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THE (NEAR) DEATH OF THE STATE
Lew Rockwell, eponymous publisher of LewRockwell.com, declared the (temporary, we now know) defeat of the bailout bill, which he called "the most horrible and outrageous bill to ever come before Congress," to be a glorious act for liberty and "the worst days in decades for the power elite" -- "the Fed, the Treasury, leadership of the Democrats and Republicans, the Wall Street Journal and the New York Times, all the major think tanks, most talking heads, the wealthiest corporations, important academics."
Indeed. Let us appreciate the victories as they come, however fleeting. Each ridiculous ripoff rammed through the Washington law-mill is another nail in the coffin of their legitimacy.
I am fully aware that Paulson and Bernanke have some nefarious scheme in mind to reverse the thrilling defeat of their criminal bailout package, a package shot down by independent members of Congress on both sides. But reflect for a few minutes on what it means that the House did this. It was a revolutionary act in the best sense of that term.
The entire establishment was united in favor of what was surely the most horrible and outrageous bill to ever come before Congress. The Fed, the Treasury, leadership of the Democrats and Republicans, the Wall Street Journal and the New York Times, all the major think tanks, most talking heads, the wealthiest corporations, important academics -- in short, the whole of the power elite -- were united in favor of this awful thing that proposed the following: Americans were to be stripped of their earnings and their future to prop up failed enterprises.
Forget back-door socialism. This was right through the front door. The consequences would have been dreadful and very scary. It was to be the first of many bailouts, since of course it cannot and would not work. Bad debts cannot be made good by legislation. This means that more money would be necessary, as the middle class was sucked dry by the vampire state for years to come. Deeper and deeper economic depression -- a repeat of the 30s -- was certain. Best to put a stop to this now.
The administration might have tried to do its wicked deeds through executive order rather than asking Congress. But there are two problems here. One is that they would not be able to share the blame when the plan flops. The other is economic. The Fed and Treasury are actually very worried that they are incapable of injecting more credit into a banking structure averse to lending right now. They would rather have the congress authorize the money directly and run up the debt.
In any case, no matter how you look at it, the defeat of the bill is a victory for freedom. The defeat of the power elite is essential for liberty to thrive. For the free market to function, we need the government/corporate cabal to lose its capacity to get its way in every area of life. They need to feel fear. They need to lose security. They need to have a sense of uncertainty as to whether their every wish is our command. The House defeat of the bailout is a magnificent rebuke in that sense.
But does it mean that the economy is going to tank and we will all suffer? On the contrary, it could mean that we can begin an economic recovery from the Fed-generated bubble that should have and would have burst years ago but for artificial props by the Fed. If the stock prices of these troubled institutions can fall to where they need to be, they can be taken over, and their assets used productively and traded by the market. Once this deleveraging takes place, we will be ready for a new round of economic growth.
You have to understand how ridiculous this whole debate looks to anyone who understands the price system. Let's change the example from houses to apples to see how silly it is to suggest that falling prices can be made to rise. Say that the Fed created an apple hysteria that drove the price from $3 per pound to $10. Stores loaded up and even used them as collateral for expansion. Suddenly the price collapsed to $5 and finally to $2.
Now government takes notice. What can government do to deal with the problem? It can try to boost the price of apples by forcing stores to raise their prices. But what about consumers? They will not buy at $10. So the apples sit and rot. Maybe government should buy them all or force consumers to buy them. Also perhaps stores will just not buy any more at all. Government could force them to. But it cannot force them to stay in business. People can always walk away. So perhaps government can just buy the stores, all in the interest of keeping the price of apples up. But it will have to buy the apple-leveraged stores at a much higher price than the market would offer, so this is a bad economic deal on the face of it.
The tangles can get ever more complicated and billions and trillions can be spent. You can put everyone in a prison camp and force people at the point of a gun to buy and sell apples at $10. But in the end, the problem is still the same: The price of apples wants to fall. Nothing government does changes that one fact. To attempt to change it is like trying to change gravity. Of course, the government's central bank can raise all prices through inflation to the point that apples do in fact cost $10, but this is purely cosmetic. In fact, in real terms, the price of apples is still $2. It is a pointless and destructive activity to try changing this. You only cause massive damage in the attempt.
More great things happened after the bailout failed. Commodity prices including oil fell dramatically. This is a magnificent thing. Right now, consumers are not threatened by the possible failure of another paper-addicted investment-banking house. Consumers are threatened by ever-higher prices for all goods. If we are in a recession, especially if it lasts and lasts, low prices are precisely what we need to start economic recovery again.
It is not entirely clear why prices fall. It could be the worldwide economic slowdown. It could be that the markets are beginning to doubt the capacity of the Fed to actually achieve the hyperinflation that it wants, since banks have become quite risk averse. In any case, we need ever-lower prices on all things, including gas and groceries -- and, yes, houses. This is the basis for economic recovery.
The failure of the bailout bill was the precondition for economic recovery. It should make believers in liberty realize that we can change history, that tyranny is not our fate, that the leviathan state can be beaten back.
Recently we have urged readers to look to books on money and banking. Now it is time to look at books like the Discourse on Voluntary Servitude by 17th century French writer Étienne de La Boétie. It was his view that the state is the least plausible institution on earth, one that would be overthrown in a day but for propaganda and ideological error. He explained all this in his book, introduced by Murray Rothbard. We just so happen to have a new edition out.
Yesterday was one of the worst days in decades for the power elite. It was one of the best for liberty.
What a heroic day! The people rose up against a coalition of every evil group in America: the central bank, Wall Street plutocrats, politicians, banksters, think tanks (including the pseudo-libertarian sort), big media, big academia, and big business, and won.
Today we got a taste of what things may look like when the regime is finally toppled, and its theft and killing stopped. The Austrian economists are vindicated again, as is Rothbard's political analysis, and our pizza party for Mises's birthday today look on an especially festive air. The bad guys may yet beat us, but how sweet to see the CNBC types running around like chickens with their heads cut off. Now let's get to work to defend the free market and sound money, and finger the Fed and all who support it as the culprits. Oh, and by the way, congratulations, Ron Paul.
Ron Paul's warning against the bailout bill is here.
THE SHADOW OF THE PITCHFORK: ELITE PANIC ATTACK AS BAILOUT GOES BUST
Chris Floyd briefly revels over the power elite's humiliation from the failure on Monday to pass the bailout bill, thanks to a comatose population actually waking up temporarily and making its voice heard: "[I]t is good to see the icy beads of panic dotting the brows of elites who have inflicted and/or countenanced so much death, destruction, terror and degradation in the past few years. Today they have suffered a very rare defeat in the relentless, remorseless class war they have been waging against us for decades. And that is something to celebrate -- at least for one night."
The vote by the House of Representatives to defeat the Wall Street bailout plan is the first act of political courage that the Congress of the United States has mounted in the last seven years. The fact that it was due largely to right-wing Republicans afraid of going down with the sinking ship of the witless leader they have followed blindly throughout his reign is a delicious irony -- but the whys and wherefores of the vote are not important. What matters is that one of America's moribund institutions has flickered to life long enough to derail a disastrous action that would have shoved the nation even deeper into the pit of corruption and ruin where it has been mired for so long.
The New York Times called the House vote "a catastrophic political defeat for President Bush, who had put the full weight of the White House behind the measure." But this is manifestly untrue. As everyone but the nation's media -- and the Democratic Party -- knows, George W. Bush has no "political weight" to use, or lose. Yes, he still retains the authoritarian powers that the spineless Democrats have given him with scarcely a whimper of protest (and often with boundless enthusiasm); but as a political force, i.e., someone whose opinions and statements can sway popular opinion, he has been a dead and rotting carcass for a long time. He is the most unpopular president in American history; and I can report from first-hand, eyewitness knowledge that he is thoroughly despised by some of the most rock-ribbed, Bible-believing, flag-waving, down-home, John Wayne-loving Heartland types that you can imagine. Even his own party -- a party fashioned in his own image, the Frankensteinian melding of willfully ignorant religious primitivism and rapaciously greedy crony capitalism that he has embodied in his twerpish person -- kept him away from their convention this year.
Nothing -- absolutely nothing -- could be politically safer than opposing George W. Bush. And yet the entire Democratic leadership, Barack Obama included, lined up to support a cockamamie plan proposed by this scorned and shriveled figure, a plan that was transparently nothing more than an audacious raid on the Treasury by Big Money hoods and yet another authoritarian power grab by a gang of murderous, torturing, warmongering toadies. This was the plan and these were the people that the Democrats decided to fight for.
What is more, the Democrats stood shoulder to shoulder with the president on what is apparently the only issue that can now stir Americans to genuine anger and widespread protest: a direct threat to their bank accounts. Wars of aggression like the Nazis used to wage, elaborate tortures like the KGB used to practice, concentration camps, lawbreaking leaders, diminishment of liberty, the slaughter of a million innocent people in a land destroyed by an illegal and pointless invasion -- all of that stuff is pretty much OK, easily swallowable, worth no more than a shrug or perhaps a frowny "tsk tsk" before going on to the sports pages or flipping over to another channel. But put out an open ploy to steal their money and give it to the filthy rich -- and baby, it's pitchfork time! Yet here, as the public face of just such a ploy, is where the Democrats chose to make their stand.
So Monday's rejection of the bailout plan is not a catastrophic political defeat for George W. Bush. He has no political standing, no political future. But it is a vast and humiliating defeat for the Democratic leadership, across the board, who, as Democrat Lloyd Dogget of Texas said:
... "never seriously considered any alternative" to the administration's plan, and had only barely modified what they were given. He criticized the plan for handing over sweeping new powers to an administration that he said was to blame for allowing the crisis to develop in the first place.
Now the Democratic elites have had their collective head handed to them on a platter. It is a dish most richly deserved. And although it is almost possible to believe that they will learn anything from this episode, there is now a chance -- a chance -- that we can at least have a discussion of alternatives to the Bush scheme.
I still believe it is unlikely any genuinely effective program -- one that could manage and mitigate the now-unavoidable effects of the Wall Street/Washington-induced disaster -- will ever get enacted. After all, the Democrats are largely owned by the same corrupt and greedy elites now seeking a handout. And it seems reasonable to assume that the Bipartisan Bailout Bunch will eventually find some kind of sugar to tempt away the two dozen votes they need for their next "compromise" on the Bush-Paulson plan.
Then again, who knows? There are obviously a lot of very powerful and privileged people sweating more bullets tonight than they have sweated in many and many a year. They have roused the drowsy beast of popular anger at last, and no one can say what might happen next. Probably nothing -- or rather, more of the same, in some form or another. But still, it is good to see the icy beads of panic dotting the brows of elites who have inflicted and/or countenanced so much death, destruction, terror and degradation in the past few years. Today they have suffered a very rare defeat in the relentless, remorseless class war they have been waging against us for decades. And that is something to celebrate -- at least for one night.
MONDAY MORNING QUARTERBACK: FIGHTING THE GOOD FIGHT
Last weekend they changed the construct of capitalism and suspended the free market system.
We remember, vividly albeit with some details missing, back around the time of the 1982 bull market blastoff, seeing Stan Weinstein, then editor of The Professional Tape Reader, being interviewed on Wall Street Week and saying (very accurately, so it transpired) that "by the time this is all over even the bulls will be surprised."
Similarly, those of us who had been anticipating a violent end to the credit bubble that infected the world through a year or two ago are having a reverse experience. Even the super-bears must be surprised by what is going on.
Todd "Toddo" Harrison, who apparently is one of the principle commentators on the Minyanville Web site, is both a "card-carrying free market guy" and a former deriviatives trader and hedge fund president. An interesting combination, to say the least, and it gives him a measured perspective on what constitutes appropriate action, if any, to stop the bleeding. And as a trader who always asks, "What is my downside?", he does think intervention of some sort is warranted.
The bottom line is that he regards the original bailout proposal as "bordering on the criminal," but did "support an effort that introduces the specter of regulatory relief while holding those responsible for creating this mess culpable with language consistent with the Constitution of the United States of America."
Sounded like a good idea, which of course meant it had no chance.
Sitting in the office after the market closed on Friday, it felt as if we had been through war. As we caught our breath and said a prayer for Washington Mutual -- the latest casualty in this bloody battle -- the mood was somber and the mindset fatigued.
"That was some week, eh?" I said to nobody in particular as I leaned back and ran my fingers through my remaining hair. "At least we have a day to gather our thoughts before the Sunday night stress ritual begins. What was last weekend, Lehman Brothers?"
The words lingered in the thick, heavy air, drifting from one consciousness to the next.
"No," I corrected myself, "Last weekend they changed the construct of capitalism and suspended the free market system. The week before that was Lehman Brothers, Merrill Lynch, Bank of America and AIG and the week before that was the Nationalization of Fannie Mae and Freddie Mac."
It all seemed very surreal, like we were watching a bad movie that never seemed to end.
We entered this month knowing it would be A September to Remember but the magnitude of the seismic shift is astounding. What began as a rushed effort to provide stability through structured socialism shifted into a heated defense of the U.S. Constitution.
It does not get any bigger than this, Minyans -- the knitting of our country and the belief system of the people will shape the foundational landscape for future generations. It is not what one would wish for but it is a challenge we must accept.
A phoenix will rise from these ashes and there will be winners in this new world order. It is up to us to determine what that looks like, how it works and who will be a part of it.
The Here and Now
Everywhere you turn, focus is fixated on the financial crisis and the merits of proposed solutions. We discussed the shifting structure numerous times -- Martial Law for the Markets, Back in the U.S.S.A.!, Shock & Awe -- and offered time and price are the only true solutions for what ails us.
The caveat in allowing that natural process to take place resides in the DNA of the disease. As a card-carrying free market guy -- someone who built several careers on the backbone of capitalism -- I would like nothing better than to see the markets self-correct.
As a derivatives trader of 17 years however -- someone who earned his stripes at Mother Morgan, ran a multi-billion dollar derivative portfolio and was president of a $400 million hedge fund -- I understand the profound consequences of letting them do so.
We live in a finance-based economy, one that is tied together with upwards of $500 trillion notional derivatives. Allowing institutions to fail -- in many cases, deservedly so -- would set off a chain reaction like dominoes laced with dynamite that would suck any corporation with finance-based operations into a cataclysmic abyss. That list could conceivably include the likes of General Motors, General Electric, Target, Ford and yes, JP Morgan, Bank America and Citigroup.
In other words, it would be game over, freeze and seize, complete chaos.
The majority of Americans are outraged at the notion of a bailout and I am equally upset. I would offer that most Americans do not fully appreciate the gravity of the alternative consequences.
As a trader, I am conditioned to assess every situation with one simple question: What is my downside? That, in a nutshell, is why -- if forced to choose -- I support a regulated response in some capacity.
That is not to say I support the original bailout, which in my view, bordered on the criminal.
I do, however, support an effort that introduces the specter of regulatory relief while holding those responsible for creating this mess culpable with language consistent with the Constitution of the United States of America.
The plan, as per our Conversation With Mr. Practical on Friday, should include:
There are no magic bullets or happy pills but there is an opportunity to make the best of a bad situation.
- Clear guidelines.
- Full transparency.
- Minimal and staggered funding.
- Dilution of equity in failed institutions and allowing bank failures so long as the savings at those banks are protected.
The unintended consequences will be enormous so I will simply ask for lucidity as we together find our way.
BAILOUT BILL LOOPS IN GREEN TECH, IRS SNOOPING
The gory details.
Ron Paul synopsized the bailout bill fiasco in an interview with CNN thusly: They took a bad bill which had been defeated, made it a lot worse, and it then passed. That tells you about all you need to know about Washington.
Besides larding the bill down with pork, "Christmas-treeing" it in the parlance of Congress, the bill gives the IRS a permanent pass from complying with various federal laws. For example, IRS agents are permitted to run businesses for an extended sting operation. The IRS was also authorized to disclose information from individual tax returns to any federal law enforcement agency investigating suspected "terrorist" activity, which can, in turn, share it with local and state police. For some reason these parts of the bill were not publicized.
Last week, the Bush administration proposed a three-page bill to bail out Wall Street to the tune of $700 billion. It died in the U.S. House of Representatives earlier this week.
On Friday, though, the House approved a far bigger, broader, and beefier version of the bill -- which has ballooned to a remarkable 442 pages. The vote was 263 to 171, with the bulk of the opposition coming from Republicans. Because the Senate already approved the measure, it immediately went to President Bush, who signed it into law.
On the theory that this would be a way to convince previously skeptical Democrats to approve the measure, one large chunk of the bailout bill is devoted to renewable energy, energy-efficient appliances, and so on (the "Energy Improvement and Extension Act of 2008"). The authors lured Republicans with protections from the alternative minimum tax (via the "Tax Extenders and Alternative Minimum Tax Relief Act of 2008").
That includes, as the New York Post pointed out, millions in tax breaks and related pork for kids' wooden arrows, Puerto Rican rum producers, auto race tracks, and corporations operating in American Samoa. (The likely explanation for the latter: StarKist has a large tuna-canning operation in American Samoa. And StarKist's parent company happens to be located in the district of House Speaker Nancy Pelosi.)
The bill has become, in other words, something almost unrelated to the business of bailing out Wall Street. The Beltway term for this is a "Christmas tree bill," meaning everyone gets to hang their favorite spending projects on it -- though by the time Congress gets it through, it more closely resembles a slop bucket.
"We will not Christmas-tree this bill," Sen. Chuck Schumer, a New York Democrat promised a few days ago. "The times are too urgent. Everyone has their own desires and needs. It's going to have to wait."
So much for that idea.
Here is a look a some of the green-tech measures:
IRS undercover operations: Privacy invasion?
- One-year extension for wind and refined coal energy tax credits. A production credit for electricity produced from renewable marine energy sources (meaning through wave power and river power, or by exploiting the differences in ocean temperature). Energy credits for "small wind properties," geothermal heat pump systems, and energy-efficient residential properties.
- New renewable-energy bonds. Up to $800 billion in energy bonds may be offered to the public, with a third from "public power providers," a third from governments, and the remainder from "cooperative electric companies."
- Tax credits for "cellulosic biofuels" and for "carbon dioxide sequestration." An extension of an alternative fuel credit. Tax credits for "new qualified plug-in electric-drive motor vehicles." Bicycle commuters get a nod, as do regulations aimed at "residential top-loading clothes washers."
The bailout bill also gives the Internal Revenue Service new authority to conduct undercover operations. It would immunize the IRS from a passel of federal laws, including permitting IRS agents to run businesses for an extended sting operation, to open their own personal bank accounts with U.S. tax dollars, and so on. (Think IRS agents posing as accountants or tax preparers and saying, "I am not sure if that deduction is entirely legal, but it will save you $1,000. Want to take it?") That section had expired as of January 1, 2008, and would now be renewed.
Starting with the so-called Anti-Drug Abuse Act in 1988, the IRS has possessed this authority temporarily, with occasional multiple-year lapses. A 1999 internal report said the IRS had 126 "trained undercover agents" working in field offices at the time. This is the first time that such undercover authority would be made permanent.
Sens. Max Baucus (D) and Chuck Grassley (R) have been pushing to make it permanent for a while, claiming (PDF) in April that: "Undercover operations are an integral part of IRS efforts to detect and prove noncompliance. The temporary status of this provision creates uncertainty, as the IRS plans its undercover efforts from year to year."
There is another section of the bailout bill worth noting. It lets the IRS give information from individual tax returns to any federal law enforcement agency investigating suspected "terrorist" activity, which can, in turn, share it with local and state police. Intelligence agencies such as the CIA and the National Security Agency can also receive that information.
The information that can be shared includes "a taxpayer's identity, the nature, source, or amount of his income, payments, receipts, deductions, exemptions, credits, assets, liabilities, net worth, tax liability, tax withheld, deficiencies, overassessments, or tax payments, whether the taxpayer's return was, is being, or will be examined or subject to other investigation or processing, or any other data received by, recorded by, prepared by, furnished to, or collected by the Secretary with respect to a return."
That provision had already existed in federal law and automatically expired on January 1, 2008.
What is a little odd is that there has been little to no discussion of the IRS sections of the bailout bill, even though they raise privacy concerns. Treasury Secretary Henry Paulson said this week: "I will continue to work with congressional leaders to find a way forward to pass a comprehensive plan to stabilize our financial system and protect the American people by limiting the prospects of further deterioration in our economy." He never mentioned the necessity of additional IRS undercover operations.
The bailout: Details, controversy, and loopholes
As my colleagues over at CBSNews.com reported on Friday, the law authorizes the Treasury Department to create a so-called Troubled Assets Relief Program, or TARP, as well as a separate insurance fund.
The TARP program permits the Treasury to purchase mortgage-backed bonds or any other "troubled assets" from financial institutions. The idea is that because banks have become so hesitant to lend to each other, this law will help unstick the gears of the modern financial economy.
Some loopholes exist. It is possible for a bank to buy $100 billion of bad debt -- perhaps in the form of subprime mortgages that are becoming quickly worthless -- declare bankruptcy, and sell it to the Treasury Department for $120 billion, or $200 billion. In other words, although the Treasury Department is supposed to look out for the best interests of taxpayers, there is no law forbidding such profits in the case of firms involved in bankruptcy, receivership, or mergers.
The Treasury Department is authorized to "guarantee" home mortgages, essentially becoming a kind of co-signer, to reduce the number of foreclosures. If the home owner stops paying his or her mortgage, taxpayers would be on the hook. The Treasury Department can also eliminate a "reasonable" amount of a home owner's mortgage debt, under section 109 of the new law, which would likely delay the process of house prices falling.
In response to grassroots pressure from Americans upset about Wall Street executives cashing in, Section 111 is titled "Executive Compensation and Corporate Governance."
It does not include, however, any statutory dollar limit on how high executive salaries of TARP bailout recipients can be. Instead, it lets Treasury Secretary Henry Paulson, the former CEO of Goldman Sachs, come up with "appropriate standards." In addition, only the top five executives will have their golden parachutes limited; all the rest will remain untouched, even if their second-tier salaries and bonuses happen to be in the millions or tens of millions of dollars.
Bear Stearns CEO James Cayne made $61.3 million from selling his shares a day after the JP Morgan bailout. Daniel Mudd, CEO of Fannie Mae, was replaced last month; he made $11.6 million in 2007. Richard Syron was chairman and CEO of Freddie Mac from 2003 until last month. He made $19.8 million last year. Martin Sullivan was ousted as president and CEO of AIG this summer, and was paid a $47 million severance package.
While salaries of failed executives will have no statutory limit, TARP-participating companies will lose a tax deduction if they pay their top executives more than $500,000 a year. The $500,000 limit only kicks in if the company offloads over $300 million in assets through TARP.
Section 115 of the law says that the administration can, after notifying Congress and waiting 15 days, purchase and hold $700 billion of assets "at any one time." (It can buy and hold $350 billion without waiting.)
This, too, is a potential loophole. It permits the Treasury Department to buy up, say, $700 billion in 2008, sell those assets off gradually over the next year at a (probable) loss, and repeat the same process in 2009. Losses to taxpayers, in other words, could exceed $700 billion. Although the Treasury Department is instructed to try to avoid losses, the text of the law does not forbid that scenario.
If the TARP ends up costing taxpayers money, the president may ask Congress to consider enacting a law to recoup "from the financial industry an amount equal to the shortfall," presumably through higher taxes. But Congress is under no obligation to do anything. A mechanism to cover the shortfall does not exist in this law.
Even though FDIC coverage will be boosted from $100,000 to $250,000 per account through December 2009, premiums to banks may not take "into account" the higher account coverage. In other words, premiums cannot increase for that reason.
• This may be just the beginning of bailouts. California Gov. Arnold Schwarzenegger said Thursday that the state may need a $7 billion loan from the U.S. Treasury, according to a report in the Los Angeles Times. That is because the state has spent more than it takes in through tax revenue, with an annual budget deficit of $14 billion or more, even though its individual income tax rate is arguably the highest in the nation.
• CBS News' John Bentley reports from Arizona that Republican presidential candidate John McCain is taking some credit for the bailout's passage: "I'm glad I suspended my campaign and went back to Washington to bring, and help bring, House Republicans to the table," he said on Friday. Democratic presidential candidate Barack Obama described the law as "absolutely necessary to prevent an economic catastrophe."
• Rep. Ron Paul of Texas, who correctly predicted in 2003 that taxpayers would be "forced to bail out investors," said in a speech on the House floor that the legislation would "only further harm the economy" and was actually worse than the previous version. In a CNN interview, the former Republican presidential candidate said his colleagues are refusing to deal with the underlying problems and spending more tax dollars even though "this country's bankrupt."
IT IS TIME TO REVISIT EMERGING MARKETS
Turbulent, yes. But they look cheap again – and they are our future.
The great credit bubble of 2001-07 floated all asset boats: stocks, real estate, commodities, collectibles favored by beneficiaries of the bubble, and bonds. The stock markets of developing overseas countries went on a wilder ride than most.
Standard rationalizations "explaining" the outperformance of emerging markets were dutifully trotted out to justify the price runups, e.g., that emerging markets are growing faster and in many cases were financially sounder than established ones. These assertions actually had some grounding in reality, current or prospective. Some other justifications given were more dubious, like that the rest of the world had "decoupled" from the U.S. and therefore that returns from those markets would also be decoupled, i.e., uncorrelated. The real problem was that those stock markets went up too far, too fast. Overpaying for a good story is as hazardous to your investment capital as buying an out and out clunker.
Now the morning after is here. Emerging market stock markets have fallen more dramatically during this year's bear market than the established stock markets. In fact, they have fallen to the point that experienced emerging markets investors think those markets are relatively cheap again. The superior growth prospects and financial dynamics -- no developing country had a reserve currency that enabled it to mortgage its whole future and the hereafter as well, and thus was protected from the temptations of self-immolation such as praticed by the U.S. -- remain. Time to start looking more closely.
For the better part of a year, Ben Inker was worried about skyrocketing emerging-markets shares. Rising commodity prices, rampant global outsourcing and rapid industrialization had shoved valuations to big premiums over older, more stable markets like the U.S.
Inker, a bright Yale grad who oversees the asset-allocation division of money-manager Grantham Mayo Van Otterloo, finally threw in the towel in July, as the U.S. financial crisis worsened, European and Japanese economies appeared stalled, and commodities prices plunged. Jeremy Grantham, GMO's chairman, subsequently said the well-respected asset manager was "underweight" the bourses of the developing world, and that U.S. shares would produce greater returns.
Smart call: Brazil is off 23%, Mexico 13%, Russia 43%, China 16%, Korea 12%, versus a 3% decline for the U.S. since July.
But just a few months later, Inker and GMO are rethinking their stance. "They have fallen far worse than everybody else, and probably are once again cheap relative to the world's other equity markets," says Inker. "Life is surprisingly different."
Mohamed El-Erian, the emerging-markets expert who is now the co-chief investment officer of Pimco, is even more optimistic. He cites the markets' superior growth and favorable wealth-dynamics, even though the U.S. financial crisis caused many fund managers to repatriate their capital from markets that, in hindsight, were probably too small and narrow to accommodate the flows. "Is there a cyclical case now for emerging markets? Yes there is," says El-Erian.
If it finally comes together, Washington's financial-stabilization plan "is not only going to stop the rush out the door, but attract new interest. Technically, you will see an even sharper rally in emerging markets than U.S. equities. I would at this point be looking to buy the [MSCI Emerging Markets] index."
Even if the next rally does not quite look like the straight-up trajectory that troubled Inker, it holds the prospect of reversing recent losses based on strong -- but not as strong -- economic growth.
Virtually all of the experts Barron's checked with last week cautioned investors to steer clear of frontier markets like Pakistan, and to channel more funds toward either broad indexes or more robust economies like China's.
There are plenty of obstacles to help keep growth from getting out of control. Third-quarter results are likely to be a bloodbath for emerging-markets funds, which are down 22% quarter-to-date, and 33% so far this year -- something Barron's predicted last summer ("Is the Bloom Off Emerging Markets?," July 30, 2007).
As oil and other commodities collapsed, Asia outpaced Latin America in the third quarter. Investors yanked cash from funds focused on the developing world as the financial crisis worsened this month. "Appetite has dwindled, even as relative optimism about U.S. shares rises," says Michael Hartnett, the emerging-markets strategist for Merrill Lynch. "Global investors are being forced to sell anything they cannot pronounce. You are starting to see distressed valuations," he says.
The jitters rose last week as Washington struggled over the terms for a bailout bill for Wall Street. In Hong Kong, false rumors about Bank of East Asia's solvency sent stocks plunging. The declines also disabused remaining fans who prized the funds for theoretically low correlation: In fact, they are 80% correlated with the Standard & Poor's 500. And as world markets sag, emerging markets fall right along with them.
One key fact to remember: This financial crisis did not start in the developing world as so many did in the '90s -- Mexico's 1994 peso devaluation, for example, or Thailand's 1997 decoupling from the dollar, or Brazil's depreciation of its currency, the real, in 1999.
Conditions in developing countries have not been this good in years. They may be at their best since MSCI launched the index exactly 20 years ago. China, Malaysia, Taiwan and Russia are all building current account surpluses. Thanks to the boom in commodities, Brazil in January became a net creditor, and joined the ranks of investment grade sovereigns in the spring.
The shares' sudden cheapness and the growth in the developing world contrast with the tougher times Western economies face trying to squeeze out more growth. Nobody knows how far the banking crisis will lower long-term growth rates for the big Group of Seven countries.
Yes, the emerging markets will be affected, too. The IMF thinks growth in the developing world will slow to 7% this year, from 8% in 2007. Analysts have been chopping earnings-growth estimates for the MSCI Emerging Markets index companies to 10.1% in 2008 and 17.2% in 2009. Morgan Stanley took its 2008 forecast down to 5%, and thinks earnings will grow 7% at these companies in 2009.
Antoine Van Agtmael, the investor who coined the term "emerging markets," thinks the group will still earn 12% to 15% this year. Last week, the MSCI index traded at 10.9 times trailing earnings -- its lowest valuation since October of 2001 and cheap even assuming a lower level of "normalized" earnings. In contrast, the S&P 500 trades at 23 times trailing earnings. A nearby list of the MSCI index's largest markets shows that for many bourses, earnings can take a decent haircut.
Thus, it makes sense to start building a position in a cheap sector where the long-term bullish case remains intact. David Fisher, chairman of Capital Group, recently said he expects 70% of the world's growth over the next two decades to come from the emerging markets. At the moment, they account for just 11% of the world's stock-market value, even though JPMorgan Chase reckons they will account for 28% of the global economy next year. By contrast, the U.S. accounts for 40% of the world's stock-market value, but only a quarter of its economy.
The developing world's young populations and rising wealth will keep growth going for decades. "These attractive demographics will go through their life cycles -- consuming more, buying houses and raising families," says David Riedel, who steers Riedel Research, an emerging-markets equity analysis firm.
Here are some pointers Barron's got last week from keen observers of developing markets:
El-Erian of Pimco recommends buying an index fund. One is the iShares MSCI Emerging Markets Index Fund (ticker: EEM). And he thinks equities are cheaper than bonds. Last week, the JPMorgan EMBI-Plus index, the developing-markets bond benchmark, was just 367 basis points over comparable U.S. Treasuries, versus 1,000 points in the Asian economic crisis.
Russell Napier of CLSA Asia-Pacific Markets advises steering clear of heavily leveraged markets, "since whole societies on the planet will spend decades deleveraging," and recommends the following: "If the loan-to-deposit ratio (LTDR) is over 100%, there is a very high probably that the whole country will need to delever." The LTDR in Hong Kong is 57.4%, in China, 65%; Indonesia, 72%; the Philippines, 73%; Malaysia, 74%, and Taiwan, 78%. The LTDRs in India, Korea and Thailand all exceed 100%.
One country to watch is China. Its market was the first to fall sharply on a whiff of inflation. Just weeks after the Olympics ended, China cut interest rates for the first time in more than six years and reduced the reserve-requirement ratio for most banks, as slower growth led to a surprisingly large profit decline. Inflation fears seem to have eased.
Yet even the once-expensive Chinese A-shares, which previously traded at a premium of 100% to comparable Hong Kong traded H-shares that are widely available to foreigners, have sunk to a premium of 15%. Today, the MSCI China index trades at 13 times trailing earnings, its lowest level since January 2006. Says Chen Zhao of BCA Research: "The market has dropped 70%, the economy is growing 10%, inflation is melting, and they are cutting rates." ...
How about the rest of the BRICs (Brazil, Russia, India, China)?
Russia, which shut down its markets amidst the worst of the turmoil and moved to support stock prices, now trades at six times forward earnings; blue chip Gazprom (GAZP.Russia), at 206 rubles last week, trades at six times earnings. Still, it is subject to political risk: It collapsed after Russia attacked Georgia, then rebounded. The index is also heavily weighted in energy.
Brazil, too, has been hard hit by the commodities slowdown. It trades at 9 times forward earnings, although MSCI pegs long-term earnings growth at 15%. "We are looking for lower interest rates in Brazil in late 2008, and I think it is oversold," says Geoff Dennis, the Latin American strategist at Citigroup. Morgan Stanley, meanwhile, moved Brazil to Overweight in its emerging-markets model portfolio, noting that valuations had halved since Brazil was upgraded to investment-grade. ...
India likewise maintains a tough credit policy, and given its double-digit valuation, there are plenty of cheaper markets around. Still, India is chock-a-bloc with attractive companies. Tom Naughton of Sparx Asset Management in Hong Kong likes HDFC Bank (HDB), the mortgage company that is growing its loan book at a 25% clip with lots of room to expand, because India's mortgage to GDP ratio is just 5%.
To real bargain-hunters, India and China remain big and expensive, although they are getting more attractive by the day.
Arjun Divecha, GMO's emerging-markets expert, notes that Thailand, Turkey and Russia all trade at single-digit valuations. They are fraught with political risk, he notes, but they are among the many bargains to in the developing world.
Today, the MSCI Emerging Markets index trades well below 930 (it has ranged from a high of 1338 in 2007 to a low of 767 earlier this month). The 930 figure is important, according to Merrill Lynch, because it is the average level at which the vast majority of money flows from retail investors entered emerging-markets funds between 2002 and 2008. Frightened investors often bail out at or near break-even. If markets rally, investors might simply bail out at those levels, acknowledges Claudio Brocado, an emerging-markets specialist at Batterymarch Financial Management. Still, he avers, "current levels present terrific buying opportunities."
We would have to agree. Surely there will be turbulence, and further downside is likely if developed markets extend their slides. The rise and fall of oil prices will have an enormous impact on political stability -- as well as infrastructure-spending and social services. But there will be many rewards over the long term. After all, after years of waiting, South Korea was finally upgraded to developed-markets status by London-based FTSE Group, joining the indexing ranks of the U.S., Europe and Japan. MSCI says it may do the same in June. That will vastly expand the pool of buyers who will consider South Korea for investment, and gives the intrepid investor less cause for worry and more reason to buy.
FINANCIAL CENTERS MORE TRANSPARENT, SAYS OECD
The OECD reports what they think of as progress in bringing "greater transparency" to offshore financial centers. For instance, anonymous bearer shares have been virtually wiped out the world over. However, the usual suspects, e.g., Switzerland and Panama, still insist on restricting fishing trips by tax authorities, and the OECD is not well pleased with this.
Advances are being achieved in bringing greater transparency to financial centers around the world, but progress on exchange of information on tax issues is more limited, according to the OECD.
Striving to achieve greater "fairness" and increased co-operation on tax issues around the world, OECD's Global Forum on Taxation has drawn up standards of transparency and effective exchange of information designed for all countries to implement and adhere to.
The OECD's latest report, entitled "Tax Co-operation: Towards a Level Playing Field -- 2008 Assessment by the Global Forum on Taxation," aims to determine the extent to which these standards are in fact being met by the 83 OECD and non-OECD economies. It acknowledges mixed results, however.
Although detailing advances in the availability of ownership information and access to bank information for tax purposes by several countries, it does make known that only a small number of offshore financial centers have demonstrated their compliance by expanding their network of exchange-of-information agreements. ...
[A]ccording to the report, significant restrictions to bank information access for tax purposes remain in three OECD countries -- Austria, Luxembourg and Switzerland -- and in a number of offshore financial centers including Liechtenstein, Panama and Singapore. The report also accuses several OFCs who initially committed to implement the OECD's standards of reneging on their agreement.
Among the key findings of the report are that 66 new Double Tax Conventions (DTCs) and four new TIEA's have entered into force, 17 of which have been signed since the beginning of 2007, including 9 by the Isle of Man. Of the 83 economies, 11 still do not have exchange agreements in place, either in the form of DTCs or TIEAs. ...
Bearer shares, often used as a vehicle for tax evasion by concealing ownership, have been abolished in Cyprus, Belgium, the U.S. and Samoa ... In Andorra, under new laws, all companies are required to file accounts with a government authority. Audits of public and limited companies must be carried out where certain thresholds pertaining to assets, turnover and number of employees are exceeded.
Alternative link to this story here.
U.K. CRACKDOWN ON OFFSHORE ACCOUNTS
Investigations launched using information gathered from London banks.
HM Revenue & Customs announced they had launched 11,582 investigations into offshore accounts held by UK taxpayers, using data obtained from major British banks. Accountants reasonably questioned how much information and how many cases the HMRC had the capacity to process and pursue. It looks like a crapshoot from the perspective of any one of those individuals.
We note, yet again, that some of the account holders made it easy by setting up an "offshore" account in a bank with a major presence in the UK. They probably thought that, e.g., the Channel Islands branch of Barclays was truly offshore. A little thought would reveal that this was weighting form, the legally distinct non-UK subsidiary, higher than substance, the UK physical presence that would serve as a pressure point should push come to shove ... which it eventually did.
Up to 80,000 wealthy investors suspected of evading tax by using offshore bank accounts are facing investigation over the next two years, it can be revealed.
Armed with information extracted from Britain's high-street banks, tax inspectors are planning an assault on individuals who have set up accounts in Monaco and other tax havens to hide their assets.
Officials at HM Revenue & Customs (HMRC) said they had launched 11,582 investigations into offshore accounts using data obtained from Barclays, HSBC, Lloyds TSB, HBOS and Royal Bank of Scotland over the past two years.
In a note obtained under the Freedom of Information Act, officials said that between now and 2010 "79,000 further cases are being held, pending a decision on which intervention will be most appropriate. Further cases are likely to be identified."
A spokesman for HMRC said: "We are working through the offshore accounts to ensure everyone pays the right tax. It is important that those with undisclosed offshore assets come forward as soon as possible because this will mean paying a reduced penalty on any outstanding tax."
However, Stephen Camm, who leads the tax-investigations business at Price Waterhouse Coopers, the accountant, said that HMRC would struggle to examine the details of so many individuals. "The Revenue has a real dilemma here: they will need an awful lot of extra resources to look into these cases," he said. "The Revenue has already asked for a great deal of client information from banks and other organisations in recent years. Should they be asking for all this extra information when inspectors seem to be struggling to process all the information they already have?"
HMRC has already granted one amnesty to allow anyone who has used offshore accounts to pay any outstanding tax owed, plus interest and a 10% penalty.
This Offshore Disclosure Facility last year raised about £400 million for the exchequer. However, about 40,000 of the 60,000 who registered for the amnesty ultimately failed to make a disclosure or pay any tax. Dave Hartnett, head of HMRC, has signaled that another amnesty may be held.
Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants, said: "The sheer number of people the Revenue is looking to investigate here will scare anyone who has used an offshore account to evade tax."
U.S. LAWMAKER INTRODUCES OFFSHORE REINSURANCE TAX BILL
Would end the advantage of offshore reinsurance entities over American companies.
In what is at root a transfer pricing issue, Congressman Richard Neal has introduced a bill to disallow deductions for "excess" reinsurance premiums paid to affiliated entities. The criterion for "excess" is whether they exceed the industry average. We predict that if this bill passes there will be a lot of time wasted in IRS audits explaining why a particular premium's excess over industry averages is justified.
Congressman Richard E. Neal (D-Massachusetts), Chairman of the Subcommittee on Select Revenue Measures, has introduced legislation that would end the advantage of offshore reinsurance entities over American companies
The bill, introduced by Neal on September 18, would disallow deductions for excess reinsurance premiums with respect to U.S. risks paid to affiliated insurance companies that are not subject to U.S. tax. The legislation also provides the U.S. Treasury with authority to prevent avoidance of the provisions of the bill.
"I am pleased to come before the House to introduce legislation ending the advantage of offshore reinsurance entities over American companies," Neal said in a floor statement. "In the past, I have offered a number of bills to limit offshore tax avoidance and have even previously offered bipartisan legislation on the issue of foreign reinsurance specifically. I am here today to try a different approach to tackle the problem of excessive reinsurance to related foreign entities and I hope my colleagues will join me in this timely effort."
While some may view Neal's legislation as far from timely given the recent bailout of insurance giant AIG by the Federal Reserve, Neal argued that now is "precisely the time to shore up the U.S. market."
"With the advantage of a no- or low-tax jurisdiction from which to operate, you can bet that foreign competitors are already eyeing purchases of the AIG business," he observed.
According to Neal, since 1996, the amount of reinsurance sent to offshore affiliates has grown dramatically, from a total of $4 billion ceded in 1996 to $34 billion in 2007, including $19 billion alone to Bermuda affiliates. There has also been a steep rise in premiums written in the U.S. by offshore entities, which have doubled in the last decade, representing $54 billion in direct premiums written in 2006. Again, Bermuda-based companies represent the bulk of this growth, although Switzerland is also a favorable jurisdiction due to its network of tax treaties.
"These insurance profits are shuttled out of the U.S. and then the investment income on those profits is also sheltered from U.S. taxes. It is easy to see why foreign reinsurers, with such a tax benefit, enjoy a significant market advantage," Neal noted.
While measures are already in place under Section 845 of the U.S. Tax Code to permit the Treasury to reallocate items and make adjustments in reinsurance transactions in order to prevent tax avoidance or evasion, Neal argued that this has patently failed to stem the offshore tide.
"My colleagues may be thinking that this sounds similar to another provision in the code, and they would be right. The tax code currently tries to limit the amount of earnings stripping -- that is, sending U.S. profits offshore through inflated interest deductions -- by disallowing the interest deduction over a certain threshold," Neal said.
"In the reinsurance context, U.S. affiliates of foreign based reinsurance entities may be sending offshore excessive amounts of reinsurance to strip those premiums out of the purview of the U.S. tax system. My bill limits the deduction for those premiums to the extent the reinsurance to a related party exceeds the industry average," he explained.
"I assure my colleagues that I will continue my efforts to combat offshore tax avoidance, regardless of what industry is impacted," Neal concluded.
SWISS COMMITTED TO COMBATING MONEY LAUNDERING
But proof of criminal activities must be supplied prior to their getting involved.
Money laudering charges have been lodged against Taiwan's former president and his family. Switzerland has been asked to help Taiwan with the investigation. Consistent with Swiss law, the Swiss Representative to the Republic of China has informed Taiwan that proof of criminal wrongdoing would have to be provided before any help could be expected. Lacking that the Swiss government would have no access to the accounts.
Swiss Representative to the Republic of China Jost Feer has said that Switzerland is committed to combating money laundering and will offer legal assistance to Taiwan once evidence is provided in a high-profile case of alleged money laundering embroiling Taiwan's former first family.
"Both (Taiwanese and Swiss prosecutors) need to provide evidence for certain things and if they match, obviously they can prove something is going on," Feer told CNA in a recent interview. "If it becomes clear enough, evidence is around that, whether it is embezzlement or whatever, of course they (the Swiss authorities) have to look into it."
Feer, director of the Trade Office of Swiss Industries (TOSI) , made the remarks in response to suspicions of money laundering through overseas banks accounts, the latest scandal implicating former President Chen Shui-bian and his family.
The Taiwanese authorities were informed in January by the international anti-money laundering organization Egmont Group that members of the former first family had opened a number of bank accounts in other countries, including the United States, the Cayman Islands, Singapore and Switzerland.
In July, Taiwan received a request from the Swiss authorities for assistance in probing alleged money laundering by Chen Shui-bian's son Chen Chih-chung and his daughter-in-law Huang Jui-ching in Switzerland.
Feer pointed out that Taiwan is not a special case and that as long as there is evidence of criminal activities, the Swiss authorities will look into it, adding that Switzerland is not a haven for money laundering, even though one-third of the world's assets management is concentrated there.
"If they see something suspicious with regard to money laundering criteria or principles, they have to follow up, whatever, whoever it is," he said.
However, Feer noted that unless there is criminal action involved in the case, the Swiss government has no access to these accounts. "We still have the bank secrecy law... so the government does not have access to your bank account unless there is suspicion and then it has to go through the legal system for evaluation before it can open or freeze your account," he said.
According to Switzerland's Federal Act on International Mutual Assistance in Criminal Matters, frozen capital assets can be released to foreign authorities if the assets are evidently related to criminal origin.
Asked if a judicial assistance agreement between Switzerland and Taiwan could further help in the investigation, Feer replied that there is "no need. For the time being, there is no discussion." ...
Chen Shui-bian confessed August 14 that he did not honestly account for his election campaign expenses and that his wife Wu Shu-jen funneled surplus funds from the election campaign contributions into overseas bank accounts. The former president argued that all the surplus funds were handled by his wife and that he had no idea until early this year that this wife had made such transactions.
He denied that the money had any connection with the "state affairs fund" case in which the former first lady was charged with corruption and forgery in November 2006 for using receipts provided by others to claim reimbursements totaling NT$14.8 million from the president's "state affairs fund" between July 2002 and March 2006.
The former first couple and their son, Chen Chih-chung, daughter-in-law Huang Jui-ching and the former first lady's older brother Wu Ching-mao are listed as suspects in the case and have been banned from leaving the country.
The TOSI, a non-government organization established in Taiwan in 1982 that is operated by the Swiss Taiwan Trading Group in Zurich, functions as the de facto Swiss embassy in Taiwan in the absence of official diplomatic relations. Feer, however, stressed that the office is not involved in the probe into the case, as such legal procedures are not coordinated through administrative channels.
ONE THIRD OF U.K. COMPANIES CONSIDER OFFSHORE MOVE
Several UK firms have moved their headquarters to other countries this year, with the announced reasons heavily emphasizing the lower tax rates of their new homes. Now a poll of 629 UK companies finds that 38% of them have discussed moving operations offshore. Even if only a quarter of them make good on the implied threat, that is a huge number.
One in three UK companies are considering moving offshore in the face of onerous corporation tax burdens, according to a YouGov poll ... Some 38% of executives polled at medium and large companies in the UK said they had discussed moving operations offshore to reduce corporation tax, while 39% said they thought the tax was "inefficient" and should be replaced.
The findings of the poll will raise the pressure on the government to consider a wholesale change of the tax which has come under increasing pressure despite Labour reducing the burden from 30% to 28% in April this year.
Drugmaker Shire has moved its headquarters to Ireland which has a corporation tax rate of 12.5% and experts point out that Britain's failure to radically reduce its tax system is harming the country's competitiveness. The Sunday Telegraph revealed last weekend that DIY retailer Kingfisher was considering moving offshore.
Regus, the serviced office provider, Henderson, the asset management company, and Charter, the engineering group, have all moved their tax bases to either Ireland or Luxembourg this year.
Commissioned by accountancy firm BDO Stoy Hayward, the poll of 629 executives shows that 37% think the time and cost burdens of corporation tax have increased over the last five years.
Paul Eagland, national head of tax at BDO, said the time was right for a radical rethink of corporate tax policies. "This could include considering options such as a much lower fixed rate of tax or even the abolition of corporation tax altogether to be replaced with a regime that focuses on prescribed distributions to shareholders," said Mr. Eagland.
BDO said changes were necessary given that corporate tax receipts were likely to fall from an average of about 10% of the UK's total tax take over the last decade.
"Though corporate profitability has in recent years seen the amount of tax rise considerably, we believe that it is almost inevitable that the current economic climate will see those profits decline," BDO said. "The recent increases in corporate tax receipts are merely an Indian summer, masking an otherwise relentlessly downward trend."
GUERNSEY OFFICIALS LOOK INTO LOWERING TAX CAP
Channel Island Guernsey introduced a tax cap on foreign source income for its residents of £250,000 this year, which is the maximum taxes that anyone would have to pay on income for those sources. While it is thought no existing Guernsey residents will pay the maximum this year, the cap is a lot higher than the caps of Jersey or the Isle of Man. Hence, Guernsey is worried about its ability to attract rich individuals to the Island. In short, tax competition is at work.
Proving that tax bureaucrazies are the same everywhere, Guernsey's has intimated it will not support a reduction in the cap, however warranted, unless the code in augmented in a way to preserve "revenue neutrality."
Guernsey's Treasury and Resources Department is set to launch a consultation into plans to introduce a lower income tax cap for the island's residents. A £250,000 tax cap -- the maximum amount of tax payable -- was introduced from January 1 this year, but the Treasury & Resource Department's deputy minister Charles Parkinson has expressed doubts about its attractiveness, commenting:
"The tax cap is not competitive, so the Department is considering whether it would benefit the island to offer a more attractive deal."
The cap did not apply to Guernsey source income and was set at a level much higher than similar arrangements offered by Jersey and the Isle of Man. It is believed that the cap did not affect any existing Guernsey residents on its introduction.
A plan to reduce the limit and the qualification criteria was deferred by the Policy Council last year.
Treasury and Resources has received several representations that the rules should be changed, and has decided to consult with the intention of gauging if there would be longer term financial benefits in making a change -- attracting more high net worth individuals to move to the island while safeguarding the island's finances.
"I must make it clear that the Department is unlikely to support any proposal unless it was allied to a further proposal which would have the effect of making a variation of the tax cap revenue-neutral initially, and make the island money in the long term," Mr. Parkinson added.
PERSONAL INCOME TAX TO COME INTO EFFECT IN VIETNAM
No flat taxes for Vietnam.
Some 33 years after the U.S. withdrew from Vietnam with its tail between its legs, Vietnam has decided that Running Dog's progressive income tax system is worth emmulating. We have not seen details, but with "expat taxpayers" being subject to the same code as domestics, it sounds as if they have also taken another page out of the U.S. tax code and deemed all citizens taxable, no matter where they live.
The government of Vietnam has announced that it will implement the country's first broad-based law on personal income tax next year, a reform which aims to extend the personal income tax base and change the residency rules
s The personal income tax law (PIT) was passed by parliament in November 2007 and will be implemented as a result of a decree issued by the government on September 8, 2008
s The principal changes brought about by the PIT will be to the definition of tax residency, but many more forms of income will be subject to tax
Under the new law, both resident and expat taxpayers will be subject to the same sliding rate of income tax which rises from 5% to 35% depending on the level of income, with five brackets in between.
The new law will also tax many more forms of income, and from next year interest (except on bank deposits and life insurance polices), dividends, gains from the sale of shares, securities and real estate, inheritances and overseas remittances will be taxed for the first time. Those considered resident in Vietnam must also declare their worldwide income under the new law.
In addition, certain other benefits-in-kind, including fees, allowances, housing and education compensation paid by employers will be subject to personal income tax.
As a result of the decree issued earlier this month, the PIT is scheduled to go into effect in January. However, certain details of how the new system will operate in practice, such as the exact definition of permanent residence, have still to be finalized.
WITH CROSSLOOP, USERS CAN GET HELP FROM A TECHIE FRIEND
Anyone who has attempted to help a technically deficient friend or client solve a problem on their PC knows full well that this can be an frustrating and sometimes daunting task. You are trying to visualize their machine and its configuration while questions like "How do I get to my C drive?" slow the workflow to a crawl. Even simple tasks take four times as long as they would compared to you just being at the machine in person.
If you could just take temporary remote control of the machine both parties would be much happier. There are several no-cost solutions that enable you to do exactly this, such as the free version of LogMeIn. LogMeIn enables one to remotely access an "agent" machine at any time. This is a security risk in theory and might be more control than the helpee wishes to cede over his/her machine.
A new alternative remote control program is CrossLoop. We have not tried it yet, but it sounds less complicated to set up than LogMeIn, and each session requires the consent of the operator of the remote machine. Wall Street Jounal "Personal Technology" columist Walter Mossberg found CrossLoop to be a "simple, effective way to do the job."
Trying to help a less-knowledgeable friend or family member solve computer problems can be very frustrating -- especially if you cannot sit with him or her in front of the PC. It can be slow and awkward merely explaining the steps you would like the other person to perform to diagnose and solve the problem.
The best approach is to control the distant computer remotely -- with the owner's consent -- during the problem-solving session. That way, you can directly manipulate the machine while explaining what you are doing over the phone.
There are a variety of services and software that allow such remote control. Tools for doing so are even preinstalled in obscure corners of the Windows and Macintosh operating systems. But many are too complicated for average users -- even those with enough knowledge to help solve common problems. Others cost money, or require you to establish an account with a service, or are aimed mainly at folks seeking unattended access to their own remote computers.
This week, I tested a remote-control product designed specifically for collaborative help sessions solicited by the person seeking help. It is free, simple and can be used without setting up an account. And it also has an added dimension: If you have a problem and lack a tech-savvy friend or relative who can help, the company that makes the software maintains a directory of thousands of geeks who can help you, usually for a fee.
The product is called CrossLoop and can be downloaded at crossloop.com. It currently works only with Windows computers, but the company plans to release a Macintosh version in a few months.
To use CrossLoop, both you and the person you are helping must download and install the free program, a quick and simple process. When you run the program, you are invited to create a free account, which allows you to track your sessions and rate people who help you. But there is a clearly marked "Skip" button that permits you to use the program with all of its features even without an account.
The software has a very clear, simple interface. It consists of two large tabbed sections: a grey one labeled Share for the person whose machine is to be operated remotely, and a green one labeled Access for the remote operator, called the "helper" by the company.
For security reasons, CrossLoop does not allow its users to gain control of unattended machines. The process must begin with a person at the remote machine clicking the "Share" tab. That click generates an access code that is different for each remote session. The person seeking help then gives that code, usually over the phone, to the helper. The helper then clicks on the Access tab on his or her PC, and types in the code. The person on the other end must confirm that he or she wants to go ahead. Only then is the connection opened.
Once this process is complete, the helper sees a large window replicating the desktop of the remotely controlled machine, and can control that PC using his or her own mouse and keyboard. The helper can even transfer files to the remote machine.
On the other end, the person being helped can be passive or can share control of the computer. At any time, the person being helped can disconnect the session or limit the helper to just viewing the screen rather than controlling it.
The company says that it keeps no record of any of the sessions and that its software encrypts all communication between the two computers involved.
I tested CrossLoop in two scenarios. In one, I used it to help my friend Alan configure his new copy of Microsoft Office to save files in the older Office formats. The remote-control session worked fine, although Alan's internet connection was so slow that there were long delays in seeing changes occur on his screen.
In the second scenario, I hired one of CrossLoop's listed consultants for $25 to clean up a Sony laptop I own that was running sluggishly. He spent over an hour deleting needless programs and removing others that were unnecessarily set to launch automatically. He carefully consulted me by phone to make sure he was not cutting anything I needed or wanted. Again, I considered the session a success.
The only problem I saw in my tests was that when helping someone with a Vista machine, you may have to temporarily disable a security-warning feature called User Account Control, which pops up frequently and cuts off the connection.
CrossLoop eventually hopes to make money by charging the paid consultants in its network a fee. But it does not guarantee that they are effective or honest, and merely relies on the ratings of others who have used them. It is theoretically possible for such a person to steal your data or plant malware on your computer.
Still, if you are helping a friend or relative with a PC problem, or are willing to trust a well-rated stranger to give you help, CrossLoop is a simple, effective way to do the job.
U.S. WEALTH IN SHRINK MODE
In what amounts to a continuation of his analysis last week, "Spengler" looks the American household's financial situation. He regards the "larger problem" behind the various liquidity crises as the de-leveraging of the U.S. household. We would see his household and raise him a government, but otherwise agree.
So, as Ed McMahon might have once asked, how much de-leveraging is required? Good question. "Spengler" looks at some statistics we have never considered before which give an intriguing first cut at putting bounds on the answer: somewhere between a lot and a huge amount. He concludes, not totally pessimistically, that the U.S. will have "an extended grace period to put its house in order" before Asia et al's capital markets mature.
The U.S. Congress went into labor this weekend, and gave birth to a gnat. With some cosmetic adjustments, Treasury Secretary Henry Paulson's $700 billion bank bailout plan will be adopted this week. [Maybe not.] Markets barely budged on the news, which was punctuated by government bailouts of two giant banks -- America's Washington Mutual and Belgium's giant Fortis group. A third rescue, of Britain's Bradford and Bingley, sees it taken over by the government.
Paulson's plan likely will provide temporary relief to the stockholders of some American banks, whose balance sheets do not look all that different from Washington Mutual's. But this has nothing to do with the larger problem, namely the de-leveraging of the American household.
Leverage is the secret of American wealth. The average American family in 2004 had a net worth of $448,000 on an income of $43,000, according to the Federal Reserve's survey of consumer wealth. Wealth equaled 10.4 years worth of income. In 1989, the Fed survey shows, it was only 7.3 years of income, and just 3.8 years worth in 1962. Measured in years, why should the ratio of Americans' net worth amount to annual income have tripled between the administrations of John F. Kennedy and George W. Bush?
The article considers various hypotheses, like Alan Greenspan's ridiculous notion that the rising ratio of wealth to income derived from the decreasing riskiness of capital assets as the U.S. economy showed that it could indefinitely grow with low inflation: "The notion that the U.S. economy is 1/3 as risky as it was in 1962, and that the valuation of financial assets should be three times as great relative to income, makes no sense at all." No, it does not. But:
Total household debt in the U.S. was roughly half of disposable income in 1962, but nearly equal to disposable income in 2004. ... Americans took on more debt, acquired more assets in the form of homes, and watched home prices appreciate on a levered basis. That did the trick. ...
Foreign demand for American assets surely has contributed to trebling of relative asset valuation in the past two generations, although the bulk of this has occurred indirectly. Foreigners lend money to the U.S., and this money is re-lent to consumers and corporations. In a recent essay ... I observed that the rapid aging of the world population has funneled money into the few venues that provide open and liquid capital markets, and made America the beneficiary of the thrift of prospective retirees from Europe to China and Japan.
Leverage is slathered onto assets, and eventually loans go bad, and banks lose capital. The collapse of American home prices to date has forced $500 billion in write-downs of bank capital, against which banks have raised $350 billion in new capital. But the private market will not provide new capital to the banks unless the federal government in effect underwrites the risk to shareholders.
That is the upshot of Paulson's plan, which proposes to buy mortgages and other assets from banks at high prices (what Federal Reserve chairman Ben Bernanke euphemistically calls the "hold to maturity price") so that they do not have to sell them at low prices. It is a transfer of capital from the government to bank shareholders. ...
At most, Paulson's plan will preserve the privileges of the financier caste that enabled the debt addiction of American households. At worst, it will give a few of the bankers an extra couple of months to unload stock in financial companies before they, too, go the way of Bear Stearns, Lehman Brothers and Washington Mutual. It is very difficult to understand why Washington Mutual's share price fell to zero ... while other financial shares have risen. The differences between the business models of these banks are trivial compared with their similarities.
The trouble is that no one knows where the process will end. American households cannot be worth 10 years of income, but should they be worth 7 years of income as in 1989, or just 3 years of income as in 1962? Where should American home prices find a level? If they return to the prices of 1998, they will fall by half, which is where homes offered in foreclosure are clearing the market today in California and Las Vegas.
Banks that provided the leverage for American households and corporations will remain under siege until asset prices find a level, and that will take two years, give or take a lifetime.
Sadly, the Asian public and private sector will continue to pour money into the U.S. because their home markets are not deep or secure enough to provide an alternative. America will have an extended grace period to put its house in order before the rest of the world finds alternatives to its capital markets.
THE AMERICAN EMPIRE: TOO BIG TO FAIL?
The American empire will meet the fate of its Soviet predecessor, and for the same reason.
Justin Raimondo links the "bailout brothers" with the War Party figureheads and functionaries. They are all members of a loosely knit Mafia-like family, with finance capital on top pulling the string -- inflation followed by deflation, boom then bust, peace then war ... Since the bailout family members know what is coming they can get out of harm's way "before disaster envelopes the rest of us." What looks like "failure" to everyone else -- financial collapses, military failures, and whatnot -- are just another opportunity to arrogate power and resources to themselves.
But the hubris that drives the master string-pullers is destined to bring the grand schemes crashing down, same as always. Too bad everyone else will get caught in the blowback.
In reading about the federal bailout of all those financial wheeler-dealer outfits that are supposedly "too big to fail," the layman may be forgiven for failing to comprehend the intricacies of the arcane financial instruments currently backfiring on their whiz-kid inventors. Such exotic creatures as "credit default swaps" may elude the understanding of the hoi polloi, but one thing the man in the street does know: He will never be "too big to fail," of that he can be sure.
He is just not the Bear-Stearns type, and Congress would never shell out a penny before he loses his savings and his home, which -- due to the propaganda of Panglossian economics, whereby houses stopped being homes and became investments -- amount to pretty much the same thing. The paper-pushers of Wall Street made untold trillions out of a policy that was doomed to fail (PDF) in advance, and whose critics have long predicted would end in precisely the manner our tale of economic woe is unfolding.
The policy of bank credit expansion, which enriches the already wealthy at the expense of the rest of us, has a fatal allure. It induces an initial euphoria, the false promise of permanent prosperity. This Panglossian view is the perfect economic system for an emerging empire, especially one with such inflated pretensions as ours. It is the economics of hubris -- the same grandiosity that let us imagine we could implant "democracy" in the arid soil of Iraq and make the desert bloom.
After the fall of the Soviet Union, the U.S. bestrode the earth like a colossus, America's stock was rising, and the pride that goeth before a fall imbued our leaders with the illusion that they could not fail. The American empire, they thought, is too big to fail. It is the end of history -- and the rest will just be a mopping-up operation, that will be well worth the costs.
The failed policies that led to our current economic predicament -- the whole system of central banking and fiat currency -- are precisely those policies that benefited those who are now demanding to be bailed out. They may have bankrupted the country, but you can be damned sure they are not going down with the rest of us, no sirree!
This outrageous rip-off is mirrored in the foreign policy realm, where the very same crowd that dragged us waist-deep into the Middle Eastern quicksand are lecturing us from every podium. The neocons who brought us the Iraq war are directing John McCain's campaign, hanging on to power for dear life, shamelessly touting their alleged "success" even as the $3 trillion bill comes in and the people ask "For what?" These are the real dead-enders, the ones who believe that George W. Bush never implemented his self-proclaimed "global democratic revolution," but they will.
The same foreign lobbyists who pushed for the overthrow of Saddam Hussein by U.S. force of arms have now turned their sights on Iran. The same newspaper columnists and professional know-it-alls who imagined that we would have a quick victory in Iraq -- that it would be a "cakewalk," as one of the more arrogant neocons once put it -- are still dominating the official discourse with their calls to action on this front and that. Bill Kristol, the little Lenin of the neocons, who made the Iraq war his vocation, was awarded a coveted pulpit on the op-ed page of the New York Times. Other people are demoted for advocating failed policies, but members in good standing of the War Party are promoted. They, too, are too big to fail.
When the bill comes due, American taxpayers -- and grieving parents and loved ones of the fallen -- will have to pay, while the authors of our suicidal foreign policy get off scot-free.
The war profiteers are not just the arms manufacturers, the Halliburtons, and the "private" international security firms who do the empire's dirty work. Key to the War Party are the intellectuals who gain prestige and real power over policymaking and public opinion on the strength of their reputations as paladins of interventionism. In some cases, these two types are embodied in the same people, Richard Perle being the exemplar.
In any event, what is becoming increasingly clear is that the bailout brothers are all members of the same clan: think of them as a Mafia family, with a strict hierarchy of authority and command, albeit an informal one. At the top is the Don, finance capital, which controls the engine and sits at the dashboard pressing buttons according to a pattern: first inflation, then deflation, boom then bust, peace and then war again. But the bailout boys always parachute to safety before disaster envelopes the rest of us. Which is why failure only emboldens them.
Our rulers really do believe their empire is too big to fail, but of all the would-be lords of creation, our own ruling elite may have the shortest reign -- and the hardest fall. The engine that runs the machinery of imperialism is breaking down at key junctures, and the whole structure is teetering and creaking ominously, as if to presage the coming implosion.
For the truth of the matter is that the very bigness of the American Imperium, the sheer scope of its rulers' ambition, is precisely what is fated to bring about its downfall, and a very messy and painful descent it will surely be. As I relate in Reclaiming the American Right: The Lost Legacy of the Conservative Movement, during Rose Wilder Lane's eye-opening trip to the Soviet Union in the 1920s she met a Russian peasant who predicted, with perfect accuracy, the fate of the commissars some 70 years later:
“‘It's too big,’ he said. ‘Too big. At the top, it is too small. It will not work. In Moscow, there are only men, and man is not God. A man has only a man's head, and one hundred heads together do not make one great head. No. Only God can know Russia.’”
The problem is that some men think they are gods. In the end, however, we will all pay the price for their hubris -- the guilty as well as the innocent -- as the American empire meets the fate of its Soviet predecessor, and for the same reason.
Massachusetts woman sentenced for tax evasion scheme.
A woman was convicted of paying employees "under the table," in cash, in order to evade taxes and the state's workers compensation insurance. The total paid out was an amazing $40 million -- rather a lot to try and avoid detection.
A Dartmouth (Massachusetts) woman has been sentenced to 6 1/2 years in federal prison for paying more than $40 million in cash wages through the temporary employment agencies she ran with her husband in order to evade millions of dollars in taxes and workers compensation insurance premiums. Aimee King McElroy was also sentenced on ... to three years of probation and ordered to pay more than $9 million in restitution.
Federal prosecutors called it the largest under-the-table payroll scheme ever prosecuted in Massachusetts. The scheme resulted in a loss of about $10 million to the IRS and $7 million to insurance companies.
King McElroy and her husband, Daniel McElroy, were convicted in February. Daniel McElroy was sentenced previously to nine years in prison.
Bookkeeper in Maryland money laundering scheme gets two months in jail.
In what sounds like a scheme led by some none-too-bright people, $7 million in cash proceeds from a restaurant business were transferred to personal accounts and then spent. Apparently the proceeds were undeclared profits from the business. The bookkeeper was charged with and convicted of money laundering.
A 69-year-old Wheaton (Maryland) woman who served as the bookkeeper of a multimillion-dollar money laundering scam at a Wheaton restaurant was sentenced ... to two months in jail, a sentence well below the government-recommended penalty of 21 to 27 months.
Consuelo Solano pleaded guilty in June to conspiracy to commit money laundering from El Pollo Rico, a Peruvian chicken restaurant ... that her brother, Francisco Solano, owned. She is also required to comply with a supervised release for three years, eight months of which will be home confinement. ...
Consuelo Solano was the first of four defendants to receive a sentence in the case. While U.S. Attorney David Salem tried to paint her as one of the main players in the multimillion-dollar operation that also involved harboring illegal immigrants, Consuelo Solano's attorneys Marc Hall and Jeannie Cho defended her as a remorseful woman who was obeying the other three defendants.
Consuelo Solano's brother, Juan Faustino Solano, 59, pleaded guilty in June to conspiracy to commit money laundering and conspiracy to harbor illegal immigrants. ... Francisco Solano, 59, of Germantown, pleaded guilty in July to conspiracy to commit money laundering, conspiracy to harbor illegal immigrants and structuring bank transactions to evade reporting. His wife, Ines Hoyos-Solano ... pleaded guilty in July to conspiracy to commit money laundering.
Prosecutors said the defendants employed illegal immigrants at the restaurant from January 1999 to July 2007 and did not list them on wage records supplied to the government. From January 2002 to July 2007, more than $7 million in cash proceeds from the restaurant was deposited in an El Pollo Rico business account and transferred to a co-defendants' personal accounts. Money was used to buy property, jewelry and vehicles.
About $2 million was found in Consuelo Solano's kitchen cabinet after police raided her house with a search warrant, according to attorneys.
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