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

W.I.L. Offshore News Digest for Week of November 3, 2008

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


The market, community, civic and religious organizations, non-profits, businesses, and individuals working for their own dreams create social peace. Politics does the opposite.

As the great election circus draws to a close, finally releasing the clowns to get down to the serious business of picking our pockets, let us step back and acknowledge a fundamental reality of human existence. Beyond the fact that the differences between the two major candidates are small, politics is inherently incapable of resolving differences among people productively and morally. Quite the opposite. Politics enforces the dictates of a few so-called representatives down the barrel of a gun. Nobody has the option of simply agreeing to disagree and building a good fence in order to be a good neighbor. You will obey. This is not the path to peace or goodwill.

Alternative modes of social organization do promote peace, or at least unarmed truces. These modes have the singular characteristic of being voluntary: the free market and the countless civic and religious organizations which dot our day to day lives. But the state is a jealous god, and will constantly seek to make these organizations serve its interests ... or else. Stalin and Mao overtly suppressed and undermined anything that served as alternative sources of identity to the state. Expect the steady encroachment to continue in America.

As far back as I can remember, presidential candidates have promised unity for a nation torn apart by partisanship. John McCain is the maverick who "reaches across the aisle" to get things done, putting aside the partisan bickering that is supposedly the source of our troubles. Barack Obama famously sermonized at the 2004 Democratic National Convention that "there's not a liberal America and a conservative America; there is the United States of America," and ever since he has promised to bring the country together.

While the candidates talk about themselves as if they can play referee, as if they can heal the nation's wounds and stop Americans from being at one another's throats, the very opposite is true: So much of the division in our society is caused by the government itself, and especially the presidency that is celebrated and heralded constantly but especially every four years at election time.

It is society that brings out the best of everyone's differences and harmonizes them toward mutually beneficial aims. The market, community, civic and religious organizations, non-profits, businesses, and individuals working for their own dreams create social peace. There is no reason why businessmen, workers, entrepreneurs, artists, writers, athletes, plumbers, community organizers, and people of all walks of life, all religions and ethnic backgrounds, cannot coexist in peace and social consonance. The market economy in particular fosters a tolerance and harmony that allow hundreds of millions, actually billions, of people, each with very different interests and hopes, to live together in a world of honest competition and cooperation. The very fact that we are all different brings us together in peace, and society needs no presidents, no rulers of any kind, to experience the wonders of true diversity in an atmosphere of commerce, cultural exchange and liberty.

At his famous "Yes We Can" speech in New Hampshire, Obama said the following words, which speak to our common humanity, and thus have a ring of inspirational truth to them, but nevertheless miss the mark completely as it relates to politics:
[T]he struggles of the textile worker in Spartanburg are not so different than the plight of the dishwasher in Las Vegas ... the hopes of the little girl who goes to a crumbling school in Dillon are the same as the dreams of the boy who learns on the streets of L.A. We will remember that there is something happening in America; that we are not as divided as our politics suggests; that we are one people; we are one nation.
Here we see the grand paradox of the politics of unity. The textile worker and dishwasher share a common human interest, an interest in peace and liberty. They both suffer under an economy crippled by regulation, inflation and taxation. They should indeed be united, despite their politics, but not with the presidential state. On the contrary, they should unite against the state that is their common enemy.

As for the little girl in Dillon and the boy in L.A., who is Obama to say their hopes and dreams "are the same"? One might wish to be a professional musician and the other a doctor. One might want to devote his life to the clergy and the other might want to pursue modeling. Liberty and the market can harmonize their very different dreams and can enrich them both in a world of peace and prosperity. But the presidency is not what brings them together. Indeed, it is politics that amplifies whatever differences they might have into social conflict.

Obama says "we are one nation." This is true in that one national government plagues us all, but aside from that, and the cultural continuity among most people of a nation, there is no magical component to our being Americans that make us "one people" or gives us uniform dreams and hopes that can be addressed and administered by a national central planner. And while, despite many differences, we have much in common, it is the contest over who gets to be that planner that most divides us.

Consider the hysteria we have witnessed over the last couple weeks. Despite the nearly identical programs of both Obama and McCain -- the continuation of the empire, the police state, the corporatist regulatory machine and entitlements, with some superficial differences here and there -- millions of Americans are convinced this is "the most important election" in decades, if not since the birth of the American republic.

Because their two agendas are so similar, every minor difference becomes amplified into a question of immense international importance. Obama prefers a slightly higher tax rate on the highest tax bracket -- thus he is a "socialist" whereas McCain is "laissez-faire." Obama wants to be more conventionally diplomatic while still beefing up the military and sending more troops to Afghanistan and maybe Pakistan and elsewhere, and so he is the "peace candidate."

Those of us who have paid close attention to American politics for years, and not just around election time but every day, can only be amused by the hysteria gripping the nation. Tens of millions of Americans wait in line to vote, and for what? Even the genuine major differences between the two -- for example, who will actually kill more people abroad -- is a matter of conjecture.

What is even worse is seeing the cultural differences among Americans transformed into a national conflict. The cosmopolitans in the blue states and the red-state townsfolk have absolutely no reason to hate each other. In fact, in today's society and economy, they depend on each other. They might have their disagreements, maybe even important ones, about how to raise their families, how to worship, and lifestyle questions in a whole range of areas. But these differences need not be a cause of animosity or resentment. They should be discussed and deliberated upon peacefully, where people live by example and share their experiences, rather than a cause of hostility culminating in a national referendum in which one side of the "culture war" wins and the other loses.

And so the struggle is over whether Obama's Chicago values or Palin's small-town Alaska values will dominate the nation. I would much prefer to see those values kept on their own turf politically. The rest of us can pick and choose what we like about urban community organizing and rural hunting (and, for my part, I see attractive and negative things about all of America).

This raises a radical point: How can a modern national election be just, even if all the votes are counted? How can one man rule 300 million Americans, most of whom did not vote for him, just because a majority of those who did vote considered him the lesser of evils? It would be insane to subject nearly half the nation to Obama's rule, or McCain's rule, no less than it has been an injustice that from sea to shining sea we have all been ruled by Bush for eight years, and Clinton for eight years before that.

What is more, when we are talking about mass democracy, we are not even talking about true democracy. The two choices presented, unlike the zillions of choices available in the marketplace, were picked by establishment handlers and have been vetted to ensure they will continue business as usual. Meanwhile, the illusion of democracy tricks the populace into thinking the state is an extension of themselves, only bolstering the state's capacity to commit oppression. Far from being a check on despotism, elections provide democratic states the social legitimacy to conduct all manners of mayhem.

Especially given the meaninglessness of the democratic choice, the hysteria and even hatred apparent in America around the time of an election cycle are a depressing sight for those of us who love liberty and who believe the one thing that actually does unite people, across many differences, is a desire to be free. Election time is the time when Americans work hard to impose their way on others so as to preemptively avoid having the other way imposed upon them. Yet we should all know, no matter the outcome, our freedom will continue to be in great jeopardy, our wealth will be looted to benefit the politically connected, the innocent will continue to be murdered by American bombs.

Tens of millions of Americans can vote but choose not to. They are castigated by their peers, but they have the right idea. We are told that if you do nnot vote you cannot complain, but voting, at least for the major parties, does not register much of a complaint at all. You might think you are voting against the war or tax hikes, but it will instead be counted as just another voice of unity behind the dictatorial mandates of the chosen leader.

There is an awful lot to complain about. If you have fundamental disagreements with American politics, reject the whole system. So long as most Americans are swindled by the promises of mass democracy and distracted by its insanities, we cannot be free. So long as national unity is seen as a goal to be pursued through nationalism and the coercive central state, we will be needlessly divided.

Ha Ha, Republicans

Having written the above one day, Anthony Gregory cannot help but gloat over the thoroughly deserved repudiation of the Republican party and its false-to-the-bone "conservativism" the next. The Republicans' conduct while in power, summarized below, and their despicable treatment of Ron Paul during the primaries and of his supporters during the Republican convention all point to an organization that does not deserve to exist in its current form.

Having made staying in power their sole priority, now the Republicans do not even have this. Perhaps a principled old-style conservatism can arise on the ashes left by the neoconmen. Meanwhile, for those who thought the Republicans were too socialistic we bequeath you four years of rule under the Democrats.

I am already dreading Democratic monopoly government. And yet, I have to laugh at the Republicans right now.

After 40 years, you finally captured Congress in 1994. You worked with Clinton to expand the government. You covered up his crimes.

Six years later, you got the presidency. For eight years now, you have had it all. You have doubled the national debt in less than a decade. You have slaughtered a million people. You have torn the soul out of the Bill of Rights.

Today, Americans said no to your ridiculous character politics and politics of fear of the other.

Today, Americans decided they did not want at least your particular type of sick warmongering.

Today, they said they do not trust you with their wallets any more than anyone else.

Today, they decided they hated you so much, they would even prefer the Democrats to you. Hahahahaha.

Sometimes we have forgotten how bad the Republicans are. No matter how bad the future is, let us not forget again.

Some pieces of mine on Republicans: And here is Lew Rockwell to remind you of how bloodthirsty, belligerent and nationalist they are.


How radical is U.S. president elect Obama? Should we trust the temperate tones of this obviously highly intelligent man's vague but hopeful campaign speeches? Or are we facing a future analogous to what happened when liberal reformers helped get rid of the corrupt oligarchies who ruled Cuba and Russia, only to be steamrolled by the Castro and Bolshevik nightmares? Obama has been backed by a large coterie of hard-left ideologues who are lusting to put their ideas into practice. This time there is no tempering force such as the rural southern backgrounds of Bill Clinton or Jimmy Carter.

The Sovereign Society's Bob Bauman, writing in his blog, advises us to prepare for the worst. Obama has previously co-sponsored several anti-offshore Senate bills, joining rabidly and chronically anti-offshore fellow Senators Carl Levin and Byron Dorgan. Obama's speeches demonstrate no wishy-washiness on those views, unlike his backtracking on his anti-war views. Like Levin and Dorgan -- and this appears to be the view of most members of the U.S. and European governments -- Obama views any offshore financial presence as guilty of being a cover for tax evasion and other criminal conduct until proven innocent. From such thinking it is only a small leap to a policy that all such activity should be monitored closely, or, more simply, outright forbidden.

So Bauman advises us to take Obama at his word. We see no countervailing reasons to do otherwise.

Well, he finally has come right out and said it. Yes, he has. ...

Barack Obama, speaking yesterday (October 23) in Indianapolis, again attacked "big corporations" who use "tax loopholes" offshore -- but he also made plain that he wants "to shut tax havens" down. If you would like to hear the farthest Left member of the U.S. Senate advocate an end to tax havens, spoken in his own mellifluous baritone, click here, then click on "Listen Now."

Of course, Obama, who can draw 100,000 adoring Europeans in socialist Berlin, is not yet Dictator of the World. He has no power, as yet, to ban tax havens worldwide or change the internal bank secrecy laws of sovereign nations such as Switzerland and Panama. But a President Obama could impose currency controls on dealings with selected countries, ban Americans moving cash offshore, and even confiscate assets under emergency decrees and the nefarious PATRIOT Act.

He Means What He Says

The young Illinois senator has made crystal clear that high among his goals in an Obama Administration will be: (1) the curtailment, if not abolition of tax havens worldwide; (2) an end to all business and personal financial privacy; (3) automatic exchange of tax information among all national tax collectors; (4) nullification of bank secrecy laws, and; (5) public records of all hitherto private beneficial ownership of trusts, foundations and corporations.

No doubt a host of far left foreign politicians and radical groups, now suddenly eager to "reform" the international financial system, will be overjoyed to join the Savior Obama in a global quest to remold the financial world.

Global organizations like Tax Justice Network, Oxfam GB, Friends of the Earth, Global Witness and Christian Aid have been waging a new global campaign against tax havens and offshore financial activity. They have been enlisting support from left-dominated countries like Norway, Chile, Brazil, Spain and France, organizations like the UNDP, the World Bank and even the International Monetary Fund.

How can I be so sure?

Because his words and actions, today and before, have defined what he intends to do.

Obama's Manifestos

In a December 13, 2007 Iowa debate with Hillary Clinton, Obama said that as president he would crack down on corporate loopholes and tax savings, particularly those involving "offshore transactions".

Earlier in 2007, Obama joined the anti-offshore crowd, co-sponsoring and speaking in behalf of bills by fellow leftist senators Levin (D-Michigan) and Dorgan (D-North Dakota). Their radical legislation wrongfully paints offshore tax havens as tax evasion centers and proposes giving the U.S. government plenary power to restrict Americans' offshore access. Indeed Obama seems to see any offshore financial activity by Americans as suspect criminal activity.

On May 1, 2008, in a statement supporting yet another of his anti-offshore bills that would end the privacy of beneficial ownership, he said: "It is unacceptable for American companies to be used by criminals and terrorists as shields for tax evasion, terror financing, and financial crimes. We must ensure our law enforcement agencies have the ability to properly investigate any financial criminal wrongdoing. This important legislation promotes transparency, fairness, and public safety, and sheds light on the people behind corporate entities so that criminal and terrorist activities can be deterred or detected more effectively."

That there are ample federal laws to accomplish such goals seems lost on the freshman senator from Illinois, but to acknowledge that would not score any political points.

Pernicious Legislation

The Anti-Tax Haven Act, S. 681, sponsored by Obama, if it becomes law, would allow the U.S. Treasury to issue rules that could restrict American banks who have received billions in bailouts. Suddenly with the socialist "spread-the-wealth" Democrats in power, the offshore financial activity of these bailed out U.S. banks could be seriously curtailed.

Among other enormities in his legislation, it creates an unprecedented blacklist of 34 offshore jurisdictions (Switzerland included) presumed to be tax evasion sites, based only on the fact they have financial secrecy guaranteed by law.

His legislation gives the U.S. Treasury free reign "to take special measures against foreign jurisdictions and financial institutions that impede U.S. tax enforcement." It also requires all U.S. financial institutions to report to the IRS any offshore financial activity by clients and impose taxes on offshore trust income used to buy real estate, artwork and jewelry for U.S. persons.

More Fascist Powers

But I am indebted to Sovereign Society Council of Experts member, Larry Grossman, CFP, for pointing out that U.S. Treasury Secretary Henry Paulsen and very lame duck President George Bush already have handed a potential President Obama all the power he may need to curtail Americans offshore financial activity. Larry pointed out language in the new Troubled Asset Relief Program (TARP) law that authorized a $700 billion bail out of banks (and, it seems, almost anyone else except taxpayers).

The TARP law authorizes the Treasury Secretary "to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation, the following: Designating financial institutions as financial agents of the Federal Government, and such institutions shall perform all such reasonable duties related to this Act as financial agents of the Federal Government as may be required."

It is not bad enough that the PATRIOT Act has forced all U.S. bankers to be spies for the government, don't you think Obama's Secretary of the Treasury can (and will) use this unlimited power seriously to curtail Americans' offshore financial activity?

Cynicism Unbounded

But the Chicago style political cynicism of Obama in denouncing offshore financial activity and tax havens is breathtaking -- as is the eagerness of bankers and Wall Street to appease him -- and prostitute themselves.

Example: In September Obama released an Internet and TV ad mocking John McCain for visiting Bermuda last year, vowing to preserve the tax haven there, then taking money from the insurance industry. McCain did indeed tell the local Royal Gazette last year: "The industry, the re-insurance that has had such phenomenal success has been good for both nations. I would oppose any measures that would upset that." Obama claimed that insurance CEOs and lobbyists then donated $50,000 to McCain.

But Obama's ad never mentioned that he also received plenty from the insurance industry, ranking as one of the top recipients, with $1,290,434 in the 3rd quarter election cycle alone.

Similarly, at a U.S. Senate hearing last July Obama praised Senator Levin's anti-offshore attacks, claiming: "Ordinary Americans pick up the slack for tax cheats who hide assets in offshore tax havens, often with the help of foreign banks like UBS and LGT."

But in issuing his ringing anti-tax haven statement critical of UBS, the major money-losing Swiss bank, Obama said nothing about one of UBS's most prominent executives, Robert Wolf, CEO of UBS Americas, who by July, 2008 had collected and bundled more than $370,850 in campaign contributions, making UBS Obama's 5th largest corporate donor.

Obama's New World Order

So much for that selfless "new era" in politics Senator Obama talked so much about. We certainly do not begrudge him his offshore banker friend at UBS -- but why should have want to block all Americans from having their own legal dealings with offshore banks of their choice?

Let us face it, Obama does not just want to pile more taxes on U.S. middle and high income earners, he wants to control productive Americans and their financial dealings -- forcing them to keep their funds in America where they more easily can be confiscated and "redistributed" to the 40% of Americans who pay no taxes.

Alexis de Tocqueville predicted Obama's ilk way back in 1835 when he wrote: "The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money." And so the New Deal motto has been revived: "Tax, tax, spend, spend, elect, elect."

And one last thought.

At a time when the world may be facing a global depression unlike anything seen since 1929, Obama, for the sake of his wealth redistribution schemes, would seriously disrupt the ability of American capital to invest, expand and aid foreign economies and other nations hard hit by the recession.

His liberty destroying, global finance disrupting plans could be the modern equivalent of the disastrous Smoot-Hawley Tariffs that prolonged Roosevelt's decade long-Great Depression.

What They Really Think

O.K., so Obama yesterday unashamedly admitted his plans to do all he can to harm and limit his favorite bogeyman, offshore tax havens. But an article in The Nation (July 22, 2008) states the Class Warfare doctrine that the Democrat's radical presidential nominee hints at -- but will not admit openly:

"Rich people the world over, including tens of thousands of wealthy Americans, are now free to opt in to this sophisticated, secretive, utterly unprincipled global private banking industry. They can become, in effect, residents of nowhere for tax purposes, citizens of a brave new virtual country, which offers its inhabitants unprecedented freedom from the taxes, regulations and moral restraints that the rest of us take for granted. They wield enormous political influence even without paying taxes, merely by making contributions, threatening to withhold them -- or better yet, threatening to abscond with their capital unless certain conditions are met. In a sense, this is the ultimate libertarian pipe dream: representation without taxation. But it is a nightmare for the rest of us, and we must design and organize our way around it."

This last quote is worthy of a whole comment piece by itself. For now we will just throw in this two cent's worth:


The rich club that does not want anyone else to become rich renews attack on offshore financial centers.

A financial writer from the Cayman Islands has looked at the way the offshore winds are blowing, and concludes the Caymans have no choice but to bend. The Caymans have tried to negotiate in good faith with the OECD cabal, seeking to obtain some meager benefits in exchange for relenting on secrecy and "transparency." However, "[I]t might be concluded that the other parties have now decided that continued vilification of Cayman and other offshore financial centres plays better in the media than recognizing their efforts and welcoming them into the fold!"

Those hoped-for benefits have been "to-date unobtainable," thus Cayman must reign in its demands, the thinking goes. The unified front presented by the OECD has understandably got the small offshore financial centers spooked. The threat of isolating them from the world financial system is proving effective. An unknown factor is how the U.S. will play this in practice. It was not represented at the lastest anti-offshore OECD convocation due to the just concluded political campaign. Barak Obama's anti-offshore sentiments are clear enough. But Clinton administration holdovers attempted to promulgate regulations which directly countered whatever pro-offshore leanings existed among the Bushites. The immoveable force of the U.S. federal bureaucrazy can work in strange ways.

And if the OECD implements everything that it has recently threatened? That is a story for another day. But as the old saying goes, be careful what you wish for ... you just might get it.

If anyone had any doubts about the storm brewing for Cayman, the reports following the recent meeting of 17 OECD member countries (the rich club that does not want anyone else to become rich) led by France and Germany will make the position clear.

Offshore financial centers are in the spotlight again and a renewed attack is under way. Various extreme and aggressive statements have been made by certain political leaders about prying open and/or shutting down tax havens, punishing those who deal with them and the like.

That may be the standard rhetoric we have come to expect from the U.S. and European (including the UK) politicians trying to deflect criticism from the mess they have created in global financial markets and in their own domestic economies. And a significant number of important global financial players, such as the U.S., Luxembourg, Austria and Switzerland opted not to attend the meeting.

But more directly concerning developments are to be found deeper in some of the reports. Naming and shaming is to restart. We are in for a new blacklist (bad guys) and possibly a green (not a white) list (good guys) from the OECD probably in 2009. This list will resurrect the names (and maybe include some new ones) of those countries that are deemed not to fully cooperate on tax evasion and transparency. The French suggest that about a dozen countries will be on this list.

There are very obvious clues as to the names that may be on the role of (dis)honor. The Secretary General of the OECD reportedly said "Aruba, Bermuda, Isle of Man, Guernsey and Netherlands Antilles are making progress in negotiating exchange of information agreements."

So far so good. These places may expect to be treated as good guys on the green list. The French Minister, Eric Woerth, then presented the other side of the coin and reportedly said "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." So these places can expect to be treated as bad guys on the blacklist. This would be an extremely disadvantageous outcome.

So what has Cayman done or not done to be singled out? In 1998, when the OECD first prepared its list of (non-cooperative) tax havens, the Cayman Islands narrowly avoided being listed because it gave an advance commitment to cooperate by eliminating what were perceived to be unfair (competitive) tax practices, by enhancing transparency and by entering into exchange of information agreements on tax matters.

Since then, Cayman has entered into the first tax information exchange agreement with the USA and implemented the EU Savings Directive (including execution of bilateral agreements with all EU members).

Good faith negotiations (at least on Cayman's part) were also started with other jurisdictions (including the UK) with a view to agreeing TIEAs or similar arrangements (hopefully with some benefits flowing to Cayman as well as to the other party).

It is these negotiations that appear to have stalled, not because of any particular deliberate fault or unwillingness on the part of Cayman. Indeed, it might be concluded that the other parties have now decided that continued vilification of Cayman and other offshore financial centers plays better in the media than recognizing their efforts and welcoming them into the fold!

Nevertheless, it is vital that Cayman renew its engagement efforts. It is necessary as a matter of urgency to move to Plan B as Plan A clearly has not worked. Plan B should include (1) increased local transparency by amending the Companies Law and similar laws governing Cayman entities to make more information public and readily available both locally and internationally, (2) a reduction in Cayman's demands that it receive significant and quantifiable (but to-date unobtainable) benefits under tax information exchange agreements and (3) the execution of a meaningful number of TIEA's.

This should demonstrate and secure international recognition of Cayman's effective implementation of its commitment to transparency and avoid Cayman again being blacklisted. The Government and the private sector A Teams must give this the highest priority.

German Finance Minister Threatens Liechtenstein with Sanctions

German Finance Minister Peer Steinbrück is the lastest pointman for Germany against foreign "tax havens." He claims the agreements that Liechtenstein is negotiating with the EU are "totally inadequate" for stopping tax evasion by German taxpayers. Of course, any agreements which stopped short of the total destruction of Liechtenstein's offshore financial services industry would be worthy of that description in Steinbrück's and his compatriots' thinking.

German Finance Minister Peer Steinbrück is threatening tax havens such as Liechtenstein with national sanctions, and urging the European Union to toughen its stance. Liechtenstein's Prime Minister Otmar Hasler has reacted angrily to the criticisms.

In the on-going struggle to combat cross-border tax evasion, Germany's Finance Minister has issued a clear ultimatum: If progress can not be made towards a European level of co-operation, then other means of legal attack will be launched, through either tax or customs laws or via financial regulations. Steinbrück's announcements follow talks at a meeting in Brussels on Tuesday with European counterparts.

Although the precise details of possible action have not been disclosed, the Finance Minister has made clear his intolerance of what he considers to be criminal activities undertaken by many individuals, deliberately seeking to evade German taxes.

Defending Liechtenstein's position, Prime Minister Otmar Hasler vehemently rejected the accusations, emphasizing that Liechtenstein was currently in constructive negotiations with the EU. Indeed, Hasler confirmed his intention to conclude double tax agreements with EU states, while emphasizing that, in return for co-operation, the interests of Liechtenstein as a business location be maintained.

During the meeting, EU Finance Ministers discussed details of a planned anti-fraud agreement, which is currently being negotiated between the European Commission and Liechtenstein. Nevertheless, Steinbrück denounced the moves, referring to the proposals as "totally inadequate." Austrian Finance Minister and Vice Chancellor Wilhelm Molterer indicated, however, that Austria would ratify the agreement in its current state.

Germany is pressing for Liechtenstein to comply with exchange of information standards. However, given that no unity on cross-border interest taxation within the EU exists, this is proving difficult. Austria, Luxembourg and Belgium, for example, do not currently provide information on interest income earned by EU savers to their home authorities under the European Savings Tax Directive, opting to levy an anonymous withholding tax instead. Third countries, including Switzerland and Liechtenstein, apply the same principle.

Austria Backs Switzerland in Tax Haven Row

The Cayman Islands may feel they have to surrender unconditionally to OECD demands for greater information disclosure by their financial sector. Switzerland has served notice that it will be a tougher nut to crack. Neighbor Austria, which also has a tradition of banking secrecy, has come out in public support of Switzerland. Among the elements of the countermove is to deny it is a "tax haven," saying that it has "scrupulously" lived up to all its information disclosure obligations, even as that does not mean providing unlimited client data on demand.

Austria came out with support for its neighbor Switzerland ... against calls from France and Germany that it be placed on a blacklist of tax havens. "Austria will always support Switzerland," Foreign Minister Ursula Plassnik told Swiss daily Tages-Anzeiger.

Her comments followed a call by German Finance Minister Peer Steinbrueck that Switzerland "should be on the blacklist" drawn up by the Organization for Economic Cooperation and Development, or OECD, of countries that do not cooperate over tax evasion.

Switzerland, often criticized for its opaque bank secrecy laws, decided to boycott the OECD meeting in Paris along with Luxembourg, while the U.S. and Austria declined to send representatives.

Plassnik said that Steinbrueck's comments were unjustified, and she felt they also targeted her country. "We will not be called a tax haven by anyone," she said, adding that Austria "scrupulously" lived up to all its obligations as an OECD member. However, "banking secrecy is an important principle for us," she said, though in certain "exceptional" cases this could be waived.

Steinbrueck's comments caused an uproar in Switzerland, and the government summoned Berlin's ambassador for a meeting over the issue. The OECD lists 38 countries that have adopted tight banking secrecy laws and are tax-free, or have very low taxation. But only three of those -- Andorra, Liechtenstein and Monaco -- are on the OECD blacklist for refusing to share any information on their finance sectors.


As previously promised, the EU will attempt to ammend the EU Savings Tax Directive by closing "loopholes," loopholes which were obvious from the beginning. Following the time-tested formula, now that a law -- any law -- is passed the time has come, following a modest waiting period, to strengthen it on the road to promoting the real goals of the law's backers.

The European Commission will on November 12 present a proposal to amend the Savings Tax Directive in an attempt to ensure "more effective taxation of savings income and eliminate undesirable loopholes which facilitate tax evasion and tax fraud."

The Commission announced ... that amendments to the directive, which have been under discussion for some time, are now all the more urgent "in light of recent events in the area of tax evasion."

According to a Commission report to the European Council last month, the directive in its current form "has proven effective within the limits set by its scope." However, this evaluation cited the need for certain amendments to the legislation in order to close possible loopholes and to limit the administrative burden on paying agents.

Since when are governments concerned about the costs they impose on their unpaid enforcers?

In a speech given to the European Platform for 3rd Country Finance Centers on October 14, Tax Commissioner Laszlo Kovacs said that the EC is "committed to promoting the co-operation against tax fraud and tax evasion."

"The sustainable development of all economies relies on the capacity of national tax administrations to effectively exchange information. Increasing the transparency of tax systems makes them less vulnerable for use in tax evasion schemes. This does not mean protecting high tax rates in certain countries, but exactly the opposite, as an increased tax compliance makes easier the lowering of the tax burden for all the honest taxpayers," he said.

"In return for its partners' acceptance of these principles, the EU is prepared to offer certain incentives. A concrete example of what we can provide is the Governance incentive tranche under the 10th European Development Fund (EDF). Countries eligible for development aid, and who take detailed commitments to the principles of good governance in the tax area, may receive an additional allocation depending on the quality of their commitment. A number of Caribbean and Pacific countries have taken such commitments, some others have simply refused to do so," he added.

The savings tax directive applies in 42 jurisdictions: 27 Member states, 5 non-EU countries (Switzerland, Liechtenstein, Monaco, Andorra and San Marino) and 10 dependent and associated non-EU territories (Anguilla, Aruba, the British Virgin Islands, the Cayman Islands, Guernsey, the Isle of Man, Jersey, Montserrat, the Netherlands Antilles as well as the Turks and Caicos Islands).

Following the request of the Ecofin Council, the European Commission has started discussions with selected Asian financial centres, namely Hong Kong, Singapore and Macao. Formal negotiations will also start shortly with Norway, at its request, while other jurisdictions like Bermuda and Iceland have shown interest in participating in the savings taxation arrangements.

EU Savings Tax Directive Fails to Fulfill Its Objectives

Information exchange is fraught with problems, while withholding is efficient and relatively speedy.

The EU Savings Tax Directive forces the financial institutions of most EU members to report interest earnings to each client's home country tax authority. Austria, Belgium, Luxembourg and Switzerland were granted a partial exemption from the directive: Their institutions were allowed to withhold a portion of the earnings and remit it directly to the home country without disclosing the client's identity.

It turns out the information exchange "model" is expensive, inefficient, and laden with technical difficulties. The high compliance costs are being incurred as Europe's, along with the rest of the world's, financial institutions are engaged in desperate capital rebuilding programs. In contrast, the withholding tax "model" has proved to be efficient; however, that model does not serve the ambitions of the EU power aggregators.

And now the EU wants to extend the Directive's scope (see above article and this one), which will impose a still greater burden on the implementers. To paraphrase John F. Kennedy: The EU banks shall pay any price, bear any burden, meet any hardship, support any friend, oppose any foe to assure the survival and the success of the EU bureaucrats' total financial information awareness system.

A new study by the European Policy Forum reveals that the European Commission is in danger of scoring an own goal (kicking the ball into its own net) in its move to raise larger tax receipts and crack down on perceived tax evasion.

In the first independent study to be undertaken on the practical operation of the EU Savings Tax Directive, the Forum shows that the Directive has not fulfilled its original goals. Member state governments have found the exchange of information model difficult to apply with a number of countries reporting long delays, inaccurate data and a range of problems centering on pursuing reports of interest income received by taxpayers in other countries.

By late 2008, six member states had yet to provide the EC with data for 2006 and the information reported was subject to wide ranging corrections, as in the case of tax revenue reported by Denmark. In addition, smaller European economies like Estonia have to follow complex procedures for information exchange even though they apply no domestic tax whatsoever on interest income for their own citizens.

The 12 smaller EU states which produced figures for 2006 on the sums which they had reported under the information exchange system of the Savings Tax (Czech Republic, Denmark, Estonia, Finland, Greece, Lithuania, Latvia, Malta, Poland, Portugal, Slovenia and Slovakia) reported between them only €90.4 million -- a combined total amounting to less than 1% of the amount reported by the largest financial center, the United Kingdom, which reported €9.13 billion.

In contrast, the alternative withholding tax model, operated by Austria, Belgium, Luxembourg and Switzerland, has proved an efficient and relatively speedy method of recording and raising tax income for EU citizens' home countries (Switzerland, for example, has already published full and detailed figures for 2007, showing a substantial increase in tax remitted to EU member states).

Compliance costs

The exchange of information model has also proved to be expensive, both in terms of banks' compliance costs and the resources and time devoted to implementing the EU Tax Savings Directive by member states' tax authorities.

Based on its extensive survey of banks of different sizes across Europe, the Forum has been able to estimate the compliance costs incurred by the paying agents covered by the Directive. The Forum calculates that the 1,243 leading banks in the EU and Switzerland have incurred compliance costs of €753 million to implement the current Savings Tax Directive. In addition, they face annual compliance costs of a further €693 million. And, if the EC's current review of the Directive leads to the scope of the tax being extended, we are likely to see Europe's financially vulnerable banking sector presented with an estimated bill of an additional €682 million to comply with the Directive's wider remit.

Given the relatively modest amounts raised by the Directive to date and the fragile status of many banks across the EU, many of which are now reliant on taxpayer support, this would appear to be a misguided policy initiative. Indeed, there is a real danger that an extended Directive will simply add to banks' cost base for little net benefit. In the meantime, banks may have to withdraw credit facilities to hard pressed businesses and households in order to meet the higher compliance costs imposed by the Commission.

Extension of Directive’s Scope

Another key feature contained in the Forum's report is the concern demonstrated by market participants with regard to an extension of the Directive's scope. Such a move would make it problematic, time-consuming and costly for paying agents to be certain about whether income received from a particular financial product falls within the Directive's catchment area or not. Such definitional difficulties make it impractical to design straightforward information technology systems and significantly increase annual compliance costs.

Many market participants would prefer the Directive to be left as it is for a further period so that the myriad practical problems associated with the application of the reporting regime can be addressed. Paying agents also express fears that the heightened and well-publicised activity by fiscal authorities in the EU is already triggering investors to move to Singapore, Hong Kong, Dubai and other jurisdictions beyond the reach of the Directive. Accordingly, if there is to be any extension of the Directive they look for simplicity and certainty in its adoption.

The study's examination of the way revenue authorities exchange information with one another about interest income received by domestic taxpayers from abroad has revealed five major problems, namely: It is striking to note that the French and German revenue authorities failed to answer the Forum's research survey despite repeated requests. Both countries have been at the forefront of calls for an extension of the scope of the EU Savings Tax Directive. Italy and Spain were two other countries that did not complete the Forum's questionnaire. In contrast, full and detailed responses were received from smaller EU member states including Denmark, Estonia and Slovakia.

The Forum's study indicates that a withholding tax system can be a far more effective means of raising tax revenue because the deduction of real cash and its transfer to the revenue authorities of another member state is a straightforward task when compared to the exchange of a large numbers of data files that may well take years to process by the relevant revenue authority. The Forum's survey suggests that much of the information received automatically from other authorities in the past has been largely ignored. Lack of transparency by revenue authorities who claim that such information is confidential makes it still more difficult to be confident that the information exchange system is working well.


Meanwhile, cheetahs seek views on the pursuit and consumption of antelopes.

The OECD is interested in "improving compliance relationships within the existing legal framework" for "high-net-worth individuals" ("HNWIs"). Then the velvet glove comes off: The OECD does not rule out pursuing "other strategies" where there is a risk of tax avoidance or evasion, such as mandatory disclosure rules, promoter penalties and additional reporting requirements.

Gee, what a surprise ... not. The OECD and the EU share an extensive membership overlap. Wherever complete information disclusure is lacking the "risk of tax avoidance or evasion" exists and "other strategies," naturally, will be required.

The Organization of Economic Cooperation and Development (OECD) has announced that it is seeking comment from interested parties on its study into tax compliance issues surrounding high-net-worth individuals across the world.

The consultation is based on an OECD discussion paper which explores concepts of "cooperative compliance" and the creation of a framework to encourage high-net-worth individuals (HNWIs) and their advisors to volunteer relevant information.

This project follows on from a 2008 OECD report entitled "Study into the Role of Tax Intermediaries" commissioned by the OECD's Forum on Tax Administration (FTA) at its meeting in Seoul in September 2006 and discussed at the FTA’s Cape Town meeting in January 2008. While this study focussed on large corporate taxpayers, the OECD noted in its findings that the concept of an "enhanced relationship" with tax administrations may also have application to HNWIs and to banks, in particular investment banks.

In March 2008 the OECD set up a focus group to carry out the follow-up study on HNWIs. The focus group consists of the following 14 countries: Australia, Canada, Ireland, Italy, France, Germany, Japan, Mexico, the Netherlands, New Zealand, Norway, South Africa, United Kingdom and the United States. Separate work is being carried out in relation to banks.

The OECD observes in its discussion paper that taxpayers at the top of the wealth or income scale "make a significant economic contribution to society and account for a large part of total income tax, thus there is much revenue at stake for national tax administrations when dealing with HNWIs. In Germany, for example, the top 0.1% of taxpayers pay about 8% of total income tax and the top 5% of taxpayers pay about 40%. In the United States the same top 5% pay 60% of total income tax.

"Whilst it is recognized that HNWIs are not a homogenous group, they are likely to be linked by the scale and complexity of their business, personal and tax arrangements (domestic and/or international), access to more sophisticated tax products, offshore opportunities and by more varied sources of income giving more possibilities for planning," the discussion paper states.

The OECD insists however, that the scope of the paper is focussed on "improving compliance relationships within the existing legal framework." However, it does not rule out pursuing "other strategies" where there is a risk of tax avoidance or evasion, such as mandatory disclosure rules, promoter penalties and additional reporting requirements.

The OECD said that comments can be submitted anonymously to the consultation between now and December 31, 2008. The organization then plans to hold a public discussion on the issue at its headquarters in Paris in February 2009.


The IRS has published an updated guide to international double taxation avoidance treaties. U.S. citizens and resident aliens are taxed on their worldwide income, thus it is very important when living abroad to avoid getting taxed by both the U.S. and the country of residence. The IRS guide is designed to help you navigate the paperwork.

The U.S. Internal Revenue Service has released a guide to double taxation avoidance treaties as they apply to individuals as part of a series of updates on the International Tax Gap.

The United States has income tax treaties with a number of foreign countries. Under these treaties, residents of foreign countries are taxed at a reduced rate or are exempt from U.S. income taxes on certain items of income received from sources within the U.S. Because treaty provisions are generally reciprocal, a U.S. citizen or resident who receives income from a treaty country may also be taxed at a reduced tax rate by that foreign country.

While tax treaties may reduce U.S. tax for nonresidents and foreign tax for U.S. residents and citizens, each treaty must be reviewed to determine eligibility for these provisions.

The IRS guide, the 9th in a series on international tax issues, highlights some important aspects of tax treaties and how to properly apply their provisions:

Saving Clause

Most tax treaties have a saving clause that preserves the right of each country to tax its own residents as if no tax treaty were in effect. Thus, once you become a resident alien of the U.S., you generally lose any tax treaty benefits that relate to your U.S. income. However, many tax treaties have an exception to the saving clause that may allow you to claim certain treaty benefits even if you are a U.S. citizen or resident.

Nonresident Aliens

For nonresident aliens, treaties limit or eliminate U.S. taxes on various types of personal services and other income, such as pensions, interest, dividends, royalties, and capital gains. Many treaties limit the number of years you can claim a treaty exemption. For students, apprentices and trainees, the limit is usually four to five years. For teachers, professors and researchers, the limit is usually two to three years. Once you reach this limit, you may no longer claim the treaty exemption. In some cases, if you exceed the limit, the income is taxed retroactively for earlier years. Treaties may also have other requirements to be eligible for benefits. Publication 901, U.S. Tax Treaties, provides a summary of these treaty provisions.

U.S. Citizens and Residents

U.S. citizens and residents generally will not be able to reduce their U.S. tax based on treaty provisions due to the saving clause. However, those who are subject to taxes imposed by a treaty partner are entitled to certain credits, deductions, exemptions and reductions in the rate of taxes paid to that foreign country. These treaty benefits are generally only available to residents of the U.S.. They generally are not available to U.S. citizens and resident aliens who do not reside in the U.S. Foreign taxing authorities sometimes require certification from the U.S. government that an applicant filed an income tax return as a U.S. resident, as part of the proof of entitlement to the treaty benefits. Form 8802, Application for U.S. Residency Certification, must be filed to obtain this certification.

Disclosing Treaty Benefits Claimed

If you claim treaty benefits that override or modify any provision of the Internal Revenue Code, and by claiming these benefits your tax is or might be reduced, you must attach a fully completed Form 8833, Treaty-Based Return Position Disclosure, to your tax return. There are exceptions to this requirement for certain types of income that are outlined in Publication 519, U.S. Tax Guide for Aliens, under the section on Reporting Treaty Benefits Claimed.

Competent Authority Assistance

If you are a U.S. citizen or resident alien, you can request assistance from the U.S. competent authority if you think that the actions of the U.S., a treaty country or both caused or will cause a tax situation not intended by the treaty between the two countries. You should read any treaty articles, including the mutual agreement procedure article, that apply in your situation. The U.S. competent authority cannot consider requests involving countries with which the U.S. does not have a treaty. See Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, and Revenue Procedure 2006-54, Procedures for How to Make a Competent Authority Request.


Private pensioners have taken it on the chin, while the public sector pension system is expanding willy-nilly.

The U.K. government is actively extracting assets from private pension funds, leading to a drastic decline in the number of active members in "private sector occupational schemes" -- the number of members has fallen by an extraordinary 41% over the past 12 years! Meanwhile, there are now over 17,000 retired public sector employees with retirement benefits worth £1 million each, while unfunded public sector pension liabilities are estimated to exceed £1 trillion, over 70% of GDP. So we know those will not get paid off in full.

Let them all eat cake, appears to be the grand de facto strategy. They must be taking public accounting lessons from the U.S. Remember that government promises are not worth the disk space they are stored on.

Private pension funds in the UK have lost between £150 billion and £225 billion as a result of changes to tax laws in the 1990s, according to a new report by the pressure group Taxpayers' Alliance.

This is one of the key findings of a report published ... into the effects that government "tax grabs" have had on the value of privately-funded pensions. The most damaging of these tax grabs, argues the Taxpayers' Alliance (TPA), was Gordon Brown's decision to cancel Advanced Corporation Tax relief shortly after becoming Chancellor of the Exchequer in 1997. This reform prevented pension schemes from reclaiming tax on a company's profits at the rate of 20%.

According to the TPA, partly as a result of this tax change, the number of active members of private sector occupational schemes has fallen by 41% in the past 12 years, with an even greater fall in defined benefit scheme members. Were this trend to continue, there would be no active members of private sector occupational schemes in 12 years' time.

However, while private pensions have been steadily eroded by what the TPA described as "political meddling and managerial incompetence on the part of inexperienced politicians," the report noted that the public sector pension system is flourishing. It concluded that there are now over 17,000 retired public sector employees with retirement benefits worth £1 million each, while unfunded public sector pension liabilities are estimated to exceed £1 trillion, over 70% of GDP.

Some public sector organizations, including Parliament and the BBC, refused to release details of how many MP and BBC pensioners have received pension benefits exceeding £1 million.

Terry Arthur, author of the report and a Fellow of the Institute of Actuaries, said: "Political management of the UK pensions system has failed to provide a decent retirement income for many people and has been a painful lesson in the limitations of government. The history of the state pension system has been littered with broken promises, while it is immediately apparent that the proposed NPSS (National Pension Savings Scheme) could lead to lawsuits on a massive scale. The possibility that contributions may prove to have been worthless because they end up disqualifying the individual from pension credits or other benefits is just the tip of the iceberg."

Corin Taylor, Research Director at the TaxPayers' Alliance, added: "The infamous tax raid on pension funds has been a major factor in the collapse of occupational pension provision in the private sector, while gold-plated public sector pensions have remained immune from necessary changes. It is not right for taxpayers to be subsidising million pound retirement benefits for the public sector elite while seeing the value of their own pensions plummet, or in many cases not having a pension at all."


Showing that not all Germans are committed to a tax everyone to death policy, a leading German economist, Michael Hüther, has called for drastic personal and business income tax cuts. Showing that he is a professional economist not isolated from the Keynesian mainstream, Hüther also called for the European Central Bank to cut interest rates in order to facilitate the expansion of the quantity of fiat euro-credits in circulation.

Given the current economic crisis deeply affecting Germany, Michael Hüther, Head of the German Economic Institute, has urged the government to implement drastic reductions in tax with immediate effect -- starting with the abolition of the solidarity tax, currently imposing a huge burden on both individuals and businesses alike.

Vehemently denouncing selective government measures aimed at granting aid to individual industries, such as the German car industry, Hüther stresses that the first step to boost the German economy and reassure concerned citizens, should be to exonerate businesses and individuals from the Solidaritätszuschlag surtax.

Introduced in 1991 in the wake of reunification, and designed to finance economic development in former Eastern Germany, the tax is currently levied on both personal and corporate income. According to Hüther, abolishing the tax would provide around €12.5 billion in tax relief, which could be felt by all from January next year.

Hüther has also called for the European Central Bank to reduce interest rates to around 3% as quickly as possible.

The German cabinet is expected to discuss proposals for a €50 billion economic stimulus package at a meeting on Wednesday. It is expected that the package will feature tax cuts or rebates in some form, although Chancellor Angela Merkel has insisted that any stimulus measures should be narrowly-targeted and able to be put in place very quickly. The automotive industry, one of Germany's largest employers, is expected to be one of the main beneficiaries of any tax cuts.


This human interest story qualifies as a bank-handed recommendation for structuring one's affairs using offshore entities. The courts have spend almost seven decades trying to track down assets owned by various entities which may or may not have been controlled or owned by the late Norwegian shipping tycoon Anders Jahre. The case may or may not be coming to a resolution at long last.

The original amount of assets was estimated at £170 million. Mr. Jahre's estate has recovered £60 million of the total so far. What should surprise no one is that lawyers representing the estate and the enties involved are said to have taken in £40 million in fees. The size of the estate was big enough to make it in everyone's interest to pay the lawyers. But with a more modest asset total it seems clear that if you structure your affairs properly, it will be more expensive to contest things than it is worth.

The arrest of Grand Court Judge Alexander Henderson may add yet another twist to the longest and possibly most-expensive legal battle in history, the 66-year-old, £170 million saga of the estate of Norwegian tycoon Anders Jahre.

The case, which was supposed to open on Monday morning, 27 October, is famous for its labyrinthine complexities that have been winding through the courts of Norway and Britain since 1941, according to a report in London's daily The Independent.

At stake is a £170 million fortune and various claims by as many as 80 defendants, many of them companies and trusts linked to the reclusive shipping magnate, once a close associate of Greek tycoon Aristotle Onassis.

Justice Henderson was assigned the case, which landed in the Cayman Islands after a series of allegations of local links to Mr. Jahre. It had been scheduled to open two days ago with a 3-week "reading-in period," during which Mr. Henderson was to peruse the extensive literature on the case, including submissions from both the estate and the claimants.

"The oral hearings were due to start in three weeks, but have been postponed, put back by about three weeks," Carlos Pimentel, attorney for Appleby, which is handling 13 of the 15 remaining defendants, told Cayman Net News.

The postponement, however, he said, had nothing to do with Justice Henderson. "This is a very, very substantial matter and by agreement of all parties, it has been postponed," Mr. Pimentel said.

Charles Adam Ritchie & Duckworth's Graham Ritchie, lead attorney for the Jahre estate, agreed that the delay was unconnected to Justice Henderson's recent absence from court in the wake of his 24 September arrest by Metropolitan Police on charges of misconduct in public office.

"Mr. Henderson was the trial judge and we were supposed to open today. It has been put back, but it had nothing do with the Justice. It has to do with technical aspects of the case. All the parties agreed. Mr. Henderson has not been a factor at all in the delay," he said.

Mr. Pimentel acknowledged, however, that Mr. Henderson's detention "did cause some consternation among lawyers, it is true," but agreed with Mr. Ritchie that court administrators had been "extremely helpful." ...

In Judge Henderson's indefinite absence, Chief Justice Anthony Smellie appointed Jamaican Supreme Court Justice Norma McIntosh and Jamaican High Court Judge Lennox Campbell to sit for a month, helping manage the caseload.

Justice Henderson was arrested and his South Side home and Kirk House office searched on 24 September by a team from the Governor's 12-member Special Investigation Police Team, formerly London's Metropolitan Police, probing corruption in the Royal Cayman Islands Police.

He has been neither charged nor suspended from office, however, but, with agreement from Mr. Smellie, has taken accumulated holiday time, although no date has been set for his return. He has since challenged the September search warrants in a Judicial Review granted by Justice Campbell.

Meanwhile, the case of Mr. Jahre's hidden offshore fortune continues, with the 14-week Cayman Islands trial only the latest venue in the tortuous courtroom drama.

The estate has recovered £60 million of the total, while lawyers are said to have taken another £40 million representing the estate and the various companies and trusts named in the litigation.

The case began in 1941 when the British seized a Panamanian tanker, which the Oslo government said belonged to Mr. Jahre. The tycoon -- whose fortune was earned processing whale blubber -- and Norwegian authorities battled through the courts until, in 1950, the government concluded that Mr. Jahre also owned other Panama-linked assets.

Mr. Jahre claimed he only managed the companies, but did not own them. After a period of dormancy, however, the case was reignited when the tycoon imported funds from Panama to invest in his southeast Norway hometown of Sandefjord, where he worked as a local solicitor before establishing his Jahres Fabrikker processing factory.

By the time the magnate died in 1982 at the age of 90, the courts had found nothing and the estate, mysteriously, was virtually empty.

The following year, however, Oslo reached agreement with the estate to pursue the assets they believed had been scattered across the world, particularly in Britain, where the next round of court battles started in 1994.

Litigation has shrunk the original roster of defendants to 15. The case has occupied the foremost legal minds in British, yet resisted resolution; and now is scheduled to open in George Town in late November, although the identity of the presiding judge has suddenly been thrown into question.

The Independent report quoted a lawyer who had been preparing to help litigate in the Grand Court: "The case is jinxed. This is an extremely frustrating event that will no doubt lead to more delay in a case that should have finished years ago," he said.

Contemplating the possible end of the nearly 7-decades-old case, Mr. Ritchie was almost fatalistic: "I guess everything has to come to an end sometime," he said, "but there is always appeal."


This interview with investor extraordinaire Jim Rogers was conducted last summer just before the bear market in stocks went into overdrive. This is of little matter, as Rogers has made his fortune via "a much-fabled ability to spot unique points in history," as the interviewer expresses it. He is a big-picture man, not a market timer. Here are the biggest points we take away from the talk:

We at W.I.L. have long predicted an economic crisis followed by government controls such as limits on exporting capital. These controls are all theft by another name. The crisis is now here. Systematic overt controls have yet to come, although the monitoring of foreign capital flows is well advanced.

One does not need to be a chronic gloom-and-doomer, or a perspicacious student of historical inflection points like Rogers, to arrive at this prediction. A brief but discerning look at past economic crises around the world reveals the obvious pattern. Since the last instance in the U.S. was several generations ago and very few people are true studiers of history, the signficance is not seen. (And many of those who are still alive are FDR worshippers, and think the fascistic controls "saved the country.")

Bottom line: Be prepared. In the long decline that appears to be ahead, the fight over the economic pie will get more vicious still. Your assets will be fair game. Take action before it is too late.

During a 40-minute interview during a wealth-management conference [in Vancouver in August], Rogers said that: Keith Fitz-Gerald (Q): Looks like the financial train wreck we talked about earlier this year is happening.

Jim Rogers: There was a train wreck, yes. Two or three -- more than one, as you know. [U.S. Federal Reserve Chairman Ben S.] Bernanke and his boys both came to the rescue. Which is going to cover things up for a while. And then I do not know how long the rally will last and then we will be off to the races again. Whether the rally lasts six days or six weeks, I don't know. I wish I did know that sort of thing, but I never do.

What would Chairman Bernanke have to do to "get it right?"


Is there anything else that you think he could do that would be correct other than let these things fail?

Well, at this stage, it does not seem like he can do it. He could raise interest rates -- which he should do, anyway. Somebody should. The market is going to do it whether he does it or not, eventually.

The problem is that he has got all that garbage on his balance sheet now. He has $400 billion of questionable assets owing to the feds on his balance sheet. I mean, he could try to reverse that. He could raise interest rates. Yeah, that is what he could do. That would help. It would cause a shock to the system, but if we do not have the shock now, the shock is going to be much worse later on. Every shock, so far, has been worse than the last shock. Bear-Stearns [now part of JP Morgan Chase & Co.] was one thing and then it is Fannie Mae, you know, and now Freddie Mac.

The next shock is going to be even bigger still. So the shocks keep getting bigger because we kept propping things up and this has been going on at least since Long-Term Capital Management. They have been bailing everyone out and Greenspan took interest rates down and then he took them down again after the "dot-com bubble" shock, so I guess Bernanke could try to start reversing some of this stuff.

But he has to not just reverse it -- he would have to increase interest rates a lot to make up for it and that is not going to solve the problem either, because the basic problems are that America has got a horrible tax system, it has got litigation right, left, and center, it has got horrible education system, you know, and it has got many, many, many [other] problems that are going to take a while to resolve. If he did at least turn things around -- turn some of these policies around -- we would have a sharp drop, but at least it would clean out some of the excesses and the system could turn around and start doing better.

But this is academic -- he is not going to do it. But again the best thing for him would be to abolish the Federal Reserve and resign. That will be the best solution. Is he going to do that? No, of course not. He still thinks he knows what he is doing.

Earlier this year, when we talked in Singapore, you made the observation that the average American still does not know anything is wrong -- that anything is happening. Is that still the case?


What would you tell the "Average Joe" in no-nonsense terms?

I would say that for the last 200 years, America has elected politicians and scoundrels have built up $5 trillion in debt. In the last few weekends, some un-elected officials added another $5 trillion to America's national debt.

Suddenly we are on the hook for another $5 trillion. There have been attempts to explain this to the public, about what is happening with the debt, and with the fact that America's situation is deteriorating in the world.

I don't know why it does not sink in. People have other things on their minds, or do not want to be bothered. Too complicated, or whatever.

I am sure when the [British Empire] declined there were many people who rang the bell and said: "Guys, we are making too many mistakes here in the U.K." And nobody listened until it was too late.

When Spain was in decline, when Rome was in decline, I am sure there were people who noticed that things were going wrong.

Many experts do not agree with -- at the very least do not understand -- the Fed's current strategies. How can our leaders think they are making the right choices? What do you think?

Bernanke is a very narrow-gauged guy. He has spent his whole intellectual career studying the printing of money and we have now given him the keys to the printing presses. All he knows how to do is run them.

Bernanke was [on the record as saying] that there is no problem with housing in America. There was no problem in housing finance. I mean this was like in 2006 or 2005.


He is the Federal Reserve and the Federal Reserve more than anybody is supposed to be regulating these [financial institutions], so they should have the inside scoop, if nothing else.

That is problematic.

It is mind-boggling. Here is a man who does not understand the market, who does not understand economics -- basic economics. His intellectual career has been spent on the narrow-gauge study of printing money. That is all he knows.

Yes, he has got a Ph.D., which says economics on it, but economics can be one of 200 different narrow fields. And his is printing money, which he is good at, we know. We have learned that he is ready, willing and able to step in and bail out everybody.

There is this worry [whenever you have a major financial institution that looks ready to fail] that, "Oh my God, we are going to go down, and if we go down, the whole system goes down."

This is nothing new. Whole systems have been taken down before. We have had it happen plenty of times

History is littered with failed financial institutions.

I know. It is not as though this is the first time it has ever happened. But since [Chairman Bernanke's] whole career is about printing money and studying the Depression, he says: "Okay, got to print some more money. Got to save the day." And, of course, that is when he gets himself in deeper, because the first time you print it, you prop up Institution X, [but] then you got to worry about institution Y and Z.

And now we have got a dangerous precedent.

That is exactly right. And when the next guy calls him up, he is going to bail him out, too.

What do you think [former Fed Chairman] Paul Volcker thinks about all this?

Well, Volcker has said it is certainly beyond the scope of central banking, as he understands central banking.

That is pretty darn clear.

Volcker has been very clear -- very clear to me, anyway -- about what he thinks of it, and Volcker was the last decent American central banker. We have had couple in our history: Volcker and William McChesney Martin were two.

You know, McChesney Martin was the guy who said the job of a good central banker was to take away the punchbowl when the party starts getting good. Now [the Fed] -- when the party starts getting out of control -- pours more moonshine in. McChesney Martin would always pull the bowl away when people started getting a little giggly. Now the party is out of control.

This could be the end of the Federal Reserve, which we talked about in Singapore. This would be the third failure -- correct?

Yes. We had two central banks that disappeared for whatever reason. This one is going to disappear, too, I say.

Throughout your career you have had a much-fabled ability to spot unique points in history -- inflection points, if you will. Points when, as you put it, somebody puts money in the corner at which you then simply pick up.

That is the way to invest, as far as I am concerned.

So conceivably, history would show that the highest returns go to those who invest when there is blood in the streets, even if it is their own.


Is there a point in time or something you are looking for that will signal that the U.S. economy has reached the inflection point in this crisis?

Well, yeah, but it is a long way away. In fact, it may not be in our lifetimes. Of course I covered my shorts -- my financial shorts. Not all of them, but most of them last week. (In early August.)

So, if you are talking about a temporary inflection point, we may have hit it.

If you look back at previous countries that have declined, you almost always see exchange controls -- all sorts of controls -- before failure. America is already doing some of that. America, for example, would not let the Chinese buy the oil company, would not let the [Dubai firm] buy the ports, et cetera.

But I am really talking about full-fledged, all-out exchange controls. That would certainly be a sign, but usually exchange controls are not the end of the story. Historically, they are somewhere during the decline. Then the politicians bring in exchange controls and then things get worse from there before they bottom.

Before World War II, Japan's yen was two to the dollar. After they lost the war, the yen was 500 to the dollar. That is a collapse. That was also a bottom.

These are not predictions for the U.S., but I am just saying that things have to usually get pretty, pretty, pretty, pretty bad.

It was similar in the United Kingdom. In 1918, the U.K. was the richest, most powerful country in the world. It had just won the First World War, et cetera. By 1939, it had exchange controls and this is in just one generation. And strict exchange controls. They in fact made it an act of treason for people to use anything except the pound sterling in settling debts.

Treason? Wow, I did not know that.

Yes ... an act of treason. It used to be that people could use anything they wanted as money. Gold or other metals. Banks would issue their own currencies. Anything. You could even use other people's currencies.

Things were so bad in the U.K. in the 1930s they made it an act of treason to use anything except sterling and then by ‘39 they had full-exchange controls. And then, of course, they had the war and that disaster. It was a disaster before the war. The war just exacerbated the problems. And by the mid-‘70s, the U.K. was bankrupt. They could not sell long-term government bonds. Remember, this is a country that two generations or three generations before had been the richest most powerful country in the world.

Now the only thing that saved the U.K. was the North Sea oil fields, even though Prime Minister Margaret Thatcher likes to take credit, but Margaret Thatcher has good PR. Margaret Thatcher came into office in 1979 and North Sea oil started flowing. And the U.K. suddenly had a huge balance-of-payment surplus.

You know, even if Mother Teresa had come in [as prime minister] in ‘79, or Joseph Stalin, or whomever had come in 1979 -- you know, Jimmy Carter, George Bush, whomever -- it still would have been great.

You give me the largest oil field in the world and I will show you a good time, too. That is what happened.

What if Thatcher had never come to power?

Who knows, because the U.K. was in such disastrous straits when she came in. And that is why she came to power ... because it was such a disaster. I am sure she would have made things better, but short of all that oil, the situation would have continued to decline.

So it may not be in our lifetimes that we will see the bottom, just given the U.K.'s history, for instance.

That is going to be terrifying for individual investors to think about.

Yeah. But remember that America had such a magnificent and gigantic position of dominance that deterioration will take time. You know, you do not just change that in a decade or two. It takes a lot of hard work by a lot of incompetent people to change the situation. The U.K. situation I just explained ... that decline was over 40 or 50 years, but they had so much money they could have continued to spiral downward for a long time.

Even Zimbabwe, you know, took 10 or 15 years to really get going into its collapse, but Robert Mugabe came into power in 1980 and, as recently as 1995, things still looked good for Zimbabwe. But now, of course, it is a major disaster.

That is one of the advantages of Singapore. The place has an astonishing amount of wealth and only 4 million people. So even if it started squandering it in 2008, which they may be, it is going to take them forever to do so.

Is there a specific signal that this is "over?"

Sure ... when our entire U.S. cabinet has Swiss bank accounts. Linked inside bank accounts. When that happens, we will know we are getting close because they will do it even after it is illegal -- after America has put in the exchange controls.

They will move their own money.

Yeah, because you look at people like the Israelis and the Argentineans and people who have had exchange controls -- the politicians usually figured it out and have taken care of themselves on the side.

We saw that in South Africa and other countries, for example, as people tried to get their money out.

Everybody figures it out, eventually, including the politicians. They say: "You know, others cannot do this, but it is alright for us." Those days will come. I guess when all the congressmen have foreign bank accounts, we will be at the bottom.

But we have got a long way to go, yet.

The obvious conclusion is move some of your assets offshore before it is illegal, and long before the policians do it themselves.


Continued ability to absorb workforce extrants is at risk.

A sobering forecast from Nouriel "Black Swan" Roubini. He sees the collapse of the U.S. consumer leading to possible negative growth in the Chinese export sector. The export sector has been the great driver of the Chinese economic boom -- a boom which is necessary to absorb what is at root displaced labor emanating from the phase-out of decades of misguided Maoist economic policies.

Not mentioned here, but interesting, is the insight offered about the odd U.S./Chinese economic relationship. When you obey the timeless advice to "follow the money," you see that the relationship amounts to the Chinese lending the U.S. consumer money to buy Chinese goods while knowing that the loans cannot be paid in full. Why do this? Imagine if the U.S. subprime mortgage brokers followed business plans of actually retaining all the imprudent loans they originated, instead of pawning them off on the packaged securities buyer/suckers. Sounds crazy.

The reason for the policy is that the Chinese ruling mandarins dare not deviate from what has worked so far, although they may not have a choice now. The Chinese government has been engaged in a giant Keynesian fiscal stimulous policy. Usually this would involve the government borrowing money and directly spending it on something employment stimulating but economically unsound. Instead the Chinese government has been borrowing money and reloaning it to the U.S. consumer, who spends in on something that stimulates Chinese employment ... but is economically unsound. (One cannot help but be amazed that so much U.S. consumer spending has been on Chinese goods that the policy makes any sense at all.) And now the difficult and long deferred task of finding alternative uses of the vast pool of Chinese savings is at hand.

[T]hese excepts from our local Dr. Doom stand on their own (although I know some will take issue with the proportion of the economy he deems to be export dependent):

Let us consider now in detail the evidence that China may be on its way to a hard landing ...

The latest batch of macro data from China are mixed but all pointing towards a sharp deceleration of economic growth: official GDP data showing growth down to 9% from the 12% of a couple of years ago; sharply falling spending on consumer durables (autos); falling home sales and sharp fall in construction activity; leading indicators of the manufacturing sector (the Chinese PMI) showing a value of 44.6% (i.e. an outright contraction of manufacturing as a level below 50% indicates a contraction), its lowest level ever since its publication. 9 out of 11 PMI sub indices showed contraction -- Output, New Orders, Input Prices, Purchases of Inputs, New Export Orders, Imports, Backlogs of Orders, Stocks of Major Inputs. Output index fell to 44.3 from 54.6 in September, while new orders dropped to 41.7 from 51.3, while the inventory index climbed to 51.4 from 50.5. The decline in total orders has been even stronger than in export orders, thus suggesting a weakening in both domestic and export demand. And the decline in construction activity is without doubt a major contributor to the recent weakness in industrial activity in China.

Note also that manufacturing, which accounts for 40% of China's GDP, is slowing based on surveys of manufacturers, matching with anecdotal reports of factory closures in China's south East coast. Industrial production has slowed to the lowest level in 6-years (output rose 11.4% in September, from 12.8% in August). While slowdown may have been exacerbated by the Olympics shut-down, it has been on a slowing trend for months. The Federation of Hong Kong Industries predicts that 10% of an estimated 60 to 70 thousand Hong Kong-run factories in the Pearl River Delta will close this year ...

There is thus now a growing risk of a hard landing in China. Let us be clear what we mean by hard landing. In a country with the potential growth of China, hard landing would occur if the growth rate of the economy were to slow down to 5-6% as China needs a growth rate of 9-10% to absorb about 24 million folks joining the labor force every year; it needs a growth rate of 9-10% to move every year about 12-14 million poor rural farmers to the modern industrial/manufacturing urban sector. The whole social and political legitimacy of the regime of the ruling Communist party rests on continuing to deliver this high growth great transformation of the economy ...

Note that China is an economy is structurally dependent on exports: net exports (or the trade balance surplus) are close to 12% of GDP (up from 2% earlier in the decade) and exports represent about 40% of GDP. Real investment in China is about 45% of GDP and, leaving aside the part of this investment that is housing and infrastructure spending, about half of this capex spending goes towards the production of new capital goods that produces more exportable goods. So, with the sum of exports and investment representing about 80% of GDP, most of Chinese aggregate demand depends on its ability to sustain an export based economic growth.

The trouble, however,is that the main outlet of Chinese exports -- the U.S. consumer -- is now collapsing for the first time in two decades. Chinese exports to the U.S. were growing at an annualized rate of over 20% a year ago; while the most recent bilateral trade data from the U.S. now show that this export growth has now fallen down to 0%. But the worst is still to come in the next few quarters.

After an OK second quarter in the U.S. (boosted by the tax rebates) U.S. retailers hoped that the consumer downturn would be minor: they thus placed over the summer massive orders for Chinese (and other imported) goods for Q3 and Q4. But now the U.S. holiday season clearly looks like the worst that the U.S. will experience in decades and the result of it will be a huge overhang of unsold Chinese goods. Thus, you can expect that orders of Chinese goods for Q1 of 2009 and the rest of 2009 will be sharply down, dragging Chinese exports to the U.S. into sharply negative territory. And it is not just Chinese exports to the U.S.: until a few months ago the U.S. was starting to contract but the rest of the advanced economies (Europe, Canada, Japan and Australia/New Zealand) were growing at a sustained rate, thus boosting Chinese exports. But there is now strong evidence that a severe recession has now started in almost all of the advanced economies. You can thus expect that Chinese export growth to Europe, Canada, Japan, etc. will sharply decelerate in the next few quarters, thus adding to the fall in Chinese net exports.