April 2008 Selected Offshore News Clips

(Especially noteworthy articles’ dates highlighted in gold.)

OBEY YOUR MASTERS IN ALL THINGS
April 8, 2008

Judge Andrew Napolitano’s A Nation of Sheep reviewed.

Economics and legal writer William Anderson reviews Judge Andrew Napolitano's important book A Nation of Sheep, and brings his own valuable economics perspective to the judge's legal one.

As I write this review of Judge Andrew Napolitano's A Nation of Sheep, I am about 37,000 feet above the ground in a Southwest Airlines Boeing 737. That means that I dutifully took off my shoes, belt and whatever else I had on my being that was metallic and went sheep-like through the infamous Transportation Security Administration gauntlet.

On my trip to the airport, I made sure I did not violate speed limits -- or at least drive fast enough to be conspicuous on the highway -- and at the rest stops, I did not park in the spaces that were reserved for Pennsylvania state troopers. Once on the plane, I did not violate FAA regulations or do anything that would call unwanted attention to me. When we land in Las Vegas, I will make sure that I do exactly what the authorities tell me, and when I fly back home in four days, you can bet I will not place my flying "privileges" in jeopardy.

To most Americans, obeying the authorities at all times, especially in the post-9/11 age, seems like the thing to do. I recall a conversation with a prominent conservative evangelical who works in Washington, D.C., barking the following words to me: "Are you telling me that our government is tyrannical?" The tone of his voice, and the things he said afterward clearly indicated that the U.S. Government, and especially government under the Republican Party, displays no telltale signs of tyranny.

After all, he reasoned, tyranny is carried out by people with "SS" on their collars, who wear leather boots, goose step, give stiff-armed salutes, and speak in a foreign language. Tyranny is Hitler, or Stalin, or Pol Pot, or Bill and Hillary Clinton.

Judge Napolitano is not buying any of this sophistry, and in A Nation of Sheep, he explains unequivocally that my Republican operative friend is wrong. Whatever belief that Americans hold in regard to their rights as guaranteed by the Constitution of the United States, reality is much different. The U.S.A. no longer is the Land of the Free, no matter how many times that line is belted out when people sing the "Star-Spangled Banner". Napolitano wastes no time in laying out the grim picture that is the wreckage of long-held American freedoms:

Picture this: The Attorney General of the United States testifies under oath that the president is not ordering federal agents to read the mail, listen to the telephone calls, and monitor the computer keystrokes of ordinary Americans, without a warrant to do so from a judge. That would be criminal. But six months later, the president admits that he has done so.

Picture this: The Constitution prohibits Congress from abridging free speech. But suddenly, Congress made it a crime to talk about receiving self-written warrants from an FBI agent.

Such things, Napolitano notes, are not imaginary, but are the present state of U.S. policy. These things are done in the name of "protecting the homeland," but the good judge is not buying that line, nor does he agree with the premise that in order to "preserve freedom," the state needs to take away "some" of those very freedoms it supposedly protects. Napolitano asks the simple question: "How can the government possibly preserve freedom by taking it away?"

After his introduction, in which Napolitano clearly lays out his thesis, he then explains the natural rights origin of freedom, and how many of the founders of the United States held to a natural rights position. Law, in their view, existed to protect individual liberties from those who would deny them. Today, the deniers of liberty are those legally entrusted to protect it.

Napolitano quotes Benjamin Franklin, who certainly knew something about a natural rights origin of law: "Those who give up essential Liberty, to purchase a little temporary Safety, deserve neither Liberty nor Safety." The judge explains that people who are willing to give up liberty are giving power to a government that will take away the rest of their liberties, and make the people even more unsafe, as a predatory government never brings safety.

In his first chapter, Napolitano takes issue with legal positivists, who seem to dot the political landscape these days. I remember speaking to a True Believing socialist who held a high place in President Jimmy Carter's government, as he told me, "The Constitution is whatever the Supreme Court says it is."

Certainly, it seems that legal positivism holds sway. From the writings of Judge Richard Posner to the Federalist Society to the New York Times to the leaders of both major political parties (or the "Republicrats or Democans"), the idea of natural rights and natural liberty seem not only passe, but also downright subversive to Good Government. Even though politicians will make passing remarks about individual rights and Constitutional government, nonetheless they govern as legal positivists who do what they want whenever they have enough weapons to back up their positions.

In Chapter Two, Napolitano asks the simple question: "Are you a sheep or a wolf?" Sheep, he writes, "stay with their herd and follow their shepherd without questioning where he is leading them. Sheep trust that the shepherd looks out for their safety."

While most Americans would not like being called sheep, nonetheless the conversation in the TSA lines generally moves along a "it is inconvenient, but I am willing to put up with it because it makes us safer" line. Americans dutifully accept the tickets police officers give them for slight infractions of the speed limit, and if anyone resists in the slightest, Americans will give unqualified support to the police when they tase or even shoot that person who really posed no danger to anyone.

From there the Good Judge goes through a litany of sins committed by the state, from the self-written warrants that federal officers now may write to the destruction of habeas corpus. Government at all levels is destroying rights and most Americans seem not to care, or will make excuses for the state.

Yet, the first aim that Napolitano takes is not at the authorities, as critical as he is of them. Rather, he writes that Americans have become sheep, and the state is the Bad Shepherd. Perhaps the greatest irony comes with the annual July 4 celebrations in which Americans now hold to be a day to give homage and honor to their government. That July 4 marks the signing of a document that declared the British state to have an illegitimate claim upon the lives of the signers and American colonials is lost completely in the mix of parades and fireworks (which are set off by state-approved entities -- for public safety, of course).

That the present U.S. Government makes King George's "tyrannical" rule look to be downright benign libertarianism does not seem to faze Americans at all. If one were to challenge the state (as opposed to telling a bunch of Democrats, heads nodding all, that George W. Bush is a Really Bad Guy), one is seen as challenging freedom. Indeed, we have gone from a view of the state being an entity that was supposed to protect liberty to an entity that protects us by taking away liberty.

The reasons for this decline are many, and they have been discussed in other articles and papers. I would like to present a different view, one that has the economist's explanation. It goes back to my dutifully and quietly standing in the TSA line.

Yes, I knew that the TSA is a terrible organization that has no place in a free society. ... But, I just wanted to get on the plane. Any resistance on my part would mean I would have to pay my university hundreds of dollars for the air fare, lodging, my advance for meals, and the like, since I would not be permitted to fly that day. Moreover, any resistance on my part would have meant I could be charged with "interfering with the duties of a federal officer," which carries 20 years in prison.

Resistance would have meant I would be out of work and in prison, and my family would be on the streets. Resistance would have been something for which I would have had to pay the price -- alone. ...

In economics, we would say simply that the marginal costs I would have incurred for resistance would have outweighed any benefits on the margin that I would have gained from standing up to the TSA. Not only would my life and the lives of my wife and children be destroyed, but nothing good would come of it. The TSA would be given even more power, and my life would be over and government would have grown even more.

Robert Higgs has pointed out that governments grow because they promote and exploit fear. ... However, there is another aspect of the state and fear, and that is the fear that all of us have of the state and the individuals who work for it. On the local level, there are police, tax collectors, social workers, and others who are given the power to destroy our lives -- and not pay a price, themselves. On the state and federal level, it is even worse. Resistance really can be dangerous.

The problem is that people -- liberals and conservatives -- believe that those who resist are the bad guys. Government cannot be the "bad guys," no matter what happens. Yes, in conversations with Democrats where I work, they are all-too-happy to pin the label of "tyrant" on George W. Bush. But, when I bring up the abuses of the Clinton Administration, from the massacre at Waco to the vicious bombing of Serbia, they suddenly become Defenders of State Supremacy. It is not that these people are against misuse of government power. They just want their people to be able to wield the batons and shoot the guns.

Governments grow because the benefits are concentrated and the costs are diffused. Yet, they also grow because the penalties for resisting injustice are draconian and are felt by that relatively small number of people who resist. At the same time, there is little sympathy for the resisters, but much sympathy and support for the abusers.

There seems to be an inevitability regarding the nature of the growth of government and the subsequent cowing of the people. Yes, as the Good Judge says, we truly have become a nation of sheep. The shame is that we have a heritage of freedom, but have thrown it away with both hands. However, they still let us get on the planes.

Although I might seem to be pessimistic, in truth, freedom and liberty always have been on the defensive throughout human history. We are given thousands of excuses for giving up our freedom, or not resisting the authorities when they try to deprive us of our God-given liberties.

The importance of this book is that it provides the framework for which we can -- and should -- hold government accountable for violating our rights. Furthermore, in those brief, shining moments when freedom has been the polestar of a society, the very principles that Napolitano lays out are the principles that have guided those who led the way. For that, alone, this book is worth reading, and one hopes that people will understand the judge's message to all of us to hold fast to our liberties, as well as the very ideal of liberty.

HAS THE MARKET FAILED?
April 11, 2008

In a tour de force of analysis and exposition, Sean Corrigan eviscerates the modern banking industry and justifiably lays at its doorstep the current financial markets crisis, as well as the unnecessary boom/bust cycles of times past. The banking business by its very nature is a government protected flim flam game that would not survive in a voluntary free market system. Ergo, claims that today's crisis is due to "market failure" is wrong to the core. (This is not to say that regulators could not be more intelligent about keeping the flim flam game operating in a less malign manner, per the posting immediately above. But that is a second-order consideration.)

With a certain weary inevitability, the cries of pain emanating from those seeing their aspirations ground to dust amid the current upheaval in financial markets have been interspersed with the shrill descant of those all too eager to proclaim a "crisis of capitalism." The implication that it is now time for those far-seeing, disinterested Solons in government to step forward once more and to put right what mere "market forces" have again so woefully failed to correct.

High finance, we are told, has become a business of "privatizing profit and socializing losses," a thoroughly inequitable mechanism which the state now has a duty to redress by erecting a whole new framework of Do's and Don'ts in order to rein in the 21st century's version of the Robber Barons.

With a breathtaking degree of effrontery, we are even being asked to take seriously the idea that the very institution which has been one of the most culpable in laying the groundwork for the disaster -- the Federal Reserve of pre-ordained, baby-step rate rises and skyscraper-ledge rate reductions -- should, henceforth, be accorded unparalleled powers of oversight and direction over every facet of our everyday business!

While the initial diagnosis is fairly unexceptionable -- since the game of "heads-I-win-tails-you-lose" is precisely what financial market institutions have long been conditioned to play -- the corollary is not. Nor is this just because politically opportune Witchfinders General tend to be more guilty of fighting the last war than even the most hidebound of generals; nor because the analogy is decidedly unfair to the original Robber Barons, many of whom grew rich by creating genuine wealth and not simply by living, often obscenely high on the hog, off that generated by others.

No, the whole concept of a "market failure" is a hoary old canard which it is vitally important to dispel for fear that an eager Leviathan will again exploit its subjects' understandable present anxieties in order permanently to increase its power over their lives and liberties.

If the basic tenets of free-market "capitalism" include the full recognition of property rights, the sanctity of voluntary contract, and the relegation of government to a minimalist role as arbiter -- and, reluctantly, as enforcer -- of last resort, it can hardly be argued that we have ever actually lived under such a regime. Indeed, the roots of today's woes -- as of those suffered innumerable times in the past -- lie not in whether this or that regulation was sufficiently well-crafted or implemented, but rather go deeper into the issue of whether banking as currently instituted is -- in any way, shape, or form -- an activity consonant with such principles.

If the very act of asking such a question sounds insupportably radical to modern ears, we would say, in our defence, that we are only following in an honorable, republican tradition which stretches all the way from Jefferson and Jackson to Ron Paul.

Not to mention it follows the path trod by many members of the much-vilified "conspiracy theorist" class, who so often place central banking at the center of the nexus of evil.

Firstly, the ability of banks to create money simply by making a book entry in favor of a borrower, without first asking whether anyone else would be willing to place their previously earned cash at the latter's disposal, is nothing other than a legalized act of counterfeiting or, if you prefer, an act of "watering" the stock of claims upon the totality of private property; of diluting the existing "shareholders" rights to the social product without their prior consent.

That such a practice of issuing monetary substitutes willy-nilly is the fons et origo of inflation (at least in countries where similarly forcing government liabilities into circulation does not predominate) should need little explanation. What might bear emphasis, though, is that if one considers the state's indulgence in such crude coin-clipping as a "tax" -- i.e., as a legal, if unethical (and often unconstitutional), act of expropriation, one is forced to conclude that the banking equivalent is nothing less than an unauthorized expropriation -- in other words, a theft.

Such a crime is no less worthy of outrage simply because it has long been officially sanctioned, even encouraged. Nor is it pardonable because there is no one, single, identifiable victim, for the truth is that we all suffer from such depredations -- or, at least, all of us excluding the initial borrower (able to spend the new money before the rest of us realize it should buy fewer goods than it does) and the issuing bankers themselves.

Secondly, the fact that depositors are led to believe that they do not relinquish any rights over the funds they entrust to the banks -- when, in fact, they are no more than the unsecured creditors of a commingled holding -- leads to the reprehensible business of promising demand account customers instant access to "their" cash, while being fully aware that such a promise is wholly fraudulent since the bulk of this "cash" will be rapidly deployed to "fund" any number of the long term, potentially illiquid ventures being undertaken by the bank's lending department.

That this "cash" can therefore only be repaid by luring other dupes into the scheme means that the whole businesses has its foundations in a further falsehood, one which seeks to make profit from what is little more than a typically lucrative, if undeclared, actuarial subterfuge. The fact is that, by some twisted thread of history, banks have been accorded the unjust privilege of being allowed to ignore the absolutely crucial lines of demarcation between four, wholly beneficial, but utterly distinct, roles.

Monies given into their possession in their guise as "giro", or transmission, agents, or as the custodians of what are, today, largely virtual safety deposit-boxes, are one thing: quite another are the resources entrusted to them in their equally laudable function as asset managers whose job is profitably to invest their customers' term deposits in a range of what are presumed to be creditworthy ventures.

A third -- individually irreproachable -- business is that of facilitating the raising and transfer of capital between customers; mobilizing savings, large and small, in order to fund entrepreneurial attempts at wealth creation, whether through arranging trade finance or by bringing issues to the bond and stock markets.

Finally, there is no intrinsic demerit to bankers speculating either with their own capital or, indeed, with that of those clients who are fully cognizant of the fact that their money will be used to bankroll an attempt to outguess other traders and to preempt changes in the valuation of securities, currencies, or commodities.

The underlying problem is that banks have been granted the right indiscriminately to mix all four of these often incompatible activities. This gives rise to an unhealthy promiscuity, corrupting their fiduciary duties, introducing irreconcilable conflicts of interest, and opening up countless opportunities for a wholly legal embezzlement which has a small, but significant, chance of going horribly awry -- as today's events have once more forcibly brought home.

Moreover, this is a world in which banking "capital" is a veritable Cheshire Cat of insubstantiality (since banks are unique in having little but their own debauched "money" on both sides of the balance sheet). That "capital" is most easily increased by means of the notional profit booked on a deal -- a profit which is often no more than a deliberately optimistic, upfront reckoning of many future years’ prospective income and, so, is one which is subject to a whole array of possibly unjustified, "modeling" assumptions.

As ethereal as this gain might turn out to be, the fact is that, for as long as this fiction can be maintained, it strongly induces banks to lend and relend against the collateral afforded by the very same assets which have most appreciated under the influence of their original loans, thus ensuring that they re-attain the maximum permissible degree of leverage and hence most flatter their returns on equity.

This powerful positive feedback -- one whose underlying fuel is the banks' unnatural ability to create money, simply by granting loans -- means that they are rewarded (at least while things are in the upswing) for reinforcing any resulting instabilities. Thus, they frequently find themselves turning the most innocuous of convective puffs into a raging hurricane of wasteful malinvestment.

What this implies is that fractional reserve banking not only gives rise to a fall in the value of money, per se, but it is also the well-spring of that thoroughly avoidable and widely destructive bipolar disorder we know as the business cycle, i.e., the boom and the bust itself, and so gives the main impulse to those periodic, lemming-like waves of folly which so mar the history of material progress.

While this indictment would seem to suggest that -- as those now waving pitchforks and mattocks on the intersections of Wall St. are noisily demanding -- banks should be subject to an unusually strict scrutiny in place of the rather lax regime prevalent of late, the truth is that no special rules whatsoever are necessary: on the contrary, all that is needed is for the same basic principles of law to apply to banks as to any other commercial enterprise, in a manner that they have never done heretofore.

Those who would deny the validity of this last contention might reflect upon the fact that the very existence of legal tender laws, government-administered deposit insurance schemes, and -- a fortiori -- public sector "lenders of last resort" reveals the inherent invalidity of the banks' logical, economic, and jurisprudential position, despite centuries of positivist legal precedent and state-sanctioned privilege.

It should be obvious by now that none of this has anything to do with "capitalism," properly defined, but rather is something more common to the practice of rent-seeking despots -- whether those of the ancien regime, or of our modern elective dictatorships.

Without the honest money which presupposes a system of 100% specie reserve, free banking with no second recourse -- should bankruptcy still occur -- to its victims' property via forced taxpayer restitution or compensatory central bank inflation, there can be no truly free market and hence no "capitalism" to let us down so badly. Instead, what we are suffering is yet another demonstration of the perils of state intrusion into the sphere of private relations, with all the perverse disincentives it entails and with all the faulty signals it gives off to businessmen and consumers alike.

In fine, what we are having to endure is the latest example of the many crises brought on by financial corporatism -- a sorry situation which will neither be remedied nor prevented from reoccurring in future by succumbing to the panic and taking measures which will only serve to strengthen the stranglehold already exerted upon our lives by a voracious, interventionist bureaucracy; measures which would only come at the expense of that genuine freeing of the economic realm which would most rapidly heal our present hurts and so assure our continuing prosperity.

THE WORLD’S TOP TAX HAVENS
April 20, 2008

This lightweight but still interesting Forbes article offers a quick introduction to a few why's and a few how's of asset protection. It also implies that the U.S. is a serious asset protection haven for those worried about being wiped out by a lawsuit, although it later qualifies this a good deal.

When people think of tax havens, they usually picture the Swiss Alps or Caribbean islands. But traditional venues like Switzerland, the duchies of Lichtenstein and Luxembourg and Caribbean paradises like the British Virgin Islands are finding competition from the U.S., where lawyers in seven states, such as Nevada and Alaska, are muscling in, looking to grab business from the world's wealthy.

They are peddling the concept of a "self-settled spendthrift trust," an irrevocable trust that is created by its beneficiary and is designed to preserve wealth. A consequence of that is that these trusts can help shield assets from lawsuits or creditors. Sexy? Not so much. Surprised? Don't be.

Contrary to the popular vision of "offshore" banking, the true purpose of these accounts for many wealthy clients is to protect a lifetime of earnings and savings not from being taxed, but from being wiped out in a major lawsuit -- say, a medical malpractice or a class-action securities litigation against an executive. "Litigation is a much bigger threat than taxes because there is an unlimited amount of assets at risk," says California lawyer Jeffrey Verdon. "High-net-worth people are at bigger risk than normal people."

There are other strategic reasons. Offshore companies in the British Virgin Islands, for example, can be used to house estate assets that can be passed to family members without estate taxes. And offshore accounts can open doors to new investment opportunities. Offshore investment funds not registered with the U.S. Securities and Exchange Commission often require U.S.-based investors to set up an offshore entity to participate.

Of course there is the, ahem, possibility that the accounts are being used to avoid paying excessive taxes, even though U.S. taxpayers who have offshore accounts are required to file annual forms to the U.S. IRS detailing transfers and other trust activities -- or face a penalty of 5% of the value of the assets. They are also supposed to file forms detailing distributions from their trust (or face a penalty of 35%).

Some countries do not necessarily enforce the reporting requirements, and some, like Luxembourg, say it is up to the trust owner to keep up with the paperwork. This perpetuates the notion that offshore accounts are being used to scam the government. "Offshore holdings continue to be viewed with skepticism and a presumption of impropriety by the IRS," writes Jeffrey Morse, a Las Vegas lawyer, in the March issue of Nevada Lawyer magazine.

Perhaps for that reason, "offshoring" has acquired a bad name. There has been a push internationally to rein in what countries can offer foreigners looking to park assets. Earlier this year, German tax authorities raided Lichtenstein, and the scandal involved spies hired by the German government to investigate what German citizens were doing with their money there.

Maybe that is why there is a movement to put assets in U.S. accounts. U.S. trusts are less costly to set up and have less paperwork hassle than some offshore locations. They are available in Alaska, Delaware, Nevada, Oklahoma, South Dakota, Rhode Island and Utah.

Still, there is reason to pause before diving in. For starters, there is not enough case law in the U.S. to judge whether the onshore trust will shield assets for those who do not actually live in the state where they were formed. For another, there is a reason why other states have not climbed on board. As a basic public policy, it makes little sense to encourage individuals to hide or keep out of reach assets from their creditors or others, such as angry ex-spouses.

Why would anyone with serious wealth to protect want to be a test case for an evolving body of law? And in a shaky economically declining country that is starved for capital? For those who have been successfully brainwashed against the whole idea of going offshore but still want to protect their assets, we can see the attraction of some of these U.S. structures. For everyone else there are better alternatives.

And U.S. trusts do not necessarily make it impossible for creditors to go after assets. Where a creditor might be deterred by the expense and hassle of pursuing assets held offshore, that is not necessarily the case at home.

In Nevada, for example, the law expressly forbids the funding of a trust to hinder, delay or defraud known creditors. If a creditor had a claim on the assets before they were transferred into the trust, the creditor has up to 2 1/2 years to get a judgment in its favor. If the creditor's claim comes after the transfer of assets, it is out of luck after two years.

Of course, that is the case of offshore trusts, too, especially where a spouse is involved. In a recent New York court case, part of a husband's assets were offshore in trust in the Cook Islands -- but only part, about half. A judge ruled in the divorce that the husband could keep his assets in the Cook Islands, but he had to fork over the rest to his wife.

"Too many people try to play games with them," says Chris Riser, a lawyer at Riser Adkisson LLP. "Make them something they are not." Caveat emptor.

The article has some interesting sidebars as well: "World's Top Tax Havens", "Top Pirate Capital Destinations", and "Where the World's Wealth is Stored", among others.

OBEDIENCE AS A RADICAL ACT
April 20, 2008

Butler Shaffer, periodic contributor to LewRockwell.com and author of Calculated Chaos: Institutional Threats to Peace and Human Survival, invariably has an interesting perspective on matters. Here, he proposes an unconventional avenue of resistance to government meddling and absurdity: exact obedience, including and up to the point that the rule being challenged falls under its own weight. One might call it "radical obedience", putting into practice a disproof by reductio ad absurdum of the proposition that a rules-based system can function as an effective method of governance.

Unions have been known to use the tactic of precisely following all company rules to the letter as a negotiating method. In practice, that ammounts to a work slowdown which would otherwise violate the union/management agreement in place if the slowdown were explicitly implemented in the usual manner. Rules cannot possibly accommodate the nuances of life in the real world, and just get in the way once they begin to proliferate out of control. Unless the rules are "broken", business and activity will grind to a halt. Shaffer proposes a similar tactic with regard to government rules.

A recent news story told of cities that are removing their cameras that photograph cars running red lights at certain intersections. The reason? Drivers are aware of such devices and, rather than run the risk of getting a ticket in the mail, they stop in time. One would think making intersections safer might be a cause for self-congratulatory celebration at city hall. Not so. By reducing red-light violations, cities have also reduced the revenues coming from the traffic tickets.

This is hearsay evidence on our part, and incidental to the thrust of the article, but we recall reading somewhere that such cameras can make intersections less safe. People stop suddenly to avoid getting ticketed, thereby resulting in more rear-enders.

This report reminded me of another phenomenon of local policing: the use of parking meters. On first impression, one might conclude that city governments would want car owners to keep meters filled with the necessary coinage for the duration of their stay. Quite the contrary. City officials count upon time expirations on meters so that motorists can be given tickets by the battalions of meter-maids who prowl the streets in search of prey. An additional dime or quarter in a meter pales in monetary significance to a $25 parking violation. This is why most cities have made it a misdemeanor for a person to put coins in a meter for cars other than their own.

A former student of mine once made an inquiry into the revenues cities derived from parking violations. Without such monies, he concluded, most cities could not sustain their existing municipal programs. This leads to an obvious conclusion: If you would like to reduce the scope of local governmental power, keep your parking meters filled!

Decades ago, I read a most important book: Humphrey Neill's classic The Art of Contrary Thinking. While Neill focused largely on the world of market investing, his ideas carry over into almost all fields of human endeavor. The contrariness to which he addressed himself was not simply a reactive antagonism to existing practices or policies, but a challenge to use intelligent, reasoned analysis in considering alternatives. Unlike what passes for thinking in our world, "truth" is not necessarily found either in consensus-based opinion or in middle-ground "balances" of competing views. It is to be found wherever it may reside, even if only one mind is cognizant of it.

I have long found Neill's book a useful metaphor for extending human understanding into realms he did not contemplate. One of these areas relates to the assessment of political systems. Government schools and the mainstream media condition us to take both the purposes and the consequences of governmental decision-making at face value; to believe that the failure of the state to accomplish its professed ends represents only a failure of "leadership" or inadequate factual "intelligence". But what if there are dynamics beneath the surface of events in our world that reflect alternative intentions or outcomes?

More so than in any other area of human behavior, the world of politics is firmly and irretrievably grounded in contradictions and illusions. If you were to ask others to identify the purposes for which governments were created, you would likely get the response: "To protect our lives, liberty, and property from both domestic and foreign threats." This is an article of faith into which most of us are indoctrinated since childhood, and to suggest any other explanation is looked upon as a blasphemous social proposition.

But what, I ask, are among the first things governments do when they get established? Do they not insist upon the power to take your liberty (by regulating what you can/cannot do), and your property (through taxation, eminent domain, and regulations), and your life (by conscripting you into their service, and killing you should you continue to resist their demands)?

The marketplace -- not that corporate-state amalgam that so many confuse with the market -- does not operate well on a bedrock of contradiction. If the manufacturer of the Belchfire-88 automobile starts producing vehicles with defective transmissions, consumers will cease buying this car, despite the millions of dollars spent on glittering advertising. Unless the company is resilient enough to respond to its failures, it will go out of business.

This is an excellent characterization of the fundamental different between voluntary transaction markets and force-based political systems:

While contradictions confuse the information base upon which marketplace transactions are conducted and, thus, impede trade, political systems thrive on them. If the police system fails to curb crime, or the government schools continue to crank out ill-educated children, most of us are disposed to giving such agencies additional monies. The motivations for state officials become quite clear: "The more we fail, the more resources we are given." Contrary to marketplace dynamics, contradictions arise between the stated incentives of government programs (e.g., to reduce crime, to improve the quality of education) and the monetary rewards that flow from the failure to accomplish the declared purposes. Like the intersection cameras now being dismantled, public expectations end up being sacrificed to the mercenary interests of the state.

Perhaps there is a lesson for libertarian-minded persons in all of this. It is both useful and necessary for critics of state power to condemn governmental policies and practices. But there is a downside to just reacting to governmental actions on an issue-by-issue basis. State officials are in a position to control both the substance and the timing of events to which critics will respond. This allows the state to manipulate -- and, thus, control -- its opposition.

While such ad hoc resistance is essential to efforts to restore peace and liberty in the world, it is not sufficient. As we ought to have learned from the Vietnam War experience, opposition to war is not the same thing as the fostering of peace. We will not enjoy a peaceful world just by ending the slaughter in Iraq, if the thinking and the machinery for conducting future wars remains intact. What is needed is a broader base from which to demonstrate to others -- as well as to ourselves -- how the functional and harmful realities of state action contradict the avowed purposes for which such programs were supposedly undertaken.

Drawing from the earlier examples, one such tactic might be -- depending upon the circumstances -- to foster a widespread and persistent obedience to the dictates of state authority. As valuable a tool as the ACLU is in using the courts to attack governmental programs, judicial decisions upholding a right to privacy are not what is bringing down traffic cameras. It is the fact that such devices are inadvertently -- through motorists' obedience to them -- promoting traffic safety (the stated purpose by which they were sold to the public) at the expense of their actual purposes (i.e., to generate more revenue for local governments).

Many cities have ordinances making it a misdemeanor for a homeowner to fail to cut his/her grass before it reaches a stated limit on height. Someone told me of an acquaintance who let his grass grow almost to the maximum height allowed. When one of his neighbors commented on this, the property owner went into his house, brought out a yardstick to measure the grass, then commented that the grass still had two inches to grow before reaching the statutorily-defined limit. He then reportedly asked the neighbor, "You don't want me to violate the ordinance, do you?"

A friend of mine told me of the practice of one of her male friends who was subject to the Selective Service System. One of the mandates of this agency was that those subject to conscription had to keep it advised of any relocations. This young man carried a stack of pre-addressed post-cards, upon which he would write: "I am now at the Rialto Theater at 3rd and Main" and drop it in a mailbox. After leaving the theater, he would send another post-card reading: "I am now at the Bar-B-Q Rib House at 10th and Oak." How much more effective might such a widespread over-compliance be in challenging the draft than hiring a lawyer to argue a 13th Amendment case to a court of law?

Along the same lines, I was at a conference where a man spoke of the compliance problems banks had in providing the Treasury Department with the information it demanded regarding customer banking transactions. In order not to be in violation of the government requirements, the banks were over-reporting such data, a practice that inconvenienced both the banks as well as the reporting agency that was suffering an information overload. The speaker suggested that the legislation be amended to provide a more narrowly-focused definition of what was required.

During the question-and-answer session, I suggested that no such amendment be made; that the banks continue to report -- and, perhaps, to increase the scope -- of such transactions, thus providing the government with more information than it could control. As banking customers, each of us might choose to comply with the avowed purposes of such regulations -- to combat "terrorism" and "drugs," right? -- by sending the Treasury Department a monthly listing of all checks we had written!

If every transaction were reported, that would be the equivalent to no transactions being reported. People try to avoid having large cash transactions reported by breaking them down into separate smaller transactions. But this is a crime, called "structuring". And it turns out that the number of reported transactions over the threshhold is sufficiently large so as to not draw that much attention from the Treasury.

During the Reagan administration, the government mandated the taking and reporting of urine samples to test for drug usage. At the time, I raised the question: what impact might it have on this program to have each one of us mail a small bottle of our urine to the White House every day, so as to satisfy the curiosity of the president? Rather than opposing this program, it might be brought down by our daily compliance -- an act of obedience!

These last ideas take advantage of bureaucracies' love of collecting information but notorious ineffectiveness at separating the wheat from the chaff. One's imagination is the limit in applying the concept. What if every business included with its tax report a list of every single transaction that went to the calculation of the profit or loss? That would bury the IRS and equivalents under paper.

One of the more enjoyable demonstrations of the libertarian value of being overly obedient is found in the wonderful movie Harold and Maude. For those who have not seen this film, Harold is an iconoclastic denizen of the dark side. His constant faking of suicides to get the attention of his mother finally leads her to set up a meeting with her brother -- an Army general -- in an effort to get Harold interested in a military career. During his conversation with the general, Harold asks if he would be able to gather some "souvenirs" while in combat, "an eye, an ear, privates" or "one of these," whereupon he presents his uncle with a shrunken head. After earlier efforts to persuade Harold to join the Army, his uncle now tells him that he believes the military is not for him.

Such examples may open the minds of some to a wider variety of creative responses to statism. Neither blind obedience nor knee-jerk reaction are qualities to be embraced by intelligent minds. It has been the combined influence of such behavior that has made the world the madhouse that it is. But when engaged in selectively and with reasoned insight, obedience can occasionally produce beneficial consequences for a free and peaceful society. In helping the state play out the unintended consequences of its contradictions, an over-zealous cooperation may cause the state to dismantle itself.

MONACO WITH BANANAS
April 21, 2008

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.

U.S. TAX HAVEN LEGISLATION GAINING MOMENTUM
April 25, 2008

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.

HOW MANIA PSYCHOLOGY TRUMPED SWISS BANKING
April 25, 2008

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.

SLAVERY AND INVOLUNTARY SERVITUDE
May 4, 2008

A counterpart to a curiously incurious New York Times article on the subject of the U.S.'s dubious leadership in various prisoner statistics (total number, number per capita) is this piece from a LewRockwell.com writer pulls no punches. Any doubts about the existence of a "Prison-Industrial Complex" are put to rest decisively, and damningly.

The Thirteenth Amendment of the Constitution, adopted at the end of the civil War in 1865, abolished slavery, but this same amendment expressly permits prison slavery and involuntary servitude.

AMENDMENT XIII – SECTION 1

Neither slavery nor involuntary servitude, except as punishment for crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction.

The United States has less than 5% of the world's population and almost 25% of the world's prisoners. Are Americans more criminal than other folks? Or are there incentives that give the U.S. the dubious honor of leading the world in prison population.

Prison labor has its roots in slavery. After the 1861–1865 Civil War a system of "hiring out prisoners" was introduced in order to continue the slavery tradition. Freed slaves were charged with not carrying out their sharecropping commitments (cultivating someone else's land in exchange for part of the harvest) or petty thievery -- which were almost never proven -- and were then "hired out" for cotton picking, working in mines and building railroads.

The tradition continues. The nation needs a way to fill the prisons which provide a source of cheap labor. Surely the criminal justice system can be of help here, and indeed they are. Gerry Spence, the famed criminal lawyer, in his book From Freedom To Slavery, tells us: "I found that the minions of the law -- the special agents of the FBI -- to be men who proved themselves not only fully capable, but also utterly willing to manufacture evidence, to conceal crucial evidence and even to change the rules that governed life and death if, in the prosecution of the accused, it seemed expedient to do so."

Well surely the court judges are concerned with justice? Spence: "We are told that our judges, charged with constitutional obligations, insure equal justice for all. That, too, is a myth. The function of the law is not to provide justice or to preserve freedom. The function of the law is to keep those who hold power, in power."

Now the law enforcement authorities do not do this all by themselves. For one thing, they have onerous laws to help them. It is instructive to look at the state of California in this regard. The California Prison system is the third largest penal system in the country, costing $5.7 billion dollars a year and housing over 170,000 inmates. Since 1980 the number of California prisons has tripled and the number of inmates has jumped significantly. In the past few years controversies involving prison expansion, sky-rocketing costs, and claims of mismanagement and inmate abuse have put the California prison system under heightened public scrutiny.

What caused prisons to be a growth industry in California? Did Californians suddenly become lawless? We need look no further than the CCPOA, the California Correctional Peace Officers Association. "The Power this prison guards' union wields inside our prisons, legislative chambers and governor's office disturbs me. It should disturb every citizen." ~ Judith Tannenbaum, formerly an English teacher at San Quentin State Prison

The CCPOA is the biggest contributor to political campaigns in California. The CCPOA gives twice as much in political contributions as the California Teachers Association, yet it is 1/10 its size. In 1998, the CCPOA gave over $2 million to Governor Gray Davis, $763,000 to the media, and over $100,000 to Proposition 184, the 3 Strikes law. The 3 Strikes law mandated that convicted felons with one prior felony got twice the normal sentence for their 2nd strike, and convicted felons with two or more prior felonies would get at least 3 times the normal sentence or 25 years (whichever is more) for their 3rd strike. The CCCPOA has a vested interest in locking up more and more Californians for longer sentences. ...

Currently California is in a fiscal crisis, so Governor Schwarzenegger is proposing the early release of some 22,000 inmates and eliminating about 4,500 prison guard positions to help shave $400 million from the budget of the state corrections department. The guards' union is unhappy with that scenario, and has allied with victims' associations to fight it. Meanwhile overcrowding in state prisons results in violence. A stabbing attack on four guards at one overcrowded state prison and a racially sparked brawl at another mark the type of violence that guards, inmates' attorneys and Schwarzenegger have been worried about for years.

What to do with all these prisoners? A U.S. prison population of over 2 million people -- mostly Black and Hispanic -- are working for various industries for a pittance. For the tycoons who have invested in the prison industry, it has been like finding a pot of gold. They don't have to worry about strikes or paying unemployment insurance, vacations or comp time. All of their workers are full-time, and never arrive late or are absent because of family problems; moreover, if they do not like the pay of 25 cents an hour and refuse to work, they are locked up in isolation cells.

Private companies, now numbering 135, began using prison labor in the 1970s. Microsoft, McDonalds, TWA, IBM, Victoria's Secret, AT&T and Toys 'R' Us are just some of the companies that use prisoners to cheaply produce products or provide services. While the rate of pay may vary from state to state, the constant is that the great majority of the money that the companies pay goes to the state in which the prisoners are incarcerated.

For instance, in California prisoners receive the "minimum wage" on paper, but the state takes 80% for state restitution, anti-drug campaigns, victim's rights organizations and a prisoner "trust fund."

The state of Colorado employs prison labor for everything from agriculture, which includes running a fishery, dairy farm and harvesting grapes, to making furniture and firefighting. Colorado legislators recently passed some of the most restrictive immigration laws in the country following a massive mobilization for immigrant rights. The new laws scared away workers, causing many crops to spoil in the fields for lack of farm workers. The Colorado farm owners' answer to this crisis is to find labor even more exploitable than immigrant workers -- prison labor "chain gangs." And the need for more prisoners is thereby increased even more.

The prison industry complex is one of the fastest-growing industries in the U.S. and its investors are on Wall Street. This multimillion-dollar industry has its own trade exhibitions, conventions, websites, and mail-order/internet catalogs. It also has direct advertising campaigns, architecture companies, construction companies, investment houses on Wall Street, plumbing supply companies, food supply companies, armed security, and padded cells in designer colors.

The federal prison industry produces 100% of all military helmets, ammunition belts, bullet-proof vests, ID tags, shirts, pants, tents, bags, and canteens. Along with war supplies, prison workers supply 98% of the entire market for equipment assembly services; 93% of paints and paintbrushes; 92% of stove assembly; 46% of body armor; 36% of home appliances; 30% of headphones/microphones/speakers; and 21% of office furniture. Airplane parts, medical supplies, and much more: prisoners are even raising seeing-eye dogs for blind people.

It might be a good idea to get away from these public union-driven prisons. How about private prisons? The number of prisoners in private prisons grew more than 3,000% between 1987 and 2004, soaring from 3,122 to 98,700.

Two companies dominate the for-profit incarceration industry -- Corrections Corporation of America (CCA) and the GEO Group, formerly known as Wackenhut Corrections. These two companies control 75% of the for-profit incarceration market. The highest-paying private prison is CCA in Tennessee, where prisoners receive 50 cents per hour for what they call "highly skilled positions."

The problem with prison privatization is that Corporate-owned prisons need a steady flow of inmates to maintain profits. To protect their profit margins, prison companies exert political influence by contributing thousands of dollars to state political campaigns. Lobbyists for private prisons support tough-on-crime legislation that ensures the continued need for prison space, including mandatory minimum sentences, life terms for "three strikes," and sentencing juveniles as adults.

We are back where we started, with the private corporations doing what the California union is doing -- promoting the supply of more inmates in more prisons with longer sentences.

So there we have it. America, with 1/4 the population of China, has 500,000 more prisoners than China and many of them are hard at work. U.S. citizens are placed in long-term involuntary servitude with the help of law enforcement and onerous laws pushed by a prison workers union and private prison corporations, and it is all constitutional.

ZEN AND THE ART OF MONETARY MAYHEM
April 30, 2008

Money supplies have been surging worldwide in the last year. In the late 1970s, financial market participants used to eagerly await the latest money supply (especially M2) numbers. Fed chairman Paul Volker had taken Milton Friedman's advice to heart and started explicitly targeting growth in money supply in order to curb the then raging inflation. High money supply number reports meant more tightening by Volker and company -- a bad thing as far as traders were concerned -- while low numbers meant monetary loosening was coming -- a good thing, as everybody knows.

The Volker purgative had its effects. The commodities and gold price bubbles were decisively deflated. Consumer price inflation plunged. And the U.S. sustained the highest unemployment numbers since the end of World War II. People were sufficiently angry about Volcker's policies that he was burnt in effigy on the steps of the Capitol building in Washington. Volker finally relented when the Latin American countries -- after former Citicorp chairman Walter Wriston had famously declared that "Countries don't go bankrupt" -- threatened to default on their debts to the U.S. money center banks.

Even the stanchest of monetary hawks at the Fed can be counted on the save their banking system buddies when the going gets tough. The monetary spigots were opened -- triggering a bull market in financial assets for the ages which topped out in either 2000 or 2006-7, depending on your yardstick. July or August 1982 was more or less the last time anyone paid any attention to money supply numbers for a generation. Thanks to Volker's medicine and a variety of favorable developments in the world economy, out-of-control 1970's-style inflation ceased to be a major concern for 20-odd years. Now it is back. And perhaps it is time to start paying attention to money supply numbers again. Perhaps it is time for Mr. Bernanke and collegues to start paying attention to them as well.

Professor Tim Besley, one of the nine people chosen to set interest-rate policy at the Bank of England in London, gave a speech on Tuesday [April 22] about "Inflation and the Global Economy." For a central banker talking about commodity prices and the cost of living, he managed a remarkable feat. He did not use the word "money" once.

Nor did his BoE colleague Charles Bean when he spoke about the "prospects for the U.K. economy" on 17th April. Nor did the deputy governor, John Gieve, when he spoke on "global imbalances" at the Sovereign Wealth Fund conference in London last month.

In fact, if you ignore the phrase "money market(s)," seven different members of the Bank's policy team used the word "money" just three times in nine speeches over the last 10 weeks. Their chosen topics included "policy dilemmas," "the return of the credit cycle," and even ... "Sterling and monetary policy." But of money itself, the very thing the Old Lady issues? It got three name-checks only.

The Federal Reserve seems to have Britney-sized "issues" with its core stock-in-trade, too. Issues verging on the neurotic, in fact. Allowing for one bizarre exception (in which Fred Mishkin claimed that the Dollar's forex collapse will not create any Main Street inflation), some 23 speeches from five Fed policy-makers since mid-February mentioned "money" a total of only eight times. Four of those mentions came in the phrase "money market(s)."

And this from a team charged with providing a "flexible currency" -- meaning money, of course -- to the citizens of the United States. So why hide from the issue? Is the Fed scared of naming its very purpose? It cannot surely fear a pile of paper, can it?

The Fed's Open Market Committee wields so much power, according to Robert Reich, former U.S. secretary of labor, it should be classed the "fourth branch of government." Forget about Congress, the White House, the courts; the Fed holds "more power over your daily life than your congressman and senator, maybe even your president," Reich writes in his blog.

In short, the Federal Reserve "can do amazing things ..." according to Reich, but from our review of Fed speeches, it cannot talk about money. Things like:

• "Decide one big bank, JP Morgan, is going to take over another, Bear Stearns, backed by $29 billion of taxpayer money ..."
• "Expose taxpayers to hundreds of billions of dollars of potential losses without a single appropriation hearing, as it did when it allowed Wall Street's major investment banks to exchange tainted mortgage-backed securities for nice clean loans from the Treasury ..."
• "Deciding the threat of recession is bigger than inflation, so it's been lowering interest rates."

This last super-heroic ability, notes Reich -- now professor of public policy at Berkeley -- "has made the Dollar drop further and faster, which means you're paying more for gas and food. Can you imagine if Congress caused this to happen?"

A cynic might add that Congress does plenty to depress the value of dollars as well. But if you cannot guess what would happen in Washington if Congress set out to destroy the currency, the Fed most likely can. It simply needs to turn history upside down for a moment.

At the start of the 1980s, former chairman Paul Volcker was burnt in effigy by an angry crowd on the steps of the Capitol for hiking short-term interest rates to 19%. His policies aimed to quell inflation, of course, defending the value of dollars. Looking at Ben Bernanke's decisions today, you may wonder if he intends precisely the opposite.

Volcker's infamous weekend announcement of sharp hikes in the cost of money -- and therefore in its future discounted value -- was a huge political gamble. Already sliding into recession, could the U.S. bear such a high cost of borrowing? To judge just what was at stake, ask if America could bear it today.

So to hold America's nose and get his strong medicine down, Volcker made plain he was in fact looking to target not growth but "money" -- meaning the quantity of credit and cash flowing through the economy. He was simply following the monetarist tactics of the German and Swiss central banks, stemming the flood of cheap credit and reducing the excess piled up during the 1970s. As the value of each remaining dollar bill stopped falling, the cost of living would ease off. And at first, it worked like a charm.

Breaking out of the lecture theatre, the idea of whipping the money supply made sense to politicians and voters alike. It had first been put forward by the "Bullion School" of British economists at the start of the 19th century. Milton Friedman confirmed it with his "monetarist" theories of the 1950s. The German Bundesbank and Swiss National Bank then applied it -- successfully -- to keep inflation at bay right through the late 1970s. U.S. and U.K. households, meantime, suffered double-digit growth in the cost of living each year.

Now in spring 2008, Zimbabwe offers the latest example of monetary inflation in action. There the cost of living is rising by 165,000% per year as the central bank prints 10 million-dollar notes. But here in the developed West's inflation-free dream world, the idea of targeting money itself -- its supply and quantity -- has lost out entirely to the idea of controlling its outcome, the cost of living, instead.

"Most people think economics is the study of money, but there is a paradox in the role of money in economic policy," as Mervyn King, now governor at the Bank of England, noted in a lecture first given at the University of Birmingham, England, in October 2001.

King repeated his findings the following spring at the Banque de France in Paris. But not even he was listening. "As central banks became more and more focused on achieving price stability [in the 1980s and '90s], less and less attention was paid to movements in money," he explained. "Indeed, the decline of interest in money appeared to go hand in hand with success in maintaining low and stable inflation."

This Zen Buddhist approach to monetary policy -- ignoring money and thereby controlling it -- was also noted by Prof. Glyn Davies in his A History of Money (University of Wales, 2002). During "the overt acceptance of monetarist policies, inflation [was] far worse than when Keynesian policies prevailed." Overlooking the money supply seems the answer to delivering low, stable inflation.

Well, stable in a way that nobody noticed. The U.S. Dollar, along with the Pound Sterling, still lost half its value for consumers and savers between 1981 and today. But annual rates of inflation held below 3%, with occasional dips towards 1% growing evermore frequent at the start of this decade.

And all this while, with no one daring to mention it beyond a few cranks at the European Central Bank in Frankfurt, the supply of money worldwide has surged once again. Over the last 12 months, the money supply in Australia has expanded by 16%, in Canada by 13% and in the United Kingdom by 12%. China's supply of money grew 18%, Singapore's 14%, and in both India and Saudi Arabia it grew 22%.

The Eurozone, stuck with those old Bundesbank cranks, got a mere 11% surge in money supplies. The United States, which stopped reporting such outdated things in March of 2006, is estimated to have got a 15% expansion.

Might it matter? On Mervyn King's analysis, yes. The correlation between annual money-supply growth and rates of inflation, he found, reaches 0.99 if you track the 3-decade period ending in 1999. It would stand at 1.00 if they moved absolutely in lock-step. But that research was done before King got top-dog position at the Bank of England. Since then, he has overseen (and overlooked?) double-digit growth in the U.K.'s money supply, running now for a full 37 months.

"Habits of speech not only reflect habits of thinking, they influence them too," King went on in that long-forgotten speech about money. "So the way in which central banks talk about money is important.

"My own belief is that the absence of money in the standard models which economists use will cause problems in future. ... It would be unfortunate if the change in the way we talk led to the erroneous belief that we could turn Milton Friedman on his head, and think that 'Inflation is always and everywhere a real phenomenon.'

"Money, I conjecture, will regain an important place in the conversation of economists," the current Bank of England chief concluded six years ago.

That day still remains a long way off yet. Meaning there is plenty more room for mayhem in money ahead.

WHAT RON PAUL’S BOOK ACCOMPLISHES
April 30, 2008

A convincing reception for Ron Paul's new book The Revolution: A Manifesto would go a long way towards continuing the momentum of his revolution. Thomas E. Woods, Jr. -- senior fellow in American history at the Ludwig von Mises Institute and the author of, among other books, 33 Questions About American History You're Not Supposed to Ask and The Politically Incorrect Guide to American History -- explains why it is fit to carry this burden.

The Revolution: A Manifesto, whose official release date is today [April 30], accomplishes much more than what you see here. But, for starters, here goes:

(1) It gives Ron Paul's movement a statement for the ages. One reason Taft Republicanism died is that Robert Taft left behind no systematic statement of his philosophy around which a continuing effort could cohere. Former Member of Congress Barry Goldwater, Jr., says of the book: "This book takes a wrecking ball to the political establishment. Senator Goldwater would have loved it. It's The Conscience of a Conservative for the twenty-first century."

(2) It is excellent for those who say they respect and agree with Dr. Paul's domestic views but cannot abide his foreign policy, and/or who denounce his foreign policy as "liberal" (in the sense of left-liberal rather than classical liberal). The foreign policy chapter of The Revolution: A Manifesto is as persuasive and succinct a defense of nonintervention as I have ever seen anywhere, and it answers his critics very effectively.

(3) A lot of people joined Ron Paul's movement out of an attachment to one particular issue, and without necessarily understanding the whole package. The Revolution: A Manifesto lays out that whole package as a single, coherent, and elegant whole.

(4) The book gives supporters of Ron Paul's message scores of additional arguments they can use to defend their positions.

(5) This book will be what countless young people, 10 to 20 years down the road, will cite as the formative influence on their political outlook. Although anyone's mind can be changed, it is the young, who are still figuring out where they stand, who are most likely to be reached. The Manifesto will reach them, and will continue to reach people long after no one remembers what The Audacity of Hope even was.

(6) It explains Dr. Paul's position on gold, fiat money, and the Federal Reserve System concisely and for the layman. Here is an issue essentially no one was talking about before, but is now cracking through into mainstream discussion.

Now to be sure, the usual hacks of Left and Right, who supposedly occupy opposing ends of our political spectrum, could not kiss and make up fast enough in their mad rush to defend the institution that has emptied the dollar of its value since 1913. That was to be expected: Whenever anyone asks a truly fundamental question, mainstream Left and Right always give the game away and close ranks in defense of the status quo. But enough independent thinkers began investigating Dr. Paul's arguments that our discourse on these matters has already begun to change.

Still, most people know nothing about the subject, except for an inchoate sense that gold = bad, so Dr. Paul's chapter on the subject is of great importance. I will never forget an entry at DailyKos in which the writer (who wished to explain to her liberal friends that Dr. Paul was really a terrible person who should be ignored in favor of the pro-war, pro-police state Hillary) argued that the gold standard "would destroy the economy." At first we wonder if she has ever cracked open a single book on the subject, but we already know the answer. Since she never hears monetary freedom and opposition to central banking discussed in Newsweek or the New York Times, she just knows it just has to be wrong.

Dr. Paul calmly eviscerates lazy thinking like that.

(7) It is filled with things no presidential candidate would dare tell the American people. I have compiled a few examples here.

(8) A bestselling book, which this one promises to be, gives the movement additional credibility and visibility. Grand Central Publishing (the former Warner Books) is a major publisher, boasting authors ranging from Stephen Colbert to John Paul II. They can get books into stores and Dr. Paul in the media. (Though the more he sells, the more media curiosity he will attract, so book purchases certainly help in this department.)

(9) For your friends who have heard of Ron Paul only in caricature, or have never heard of him at all, it shows him to be a learned, thoughtful, and mature statesman. Its arguments are consistently persuasive, and it is written in a way that keeps your attention from the first page to the last. It is a book that can change minds.

And we sure need plenty of that.

BUILDING YOUR OWN LOWER POWER HOME THEATER PC
May 4, 2008

New chipset from AMD with integrated graphics allows amazing power and efficiency.

As circuit sizes have gotten smaller, more features have been integrated into the motherboard chipset. How often does one need to add network adaptor or USB/Firewire cards these days? Even the audio processors integrated into the chipset are good enough that only gaming fiends or super-picky audiophiles bother adding a separate sound card. Integrated graphics capabilities, on the other hand, have been pretty lame so far. If you wanted any game handling capabilities -- we do not care ourselves, but do take that capability as quality measure of a sort -- buying a discrete graphics card was mandatory. Until now?

CPU chipmaker Advanced Micro Devices purchased graphics chip maker ATI in 2006. ATI's arch-graphics processing chip competitor nVidia had previously moved into the chipset business, and AMD felt it had to buy ATI in order to defend its competitive position. And now the new AMD 780g chipset has graphics capabilities comparable to the latest entry-level discrete video cards, and many integrated video-out streams to boot. Combined with AMD's Athlon X2 4050e 2.1 GHz CPU the power consumption is also spectacularly low, which means low heat and low fan noise needed to keep the heat in check. All of which means the 780g chipset plus the Athlon X2 4050e CPU makes an idea home theater PC platform. Coding Horror, a site whose virtues we recently made acquaintance with, editor Jeff Atwood explains how easy and cheap building a HTPC now is.

I have kept a PC in my living room for the past three years as my primary home theater interface, and I heartily recommend it. It is shocking how cheap and easy it is to build a home theater PC these days.

I have been pondering an upgrade to my creaky old home theater PC, and rave reviews of the new integrated AMD platform at Tech Report, Silent PC Review, and Tom's Hardware finally pushed me over the edge.

CPU	AMD Athlon X2 4050e 2.1 GHz (45w)	$70
Motherboard	Gigabyte GA-MA78GM-S2H Micro ATX	$100
RAM	Kingston 2GB DDR2 800	$39
Power Supply Unit	Seasonic ECO 300W	$55
DVD	Lite-On 20X DVD±R SATA	$29

I did not buy the PSU because I already have that particular model, but I bought everything else on this list for a grand total of less than 250 bucks. (You can save a bit on the power supply, but I do not recommend it, particularly if you plan to leave your HTPC running 24/7. Efficient power supplies not only save you money on electricity in the long run, but also tend to be of generally higher quality, and quieter to boot.)

The new AMD 780G platform is striking in its simplicity. Just pop in the RAM and the low-power Athlon X2 CPU and you have an (almost) complete ultra low-power home theater PC. Just check out the awesome array of rear panel connections [image]. We have the expected stuff (4x USB, gigabit ethernet), but the exciting part is DVI, VGA, and HDMI video out! Not to mention optical digital out for beautiful, pristine digital audio direct to your receiver. Those are the key connections for a home theater PC. We even have an eSATA port and firewire thrown in, which is always nice.

I simply dropped the new motherboard and DVD in my existing transparent acrylic Micro-ATX PC case [image here], replacing the old stuff. (If you are thinking of going this route, I can recommend the Antec Minuet Micro-ATX case for $100, which conveniently comes with an efficient power supply, too -- but be aware of the half-height expansion slots.)

I kept my existing hard drives (a small 2.5" boot drive for low noise / power consumption, and giant capacity 3.5" drives for long-term storage and recording), and my Hauppauge PVR-150 dual analog PCI tuner card, which I love to death.

For the longest time, integrated graphics was synonymous with craptacular graphics. That is not the case for this new AMD 780g chipset. The integrated graphics are fully DirectX 10 compliant, comparable to the latest entry-level discrete video cards. Gaming is not our goal, though this would be perfectly adequate for many games. More importantly for a HTPC build, the integrated graphics support the full suite of H.264 and WMV video playback acceleration. ...

My old Pentium-M single core struggled to play back 1080p videos. The Athlon X2 4050e CPU I chose is one of AMD's low power dual core models, far from top of the line. The testers at SilentPCReview found any modern dual core chip is more than enough for the most strenuous of video playback tasks ...

AMD is a better choice for a home theater PC because their idle voltage and multiplier throttling -- the marketing term is "Cool n' Quiet" -- is outstanding. (I am also glad to have the opportunity to support AMD because I am desperately afraid of a world where Intel is the only CPU vendor. And you should be too.) ...

My old highly optimized HTPC build consumed just under 80 watts at idle, up from around 65 before I began upgrading it to make it more Vista friendly. Guess how much this new HTPC platform build, which is more than twice as powerful, consumes at idle? ... FORTY. SIX. WATTS. That is flippin' amazing. We are talking about a powerful modern PC here, with quite a bit of additional hardware you would not find in most PCs, including a dual TV tuner PCI card and three hard drives. Granted two of those drives are in sleep mode most of the time, but still. 46 watts -- twice the power at almost half the energy consumption! Incredible! Silence and efficiency were nowhere near this easy three or four years ago.

Needless to say, I am pretty excited about this particular $250 upgrade, and I can sell my old parts to underwrite it. ... We use our home theater PC every day. It is silent, draws very little power, and it is small enough to tuck away cleanly in our living room decor. It plays anything through a slick 10-foot UI, and offers unrestricted access to the web at any time. Putting a great one together today is almost ridiculously easy. If you have not considered building your own home theater PC -- why not?

UPDATE: since people asked, here is a complete from-scratch build list for a home theater PC. [Total is $523.] If you plan to use Vista Media Center, add a Vista Home Premium SP1 license for $110. I also saw that Blu-Ray internal drives (read only) are down to $130 as of the time I am writing this.

We are still perfectly happy with a DVD player for movies and do not watch enough television to even bother subscibing to cable, but this article is of interest because it indicates how cheaply a powerful, small, quiet PC can be built for these days. The author's from-scatch price list, minus the tuner and remote control, adds up to $430. Wait a couple of months and this will probably be down to $400 or so.

Which brings us to another observation: The high tech hardware industry must be among the least regulated industries out there. (Software shows the heavy hand of government with software patents, copyright laws, digital rights managment, etc.) With unfettered competition we have seen an astounding fall in the technology price/performance ratio over time. The decline is so swift that it is measurable over timespans as short as months. There is no reason that medical care, for example, should not demonstrate a cost curve with similar characteristics, if less dramatic due to the high labor component. But, as we are all aware, the forces that drive the medical industry are anything but market-based.

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