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GOLD AS SAFE-HAVEN AMID GLOBAL DEPRESSION
“The world economy is now held hostage by an elite banking cartel, whose reckless pursuit of speculation and bloated profits, has precipitated a breakdown of the global financial system.”
Gold has emerged as the ultimate safe-haven, argues Gary "SirChartsAlot" Dorsch. Just as in the 1930s no country wants its currency to be too strong. They would rather "beggar thy neighbor" to keep their export-dependent businesses going. As far as we can tell, this is basically crap. If your currency is "too strong," as Switzerland now feels the Swiss franc is, your import prices decline and you can lower final product prices to compensate for the higher currency. Nevertheless, every country acts as if the policy is a wise idea. Only gold is immune from such political and monetary machinations. Thus its strength.
"If you want to continue to be the slaves of bankers, and pay the cost of your own slavery, then let bankers continue to create money and control credit," warned Sir Josiah Stamp, former chief of the Bank of England in 1927. Indeed, the world economy is now held hostage by an elite banking cartel, whose reckless pursuit of speculation and bloated profits, has precipitated a breakdown of the global financial system, and is plunging the world towards a "Great Depression."
The global economy will grind to a halt this year, the IMF predicts, after $ 30-trillion in market capitalization was erased from world stock markets since October 2007, in the wake of the worst banking crisis since the Great Depression of the 1930s. What began with the bursting of the U.S. house price bubble, has so far, resulted in $1.2 trillion of losses and write-downs from toxic assets held by banks worldwide.
"Unless stronger financial strains and uncertainties are forcefully addressed, the pernicious feedback loop between real activity and financial markets will intensify, leading to even more toxic effects on global growth," the IMF warned, predicting that bank losses could eventually peak at $2.2 trillion, and hobble the world economy in the year ahead. "Downside risks continue to dominate, as the scale and scope of the current financial crisis has taken the global economy into uncharted waters, triggered by the collapse of bank credit and stock markets." the IMF said on January 28th.
Global trade collapsed by 45% in the 4th quarter from a year earlier, exposing the staggering depth of the global financial crisis. Speaking at Davos, Switzerland last week, Australian trade minister Simon Crean warned that falling global trade would compound the economic downturn. "If global trade is a multiplier in growth, it also has the potential to be a multiplier in reverse," he warned on January 31st.
The Baltic Cape-Size Index, which measures the cost of shipping coal, iron ore, and steel across the high seas, is still languishing 90% below its record high of 19,200 points set in May 2007. Global bankers suspended issuing "letters of credit" that importers and exporters rely upon to finance overseas trade. Of the $14.5 trillion of cargo that is shipped across the high seas each year, roughly 90% is financed with "letters of credit," issued by bankers, guaranteeing payment to the shipper, once shipments are delivered to the buyer. With banks cutting off "letters of credit," the wheels of global shipping have ground to a halt.
Global growth this year will come to a "virtual standstill," warned Olivier Blanchard, the IMF's chief economist, on January 28th. "We need stronger policy on the financial front," he said. Leading the Group of Seven nations into contraction will be the UK economy, projected to slide 2.8%, Japan's economy will shrink 2.6% and the Euro-zone will lose 2%, followed by the U.S. economy, which will contract 1.6 %. China's economy will slow to 6.7% growth, after peaking at 12.7% in Q2, 2007.
There are indications that U.S. President Obama is heeding the IMF's message, and is ready to exert pressure on the largest U.S. banks, and over time, could exercise more day-to-day control and scrutiny over their lending practices. Obama will require American bankers receiving cash from the Treasury's bail out fund, to commit to minimum levels of lending and place caps on executive pay and bonuses.
Shifting the focus from paying bonuses to Wall Street bankers, to reviving the U.S. housing market and consumer spending, is the first step for escaping the economic death spiral. Citigroup, under government pressure to increase its lending, says it will use $36.5 billion to issue mortgages, make credit card loans, and buy distressed assets in the tight credit markets in the coming months.
A reeling U.S. economy has also translated into severe pain for overseas markets. South Korea, the world's 13th largest economy, is among the most vulnerable to the global financial crisis. Although China is now Korea's largest trading partner, much of what China imports from Korea is re-exported to the global markets in the form of finished goods. Korea's exports to China plunged to $4.75 billion in December, or 35.4% lower from a year ago, despite a sharply weaker Korean won. The last double-digit drop of exports was in 2002, amid the bursting of the dot-com bubble.
Korea's economy is a key bellwether of the global economy, since exports are equivalent to 52% of its gross domestic product. Preliminary reports indicate that exports continued to plunge in January, with shipments to the U.S. declining 21.5%, exports to Europe plunging 47%, and sales to Latin America 36% lower than a year ago. Not surprisingly, Korea's GDP shrank 5.6% in the 4th quarter from the previous three months, the biggest drop since 1998.
Korea's industrial output plunged 9.6% in December, slipping for a 6th consecutive month, as Hyundai Motor, Hynix Semiconductor, and steelmaker Posco reduced output in January, to cope with sagging demand. Samsung Electronics, the world's largest maker of memory chips, liquid-crystal displays and televisions, reported its first ever quarterly loss. Exports of semiconductors plunged 47% in January from a year earlier, and automobiles declined 55%.
China's vast manufacturing sector, which employs tens of millions of workers and has functioned as the cheap labor workshop of the globe, also slowed dramatically as demand for its exports collapses in its major North American and European markets. About 20 million migrant workers, moving from villages to cities and factories have returned to the countryside, after losing their jobs because of the economic downturn. Beijing is warning that rising unemployment could fuel social unrest.
After growing at more than 10% a year for the past five years, the Chinese economy's growth rate has fallen in every quarter since reaching an all-time high point of 12.7% in Q2 2007. Growth rate slumped to 6.8% in Q4 2008, which is not fast enough to create jobs for this year's 7 million new entrants into the rural labor market, and would leave China with about 25 million jobless workers.
Still, China has internal resources -- roughly $2 trillion in foreign currency reserves, to prevent a hard-landing for its economy, and has vowed to spend 4 trillion yuan on various infrastructure and social programs, over the next two-years, equal to 15% of its total economic output. Chinese premier, Wen Jiabao, said the goal of 8% growth this year, is "an attainable target through hard work. The harsh winter will be gone and spring is around the corner," he said.
When searching for a glimmer of optimism for the global economy these days, there is a small sigh of relief that China's Purchasing Managers' Index (PMI) rose to a reading of 42.2 in January from 41.2 in December, inching further away from the record low of 40.9 plumbed in November. The PMI is a snapshot of overall conditions in manufacturing industry, and still signals a sub-par growth rate that can ultimately lead to higher Chinese unemployment.
However, the index for new export orders from overseas jumped to 36.3 in January, up 28% from a low of 28.2 in November, a possible sign that the worst is behind China's export industry. If China is going to be the savior that pulls the global economy out of its death spiral, one early signal could be a sustained rally in the Shanghai stock index, above the December high at the 2,100 level. Copper traders in Shanghai are also tracking factory activity and stock market trends.
Russia’s Putin Lashes out at Wall Street Barons
Last week, the world's most influential business executives and politicians converged in Davos, Switzerland, with the most dangerous economic crisis since the 1930's dominating the discourse. One of the main attractions at the World Economic Forum in Davos, was Russian kingpin Vladimir Putin, whose political strength rests on the Kremlin's authoritarian control over the media, secret police, banks, and natural resource oligarchs, that has stifled any meaningful political opposition.
Putin scolded Western capitalists for dragging the global economy into a death spiral. "A year ago, American delegates emphasized the U.S. economy's fundamental stability and its cloudless prospects. Today, investment banks, the pride of Wall Street, have virtually ceased to exist. The entire economic growth system, where one regional center prints money without respite and consumes material wealth, while another regional center manufactures inexpensive goods and saves money printed by other governments, has suffered a major setback," Putin declared.
World leaders in Davos were informed of street riots and spreading discontent, and vowed to prevent the financial crisis from inflicting deeper damage and making global poverty worse. Last week, more than a million people took to the streets of French cities to protest, thousands marched in Russia, "Buy American" initiatives have sprung up in the U.S. Congress, and thousands of British employees staged walkouts against the use of foreign contract workers.
So far, the biggest casualties of the global financial crisis are the Russian economy, currency, stock market, and the Kremlin's rapidly shrinking stash of FX reserves. The Russian Trading System Index, once the world's biggest stock market bubble, has collapsed, with a staggering 80% slide from its record high set in July of last year. Putin called the Western banking crisis a "perfect storm whose destructive powers were multiplied worldwide," but in a humble tone, called upon his economic rivals to work together to find an exit route from the death spiral.
Global bankers are retreating en masse from the emerging world, including Russia, and private capital flows to emerging markets are expected to plunge to $165 billion this year, down from almost $1 trillion two years ago. Foreign investors and Russian citizens withdrew at least $278 billion from Russian banks deposits, exchange traded bonds and stocks since August, shedding more than $1 trillion from the RTS Index.
Energy and metals make up 80% of Russia's exports, Deputy Prime Minister and Finance chief Alexei Kudrin said on January 30th, that Russia's export revenue could plunge by $200 billion in 2009, to roughly $269 billion. "It is the first time since 1982-1983 that the global economy will see demand for crude oil and energy products decline for two years running," Kudrin said. However, unlike in the Euro-zone and the U.S. economy, Russia does not face a debilitating deflation risk, since falling demand in Russia will be counteracted by rising prices on imported goods due to the devaluation of the Russian rouble," Kudrin said.
The demise of Putin's empire is largely linked to the stunning collapse of crude oil, with Russia's Urals blend tumbling from as high as $140/barrel in July, to as low as $32/barrel in December. Surprisingly, the Kremlin has refused to join the OPEC cartel in cutting its oil output to support prices, or even siphoning off some of its oil supply into strategic tankers, to help reverse the bear market slide.
The sharp slide in crude oil prices has left Russia's rouble vulnerable to speculative attack by currency traders, and a 40% drop in budget revenues as the global economic crisis lays bare Russia's poorly diversified economy. Putin relied upon oil profits to steer Russia out of the 1998 currency-crisis, wiped out the country's foreign debt, amassed nearly $600 billion in foreign currency reserves, and doubled average worker's incomes in six years, during oil's boom years.
Russia's economy quickly became the world's 7th-largest. One year ago, on February 14, 2008, Putin boasted of Russia's economic transformation in his eight years in power. "It will be quite easy for Russian banks to get through the liquidity crisis. We have restored the fundamental principles of Russian economy on an absolutely new market base, and we are surely changing into one of the economic leaders of the world. The stock index rose 20% in 2007," Putin declared.
But without a competitive manufacturing base as a balance, to Russia's dependence on energy, base metals, and other natural resources, Russia's economy is highly vulnerable to commodity price fluctuations. Russia has lost 6 million jobs since the global credit crunch began to bite, as industrial output went into free fall.
Foreign inflows which hit $100 billion in 2007, and were responsible for 25% of the investments in Russia's capital markets, went into reverse after Putin's accusation in July that the coal and steel company Mechel MTL.n had engaged in price-fixing, knocking its shares 40% lower in a single day. So was the continuing battle between Putin and the embattled Anglo-Russian oil producer TNK-BP, reminiscent of a Yukos-style asset grab, and there was the August invasion of Georgia.
Urals crude oil, Russia's chief export blend, has slumped far below the $70 average required to balance Russia's budget this year. Declining oil prices and a deteriorating economy has invited speculators to short-sell the Russian rouble, and ordinary Russian citizens, mindful of the previous rouble devaluation in 1998, when the currency lost 70% of its purchasing power, are rushing to convert their rouble savings into U.S. dollars, Swiss francs, and gold.
Russia holds the world's largest natural gas reserves, the 2nd largest coal reserves, and the 8th largest oil reserves, and in a crowning achievement of Russian petro-power, Putin ordered the Russian rouble to be freely convertible into other foreign currencies. One year ago, Dmitry Medvedev declared that he would push for Russian oil and gas to be traded in roubles. "We need to stimulate the switch to rouble payment for our commodities," Medvedev said, since a decline in the U.S. dollar's value had eroded the purchasing power of oil exporters.
But one year later, it is the Russian rouble which has fallen to an all-time low against the U.S. dollar, despite efforts by the central bank to stem capital flight by hiking its repo rate to 13%, and selling $200 billion from its FX stash for roubles on the open market. By remaining committed to rouble convertibility, the Kremlin was forced to spend 1/3 of its treasure chest, to defend its currency, which still lost 1/3 of its value against the dollar since the invasion of Georgia last August.
Unable to restore confidence in the rouble, amid weak base metal and crude oil prices, Moscow has adopted a so-called dirty float that will allow the rouble to gyrate within a wide range of 26 to 41 to the dollar. The currency market is still allowed to determine the value of the rouble, but the central bank could intervene to enforce the trading band, rather than trying to influence it on a day-to-day basis.
By widening the trading band for the rouble, the Kremlin aims to conserve more of its badly depleted FX stash. Sergei Shvetsov, Russia's FX chief, said on January 27th, the central bank had spent $35 billion to support the rouble in January, but there were no interventions in the last week of the month, as the rouble found its own level of equilibrium, with Urals crude gyrating around $42/barrel.
But should Urals crude tumble towards $30 amid a synchronized global depression, the rouble could tumble further towards 41 per US$, from around 36 roubles today. Shvetsov also expressed his backing for a freely floating currency, in order to have more leverage over inflation through adjusting interest rates, and to attract foreign capital, once commodity prices stabilize and begin to rebound.
The global capital and money markets operate in a vast web of interconnections that are sometimes difficult for traders to uncover. One of the outgrowths of the Russian rouble devaluation, and the collapse of the crude oil and Russian stock market, was a flight into safe-haven Swiss francs and gold. The Swiss franc has gained 35% against the Russian rouble over the past three months, while the yellow metal has soared 65% to an all-time high of 33,000 roubles per ounce.
Swiss National Bank warns Currency Speculators
Gold hit all-time highs against most major foreign currencies in January, confounding conventional wisdom, with a background of plunging industrial commodities, and a global economy that is lurching towards a deflationary depression. Instead, gold's role as a hedge against excessive money printing by central bankers, and major currency devaluations, has attracted legions of investors worldwide.
"Nations are not ruined by one act of violence, but quite often, gradually, and almost imperceptibly, by the depreciation of their currency, through excessive quantity," said Nicolas Copernicus, in 1525. Even the Swiss National Bank, with its reputation as a monetary hawk, has now declared war against currency traders who are bidding up the Swiss franc as a safe-haven against other depreciating paper currencies, such as the Russian rouble and weak Central European currencies.
The Swiss National Bank is ready utilize all the weapons in its arsenal, to prevent further appreciation of the Swiss franc against other currencies, especially against the euro, said SNB deputy Philipp Hildebrand on January 21st. The SNB slashed its 3-month Libor target by 50 basis points to 0.50% on December 11th, yet the Swiss franc has climbed 7% higher against the euro, threatening to undermine Switzerland's export oriented economy. "The SNB could also buy government or corporate bonds to ease monetary conditions further," Hildebrand warned, even if rates reached zero.
"We have all options open and have no limits when intervening in financial markets should it become necessary," SNB member Thomas Jordan said on December 11th. "In general, a central bank can always increase the absolute amount of its own currency in circulation," Hildebrand added. "The SNB could sell Swiss francs against other currencies without limits. In an extreme case, it could commit itself to buying foreign currencies at a fixed rate," he warned.
In a world of currency devaluations and instability, zero-percent money market rates, and soon, massive central bank monetization of government bonds, gold has emerged as a safe-haven for preserving wealth.
"The things that will destroy us are, politics without principle, pleasure without conscience, wealth without work, knowledge without character, business without morality, science without humanity, and worship without sacrifice." ~~ Mahatma Gandhi.
A GAO report found that 83 of the largest U.S. companies had at least one subsidiary in a tax haven. We are surprised it is not 100 out of 100.
83 of the 100 largest publicly traded U.S. companies, including Citigroup, PepsiCo and General Motors, had units in multiple tax havens in 2007, a government study said. Among those companies were some recipients of federal bailout money.
The Government Accountability Office said in a report dated December 18 and released today (1-16) by two senators that four companies, Morgan Stanley, Citigroup, Bank of America, and News Corp., had more than 100 subsidiaries in low-tax or no-tax countries. The first three companies received or will receive shares of a $700 billion financial rescue package approved by Congress.
"We should take action to shut down these tax dodgers and we will be introducing legislation to do just that," said North Dakota Senator Byron Dorgan, a Democrat who released the report with Michigan Senator Carl Levin, also a Democrat.
Companies have many reasons for establishing units in low-tax countries such as the Isle of Man, British Virgin Islands, or Liechtenstein, many of which also have strict financial-privacy protections, the GAO said.
"The existence of a subsidiary in a jurisdiction listed as a tax haven or financial privacy jurisdiction does not signify that a corporation or contractor established that subsidiary for the purpose of reducing its tax burden," the report said. "We did not attempt to determine if corporations or contractors engaged in transactions with their subsidiaries in order to reduce their tax burden."
Citigroup had 427 subsidiaries in tax-haven countries and Morgan Stanley had 273, the GAO said. News Corp. and Bank of America had 152 and 115, respectively.
In some cases, such as in the soda industry, competitors varied on their presence in tax havens. Pepsi had 70 subsidiaries in tax havens, compared with eight for Coca Cola, the GAO said.
Of the 83 companies, 74 held federal contracts, including General Motors with 11 subsidiaries in countries such as Barbados, Bermuda, Ireland, Switzerland, Singapore and the Cayman Islands.
The companies identified by the GAO generally declined to comment. PepsiCo said it was not trying to evade taxes with its international presence. "Our subsidiaries are to support the sale of our products," PepsiCo spokeswoman Jenny Schiavone said. "We operate or sell our products in the majority of the countries considered in the GAO analysis."
Some of the companies identified by the GAO, including Oracle Corp., which has 77 subsidiaries in foreign tax havens, are urging Congress to renew a former tax holiday that would let them pay an effective rate of 5.25% on foreign profits they import to the U.S., instead of rates as high as 35% that otherwise would be due.
UBS TAX PROBE FALLOUT EXACERBATED BY SWISS PRESSURE IN BAILOUT
UBS AG, the Swiss bank that received $59.2 billion in an unprecedented national bailout, is facing growing pressure from government officials on both sides of the Atlantic to resolve a U.S. tax evasion investigation and restructure its loss-making investment bank.
While the tax probe threatens UBS's business in the U.S. where the company derives almost 20% of revenue, the Zurich-based bank is struggling to stabilize its wealth-management units after clients withdrew a record SF101 billion $87 billion) in 2008, JPMorgan Chase & Co. analyst Kian Abouhossein estimates. UBS shares slumped 63% during the past 12 months, more than any bank in the benchmark Swiss Market Index.
Pressure is intensifying on Chairman Peter Kurer, whose one-year term expires in April, to restore earnings. After helping UBS unload subprime and other toxic U.S. mortgage-backed securities, the Swiss government wants management to move faster to reorganize the investment bank, which analysts estimate had a loss last year of 32.5 billion francs, and to stop customers from pulling funds, said a person familiar with the matter who declined to be identified.
"UBS seems to be a magnet for a particular slew of problems," said Scott Moeller, a finance professor at Cass Business School in London and former banker at Morgan Stanley and Deutsche Bank AG. "They need to do something quickly."
UBS has said it will reduce risk-taking and the balance sheet, scale down the securities unit to complement wealth management and return to profitability this year. The company lowered assets by more than $700 billion since June 2007, announced 9,000 job cuts, and raised $32 billion from investors to replenish capital after $48.6 billion of losses and credit-market writedowns, according to data compiled by Bloomberg.
The largest Swiss bank may report a loss of almost 18 billion francs for 2008 when it publishes results on February 10, according to the median estimate of eight analysts surveyed by Bloomberg. It would be the most in the country's history. The 4th-quarter deficit was probably SF6.3 billion. ...
Raoul Weil, the former head of wealth management, UBS's biggest unit, was declared a fugitive from U.S. justice last month and Jerker Johansson's position as head of the investment banking division is tenuous, said four bankers who work in the group.
UBS has lost 79% of its market value from the peak in June 2007, compared with the 68% drop of Zurich-based Credit Suisse Group AG, the 2nd-biggest Swiss bank, in the same period. Deutsche Bank AG in Frankfurt, the largest German bank, fell 82% and London-based HSBC Holdings Plc, Europe's #1 bank by market value, declined 42% ...
Kurer, 59, told investors in Zurich last month that the recovery of UBS's reputation and a settlement of the probe into whether the bank helped 20,000 wealthy clients avoid American taxes are priorities for this year. Both have the potential to further erode UBS's wealth-management subsidiary, from which clients may redeem another 65 billion francs in 2009, according to JPMorgan's Abouhossein in London.
UBS's assets under management probably will drop to 2.3 trillion francs this year from 3.3 trillion francs in mid-2007, Dresdner Kleinwort analyst Stefan-Michael Stalmann said. While assets are down to levels last seen in early 2005, UBS employs about 10,000 more people at the units than four years ago.
The executive team has not yet proven it can achieve a turnaround to stop client withdrawals, said Florian Esterer, a senior portfolio manager at Zurich-based Swisscanto Asset Management AG, which oversees about $48 billion and owns UBS shares. "I am afraid it will be pretty difficult. One big problem for UBS is the U.S. investigation," he said.
UBS may pay a $1.7 billion fine as part of a settlement with U.S. authorities before the next meeting of the Senate's Permanent Subcommittee on Investigations, scheduled for February 24, said a person with knowledge of the matter.
UBS also may turn over 200 to 1,000 accounts that had a middleman between the Swiss account and the account-holder, typically a Liechtenstein trust or Cayman Islands corporation, said two people with knowledge of the probe. The entities were set up so clients could invest in U.S. securities without being detected by the IRS, they said.
The use of such entities may be viewed as fraud in Switzerland, which would provide a reason to turn over the documents to U.S. authorities, the people said. U.S. officials are also looking into American accounts in other parts of UBS's business, three people with knowledge of the case said.
UBS is straddling the divide between cooperating with U.S. officials and maintaining the confidentiality of its clients, a cornerstone of Swiss banking. Sabine Jaenecke, a spokeswoman for the bank, declined to comment on the U.S. inquiry.
"Nearly any level of financial settlement would be good news, if it was capable of delivering finality and the ability to return to repairing the brand," Credit Suisse analysts Daniel Davies and Rupak Ghose wrote in a Jan. 29 note to clients.
Weil, 49, who became head of wealth management after Marcel Rohner, 44, was named chief executive officer in July 2007, was indicted on conspiracy charges in the U.S. tax case and stepped down from his role at the bank in November. Weil has denied allegations through his lawyer.
In his indictment, U.S. prosecutors said that about 60 private bankers "routinely" traveled to the U.S. to conduct unlicensed banking and investment advisory activities in the country. Former UBS private banker Bradley Birkenfeld pleaded guilty in June to helping Igor Olenicoff, a California billionaire, dodge taxes. He also described schemes used by UBS bankers to help conceal clients' assets, including the smuggling of diamonds into the U.S. in a toothpaste tube.
Olenicoff in turn sued UBS, naming Kurer, the former general counsel, as one of the defendants in an alleged plot to dupe the billionaire and other U.S. clients about their tax liabilities and put them "in the cross-hairs of a criminal investigation."
IRS Is Said to Broaden UBS Inquiry
The Internal Revenue Service, which is participating in a broad federal investigation into UBS and its offshore private banking services, is widening its scrutiny to include ordinary accounts owned by Americans who work overseas, according to a person briefed on the issue.
The expanded scrutiny, which is being conducted by the agency's civil division, parallels a narrower investigation by the Justice Department's criminal division into scores of wealthy American clients with hidden offshore accounts run by UBS.
The so-called expatriate accounts are maintained in the same division, global wealth management and business banking, that oversaw the offshore accounts business now under criminal investigation. Prosecutors are investigating whether UBS, the world's largest private bank, helped up to 19,000 wealthy American clients improperly deposit $20 billion overseas, evading an estimated $300 million a year in taxes.
The additional spotlight on a separate group of UBS clients increases the pressure on the bank, which has been asked to disclose the names of the American private banking clients or face possible indictment. The I.R.S. and UBS, which is in negotiations with the Justice Department, declined to comment.
Like the wealthy investors with offshore bank accounts at UBS, American citizens or residents who work abroad and have foreign banking accounts must file forms with the Treasury Department known as F-bars, or foreign bank and financial accounts reports, that disclose their assets. They typically must also sign and give to their employers forms that allow the I.R.S. to track whether taxes have been properly withheld.
Michael G. Pfeifer, a tax lawyer at Caplin Drysdale who is a former I.R.S. lawyer, said that American citizens or residents who work abroad are taxed on their worldwide income but can either receive a tax credit for taxes paid to foreign governments or exclude those taxes from their income on which they owe taxes.
HONG KONG, SINGAPORE MAY SOON COME UNDER INCREASED SCRUTINY FROM THE U.S.
It has been speculated that Hong Kong and Singapore have benefited and will continue to do so from the increased pressure put on Switzerland and Liechtenstein, which will cause European customers to send their assets east. Also it is expected that the two Asian financial centers will piggyback on the rise of China as an economic power.
The U.S. will soon have a tool at its disposal which makes it difficult for a U.S. person or entity to deal with a jurisdiction: designating the jurisdiction as an "Offshore Secrecy Jurisdiction" or "Tax Haven." Some details are provided below. Suffice it to say that Hong Kong and Singapore would like to avoid the designation, and that they may end up coming to some understanding with the U.S. government with regard to financial privacy in the not to distant future -- to the detriment of their U.S. customers, of course.
Hong Kong and Singapore may soon come under increased scrutiny from the U.S., if incoming President Barack Obama follows through with his pledge to crack down on abusive "tax havens" which "peddle secrecy" and "cloak tax evasion and other misconduct,"according to Withers law firm.
In February 2007, then-Senator Obama co-sponsored the Stop Tax Haven Abuse Act (STHAA), which was introduced in both the Senate and the House. Although no action has been taken on either version since then, Obama's aides have indicated that similar legislation will be considered in the early stages of the new administration.
With both Hong Kong and Singapore featuring on the initial list of 34 "Offshore Secrecy Jurisdictions," Obama's inauguration could mark the beginning of increased restrictions for U.S. persons utilizing these offshore financial centers, according to Kurt Rademacher, Partner at Withers, Hong Kong.
"If Obama, as President, pushes similar legislation through, the next step would be to determine whether Hong Kong and Singapore should be considered official 'tax havens'," said Mr. Rademacher. "If designated as "tax havens," a number of restrictions would be imposed on U.S. persons using these jurisdictions as offshore financial centers."
The centerpiece of the STHAA is a provision that would force taxpayers to prove that they do not have control over any offshore entities with which they contract, including trusts, corporations, limited liability companies and partnerships. The STHAA would also increase reporting and withholding requirements on financial institutions and fiduciaries dealing with Hong Kong and Singapore, provided they are designated as "tax havens," as well as increase penalties for tax avoidance in these offshore jurisdictions.
"The penalties and deterrents that come with the STHAA are very real," added Mr.Rademacher. "U.S. banks could be prohibited from operating accounts for non-compliant foreign financial institutions and U.S. financial institutions could be prohibited from accepting credit card transactions involving non-compliant foreign banks."
Other jurisdictions that featured on the "Offshore Secrecy Jurisdictions" list include Jersey, Guernsey, the Isle of Man, Switzerland, the Cayman Islands, the British Virgin Islands, Bermuda, the Bahamas, Costa Rica and Belize.
It has been estimated that the STHAA would generate up to US$50 billion of additional tax revenue for the U.S. annually, which could be used to offset an array of new spending programs Obama has promised.
Total wild guess on the revenue generation, and unmitigated bs on the "offset" notion, since the spending will continue out of control no matter what.
EU TAX COMMISSIONER TARGETS BANK SECRECY IN TAX PROBES
European Union states will not be able to fend off tax evasion inquiries by hiding behind bank secrecy rules under a proposal to be adopted on [February 2]. The measure is part of wider EU efforts to snare people who exploit loopholes in rules to escape the taxman.
"The European Commission will approve a reform of the mutual assistance in the assessment of taxes in other countries and it would cover all taxes, including value added tax and excise duties," EU Tax Commissioner Laszlo Kovacs told Reuters.
The proposal, which will need the backing of all 27 member states to become law, allows an EU country to request information about one of its citizens living in another member state. It targets Luxembourg, Austria and Belgium which have local bank secrecy rules in place.
"For example, the German tax authorities will have the right to request information on a German resident in Belgium and Belgium should not decline it. It will have no impact on the relations between the Belgium tax authority and the Belgian resident," Kovacs said.
"A state cannot decline the request by using bank secrecy as a kind of argument. It should provide the information. I expect majority support and when you have that I expect sooner or later the two or three member states who are opposing will finally give in," Kovacs said.
The cross-border recovery rate of unpaid taxes is about 5% and tax evasion has become a major issue for cash-strapped EU finance ministers. Germany was incensed that some of its citizens were squirreling away cash in neighboring non-EU Liechtenstein.
Kovacs believes that by adopting this measure it will also give the bloc leverage in dealing with non-EU tax havens.
"This will certainly help EU member states when they are negotiating this kind of cooperation with some third countries, including some tax havens that normally reject any kind of information request," Kovacs said.
"Today, the tax havens say ‘you don’t have this system even in the European Union so why do you expect us to give you information,’" Kovacs added.
The measure will also radically alter the debate on a separate proposal Kovacs made in November to tighten up the bloc's rules that tax savings a citizen from one EU state has in another or in non-EU states like Liechtenstein and San Marino which signed up to the law.
The reform widens the scope of the savings tax rules to include foundations that were used in Liechtenstein by German investors.
The savings tax reform has yet to be adopted with EU states like Luxembourg saying it was not needed. Under the current EU savings tax regime Luxembourg, Belgium and Austria were allowed to keep their bank secrecy rules by adopting a version of the law that is different from the rest of the bloc.
Kovacs does not expect the savings tax or mutual assistance reforms to be adopted under his watch which ends in November.
Additionally, the savings tax reform is unlikely to take effect unless the 15 third country jurisdictions which signed up to the original measure also back the updated version.
"I think the new Commission can finalize the agreement within a year," Kovacs said.
TAXES: HOW TO CHEAT LIKE A PRO
If it is not reported on a W-2 or 1099, who is to know? Not the IRS, taxpayers figure. But you can still get caught.
Before bowing out as nominee for health czar, Thomas A. Daschle explained as best he could how he managed to overlook $340,000 of income on his 2005 through 2007 tax returns. His reason: The income (some cash and a lot of chauffeuring) did not show up on his 1099s. These are the forms self-employed people such as influence peddlers receive instead of W-2 wage statements.
The former Senate majority leader seems to have something in common with his fellow citizens -- or at least those who contribute to the $345 billion annual gap (as of 2001) between what the Internal Revenue Service estimates taxpayers owe and what they voluntarily cough up. Tax filers own up to nearly all the income the IRS can double-check against documents sent to it by employers, brokers and banks. But people are for some reason very neglectful when it comes to income and deductions that the IRS cannot easily cross-check. They pay only 45% of the taxes owed in their noncheckable lives.
"I run into it with clients all the time. The current system has built a mentality that if there is no W-2 or 1099, it is not reportable income," says Phoenix CPA Edward Zollars.
Daschle should have known better, but maybe it is understandable if ordinary folks think this way. Over the past two decades the number of 1099s and other information returns sent to the Internal Revenue Service has doubled -- to a projected 1.95 billion this year. IRS computers match most against individual returns and spit out 3 million-plus CP 2000 notices to taxpayers a year demanding an explanation for discrepancies.
Meanwhile, the ranks of IRS revenue agents (who perform the "field" audits that might find, say, unreported cash income) have shrunk 25% and the IRS has been busy battling dicey tax shelters, wacky tax protesters and hidden offshore accounts. The result: The IRS conducted field audits of only one in 440 taxpayers last year, half the rate in 1998. "The IRS does not have the resources now to do anything besides document matching for the bulk of the population," observes attorney Lawrence B. Gibbs, a Miller & Chevalier partner who was IRS commissioner in the late 1980s.
Yes, but do not get too cocky. As the table shows, the IRS is now using its shrunken field force to go after the better off. And it has ramped up use of a low-cost technique to attack deductions and credits claimed by ordinary folks: "correspondence," or by-mail, audits. Last year the IRS sent 1.1 million letters declaring deductions of some kind would be denied unless taxpayers mailed back acceptable documentation. "This paper tiger can make people's lives miserable," says Claudia Hill, a Cupertino, California tax pro who edits CCH's Journal of Tax Practice & Procedure.
Income Field audit By-Mail audit Any Audit Under $200,000 1 in 519 1 in 133 1 in 106 $200,000 and higher 1 in 83 1 in 58 1 in 34 $1 million and higher 1 in 32 1 in 41 1 in 18 Source: Internal Revenue Service
Here are some ways for the law-abiding (and the less so) to minimize IRS grief.
Study the charity rules. Congress has tightened rules on charitable deductions, making this a prime area for mail audits, says Hill. Gone are the days when Bill and Hillary Clinton could deduct $75 for giving a suit with ripped pants to the Salvation Army. You cannot write off donations of small items in less than good condition and need receipts or canceled checks for any cash gift, even $10 put in the church collection plate. For donations of $250 or more, you must have a letter from the charity before filing your tax return. Last year a Tax Court judge ruled that Ruth M. and Daniel Gomez of El Paso, Texas could not deduct $6,100 they tithed in 2005 to their church, even though they had canceled checks and a 2008 letter acknowledging the donations. "We did not know the law," admits Ruth, 33. "We know so many people do cheat the system. We were doing the right thing and we got red-flagged."
Document employee expenses. Unreimbursed employee business expense deductions are another mail audit magnet. In 2007 hundreds of Secret Service agents received letters disallowing deductions for various job expenses, including oversize suits they bought to fit over bulletproof vests. (You cannot deduct clothes you would otherwise wear off the job.) William Stevenson, a Merrick, New York tax accountant representing dozens of agents in Tax Court, says the IRS appears to be conceding the big-suit issue, but is being picky on substantiation. "There is no wiggle room. You cannot even use credit card statements; you have to have the actual receipts," he warns. (Note that upper-middle-class folks who pay the alternative minimum tax cannot deduct employee expenses anyway.)
Use an honest tax preparer. If your tax preparer suggests inflating deductions or winks at unreported income, find another one. The government has targeted sleazy preparers. It goes after them in court and then audits their clients en masse. If you are inclined to finagle, get an honest CPA for cover -- just do not tell him what you are up to.
For a field audit, hire a lawyer. If you have been naughty and are selected for a face-to-face audit, send a representative in your place, advises Charles Rettig, a Beverly Hills tax litigator. If the IRS agent asks a loaded question -- say, about cash receipts -- and a taxpayer lies, he has just committed the felony of making a false statement to a federal official. "If he asks me a tough question, my answer is 'I'll find out,'" Rettig confides. Plus, he says, thanks to currency transaction reports banks and others must now file, the agent is more likely than ever to know you are lying. To be extra safe, send a lawyer instead of a CPA; what you tell a lawyer has more protection in the event the case turns criminal.
Close secret offshore accounts. The government's efforts to get UBS to turn over the names of 19,000 Americans with Swiss accounts have been much publicized. What is less well known is that Congress has beefed up rewards for squealing to the IRS, giving clerks at every two-bit offshore bank an incentive to copy all the names onto a flash memory stick and rat them out. Failing to disclose a foreign account is a felony. The government does not bring many criminal cases. But the civil penalties are potentially confiscatory. Taxpayers who amend their returns before the IRS gets their names are likely to avoid criminal prosecution and the heaviest penalties. (Hire a lawyer to do this.)
Stay right with your nanny. The IRS does not have an easy way to find folks who do not pay the required payroll tax for domestic workers, and filings of nanny tax forms have been dropping. But field agents routinely ask if you have such help. And clients of Independence, Missouri tax preparer Michael Martin discovered another risk, when they fired their off-the-books nanny and she applied for state unemployment benefits. It cost them $3,460 in back taxes, interest and penalties -- three times what they would have owed.
Who files nanny returns? The forms are quite popular among residents of Washington, D.C., where the filing rate is six times the national average. That tells you two things: (1) Every other person in the capital is hoping for an appointment to a position that requires Senate confirmation. (2) Elsewhere, a lot of cheating is going on.
The Audit Is In The Mail
If you are not well-off or involved in a shelter or scam, your odds of facing an IRS agent in a field audit are slim. But taking big deductions could invite a mail audit.
ECONOMICS IS NOT THE HARD SCIENCE MANY THINK IT IS
The Swedish central bank awards the Nobel Memorial Prize in Economic Sciences without regard to former prizes and prize-winners. Its style is like the Nobel Prize in Literature -- strictly a matter of taste, which changes from year to year. The result is a random scattering of recognition among disagreeable economists. Handing a prize to Paul Krugman, the 2008 winner, neither credited nor discredited the prize awarded to Milton Friedman in 1976.
There is a simple reason for the scatter-shot approach: Economics is not a science. It is, at best, a continuing philosophical debate, although it sometimes seems like an intellectual substitute for football between the Massachusetts Institute of Technology and University of Chicago teams.
Winners frequently are recognized for research and mathematical analysis that other economists value, not for the expression of opinions that later made them famous in the public eye.
Milton Friedman, for example, won the 1976 economics prize largely for his work on consumption functions, which are mathematical descriptions of the ebbs and flows of individuals' propensities to save and consume.
This work is still used by economists who have no use for the other side of his prize citation -- his monetary history of the United States and the monetarist theories he propounded. Still less do some of them appreciate Friedman's televised defenses of economic liberty and individual freedom.
Similarly, Paul Krugman won in 2008 while enjoying notoriety as a political columnist, but his prize-winning work, published nearly 30 years earlier, concerned analysis of trade between countries that have similarly efficient production of similar goods.
Choosing Up Sides
With such models as Friedman and Krugman, we should not be surprised at the ease with which contending politicians can line up economists, even Nobel-winning economists, to support their political judgments with their reputations.
President Barack Obama has been presenting the views of a coterie of economists as the view of the great mass of economists. To help him, the Center for American Progress gathered a couple of hundred economists, including nine Nobel Prize-winners, to support the version of the stimulus bill that was passed by the House of Representatives. The statement, published as advertising in major newspapers, said the bill would put the U.S. economy "back onto a sustainable long-term-growth path" through its reliance on infrastructure investments.
The Cato Institute published a riposte, featuring three Nobel laureates among 90 contrary economists -- some against details of the plan, others who think there should be no plan at all. A third group, not enumerated because they did not publish a manifesto, holds that the $789 billion stimulus bill is entirely inadequate, by a factor of two or three.
Making a Mess
When Friedrich Hayek won the Nobel Prize for economics in 1974, he embarrassed many economists by noting their failures. Speaking in the midst of a great inflation that caused a greater loss of stock-market wealth in the U.S. than the Great Depression, he noted that the inflation was "brought about by policies which the majority of economists recommended and even urged governments to pursue." He added, "We have indeed at the moment little cause for pride: As a profession, we have made a mess of things."
Hayek pronounced the failure of economics to be rooted in a "scientistic" attitude that employed the habits and methods of physical science where they were not appropriate. He faulted particularly, "the assertion that there exists a simple positive correlation between total employment and the size of the aggregate demand for goods and services; it leads to the belief that we can permanently assure full employment by maintaining total money expenditure at an appropriate level."
Hayek conceded that there was quantitative evidence for the assertions and beliefs adduced by John Maynard Keynes and his followers, but he warned that the evidence was not good enough: "In the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process...will hardly ever be fully known or measurable."
Economists, Hayek continued, "happily proceed on the fiction that the factors which they can measure are the only ones that are relevant. The correlation between aggregate demand and total employment, for instance, may only be approximate -- but as it is the only one on which we have quantitative data, it is accepted as the only causal connection that counts. On this standard, there may thus well exist better 'scientific' evidence for a false theory, which will be accepted because it is more 'scientific,' than for a valid explanation, which is rejected because there is no sufficient quantitative evidence for it."
Hayek, of course, was on the side that had less quantitative evidence.
A Bold Experiment
In this political climate, too many economists are treating the Keynesian multiplier as if it were Newtonian physics. Every dollar of government spending, we hear, will generate $1.57 of gross domestic product. We are reminded of the long-buried claim that cuts in the marginal rate of income taxation would pay for themselves, but Keynesian economists have no such sense of fallibility. Indeed, some estimate that every dollar of tax cuts in the stimulus bill will generate 50 cents of GDP.
Resolving this is not a matter for econometrics. Running an opinion through a computer does not make it any less an opinion. Resolving it is a matter for representative democracy. We are on the brink of an experiment: The Keynesians won the election; they should try their theory -- and be held responsible for the results.
It is the latter condition that is hard to enforce, of course. Keynesians are still trying to convince us that their policies defeated the Great Depression -- either in the 1930s as the New Deal or in the 1940s as the deficit-driven spending to win World War II. The evidence in favor does not do much to explain the postwar prosperity: If government spending drove the economy, what drove it when the spending was withdrawn?
An explanation, with or without quantitative evidence, could win the Nobel Prize.
MERCHANT OF DEBT
When dealing with China, Tim Geithner needs to appreciate the first principle of sales – the customer is always right.
This editorial from Barron's editorialist Thomas Donlan tries, probably ineffectively, at injecting some common sense into Congressional natterings about Chinese "currency manipulation." Worryingly, new Treasury Secretary Tim Geithner appears to believe the idiotic idea that the U.S. economy is being hurt by an artificially low yuan. A couple of subtle digs at the expense of economists are alone worth the price of reading.
We do not have Hank Paulson to kick around anymore, but Tim Geithner is arriving in Washington just in time. He has become the chief merchant of debt for the United States, but Geithner does not seem to appreciate the first principle of sales -- that the customer is always right.
At his confirmation hearing Geithner twice denounced Chinese manipulation of their currency exchange rate. Once could have been rhetoric to please the Senate but twice suggests he meant it.
It could have been just a trial balloon -- a new administration trying out its campaign rhetoric in the real world like a Broadway show opening out of town. But Geithner wrapped himself in President Obama's flag.
"President Obama, backed by the conclusions of a broad range of economists, believes that China is manipulating its currency. President Obama has pledged as president to use aggressively all the diplomatic avenues open to him to seek change in China's currency practices."
No matter how many economists are on that broad range, this is neither news nor new policy. The Chinese intervene in markets to maintain their preferred price for the yuan. Holy dollar sign, Batman.
Ever since Deng Xioping opened the door to trade, U.S. officials and a substantial claque in Congress have railed against Chinese currency manipulation, as they railed against Japanese manipulators before them. They also had plenty of economists backing them up -- the U.S. has a surfeit of economists sufficient unto every purpose.
It is a clumsy gambit in a game more complex than pegging the price of money. Americans who gripe about exchange rates are saying that U.S. companies are made uncompetitive by Chinese skullduggery. Actually, we import things we are too competitive to make. Most of the things that China exports to the U.S. are things that America does not deign to make because the profits are so small.
Even in the middle of recession, we profit when we export jobs and import people. The Chinese have been making things we did not have time or people to make for ourselves. If Americans assembled laptop computers, for one example, we would make the computers more expensive and make less profit.
Some economists say the yuan should float 40% higher than its current level. No American who wears sneakers or uses computers should be eager for that to happen.
And nobody at all, from China, America or any other country, should be eager to get a trade war started. The natural progression from charges of currency manipulation is to redress the balance with tariffs or quotas. That is the dangerous road taken by Sen. Reed Smoot, Rep. W.C. Hawley and President Herbert Hoover, which turned a recession into a depression.
Without a doubt, the Smoot-Hawley tariff worked: Imports fell 66% between 1929 and 1933, while exports declined 61%. Gross domestic product fell 50%, with the trade decline partly cause and partly effect. Only a madman would want this, but fear made many madmen in those days.
By 1933, it was a breeze for Congress to enact a "Buy American" law, which established preferences for U.S. goods and services in any government project.
Lest we think that the days of madmen are past, important vestiges of the Buy American Act have never been repealed. Look at the maker's plates on buses and subway cars. You will find Italian, German and Canadian companies using plants located in the U.S. to comply with such laws. The additional cost of inefficient production is borne by the taxpayers and the riders.
The House of Representatives last week added more weight to the nationalistic chains that rattle behind us and drag down the economy. With plenty of bipartisan help, Democratic Rep. Peter J. Visclosky of Indiana toughened the Buy American provisions for steel purchases in the new spending bill.
To measure the importance of Visclosky's steel clause, consider the size of its one loophole. Government purchasers may consider buying foreign steel and iron if buying domestic steel would drive up the total cost of a project -- not just the bill for steel -- by 25% or more. With that information, we can estimate that most highway bridges will cost 24% too much.
Free trade is never free. There are losers in Indiana steel mills when the rules give foreign competitors a fair shake. But the losers are local and temporary. The big losers from protectionism are all the people, who are forced to pay too much for everything.
Protectionist foolishness like the Visclosky clause is a sure sign of a larger bill that should never pass. Unfortunately, it is also a sure sign of a bill that will pass. The economic-stimulus bill moves on to the Senate this week for another injection of hot air.
The one question getting a wide airing in Washington is whether all the spending will come quickly enough. House Appropriations Committee Chairman David Obey of Wisconsin constructed the bill out of spare parts and pet projects languishing in the lobbies of the Capitol. His omnibus bill has picked up anything that wanted a ride and shows no sign of following a set route. His philosophy is that any spending is good for the economy and spending by poor people is better.
The question that is almost never raised is more important: Can spending and tax cuts, no matter how conceived or dedicated, stimulate this economy? Economic models say yes, but the people who designed the economic models thought so before they turned on their computers.
Washington gives little thought to the source of the money, or its alternate, possibly more productive uses in private hands. Never does anyone say the economy does not need stimulation; it is demanding a breather from all the overstimulation of housing and consumption it got between 2002 and 2007.
There is a good chance we will be kicking Treasury Secretary Geithner around quite a bit for the next few years. But we will do it with sympathy, especially if the Obama administration carries on with this reckless disregard of international trade. After all, Geithner is the poor sap who will have to sell Treasury bonds to skeptical Chinese customers.
SECURE DEVICES FOR EVERYONE
Once a message is properly scrambled, our sun would burn out before you could unscramble it.
Some perquisites of the American presidency -- Air Force One, say -- are available only to the occupant of 1600 Pennsylvania Avenue. Many others, though, can be had by anyone, including a mobile phone that is immune to snooping and spying.
President Obama is, like many of us, an e-mail addict, and press coverage of his new BlackBerry has tended to describe it as some sort of top-secret, supersecure device. In fact, owing to advances in both mathematics and computers, presidential-level security is now available on every desktop computer and can easily be added, for a price, to any mobile device as well.
This easy absolute privacy is what makes Web commerce secure. There is a downside, though, in that it is available for all takers, like the Mumbai terrorists, who used secure cell phones.
Off-the-shelf BlackBerrys or mobile phones have minimal built-in security. But even in their relatively unprotected, out-of-the-box state, they cannot be monitored without technical sophistication and specialized equipment. The days of using an ordinary scanner to listen in on your neighbor's cell phone chatter are long gone.
But what if you need something more secure? It is easy. The U.S. National Institute of Standards & Technology has created what is, in effect, a Good Housekeeping Seal of Approval program for mobile devices. The NIST specs spell out the sorts of encryption systems that can be used to scramble messages. Once a message has been properly scrambled, our sun would burn out before you could unscramble it, even if you used every computer in the world.
The encryption part of security gets all the glamour. The World War II story of Germany's Enigma machine never fails to thrill. But there are myriad banal but crucial details involved in making a device secure, and NIST covers these, too. For example, a secret code is of little use if a device's keyboard emits electromagnetic "noise," which can be easily monitored. These "side channel" leakages can cancel out all the device's other safeguards.
The NIST specs are used all over the world by businesses and civilian government agencies. U.S. military and spy agencies use a National Security Agency standard known as Suite B, which borrows heavily from the NIST specs. President Obama's new device is presumed to be one of these Suite B gadgets.
Traditional cryptography tools seek to prevent a set of prying eyes from reading a message. They are no defense, though, against the viruses, malware and spyware that can be found every day online. The problem becomes even starker when you consider that Suite-B-grade devices, like L-3 Communications' forthcoming Guardian, set to cost in excess of $3,000, use Microsoft Windows Mobile and Internet Explorer, which are far from immune to viruses.
As a result, network managers working with the country's classified data need to block suspect Web sites, scan e-mail for viruses and keep software fully patched -- just like their counterparts in the civilian world. "Getting the encryption right is the easy part," says NIST's Randall J. Easter. "It is all the other stuff that makes it hard."
The fact that unbreakable encryption is available to every computer owner suggests that there is nothing left for modern code breakers like those at the NSA to do. In fact, there is plenty, since bad guys make the same sorts of security mistakes that good guys do. During World War II reading enemy communications required an operation like Bletchley Park, home to the British code-breaking effort. Today it might mean infiltrating a terrorist cell and reading the passwords written on Post-it notes.
One of the enduring questions of modern cryptography is whether the NSA has some secret, backdoor way to read encrypted messages. Sorry, conspiracy theory buffs; the chances are remote in the extreme.
Modern encryption is based on problems in mathematics (like factoring large numbers) that have been worked on with limited success, in some cases for centuries. For the NSA to read an encrypted message -- even one as simple as the information you send to Amazon when buying a book -- would mean they have figured something out that still eludes the world's best mathematicians.
"I know people in the NSA community," says Eric Bach, a computer scientist at the University of Wisconsin, "and while they are awfully smart, they do not have any special knowledge outsiders don't. And if they did discover something, it would take about two seconds for word to get out."
MARXISM MARCHES ON
The week begins with a bang, according to the Financial Times. The FT reports that, "The Obama administration is gearing up for a 'big bang' announcement within the next two weeks that will combine a bank clean-up with measures to reduce home foreclosures and probably steps to kick-start credit markets."
Obama as Prime Mover will have to turn the chaos in America's housing and mortgage market into harmonious order. Then He has to single-handedly leap a tall legacy of toxic assets in a single bound, freeing up banks to lend by buying all of their dodgy assets.
It is a big ask. But if anyone can do it, He can. Especially when He has got America's credit rating to abuse!
Reordering the financial universe is not cheap. It takes a lot of energy and a lot of matter in the form of new U.S. dollars. Reuters reports that, "Goldman Sachs estimated that it would take on the order of $4 trillion to buy troubled mortgage and consumer debt. That number could shrink if the program were limited to only certain loans or banks, but it could also grow if other asset classes such as commercial real estate loans were included."
How much is $4 trillion? "At $4 trillion, that would be the equivalent of nearly 1/3 of U.S. gross domestic product. If the government had to fund that amount by issuing additional debt, it would intensify investor concerns about massive supply scaring off demand."
Yes. You can imagine the world's main owners of dollar-denominated reserve assets (China, Japan, the Petro states) would be intensely concerned about a $4 trillion increase in dollar denominated debt. But wait a tick ...
It is one thing to say you might need to float as much as $4 trillion in debt to fund your bad bank. It is another thing to sell that debt? Who will buy it? Even these days, $4 trillion is a lot of capital to loan. Maybe that number has been floated to make a smaller number, say $2 trillion, look small by comparison.
Good news everyone! The Bad Bank is going to cost us half as much as we thought!
If the 'big bang' goes off this week, what will it mean for Planet U.S. Dollar? Or Planet Gold? Well, as our friend Steve Belmont in Chicago reported on Friday, gold is moving toward a day of reckoning after trading in a range for the last 10 months. It will either break out much higher, Steve says, or buckle. We will be watching.
Did you notice the obnoxious change in political rhetoric this weekend? You knew Barrack Obama was going to give it to Wall Street, calling executives "shameful" for getting bonuses while their firms received TARP money. Remember, by the way, the TARP money was forced on some firms in an effort to boost confidence in the overall plan.
We normally try to keep a reserved, ironic, and sceptical air when reading the statements of politicians. Most of them are not worth taking seriously. But every once in a while, you get the scent of something so noxious and dangerous that you have to put aside humor and call it what is. Today is one of those days.
Now, the populist shame game is to be expected. That is not a big deal. What is more alarming is the bilge and claptrap spilling from Kevin Rudd's gob and what it may mean for your ability to preserve and create wealth in the coming years.
In The Monthly, Rudd plants a Neo-Marxist flag in the ground of the current debate with the kind of jargon-laden elitist preening that makes academic critics of the free market (who have never spent a day in the business world creating value) so nauseating.
Specifically, Rudd writes that, "The time has come, off the back of the current crisis, to proclaim that the great neo-liberal experiment of the past 30 years has failed, that the emperor has no clothes. Neo-liberalism, and the free-market fundamentalism it has produced, has been revealed as little more than personal greed dressed up as an economic philosophy."
Why not proclaim, since he is apparently in the position to make such proclamations, that the experiment in paper money and the deliberate policy of inflation it implies is theft? It is bureaucratic lust for power and authority disguised as monetary policy? It is also, at its heart, the belief that one or a few people in government know better than you how you should lead your life.
Leave it to Rudd and the resurgent global Left to use the present crisis as an occasion to expand their political ideology of government power and wealth confiscation. Despite the fall of the Berlin Wall in 1989, Marxism never really went away. It ensconced itself in Western universities and colleges, and in the careerism of the political class, which believes it is entitled to govern by virtue of its intellectual superiority and the moral justness of its anti-market position.
Their strategy, as always, is to control the rhetorical high ground by framing the discussion in populist terms and making an enemy of "greedy capitalists." Do not get us wrong. There are plenty of greedy capitalists to go around, or to go to jail. In fact, many more of them would be going out of business if the government would quit propping them up with taxpayer money. This generation of corporate executives shares plenty of blame for playing fast and loose with the corporations they were supposed to be stewards of. They over-levered, over-speculated, and over-paid themselves.
But Rudd is an ignoramus of the lowest order to say that current events somehow negate the last 30 years of globalization, or 300 years of economic growth and the division of labor. Tens of millions have been lifted out of poverty. Hundreds of millions have more economic and political freedom than ever before.
These results can only be the product of a system in which risk taking entrepreneurs have access to capital and savings, allocated through competitive markets where firms that deliver real value to consumers thrive and those that do not fail. That system has worked for 300 years of Western history to create wealth, choice, and opportunity.
Shame on Kevin Rudd for calling that "market fundamentalism," as if belief in the institutions that create wealth and liberty is akin to the same kind of religious fundamentalism that permits suicide bombing. If there is a more offensive use of rhetoric to equate two vastly different things, we have not seen it.
But the Neo-Marxists are back on the march. And they are probably coming for your wages and pension sometime soon. Make no mistake about it. 2009 is the year the Neo-Marxists have been waiting for.
It is their chance to undo all the perceived evils of Thatcher and Reagan. There would be plenty of those to undo, of course, not least the idea that deficit spending is morally permissible. But the real push by the Neo-Marxists is to use the present occasion to expand the scope and reach of government power into your private life, so they can tell you what to do, what to watch, what to eat, what car to drive, and ultimately, what to think or say.
This will be disguised as better more "parental" regulation to achieve more equality and social justice. But behind the false populist outrage and the elevated language of idealism, it is just another push for government elites to expand their ability to compel you to live the life they think you should lead.
The simple regulatory response to all this is to reduce the amount of leverage available to financial players. Reduce margin lending in shares. Let bankers get back to making prudent loans in the housing market based on what a buyer can actually repay, rather than letting the government subsidize subprime lending because it is politically desirable.
There are other sensible regulatory responses to the mess. But they will be discarded in favor of grandiose and over-reaching plans to redesign the entire world in some utopian image. A "big bang"? Really. Does that mean they are going to blow things up and call it a "fix?"
What we are getting at is that it is going to be a tremendous challenge to withstand this push in the next few years, mostly because it will have so much popular support from people with no brains who believe in fine sounding speeches and appreciate getting tax rebates/credits/handouts from the government. The first battle in the war on wealth creation is wealth redistribution, whether you like it or not.
It would be more honest if the Left just came out and said something like, "The last 10 years have been a huge wealth transfer from the middle class to Wall Street and from the developing world to the developed world. We are going to try and reverse all that now because we know it is our best shot in the last 30 years to get some back. So here we come! Open your wallet and shut your mouth!"
Neo-liberalism is not the culprit in all this. What does that word even mean? Is Rudd not using it because it sounds like Neo-Conservatism? And everyone knows that Neo-conservatism is evil, therefore Neo-Liberalism must be evil too!
The real evil of the last 30 years is the vast expansion of credit in the world that changed personal and corporate incentives. The plunge in the cost of capital-encouraged by governments and Central Banks-set of an orgy of bad risk taking, quietly condoned by regulators and politicians who all benefitted in some way from housing/commodity/trade booms.
But now the credit cycle has turned. The Credit Depression is upon us. And Comrades Rudd and Obama will try and use it for the next great push in the Neo-Marxist dream, one world government with one world currency. More on that tomorrow! [Next article.]
The Real Causes of Depression
Let's dispense with the usual recap of bad news today and go straight to more important matters, like the weather.
"Is that rain?" asked a co-worker the other day.
"No. It is the sound of leaves blowing down the street," we speculated.
And it was.
Huge drifts of leaves have accumulated on the footpaths in the past week, swirled around by the wind and piling up in banks along the street. All the leaves on the plane trees that line Melbourne's [Australia] streets seem to have died at once during last week's heat wave. Normally, in the autumn, the leaves fall at a statelier pace. The days get cooler and the seasons change at a more natural rhythm.
But not this year. They fell all at once. The whole natural cycle was condensed into just a few days, thanks to the heat wave that scorched the trees last week. And alongside huge piles of dead leaves burnt brown you will find the occasional dead brown possum.
We stumbled on three the other day, walking up St. Kilda Road. It is a veritable banquet of organic matter for the flies. The poor little possums lay on the ground, their prehensile tales curled up in a tidy little spiral. By the looks of things, dead possums do not bounce.
The plane trees are not native to Australia (they were imported from Britain to Victorianize the place). The possums are native. But neither one is suited to the kind of extraordinary heat that set upon the city last week.
Sure, there are hotter places in the world. But if something is designed to live in one environment and finds itself in another, it probably will not last long if it is not adaptable. Tomorrow is expected to be another 43-degree day in Melbourne. Which brings us to the economy.
Recessions are perfectly natural in the business cycle. Human beings take risks with borrowed money during a growth phase. Some risks pay off. Some do not. A recession is a reckoning up of the risks. The bad investments are liquidated, asset values readjust, and the next cycle begins.
You can only get a depression when the government and the monetary authorities take unusual steps -- driven by political motives -- to prevent the natural process of recession. This is why today's policy moves are setting us up for a Depression. And it is not the first time.
It is widely believed that the Great Depression had its origins in the slow response of the Fed to the banking collapse that followed the stock market crash. That failure, so the theory goes, was followed by too little fiscal innovation and government spending by then U.S. President Herbert Hoover.
But all of that claptrap is exactly wrong, we humbly suggest. The Depression was a foregone conclusion the minute the business cycle was hijacked by manipulation of the credit cycle. A recession is natural. A Depression is always man-made.
That is right; the origin of the Depression is in the credit boom that preceded it. The credit boom of the 1920s made it inevitable that the natural rhythm of the business cycle would be amplified and made more severe. The boom was boomier. The bust was ... worse than it had to be.
It was made worse by government policies that put America into debt, allocated capital in the most inefficient hands possible while crowding out business investment, and locked in wages and prices higher than they ought to have been, further delaying the vigorous rebound in employment and wages you usually get in a recovery.
To repeat, recessions are a natural and unavoidable part of the business cycle. Depressions are the bill you pay for trying to avoid recessions with even looser monetary policy and more government spending to stimulate consumption. What you need is a cleansing break. What you get is a money-induced fever of pointless economic activity, full of noisy cash registers, signifying nothing.
So here we are on a Friday, waiting for the Depression. How seen we get one depends, in some small part, on what Timothy Geithner comes up with next week and world stock markets receive it. Geithner unveils his plan to rescue America's banks and get the credit crisis behind us on Monday. It had better be a good plan.
What can you expect? Well, for one, we would be really surprised if there was not a suspension -- at least for a period -- of mark-to-market accounting. This would prevent the banks from having to realize losses on securities they do not intend to sell, but are currently held on the books at values well below market value.
Another element will be buying "toxic" assets from the bank. At what price? You will find out soon enough. It probably will not be fair value. But it will not be so far below fair value that it forces the banks to realize huge losses and require even larger infusions of taxpayer capital.
Not to be a stick in the mud, but do you get the feeling that the Feds are already one or two steps behind in the game of "prop up the falling asset values"? Bloomberg reports that, "Moody's Investors Service is reviewing the ratings of $302.6 billion in commercial mortgage-backed securities as real-estate values drop and property owners fall behind on payments." ...
Finally, we have been dodging the question of how you deal the infinite growth in a system with finite resources. We have been dodging it mostly because it is such an abstract and theoretical subject that we fear we will bore you to death, and it is not good to kill your present or future customers. But since we are fundamentally optimistic about the answer, let us push on!
The answer is in the architecture of the system you are talking about and the energy inputs it requires. We have a global economy that has developed a great deal of complexity thanks, in part, to an abundance of credit. It is a system of systems built on two key inputs: credit and energy.
The more important input to the current world order is cheap energy. It began when Colonel Edwin Drake drilled his first oil well at Titusville, Pennsylvania in the spring of 1858. The world has never been the same.
With the huge amounts of energy available from petroleum came the Industrial Revolution, the acceleration of the division of labor with mechanisation, dramatic increases in agricultural yields (allowing for a major structural shift in employment as fewer people were engaged in growing food and more in making things), the growth of large urban population centers (and later the exodus to the suburbs and the housing boom as the cities went bad), and all the many capital investments and institutions that are somehow related to the fact that energy has been cheep and abundant for the last 150 years.
So is all that really collapsing now because of the fundamental physical limits on the amount of energy we can get from oil? Can an economy that has evolved around oil as the chief energy input survive when its rate of growth has been so artificially accelerated by easy credit and fractional reserve banking? See. We told you. It is a pretty ambitious question.
John Robb posts an answer over at his Global Guerrillas blog. Robb quotes from Joseph Tainter's book, The Collapse of Complex Societies. "The method of collapse favored by Tainter as a tipping point is defined by a fundamental change (assumption level) in the underlying costs of running the society. He maintains that every great society is driven to the heights of its organizational potential by leveraging a 'free' (for all intents and purposes) energy input.
"Unlimited access to this energy resource allows them essentially 'free' problem solving and rapid recovery from mistakes. However, once that 'free' energy becomes erratically available or expensive, the cost/benefit equations of many (if not most) of that social system's evolved solutions turn decidedly negative. Collapse, at that point, is inevitable. In our case, this 'free' energy input would be fossil fuels (the negligible cost of which underwrites all social solutions)."
In a closed system, the amount of energy available to you is finite. In an open system, it is not. The Earth is an open system. Energy rains down on the planet everyday in the form of solar radiation. We do not, however, have a global economy that is scaled to live and produce off this kind of energy.
Your editor's guess is that we are headed to a fundamental reorganization of the world's economy that will be driven by how we get and use energy. The current system of production is based on cheap energy for the production of goods which are consumed with the help of cheap credit.
A graph of the growth of Wal-Mart stores across the U.S. from 1965 to today (where Wal-Mart became the largest private employer in America) reminds us of that scene in War Games with Matthew Broderick.
Only in the Wal-Mart example you have little nuclear explosions of consumerism. They should probably be red though, instead of green, those "store strikes". America bombing itself to debt by cheap Chinese goods imported on container ships (efficient transportation) and distributed via Wal-Mart's warehouse network (cheap energy and good logistics).
Add to this whole system the historically cheap cost of labor inputs (mostly in the Far East), and you have a global system buckling under its own excess and complexity after an enormous but abnormal rate of growth and innovation. As Bill points out below, creative destruction is a normal part of the business cycle. It is essential, in fact.
And while the Austrian theory of the credit cycle is becoming vogue now for its successful prediction that a boom in credit leads to a later bust, a lot of Austrian theory is also focused on entrepreneurship and human action and wealth creation. If you spend some time in that part of the Austrian textbook, you might actually be encouraged about the future. Why?
Entrepreneurs love recessions. Not only is it a chance for investors to buy assets at a discounted price, it is a time of reorganization of economic life. People still have everyday wants and needs. And in a recession, there is much less competition. Most people are inclined to be conservative and take fewer risks with their capital.
This is why the entrepreneur is the hero of Joseph Schumpeter's capitalism. The capitalist provides surplus capital. But real business innovation and risk-taking comes from the entrepreneur. During a recession, he can form a long-lasting relationship with his customers. But what does that have to do with the current situation?
For the better part of 100 years global trade has expanded, bringing more and more people into the world trade system. We suspect now that it must contract and eventually reorganize itself into smaller, more scalable systems. These smaller systems will produce and use energy more efficiently because they have to.
Of course no one is sure what it will look like yet. But it is likely to be a lot different than what we are used to. It will have to be, if we are going to successfully adapt. We have an idea of what the characteristics of these smaller systems will be and will tell you about them next week.
But from an investment perspective, your Permanent Portfolio ought to maintain some small allocation of capital for aggressive growth stocks, especially in the energy space. They will be key to the success of any system which evolves out of the disintegration of the present one.
So yes. In a closed system without new energy inputs, there are inescapable limits on growth. We reckon the rate of growth is about to slow down dramatically (contract) as the complex systems and institutions supported by cheap credit and cheap energy collapse. But this does not mean we plan on finding a cave to hide in so we can curl up and die.
Far from it. There is only one way through a time like this. You have to have a plan. You have to use your own brain. And you have to have some idea of what is coming so you can put yourself in a position to avoid the calamity and profit from the opportunity.
UNWINDING COMPLEXITY AND THE COLLAPSE OF SOCIETIES
I was in New York City recently for some meetings. I was walking around Lower Manhattan and -- in a city that large -- by chance bumped into an old Navy buddy who now works for the National Transportation Safety Board (NTSB). The NTSB ball cap gave him away. He was investigating the "splashdown" of the US Airways Flight 1549 in the Hudson River. It was an unbelievable coincidence to see this fellow after many years.
My NTSB friend was good enough to get me past the security and near the aircraft as it floated in the water. It was nighttime. The weather was very cold and windy, so all the physical work was just plain tough. (Pity the frigid divers, placing slings under the fuselage and wings.) The giant cranes were just getting ready to lift the aircraft hulk out of the river and onto a barge. I was taken in by all the personnel and equipment at the scene of the crash -- and this was a nonfatal crash, thank God!
There were New York police and firefighters. There were Port Authority cops. There were New York Dept. of Environmental Conservation people and folks from the U.S. Environmental Protection Agency. There were New York City Hazmat people, the Army Corps of Engineers, the U.S. Coast Guard and the Federal Aviation Administration. There were people from the State University of New York scanning the river bottom with sonar.
There were reps from a multitude of private entities like U.S. Airways (naturally), Airbus (ditto), the crane company employees, diving and salvage people, insurance carriers, environmental testing firms and many others. There were lots of news media there as well. There was even a Salvation Army truck on-site, with pots of hot coffee and sandwiches for the many people who were part of the effort.
And then there were lots of spectators, including people working out behind the glass at a gym inside an adjacent building. They were watching the whole scene from the comfort of their StairMasters and Lifecycles.
My take-away thought about this was how complex our society has become. There are layers upon layers of complexity and astonishing levels of technical expertise. There are so many different organizations, agencies, groupings of people and assemblages of equipment. It all costs a lot of money and consumes a lot of energy. When something dramatic happens, like an airplane crash, it all mobilizes and comes on-site. That is OK when major disasters are one-off incidents. But what if several incidents occur in short order or close proximity? What happens when money, if not energy, gets scarce? The whole process could get overwhelmed.
Of course, New York knows something about dealing with disasters. After all, we were about three blocks from the site of the former World Trade Center. Still, it takes years to hire and train all of these experts. And more years to acquire all this sophisticated gear. It is a very laborious and expensive process. Just keeping this level of capability on a standby basis requires a massive commitment of resources. When you need it, you need it now. If you do not have it, you cannot build it up quickly. And when you have it (like New York has some of everything), you do not want to get rid of it in some frenzy of so-called cost cutting. But still, it makes me wonder.
Societies develop layers of complexity to solve problems. The thing to keep in mind, however, is the historical fact that every complex civilization that has ever lived on this world has collapsed. Bar none. All societies have come to an end. Cultural anthropologist Joseph Tainter documented this in 1988 in his astonishing book The Collapse of Complex Societies.
That is, as societies become more complex, the costs of meeting new challenges increase. Eventually, every society arrives at a point at which devoting extra resources to meeting new challenges produces diminishing returns. Then negative returns. Along comes a systemic shock. The shock might be internal (resource exhaustion, for example) or external (foreign war, for another example). And the shock triggers collapse. When collapse occurs, it almost always occurs rapidly. Things fall apart and quickly decay to a much lower state of complexity. Societies become less complex by collapsing into smaller, much less complex subgroups.
The Western world -- certainly, the U.S. -- has spent the past century engaged in an arms race of social complexity. And from where we now stand, there is no gentle "build-down." The more people who understand that, the better.
Meanwhile, we have a new U.S. president. You-know-who. And the new president has a new secretary at the Dept. of Energy (DOE), Steven Chu, who received a Nobel Prize in physics. (That is a refreshing change for the DOE.) And the new DOE secretary has a new chief of staff, Rod O'Connor.
Mr. O'Connor has a master's degree in public administration from Harvard. And he worked for Al Gore in both the Senate and White House. Mr. O'Connor organized and ran the 2000 Democratic National Convention in Los Angeles as well as the 2004 Democratic National Convention in Boston. And he was chief of staff of the Democratic National Committee.
I have never met Mr. O'Connor. But I have met Joseph Tainter (see above). It seems to me that what we need at DOE is a more of a Rickover man (Hyman Rickover being "the Father of the Nuclear Navy"), not a Gore man whose claim to fame is strong political credentials. So is this a sign of the politicization of energy? I am shocked. I truly want to see the country do well in the next four years. As a nation, we cannot afford to screw up, either with energy in general or at the Energy Dept. We shall see what happens at DOE. Meanwhile, I hope that Mr. O'Connor reads Mr. Tainter's book. He can even have my copy. It is underlined.
THE 80 BEST LIFEHACKS OF 2008, CONT.
Continued from here ...
- 8 Essential Skills They Did Not Teach You In School
Important life skills like how to network, set goals, and negotiate. FIgure these out and you are miles ahead the rest! (Brian Armstrong)
- 10 Skills You Need to Succeed at Almost Anything
No matter what field you are in, these skills are essential to achieving success. (Dustin M. Wax)
- 29 Worn Out Perspectives in Need of the "Oh Really?" Factor
We all have excuses for why we do not achieve our goals. But are they really to blame, or are we just avoiding the hard work of succeeding? (Lisa Gates)
- 10 HARD Ways to Make Your Life Better
In today's quick-fix culture, there are still great rewards to be gained for people willing to work hard and pay dome dues. (Dustin M. Wax)
- I Won Science Fair with a Failed Project: The Skill of Presenting Failures
Turn failure into success with these tips. (Thursday Bram)
- Three Basic Steps to Get Your Desire with the Least Effort
Know what you want, how to get it, and the tools you will need on the way. (Donald Latumahina)
- Build Your Platform: How to Show You Are the Right Person for Any Job
Convince your world you can handle anything by building a strong platform to build your case on. (Dustin M. Wax)
- The George Costanza Lifehack for Overcoming Fear and Anxiety
Important life lessons from everyone's favorite schlub, George Costanza. (Derek Ralston)
Remaining "Best Lifehacks" categories are Technology, Work/Finance, and the fundamentals of productivity.
The Singapore Dollar Needs to Drop
The Singapore dollar, which was on a sustained trend of appreciation from early 2002 to July 2008, seems set for a choppy ride this year, and probably next. Singapore, a high-beta economy -- it is more dependent on external demand than internal -- is already in recession, and a bleak outlook for the next two years must be factored into any potential change in the currency.
The country's central bank had a decidedly hawkish bias on the Singapore dollar through much of 2007 and in the first half of 2008, when inflation spiraled to highs not seen in more than 25 years. As most inflation in Singapore is imported, a strategy seeking a stronger currency made eminent sense. But not any longer: The latest data show that the economy shrank almost 17% in the 4th quarter. Economists say that the contraction for the whole of 2009 could be as much as 5%. The last time the economy shrank -- in 2001 -- it was by 2.4%. Even during the 1998 Asian financial crisis, it contracted by only 1.4%.
The Singapore government has come up with an ambitious S$20.5 billion stimulus package, equivalent to 8.2% of GDP, to save jobs and ease the flow of domestic credit. That will not, however, address the nub of Singapore's problem: its reliance on external, rather than domestic, demand.
"[Singapore's] exports of goods and services are 2.5 times the size of the economy. That is why we fell into recession quickly," says Song Seng Wun, a regional economist at CIMB-GK Research. Other than coming up with a policy centered on its currency, there is not much of a meaningful response the country can mount to boost its exports. The Monetary Authority of Singapore, the country's de facto central bank, has historically targeted an undisclosed trade-weighted exchange rate against a basket of currencies that reflects the country's key trading partners. In its latest review in October, the MAS somewhat eased its previously bullish stance by deciding not to push the currency one way or the other within its targeted band. Economists say the authority will eventually let the Singapore dollar weaken, as otherwise it risks falling behind the curve even as other central banks cut rates aggressively to prop up their economies.
Tim Condon, chief economist for Asia at ING Bank, expects the currency to fall to S$1.575 by the end of the year and to S$1.597 by the end of 2010, assuming mild U.S. dollar strength. The U.S. dollar's now worth about S$1.50.
Yet the Singapore dollar is backed by solid fundamentals. The island-state boasts an enviable foreign-exchange war chest of US$174 billion, while the current-account surplus has been more than 20% of GDP in each of the past three years, notes Société Générale currency strategist Patrick Bennett. "Though the surplus will be trimmed in 2009-10, there is no reason for concern," he says. He estimates that the currency's current nominal effective exchange rate -- a trade-weighted measure of the Singapore dollar -- to be 1.9% below the midpoint of the MAS' policy range. Bennett sees the greenback rising 8%, to S$1.62, by year's end.
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