. Shuttleworth said: "It's a favorite version of Linux both for specialists and one that specialists would recommend to a cousin, aunt or uncle who want to have a stable desktop internet experience. There are other versions of Linux that are better for a particular purpose -- but Ubuntu strives to be a general platform that is secure and self-maintained."

Is it Liftoff for Linux?

Darren Waters, technology editor for the BBC News website, interviewed Ubuntu founder Mark Shuttleworth, and summarized the conversation in the news story posted above. Below is a sampling of the Q&A.

Q: How is Linux innovating beyond the desktop?

Mark Shuttleworth: We are seeing a lot of innovation in the consumer electronics area -- all driven by Linux.

Motorola, for example, has said that 60% of their phones will be running on Linux within three years. I expect that figure to not stop at 60%. It will power on right past that. The majority of the new small phone manufacturers are a real hotbed of innovation in China, Taiwan, Korea and Japan and are using Linux as a platform.

It suggests that Linux enables anyone to innovate. One of the harshest criticisms I ever saw coming from the proprietorial software world of Linux was that it only copied the ideas that had already been proved in the commercial software world.

This is quite deeply offensive to anyone who has been close to the open source. If you look at all the innovation in internet itself, which is largely powered by free software, and then if you look at the innovation placed on top of that -- everything from YouTube to Facebook, eBay, Amazon, Google -- these extraordinarily innovative technology companies are really powered by free software.

Now increasingly we are seeing innovation happening on things that every day consumers use, like Firefox. If you look at innovation in the web browser, Firefox faced a long walk in the desert as it reached for feature parity with Internet Explorer. But once it reached that it became an extraordinary hotbed of innovation. Anybody who had interesting idea about how to make the browser better could build that as a Firefox extension.

Q: What impact can open source have in the commercial world?

Mark Shuttleworth: Open source is the key. The tech industry has tended towards natural monopolies, towards a single company which comes to dominate the whole platform -- it is true of databases, true of operating systems, of every category of software, due to the network effect. Open source is the very best defence we have against that underlying tendency.

Q: What are the common misconceptions of open source and Linux?

Mark Shuttleworth: One of the key things is that end users are very often not aware that a particular piece of software is open source or not -- and that is a good thing. For example, when people sit down in front of an Apple computer [they do not know that] a lot of key capabilities are produced as open source.

Folks should adopt the best software for themselves. Increasingly that is open source. I am willing to bet the majority of people in the UK are running Linux in the home if they have a set top box or digital photo frame, or wireless access point. The vast majority of those devices are powered by Linux. And the economics of them only possible because of open source.

EARLY AMERICAN GANGS AND THE MYTH OF STATEHOOD

Anarchist writer Stefan Molyneux smells a rat in the deification of America's Founding Fathers. He also finds wanting the leftist critique of the Founders: that their blinkered view on who deserved precious freedom irretrievably compromised their ideals. He finds the idea that the Founders were idealists of any kind unsupportable. To the degree we keep buying into the fable of the Founding Fathers -- and even those who criticize them by implication grant credibility to the basic premise -- we blind ourselves to raw reality of political power. It is violence, pure and simple.

Separating facts from myths is always one of the greatest challenges when examining the past. In particular, narratives that benefit those in power are particularly resistant to rational examination, since they tend to be propagated among the impressionable and credible -- particularly children, in the form of state "education."

The history of the United States in particular has gone through an enormous amount of propagandistic revisionism, so that now the standard view of early American history tends to resemble more the slavishly pro-state "Pravda" palimpsests of the Stalinist era than a clear-eyed and rational assessment of past circumstances and events.

There remains at present a large constituency of Americans -- often regarding themselves as libertarian -- who look back with nostalgia to the founding of the Republic. In their mind's eye, the late 18th Century was a noble era when the steely genius of the Founding Fathers forged in the fires of liberty precious documents designed to limit the power of the state over its citizens. These preternaturally wise philosopher-kings wafted above all human temptations for the exercise of power, remaining farseeing moral visionaries steeped in the humanism and rationality of the Enlightenment, keenly aware of the dangers of the state. These noble heroes led a people yearning for freedom to the revolution of 1776, overthrew an increasingly despotic foreign rule, and put in place a system designed to guarantee the liberty of individuals far into the future.

In this narrative, the founding of the American Republic was considered a watershed epoch in the history of humanity. Never before had a government been created according to rational and objective principles, with the express design of limiting its power, and forcing it to remain answerable to the citizens it served.

The slogans of the American Revolution have been carved into the lexicon of human fantasies about freedom -- “all men are created equal,” “government by and for the people,” “conceived in liberty,” “life, liberty and the pursuit of happiness,” and so on. Early America was considered to be the highest achievement in the construction of a benevolent, wise, limited and regulated government.

Those who hold this view regard existing escalations of state power -- particularly at the Federal level -- to be fundamentally anti-American, and yearn for a return to an imaginary past where selfless heroes ran the government with the sole purpose of serving others.

On the other hand, certain historians -- particularly leftists -- have attempted to overthrow most of the supposed virtues of this period, repeatedly pointing out that early America enslaved nearly 1/6 of its population, that under the cover of its Manifest Destiny doctrine the American government forcibly uprooted and exiled dozens of native tribes, that public hangings were a common form of entertainment, and that political bribery and corruption were endemic. In many ways, according to this version of history, the expansion of the U.S. at the expense of Mexicans and Native Americans was very similar to modern claims that China imposes on Tibet.

I view these opposing perspectives as a false dichotomy. In the "patriotic nostalgic" version, the evils of slavery and the forced relocations of native tribes and Mexicans are acknowledged as unfortunate but necessary political compromises required to create an initial union of disparate states. It is recognized that one of the original drafts of "life, liberty and the pursuit of happiness," was "life, liberty and property," but that the word "property" had to be removed because of its implicit repudiation of the concept of slavery -- if all men can own property, no man can be property. Jefferson's own ambiguity with regards to slavery is usually referenced by quoting his words: "We have the wolf by the ears; and we can neither hold him, nor safely let him go. Justice is in one scale, and self-preservation in the other."

The inability of the Founding Fathers to realize their own idealized visions of perfect and universal human equality is usually chalked up to the political realities of the time, and the ideological prejudices of those around them.

These two versions of history can be roughly characterized in the following manner: In the "patriotic nostalgic" view, the genuine political ideals of the Founding Fathers proved unachievable in practice due to the influence of history, and the collective self-interest of basic economic and political realities -- particularly in the South.

In the "cynical leftist" view, the Founding Fathers crafted an idealized world out of their own lofty moral aspirations, while ignoring all those who were non-white, non-male, and often non-middle-class. In other words, Washington, Jefferson, Adams et al did in fact believe their goals of noble and political equality, but unconsciously limited its application to their own gender, class and race. The problem was that these men did not have any real conscious conception of "equality" for women, slaves, Native Americans, children and so on. ...

To me, arguing whether the Founding Fathers were genuine idealists who bowed to political pragmatism, or genuine idealists tragically limited by the ethical perspectives of their time, entirely misses the point by assuming that they were "genuine idealists" of any kind whatsoever. ...

We can only forgive an idealist for bowing to pragmatism if the corruption of his ideals is demanded by powerful elements beyond his control. We can only forgive an idealist for his limited knowledge if he does not in fact possess knowledge of the standards he fails to meet.

If, however, a supposed "idealist" voluntarily corrupts his own standards, bowing to no powerful external pressure whatsoever, then clearly he is no idealist. If I set up a charity, and then shamelessly rob those I am supposed to help, I cannot reasonably be called a starry-eyed idealist who had to bow to pragmatic reality, or who was limited by the moral standards of my time. I could only be accurately called a moral hypocrite who used ethical "standards" to corrupt and betray my victims.

The anarchist view of history can only regard the transfer of political power as directly analogous to the transfer of criminal power, as in the example of organized crime. Since in the anarchist approach all state power is considered criminal, any transfer of that power can be far more accurately understood by looking at criminal gangs, rather than repeating the quasi-ethical ramblings of self-interested state propagandists.

If this is the correct approach -- as I believe it is -- then all "ideals" put forward to justify state power -- whether referring to a revolution, a despotic or democratic transfer of power, or even the daily continued existence of state power -- are completely irrelevant, and foolish distractions to the actual process that is occurring.

Since the state is a criminal gang, referring to the ideals in the Federalist Papers, the Constitution, or the Bill of Rights makes about as much sense as referring to a Mafia stooge's claims that he only wants to "protect" a shopkeeper that he is in fact extorting, or a pimp's protestations of virtuous benevolence with regards to his enslaved prostitutes.

Political leaders use virtuous abstractions to "sell" the imposition of violent power over citizens. As long as individuals continue to be distracted by the shiny emptiness of ethical bloviating, and ignore the gun that is steadily rising towards them, we will continue to remain as enslaved to words as we are to governments. ...

Thomas Jefferson claimed to be a great fan of limited government, and in particular railed against the potential tyranny of an individual despotic leader, which was why he so consistently championed the separation of powers. Naturally, since he was so against despotic leadership, and set up a system specifically designed to block the execution of war powers at the executive level, when he found that he was not just tempted by but actually initiated the process of executing these war powers on his own whim, he clearly had the intellectual ability to recognize that he had become an example of an evil that he originally aimed to conquer.

If Jefferson genuinely opposed the evil that he had become, then he would have resigned his position, and worked as hard as possible to find the flaws in the system he had helped design that had led to his own corruption. Surely, he would understand that if someone as moral, intelligent, understanding and well-meaning as himself could be utterly corrupted by political power, that the system he had worked so hard to create simply did not work.

However, there is no evidence that these pangs of conscience ever troubled Jefferson in the slightest -- and he most certainly did not resign and devote himself to figuring out the flaws in his system. Instead, he sailed on attempting to foment a war between America and a variety of Muslim states, all the while attempting to bypass the powers that he had specifically reserved for Congress in order to avoid such a situation.

When a man consistently repudiates in action the moral ideals that he professes in theory, we can clearly understand that his moral ideals are only professed as a means of achieving the power to act in opposition to them. If a man claims to love and respect his wife, and then continually abuses her in private, we can understand that his claims of love and devotion are mere "covers" for his core desire, which is to continue to abuse his wife.

Thus, since Jefferson claimed that the power to declare war must be reserved for Congress alone, and then attempted to bypass that rule when he became president, it is clear that he had no interest in actually controlling the power of the executive branch of government. His "ideals" are thus revealed as a shallow form of hypocritical moral manipulation designed to hoodwink the average citizen into believing that Jeffersonian democracy is some sort of protection against the growth of tyranny.

If I convince others that my political system is designed to prevent tyranny, and then when I gain political power by implementing my system, I assiduously pursue tyrannical powers, it is surely clear to all but the most wilfully self-blinded that I only spoke of my hostility to tyranny because I wished to be a tyrant. My words were designed to disarm others, to lull their natural scepticism -- and thus secure my dominance over them.

It is in this way that we can begin to pierce the quasi-religious veil of self-serving hypocrisy and look to the values that were in fact practiced, rather than the fairy tales that were merely preached. A man is revealed by his actions, not his words.

If we look at the actions of George Washington, we can see exactly the same pattern. This is a man who used violence to oppose a British tax that was not agreed to by the colonists. After the powers of the Federal government had been expanded by the replacement of the Articles of Confederation by the United States Constitution in 1789, it took less than two years for Alexander Hamilton to convince Congress to approve taxes on distilled spirits and carriages.

In order to control the increasing rebellions against this tax, George Washington and Alexander Hamilton summoned a militia of almost 13,000 men -- approximately the size of the entire revolutionary army -- and invoked martial law against those resisting the tax. The subsequent assault upon the rebels marked the first time that the U.S. Federal Government had attacked its own citizens in order to extract taxes, and set the precedent that laws could only be challenged through "peaceful" means.

The staggering hypocrisy in this action scarcely needs any comment at all. There is no evidence whatsoever that either Hamilton or Washington were disturbed by their own decisions -- which clearly means that they had no interest in their own professed moral ideals, but rather only in the exercise of power over others.

When we look at the effects of the transfer of power through the un-Vaselined lens of anarchistic philosophy, we can see the following pattern clearly emerging. Let us analogize it -- not unjustly -- through the example of organized crime.

If Mafia Gang A attacks Mafia Gang B -- while claiming eternal hatred for Mafia Gang B's evil practice of extortion -- and then, as soon as it overthrows Mafia Gang B, immediately sets up its own more predatory extortion rackets, we can clearly understand that Mafia Gang A was motivated by jealousy of Mafia Gang B, not out of any fundamental dislike of their practices.

If we continue to believe the pious lies of statist propaganda, we will forever be drawn to drown ourselves in the mirage of a mythical past where people were "free." If we continue to believe that the "founding of the Republic" -- really the overthrow of a relatively benign foreign gang by a vastly more rapacious domestic gang -- was defined by the moral fairy tales designed to dull the scepticism of the average citizen, then we shall be forever drawn to repeat the mistakes of the past and waste our lives believing that a new criminal gang will somehow set us free.

If we believe that the Constitution was genuinely designed to limit the power of the state, then we will forever try to limit the power of the state by revising political documents or pursuing other kinds of political solutions. If we understand that political documents are in fact mere tools of hypocritical moral propaganda, we will be no more tempted to revise them than we would to fact-check back issues of Pravda.

Unfortunately, as a population, we remain bamboozled by the pious sentiments of the power-hungry. We live free in a world of words, but lie chained in a prison of reality. We can only achieve real liberty by refusing to sanctify criminals, and understanding the basic reality that the phrase "moral government" is as oxymoronic as the phrase "moral genocide."

The only path to a freer future is clarity about the tyrannies of the past.

WEALTH DISPARITY: THE COMING POLITICAL STORM?

The last time the U.S.'s top 10% of earners had as large a share of total income as today was 1929. (We believe that a lot of today's result can be traced to the Fed-engineered credit inflation of the last 30 years -- a commentary for another day.) Everyone knows what happened to the stock market and the economy after 1929. Perhaps less well-known is the role that the bitter politics of the 1930s played in re-spreading incomes around. This piece from Robert Folsom of Elliott Wave International tells us we will be seeing a rerun of this.

In bullish times, the public is largely tolerant of Wall Street's immense salaries and bonuses. But as you know, these are not bullish times -- and "tolerant" ain't exactly the best word to describe the public mood. You may already have noticed some of the stories that reflect the shift.

In 1970, for example, the average for all CEO pay was about 30 times that of an average worker's. This multiple has increased steadily to about 100 times today. And as much as the chart speaks for itself, there is more: The multiple is actually closer to 500 times if you include benefits and stock options.

If that is not enough, recent data can show the income disparity in other ways, such as how the highest 1% of income earners in the U.S. accounted for nearly 25% of total income in 2006. [See chart.] In 2007, it is likely that the current trend eclipsed the 1929 high.

You will notice that income inequality fell dramatically after 1929, but the reasons why include more than the economics of the Great Depression. Most of us have heard or read about the bank runs and bread lines. Less well understood is the hugely important role that politics played, specifically the political policies driven by the public's overwhelmingly bearish mood. Today's so-called negative politics pales when compared with the vitriol that passed between President Franklin Roosevelt and the opponents of his New Deal.

I can give you a flavor of this by describing a bit of history regarding Gainesville, Georgia, the town where I live today. It was demolished in 1936 when two large twisters joined to create one massive F4 tornado that came directly into the town square (240 dead, 1,600 injured). FDR took a strong interest in the town's plight, and in turn the rebuilding effort included substantial aid from the Federal government.

In March 1938 the town was ready to celebrate its rebirth: the ceremony included a personal visit and speech from Roosevelt himself. The U.S. economy still had not recovered, and FDR was still embroiled in New Deal-related (i.e. political) controversies. So, while his speech began with a mention of "the fine courage which has made it possible for this city to come back after it had been, in great part, destroyed by the tornado of 1936," most of his comments attacked the "economic royalists" who opposed him:

"Today, national progress and national prosperity are being held back chiefly because of selfishness on the part of a few. If Gainesville had been faced with that type of minority selfishness your city would not stand rebuilt as it is today.

"The type of selfishness to which I refer is definitely not to be applied to the overwhelming majority of the American public. Most people, if they know both sides of a question and are appealed to, to support the public good, will gladly lay aside selfishness. But we must admit that there are some people who honestly believe in a wholly different theory of government than the one our Constitution provides.

"You know their reasoning. They say that in the competition of life for the good things of life; 'Some are successful because they have better brains or are more efficient; the wise, the swift and the strong are able to outstrip their fellowmen. That is nature itself, and it is just too bad if some get left behind.'

"It is that attitude which leads such people to give little thought to the one-third of our population which I have described as being ill-fed, ill-clad and ill-housed. They say, 'I am not my brother's keeper' -- and they 'pass by on the other side.'"

So if you are wondering what the "politics of anger" on a national level really sounds like, perhaps now you have a better idea. It is not like politicians in our day who want to say likewise will have to dream it up on their own -- the precedent is on the record. And the ... May issue of The Elliott Wave Financial Forecast explains why "likewise" is indeed what we should expect in the near future.

MANGA MANAGEMENT

Book review: The Adventures of Johnny Bunko: The Last Career Guide You’ll Ever Need by Daniel H. Pink.

We read Daniel Pink's A Whole New Mind late last year and found it both entertaining and thought-provoking. His thesis is that linear, left-brained thinking is on the way out. Computers and cheap linear thinkers on the other side of the world are driving down the value of skills that derive from that mode of thinking. The future lies in "whole-brained" skills that require integration and imagination. Computers might be able to design a better microchip, but they will never become good comedians.

Now Pink has come out with another book, a nominal career guide, which further develops the ideas from Pink's previous books. It is on our to-read list.

If you are like many recent college graduates, chances are you are in a dead-end, far-from-ideal job that makes you wonder, "Why did I slog through four years of grueling exams and droning professors for this?"

But fear not -- there is more to office life than mastering the art of pouring coffee, sifting through faxes and dialing Audix. The Adventures of Johnny Bunko: The Last Career Guide You'll Ever Need, by author Daniel H. Pink and illustrator Rob Ten Pais, is a 160-page gift to the degree-sporting, disgruntled 20-something who craves more in the workplace.

The book opens with the eponymous Johnny Bunko, a new recruit at parachute company Boggs Corp., sitting at his work space after hours. Papers are tossed on his already smothered desk. A drop of sweat slides down his cheek. He sighs. Realizing that another late night is in store, he picks up dinner from a local sushi and noodles joint. While mumbling under his breath about how bored and uninspired he is, he snaps the chopsticks and poof, a genie and career counselor named Diana appears, ready to be of assistance.

This is clearly not a run-of-the-mill handbook. Relayed in manga, a popular breed of stylized comics in Japan, Johnny Bunko aims to override (and poke fun at) the endless bad advice given by family, counselors and friends. Bunko is a creative person who was told to "major in accounting -- that way you will always have a job" and, lo and behold, his right-brain talents were exchanged for spreadsheets, formulas and around-the-clock practicality. Like many misguided young professionals, he was left with a gnawing feeling that his dreams took an irreparably wrong turn.

Exhale, though, because there is hope. Pink, who previously offered career advice in books such as Free-Agent Nation and A Whole New Mind, participated in a two-month fellowship in Japan before churning out Johnny Bunko, the first manga business book for the American market. He shares six core tips to a promising career, which leap off the page in comic form: (1) There is no plan, (2) Forget about your weaknesses, (3) Persistence trumps talent, (4) It's not about you, (5) Make excellent mistakes, and (6) Leave an imprint.

Johnny Bunko clicks because of its good sense ("The most valuable people in any job bring out the best in others") and good humor (Bunko finds an online course called "Leadership, finance and narcissism," and then points out that it is oversubscribed and he is on the wait list). Pink has a knack for teaching in such an entertaining way that you will forget you are learning, and that makes the book an accessible, breezy read.

Above all, Johnny Bunko is hard-hitting and informative yet bursting with optimism -- and what cubicle dweller could not use more of that?

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