June 2004 Selected Offshore News Clips

(Especially noteworthy articles’ headings highlighted in gold.)

LOCKBOXES, IRAQI LOOT AND A TRAIL TO THE FED

About a year ago, a discovery by a U.S. Army sargeant ultimately led to the finding of 164 metal boxes, all riveted shut, that held about $650 million in shrink-wrapped greenbacks. The cash was so heavy that the Army needed a C-130 Hercules cargo plane to airlift it to a secure location. Just two days later Thomas C. Baxter, head of the legal unit of the Federal Reserve Bank of New York, read a brief news account of the discovery. Most of the money that turned up in Baghdad was new, bore sequential serial numbers and was stored with documents indicating that it had once been held in Iraq’s central bank. One fact particularly bothered Mr. Baxter: the money had markings from three Fed banks, including his own in New York.

Mr. Baxter and the New York Fed, along with the Treasury Department and the Customs Service, immediately began an investigation into Baghdad’s currency stockpile. The continuing inquiry offers a rudimentary road map of illicit dealings -- including lucrative oil smuggling -- in Iraq and neighboring countries during the Hussein years, the federal authorities say. The investigation led quickly to the vaults of four Western banks that were among a select group handling the sensitive task of distributing freshly printed dollars overseas. Several other commercial banks and foreign central banks also served as stopovers along Baghdad’s money trail.

None of the four main banks the Fed scrutinized had sent currency directly to Iraq. But investigators eventually learned that UBS, Switzerland’s largest bank, had transferred $4 billion to $5 billion to four other countries that were under sanctions: Libya, Iran, Cuba and the former Yugoslavia. Over an eight-year period, UBS employees had quietly shipped the money to those countries from a vault at the Zurich airport, undetected by Fed auditors.

Of the $680 billion in cash that the Fed has in circulation, more than $400 billion, or nearly 60 percent, is outside the United States. That overseas supply, particularly in economically unstable regions, is the financial lifeblood of businesses, and even of pensioners who stow dollars in their mattresses. The authorities constantly monitor that supply to keep counterfeiters from tainting it, and hub banks like UBS play a pivotal role in ferreting out currency forgers. Those billions overseas, however, also grease the wheels of more nefarious commerce -- arms trafficking, smuggling and the timeless crafts of political and financial graft.

BULLYING IN BERLIN, PART I: THE OECD VS. ITSELF

The US government wastes a lot of money, but few items in the federal budget do as much damage as the $50 million that American taxpayers send each year to the OECD. This Paris-based bureaucracy is helping pave the way for higher taxes around the world through a little-known, yet insidious project to stamp out “harmful tax competition”. Representing mostly high-tax European nations, the OECD thinks it is unfair when jobs and investment move from high-tax to low-tax nations. The bureaucrats are particularly upset that so-called tax havens provide a refuge for oppressed taxpayers from welfare states like France, Germany, and Sweden. As part of its anti-tax competition project, the OECD met in Berlin last week, hoping to bully tax havens into helping high-tax nations track and tax flight capital.

Acting as the Gambino family of the tax world, the OECD has pressured places like Anguilla and Panama to sign “commitment letters” pledging to participate in something called “information exchange” -- an odd term for a one-way flow of data from “tax havens” to high-tax governments. The OECD is having a problem, though, since it is throwing stones from inside a glass house. The term “tax haven” conjures up images of small islands in the middle of a tropical paradise, but the OECD’s definition of one clearly covers many of its own member nations, including Switzerland, Luxembourg, and yes, the United States.

The United States is actually the world’s biggest “tax haven” -- passive foreign investments here generally are not taxed, and investors from other nations easily can structure their portfolios so that foreign tax collectors cannot discover assets invested in the U.S. -- which makes it all the more ironic that one-fourth of the OECD’s annual $200 million budget comes from U.S. taxpayers.

Bullying in Berlin, Part II

The OECD has for six years pushed for eliminating what it calls "harmful tax competition" -- which can be best described as any policy that undermines the ability of welfare states like France, Belgium, and Germany to maintain extraordinarily high tax rates. The stated goal of this project is to stamp out so-called “tax havens” -- jurisdictions that have appealing tax and privacy laws, and thus attract investment capital and business from high-tax regions, primarily European welfare states. The OECD even has a blacklist, and has threatened these jurisdictions with financial protectionism. The problem, at least from the OECD perspective, is that the jurisdictions they are targeting insist that they should not be forced to surrender their fiscal sovereignty until all nations and territories agree to the same policy.

This “level playing field” requirement puts the Paris-based bureaucracy in a quandary since member countries such as Switzerland, Luxembourg, and even the United States, are tax havens under the OECD’s standards. Each has little to no taxes on non-resident investors, and those foreign investors generally can structure their affairs to avoid the reporting of their financial information to home country tax authorities. Yet the OECD has been unsuccessful to date in “persuading” its own tax haven members to adopt bad tax policy, in part because it is much more polite when dealing with its own member nations. There are no threats of protectionism and no blacklist. The bureaucrats apparently realize the futility in fighting nations that can fight back.

So it is little wonder that smaller nations like Panama and the Bahamas felt unduly picked upon when their supposed sin is adopting rules for foreign investment modeled on those of several OECD members. Not helping matters for the OECD was the pesky presence of Dan Mitchell of the Heritage Foundation and Andy Quinlan of the Center for Freedom and Prosperity, who camped out at the same hotel where most of the conference participants were staying. To the extent any attendees needed a reminder that lower taxes are fundamentally sound economic policy, there was even a Swiss professor on hand to give a powerpoint-based lecture.

It appears that the OECD conference was doomed from the start. Small countries not privileged enough to be included in the OECD were determined not to cave, particularly since OECD members like Switzerland probably never will. The affair, ironically, was not terribly contentious, as low-tax nations politely smiled and nodded, but in the end, brushed off the tax cartel’s entreaties. Failing to twist the arms of tiny jurisdictions like the Cayman Islands and Anguilla, the OECD’s next mission is an odd mix of quixotic and absurd. The OECD’s blacklist is now being expanded to include various Asian nations, particularly Singapore and two jurisdictions that are part of communist China, Hong Kong and Macao. Which raises an important question: why is the U.S. supplying $50 million per year to a group that thinks jurisdictions within a communist country have dangerously low tax rates?

WELCOME TO SECURITY NATION

Nearly three years after September 11, the feds are massively funding new anti-terror tools under development by America’s technology wizards. Half a billion foreign visitors cross America’s borders, land at her airports, and dock at her harbors each year. Imagine trying to weed out the criminals and terrorists while keeping track of everyone else as they vacation, conduct business, enroll in college -- and try to drop out of sight once they have overstayed their visa. That is the challenge Accenture LLP took on when it landed a federal contract on June 1 that could ultimately be worth $10 billion. The Bermuda technology consulting company, with U.S. headquarters in Reston, Virginia, will design a system for high-tech passports and visas, plus a database to keep track of when and where travelers cross the border.

Welcome to a high-tech Security Nation. The passport-and-visa system could take 10 years to perfect. The Bush Administration has booked a 10% hike in spending for the Department of Homeland Security in fiscal 2005, which will boost its budget to $40.2 billion. Most of the new money will flow to anti-terrorism tools under development by the nation’s technological wizards. And that is just the start. Tally it all up and government and private-sector security spending will hit $130 billion to $180 billion a year by 2010, up from $65 billion in 2003, calculates consultant Homeland Security Research Corp.

THE RELUCTANT ANARCHIST

As a child I acquired a deep respect for authority and a horror of chaos. In my case the two things were blended by the uncertainty of my existence after my parents divorced and I bounced from one home to another for several years, often living with strangers. A stable authority was something I yearned for. Meanwhile, my public-school education imbued me with the sort of patriotism encouraged in all children in those days. I grew up feeling that if there was one thing I could trust and rely on, it was my government. I knew it was strong and benign, even if I did not know much else about it. The idea that some people -- Communists, for example -- might want to overthrow the government filled me with horror.

In the late 1980s I began mixing with Rothbardian libertarians -- they called themselves by the unprepossessing label “anarcho-capitalists” -- and even met Rothbard himself. They were a brilliant, combative lot, full of challenging ideas and surprising arguments. Rothbard himself combined a profound theoretical intelligence with a deep knowledge of history. I can only say of Murray what so many others have said: never in my life have I encountered such an original and vigorous mind. Murray’s view of politics was shockingly blunt: the state was nothing but a criminal gang writ large. Much as I agreed with him in general, and fascinating though I found his arguments, I resisted this conclusion. I still wanted to believe in constitutional government. Murray would have none of this. He insisted that the Philadelphia convention at which the Constitution had been drafted was nothing but a “coup d’etat”, centralizing power and destroying the far more tolerable arrangements of the Articles of Confederation.

Murray died a few years ago without quite having made an anarchist of me. It was left to his brilliant disciple, Hans-Hermann Hoppe, to finish my conversion. Hans argued that no constitution could restrain the state. Once its monopoly of force was granted legitimacy, constitutional limits became mere fictions it could disregard; nobody could have the legal standing to enforce those limits. The state itself would decide, by force, what the constitution “meant”, steadily ruling in its own favor and increasing its own power. This was true a priori, and American history bore it out. The U.S. Constitution is a dead letter. It was mortally wounded in 1865. The corpse cannot be revived.

For most people, anarchy is a disturbing word, suggesting chaos, violence, antinomianism -- things they hope the state can control or prevent. Yet it is the state that is truly chaotic, because it means the rule of the strong and cunning. They imagine that anarchy would naturally terminate in the rule of thugs. But mere thugs cannot assert a plausible right to rule. Only the state, with its propaganda apparatus, can do that. This is what legitimacy means. Anarchists obviously need a more seductive label. “But what would you replace the state with?” It would seem that an institution that can take 200,000,000 lives within a century hardly needs to be “replaced”. I miss the serenity of believing I lived under a good government, wisely designed and benevolent in its operation. But, as St. Paul says, there comes a time to put away childish things.

NEW WRINKLE IN ID THEFT

Most people think of identity theft as a crime that occurs when a crook steals a person’s entire identity -- their name and Social Security number -- to make fraudulent purchases. But a growing number of victims’ good credit is hijacked by thieves who use the victims’ names with other people’s Social Security numbers. Making purchases on credit using your own name and someone else’s Social Security number may sound difficult -- even impossible -- given the level of sophistication of the nation’s financial services industry. But investigators say it is happening with alarming frequency because businesses granting credit do little to ensure names and Social Security numbers match and credit bureaus allow perpetrators to establish credit files using other people’s Social Security numbers.

Social Security number-only fraud now makes up the majority of cases of identity theft, Ingleby said. The Federal Trade Commission estimates that one in eight adults have had their identities stolen over the past five years. The crime also is escalating to bigger ticket items such as homes. The most alarming facet of this new form of identity theft is that victims, faced with overwhelmed government agencies ill-equipped to handle the deluge of identity theft cases, quickly find out there is no easy way -- or any way at all -- to completely clear their credit reports. It is almost easier for victims to detect fraud and fix their reports if the crook uses both their name and Social Security number. That disparity between the two types of fraud stems from the way that credit data are collected.

When crooks use their own names and someone else’s Social Security number, a new “subfile” is created that is attached to the SSN holder’s own credit report and is accessible only by the crook, contends Ron Ingleby from the Social Security Administration’s Office of Inspector General. Victims cannot access that subfile or receive a copy of it, he says, let alone try to correct it, yet the subfile can mar a victim’s overall credit report, making it difficult or impossible to gain credit. Victims also can be targeted by collection agents once the crook stops making payments. Ingleby said the fact that credit bureaus allow subfiles to be created allows this type of fraud to proliferate. He said if credit bureaus simply rejected inquiries by creditors when the name and Social Security number did not match, this type of fraud could be dramatically reduced. The bureaus themselves deny the existence of subfiles, though ample evidence from the files of numbers of victims provides proof that such files exist.

BUSINESSES SHOULD NEVER HOLD INSURANCE POLICIES ON THE OWNER’S LIFE

It is rare, indeed, that we look over the life insurance program of a business-owner client without finding a potentially expensive tax blunder. Sometimes it is the income tax, sometimes the estate tax. Usually both. What is the most common mistake? Having the corporation own one or more policies on the owner’s life. No, the insurance is not the mistake. But the way the policy is owned will enrich the IRS -- usually more than your family -- down the road.

The most common reason a business buys life insurance is for so-called key-man insurance or to fund a buy-sell agreement. When you die, the corporation collects the insurance proceeds on your life -- say $1 million. First, the good news: The entire proceeds are free of the regular income tax. Sorry, but the rest of the news is all bad. Very bad. Who should own the policy to make the death benefit tax-free and to avoid the claims of creditors, then? There are four choices.

OIL-AHOLIC AGRESSION

A hawkish leadership in the US, the war in Iraq, terrorism, soaring commodity prices, the economic rise of China and its thirst for resources (oil in particular), several recent articles concerning the growing tensions between Japan and China, and instability in Saudi Arabia all suggest that global geopolitical tensions are on the rise and could, at some point in the future, have a very negative impact on the global economy and financial markets. Today we focus on China. Last year, China replaced Japan as the world’s second largest importer of crude oil. Soon after taking over power, a year ago, President Hu Jiantao and Premier Wen Jiabao decided that, “securing reliable supplies of petroleum and other scarce resources was not only crucial to sustained economic development, but integral to China’s national security.” It is a thirst that threatens to pit China against its neighbors, despite Beijing’s avowed policy of “peaceful emergence” in the global community.

It may initially seem far-fetched, but with all these threats, it is not hard to see why China might want to invade Taiwan. To anyone who looks at a map of the region, the reasons are obvious. Taiwan’s strategic location makes it extremely valuable. The Taiwan Strait is a critical sea lane, and taking Taiwan would allow China to choke off international commercial shipping, especially oil, to Japan and South Korea, should it ever decide to do so.

Wendell Minnick, Jane’s Taiwan correspondent, published a disturbing article recently. Under the title “The year to fear for Taiwan: 2006.” (Most analysts believe that China’s military strength will exceed Taiwan’s defense capabilities by 2005, hence 2006 is the year to fear.) Minnick postulates that should China decide to take this route, it would be unlikely to be a large-scale, Normandy-type of amphibious assault, but involve something more akin to a “decapitation strategy”. Minnick explains that “decapitation strategies short circuit command and control systems, wipe out nationwide nerve centers, and leave the opponent hopelessly lost. As the old saying goes, ‘Kill the head and the body dies.’ All China needs to do is seize the center of power, the capital and its leaders.” There would be too many pro-China people in the US State Department -- privately relieved the Taiwan issue was finally settled -- to say anything in Taiwan’s defense. With pro-China sentiments running high in the Taiwan military, it is likely that most would grudgingly accept a new mainland president.

Taiwan is strategically important for the US and Japan, but from the Chinese perspective it is vital. Rest assured that the administration will consider every option to ensure China’s continued growth, including military operations.

OFFSHORE FINANCIAL CENTERS AFFECT CROSS-BORDER CAPITAL FLOW IN CHINA

According to a research report completed recently, a number of offshore financial centers like the British Virgin Islands, Cayman Islands, Western Samoa and Bermuda have become important sources of foreign investment for China, and the fast-growing investment from these regions have become quite prominent in the capital inflow that China has experienced in recent years. By actual investment amount, in 2002 and 2003, the British Virgin Islands ranked the second largest source of foreign investment for Mainland China. And now there are “tens of thousands” of Chinese offshore companies registered at offshore financial centers.

Dr. Mei Xinyu, author of the report, notes that we cannot afford to neglect the effect of offshore financial centers on cross-border capital flow in China. Why do so many Chinese enterprises go to such distant islands -- “offshore financial centers” to register “offshore companies”, and then make a “detour” to invest in China? Dr. Mei sees five motives behind this moves, and at least five problems associated with the moves.

Some Chinese companies were using offshore operations as a short-cut to listing on foreign stock exchanges as the Chinese regulations for a domestic firm to list overseas were very complicated and strict, Xinhua said. Offshore operations could also be used to disguise non-performing assets and debts by removing them to a firm set up in those regions where the company’s financial situation would be kept secret, he said. They could also be used for illegal transfers of state assets by corrupt officials or managers of state-owned enterprises.

YOU HAVE RIGHTS -- IF BUSH SAYS YOU DO

This week, the U.S. Justice Department held an extraordinary news conference. After insisting for two years that details of the case of Jose Padilla, an American citizen accused of being an “enemy combatant”, had to be kept secret even from the federal courts, the Justice Department suddenly released detailed information on his interrogations and their results. What made this press conference particularly notable was its intended audience: the U.S. Supreme Court. The court is currently reviewing the Padilla case, with a decision expected in the next few weeks, and there is a growing question of whether a majority can be found to support President Bush’s claims of absolute authority to hold a U.S. citizen indefinitely without filing charges.

It is, of course, considered highly improper to stage such a news conference while a case is pending. Indeed, such a stunt is likely to outrage some members of the court. But the administration appeared to be playing for the one swing justice, Sandra Day O’Connor, who, during the arguments in April, was openly struggling to find any plausible rationale for giving a president absolute power over citizens. With the record now closed, the only realistic chance of getting such information to O’Connor was her morning newspaper.

In alleging that Padilla had planned to target apartment buildings and hotels, Deputy U.S. Atty. Gen. James Comey Jr. said the administration wanted to show that there were benefits to stripping citizens like Padilla of their rights. In a moment of extraordinary and chilling honesty, Comey explained that Padilla had to be stripped of his civil liberties because, if he used them (including his right to remain silent or his right to a lawyer), he might have been able to win his freedom. Thus, the government had to keep him away from lawyers and judges at all costs. Gone was the pretense of legality or principle. The Justice Department had finally found its natural moral resting point: Civil liberties are tolerated only to the extent that they will not interfere with the government’s actions.

UNHAPPY EUROPEAN VOTERS SEND A MESSAGE

Another set of European Parliament elections, another depressing outcome. In the four days to Sunday June 13th, the 25 member countries of the newly enlarged EU held elections for the 732-member legislative body, which helps to make laws binding on all of the Union’s 450 million citizens. The parliament has steadily gained power over the course of the EU’s history but, sadly, its image has only suffered over time. It is perceived as being distant from voters, despite being the only EU institution with a direct democratic connection to them. Recent media exposés mean that the parliament is probably now best known for its members’ abuse of their perks.

It was therefore no surprise that just over 45% of the EU electorate turned out to vote; and that those who did so mainly used the chance to deliver an angry message to their national governments over domestic issues. The governing parties in Britain, France, Germany, and Poland were the most notable losers, while Eurosceptics plainly had a field day. Newish parties wholeheartedly opposed to EU membership did well in two of the Union’s biggest countries. In Britain, the UK Independence Party drew Eurosceptic voters from the main opposition Conservative Party to take 17% of the vote, entitling it to 12 seats in the parliament. In Poland, a traditionalist and ruralist party, Samoobrona (Selfdefence), came third, nabbing seven seats. The parliament’s new members will mostly sit in vaguely like-minded groupings.

What will it all mean for the overall future of the EU? The anti-establishment vote for Eurosceptics, nationalists and anti-corruption campaigners, as well as the low turnout, should serve as a wake-up call for Europe’s leaders. Much post-poll commentary has said that now, finally, Europe’s leaders must make voters feel connected to the EU. But will they? The backlash against the EU in the parliamentary elections may make it harder for the 25 leaders to reach an accord at the forthcoming summit this week in Brussels.

POST-9/11 LAWS EXPAND TO MORE THAN TERRORISM

Federal and state prosecutors are applying stiff antiterrorism laws adopted after the 9/11 attacks to broad, run-of-the-mill probes of political corruption, financial crimes and immigration frauds. If the government gets its way, even routine transactions of buying or selling American homes could soon come under the scrutiny of money-laundering provisions of the USA Patriot Act. The Treasury Department, which already has caught up financial transactions in casinos, storefront check-cashing stores and auto dealers for scrutiny, wants to expand Patriot Act coverage to home purchases as well.

Since 9/11, critics say the greatest effect of new state and federal antiterrorism laws has been on crimes already covered by other laws. The FBI has used Patriot Act provisions in a political corruption probe involving a Las Vegas girlie bar, and the Justice Department reported to the House Judiciary Committee last year that it used the new law in probes of credit-card fraud, theft from a bank account and a kidnapping.

Legal experts say they are not surprised that antiterrorism laws are being used for more than just terrorism. Peter Swire, a law professor at Ohio State University who worked in the Clinton administration, recalled that Congress adopted antiracketeering laws in 1970 with the intent to thwart mobsters, but the punitive laws have since been broadened and put to use in civil cases against corporations, and most recently against the organized campaigns of pro-life protesters against abortion clinics. Swire said one little-noted impact of that law on the judicial system is that prosecutors can add more charges against defendants, even when terrorism is not involved. Swire contends the Patriot Act has been so controversial that the Justice Department has been very cautious in using all of its provisions. “They are careful because they know people are checking to see if it is abused,” he said. “Once it becomes permanent, I think it will be used more widely.”

LAUGHING ALL THE WAY FROM THE BANK: CRIME DOES PAY IN THE CITY OF LONDON

When Joyti De-Laurey left Southwark Crown Court on Monday, she did not return to the respectable life she had built for herself and her family in the well-heeled town of Cheam. She will, in fact, be away from her husband and six-year-old son for quite some time -- seven years, to be spent in one of Her Majesty’s prisons, for stealing £4.4 million from her former employer, the investment bank Goldman Sachs. The prison sentence was the culmination of an in-depth investigation by the City of London Police, and punishment for fooling some senior individuals in the world of banking.

The fantasy land of the super rich that De-Laurey so wanted to be part of must seem a long way away now, as she prepares to serve her sentence. Yet, it is quite possible that much of that life of luxury might be waiting for the 35-year-old -- who has also worked on a market stall and run a sandwich shop in the course of her eclectic career -- when she is freed. That is because tracking down assets gained by illegal means is a hugely difficult task, and the legal hurdles to gain access to suspected criminals’ personal financial information are often insurmountable.

There is no doubt that being convicted of any crime takes its toll on the individual. Yet, for those who can look forward to a stash of cash or other goodies they have hidden away until after they have served their time, it would appear that crime pays in the City.

BRITISH EXPATRIATES FAVOR SPAIN, FRANCE AND PORTUGAL

When it comes to retirement, many expatriates find Britain less than enticing. A high cost of living, overcrowding and a deteriorating healthcare system combined with a desire for fun in the sun and lower living expenses are driving an increasing number of retirees abroad. With myriad attractive locations to choose from, how does the savvy retiree determine where is the perfect little piece of paradise in which to spend their twilight years? Close to home is always a good place to start. Steve Travis, overseas manager of the international division at taxation and financial planning specialists Wilfred T Fry, points out that the most popular destinations for British expatriates remain Spain, France and Portugal.

Other niche retirement spots include Italy, particularly Tuscany, which attracts culture vultures who retire there for the lifestyle, and Malta with its variety of tax exemptions. For non-residents, there are numerous advantages of buying property in Malta, including local mortgage facilities offered by the major banks, and the fact that all deeds and documents are read and published in English.

More adventurous and well-traveled retirees are looking further afield than Europe and are considering the exotic delights of Asia and South America, where a number of governments have been quick to recognise the advantages of enticing affluent retirees and are offering very attractive financial inducements. Belize is embracing retirees through a new law, which provides tax, and residency breaks to qualified retirees aged 45 and older who are citizens of the US, UK, Canada or Belize. Panama also offers an attractive incentive program for retirees.

BREAKING CODES: AN IMPOSSIBLE TASK?

Recent reports that the U.S. had broken codes used by the Iranian intelligence service have intrigued experts on cryptology because a modern cipher should be unbreakable. Four leading British experts said that the story, if true, points to an operating failure by the Iranians or a backdoor way in by the National Security Agency (NSA) -- the American electronic intelligence organization.

Simon Singh, author of The Code Book, a history of codes, said, “Modern codes are effectively unbreakable, very cheap and widely available. I could send an email today and all the world’s secret services using all the computers in the world would not be able to break it. The code maker definitely has a huge advantage over the codebreaker.” It is probable, though not certain of course, that Iran was using what is called public-private key or asymmetric cryptography. In this system, the message is encoded by someone using a freely distributed public key. This can be decoded only by someone using a different private key.

Ross Anderson of the Computer Laboratory at Cambridge University said that, “As the former chief scientist of the NSA once remarked at one of our security workshops, almost all breaks of cipher systems are due to implementation errors, operational failures, burglary, blackmail and bribery.” Professor Fred Piper of the Royal Holloway College made the same point strongly: “There is a difference between breaking a code and breaking a system. In general it is true that a system using a practically unbreakable cipher might be broken though a management fault.” The three “Bs” -- burglary, blackmail and bribery -- might have to be employed if there is no other way of getting at the decryption mechanism. We are back to the world of spies. Simon Singh says that sometimes there is a “backdoor” way in through deliberately corrupted software.

HOUSE PASSES OVERHAUL OF CORPORATE TAX CODE TO STOP EU SANCTIONS

The House of Representatives voted to reorder the U.S. corporate tax code to halt rising trade sanctions imposed by the EU, by a vote of 251-178. It cuts taxes for manufacturers and companies expanding outside the U.S. such as General Electric. It raises taxes on large exporters like Microsoft, Boeing, and Caterpillar and penalizes U.S. corporations that use abusive tax shelters. Lawmakers are under pressure to restructure an export subsidy ruled illegal in 2002 by the World Trade Organization, which authorized EU sanctions that may reach $4 billion annually. The EU began levying the tariffs in March, starting with a 5% duty on products including jewelry, textiles and wood. Those tariffs are at 8% and accelerating by one percentage point a month.

Critics led by Democrats such as New York Representative Charles Rangel urged lawmakers to reject what they describe as a bloated bill filled with targeted tax breaks for special interests and rewards companies that shift hiring overseas. The beneficiaries would include makers of hunting and fishing equipment and owners of race cars. The bill passed largely along party lines. Of the 228 Republicans in the House, 23 voted against it. Forty-eight of the chamber’s 205 Democrats voted for it.

The two-year battle has pitted companies like Boeing and Caterpillar, which benefit most from the export tax break Congress must repeal, against multinational corporations like General Electric and Citigroup, which want Congress to change the way the U.S. taxes their global income to end what they say is double taxation. The bill replaces the export tax break with a new 32 percent tax rate for manufacturers. House passage of the bill would trigger the start of negotiations with the Senate on major differences in the two bill versions before it can be sent to President George W. Bush to be signed into law.

FEW TRIALS ACTUALLY GO IN FRONT OF A JURY

It is the centerpiece of America’s judicial process: the right to a trial by jury system that places a defendant’s fate in the hands of a jury of one’s peers. But it may surprise many to learn that nearly 95% of all cases resulting in felony convictions never reach a jury, but instead are settled through plea bargains, in which a defendant agrees to plead guilty in exchange for a reduced sentence.

For example, when Charles Gampero, Jr., was arrested and charged with murder in the second degree in 1994, the twenty-year-old insisted he was innocent. While admitting to having hit the victim while trying to break up a fight outside a bowling alley on the night in question, Gampero said the victim was very much alive when he left him. Gampero was convinced that a jury would believe his story and acquit him of the charges, but a jury would never hear his case. After jury selection had begun, Gampero and his family say the judge pressured the young man to accept a plea bargain that would send him to prison for 7 to 21 years. “[The judge] told me point blank -- he said, ‘I will give your son twenty-five to life, so you better take the plea, or if you don’t take the plea, he’s getting it,’” says Charles Gampero, Sr., whose son is now entering his 9th in prison. “We took the plea agreement thinking that the judge knew what he was talking about and my son would be home by the time he’s twenty-seven,” Gampero says. “It didn’t work out.”

To overworked and understaffed defense lawyers, prosecutors, and jurists, plea bargains are the safety valve that keeps cases moving through our backlogged courts. “The system would collapse if every case that was filed in the criminal justice system were to be set for trial,” says Judge Caprice Cosper of the Harris County Criminal Court in Houston, Texas. “The system would just entirely collapse.” Critics, however, contend that the push to resolve cases through plea bargains jeopardizes the constitutional rights of defendants, who may be pressured to admit their guilt whether they are guilty or not.

BIOMETRICS -- GREAT HOPE FOR WORLD SECURITY OR TRIUMPH FOR BIG BROTHER?

As the war on terror increasingly comes to rely on biometric technology -- the use of physical characteristics unique to individuals such as iris pattern, DNA and fingerprints to verify identify -- western police and intelligence agencies are drawing up plans for sophisticated biometric databases which would allow them to share sensitive information. The FBI, which has more than 75 million fingerprints on its criminal and civil computer records, is adding biometric details from suspects detained in Iraq, Afghanistan and elsewhere.

The UK immigration service is already fingerprinting visa applicants in Sri Lanka and east Africa as well as asylum seekers who arrive in the UK. The fingerprints are checked against a computer database called Eurodac -- based in Luxembourg and developed by a British company, Steria Ltd -- to see if there have been previous applications for asylum in any other EU country. If so, the asylum seeker may be deported. The main UK police computer storing fingerprints is also due to be replaced soon.

Civil liberties campaigners are voicing concerns about governments sharing biometric data through international databases. “There is now a total obsession with this technology as a way of combatting anything and everything and it’s a fallacy,” said Barry Hugill of Liberty. “Once you begin to compile massive databases it’s a matter of common sense that you are going to get the most horrendous mix-ups, with the wrong people being accused and the the wrong information being shared around the world.”

TYCOON’S SHOW TRIAL A TEST FOR CAPITALISM IN RUSSIA

Since his incarceration eight months ago, Russia’s richest man, Mikhail B. Khodorkovsky, has made only fleeting public appearances -- behind bars on a prison video screen, hustled from police vans amid a phalanx of security guards, or, as his trial began on Wednesday in a Moscow courtroom, seated inside a cage. In these glimpses, Mr. Khodorkovsky looks pale, resolute and unemotional, much as he did in the years before the state police arrested him at gunpoint aboard his private jet in October, charging him with looting public assets and evading hundreds of millions of dollars in taxes.

And until his arrest, Mr. Khodorkovsky’s past as one of Russia’s wiliest and most hard-nosed tycoons seemed a rapidly fading memory. He began his career as a banker who built his fortune on a series of highly criticized privatizations of state-owned companies, like Yukos. The deals were plagued by inside maneuvering and fire-sale prices, giving rise to a group of powerful businessmen, including Mr. Khodorkovsky, who became known as oligarchs.

Perhaps inevitably, given the arc of his career, Mr. Khodorkovsky’s showcase trial -- freighted with the possibility of a lengthy prison term and a Yukos bankruptcy -- promises to offer one of the first public referendums on the state of Russia’s riches. Its outcome could help shape for years the nature of the country’s experiments in capitalism. “This should be Russi’qs O. J. trial and should be the most public and most important bit of jurisprudence in modern Russian history,” said Bernard Sucher, a Moscow investment banker.

THE USE AND ABUSE OF DOMESTIC ASSET PROTECTION TRUSTS

We live in an era of unprecedented litigiousness where doctors, lawyers, accountants and business owners frequently become defendants in lawsuits seeking damages in the tens of millions of dollars. Clients concerned about these potentially devastating liabilities are increasingly inquiring about the efficacy of establishing an asset protection trust (APT) as a part of a comprehensive estate plan to provide a measure of protection for their family’s core savings.

An APT is an irrevocable, self-settled spendthrift trust that protects a portion of an individual’s assets from creditors. Since the late 1970s, APTs have been formed by U.S. citizens in offshore jurisdictions including Bermuda, the Isle of Man, and various Caribbean nations. Until recently, no U.S. jurisdiction extended spendthrift protection to trusts in which the grantor had retained an interest, at least to the extent of such retained interest. APTs have now been authorized in five U.S. jurisdictions: Delaware, Alaska, Nevada, Rhode Island and Utah.

Nowhere is it written that an individual must preserve his or her assets for the satisfaction of unknown future claims and claimants. With the enactment of legislation in five states expressly authorizing the establishment of domestic APTs, asset protection planning has entered a new era. APTs formed under the proper circumstances and with the requisite due diligence can be expected to play an increasing role in the estate planning process for professionals and business owners.

THE STORY OF THE RISE AND FALL OF FOURTH AMENDMENT PROTECTIONS

On May 29, 2004, Sam Dash, who had served as Chief Counsel of the Senate Watergate Committee, died. Throughout his career as a practicing attorney, prosecutor and law professor, Sam Dash found himself challenging those who abused their powers. When I talked with him shortly before he was hospitalized with the heart problem that would take his life, he was planning to do so again. “This guy Ashcroft is a very dangerous attorney general,” he told me during our last telephone conversation. We were talking about the book he had just finished, The Intruders: Unreasonable Searches and Seizures from King John to John Ashcroft, which has now been published.

Sam was not a partisan, but rather a consummate professional. He never looked for gratuitous combat, yet when so engaged, he never shied from saying what needed to be said. As Chief Counsel to the Senate Watergate Committee, Dash found it necessary to take to task some of the most powerful men in government for abusing their authority. He was deeply troubled, for good reasons, about the Nixon White House’s illegal wiretaps and unfounded break-ins to obtain information without a search warrant.

In our last conversation, Sam told me of his plans to tell Americans that Attorney General John Ashcroft was ignoring the lessons of history in fighting terrorism. He had been working on a book about history of the Fourth Amendment’s protections against unreasonable searches and seizures -- a body of law he had studied throughout his professional career. Sam was deeply concerned that Ashcroft had asked Congress for, and then received, new laws as part of the USA Patriot Act that further narrowed the proscription of the Fourth Amendment. For there was no chance, he thought, that the present conservative U.S. Supreme Court would strike down the new law as unconstitutional, despite the fact that it pushed even further than the High Court’s present limits.

The Intruders offers a compressed history of the 800-year struggle for individual privacy rights that ranges from the Magna Carta to writing of the Fourth Amendment. For this nation, those rights were central to the American Revolution. The book masterfully digests important history that is essential to understanding a freedom many Americans take for granted. But the true reason underlying Dash’s work becomes apparent only in its last two chapters. There, it takes Dash less than fifty pages to show how we are now rapidly losing rights and liberties it took us some 800 years to acquire.

SEC STEPPING UP ENFORCEMENT, BUT FEW OFFSHORE BOILER ROOMS SNARED

The SEC’s Office of Internet Enforcement routinely patrols cyberspace to look for fraudulent investment offers. It also helps manage the agency’s complaint center, which gets 1,200 to 1,300 tips a day. Although the SEC brought a record number of enforcement cases last year, critics say it still is not doing enough to stop some types of fraud, such as the sale of dubious U.S. securities by unlicensed, offshore brokerages known as “boiler rooms”. The shares are routed overseas through a securities rule known as Regulation S. It allows companies to raise money directly from foreign investors without having to go through the time and expense of a formal stock offering.

James Martin, a U.S. businessman who says he lost control of his company after agreeing to merge with another being used by a boiler room ring, thinks the only way to stop the overseas stock fraud is to scrap Regulation S or seriously restrict its use. Martin now lives in New Zealand and runs the Securities Investigation Research Society, a nonprofit group formed by boiler room victims to help other investors determine the legitimacy of international stock offers. The SEC contends that closer cooperation with foreign securities regulators is the key to making the global markets safer.

Despite criticism from some investors and activists, regulators in the United States are bringing more cases than ever. Boiler room cases have taken a back seat to other types of crackdowns, on everything from insider trading and accounting fraud to market manipulation and sales of unregistered securities. The SEC filed 679 enforcement actions last year against individuals and companies suspected of violating federal securities laws, compared with 598 in 2002. Of last year’s cases, nearly 30 percent involved allegations of fraud. However, only one involved an offshore boiler room. That is because false addresses and false identities make those cases harder to develop, and because most of the schemes are conducted beyond America’s borders and the agency’s jurisdiction.

ICELAND PRIME MINISTER UNDERSTANDS WISDOM OF LOW TAX RATES

After years of economic stagnation, unemployment and fiscal disarray, an Icelandic government led by Prime Minister David Oddsson implemented a series of Reaganesque reforms that have turned the economy around. In the 1990s, he reformed the income tax moving it towards a simpler and flatter structure. He also lowered the corporate marginal tax rate from 48% to 30%. And he also managed to contain spending, got rid of inflation, privatized large public companies and got the government out of the banking industry.

The results were astonishing. Unemployment dropped, the deficit disappeared, as did inflation, and Iceland is now one of the fastest growing countries in Europe -- 5% a year on average for the last 10 years. According to Mr. Oddsson, “This success has been achieved not in spite of extensive tax cuts but, to a great degree, because of them.” In 2002, the corporate rate was cut again, from 30% to 18%. Today, Iceland has the third lowest corporate income tax rates of all the OECD countries behind Ireland’s 12.5% and Hungary’s 16%. And according to the Prime Minister, personal income tax will be reduced again this year by four percentage points, the income tax surcharge on the highest incomes will be removed and plans are formed to cut the corporate income tax rate further down to 15%.

Some small countries with stable political and monetary arrangements have become quite wealthy by offering a business-friendly environment and low tax rates to individuals and corporations: Switzerland, Luxembourg, and the two Channel Islands, to name a few. Clearly, Iceland has joined their rank with great success. This choice makes a lot of sense. Iceland is a small, isolated country of less than 300,000 inhabitants. Like most tiny countries, it cannot compete with large nations on things requiring large infrastructure. Iceland would also have a hard time accommodating a large number of immigrants. On the other hand, there is plenty of legitimate capital looking for a friendly environment and Iceland is committed to grab it. This is called tax competition.

JUNE ISSUE OF ESCAPE FROM AMERICA MAGAZINE IS OUT

Sample articles from this issue include:

Some Thoughts On Living In The Less Developed World : Loads of articles in this magazine revolve around countries like Argentina, Brazil, Mexico, South Africa, Panama, Belize, the Dominican Republic etc. What do these countries have in common? They all fall into the category of emerging markets. No matter what the differences and similarities of these countries may be, one way or another, they all belong to the less developed world. Taking the drawbacks into account, is it worth living in a less developed country? Yes, it is. Based on my own experience in South Africa and Mexico, there appear to be less rules and regulations that dominate your life, both privately and professionally. The individual often enjoys more freedom in terms of what you can do and how you can get things done. In a nutshell, there are more opportunities to make your mark.

Moving To The Caribbean, Phase 1: Research And Preparation : There probably are very few among us that have not considered moving to the Caribbean after a vacation there. After all, the Caribbean is one of the most scenic and friendly areas of the world. For me, that feeling of being drawn there has not gone away since my first visit in 1997, and it is for that reason, among others, that has led me to moving there to start a small business. This will require doing some serious investigation into the realities of such a venture. It is this information that I would like to share with you in hopes that it helps you, and in hopes that it might motivate others who have already made the move to share their knowledge and experience as well. I have separated my moving plan into phases so that it will not be so overwhelming. This article covers Phase 1.

The Expatriation Option : Expatriation has been called “the ultimate estate plan” and it is a legal, step-by-step process that can lead to the legal right for you to stop paying U.S. or other national income taxes -- forever. It requires professional consultations, careful planning, movement of assets offshore and acquisition of a second nationality. When all that is done (and done exactly right), you must leave behind your home country and become a “tax exile” with an established domicile in a low or no-tax jurisdiction. And, for U.S. citizens, this unusual plan requires, as a final step toward tax freedom, the formal relinquishment of citizenship. A drastic plan? You bet. But for U.S. citizens and long-term residents who seek a permanent and completely legal way to stop paying all U.S. taxes, expatriation is the only option.

PEOPLE MUST GIVE POLICE THEIR NAMES, U.S. SUPREME COURT RULES

People stopped by the police must give their names, a divided U.S. Supreme Court said, ruling that it did not violate their constitutional right to privacy or to remain silent. By a 5-4 vote, the high court upheld a Nevada law that requires detained individuals to identify themselves when asked to do so by the police, based on reasonable suspicion of wrongdoing. Twenty other states have similar laws. The ruling was a victory for the U.S. Justice Department and state officials who said forced identification represented a “minimal” intrusion on privacy rights, helped solve crimes and contributed to police and public safety.

The case involved Larry Hiibel, who was convicted of resisting an officer after refusing 11 times to give his name when Sheriff’s Deputy Lee Dove questioned him on May 21, 2000, as he stood beside his parked truck in Humboldt County. Based on a report from a witness, Hiibel was suspected of hitting his daughter, who was inside the truck. Hiibel also was suspected of driving under the influence of alcohol, based on his eyes, mannerisms, speech and the smell of alcohol. Hiibel told Dove he would cooperate, but refused to give his name because he said he did not believe he had done anything wrong. He was arrested, found guilty of the misdemeanor offense of resisting an officer and fined $250.

What’s in a name?

“What’s in a name?” asked Shakespeare’s Juliet. This week, the Supreme Court gave a partial answer to the question. Not, they insist, anything necessarily incriminating. If a cop wants you to give him your name and a state statute requires it, there are no constitutional protections to say otherwise. Paradoxically, an arrestee may now refuse to answer any question without opening himself up to punishment while Larry Hiibel could not. Many people filing amicus briefs for Hiibel, including the Cato Institute and the Electronic Privacy Information Center, believed the Court needed to think harder about what we are really doing when we give a police officer our name.

A name becomes a powerful key. It can be checked by police against the National Criminal Information Center database, which the Justice Department exempted last March from federal requirements that the info in it be “timely, relevant, complete, and accurate”q Names can also be checked against the Multistate Anti-Terrorism Information Exchange -- MATRIX -- which the ACLU believes contains some of the data-mining aspects of the controversial, supposedly mothballed Total Information Awareness program.

It is simply not true that only the guilty have reason to fear this world we are moving into -- one in which all sorts of standard activities of a private citizen, from traveling by air to standing by one’s truck at the side of the road, leave you vulnerable to an officious police check on every bit of information any source -- public or private -- has gathered about you. Anyone concerned with his own privacy and dignity has reason to fear this decision.

The Hiibel decision does not say that one has to carry a state-approved I.D. It merely says that one is obligated, as the Nevada statute requires, to supply a name if a state statute so requires. However, the logic of the request demands that something more substantive and certain than a mere verbal declaration be given to satisfy an officer. A combination of Hiibel and the 1982 decision in Kolender v. Lawson -- which decided that a California statute demanding I.D. was unconstitutionally vague since it did not specify what kind of I.D. is “credible and reliable” -- both point toward a national I.D. card. We have been approaching this sad destination from many byways now, and Hiibel will take us very close to the final destination.

THE FINAL VICTIM OF 9/11: THE MYTH OF GOVERNMENT COMPETENCE

If a novelist of Dostoevsky’s caliber set out to illustrate the inherent incompetence of government, he could not surpass the impact of a third-rate journalist’s account of what the federal government “did” on September 11, 2001. Then, add in for good measure what we know about the state’s pre-9/11 and post-9/11 screw-ups, and the myth of the modern state as our indispensable protector has been destroyed.

This myth is easily propagated. All it takes is some wishful thinking and jawboning. “Government is great, blah, blah, blah... Without government, Arab terrorists would hijack planes and crash them into the World Trade Center, blah, blah, blah...” On 9/11, this idea, this will o’ the wisp fantasy, was sorely tested. All we asked was that it emerge from the craniums of state-worshipping hacks such as Mario Cuomo and Rudy Giuliani and have the nerve to meet Mr. Reality. It chickened out and checked out and is currently hiding out.

Let me back up a bit before I indict the state for criminal negligence. They cannot complain about money. The agencies in question had a combined budget of over $300 billion. They cannot complain about power. Defense, Justice, CIA, FAA, et al. had plenty of power. They cannot complain that we did not centralize power enough. The feds, not local yokels, were in charge. Manpower was not lacking. They had millions of warm bodies. Education was not lacking: Ph.D’s and Ivy League B.S.’s were falling all over each other.

Then, when all that talent, brains, money and power was desperately needed, what happened? Utter incompetence, confusion, delay, indecisiveness, ill-preparedness, and stupidity from start to finish. Our much-vaunted and ballyhooed government, when it really mattered, on the worst day in American history, blew it; stunk up the joint. Worse yet, it actively generated the conditions that gave rise to the attack! And it responded to the attack by means that will increase terrorism in the future. And please, do not tell us it will do better next time. So will the attackers, and we will get our butts kicked again. It is time to realize that the federal government is led by a bunch of incompetent, brain-less morons who are a threat to our personal and national security.

SUPREME COURT RULING PROTECTS TRIAL BY JURY

In at least 11 states, judges can increase the sentences of convicted criminals purely on the basis of alleged facts never submitted to trial juries and proved beyond a reasonable doubt. Or they could until last week. On June 24 the U.S. Supreme ruled that practice unconstitutional. The 5-4 decision, the latest in a series of reevaluations of sentencing matters, not only invalidated the state laws, it also cast a shadow over federal sentencing guidelines. Writing for the majority, Justice Antonin Scalia said the Court sought to “give intelligible content to the right of jury trial.” (Scalia was joined by Justices Ruth Bader Ginsburg, David Souter, John Paul Stevens, and Clarence Thomas.)

Scalia dismissed the dissenters’ arguments, summing up, “Ultimately, our decision cannot turn on whether or to what degree trial by jury impairs the efficiency or fairness of criminal justice. One can certainly argue that both these values would be better served by leaving justice entirely in the hands of professionals; many nations of the world, particularly those following civil-law traditions, take just that course. There is not one shred of doubt, however, about the Framers’ paradigm for criminal justice: not the civil-law ideal of administrative perfection, but the common-law ideal of limited state power accomplished by strict division of authority between judge and jury. ...[E]very defendant has the right to insist that the prosecutor prove to a jury all facts legally essential to the punishment. Under the dissenters’ alternative, he has no such right. That should be the end of the matter.”

THE REAL BUBBLE IS IN THE BOND -- NOT THE HOUSING -- MARKET

Many people, economists and laymen alike, are suspicious of the recent behavior of house prices, particularly in coastal urban areas. However, I would argue (and other economists would agree) that the bubble is in the bond market, not in the housing market. That is, if interest rates remain close to where they are today, then there is no reason for house prices to collapse. However, some of us think that interest rates ought to rise more than the market expects.

The intrinsic value of an asset is equal to the income from the asset, discounted at the real interest rate [ed: Assuming the income from the asset increases at the rate of inflation]. In the case of a house, the income is the rent that someone would pay to live in that house [ed: Less property taxes, maintenance, etc.]. In the case of a stock, the income is the profits of the company. Over the last two years, by one estimate, the real ten-year interest rate has fallen from just over 3 percent to slightly over 2 percent. The drop in the real interest rate of one percentage point from 3 percent should have raised the intrinsic value on stocks and houses by 33%! So, if house prices in your area have gone up 33% in the past two years, that may seem dramatic, but it is not out of line with the drop in the real interest rate. (The Dow Jones Industrial Average is also about 33% higher over the period.) Because houses are risky assets, they ought to be priced below intrinsic value by a “margin of safety”.

As Brad DeLong said, “P/E ratios -- of all kinds -- should be high when interest rates are low now and are expected to be low in the future. Interest rates are very low now. Long-term interest rates tell us that short term rates are not expected to rise that much. How should we expect house prices to react to low interest rates?... Personally, I think we are in an interest rate bubble -- and that high housing prices are (outside of New York, SF, and LA) probably a rational reaction to very low interest rates.”

So the drop in real interest rates helps to justify a rise in housing prices. But this raises the question of whether real interest rates can remain low. Many economists are skeptical that real interest rates will remain low. It appears to us that investors are ignoring the potential for large increases in borrowing by the U.S. government as deficits accumulate. If the real interest rate doubles in the next five years, then the intrinsic value of houses would drop by 50%. Home prices would not necessarily fall by the full 50%, as the margin of safety could simultaneously contract. Interest rates are low today in part because foreign investors have been willing to increase their holdings of U.S. assets. They cannot go on raising the share of U.S. assets in their portfolios forever.

Another plausible scenario involves an increase in expected inflation, with a corresponding increase in nominal rates. In that case, home buyers with fixed-rate mortgages will enjoy a benefit. They will see their incomes rise relative to their monthly payments. In the late 1970’s, homeowners experienced this sort of drop in their debt burdens, and they made out really well. The savings and loan industry, which lent the money for those fixed-rate mortgages, got clobbered.

So, what is the bottom line? I think that there is some reason to be concerned that both real rates and expected inflation could increase more than the market expects over the next five years. The advice implied by that perspective starts with not borrowing using an adjustable-rate mortgage.

SCHUTZHAFT LIGHT

While L. Paul Bremer was touting the merits of bringing democracy to Iraq, the U.S. Supreme Court was announcing its decision for its own version of the Nazis’ legal concept of Schutzhaft or “protective custody” -- which enabled the Nazis to arrest and incarcerate people without charging them with a crime -- but for American citizens instead. Yaser Esam Hamdi, the American citizen captured on an Afghanistan battlefield, will finally get his day in court, as the Supreme Court ruled that the government can detain so-called ‘enemy combatants’ under limited circumstances during times of war, but that the accused can contest that detention before a federal judge. While most will see this decision as a victory for freedom, I see it as the first step onto the slippery slope.

In Nazi Germany, with the reinterpretation of “protective custody” (Schutzhaft) in 1933, police power became independent of judicial controls. In Nazi terminology, protective custody meant the arrest -- without judicial review -- of real and potential opponents of the regime. “Protective custody” prisoners were not confined within the normal prison system but in concentration camps under the exclusive authority of the SS (Schutzstaffel; the elite guard of the Nazi state).

With this decision the court has approved Schutzhaft Light. It does not require a charge to be brought, only that a hearing be held. Once that hearing is held, a prisoner can still be held indefinitely. What is the likelihood that an alleged “enemy combatant” will be released, especially in wartime? Slim at best. The military’s assertion that Hamdi is an “enemy combatant” will be given more than a fair amount of deference. The judicial review granted in this case will more than likely rise to little more than a legal rubber stamp of the military’s position. When it comes to wartime, the military will always remain superior to any form of judicial review of its actions. With that in mind, Hamdi is clearly not the great civil rights victory that many will attempt to make it out to be. What we could be seeing is the rise of dual judicial systems in America , just like in Nazi Germany: One for political prisoners and the other for common criminals.

The Hamdi, Padilla and Rasul rulings: Game, set, and match to George Bush.

Forget what the media’s talking heads have told you about these three Supreme Court decisions that tested the power of George W. Bush. The President won far more than he lost, so administration “officials” who pronounce themselves victors are more on target than the press who tell you that the decisions represent a defeat for the Administration, or rein in its power. Taken together, the decisions are more important for what they did not do. Their significance for the future, particularly if Bush is reelected, cannot be underestimated.

Reading the cases and placing them in the context of the “war on terror” supports a view that is admittedly contrary to what mainstream media are saying. But if you have been listening to them since September 11, you do not know much about what has happened to the legal system in this country, all in the name of preserving liberty. In these three cases, the Supreme Court did not want to totally abrogate its responsibility (except for one Justice, Thomas, who, as a reluctant justice on a court he often expresses contempt for, not surprisingly wants to be left out of any judicial interference with the almighty President) or the Constitution so it threw a vote or two in the direction of the Constitution.

But it left plenty of room for this despotic President, and all who follow him (you think Kerry cares about civil liberties? You think he would not want the same power Bush is wielding?) to incarcerate Americans at whim, concoct a story about “fighting” against American, and dare you, just dare you, to try your luck at proving your innocence. Game, set, match to George Bush.

THE THREAT OF MARITIME TERRORISM

A quarter of the world’s entire maritime trade, including about half of all seaborne oil shipments, passes through the Malacca strait in South-East Asia, which at one point narrows to as little as one-and-a-half nautical miles. The strait and the seas around it are infested with well-organised, armed and ruthless pirates (see map) who hijack ships and kill or maroon their crews before repainting the vessels at sea and sailing into port under a new, “phantom” identity. If pirates can do this so easily, why not terrorists? Imagine the devastation to world trade if one or more giant tankers were captured and used to block the straits. Or the possible casualties if a hijacked phantom ship were used to carry a nuclear “dirty bomb” into one of the world’s main ports or to launch missiles at a coastal city?

These are nightmare scenarios worthy of a Hollywood disaster movie. But they are also the sort of threats that are being taken seriously by the world’s governments. Leaders of the NATO military alliance, meeting in Istanbul, Turkey, agreed a package of anti-terrorism measures including new defences against attacks on ports and shipping. (To guard against just such threats, the nearby Bosphorus strait, another busy shipping route, was closed to hazardous cargoes during the summit.) New international security regulations for ships and ports will come into force, along with measures under America’s new Maritime Transportation Security Act.

The new regulations specify what security equipment each ship and port must have, and oblige them to draw up and enact adequate security plans, and to designate officers to ensure these are complied with. But while the new rules are intended to prevent serious disruption to world trade due to terrorist attacks, in the short term they risk causing exactly such disruption: many ports and shipping lines are still not up to the new security standards and thus, if America and other countries impose them strictly from day one, many ships may be arrested or denied entry to ports. The U.S. Coast Guard says it intends to board every ship that does not comply with the rules on its first entry to an American port starting July 1.

WILL INFLATION REALLY TURN OUT TO BE AMERICA’S MAIN ECONOMIC PROBLEM?

The outlook for interest rates will be quite different if inflation is not America’s biggest economic problem. A fascinating paper, “Dicing with Debt”, by Stephen King, the head economist at HSBC, a big British bank, explains why it might not be. Mr. King’s starting-point is that the Fed and other central banks need not have been as worried as they were about the threat of deflation. Certainly, debt deflation is a particularly malign economic beast, which emerges when people curb their spending in an effort to pay off their debts. Those very spending cuts cause prices to drop, and force up the real value of debts, creating a vicious spiral. As the experience of America in the 1930s and Japan in the 1990s shows, central banks can do little about this, because they cannot set interest rates lower than zero. It was fears of just this sort that caused the Fed to slash interest rates 13 times, to anorexic dimensions.

Most commentators have cheered Alan Greenspan and his colleagues at the Fed for being so aggressive in warding off the deflationary threat caused by huge corporate debts and the popping of the stockmarket bubble. After all, one of the shallowest recessions on record was followed by a strong recovery in which bumper profits enabled overly indebted companies to reduce their debts to more manageable levels. Mr. King is not among those cheerleaders. He argues that the Fed was wrong to cut interest rates so much, because much of the deflationary pressure was of an altogether more benign sort: a reduction in overall prices caused by rapid technological change, improvements in the terms of trade and other factors.

Technological change and the integration of China, and increasingly India, into the global economy have pushed down the price of traded goods in America, thus pushing up real incomes. “And, because of these real gains, any rise in real debt levels will not be a source of potential ongoing instability,” writes Mr. King. Alas, because the Fed’s perceptions of deflation have been colored by the experiences of America in the Depression and Japan in its lost decade, it reacted by reducing interest rates sharply, a response that is more likely to bring about the debt deflation it most feared. High real growth -- so long as deflation is of the good sort -- requires high real interest rates. If rates are too low, people borrow too much and spend it badly. By cutting nominal rates to prevent deflation, the Fed has reduced the real rate of interest too much. Evidence that this has been the case comes in two forms. The first is that borrowing has ballooned in America in recent years. The second piece of evidence: what Americans spend their money on.

GLOBALIZATION, DEREGULATION ALLOW STOCK FRAUD INDUSTRY TO THRIVE

Smooth-talking brokers, many of them American, use flattery, urgency, and sometimes lies to persuade foreign investors to buy stock in the small U.S. companies they tout as the next Microsoft or eBay. But almost as soon as money changes hands, many of these can’t-miss propositions become sure losers. The value of the stock plunges, and the firms that peddled the shares stop answering the phones, shut down their Web sites and vanish. The prestigious-sounding brokerages are actually unlicensed, offshore “boiler rooms”, selling stock in companies that would have little appeal without a listing on the U.S. market and trading approval by the U.S. Securities and Exchange Commission. The rise of the overseas boiler rooms is an unforeseen consequence of globalization and deregulation.

Just as the U.S. manufacturing and technology industries have gone offshore in search of lower costs and looser operating restrictions, so has the stock fraud industry. The Internet has added a new twist, allowing boiler rooms to create impressive virtual storefronts. Advanced telecommunications also aid in their deception, routing calls, faxes and voice mail from answering services in Hong Kong, Tokyo and other business capitals to their true headquarters in less visible locations. In essence, the operations are everywhere and nowhere, making them hard to find and even harder to stop.

An investigation by the St. Louis Post-Dispatch has identified more than 100 publicly traded U.S. companies whose stock has been peddled by the offshore rings. The boiler rooms profit by obtaining newly issued company stock at discount prices and immediately reselling it at big markups, a practice that is illegal in America. Despite efforts by international regulators and aggrieved investors to disrupt their activities, the number of active boiler rooms appears to be multiplying.

A FREE NATION DOES NOT DO THIS, NOR DO FREE PEOPLE ALLOW IT

The concept of “government” in the United States, a/k/a United Socialist States of America, is skewed beyond belief, intruding into every aspect of our lives whether we realize it or not. Never did the founders of this nation envision a people of such dependence on government less than two hundred years after the American Revolution had freed them from the tyranny of the British Crown. Nor did our founders envision a people who would willingly sell themselves back into such tyranny by allowing government to grow to unprecedented size, with unprecedented expenditures (supposedly for the public good) and unprecedented power to intrude into the lives of the people at every stage from cradle to grave. Such a nation would have been unworthy of the investment they made in the future of freedom and the granting of liberty as the birthright of all Americans and the acquired right of all legally naturalized citizens.

There is nothing in our Constitution that even remotely contemplates a government that is in the business of child care, education, enormous welfare programs, automobile or other transportation design standards, the protection of trees, owls and fish, health and other forms of insurance including home mortgage insurance, the obesity and food consumption habits of its people, underwriting higher education via grants and loans, and the “right” to invade private homes or tap into personal communications without just cause and a proper warrant. Nor did the framers of the Constitution and the Bill of Rights contemplate foreign nation-building by the federal government of this nation at the expense of our citizens, the taxpayers, who inevitably pay the bill, since government has no income of its own. Farther yet from the minds of the founders would have been the idea that this nation would ever surrender control of its treasury to a private institute deceptively named the Federal Reserve Board, made up of private bankers, domestic and foreign.

All of the above has occurred, and most of it in the twentieth century, with the final power being usurped from the people in bills passed, unread, by the elected Congress after September 11, 2001. America is no longer a free nation as freedom is commonly understood and as spelled out in the Constitution and Bill of Rights. Now the government police powers are so enormous, and so all-pervasive, no one can take any steps toward their self-protection without government intervention, not for our liberty, but for our enslavement! America is not the land of the free and the home of the brave. It is a land of those who fear having their creature comforts disturbed now, only to find that down the line, they will all be gone anyway.

REMEMBERING SILENT CAL ON JULY 4TH

Historians have trivialized Calvin Coolidge as a do-nothing President naïve enough to believe that “the business of America is business”, and many have rated him as one of the worst of all time. However, he produced remarkable results without sacrificing our freedoms. And given that he was born on the 4th of July, there is no better time than our Independence Day to remember him. Under Coolidge, the top income tax rate of 65% under Wilson was eventually cut to 20%. The stock market began its unprecedented “roaring 20s” climb as it became clear through 1924 that Coolidge’s tax reduction bill would pass. In both his first and last year in office, federal receipts were $3.8 billion and expenditures were $3.1 billion, and in between, he cut the national debt from $22.3 billion to $16.9 billion.

His policies took more than a million people off the income tax rolls, and 98% of Americans paid no income tax at the end of his term. As a result, America prospered under Coolidge. Real economic growth averaged 7% per year while he was in office (the highest growth on record), while inflation averaged only 0.4%. Investment, manufacturing output, and disposable income rose dramatically, and unemployment averaged 3.3%. That remarkable record explains why, after Coolidge outpolled his Democratic opponent by nearly 2 to 1 in 1924, he would have won in another landslide if he had run again in 1928.

But unfortunately for America, he did not. So why is there such a disconnect between Coolidge’s success and his reputation? In large part, it is because he advocated individualism, as clearly spelled out in his speeches (which he composed himself), and the newspaper column he wrote after leaving the Presidency. But while that seems appropriate for someone born on the Fourth of July, it is so distant from the modern mindset that many now cannot understand why someone who, as Senator, Governor, Vice-President, and President viewed government intervention in broad areas of life as a problem rather than a panacea.

Further, people have attributed to Coolidge the origins of the Great Depression under Herbert Hoover, his Vice-President. But they have not done so because of any evidence that his policies were responsible. Along with monetary policy blunders, the Great Depression was triggered by Hoover’s abandonment of Coolidge’s policies, in favor of disasters ranging from erecting monumental trade barriers to sharply raising tax rates. Never was this divide between the policies of the two made clearer than when Coolidge said of Hoover, “That man has offered me unsolicited advice for six years, all of it bad.” Calvin Coolidge may have been called “Silent Cal”, but his record brags for him, if people would bother to look honestly.