Wealth International, Limited (trustprofessionals.com) : Where There’s W.I.L., There’s A Way

W.I.L. Offshore News Digest for Week of October 20, 2008

This Week’s Entries : This week’s W.I.L. Finance Digest is here.


The online publication Escape from America Magazine is back after an extended sabatical earlier this year. (Of its sister e-publications, Offshore Real Estate Quarterly has yet to resurface and is "not currently being published," Before You Go is a new non-free offering, and Caribbean Property & Lifestyles has continued publishing without interuption.) This piece details the virtues of Costa Rica, the most popular American expat destination in Latin America, while perhaps brushing off some of the problems a little too quickly. A good introduction nevertheless.

A few months ago I led a group of prospective residents on a tour around Costa Rica. After a week of traveling and attending a series of informative seminars, the majority had decided they would like to live here for at least part of the year. Costa Rica has more Americans proportionately than any other country outside the United States. Why do so many people want to live here?

The most obvious reason is the climate. People are tired of freezing winters, scorching summers and the high utility bills that go with them. In Costa Rica they can enjoy one of the best year-round climates in the world (72° F average in the Central Valley.) We have only two seasons here -- dry and rainy, both with an abundance of sunshine. We rarely need air conditioning and never need heat. Costa Rica has more winter sunshine than Hawaii or Florida and fewer people.

Costa Rica is called by many "the Switzerland of the Americas" due to its neutral political status and spectacular mountains. From the huge, curling waves of the Pacific coast, to the sight of molten rock tumbling down the sides of a volcano, Costa Rica's natural beauty has something for everyone. This unique little country offers a real paradise for the nature lover, the fishing enthusiast and water sports fanatic as well as the retiree.

Many come here for the lifestyle. Costa Rica fits the bill for anyone sick of the hustle and bustle, seeking a more laid-back way of life. One of the tour participants remarked, "Costa Rica reminds me of the U.S. about 40 years ago when everything was unspoiled, unhurried and not crowded." It will also appeal to people of all ages seeking to move to a new and exotic land outside of the States and Canada and the energetic entrepreneur, the burned-out baby boomer, those sick of long rush-hour commutes and anyone seeking an alternative way of life.

This beautiful country is so appealing because it has the warmth and flavor of Mexico, without anti-Americanism and fear of government expropriations; the physical beauty of Guatemala without a large military presence; and the sophistication of Brazil without the abject poverty or endemic violent crime.

But Isn’t It Expensive?

Although much has been written about the high cost of living here, what you spend depends on your lifestyle. If you must have a luxurious home, drive a late model car and buy imported goods, you will spend as much or more than you would in the States. But if you live more like the locals and watch your spending, you will spend considerably less.

Many Americans living below the poverty line in the United States can live in moderate luxury on a modest retirement or investment income in Costa Rica.

The favorable exchange rate and low rate of inflation let you stretch your dollars here. The cost of food, utilities and entertainment are all substantially lower than in the United States.

Costa Rica's affordable medical care is among the best anywhere. The quality of health care is comparable to North America but the prices are one half or less! Considered by many to be the healthiest country south of Canada, Costa Rica has a higher life-expectancy rate -- rumoured to be the third longest in the world (76.3 for men) -- than the United States (76).

Housing is a fraction of what you are accustomed to paying. An American friend just purchased a new three-bedroom home in a gated community in the suburb of Heredia, about five miles from downtown San José, for $155,000. It has a cathedral ceiling, sits on a 350 square meter lot and is very comfortable for three people and a dog.

Besides his home my friend has a car and a full-time maid. Household help makes life easier. (You can hire a full-time maid for as little as $200 per month or $1 per hour.) My friend's son goes to one of the best private schools in the country. He eats out a few times a week and enjoys various types of entertainment. He also spends a week at the beach during Easter and goes to the United States every Christmas. His monthly expenses are about $2700.

The country's inexpensive medical care, affordable housing, excellent transportation and communication networks, every imaginable activity to stay busy and happy, a government which goes to great lengths to make retirement and living as easy as possible, contribute to Costa Rica's appeal and make it tops on the list of retirement and expatriate havens.

According to a survey of potential foreign retirement areas in the Robb Report, Costa Rica surpasses all countries including Mexico, Puerto Rico, Spain, Portugal, Australia, the Caribbean Islands and Greece.

What Sets Costa Rica Apart from Its Neighbors?

Countries such as Nicaragua, Belize, Honduras and Guatemala have lower living costs, but I believe you get what you pay for. The quality of life and lack of infrastructure in those countries leave a lot to be desired. Safety is a concern, especially where paramilitary police have power or where police are corrupt, as in Mexico.

Costa Rica is politically stable and is unique in having no army. Although theft occurs, violent crime is minimal.

A Place to Invest

Costa Rica has a myriad of business opportunities awaiting creative, hard-working individuals. You can run a global business from here by using Internet access, fax machines and cell phones. It is also relatively easy to start a small business on a shoestring. Furthermore, tax incentives and a government that encourages investments and affords investors the same rights as citizens contribute to a propitious business climate. Many countries do not permit non-citizens to own property or place restrictions on foreign-owned real estate, but this is not the case in Costa Rica. Anyone may buy real estate with all the legal rights of citizens. Actually, an investment in Costa Rica today is much better than an investment in California real estate was 30 years ago.

What gets people excited about Costa Rica , however, is that it offers some of the most undervalued prime real estate in the world. In fact, a recent report on CNBC news said that the country has one of the five best emerging real estate markets in the world. There is only so much beautiful beachfront and prime real estate left in the world. When you think that almost every bit of the coastline in the US is becoming overcrowded and overpriced, Costa Rica seems like a bargain. Passive investors will find CDs, second mortgages or other investments that generate good interest rates.

With the new millennium upon us, a shrinking world due to better communication, a burgeoning global economy—possibilities are unlimited for doing business in Central and South America. Trade pacts between Costa Rica, U.S., Mexico, and South America are a reality. They promise to link all of the nations in the hemisphere into one powerful trading block.

Costa Rica's current prosperity is being fueled by the emigration of affluent baby boomers from around the world seeking their own piece of paradise and the same engine that fueled the growth in California for the last 30 years, technology. When Intel decided they needed more capacity, they looked all over the western hemisphere and chose Costa Rica for the very same reasons you will.

Word is getting out about Costa Rica. And that is why now is such a good time to invest.

The Adventure of Starting Over

Some move here to start over and seek adventure in an exotic land. They are tired of dead-end jobs or the rat race and want new challenges, a chance to pursue their dreams and achieve greater personal growth. As an expatriate, you have the challenge of immersing yourself in a new culture and, if you choose, the rewards of learning a foreign language. Newcomers can make friends easily because foreigners gravitate towards one another.

Adjustment to a new way of life can take many months. However, an open mind, a positive attitude and a willingness to seek out new experiences can make the transition relatively painless.

Costa Rica has come a long way in the last decade. Satellite and Direct TV, private mail service and the Internet make it easier to stay in touch with family and friends in the United States and keep up with what is going on all over the world. If you do not own a computer, you can go to an Internet café.

A friend of ours, a 20-year resident of Costa Rica, said, "My days are so filled with exciting activities and interesting experiences that each day seems like a whole lifetime. I really feel that I have discovered the fountain of youth."

You will never be bored here unless you choose to be. Costa Rica has "something for everyone and everything for someone." In the Tico Times, the weekly English-language newspaper, you can find hundreds of interesting activities: movies in English, support groups, computer and bridge clubs. You name it, and Costa Rica has it.

Living in Costa Rica can open the door to a new and exciting life. Who knows? You may never want to return home.

Costa Rica: A Home Buyer’s Guide

If you decide to move to Costa Rica and buy a property, be prepared, and be warned. Things are not the same as back home, along many dimensions. The following home buyer's guide constitutes a warning against making a quick decision or, in case you decide to build, trying to do things on the cheap.

Must-reading also is the posting in next week's Offshore Digest which addresses Costa Rica's sometimes notorious problem of squatter approprition of land.

In order to understand the housing purchase process in Costa Rica, you need to know what is required of you and everyone else you need to associate with to insure your real estate transaction is completed properly. In Costa Rica, things that can cause stress and end up costing you more money are not predictable problems a foreigner could have anticipated based on the knowledge they may have acquired elsewhere. The following guidelines will help you understand much of what you need to know and help you determine how much you can afford as well as to knowledgeably determine the things you should look for in Costa Rica.

If you prepare your own list from the following options, you or your agent will be able to locate the most suitable residence in the least amount of time. ...

If you have not spent much time in Latin America, you may not initially notice the lack of amenities that you have taken for granted your whole life. Many times after a foreigner has purchased a residence, and had the time to live in it for a while, they then realize the amenities that are missing. Such as: Additional things to look out for: ...

In Costa Rica, the things that can cause delays and end up costing more money are not predictable problems a foreigner could have anticipated based on the knowledge they may have acquired elsewhere. Here you must work with entrepreneurial instincts and an entirely different set of guidelines that are not taught in a school. This hands-on knowledge is acquired from understanding the language, culture and how the local subcontractors conduct business.

It is also prudent to align yourself with an experienced builder who keeps up with the new more efficient construction materials and their proprietary installation techniques.

Here are some of the problems I have discovered while constructing housing in Costa Rica during the past 15 years.

Many problems are a result of the intense ultraviolet rays of the sun. Day in and day out this natural solar energy is prematurely wearing down the surfaces of many exterior installations. For instance: Other unforeseen problems with construction in Costa Rica are many times the result of inexperienced tradesmen using foreign building products that they are not familiar with. One of the biggest problems with these modern products is that they have specific installation procedures that the Latino tradesmen do not understand. If the manufacturers recommended installation procedures are not followed, the products fail and the guarantee is worthless. A knowledgeable builder who has experience with modern building materials and their proper installation techniques can properly train his Latino tradesmen to install these products according to the manufacturer's recommendations.

Using the wrong materials and/or improper installation procedures, can result in very expensive repairs that usually have to be absorbed by the owner. ...

There are many excellent Latino architects and contractors here, who are capable of building up to international standards if given a sufficient budget and time. The problem is that the average construction worker and the supervisors who perform the hands on work here are accustomed to building using traditional local methods. Modern construction materials and their proprietary installation methods are not understood by the vast majority of the local professionals and tradesmen who install the building materials here. In order to achieve quality standards the local tradesmen need to be trained and supervised constantly by an experienced builder who understands their culture and language. ...

Plan your legal strategy before you invest here. Make sure you fully understand and accept everything you will need to conduct business in Costa Rica. Do not do anything you would not do in your hometown. Many foreigners seem to believe they can outsmart the system when they come to a less developed country. The legal system in Costa Rica is Napoleonic, not Common Law, so legal matters here are different from North American and European laws.

Always hire your own attorney and never use the seller's attorney. Some folks, who are trying to save money, avoid the work of finding a qualified attorney to represent their best interests. There are many attorneys in Costa Rica and several of them will be recommended to you by others. You can find a wide range of attorneys; those who work at big law firms, with USA type hourly fees, to solo practitioners. Once you have made your decision, call the Costa Rican Bar Association and inquire if the attorney you like is in good standing. Finally, ask the attorney to provide a document that describes all the services to be provided and the method that will be used to charge and pay the legal fees.


The October issue of the online e-zine Caribbean Property Magazine has a "country focus" on the Dominican Republic. A principal claim is that the DR is now "the largest developing economy in the Caribbean and Central America" (presumably Mexico is not included in Central America in this calculation). In any case the country's economy has been moving forward at a decent pace.

The question is to what extent U.S. economic problems will spill over to the Dominican Republic, and everywhere else in the Western Hemisphere for that matter. This will be a major ongoing consideration for all those considering emmigrating abroad for some time to come, and it will not be answered instantly.

Despite a decade of little to no growth in the Dominican Republic's economic sector during the 1980s, business began booming in the mid ‘90s propelling the country's economy into an average expansion rate of 7.7% per year. This trend continued from 1996 to 2000 and helped to secure the country's position as having the largest developing economy in the Caribbean and Central America.

The Dominican Republic's economy is 58.5% free -- which makes it the world's 87th freest economy. Its overall score is 0.9% higher than in 2007, partially reflecting improved business freedom, labor freedom, and monetary freedom. Despite previous setbacks which affected the economy in the ‘80s, this nation has progressed incredibly and continues to do so.

The Dominican Republic owes much of its success to the adoption of sound macroeconomic policies in the early 1990s and to creating greater openings for foreign investment. Tourism (the leading foreign exchange earner), agriculture, and trade, are some of the most important sectors in correlation to the economy. Specifically: Tourism

Tourism is by far the most lucrative sector in conjunction to the economy, the revenue from which has increased from US$173 million in 1980 to more than US$2 billion by 2000. Successive governments have invested heavily in tourism development, creating upgraded airports and other infrastructure.

Some 2.1 million (foreign) tourists arrived in the country in 1999 ... Most come from Europe, and about 25% originated from the U.S. or Canada. To accommodate the tourists, the country now has almost 50,000 hotel rooms, more than any other Caribbean country. About 50,000 Dominicans are directly employed in this sector, mostly working in hotels, and another 110,000 are indirectly employed as taxi drivers, tour guides, or tourist-shop staff.

Most tourists visit the Dominican Republic to experience its beautiful beaches and vacationer friendly resorts. The country's gorgeous white sand beaches are widely celebrated as being among the world's best. There is an expanding ecotourism and outdoor activity sector centered around the country's mountains and wildlife which has grown to be another luring attraction and major income producer.

Since 1962, the Dominican Republic has led the Caribbean in the preservation of sensitive inland and coastal ecosystems through partnerships with leaders like the Nature Conservancy, the United Nations, the Smithsonian and numerous others to establish powerful environmental protections. The nation's preserves and sanctuaries are a vital tourism draw to DR's fabled lush green surroundings.

The government's constant dedication to preserving the island's environment makes eco- and adventure-tourism in the country remarkable and exciting, as the natural beauty of the island can be viewed most everywhere. Minister of Tourism, Francisco Javier Garcia commented, "By setting aside 20% of our land for preservation the DR has taken a very systematic approach to ensure our natural beauty remains unspoiled. This dedication has led to the development of 83 protected areas including 19 national parks, 32 natural monuments, 6 reserves and 2 marine sanctuaries."

In the DR, ecotourism opportunities connect visitors with the environment in sustainable ways granting access to the unimaginable beauty of the land. The Whale Sanctuary in Samana provides safety for 3,000 to 5,000 breeding humpback whales each winter.

In addition to coastal protections, the DR's plentiful national parks located inland boast such sites as the highest and lowest geographical points in the entire Caribbean. In the Southwest Region, Lake Enriquillo in Cabritos Island National Park, is the largest salt water lake in the Caribbean, and the lowest point at 144 feet below sea level.

American Crocodiles, flamingos and iguanas find a haven here, and add to the diverse scenery that awaits those traveling to Cabritos Island at the center. Just north, Armando Bermudez National Park is the source of 12 of the country's most important rivers, as well as the four highest peaks in the Antilles.

As the highest point, Pico Duarte at 10,128 feet above sea level offers brave climbers an eclectic mix of plant and wildlife to view as they make their way to the top. Both of these areas offer adventures and activities that will get adrenaline rushing, hearts racing and senses bursting and it is no wonder why the tourism rate is so high and such a lucrative aspect of the economy.


With nearly 30% of the total land area suitable for crop production and about 17% of the labor force engaged in farming, agriculture remains the primary occupation in the Dominican Republic. In 1999, agricultural production grew 0.4% higher than during 1989-91. ... The fertile Cibao Valley is the main agricultural center. ...

After Cuba, the Dominican Republic is the 2nd-largest Caribbean producer of sugarcane, the nation's most important crop. ... Sugar is grown in the southeastern plains, around Barahona and on the North Coast Plain. However, the land is gradually being taken out of sugar production and switched to food crops. Production of raw sugar rose from 636,000 tons in 1990 to 813,000 tons in 1997 but declined in 1999.

Another leading cash crop is coffee. Coffee production in 2001 generated US$11 million and has steadily increased since then. A little known fact about Dominican Republic is it is one of the top 10 major producers and exporters of cocoa in the world. This bean is grown in the Cibao Valley around San Francisco de Macoris. Tobacco is also grown in the Cibao Valley, near Santiago, and serves as a source of revenue for the country.


The Dominican Republic's most important trading partner is the United States (75% of export revenues). Other markets include Canada, Western Europe, and Japan. The country exports free-trade-zone manufactured products -- garments, medical devices, etc. -- and also nickel, sugar, coffee, cocoa, and tobacco.

It imports petroleum, industrial raw materials, capital goods, and foodstuffs. On September 5, 2005, the Dominican Congress ratified a free trade agreement with the U.S. and five Central American countries, known as CAFTA-DR. The CAFTA-DR agreement took affect for the Dominican Republic on March 1, 2007. The Free Trade Zone was created to attract foreign investment.

A Free Trade Zone, also referred to as an Export Processing Zone, is one or more special areas of a country where some normal trade barriers such as tariffs and quotas are eliminated and bureaucratic requirements are lowered in hopes of attracting new business and foreign investments.

Free trade zones can be defined as labor-intensive manufacturing centers that involve the import of raw materials or components and the export of factory products. The Free Trade Zone will offer a number of major incentives through tax, tariff and cost savings to those starting a business or setting up new operations or facilities in the Dominican Republic.

Typically, a "Free Zone" attracts businesses involved in basic manufacturing or assembly of hard goods. It is also more frequently becoming the case that service operations such as call-centers and other administrative activities are recognizing the considerable tax benefits offered by the DR Free Trade Zone.

Some of the advantages offered by Free Zones are as follows: The Dominican Republic's Free Zone specific benefits for anyone starting a business include exemption from: This exemption operates from the day that production/operation commences and applies for a 15 year renewable period. [Import duties are waived on items] the business need to import [such as]: Import duties on all these items are also waived for operations established in the Dominican Republic Free Zone. The Dominican Constitution guarantees the freedom to own private property and to establish businesses. Foreign Investment Law ensures foreign investors the same rights to own property as are guaranteed by the Constitution to Dominican investors.

Public enterprises are not given preference over private enterprises. An area of concern, however, is the legitimacy of property titles. The DR has a history of problems resulting from conflicting property titles. In an effort to combat this problem, the authorities are working with the Inter-American Development Bank to create an electronic database of all property titles within the country. This project will authenticate and reissue electronically generated property titles to owners. It is not yet clear how conflicts between titles will be resolved.

About 500 companies in the DR manufacture goods primarily for the North American market. Situated in 50 industrial free zones around the country, these mostly foreign-owned corporations take advantage of generous tax and other financial inducements offered by the government to businesses that operate within the zones. Approximately 200,000 people, or about 8% of the workforce, are employed in this sector.

They mostly produce clothing, electronic components, footwear, and leather goods, which are then assembled. The raw materials or semi-manufactured goods are usually imported duty-free from other developing countries (electronic parts are imported from industrialized Puerto Rico) and put together in the free zones. Products created are cosmetics, pharmaceuticals, textiles, perfumes and foodstuffs. The value of exports amounted to US$1.9 billion in 1996, but the contribution to the trade balance was only US$520 million because many of the basic materials for the free zones had to be imported and paid for.

In addition to Free Zone production there is also a healthy traditional manufacturing sector based on sugar refining, cement, iron and steel production, and food processing. Rum is a significant export commodity, and beer and cigarettes are manufactured for local consumption. Most industries of this sort are located around the working-class perimeter of Santo Domingo and other large towns.

Another reason for the success of the economy is the structure of the labor code, which is fair to employer and employee, unlike labor laws in many Caribbean countries. For instance, the Free Labor Zone laws also ensure the fair treatment of Dominican Republic native workers. The Labor Code establishes a standard work period of 8 hours per day and 44 hours per week and stipulates that all workers are entitled to 36 hours of uninterrupted rest each week. An ample labor supply is available. Most employers have found the local work force competent, trainable, and cooperative. Foreign employers are not singled out when labor complaints are made. Organized labor represented an estimated 8 percent of the work force. ...

The Dominican peso (DOP) is the national currency of the country, although U.S. dollars and euros are accepted at most tourist sites. The peso was worth the same as the USD until the 1980s, but has depreciated. The exchange rate in 1993 was 14.00 pesos per USD and 16.00 pesos in 2000, but it jumped to 53.00 pesos per USD in 2003. In 2004, the exchange rate was back down to around 31.00 pesos per USD.

The U.S. dollar is implicated in almost all commercial transactions of the Dominican Republic; such this is common in high inflation economies. On February 2005, 1.32 USD = one EUR = 29 DR pesos; in October 2005, 1.19 USD = one EUR = 32 DR pesos. As of September 2007 the value of the peso is 1 USD= 0.7006 EUR = 33.430 DOP

Another source of revenue for the country is remittances. Remittances are the transfers of money by foreign workers to their home countries. Money sent home by migrants constitutes the second largest financial inflow for many developing countries, exceeding international aid. Latest estimates vary between IFAD estimates of US$401 billion and the World Bank information from central banks at a more conservative US$250 billion for 2006 and these figures are increasing by almost 30% year on year. ...

There are numerous reasons why many view the business market in the Dominican Republic as promising. As explained above, everything from cheap goods and services to laws specifically created to accommodate foreign investors and business owners reiterate this fact. So if one is looking to do business and needs a port country for trade in the Caribbean, the Dominican Republic should be at the top of your list as it is the place where the sand is always white, the waters is always warm, and business is booming.

The Dazzling Dominican Republic

Two related articles accompanied the one above. This one is a primer on the Dominican Republic's geography and recreational opportunities.

I can truthfully report that after 12 years of travel throughout the Caribbean my favorite island is easily the Dominican Republic. There is just simply no other island like it as no other island offers the plethora of world class activities, upscale resorts and casinos, high-end retail, old-world charm, new-world convenience, dedicated ecotourism -- and all at very reasonable prices. There is something for everyone to truly enjoy in the Dominican Republic.

The Dominican Republic is that rare colorful tapestry of Spanish, French, Haitian, and African influences woven by a rich and storied history. Christopher Columbus described this lush land as "a beautiful island paradise with high forested mountains and large river valleys". This statement is still as true today as it was in 1492. In addition to the comforts of sun, sea, and sand, the Dominican Republic offers an exciting and unique cultural experience that will captivate your senses.

The rest of the article gives summary descriptions of the country's regions, and outlines the many "eco and adventure activities" available in the DR. It also contains a brief promotion of a real estate development.

The Dominican Republic: Real Estate Haven

Still one of most affordable places for tourists and for real estate investors alike.

This article is a primer on buying real estate in the Dominican Republic. The bulk of it covers the nuts and bolts of the purchase/sale transaction process. Those seriously interested should take the promotion of the virtues of DR as a place to buy real estate with a grain of salt, and verify specifics independently.

The lure of the Dominican Republic is not just about beautiful beaches, crystal clear water, luxurious tropical breezes and all of the other things that come to mind when conjuring images of the Caribbean. Actually, numerous other locations do in fact offer the same. However, what differentiates the Dominican Republic is the fact that it is still one of most affordable places for tourists and for real estate investors alike. Tax free banking, property taxes so low they are almost non existent and the ability to live very comfortably on less than $2,000 per month make the Dominican Republic the undiscovered paradise it is commonly referred to as.

The Dominican Republic has been called one of the best and last remaining property bargains in the entire Caribbean. In fact, it may also be one of the very few destinations that can also offer so much in terms of diversity. Metropolitan areas such as the Capital City of Santo Domingo or Santiago, beach resort areas such as Sosua (with the fabulous Infiniti Blu project), Punta Cana, Juan Dolio, Samana, and many others. In addition to incredible beach front resorts, the DR also offers beautiful mountain regions which are often called the Alps of the Caribbean, and boasts some of the highest elevations of mountainous regions. There is an array of different climates and environments to choose from all in existence on the island.

Regardless of whether you prefer the casual beach lifestyle, the cooler temperatures of the mountains, or the nightlife of a modern cosmopolitan capital city, the Dominican Republic has something for everyone. Located on the second largest island in the Caribbean it has more undeveloped and unspoiled beach front property than any other place you can imagine, this is in large part attributed to the DR's valiant efforts to preserve the countries wildlife and natural environment.


New “blacklist” proposed.

More anti-offshore haven rhetoric out of the OECD. In the best "What's ours is ours; what's yours in negotiable" tradition of the Soviet Union, those countries that had previously negotiated a truce with the European Union, such as Switzerland, Luxembourg and Austria, are square in the crosshairs.

Leaders from the Organization of Economic Cooperation and Development (OECD) member nations gathered in Paris on Tuesday (October 21) where a new crackdown on offshore financial centers is expected to be discussed as part of plans aimed at tighter regulation of the global financial system.

The initiative is being led by the governments of France and Germany, and could lead to the drawing up of a new "black list" of offshore jurisdictions still deemed to be "uncooperative" or with tight banking secrecy and confidentiality laws. Switzerland, Luxembourg and Austria -- all jurisdictions with a measure of banking secrecy -- have apparently boycotted the meeting.

From an offshore point of view, the recent rhetoric from the French government concerning the current banking crisis is worrying. Last week, President Nicolas Sarkozy questioned why banks that have received backing from the government should continue "operating in tax havens," while Prime Minister Francois Fillon described offshore financial centres as the "dark pockets" of global finance which should be eliminated altogether.

The OECD launched its campaign against "harmful" tax competition at the turn of the century, naming more than 30 jurisdictions on its blacklist, since which time the majority have been removed after promising to put in place tax reforms that effectively removed the distinction between "onshore" and "offshore" regimes.

Meanwhile, the OECD's Financial Action Task Force (FATF), which was more concerned with anti-money laundering, also placed more than a dozen jurisdictions on its blacklist, all of which have been removed after putting in place legislation which some argue is even tougher than in some onshore countries. Despite this, French Budget Minister Eric Woerth has suggested the need for a new blacklist to be released some time in 2009.

It is thought that about 18 leaders attended Tuesday's meeting, and most are likely to be sympathetic to the Franco-German position. However, the U.S. was notable by its absence at the meeting with the looming Presidential election taking precedence. Nonetheless, Washington is almost certain to support another offshore crackdown in the months and years ahead, whoever is in the White House.

A link to the same essential story is here.

Germany Wants Switzerland “Blacklisted” in New OECD Offshore Clampdown

Following extensive negotiations with the European Union when the EU was instituting its Savings Directive, non-EU member Switzerland and EU members Austria, Belgium and Luxembourg agreed to report interest income recipients' earnings directly to their home countries, or, if the recipient requested, withhold part of the income without reporting his or her identity.

Now, somewhat over three years after the EUSD came into effect, Germany and its fellow OECD members are objecting to allowing any level of protection of client privacy -- such as the withholding alternative above -- by those four countries and also non-European countries which "significantly restrict" access to bank information for tax purposes. They also have noticed that non-interest income is outside their net.

It was always just a matter of time before this kind of attempted expansion happened. Now it is here.

German Finance Minister Peer Steinbrueck said that Switzerland should be placed on a list of tax havens being drawn up by the Paris-based Organization for Economic Cooperation and Development.

The OECD, which currently names just Andorra, Monaco and Liechtenstein as uncooperative tax havens, is preparing a new "black list" and a separate "green list" of countries that are making progress in exchanging information on bank accounts, Steinbrueck told reporters in Paris today after a conference on measures to combat tax avoidance. "Switzerland deserves to be on the black list rather than the green one because its investment conditions encourage some German taxpayers to commit fraud," Steinbrueck said.

Probes into tax evasion began worldwide earlier this year after German tax prosecutors investigated hundreds of people suspected of concealing money in Liechtenstein, a principality next to Switzerland. The U.S. tax department this month proposed new rules to discourage foreign banks from helping U.S. citizens evade taxes after clients of Swiss bank UBS AG were accused of exploiting loopholes to shield $20 billion in assets from taxes.

The Swiss definition of tax fraud is "very narrow," even if the country has made progress, French Budget Minister Eric Woerth told the conference. The OECD's new lists and proposals for retaliation against tax havens are scheduled to be ready in May or June 2009, he added. Tax Evasion Talks

German Chancellor Angela Merkel met with Swiss President Pascal Couchepin in April this year to discuss tax evasion, pledging closer cooperation on tax matters between their relative tax authorities.

"Switzerland has taken account of the results of the conference and presently sees no reason to react," Delphine Jaccard, spokeswoman for the Swiss Finance Ministry, said in an emailed statement. Switzerland "has already made agreements with several states, including Germany" relating to "the exchange of information for the implementation of domestic law of contractual states in cases of tax fraud."

Funds held offshore by individuals or companies to evade taxes or escape from political instability in their home countries is "somewhere between $5 trillion and $7 trillion," OECD Secretary General Angel Gurria said in prepared remarks for the Paris conference.

French President Nicolas Sarkozy, addressing lawmakers at the European Parliament in Strasbourg ... reiterated calls for changes to the treatment of tax havens such as the Cayman Islands and Monaco to be on the agenda for a summit of world leaders to discuss the global financial crisis.

Tax havens offer "unfair competition" because they help "people who earn a lot of money" evade taxes that would finance schools and other infrastructure, Steinbrueck said. That Switzerland, Austria, Luxembourg and Liechtenstein failed to take part in the Paris conference underlines that "we have a problem on our borders."

Luxembourg did not join because it disagrees with the "connection made between banking secrecy and tax havens," Luxembourg Prime Minister Jean-Claude Juncker said in an interview with French TV channel France 2. "We are not obliged to respond to every summons from France and Germany," he added.

Seventeen nations, including the U.K., Ireland and Australia, attended the conference. The U.S. did not participate because of the presidential elections, Woerth said.

The 27 European Union members are trying to agree on new rules for savings. At present, there is an automatic exchange of information on savings income paid to individuals resident in another member state or any other country that has signed the relevant treaty. A preferential transition regime allows Belgium, Austria and Luxembourg to exempt themselves from the information exchange obligation, and instead levy a fixed withholding tax in favor of the country where the taxpayer is resident.

"We are calling for the end of the withholding tax system," which is making "everything opaque," Woerth said. France is getting only €30 million ($40 million) from Switzerland through that system, he said.

The European Commission is scheduled to propose new rules on savings next month. Steinbruck and Woerth said they want exchange of information to apply to a wider range of investment income such as dividends, and to companies and foundations as well as individuals. Treaties with territories including Singapore and Hong Kong must improve requirements on investment transparency, Woerth said.

The German minister said he is considering measures to increase surveillance of German financial institutions which have subsidiaries in Liechtenstein. Germany may limit tax deductions on some corporate spending for companies with links to countries that refuse to sign up to OECD rules on fighting tax evasion.

"If the carrot does not work, we will use the stick," Steinbruck said.

As the old cliché scene from World War II era movies goes, where a Gestapo agent is trying to get a captured enemy spy to disclose information: "We have ways of making you talk!"

Aruba, Bermuda, Isle of Man, Jersey, Guernsey and Netherlands Antilles are making progress in negotiating exchange of information agreements, said the OECD's Gurria. The Bahamas, the Cayman Islands, St. Kitts and Nevis, as well as some Pacific islands such as Samoa, are not meeting their pledge to fight tax evasion, Woerth said. Monaco has a tax treaty with France, though it is seen as a tax haven by other nations, he said.


With the implosion of Iceland's banking system (see immediately below) many UK taxpayers are repatriating (or attempting to repatriate) their funds in order to take advantage of the £50,000 deposit insurance available for domestic accounts. Those making such a move who have undeclared offshore income may discover that they will wish they had taken advantage of an offshore amnesty of sorts previously offered by HMRC, as such undeclared income is highly likely to be revealed.

Driven by the prospect of losing their offshore savings following the collapse of Icelandic savings bank ICEsave, investors' money is being lured back to the UK by the Government's £50,000 guarantee. But with the money's return comes possible pursuit from HM Revenue and Customs (HMRC) over the use of offshore accounts for tax purposes.

Gary Ashford, a tax investigations director at Grant Thornton, said: "The current problems in the global savings market may result in many high net worth individuals moving their funds back to the UK in a bid to seek the UK Government's protection. ... We may well see an increase in retail banks issuing suspicious activity reports as they closely examine the movement of money by investors suspected of failing to comply with current tax legislation."

It is estimated that 70,000 investors have offshore accounts.

In an effort to recoup lost tax and balance its accounts HMRC hopes to catch those who did not disclose funds under last year's Offshore Disclosure Facility (ODF), which raised an estimated £400 million.

The ODF offered a reduced penalty of 10% for the contacted 200,000 people whom HMRC believed to hold offshore accounts. 60,000 registered for the amnesty with only 20,000 ever making a disclosure or paying any tax. Grant Thorton expects the Pre-Budget Report to give a clearer indication of the timescale of the new clampdown.

HMRC has stated its commitment to catching anyone who it feels has not adhered to tax laws. Now with the undeclared funds coming back to UK shores some investors may be getting rather a large tax bill this Christmas.

UK Expats Face Big Icelandic Bank Losses

Expatriates who saved with Icelandic banks offshore still face massive losses despite a promised early part repayment for Landsbanki Guernsey customers and a £50,000 deposit protection scheme for customers of Kaupthing Singer and Friedlander (KSF) in the Isle of Man.

A majority of KSF (Isle of Man) savers held more than £50,000 with the bank and one in 20 held over £500,000, according to a poll of savers by the KSF (IoM) action group, which was set up last week.

Savers with Landsbanki Guernsey are not covered by a compensation scheme, while the likelihood of recovering all their money is uncertain, according to Deloitte and Touche, the administrators. An early payment is in prospect, but will only total 30 pence on the pound. ...

Daniel Herzberg, who set up an action group for Landsbanki Guernsey savers, said: "Naturally this payout will be welcome. But anything less than 100% is not acceptable. Indeed that is the new slogan of our group."

Savers are owed an estimated £120 million in capital and accrued interest. Full repayment depends on recovering deposits from Heritable (another bank within the group), selling commercial loans, a sale of other bank assets, and perhaps goodwill payments from the UK, Guernsey and Icelandic governments.

Mr. Garrard said: "Prospects for further repayments to depositors are good, but there is doubt over the ability of the bank to recover sufficient assets to repay depositors in full."

About a third of the 2,000 Landsbanki Guernsey customers can be classed as expatriates, as they live outside the UK or Guernsey, according to the administrators.

The estimated 10,000 customers of KSF (Isle of Man) remain in limbo. However, an official winding-up meeting has been called for October 24 and should the bank then be declared in default, savers will be covered by the Manx deposit compensation scheme to a maximum of £50,000 per personal customer.

There are also £103 million-worth of liquid funds in KSF (Isle of Man), according to provisional liquidator Michael Simpson of Pricewaterhouse Coopers, which could be used to pay £10,000 per customer. But the total owed to customers is £840 million, according to Mr. Simpson.

People who held deposits in KSF (Isle of Man) through pension schemes, investment bonds, or trusts may not be covered by the compensation scheme as it strictly applies to personal savings. But the Isle of Man government may relax this, if its parliament, the Tynwald, agrees.


Probably trying to forestall a property price crash, the Chinese government has lowered transaction taxes on property, with extra benefits targeting first-time buyers. It is hard to see how this will help much if property prices are substantially overvalued such as they became in the U.S., UK, and various other bubble economies. With the Chinese stock market down 60% or so it would be natural to hypothesize that the property market had sustained a similar dose of speculation, but we will see soon enough.

After years of soaring real estate prices, the Chinese government now finds itself in the rare position of lowering taxes on the cost of buying a house in China as the domestic property market begins to fall victim to the negative economic trends now affecting the globe.

In measures targeting those buying their first home in particular, the Finance Minister has announced that property contract tax will be lowered to 1% on purchases of dwellings that are smaller than 90 square meters. Under current rules, a 1.5% tax is paid on houses smaller than 140 square meters, with a 3% tax levied on other properties. The government has also decided to lift stamp tax and value added tax on property purchases. All measures are set to take effect on November 1.

In another step designed to encourage more people to step onto the housing ladder, the country's central bank has relaxed mortgage lending rules for banks dealing with first-time buyers.

While the real estate market is still relatively buoyant in China compared with major developed economies such as the U.S. and the UK, property price growth has slowed considerable in recent months. Recent figures show that property prices in 70 Chinese cities increased 3.5% year-on-year in September, but this was the slowest rise in three years.

High transaction costs, including taxes, have been cited by the property industry as a major factor in the slow-down and Beijing's move to cut taxes is designed to encourage those on more modest incomes to buy houses, rather than foreign investors, who have largely been to blame for astronomical property price rises in recent years.

Before the credit crunch exploded into life in mid-2006, central and local governments were in fact raising taxes on the property sector in order to avert the potential bursting of a rapidly growing real estate market bubble. For example, Beijing announced in 2006 that the government would begin to actively enforce capital gains tax rules, which up until that point had been easily by-passed by investors. Earlier that year, the Land Use Department of the Ministry of Land and Resources announced plans for a heavy tax on second homes to curb rampant house price inflation and ensure that homes remained affordable for Chinese workers.


A report from the OECD admits that its efforts at social engineering by mucking with its tax codes has become less and less effective over time. The summary of the report shows incipient signs of coming to terms with the reality of this ineffectiveness. Of course, alternative centrally orchestrated policies are hinted at as necessary, as opposed to the tried and true method of getting government out of the way and letting free enterprise go to work.

The OECD has released a new report, titled "Growing Unequal?", in which it analyzes the changes in income distribution and poverty in OECD countries, and claims that tax policy is increasingly less effective as a tool for redistributing incomes. Launching the report in Paris, OECD Secretary-General Angel Gurría said:

"Although the role of the tax and benefit system in redistributing incomes and in curbing poverty remains important in many OECD countries, our data confirms that its effectiveness has gone down in the past ten years. Trying to patch the gaps in income distribution solely through more social spending is like treating the symptoms instead of the disease."

The key finding of the report is that the gap between rich and poor is growing. The reasons for this are given as:

"In most countries the gap is growing because rich households have done significantly better than middle-class and poor households. Changes in the structure of the population and in the labor market over the past 20 years have contributed greatly to this rise in inequality." The report goes on to discuss what can be done to rectify the situation and close the poverty gap, again highlighting that the solution is not necessarily to be immediately sought through manipulation of the tax and benefit systems.

"In some cases, government policies of taxation and redistribution of income have helped to counteract widening inequalities, but this cannot be their only response. Governments must also improve their policies in other areas."


In what looks like irony, many Wall Street and other financial companies now turning to Washington for bailouts have been pioneers and heavy users and purveyors of complex and aggressive tax reduction schemes, some of which were later declared illegal. A typical litany of suspects, including the ever-present and shameless Senator Carl Levin, is making noise about putting a stop to this general practice, although exactly how that would happen is most unclear. How should such a rule read? If you think you might need a bailout in the future, do not take full advantage of the tax code as written?

The apparent irony is resolved if one remembers the primary goal driving the equation is to drain money from everyone else and funnel it to Wall Street and Washington. The bailouts and tax loophole use both serve this goal. Some in D.C. may object that Wall Street is getting too big a cut of the take, but that is a second-order issue.

Some of the financial giants that are turning to U.S. taxpayers for unprecedented assistance have used disputed practices over the years to avoid the payment of billions of dollars in taxes for themselves and their clients, according to tax specialists, court records, and a Senate investigation committee.

American International Group, the insurance giant the U.S. Treasury rescued last month with a cash lifeline that could reach $123 billion, promoted an abusive tax shelter that, when used by AIG and other companies, resulted in an initial loss of at least $3.7 billion in federal tax revenues, according to the IRS.

Bear Stearns, a recipient of $35 billion worth of taxpayer backing this spring, sold a tax-avoidance plan to corporate clients involving real estate trusts that would have resulted in tens of billions in lost tax revenue had the IRS not discovered it and shut it down in 1997. And the biggest client to sign up for it was Freddie Mac, the mortgage giant taken over by the government last month.

"I think it is ironic that they need to be bailed out by the very same taxes that they did not pay," said Reuven S. Avi-Yonah, director of the international tax program at the University of Michigan Law School.

Many tax specialists argue that large corporations should be expected to devise new ways to avoid taxes, just as the IRS is expected to find new ways to close tax loopholes. But in this new climate of economic crisis, as teetering firms rely on billion-dollar government lifelines, some members of Congress argue that the government should use its new leverage to get the companies to promise to give up some of their tax-avoidance practices.

"The public cannot accept, and the country cannot afford, financial institutions that pocket taxpayer dollars while peddling tax dodges," said Senator Carl Levin, a Michigan Democrat who chairs a Senate committee that investigates questionable tax-avoidance practices. Last month, Levin's committee released a 77-page report that accused top Wall Street firms of helping offshore clients to avoid paying millions in taxes on U.S. stock dividends using a series of complex offshore equity transactions.

One such product enables a foreign investor, often an offshore hedge fund, to avoid taxes by "loaning" its stock to another foreign entity. When the stock pays a dividend, the foreign entity that "borrowed" the stock will pay the investor a "substitute dividend," which they claim is not subject to U.S. tax.

The list of companies that sold these financial products reads like a Who's Who of Wall Street firms that are eligible to seek assistance through the new bailout package, which gives the Treasury wide latitude to buy the troubled assets of financial firms.

Merrill Lynch, which is selling itself to Bank of America, estimated that its stock loan program resulted in a loss to the U.S. treasury of between $20 million and $50 million a year during the two years that it operated, according to the committee report.

Citigroup engaged in similar transactions, but later voluntarily paid the IRS $24 million in back taxes for those trades, according to the report. The Treasury Department plans to invest $25 billion each in Citigroup and Bank of America. ...

Lehman Brothers Holdings Inc., which collapsed last month, estimated its clients avoided paying as much as $115 million in dividend taxes in 2004 alone, using similar offshore financial products, the report said. Mark Herr, a spokesman for Merrill Lynch, said, "We believe we acted in good faith when we advised our clients and..Lehman could not be reached for comment.

Levin's committee estimates the total loss to the U.S. treasury from all offshore tax-avoidance plans at $100 billion a year. Levin said those who seek the U.S. government's help should end the equity swap transactions. ... Levin voted in favor of the bailout package, despite the fact it did not include a measure to curb equity swaps. A congressional aide said it was not possible to work the measure into the bill.

Some observers of Wall Street say the government should not balk at helping companies that have sought to avoid taxes, because government assistance is aimed at rescuing the economy itself, and because companies have a duty to their shareholders to cut costs.

"Every single company does their very best to avoid paying taxes," said David Schiff, an independent insurance analyst who writes Schiff’s Insurance Observer. "People are always going to be a step ahead of the government."

But others say the culture of aggressive tax avoidance has grown too rampant, and that now is a perfect time to cut it back. "When this tax-avoidance culture started in the early 1990s, it was new," said Avi-Yonah. Prior to those years, he said, "most big American corporations perceived tax as a [necessary] cost rather than a way of making a profit."

As globalization opened up the world to more competition -- and to the possibility of operating in no-tax jurisdictions -- companies began to develop more aggressive ways to save on taxes. Between 1997 and 1999, corporations reported paying an average tax rate of 34% -- just below the 35% corporate income tax rate, according to a study by Martin Sullivan, an economist with Tax Analysts, a Virginia-based nonprofit publisher of tax information. But from 2004 to 2006, corporations paid taxes at a rate of 30%, he said.

In recent years, a long list of firms have been in the headlines for aggressive tax avoidance. In 1997, Bear Stearns made news for pioneering so-called fast pay preferred-stock deals, which created real estate investment trusts to give corporate borrowers tax advantages. Freddie Mac invested $4 billion in such a deal with Bear Stearns before the IRS shut down the loophole, saying it posed significant losses for the U.S. Treasury. ...

In 2007, the U.S. Court of Federal Claims ruled against two brothers who purchased an abusive tax shelter known as "Son of Boss" from AIG in 1999. The shelter, which was similar to a previously outlawed shelter called Bond and Option Sales Strategy, or BOSS, earned AIG $1 million in fees for that deal alone, and helped the brothers create an artificial loss of $40 million that improperly lowered their taxes.

AIG was not a defendant, but documents in the trial describe how the insurance giant marketed and sold the scheme, which became one of the most widely used abusive tax shelters. IRS officials have collected at least $3.7 billion in back taxes paid by 1,200 individuals who used Son of Boss, but hundreds of others have not paid. ...

Although experts say the rescue package passed by Congress does little to stop firms from sidestepping taxes, many also believe the coming months will be filled with talk of tightening tax laws, as the Treasury runs low and the government racks up debt.


FedEx (somewhat to our surprise, it appears that the old Federal Express corporate name has been entirely changed to its old nickname) drivers are legally classified as independent contractors by FedEx rather than employees, notwithstanding that they do not really have an independent work life apart from what FedEx commands. The IRS objected because that results in lower tax payments. FedEx has won the battle, at least when it comes to the 2002 tax year, which goes to show the benefits of having an extensive (and expensive) phalanx of lawyers on your side.

International package delivery company FedEx has announced that the IRS has withdrawn a demand for $319 million in back taxes, penalties and interest relating to the classification of its drivers as independent contractors.

The company said in a regulatory filing on October 22 that the IRS has rescinded its "tentative assessment" of tax and penalties for the 2002 calendar year against FedEx Ground Package System Inc., a wholly owned subsidiary of FedEx Corporation, relating to the classification of FedEx Ground's owner-operators for federal employment tax purposes. However, FedEx said that the IRS is continuing its employment tax audit of FedEx Ground for the 2002 calendar year.

"We are engaged in discussions with the IRS audit team regarding this matter," the company's filing with the Securities and Exchange Commission stated. "We continue to believe that FedEx Ground's owner-operators are independent contractors and that no loss is probable in this matter," the filing added.

Last December, FedEx revealed in another SEC filing that the IRS had concluded that its ground drivers, who number about 15,000, should be re-classified as employees rather than as contractors to the company.


Huge entitlements are the real threat to the U.S.

The cascading financial crisis has been dominating headlines the last few months. The dramatic bailouts of Fannie Mae and Freddie Mac, AIG, et al, and the notorious $700 billion bad loan fund sound large. A trillion here ... a trillion there ... pretty soon you are talking real money.

The fact is that even if the worst-case estimates of those expenditures come to pass, their total is dwarfed by promised entitlements to retirement and medical benefits for future generations of retirees. This has been pointed out many times by many, and been met with indifference each time -- probably because the numbers are too big for the human mind to take in.

Add it up, if you dare: $30 billion to facilitate JPMorgan Chase's embrace of Bear Stearns; $85 billion for AIG; $200 billion for a federal conservatorship for Fannie Mae and Freddie Mac; $700 billion for buying bad loans, bad loan securities and stock in bad lenders; $100 billion of pork-barrel spending tacked on to the bailout bill to win swing votes; another $37 billion for AIG; $20 billion for the national flood-insurance program. And the Federal Reserve has expanded the money supply by something like $1.2 trillion, though we cannot say where it has gone.

Add the bailouts not yet borrowed: Virtually unlimited deposit insurance for banks and money-market funds; $50 billion or more for car companies; a similar sum for their pensioners; covering the new holes in the federal Pension Benefit Guaranty Corp.; Treasury guarantees that back the mortgages that Fannie and Freddie and the Federal Housing Administration own or guarantee (where 20% losses could cost $1 trillion).

If we missed some bailouts, no matter. We can be sure that in the past few months, the U.S. government has put itself in further hock to the tune of at least $1 trillion or maybe $2 trillion or maybe $5 trillion, depending on who does the estimating, who does the administering and who takes the bailouts offered now and in the future.

In Proper Perspective

Americans are likely to ignore the whole mess. They have ignored a much bigger mess that has been growing for decades.

The debts we are creating on the books this year are nothing compared to the debts we already have piled up off the books. Americans owe a great and unaffordable intergenerational transfer, from Generations X and Y and Z to the Baby Boom Generation, then from Y and Z and the as-yet-unnamed next generation to Gen X, and so on.

Even Social Security's much-discussed funding gap is not our biggest problem. All Americans who are working or will be working owe more than $12 trillion to support the present and future beneficiaries of Social Security's old-age and disability pensions. But we have set ourselves up to owe more than $140 trillion for Medicare as it is currently legislated, to pay for most of the medical care for persons over 65 or disabled. Even bigger is the looming cost of Medicaid, which guards the health of indigents. No realistic estimate can be made for the future cost of Medicaid services because its benefits, under the control of state governments, are difficult to evaluate. But its combined costs to federal and state governments have been running 20% greater than Medicare in recent years, so add another $170 trillion.

These figures, derived from the fine print in federal reports, are present values: If the U.S. were able to borrow $322 trillion now and invest the money in private markets at 3% more than inflation, the three big programs would be fully funded forever. Of course, we cannot and will not borrow everything at once, so the eventual cost will be greater.

If We Make It That Far

Another way of looking at the size of the three programs is to consider their costs in a far-off future year as a percentage of that year's projected Gross Domestic Product. Fortunately for our sanity, the trustees of Social Security and Medicare picked 2082, a year when most of us will be safely dead. Medicare will be costing 10.8% of GDP, up from 3.2% of last year's GDP. The Medicare trustees' report, however, cautions that cost estimates for paying doctors are unrealistically low because current law mandates some unlikely pay cuts. A better estimate might be 12% of GDP in 2082. If Medicaid grows like Medicare, that is another 14.4% of GDP. The cost estimate for Social Security is 5.8% of GDP, up from 4.5% last year.

In round numbers, we have promised ourselves that at least a third of the nation's annual output in 2082 will be spent on health care and pensions for the aged, infirm and indigent.

As some Americans used to say to minimize the importance of a much-smaller binge of borrowing, "We owe it to ourselves." So we do, and yet that does not mean that we will pay it to ourselves.

None of these obligations are guaranteed by the full faith and credit of the U.S., such as it may be. When their size becomes clearer, Americans will have to face their government head on. We have trusted political promises that do not add up.

With Fingers Crossed

If all goes really well, the Great Bank Bailout may add less than a trillion dollars to the debt of the country. Some of the assets and shares of questionable value may be sold eventually at higher prices than the Treasury will pay right now. That does not seem likely at this point, since the essence of a bailout is to pay the price the seller needs to receive, rather than to drive a hard bargain and pay the least the seller will accept. Hard bargains are available in the free market.

If all goes very badly, not just in banking but in our silent entitlement crisis, a cost of trillions of dollars will be insignificant compared to the cost to the dollar of all our money-creation. When Germany had to pay reparations to the Allies after World War I, it effectively paid in marks printed for the purpose.

At first, the inflation created a boom. German workers, blinded by what John Maynard Keynes later called "money illusion," produced as if they were being paid in old marks, rather than in new marks that were quickly losing value. Germany could export the goods thus produced and pay Britain and France their reparations in gold. Later, of course, people refused to work for worthless money.

As our founder, Clarence W. Barron, said in the first issue of this magazine, dated May 9, 1921: "A country so highly organized industrially as Germany and with its workers so highly trained under civil and military discipline can for a considerable time force billions of paper into circulation, especially under a unified credit system and government control of transport, rents, housing and food prices."

"For a considerable time" is not forever, and we should hope the U.S. never has such dictatorial discipline.

The U. S. has advantages, also. It has not lost a Great War. It does not owe trillions of dollars to conquering nations -- only to trading partners. We can be masters in our house. We have time and freedom to mend our policies and our finances.


“The Axis of Arrogance” runs amuck.

PrudentBear.com guest commentator Christopher Grey recites a laudry list of items for which we owe "thanks" to our ignorant/arrogant leaders and string-pullers. Among the questions he raises is one that has been gnawing at us during all the debates in Washington about how to "solve" the "crisis": Ron Paul predicted the current disaster years ago. His warnings were not the gloom and doom naysaying characteristic of much of the goldbug/permabear/anarcho-capitalist fringe types, but well articulated and grounded in economic theory and, most importantly, history -- much of it pretty recent at that. So why is everyone still ignoring Congressman Paul??

In a time of universal deceit, telling the truth becomes a revolutionary act.” ~~ George Orwell

How is a meeting of bankers and politicians similar to a country and western song? Afterward, you have probably lost your house, your job, your car, and, with any luck, your wife or husband. Seriously, every time I see "fat cat" bankers and political hacks hard at work trying to "help" me, I cannot sleep at night with the gripping fear that this image brings to mind. Here are just a few examples of the great things Washington, the Federal Reserve, and Wall Street (aka "The Axis of Arrogance") have brought us in the past few years.

1) The highest inflation, and the lowest real interest rates, since the late 1970s. For responsible citizens who work hard, play by the rules, and save their money, these past few years has been one of the greatest transfers of wealth in history from savers to debtors.

2) Record trade and budget deficits that have mortgaged the future of this country and almost guaranteed that your children will have a lower standard of living that you do. No country in history has ever borrowed and spent its way into prosperity. Somehow this basic concept is too difficult for our financial and political leaders to understand.

3) A historic bubble in housing that made buying a house at the same time totally unaffordable for most people and also incredibly easy due to loans that required no income, assets, documentation, or credit. The aftermath of this bubble is now forcing millions of homes into foreclosure, penalizing whole neighborhoods for the irresponsible behavior of those among us who were suckered into the mania either because of greed or ignorance.

4) An enormous credit bubble in toxic derivatives, credit default swaps, and collateralized debt obligations that has lead to a near total destruction of our private banking and insurance system, has frozen credit markets and our credit dependent economy, and thereby forced even more government intervention, at least in the short run. There is no telling what other unintended disasters will result from this latest round of attempts at central planning.

5) A hedge fund bubble that made a few star investment managers wildly rich and is now contributing to the most extreme stock market collapse since the 1930s as investors rush to the exits after waking up to the reality that a hedge fund is simply a highly leveraged speculation game with other people's money.

6) A shameful and transparent effort to cover up the obvious insolvency of Citigroup and Morgan Stanley by requiring all of our country's largest banks, even the one who did not need or want the money, to take similar preferred stock investments from the government. Do they really think that anyone is fooled by this stuff? All this kabuki theater does is further erodes any remaining credibility of regulators and government officials in the eyes of market players.

7) A vicious exit from mortgage debt, driving up mortgage rates for homeowners and buyers in an already severely distressed housing market, that was a direct result of the government's recent announcement that it was effectively guaranteeing unsecured bank debt. Sorry Hank (Paulson) and Ben (Bernanke), this central planning stuff is harder than it looks. Stalin and Mao could not make it work, and they had people at gunpoint. What makes you think that you guys can pull it off? Nothing but sheer arrogance and ignorance.

8) The worst market for corporate and municipal bonds in decades caused directly because the government allowed Lehman to go bankrupt instead of placing it in a conservatorship like the GSE's (Fannie Mae and Freddie Mac). Lehman's bankruptcy created chaos among their bank, hedge fund, broker, and insurance counterparties. This had a cascading effect that led to the near failure of AIG, which was only saved by another extremely costly lifeline from the Feds. Many other large insurance companies, such as Hartford, Prudential, and Met Life, have also suffered extreme collateral damage from this unwinding of Lehman and AIG that is still playing out in the markets.

9) Making matters worse, investors are now running away from even the strongest municipal and corporate credits and flocking to the growing list of investments, such as GSE mortgage debt, bank debt, money market accounts, and deposits, that have virtually unlimited guarantees from the Feds. Way to go Hank and Ben. You saved Citigroup and Morgan Stanley, but you may cause California and other states to have no choice but to either raise taxes during a recession or eviscerate basic services such as police, fire, infrastructure, and education due to lack of funds caused directly by these idiotic and poorly conceived governments actions.

Further, due to the unavailability of typical commercial paper, corporate debt, and DIP (debtor in possession) financing, tens of thousands of people may now lose their jobs. Even many healthy companies, such as General Electric, will have no choice but to severely downsize, and weaker companies will be forced to liquidate rather than restructure. All of this is a direct result of government constantly changing the rules and picking winners (big banks, GSE's, automakers, and Wall Street) and losers (everybody else) instead of establishing clear rules and providing liquidity on a priority basis to those entities that were most essential to maintaining basic services and productive jobs at real businesses on Main Street rather than to those businesses with the best lobbyists and political connections.

10) All of the arrogance and ignorance on Wall Street and in Washington has created an entire generation of Americans that now sees the stock market, credit markets, and housing markets as rigged. This cynicism is justified by the events of the past few years, but it will probably take decades to be forgotten. During that time, all of us will suffer from the general public's unwillingness to believe that capitalism can work for regular people instead of just the insiders and the "fat cats." What does it say about confidence in our markets that some of the most sophisticated investors in the world, such as SAC's (billionaire hedge fund manager) Steve Cohen, have recently gone almost entirely into cash?

People on Main Street in this country are now so desperate for a way out of this financial mess that they will believe anything, even the emptiest political rhetoric that promises nothing more than a free lunch. Unfortunately, there is no free lunch. That is exactly the kind of thinking that got us into this mess in the first place.

The way out of this mess involves sacrifice and character, which needs to start at the top. Executives, investment managers, regulators, and politicians need to demonstrate competence and take responsibility for failure. Why do Hank and Ben and Chris (Cox) still have their jobs? Why are people not burning an effigy of Alan Greenspan in the street? Why is everyone still ignoring Congressman Ron Paul, one of the very few politicians who predicted this disaster many years ago and tried, without success, to stop it from happening? Why are people not listening to responsible career regulators like Sheila Bair at the FDIC and David Walker, former head of the Government Accounting Office? This country needs more hedge hogs (workers) and fewer peacocks (show offs). We need to start saving again. We need to stop borrowing so much money. We need to start creating more goods and services that people at home and all over the world want to buy. That is what makes a great country. This is not rocket science, but it is also not easy. It is not fun. It will be a painful and slow process of reorienting the economy away from borrowing, spending and speculating and towards saving and producing, but if we do not start changing our profligate ways our problems will continue to get worse.


Since we have learned nothing from history, we are about to repeat the very mistakes that lead to the most dire economic circumstance of the last century.

Why was the Great Depression of the 1930s so brutally prolonged? Peter Schiff offers a compact summary of the Austrian Economics explanation, which has direct implications for today.

According to the Austrians, the artificial credit-fueled boom of the 1920s (sound familiar?) led to a large mass of "mal-investments" -- investments which were unprofitable except under the unsustainable conditions that prevailed during the bubble. Once the bubble popped, and its end was announced for all the hear by the stock market crash in the fall of 1929, the asset owners could no longer pay their creditors on the original terms. The bankruptcy courts could go into overdrive and sort out who would end up as the new owners of claims on the assets. It might take a while to clean up the mess given the extent of the excesses that created it, but there is no reason to think the process of adjusting to new economic realities would have taken longer than a year or two.

The current stock market crash has spurred a vital national debate about the causes and catalysts of the Great Depression. The dominant school of thought believes that the stubborn refusal of then president Herbert Hoover to intervene after the stock market crash of 1929, and his preference for free market solutions, led directly to the ensuing decade-long catastrophe. Through this lens, our leaders assure us that the most recent raft of government measures will prevent another episode of bread lines, Hoovervilles and pencil salesmen. As usual they have it completely wrong. In my view, the Depression was created precisely because Hoover followed the path that our government is now taking.

When the stock market bubble of the Roaring Twenties (which was created as a result of the loose monetary policy of the newly created Federal Reserve) finally popped, Hoover would not allow market forces to correct the imbalances. His policies were aimed at propping up unsound businesses, artificially supporting prices, particularly wages, and providing federal funds for public works projects. These moves went well beyond the progressive reforms of Teddy Roosevelt, and established Hoover as the most interventionist president ever up to that point. In fact, much of what eventually became the New Deal had its roots in Hoover's policies.

However, at the time, there were those who recommended a different course. Andrew Mellon, the long-serving Secretary of the Treasury whom Hoover had inherited from the prior two Republican Administrations, was labeled by Hoover as a "leave it alone isolationist" who wanted to "liquidate labor, liquidate stocks, liquidate the farmers, and liquidate real estate." Hoover would have none of it. In fact, during his nomination speech for a potential second term, Hoover bragged "We determined that we would not follow the advice of the bitter liquidationists and see the whole body of debtors of the United States brought to bankruptcy and the savings of our people brought to destruction."

Hoover chose to ignore the sound advice of his Treasury Secretary (in contrast to today where the current Treasury Secretary Henry Paulson is actually leading the charge over the cliff) and instead used every tool at his disposal to "fix" the problem. As a result, rather than allowing a recession to run its course, with healthy and rapid liquidations of the mal-investments built up during the boom, Hoover inadvertently created what became the Great Depression.

When Roosevelt took office he continued the same failed policies only on a grander scale. The magnitude and the idiocy of many New Deal programs, such as the wage and price setting National Recovery Administration (NRA), compounded the problems. So while Mellon's advice would have caused a sharp but relatively brief economic downturn (which occurred after the Panic of 1907, for example), the Depression plodded on for nearly a decade until the country began gearing up for the Second World War.

In an amazing feat of revisionist history, somehow Hoover's interventionist policies have been completely forgotten. It is taken as fundamental that his inaction led to the Depression and Roosevelt's "heroics" got us out. Unfortunately, since we have learned nothing from history, we are about to repeat the very mistakes that lead to the most dire economic circumstance of the last century.

A major difference however, is that the structure of the U.S economy today is far weaker than it was in the fall of 1929. Years of reckless consumer borrowing and spending, and enormous trade and budget deficits have resulted in a hollowed out industrial base and an unmanageable mountain of debt owed to foreign creditors. Instead of the support of a strong currency backed by gold, the public now must deal with a modern Fed free to print as much money as politicians want. So rather than getting the benefits of falling consumer prices (as happened during the Depression), consumers today will contend with much higher consumer prices, even as the economy contracts.

With Barack Obama now waiting in the wings to conjure a newer New Deal, far larger than even FDR could have imagined, and at a time when we cannot even afford the old one, this will not be your grandfather's Depression. It may be much worse.


ABBA Songwriter Wins Swedish Royalties Case

Songwriter Bjorn Ulvaes, one of the "B's" in the pop music group ABBA, put the copyrights to his songs in an offshore company, hoping to avoid the extortionate tax rates of his native Sweden. The Swedish Tax Authority maintained the legal structure was a "sham." Details of the Swedish government's argument are not provided. In any case, a Swedish court ruled in Ulvaes's favor on all counts, thereby saving him a $12 million judgement.

Bjorn Ulvaes, previously a member of ABBA and "Mamma Mia" (the musical and the song) writer, has won an appeal against the Swedish Tax Authority. Ulvaes has battled the authority for several years over the amount of tax due on royalty income received on his behalf, primarily earned from ABBA recordings.

The case centered on a company structure that Ulvaes had set up to pay him the royalties. Swedish authorities alleged that song royalty deals Ulvaes was involved in were shams to shelter them from being taxed as personal income at a higher rate of tax.

While royalties can be paid out to the copyright holder in person, many artists both in Sweden and abroad choose to transfer the rights to a company to mitigate tax liability.

Stockholm's County Administrative Court ruled in the musician's favour on all counts, allowing Ulvaeus to retain SEK85 million ($12 million) that the Swedish Authorities claimed it was owed in taxes, interest and charges. Relieved and $12 million richer, Ulvaeus said that he hoped the judgment would help others in the industry facing similar problems at the hands of the tax authority.

Gold Futures Market Launched in Hong Kong

In major corrective mode or not, gold's heightened volatility has drawn speculators like bees to honey. As Hong Kong Exchanges and Clearing Limited chairman Ronald Arculli noted, this creates an ideal environment to launch a gold futures market -- which Asia had previously lacked.

Hong Kong's gold futures market will provide a deep liquidity pool in the Asian time zone to facilitate price discovery and risk management, Hong Kong Exchanges and Clearing Limited chairman Ronald Arculli says.

Speaking at the gold futures launch ceremony on Wednesday (October 22), Arculli noted that it was an ideal time for the launch due to the rising public interest in the commodity and its greater price volatility.

The gold price has doubled in the past five years, while the annualized 30-day volatility jumped to 50% in August from 10% over a year earlier.

Mr. Arculli said gold futures trading will enable investors to guard against unexpected moves in the international gold market, and capture trading opportunities.

"Hong Kong is the Mainland's largest trading partner for gold, which accounts for 20% to 30% of Asian gold exports, making it an important trading hub," he observed. He also reminded investors to understand the commodity, its risk and the unprecedented volatility in the market before making investments.

Cayman Islands Regulator Reassures Public Over Retail Banks

The Cayman Islands Monetary Authority (CIMA), if its claims are accurate, did a credible job in its regulatory oversight by preventing its retail banks from participating in the worldwide credit bubble while it was happening. CIMA says the Caymans' retail banks did not make subprime loans. If this means they generally avoided the vast array of flakey credits in general, in addition to the mentioned subprime mortgages, we are reasonably impressed.

In light of the current international financial crisis, the Cayman Islands Monetary Authority (CIMA) has reassured the public that their retail banks are subject to "robust and strict regulatory oversight."

According to CIMA, in recent years the Islands' banks remained relatively conservative in their lending practices, with subprime loans not a feature of their domestic banking system. This has led to minimal losses with the banks remaining liquid and well capitalized.

"The regulatory environment in which Cayman's retail banks operate is very strong and there is reason for confidence in the banking system," the regulator stated.

As a result of the international financial crisis, CIMA's meetings with local banks have increased. CIMA added that confidence remains high in the Island's banks with capital position in excess of the minimum requirements.

British Virgin Islands Confirmed as a “Top Financial Center”

The BVI retained its #29 ranking this year among the global financial centers, as ranked by the City of London.

The British Virgin Islands has reaffirmed its place as a "top financial center" in terms of regulation and taxation, according to the City of London's Global Financial Centers Indexes. The British Virgin Islands maintains its place at 29th this year with an increased rating of 10 to 584. The BVI has also been placed among the world's most stable finance centers, just behind jurisdictions such as Zurich, Hong Kong and the Isle of Man.

The report notes: "Offshore and niche centers continue to grow in importance. ... The regulatory environment (which includes taxation) is still seen as the single most important factor in a center's competitiveness." The report cites speed of decision-making and a coherent regulatory regime as increasingly important reasons why relatively small financial centers are very competitive.

In a press release released by BVI earlier this month, the BVI Financial Services Commission said: "In these challenging times, it is good to know that practitioners across the world continue to view the BVI as a leading global finance center. ... As the global index shows, the BVI's good regulation continues to enhance our reputation among professionals. We are committed to doing what is needed to meet international standards, concerns and expectations while remaining competitive."

Dominica Tax Reform Enters Second Phase

Caribbean island nation Dominica, best known for its amazing scenery and its reasonably inexpensive second passport/citizenship program, has lowered the rates within its progressive income tax system slightly and has raised the income level at which taxes are first owed. The new level will diminish the number of people on the tax roles by 585 out of a total population of 70,000 or so.

The Government of Dominica has released the second phase of its tax reform after the Income Tax (Amendment) Act 2008 was tabled in parliament earlier this week.

In the 2007/2008 Budget Address, Prime Minister and Minister for Finance, Roosevelt Skerrit, revealed the first phase of a comprehensive income tax adjustment programme, expected to take three years to fully implement. ...

As a result of the amended reform, effective from January 1, 2009, Dominica's citizens will experience increases in the non-taxable allowance from a previous $18,000 to $20,000, and reductions in tax rates as follows: The second phase of the income tax adjustment will result in 585 residents no longer paying income tax.

According to the Ministry of Finance and Social Security, the total cost of the second phase of the income tax adjustment is $9.7 million for the full fiscal year.