April 2007 Selected Offshore News Clips

(Especially noteworthy articles’ headings highlighted in gold.)

HOW TO VOLUNTEER OVERSEAS FOR A WEEK TO A YEAR OR MORE

Have you wanted to volunteer overseas but did not know how to go about it? Want to do some good in another part of the world but do not have two years to spend in the Peace Corps? Do you want to be able to be a better judge of which volunteer programs would best suit your individual goals? Or perhaps you would like to organize your own thing, something you could do apart from any existing organized volunteer program? I will give you enough information so you can at least know where to start, and how to evaluate what is out there.

A good place to start would be to decide what your goals are, what you hope to learn or do or accomplish from the volunteer experience. Do you want to learn about life in a Third World village? Do you want to help poor people in some impoverished place? It helps to be realistic about your goals – we cannot change the world overnight, but we can make a start. Also keep in mind that the people you will volunteer among are not dumb, usually they just lack resources. Sometimes they will benefit from better ways of doing things, but be respectful of their way of life, even if they do not do things the way you have been used to doing them.

If you only learn one thing from this article, remember this: the person who will be changed the most from the experience will not be anybody you are volunteering among, but you. You will see the world a little bit differently. You will probably see how few resources most people in the world have, but still they manage to get along. It is a great introduction to living overseas. You might even find a country to settle in as a result of your volunteer experience, one that you would not have considered before.

If you have not traveled extensively overseas, you might want to start with a relatively easy country to volunteer in – perhaps Costa Rica or Panama or Poland, someplace with decent health conditions that is easy to get around. If you have not traveled much and choose a more challenging place like India or parts of Africa it can take quite a bit more adjustment, not to mention preparation. But if your heart is set on it, don’t let lack of experience stop you.

If you are looking for a short term program, you could consider going with a church group. Some church groups are heavy on religion, in others it would never come up in the course of your experience. If you consider this route, ask around at local churches in your area – maybe a church in your city has an annual trip to Nicaragua where they do a free clinic, or a trip to Mexico where they build houses for the poor. Even if it is a medical trip they usually need people to do crowd control, help set up, screen patients and so on. If building houses for the poor sounds appealing, you could give Habitat for Humanity a try.

If you are more adventurous, you could consider looking up local affiliates in other countries, and going there on your own, and asking if you can volunteer by basically just showing up on your own. If you choose this route, you can search for affiliates on the Habitat site. If you go on your own you should speak at least some of the local language, and remember, you are on your own. But it is more flexible and cheaper than going with a group. I am not endorsing Habitat, but my experience with them has been good.

There are several reference books that are full of programs and ideas. Alternatives to the Peace Corps, edited by J.S. Willsea is a great book. The International Directory of Volunteer Work by Victoria Pybus and Volunteer Vacations: Short Term Vacations That Will Benefit You and Others by Bill McMillon are two more excellent references.

INVESTMENT THEMES TIE TOGETHER IN ARGENTINA

If you were shown pictures of the street scene in Buenos Aires, your first guess would probably be a European city. Many of the older buildings display European influences, with their spires and decorative frameworks. And in the wake of a nasty crisis, Argentina is well on the road to recovery and that creates opportunities for investors. Many global investment themes come together here. And, it is also one of those places in the world where the dollar still goes a long way.

Real estate is still cheap here. Americans and Europeans have been among the most active buyers of property in Argentina. They are real estate bubble refugees, you might say. They cashed out of their expensive and inflated properties in the U.S. and Europe, and then they came down here to live like kings. It is also a cash market, so you do not have the speculation you have in hot U.S. markets where mortgages vastly increase people’s purchasing power (and raise the risk of a meltdown). Apartments here go for about what they go for in Lagos, Nigeria or Dakar, Senegal. One paper here refers to Buenos Aires as the “It is so cheap I will take two” city. The remaining developable land in the city is shrinking fast.

Besides having some good buys in real estate, other global investment themes come together in Argentina. There is no escaping the high cost of energy or the growing scarcity of traditional fossil fuels. Reading the local newspaper is always a good way to get the pulse of a city. In reading the Buenos Aires Herald, you can get a sense for what worries the Argentines. There are growing concerns over possible energy shortages and blackouts. Argentines pay one-third of what their South American neighbors pay. This has stifled investment in new power generation, as you might imagine. Still, there is change there, too.

Then there is the issue of finding reliable sources of water. One week, I traveled around the rural areas in Salta. I spent some time at a ranch and also viewed properties owned by American and European investors seeking to develop them into residential communities, golf courses, vineyards and more. So it was interesting to hear them talk about water rights and energy issues. In the fertile valley of Cafayate, there is plenty of water. In some other areas, there are worries of polluted water supplies. Cafayate is wine country. The weather is pleasant, with 320 days of sunshine a year. There is plenty of water.

As in the U.S., there is growing inflation. Unlike the U.S., Argentina already suffered through a recent ugly monetary meltdown. As late as 2002, the peso was on par with the dollar, 1 for 1. Today, that exchange rate is more than 3 pesos for $1. Yet somehow people slog through it. Just as in the U.S., despite numerous problems and issues, the economy manages to make headway in certain areas. Markets, I have come to appreciate, are durable things. Leonard Read, founder of the Foundation for Economic Education, would use the analogy of a sponge to describe an economy. It could absorb a lot of mess before it ceased to function and had to be wrung out. The Argentinean economy got a serious wringing out in the meltdown of 2001-2002. But, governments around the world cannot help but make new messes. The basic problem with government here, and everywhere, is that there is too much of it.

Be that as it may, the economy has grown briskly here in recent years. The commodity bull market has also been good to South American commodity producers rich in iron ore, copper and more. It is all part of an interesting montag. I am always fascinated by how all these themes come together, how all these moving parts impact companies and industries. And of course, I love the challenge of finding great investment ideas. In Argentina, there are at least a few of those.

OFFSHORE E-COMMERCE IN THE AGE OF DETERRITORIALIZATION

The natural bonding of the Internet and Offshore stems from the fact that both, of their nature, manage to minimize taxes. Businesses which can operate on the Internet without, so to speak, touching ground in a high-tax jurisdiction will naturally migrate to offshore or low-tax jurisdictions. Businesses that already have offshore existence will find it highly convenient to be able to use the Internet to trade with their high-tax customers without having to make a landing in their countries.

The widespread use of the Internet has brought a paradigm shift in the way small to medium sized business owners, or those just launching a business, can access offshore banking. Because of the nature of Internet eCommerce where servers can be physically located in any part of the world, there is a near-perfect match with the world of offshore IBCs and trusts. This phenomenon has been referred to as “deterritorialization”.

One offshore expert who researches this field describes it this way: “Among the innumerable things that the development of the internet has changed for the better, online eCommerce has had the greatest effect in freeing humanity from the concept of location, as a factor in owning and operating a business. It is now possible to run a business from cyberspace while living anywhere in the world, choosing the most preferable jurisdiction as a tax base, and using any number of jurisdictions as they may apply to manufacturing, distribution, banking, web hosting, and other related factors.”

By locating websites in low-tax jurisdictions to carry out functions previously based in high-tax jurisdictions such as sales and marketing, treasury management, supply of financial services, and most of all, the supply of digital goods such as music, video, training and software, businesses can take advantage of low rates of taxation for increasingly substantial parts of their operation. In many countries, the distribution of goods from a warehousing facility does not constitute the carrying on of a trade or business in that jurisdiction. So even for physical goods, in many case it will be possible to avoid a permanent establishment (taxable presence) altogether in many high-tax jurisdictions where trading activities currently take place.

Online eCommerce, when correctly structured, frees commerce from oppressive legislation in oppressive jurisdictions and opens up the entire world to choice as to the most favorable economic locus. We can now freely choose how we want to run our business, where we want to locate it in the real world, and under what sort of legal system and tax basis we want to place it. And best of all, if it is structured correctly it is absolutely legal for most citizens of the world.

VERMONT BECOMING “OFFSHORE” DESTINATION

At conferences of the offshore insurance industry, next to the booth for Bermuda, can often be found one promoting Vermont. While that may seem strange for a chilly, landlocked state, Vermont is an offshore haven in one very real sense: It offers American companies lucrative tax breaks through unusual insurance arrangements.

More than 560 U.S. firms, including Wal-Mart, Starbucks, and McGraw-Hill, have set up Vermont-based wholly owned insurers – called captives – to cover their biggest risks and liabilities, giving them big tax benefits. Vermont now rivals the Cayman Islands and Bermuda as the insurance destination of choice for U.S. firms.

Vermont’s success in attracting captives also highlights the many ways that American corporations can minimize their tax bills by moving their profits, intellectual property or liabilities to places that provide substantial tax advantages, whether it is a Caribbean island, Ireland, or Singapore. And while many U.S. states provide tax breaks and subsidies to companies that move or expand operations in state, the benefits offered by Vermont are much larger.

Big financial services companies typically spend $25 million to $100 million a year on insurance coverage. Being insured through a captive cuts that cost for them by 5% to 20%, according to Nancy Gray of Aon Insurance Managers in Burlington, Vermont. Vermont has had laws allowing insurance captives since the early 1980s. But it was not until the late 1990s that the state began promoting itself as an alternative to traditional offshore insurance havens. The captive insurance industry, including insurers and the law firms that service them, is now one of the 10 biggest employers in the state.

RFID AND THE END OF PRIVACY

Imagine a world where everything is fitted with an RFID (Radio Frequency Identification) spychip, containing a unique ID for each of the same product to differentiate it from others, and tracked in real time. It sounds far-fetched, but that is exactly what RFID companies like Accenture and the Auto-ID labs at MIT have been trying to do since 1999. They are now backed with funding from over 100 major corporations including Coca-Cola, Kraft, CVS, Proctor and Gamble, Kelloggs, Best Buy, Home Depot, and even the U.S. Postal Service. Already, products like Gillette Mach3 razor blades have been fitted with half a billion RFID tags and sold at Wal-Marts throughout the country without the knowledge or consent of the consumer back in January of 2003.

RFID is also known as an EPC, or an Electronic Product Code, which is what companies plan to implement to replace the current UPC barcode, or Universal Product Code. Companies like Pepsi, Nestle, Pfizer, Phillip Morris USA, Johnson & Johnson and many others want to make this EPC universal, meaning every thing ever made on planet Earth must be tagged with an RFID chip. Each RFID chip contains a unique ID unlike barcodes, and can emit information constantly as an active RFID chip or on when triggered by a RFID reader as a passive RFID chip.

Products that have been fitted with RFID include Calvin Klein and Abercrombie and Fitch clothing, Kleenex and Huggies baby wipes, Toyotas after 2004, Viagra and Oxycontin prescription bottles, company loyalty and membership cards, library books, every new U.S. passport beginning in October 2006, and many more that companies will not disclose.

To find out more about the subject, I contacted Dr. Katherine Albrecht, the founder and director of CASPIAN, Consumers Against Supermarket Privacy Invasion and Numbering. She is a Harvard graduate, and also the author of Spychips, the definitive book on the subject of RFID and its dangers to privacy.

THE EARTHLY LESSON OF JESUS’S CRUCIFIXION, AND WHY HIS SECULAR TEACHINGS LIVE ON

Stripped to its basics, and considering only the real-world, non-supernatural elements, Jesus’s story is this: A man begins a ministry in the Middle East, 20 centuries ago. Cruelty is common in the culture, both to children and to adults. For example, even petty thieves may be executed and in a spectacularly cruel fashion – by crucifixion. The Roman occupation is brutally repressive in other ways as well, quick to imprison citizens or torture them or put them to death for even minor resistance to the regime. Slavery is commonplace, poverty is the norm, and modern comforts and protections are centuries in the future.

Completely at odds with this harsh reality, Jesus preaches love. He does so in a manner that seems deeply felt and sincere, at least from what we can know, given the materials available to us. Preaching love is not a marketing tactic for Jesus. We can easily believe, reading the New Testament, that Jesus means every word. Jesus goes so far as to assert that those who love others are his followers.

The weapon used to arrest, torture, and murder Jesus is the coercive state – murder being its most characteristic activity, and coercive power in general being the essence of coercive government itself. Given that the wealthy and influential outside of government have so often bent government power to their own ends, it is hardly surprising that government’s power to kill without legal consequence is sought and granted in this case.

For the crime of advocating love and compassion (and of course for developing a large following based on those teachings), Jesus is arrested by agents of the Roman empire – at the behest of local merchants, religious leaders, and others, including, ultimately, a growing mob. He is accused of blasphemy, but had he not been preaching love and compassion, and gaining a huge following as a result, he would never have come to the attention of the authorities in the first place. Roman soldiers lead Jesus away, mock him and torture him (ripping flesh from his back with a scourge), and finally nail him to a wooden cross, leaving him to die slowly, in agony, between two common criminals who are also being crucified. Not a random killing, this one.

So an detail (and lesson) of Jesus’s story, then, is that coercive government is fundamentally at odds with love. It is anti-life. That should be no surprise, because coercion is a crime, no matter who is doing it or what the excuse. Coercion is all it takes to turn sex into rape, or a bank withdrawal into armed robbery. Coercion is among the central components of child abuse. Coercion replaces voluntary cooperation with violence and threats of violence. Gandhi, for one, put this clearly: “One who uses coercion is guilty of deliberate violence. Coercion is inhuman.”

The secular story of Jesus is, among other things, a reminder of the essentially violent, cruel, and deeply unhealthy nature of coercive power. It is the story of Power’s hatred and mortal fear of the real and the healthy. The story of Jesus tells, in clear language, of Power’s willingness to inflict any atrocity, to murder any number of innocents, to tolerate or instill any corruption, and to do whatever else is necessary to retain control and privilege.

Power is threatened by love, by compassion, and by open, healthy access to feeling – characteristics of young children and of healthy adults – and it will not tolerate them. Power’s most devastating and subtle deception has been to corrupt the story of Jesus and to incorporate it, along with the human desire for a compassionate world generally, into Power’s own justifications and machinery.

U.S. STATES MOVE TO CLOSE “ABUSIVE” CORPORATE TAX STRATEGIES

Try to thwart shifting of profits to lower tax states.

Governors in six states have recommended that their state adopt a key reform to outlaw a variety of “abusive” income-tax-avoidance strategies practiced by large corporations, a new report by the Center on Budget and Policy Priorities has shown. According to the report by the nonpartisan research organization and policy institute, 18 states had already adopted the reform, known as “combined reporting”, as of the start of 2007. In recent weeks, the governors of 6 more states all proposed the reform as part of their new budgets.

The Center’s study reported that, to avoid state corporate income taxes, a number of large, multistate corporations have devised strategies to move profits out of the states in which they are earned and into states in which they will be taxed at lower rates – or not at all. They do this by creating subsidiaries largely or solely as tax shelters in “tax haven” states like Delaware and then artificially shifting funds to them in the form of royalties or rent.

The report cited as an example the case of retailer Wal-Mart, which has transferred ownership of all of its stores to a Wal-Mart subsidiary. In most states, this enables Wal-Mart to deduct the “rent” it pays the subsidiary (i.e., the rent it pays itself) from the income that is subject to state corporate taxes. The subsidiary receiving the rent is not taxed because it qualifies as a tax-exempt Real Estate Investment Trust under federal and state law. The Center argues that this practice is wrong because it costs states billions of dollars in revenue, and because it give multistate corporations an unfair tax advantage over in-state corporations and smaller businesses.

Combined reporting is considered to create a level playing field for all businesses by treating a parent corporation and most of its subsidiaries as a single corporation for income tax purposes. The state taxes a share of the entities’ combined nationwide income, depending on how much of the corporation’s total activity takes place in that state. The U.S. Supreme Court ruled in 1983 that combined reporting was both fair and constitutional. In 2004-05, Vermont became the first state in more than 20 years to adopt combined reporting.

TEXAS LAWYERS FOUGHT THE IRS AND WON

Two weeks before tax day (April 15), married lawyers Alan and Jean Brown were signing their names to the back of a familiar-looking green and yellow U.S. Treasury Department check that most Americans associate with a tax refund. The check the San Antonio couple endorsed on March 30 was an IRS refund of sorts – but not in the traditional sense.

The $1.34 million check was the result of a settlement between the Browns and the government in Alan Brown, et al. v. United States, a Federal Tort Claims Act (FTCA) suit the couple filed three years ago in the U.S. District Court for the Western District of Texas. The couple filed the civil suit after they were caught up in a complicated tax prosecution in which Alan Brown, a well-known criminal defense attorney with Brown & Norton, and Jean Brown, a family law solo, allege they were targeted by overzealous IRS agents, which led to the Browns being indicted in 2003 by a federal grand jury in Austin, Texas, for allegedly filing false personal tax returns between 1994 and 1997.

In their first amended complaint in their civil suit, the Browns alleged, among other things, that IRS agents had authorized a warrantless search of their offices, records and home that was without probable cause; that the defendants and/or other “investigative or law enforcement officers” used false or misleading evidence to seek a search warrant, justify the grand jury investigation, and the indictments; and that the government, “through its ‘investigative or law enforcement officers,’ maliciously prosecuted Alan Brown through and including a lengthy criminal trial without probable cause, which proximately caused plaintiffs to suffer significant damages.” The Browns further alleged in a response pleading that IRS agents made “material misrepresentations and omissions to their supervisors, prosecutors, and a grand jury.”

After a 5-week trial in Austin in U.S. v. Alan Brown, a jury acquitted Alan Brown in 2005. The government subsequently dismissed the indictment against Jean Brown. While the settlement check that resulted from their civil suit will just about cover the Browns’ legal expenses in their criminal tangle with the government, the couple says the money represents something more important. The fight with the government finally is over. “While we believe we would have gotten a lot more in trial, it would have hung up on appeal,” says Jean Brown, who adds that she was indicted merely because she filed a joint tax return with her husband.

Julie Zatz, an Assistant U.S. Attorney in Los Angeles who handled the FTCA civil suit after the U.S. Attorney’s Office for the Western District of Texas recused itself, says the government did not admit any liability in settling the case. “It did not settle for anything that the agents had alleged to have done or failed to do,” Zatz says. Rather, she explains, the government wanted to contain its litigation costs by settling the suit.

But Bill Reid, a partner in Austin’s Diamond McCarthy who represented the Browns in their civil suit, disagrees with Zatz. It is unusual for the government to settle such a case for more than $1 million, he says. “The thing is, this is not your normal tax case,” says Reid, who is a former Assistant U.S. Attorney for the Western District of Texas. “Generally, they’re not paying that ... on a malicious prosecution case.”

To pay for their criminal defense lawyers, the Browns took out a second mortgage on their house, spending just over $1 million in legal fees. “And that was people being nice to me. If it was a company it could have been $5 million,” Alan Brown says. “Discovery was huge,” he says, adding that the government had close to 30,000 files. After paying their legal bills, there won’t be any money left over from the settlement, Jean Brown says. “The settlement certainly will not put any extra change in our pocket, but it will be able for us to get out of the hole,” Jean Brown says. “Is any one of us going to quit working? No.”

ANCHORED TO THE DOLLAR

It is the dream of many an escapist to finish a working career and, with money in the bank and retirement checks coming each month, set off in search of adventure. Dreams of gorgeous anchorages, aqua blue waters, sandy beaches, and palm tree lined beaches have literally spelled disaster for many an afternoon’s work schedule. But how often do any of these dreams include that occasional storm and the resulting consequences? Do your dreams include the preparations necessary to weather the storms common to these adventures?

Now, if you are thinking this is just another one of those sailing articles being written by some parrot head who is typing with one finger on one hand while holding a margarita in the other you would be wrong... at least about it being a sailing article. Whether you dream of boats, wineries, or beautiful estates – if your finances are tied to savings or investments in the U.S. your future is anchored to the ups and downs of the dollar. Understanding this could mean the difference between a wonderfully successful adventure or years of difficulty and possibly total failure.

Just ask anyone who happened to have made their escape back in the 1990’s or early 2000 how important it is to plan for the dollar’s rise and fall on the currency market. Imagine purchasing a nice little house in Tuscany in 1999 knowing that your retirement would provide you with just enough to live comfortably. Not even considering the stock market collapse, how would you then feel as you watched (and felt) the effects of the dollar falling 30% over the next few years. Could you survive living expenses rising 30% or would your wonderful dreams be seriously at risk? Now, how would you feel when you hear the leaders of the world’s central banks making statements that the dollar needs to fall another 20 to 30% to be in balance? As you dream and plan your escape have you considered such scenarios?

Using the assistance of the sailing metaphor, this article will attempt to help readers better understand currency fluctuations, what causes them, future trends, and strategies you can use to protect your financial assets and future retirement dreams. This is a brief introduction designed to stimulate your thinking and studies in a topic seldom considered until the last moment.

SHADOW STATS GIVE A TRUER PICTURE (OR FIGURES DON’T LIE, BUT LIARS WILL FIGURE)

“If you asked a bunch of people sitting at a bar what the inflation rate was, you would get numbers closer to the truth than what the government says in its official numbers.” So said economist John Williams one afternoon. I made the trek to visit him, along with my publisher and friend Addison Wiggin. We wanted to meet the old fellow, whose work we hold in esteem. Truth seekers like Williams are dear, because lies are so cheap. And because not too many of us are willing to parse through thousands of pages of dry economic reports to get behind the government’s accounting alchemy. What follows is an update on some of Williams’s latest work and its investment implications.

In a nutshell, here is the story. Government officials, mere self-interested mortals like the rest of us, want to paint the best picture possible. This, they have found, tends to win them more elections. So every administration for years and years has made little adjustments in reported figures for things such as inflation. These little adjustments, as you might imagine, always go one way. They make things look better than they otherwise might. Over time, these little adjustments start adding up. Then you get big differences between what is really happening and what the reported figures say.

Williams has gone back and reversed these adjustments. Take a look at inflation, popularly measured using the consumer price index (CPI). The official numbers tell us inflation is less than 3%. Yet calculating inflation using the same methods from before Clinton took office, Williams gets inflation closer to 6%! The latter figure is nearer to the experiences of everyday people living in this country, who have to pay for groceries, gasoline, insurance, medical bills and more.

“We are in an inflationary recession now,” Williams told us. His evidence: much weaker than expected housing starts, retail sales and industrial production. Also, a weak manufacturing survey, sluggish annual growth in durable goods orders, rising new claims for unemployment insurance and anemic employment growth. Williams’s Shadow Government Statistics shows the economy shrinking now, whereas the official government numbers still show positive growth.

What does an inflationary recession mean for investors? Think 1970s. Not disco and bell-bottoms, but rising prices for gasoline, groceries and gold. Think higher interest rates. As an investor, you want to stay ahead of that inflation number, to keep your purchasing power. A bond yielding 5%, which is about what a 10-year Treasury pays, looks rather inadequate against an inflation rate of nearly 6% per Williams. Tangible assets tend to do better in environments like this. In the early 1970s, commodities soared even as the economy headed into recession. So long-term investors should look to own real assets – whether oil and gas in the ground, cheap raw land, water rights, ships, rigs or what have you.

Companies that can grow at a rate higher than inflation should reward investors as well, as long as you do not pay too much for them. Companies that should be able to swim upstream and boost cash flow in a sluggish economy include certain commodity and infrastructure businesses. And do not forget about opportunities abroad. In short: Buy cheap tangible assets with growing cash flows (“tangible assets that sweat”). It has been our playbook for a few years now. That, and do not trust the government’s numbers. Ever.

PANIC NOW! ... AVOID THE RUSH

“Invest for the long-term.” ... “Diversify.” ... “We are in a period of Great Moderation in volatility, so don’t panic.” You should probably ignore all these soothing platitudes. Our suggestion is to panic now and avoid the rush later. In other words, sell risk. Don’t try to diversify your risk away. Sell it! Soothing axioms barely disguise the truth that markets today are more prone to volatility than ever, and that what we have recently witnessed may be just a taste of what is to come.

“An investor’s two best friends,” writes American financial guru Ben Stein, “are time and diversification. Get the broadest possible market indexes. Spread yourself out over large and small caps. Have a large dollop of the developed foreign and a goodly chunk of the developing market. Yes, it’ll be a rocky ride in China and Brazil, but over long periods you’ll do great.” Exactly what portion of your portfolio is a dollop? How do you tell a “goodly chunk” from a “badly chunk?”

Here is our beef with diversification, as most folks use the term: The idea of diversification relies on the existence of negative correlations between sectors or asset classes. When X zigs, Y tends to zag. And diversification makes sense if some things go up while others go down. But most financial markets have become dangerously correlated. We can no longer count on bonds to go down when inflation goes up, or gold to go up when stocks go down. Inverse correlations like these used to be more more reliable. Pre-Greenspan, there were certain inter-marker relationships that made sense and that you could prove with real performance data. There were also relationships between risk and reward that seemed more logical than what passes for logic today. In the “old days”, way back in 2000, risky bonds paid much higher rates of interest than Treasury bonds. No more.

Perhaps it sounds quaint today, but the high returns that used to be available on Emerging Market bonds were the reward you received for taking a risk with your capital. If you wanted a safe savings account, you were not going to make much money in it. But if you were willing to buy Brazilian stocks or Icelandic bonds, well that was another matter entirely. You might be crazy. However, you might also be right. And you deserved a few hundred extra basis points for being crazy, brave, and correct. But over the last four years, risk premia have nearly vanished. These days, everyone is crazy, no one is brave, and many people are wrong. We say no one is brave because bravery requires some knowledge or appreciation of the nature of the risk you are taking. And no one seems to think investing in shares is all that dangerous.

There is too much money chasing too few assets. This imbalance causes prices to rise ... and to rise ... and to rise, creating the impression that risk is not so risky after all. But this phenomenon does not mean that risk has vanished from certain types of assets. It just means you are no longer compensated for taking it. What does diversification even mean in a world flooded with liquidity and cheap money? When all asset classes start moving up because of excess liquidity, negative correlations tend to disappear. X and Y move up along with A, B, C, D, E, and F. With everything rising in lock-step over the last few years, is the risk not now that everything will fall in lock-step too?

So if you would like to stay ahead of financial fashions, panic now.

THE MIND OF CLARENCE THOMAS

The Supreme Court Opinions of Clarence Thomas, 1991–2006: A Conservative’s Perspective reviewed.

The title word “conservative” may create the wrong impression. At an earlier time in his career, book author Henry Mark Holzer was a member of the inner circle of Ayn Rand, a writer who has exerted a major influence on libertarian thought. Holzer himself has been a courageous and determined advocate of individual liberties throughout his life as lawyer and professor of law. He leaves to the reader the task of deciding whether Justice Thomas is a libertarian or a conservative (160), but it is plain that he admires Thomas as a proponent of what I have no hesitation in calling a libertarian approach to constitutional law. Nevertheless, I put the “a” before “libertarian approach”, in recognition that libertarians are not all of the same mind when it comes to the interpretation of law.

If you are worried about intellectual honesty, as Holzer is, you are much more likely to find it with the libertarianism of process than with the libertarianism of result. It is simply breathtaking, the degree to which presumed supporters of civil liberties have gone in amending the Constitution by judicial interpretation. I am, by profession, a literary historian and critic, and I know I would be laughed out of my profession if, when I interpreted texts, I took the kind of freedoms with fact and logic that judges, lawyers, and professors of law routinely take when they interpret the Constitution.

Of course, no text interprets itself. Even apparently simple texts can pose interpretive challenges. Suppose we assume that a text that is so important to so many people ought to be adapted to their changing needs and evolving perceptions of life. Or suppose we simply do not like the original meaning of the text. What about the popular claim that the Constitution is such a peculiar kind of text as to require interpretation by methods that would never be applied to others? One hears that the Constitution is a “living” document, and that it ought to “evolve”, so as to adapt itself to new “conditions”. In other words, we can rid ourselves of bad laws only by treating the Constitution as a butterfly that is constantly emerging from a cocoon.

Do you believe that anything called a “constitution” could possibly be ratified if its proponents proclaimed, “This is a document that is going to keep changing in unpredictable ways, in a continual process of reinterpretation by people who have been educated to believe that it has no fixed and definite meaning”? No one would answer yes to that question. Constitutions are written and ratified with the expectation that their meaning will not be changed except by regular and deliberate process of the body politic (as opposed to the internal debates of a politicized judiciary). It is because most of our fellow citizens still cherish that expectation that they are willing to respect decisions that honor the Bill of Rights, no matter how much they may dislike its particular applications.

Enter Professor Holzer, who demonstrates that Justice Thomas is the Supreme Court’s smartest and most consistent advocate of interpreting the Constitution according to its authors’ original intent. In the process, Holzer illuminates many of the great controversies of constitutional law. Holzer is always clear and precise, both in his own analyses and in his criticism (favorable or not) of the analyses of others. He aptly describes “the decades-long metastasis of the ‘Living Constitution’s’ malignant doctrines into most areas of American constitutional and statutory law” and explores the various intellectually interesting ways in which Justice Thomas has “fought against this anti-constitutional disease.”

The appeal of Holzer’s book extends much farther than the audience of Supreme Court watchers and conservatives still angry (and they ought to be) over the controversy that surrounded Thomas’s appointment. The book amounts to a seminar on constitutional law, its history and practice, and on the processes and specialized language of the Supreme Court. Ideas and customs that are ordinarily explicated (badly) at the length of hundreds of pages are swiftly and memorably communicated here.

Holzer identifies the essential issue: do we have a constitution, or merely a set of judicial dogmas? I hope that the answer is, Yes, we still have a constitution. But if the answer is No to that, then Holzer’s book may help us get it back.

WHAT HAPPENS IN OFFSHORE PRIVACY HAVENS STAYS IN OFFSHORE PRIVACY HAVENS

If you are making a so-called “private” transaction in either your U.S. bank or securities account, you might as well publish your financial activity right on the front page of The New York Times. After all, practically anyone can see it anyway.

Why do I say that? First there is the U.S. Department of Justice. Armed with only with a “national security letter”, with absolutely zero due process, the FBI and other federal investigative agencies can demand a complete list of every banking transaction you have ever conducted. And, it is illegal for your bank to tell you about their demands. (You can thank the U.S. PATRIOT Act for this legal provision!)

Second, there is the IRS, which may also obtain your bank records without the use of a summons or other legal procedure if the IRS believes you could be violating tax laws. Third, there are “pretexters”. Those are private investigators, identity thieves and others who, by impersonating you, can gain access to the information in your bank account.

Next, if you are sued, and lose, the winner may be able to obtain a court order to obtain your bank records. And finally, there are banks and brokers, who themselves can sell your personal financial information to the highest bidder. They can do so without restriction, if the transactions are made between “affiliates” or with outside service providers that market the bank or broker’s products or services.

But privacy still reigns elsewhere.

Things are very different in countries like Switzerland, Liechtenstein and Austria, where professionals at financial institutions are forbidden from disclosing any aspect of your financial transactions, including private bank account information, without an order from a local court. Closer to the U.S., Panama also has stringent bank secrecy laws to protect your privacy. Unlike the U.S. where average bank employees can – and must – reveal your personal financial details, many offshore nations impose fines and prison sentences on bank employees who violate the privacy of account holders. That is the outstanding hallmark of an offshore account.

Naturally, the IRS and other U.S. government busybodies do not like offshore bank secrecy. They constantly whine that terrorists, tax evaders and narcotics dealers use these offshore banks to keep their illicit secrets. But these accusations are mostly hot air. Panama, Liechtenstein, Switzerland and the rest of the privacy havens have strict anti-money laundering laws and procedures to ensure that its financial institutions are not used for unlawful purposes. They do not want to assist illegal dealings either. Offshore banks must comply with strict “know-your-customer” procedures.

KYC rules mean you can no longer set up anonymous “numbered accounts” in offshore jurisdictions. If you walk into a bank in say Liechtenstein, and ask to set up an offshore account, they will politely ask you to fill out several forms. These forms will include a detailed application and your source of funds, so they can make sure you are exactly what you are – a freedom-seeking individual who is interested in higher investment returns, stronger asset protection and true financial privacy.

The bottom line is that offshore privacy havens like Switzerland and Austria vigorously defend their bank secrecy laws, so they offer wonderful alternatives to the absolutely ZERO privacy available in the U.S. Rest assured, as long as you are keeping your offshore dealings legal, your secrets are safe in such an offshore region.

BETTER AND CHEAPER INSURANCE COVERAGE IS NOW AVAILABLE OFFSHORE

The state of Vermont as an offshore tax haven? Does not sound right, does it? Particularly when you know that Vermont has moved so far left on the American political spectrum that some conservative locals ruefully call it “The Peoples Republic of Vermont”. But, according to The New York Times, “Vermont is an offshore haven in one very real sense: It offers American companies lucrative tax breaks through unusual insurance arrangements. ... Vermont now rivals the Cayman Islands and Bermuda as the insurance destination of choice for American companies.” Indeed, Vermont, and more than two dozen states, South Carolina, Arizona and Hawaii among them, are cashing in on the ballooning demand for less costly, tax-advantaged captive insurance.

Looking for ways to provide alternative insurance coverage, medical professionals and many other business and professionals groups, have found an excellent alternative – a captive insurance company. These captive insurance companies are owned and operated by the professionals or corporate owners it insures. And under U.S. tax law, lower cost captives enjoy special tax breaks only available to insurance companies.

There are now over 5,000 captive insurance companies in operation. A large number of these are domiciled in Bermuda, where captive insurance began, and other offshore jurisdictions where laws are tailored for captives with more reasonable regulations. Out from under American law, they can operate with a more realistic level of capitalization that matches the risks involved. And these specialized offshore jurisdictions provide far better asset protection and insulation from domestic U.S. lawsuits as well. That is a major plus offshore has to offer over Vermont or any other American state where costly lawsuits can be easily filed and runaway juries routinely award unreasonably huge sums.

U.S. persons – and their assets – are sitting ducks.

For Americans, lawsuits are a real hazard. With more lawyers and lawsuits per capita than any other nation, U.S. persons are sitting ducks. Anyone who conducts a business in the U.S. is an automatic target for litigation. One professional group that has been a special target for contingency fee lawyers are healthcare providers – doctors, dentists, nurses, hospitals, clinics and pharmaceutical companies.

A new report issued early this month, Jackpot Justice: The True Cost of America’s Tort System, claimed the out-of-control U.S. legal system costs the U.S. economy $865 billion annually in direct and indirect costs – a yearly “tort tax” of $9,827 for a family of four. The authors claim, “These are astounding figures with real world consequences for American businesses and their employees. To put this in perspective, the average American household pays more annually in ‘tort taxes’ than in federal income taxes.”

This flood of lawsuits has driven business coverage and professional malpractice insurance costs sky-high. In some cases, these costs are far beyond companies and healthcare providers’ ability to pay. In many areas, medical specialists who are especially vulnerable to being sued, simply have moved away or stopped practicing. The American Medical Association identified 20 states facing a “medical liability crisis”, where medical malpractice insurance costs are so high that physicians have to abandon their practices or “go naked” without malpractice coverage.

Captive insurance is big business. More than 40% of the Fortune 500 corporations and many multinational companies own one or more captives. But captive insurance can be cost effective for small businesses and professional associations, such as physicians, dentists, medical group practices and hospitals. If you own a business or a professional association with annual insurance costs of $200,000 or more, forming or joining a captive insurance company may provide you significant cost savings, plus far better management and settlement of claims.

But do not let recently publicity about Vermont fool you. If you want true, iron-clad protection, you need to establish a captive insurance company in an offshore jurisdiction where your corporate and professional assets are far beyond the immediate reach of U.S. tort lawyers and American state and federal courts.

AS U.S. TAX RATES DROP, GOVERNMENT’S REACH GROWS

Maybe the era of big government is not over, after all. As Americans finish their annual tax-filing flurry, it is true that tax rates are lower than they were a few years ago. But according to a different yardstick, the federal government’s reach is expanding.

52.6% of all Americans now receive significant income from government programs, according to an analysis by economist Gary Shilling. That is up from 49.4% in 2000 and far above the 28.3% in 1950. If the trend continues, the percentage could rise within 10 years to pass 55%, where it stood in 1980 on the eve of President Reagan’s move to scale back the size of government. That two-decade shrink-the-government trend now appears over, if for no other reason than demographics. The aging baby-boomer generation is poised to receive big payments from Social Security and government healthcare programs.

Mr. Shilling’s analysis found that about 1 in 5 Americans hold a government job or a job reliant on federal spending. A similar number receive Social Security or a government pension. About 19 million others get food stamps, 2 million get subsidized housing, and 5 million get education grants. For all these categories, Mr. Shilling counted dependents as well as the direct recipients of government income. Many Americans, in surveys, say they do not like the way their tax money is spent. And a majority now says, in a reversal from a year ago, that their federal income taxes are too high, according to an April Gallup poll. Yet at the same time, much of U.S. population is on the receiving end of that tax-revenue stream.

SENATE BILL TO MODERNIZE U.S. FEDERAL TAX LIEN SYSTEM

Propose to move from paper-based to electronic filings.

Citing $570 million in cost savings for federal taxpayers, Sen. Carl Levin, (D-Michigan), and Sen. Norm Coleman, (R-Minnesota), have introduced legislation to modernize the federal tax lien system by moving it from paper-based filings in local recording offices to electronic filings on a national tax lien registry accessible through the internet.

“Outdated laws are forcing the IRS to waste taxpayer dollars on an old-fashioned, inefficient, and burdensome paper tax lien filing system that could be easily replaced by a modern electronic filing system that could save taxpayers a half a billion dollars over the next ten years,” explained Levin. “Using a centralized, electronic filing system instead of a decentralized system requiring tax liens to be filed on paper in over 4,000 local recording offices across the country would save millions of taxpayer dollars, while actually improving taxpayer service. Liens would be filed faster, errors would be easier to correct, and, once resolved, liens could be released quicker – in 10 days instead of the 30 days now permitted.”

“The current federal tax lien system is costly, antiquated, and generally unreliable. Tax liens are an essential tool to recover unpaid taxes, which is why we need to bring the system into the twenty-first century,” added Coleman. “In short, the bill would enable the IRS to file federal tax liens electronically and would post all federal tax liens on the IRS website. ... Posting the liens on-line will make tax lien information more readily available to the public and will make it easier for federal contracting officials to make sure that the federal government is not handing over hard-earned taxpayer dollars to tax-cheating federal contractors.”

Tax liens are a key tool used by the IRS to collect funds from persons who are delinquent in paying their taxes. Notices of tax liens must be made public. Currently, tax lien notices are made public by filing them in one or more of 4,100 local recording offices.

The bipartisan Tax Lien Simplification Act is the result of investigations into abusive tax shelters, offshore tax havens, and tax delinquent federal contractors conducted over the last four years by the Senate Permanent Subcommittee on Investigations, on which Levin serves as the Chairman and Coleman serves as the Ranking Member. During the course of those investigations, the Subcommittee learned of the existing, decentralized system for filing federal tax liens and the high costs of maintaining it. The IRS, for example, maintains a service center dedicated to monitoring dozens of varying local requirements regulating the format and legal styling applicable to tax lien filings, preparing those liens in the proper format, requesting local officials to file the liens, paying lien filing fees, tracing and replacing lost filings; correcting errors, and, once resolved, releasing appropriate liens.

The bill would replace the local filing system with a centralized, federal tax lien registry that would be operated by the IRS and made accessible and searchable by the public on the internet at no cost. Each federal tax lien would use the same format and be made effective from the date and time of its recording in the national registry, in the same manner as now occurs with local filings. Once the underlying tax liability was resolved, the IRS would have 10 days instead of the current 30 days to release the tax lien and remove it from the registry.

The Treasury would be required to make the registry secure and prevent data tampering. Before the registry was implemented, the Treasury Secretary would also be required to review the information currently included in public tax lien filings to determine whether any of that information should be excluded or protected from public viewing on the internet. For example, the Treasury Secretary would be expected to prevent the disclosure of social security numbers that are currently included in many public tax lien filings, but, if disclosed on the Internet, could facilitate identity theft. The bill is thus expected to provide greater protection of some taxpayer information than occurs in current tax lien filings. The bill would require the registry to be operational by January 1, 2009, but would allow continued use of the existing local filing system for an appropriate time to ensure a smooth transition.

UK’S HM REVENUE AND CUSTOMS SWEEPS DECKS TO FOCUS ON HARDCORE OFFSHORE EVADERS

But amnesty applies to onshore tax evaders too.

HMRC have taken UK taxpayers by surprise by their recent announcement of a form of amnesty for all tax evasion including VAT, Income & Corporation Tax, Inheritance Tax and PAYE – the first time in living memory that the UK has embarked on such a bold initiative, says Andrew Watt, Director of Tax Investigations at Chiltern PLC. But he believes that it remains to be seen whether it will have the effect HMRC so desperately wishes to achieve.

According to Andrew Watt, the move is born out of the need to be able to cope with the anticipated surge in the numbers of investigations following HMRC’s success over the last 18 months in obtaining from five High Street Banks access to the details of UK residents (individuals and companies) with an address in the UK and an offshore bank account. In the course of the next few years HMRC will serve similar information notices on all Banks trading in the UK including the branches and subsidiaries of foreign Banks. It is estimated that this exercise will yield almost a million pieces of information. The amnesty, it is hoped, will clear the decks by encouraging evaders to come forward in large numbers and make a clean breast of previous tax irregularities leaving HMRC free in due course to target the hard core who choose not to make a disclosure.

The booklet published to coincide with the announcement of the amnesty (or to give it its official name the “Offshore Disclosure Facility”) appears to suggest that the benefits are open only to those who hold, or have held, an offshore bank account. However, this would clearly in due course have led to a challenge under Human Rights legislation and the booklet goes on to make it clear that tax evaders who have never held an offshore bank account are entitled to make disclosures on precisely the same basis, and to expect to receive the same treatment, as those who do have offshore accounts.

MONTANA REJECTS REAL ID ACT

Gov. Brian Schweitzer signed a law rejecting national driver’s licenses for Montanans, saying the message to the federal government was “no, nope, no way, hell no.” The bill the governor signed rejected implementing the Real ID act in Montana, a federal law that sets a national standard for driver’s licenses and requires states to link their record-keeping systems to national databases.

Montana joined two other states, Idaho and Arkansas, in enacting laws that outright refuse to comply with the federal law, according to National Conference on State Legislatures. Washington’s legislature has also passed a similar bill and Maine and Hawaii have passed resolutions opposing the Real ID act. The law says that the federally approved identification cards eventually would be necessary to board airplanes or enter federal buildings.

“We also don’t think that bureaucrats in Washington D.C. ought to tell us that if we’re going to get on a plane we have to carry their card, so when it’s scanned through they know where you went, when you got there and when you came home,” Schweitzer said. “This is still a free country and there are no freer people than the people that we have in Montana.”

U.S. RETIREES FUEL BOOM IN PANAMA

Dollar economy, widespread use of English, and cheap health care are drawing many.

Sharyn and Reuben Bronstein are witnessing a building frenzy from the balcony of their 22nd-floor apartment in Panama City. Towering cranes and more than a dozen residential skyscrapers under construction obscure the retired Houston couple’s view overlooking Punta Pacifica, Panama City’s hot new foreign enclave.

In one direction, Donald Trump is building a 68-story, sail-shaped edifice on the Pacific Ocean called the Trump Ocean Club International Hotel & Tower. In another, Spanish company Grupo Mall, which is selling properties out of Houston, is putting up Los Faros de Panama, The Lighthouses of Panama, a glitzy development complete with apartments, a casino and a hotel. At least 170 residential towers worth $3.2 billion are planned or currently under construction, according to a recent survey by real estate consultancy Prima Panama. Fueling this boom, in part, are U.S. retirees lured by Panama’s cheap health care, dollar economy and widespread use of English.

Between 2003 and March 2006, the Panamanian government issued 1,379 visas to Americans 55 and older, adding to the already growing retiree population. In 1990, by contrast, 491 American retirees called Panama home. With 78.2 million U.S. baby boomers expected to reach retirement age in the next two decades, developers and the real estate industry are counting on Panama to issue many more visas. “Panama is the latest country to join this boom – and with a lot of dynamism,” said Orlando Lopez, general manager of Central America for Houston-based Stewart Title, which plans to open an office in Panama City later this year. Lopez, based in Costa Rica, estimates the office could guarantee $300 million in properties within a year of operation.

Panamanian developers began aggressively catering to U.S. buyers, with golf courses, gated communities and American-style shopping centers, about three years ago. Magazines and even television shows with tips for buying property abound in Panama. Promoters tout the nation’s warm weather, flights to the U.S. and discounts for a variety of items, including movie tickets and doctor’s visits. The Panamanian government is also selling the nation, offering some exemptions on property taxes, duties for importing household goods and a car. Such incentives seem to be at least sparking the interest of American retirees.

More than 150 U.S. real estate agents recently attended a weeklong conference providing tours of dozens of properties in Panama City and along the Pacific Ocean. Though there are plenty of promotions of projects, real estate agents and interested buyers can view few completed developments for now. Instead, they stop by fenced-in construction sites, model homes and empty Pacific Coast beaches where developers promise to build high-rise buildings and gated communities. “This phenomenon right now is all about sales and beginning to get into construction,” said Paul McBride, chief executive officer of Prima Panama, the real estate consultancy, which also publishes Paradise, a magazine for North American retirees. His company also offers a travel-discount program, and in 10 months it issued 3,500 memberships. “The inventory is not going to show up for another three to six years.”

Although few properties are complete, Panamanian, European and American developers continue their plans for posh skyscrapers in the city and luxury beachfront communities in the Panamana City’s suburbs. “We are finding the city is getting a little bit crowded with developers,” joked Jose Manuel Bern, sales director at Empresas Bern, a nearly three-decade-old developer and builder. “It seems like everybody is either a developer or a Realtor.” The pace of construction tends to delay some developments as builders cannot find enough equipment or workers.

KEVIN PHILLIPS ASSESSES THE ONGOING DECLINE OF THE AMERICAN EMPIRE

Kevin Phillips delivered a talk on his latest book, American Theocracy: The Peril And Politics Of Radical Religion, Oil And Borrowed Money In The 21st Century. The Empire Salon meets regularly in Washington D.C. where one can practically hear the beating heart of empire and feel its tremors in the ground. They look to hash out the implications of American Empire. In Phillips they had the man for the job.

Phillips is a former Republican strategist turned fiery critic of the Republican Party’s metamorphosis under George W. Bush. He has also dedicated much of efforts in studying leading economic powers of the past – Great Britain, Spain, the Dutch and Rome in particular. Phillips has come up with some yardsticks to gauge the decline of these powers. All past empires suffered through the following. And all of the below “seem to be intensifying under the George W. Bush administration.”

1. As the empire topped out, there was a popular sense that something was wrong – loss of jobs, increased violence, moral decay and more.
2. An intensification of religious fervor. (See the rise of the mega churches in the “red states”.)
3. Conflicts between faith and science. (Witness the Evolution-creationism “debate”.)
4. Imperialism and global overreach. (See the Iraq War, which Phillips called “the most poorly thought out war in U.S. history.”)
5. Decline of industry and the rise of finance. (As Phillips says, “moving money around as opposed to building things.”)
6. The burden of excessive debt. No need to comment here.

The other interesting wrinkle Phillips tackles is the role of energy. Past empires mastered an energy source and as the importance of that energy source diminished, they could not make the adjustment. America’s addiction to increasingly expensive oil will play a role in its downfall, Phillips says. “The U.S. is not going to make it with another energy regime.” It is oil or bust.

Globalization and its discontents.

It is widely believed that the Chinese are eating our lunch. Their factories hum and belch smoke, while ours go silent and send up weeds in the parking lot. This phenomenon is commonly called “globalization”. But it is also commonly misunderstood. In the reverie of modern Americans, globalization means the rest of the world sends you things you do not have to pay for. The burden of today’s little essay is two-fold. The first part is easy. We point out that anyone who thinks such a thing is a fool. The second point is harder. And more important.

The end of history has been announced several times. But it never seems to arrive. People always tend to think that what is will remain ... that trends in place right now will continue at least indefinitely, and perhaps forever. The odds of anything going wrong, they tell themselves when the going is good, are like the extreme edges of a bell curve – vanishingly small. But people badly “underestimate the persistence of history’s traditional side, the rise and fall of empires, the rivalry of regimes, and the disastrous exploits of great men,” wrote French historian Raymond Aron. That is to say, they tend to ignore the political means that tend to mess things up. And the rare, fat tail events that make history interesting.

Such a fat tail event happened in 1914. A European war disturbed nearly 100 years of peace and progress. People thought the war could not happen. And if it did happen, they said, it would be short and sweet. They were wrong on both points. Globalization had entered a shrinking phase.

Then, on April 2, 1917, Woodrow Wilson stood before Congress and announced that the world’s biggest economy was about to shift to “political means” to get what it wanted. Instead of merely doing business with the Entente powers, America, too, was going to get involved in killing people. This day marked not only another big setback for globalization. It also established a demarcation for where one empire ended and another began. Britain ceased being the world’s hegemonic imperial power. Henceforth, the U.S. was the Alpha nation.

There are times when civilization goes forward. And there are times when it goes in the other direction. Woodrow Wilson slammed the U.S. into reverse in 1917. It has been backing up ever since, in the sense that Americans rely more on force and fraud to get what they want. Gun-toting soldiers now defend America’s many supposed interests all over the world – even in places where America seems to have no interests. The U.S. government takes far more of its citizens’ money than it did in 1917, and provides detailed instructions to Americans on such a wide variety of matters that one can scarcely toss a chicken out the window or blow up an outhouse without asking permission of the authorities.

While the U.S. Empire was growing, so was world trade. In the free world until 1989, and now almost everywhere, a “pax dollarum” greatly aided the cause of globalization throughout the second half of the 20th century. But this new globalized commerce has a fraudulent side to it. The hegemonic power is using political means, even while it shops. During the last big boost in the division of labor, in the 19th century up until 1914, the money in which transactions were calibrated was backed by gold. No country – not even an imperial one – could cheat.

If a country consumed more than it produced, other countries found themselves with surpluses of the laggard nation’s currency. They then could ask for gold in settlement. Gold was real, the ultimate money. When a nation’s gold horde was in danger, it quickly adjusted its policies to correct the imbalance. The dollar, on the other hand, is merely a piece of paper, backed by nothing more than the full faith and credit of the U.S. treasury. How good a promise is that? No one knows for sure.

The odd thing about this century’s spurt of globalization is that it is so lopsided. The U.S. takes, but it does not give. It borrows, but it does not pay back. It buys, but it does not sell. The only reason foreigners put up with those shenanigans is because they receive paper currency in payment. They assume their dollars will be as valuable in the future as they are now. They assume the trends of the last 50 years will continue unchanged. They assume that no terrorists will knock off an archduke ... and no fat tail will plop itself down in the currency markets. They assume that someone, somewhere, had the situation under control. And yet, “If the private market – which knows that with high probability the dollar is going down someday – decides that that someday has come and that the dollar is going down now,” writes Brad DeLong, “then all the Asian central banks in the world cannot stop it.”

What will happen when the world figures out that the United States is pulling a fast one? We do not know. But like the period following the sinking of the Lusitania, we are sure it will make the history books.

NEW WAVE OF MULTINATIONALS POSES COMPETITIVE THREAT TO U.S.

A new wave of foreign competitive pressure is beginning to ripple through the U.S. economy, from companies in emerging markets like Brazil, Russia, India and China. These companies are seeking to become world-spanning multinationals – just as Samsung Electronics emerged from South Korea and Toyota sprang from Japan in earlier phases of globalization.

From Brazil, Embraer has become a big supplier of regional jets in the airline industry. Other Brazilian companies, like Braskem, Embraco and Natura, are also expanding in a variety of global markets. Russian companies like Gazprom, Lukoil and Rusal are using Russia’s natural resources to leap into the U.S. and other countries. India is producing powerhouses in technology services like Wipro, Infosys Technologies and Tata Consultancy Services, and global competitors in manufacturing and pharmaceuticals. The world’s largest steel company is now controlled by Lakshmi Mittal, an Indian living in Europe. China may be the largest single source of new multinationals. Aside from Lenovo, which bought IBM’s personal computer division, Haier is emerging in appliances, Huawei Technologies is competing against Cisco Systems to sell telecommunications equipment around the world and the Pearl River Piano Group is carving out a huge share of the piano market.

The emergence of these new multinationals is part of “the biggest shift in the global economy since the Industrial Revolution of the 18th century,” says Antoine van Agtmael, the author of a new book, The Emerging Markets Century: How a New Breed of World-Class Companies is Overtaking the World. “We are seeing a rebalancing of the global economy back to where it was before the Industrial Revolution, when China and India were major powers in the world.”

TOO MUCH LIKE 1929

The following commentary will describe the final sequence of events that will lead to the implosion of the global economy.

As U.S. real estate prices fall and depress U.S. economic growth, private foreign investors begin to withdraw their capital from the U.S. financial markets. This capital flow would by itself act to elevate the currency value of the country that it is returning to. In order to maintain fixed exchange rates, foreign central banks will print their own currency and exchange it for U.S. dollars (which are then invested into U.S. government debt). These central bank policies will act to artificially keep the value of the U.S. dollar elevated and artificially keep U.S. interest rates low.

The foreign central banks print much greater amounts of their own currency will act to boost their domestic money supply and cause their own economy and stock market to “overheat”. Additionally, the foreign central bank rapidly builds up the amount of foreign exchange reserves that they own. The increasingly large holdings of foreign exchange reserves represent a corresponding increasingly large risk of foreign exchange losses to the central bank (should the U.S. dollar fall in value in the future).

In the face of increasing private investment inflows (caused by a deteriorating U.S. economy), the foreign central bank is faced with a dilemma. Its economy begins to overheat, but increasing interest rates will only serve to worsen the situation. The only way to stop the rapid acceleration in domestic money supply growth is to finally abandon the fixed exchange rate regime altogether. This will negate the necessity of printing new currency with no control. When the fixed exchange rate regime is terminated, then newly minted funds from the foreign central bank no longer act to support the value of the U.S. dollar and maintain low U.S. interest rates. In effect, there is nothing left to support the U.S. consumer anymore. The value of the U.S. dollar collapses and U.S. interest rates skyrocket. The skyrocketing interest rates cause a real estate crash. The collapsing value of the U.S. dollar causes the price of gold to skyrocket. And needless to say, the stock market collapses.

At this time, the key foreign central bank that is artificially supporting the U.S. economy at present is the central bank of China. The Chinese stock market began to rise in value dramatically starting in November 2006. The run-up in the Chinese stock market and the acceleration in economic growth at the same time that China’s foreign exchange reserves rose sharply is no coincidence. The point is rapidly approaching when China’s central bank will be forced to abandon their fixed exchange rate regime. When the peg on China’s foreign exchange rate is dropped, the U.S. economy (as well as the global economy) will implode.

The global economy is critically dependent right now on what happens in the Chinese economy. To that extent, it is very important to focus on three elements going forward: (1) the growth of China’s foreign exchange reserves, (2) Chinese economic growth and (3) the Chinese stock market. In turn, what happens in China will depend on the rate of deterioration in the U.S. economy (which will determine the amount of private investment capital that returns back to China and causes their economy to overheat further). At this point, we are witnessing an extremely unusual relationship, whereby deterioration in U.S. economic growth actually causes an acceleration in Chinese economic growth.

Further deterioration in U.S. economic growth from this point onward will cause the U.S. Federal Reserve to consider cutting the U.S. short term interest rate. While many participants in the U.S. financial markets are conditioned to look at this outcome favorably, at this point such a decision would result in a repatriation of foreign capital (and rising longer term interest rates), because the interest rate differential versus other countries will become less favorable. An interest rate cut for a highly indebted country that is highly dependent on foreign capital will result in a completely opposite effect from that intended. The Fed is in a box. The Fed is now powerless to rescue the U.S. economy, because of the threat of foreign capital flight. The emperor has no clothes.

The tension in the world financial system will continue to build as the system is stretched from two opposite ends (the U.S. and China). Further acceleration in Chinese economic growth or further deterioration in U.S. economic growth will increase this tension to the point that the system literally breaks. Any further increases in the Chinese short term interest rate or decreases in the U.S. short term interest rate will amplify these stresses and cause the cracks in the dam to widen – until the dam bursts.

The wild card in this situation is Iran. Iran’s intent is clearly to escalate the conflict (in a “tit-for-tat” manner) to the point where a military conflict ensues. If Iran threatens in a more specific and tangible manner to attack the U.S. directly, then you can rest assured that private foreign capital with flee from the U.S. financial markets. When that capital flees back to China, the flow of capital will overwhelm their central bank and cause them to abandon their fixed exchange rate regime. As mentioned before, this in turn will cause the stream of money leaving the U.S. to turn into a flood. Given Iran’s deep hostility toward the U.S., they may very well recognize the acute vulnerability of their opponent and seek to exploit it by escalating the conflict (at least verbally) to the point of literally “scaring” foreign capital out of the U.S. and destroying their economy.

Now I would like to draw a very important parallel. Let us return to the sequence of events that led to the stock market crash of 1929 and the Great Depression in the 1930s. The two major players in the world financial system at that time were the U.S. and Great Britain. The U.S. was the emerging industrial power, whereas Great Britain was the mature and stagnating industrial power. The central bank of the emerging industrial power (the U.S.) printed money in an effort to prop up the economy of the mature industrial power (Britain). The inflation of the money supply resulted in the overheating of the economy and the stock market of the emerging industrial power. It was the crash in the stock market of the emerging industrial power (the U.S.) that brought about the crash in all the world’s stock markets and the Great Depression followed later.

Now fast forward to today, and what you see is China as the emerging industrial power and the U.S. as the mature and stagnating industrial power. China is printing money in an effort to prop up the economy of the mature industrial power (the U.S.). The inflation of the money supply is resulting in the overheating of the Chinese economy and stock market. Very interestingly, on February 27, 2007, it was the sharp 9% one-day drop in the Chinese stock market that led to the sharp drop in stock markets worldwide, including the U.S. People may be conditioned to think that economic events in developing countries pale in significance to economic events in the U.S., and may fail to see how what happens “way over there” in China would have any significant impact on their economic well-being. But how different the truth really is. I think most people even now after the February 27th turn of events, fail to grasp why the U.S. stock market sold off so sharply after the Chinese stock market sell off occurred first. A word of advice: you better get used to it, as there is much more of that to come. The crash is coming.

PANAMA HAS NO CENTRAL BANK

In this modern, post-Bretton Woods world of “monetary order” and coordinated central-bank inflation, many who are otherwise sympathetic to the arguments against central banks believe that the elimination of central banking is an unattainable, utopian dream. For a real-world example of how a system of market-chosen monetary policy would work in the absence of a central bank, one need not look to the past. The example exists in present-day Central America, in the Republic of Panama, a country that has lived without a central bank since its independence, with a very successful and stable macroeconomic environment.

The absence of a central bank in Panama has created a completely market-driven money supply. Panama’s market has also chosen the U.S. dollar as its de facto currency. The country must buy or obtain their dollars by producing or exporting real goods or services. It cannot create money out of thin air. In this way, at least, the system is similar to the old gold standard. Annual inflation in the past 20 years has averaged 1% and there have been years with price deflation, as well – 1986, 1989, and 2003.

Panamanian inflation is usually between 1 and 3 points lower than U.S. inflation. It is caused mostly by the Federal Reserve’s effect on world prices. This market-driven system has created an extremely stable macroeconomic environment. Panama is the only country in Latin America that has not experienced a financial collapse or a currency crisis since its independence.

As with most countries in the Americas, Panama’s currency in the 19th century was based on gold and silver, with a variety of silver coins and gold-based currencies in circulation. The Silver Peso was the currency of choice. However, the U.S. greenback had also been partially in circulation, because of the isthmian railroad – the first railroad to connect the Atlantic to the Pacific – that was built by a U.S. company in 1855. Panama originally became independent from Spain in 1826, but integrated with Colombia. Being a small state, it was not able to immediately secede from Colombia, as Venezuela and Ecuador had done. In 1886 the Colombian government introduced several decrees forcing the acceptance of government fiat paper notes. Panama’s open economy, being based on transport and trade, plainly could not benefit from this. An 1886 editorial of its main newspaper read: “Everything we consume here is imported. We have no products and can only send money in exchange for what is imported.”

In 1903, the country became independent, supported by the U.S. because of its interest in building a Canal through Panama. The citizens of the new country, in distrust of the 1886 experiment of forced fiat Colombian paper notes, decided to include article 114 in the 1904 constitution, which reads, “There will be no forced fiat paper currency in the Republic. Thus, any individual can reject any note that he may deem untrustworthy.” With this article, any currency in circulation would be de facto and market driven. In 1904 the Government of Panama signed a monetary agreement to allow the U.S. dollar to become legal tender. At first, Panamanians viewed it with mistrust, preferring to utilize the silver peso. Gresham’s Law, however, drove the silver coins out of circulation.

In 1971 the government passed a banking law that allowed for a very liberal and open banking system, without any government agency of consolidated banking supervision, and confirmed that no taxes could be exacted from interest or transactions generated in the financial system. The number of banks jumped from 23 in 1970 to 125 in 1983, most of them being international banks. The banking law promoted international lending, and because Panama has a territorial tax system, profits from loans or transactions made offshore are tax free. This, and the presence of numerous foreign banks, allows for international integration of the system. Panama has no capital controls. Therefore, when international capital floods the system, the banks lend the excess capital offshore, avoiding the common ills, imbalances, and high inflation that other countries face when receiving huge influxes of capital.

Fiscal policy has little room to maneuver since the treasury cannot monetize its deficit. Banks cannot coordinate inflation due to ample competition and the fact that (unlike even the U.S. banking system prior to the Federal Reserve) they do not issue bank notes. The panics and general bank runs that were so common in the U.S. banking system in the 19th century have not occurred in Panama, and bank failures do not spread to other banks. Several banks in trouble have been bought – before any runs ensue – by larger banks, attracted by the profits that can be made from obtaining assets at a discount. There is no deposit insurance and no lender of last resort, so banks have to act in a responsible manner. Any bad loans will be paid by the stockholders.

After malinvestments during the booms, banks begin the necessary liquidation of bad credit. Since there is no central bank that can step in to provide cheap credit, the recession begins without any hampering by monetary policy. Banks thus create the necessary contraction by obeying market forces. Panama’s recessions commonly create deflation, which mollifies consumers and also facilitates the recovery process by reducing business costs. Only the fact that the law does not allow for the downward flexibility of wages makes recessions longer than they would otherwise be.

Deflation happens without the terrible consequences that Keynesian economists predict. The country, now under democratic rule, is experiencing its 4th year of market economic growth well above 7%. So the policy makers who have said that abolition of the central bank is unfeasible need only look to Panama’s macroeconomic environment, which has been favorable for over 100 years, to realize that it is, in fact, not only possible, but very beneficial. Clearly no government-forced fiat currency, no central bank, and the absence of high inflation are working quite well in this small country. Who can argue that these policies would not work in larger economies?

OUR BENEVOLENT SURVEILLANCE STATE

The expansion of the Surveillance State is endless. Buried within an ABC report on the Virginia Tech shootings is this paragraph: “Some news accounts have suggested that Cho had a history of antidepressant use, but senior federal officials tell ABC News that they can find no record of such medication in the government’s files. This does not completely rule out prescription drug use, including samples from a physician, drugs obtained through illegal Internet sources, or a gap in the federal database, but the sources say theirs is a reasonably complete search.”

Is there any good reason whatsoever why the federal government should be maintaining “files” which contain information about the pharmaceutical products which all Americans are consuming? The noxious idea has taken root in our country – even before the Bush presidency, though certainly greatly bolstered during it – that one of the functions of the federal government is to track the private lives of American citizens and maintain dossiers on what we do.

If that sounds hyperbolic, just review the disclosures over the course of recent years concerning what data bases the Federal Government has created and maintained and the vast amounts of data they contain – everything from every domestic telephone call we make and receive to the content of our international calls to “risk assessment” records based on our travel activities to all sorts of information obtained by the FBI’s use of National Security Letters. And none of that includes, obviously, the as-yet-undisclosed surveillance programs undertaken by the most secretive administration in history.

It is true that much (though not all) of this data is already scattered in the hands of various private corporations and insurance companies. But, for multiple and self-evident reasons, it presents a fundamentally different type and level of threat when it is all consolidated and centralized in the hands of the federal government. Amazingly, it is the political movement that spent all of the 1990s stridently warning of the dangers of federal government power – The Black Helicopters and Janet Reno Are Coming – which has brought us this Surveillance State and continues to cheer on its infinite expansion.

The federal government data base which contains all of our controlled substance prescriptions, for instance, was mandated by a law passed in 2005 by the Republican-controlled Congress (though with full bipartisan support) and signed into law by the “conservative” Leader. That law appropriates funds to each state to create and maintain these data bases which are, apparently, accessible to federal agencies, federal law enforcement officials, and almost certainly thousands of other state and federal employees (as well as, most likely, employees of private companies).

The Department of Homeland Security last month promulgated proposed regulations for enforcement of the so-called Real ID Act of 2005. Those regulations require that every state issue technologically compatible driver’s licenses which enable, in essence, uniform and nationwide tracking of all sorts of private information about every individual. Just as the Prescription Drug Tracking Law is “justified” by the Drug War, these national ID cards are justified by the War on Terrorism. EPIC explains why these regulations are so disturbing: The requirement for non-REAL ID-compliant DL/ID to have explicit “invalid for federal purposes” designations, turns this “voluntary” card into a mandatory national ID card. Anyone with a non-REAL ID-compliant card would be instantly suspicious. Compliant cards would be necessary for federal purposes such as entering courthouses, air travel or receiving federal benefits, such as Medicaid or Social Security. It would be easy for insurance companies, credit card companies, even video stores, to demand a REAL ID-compliant DL/ID in order to receive services.

That the “conservative” movement is ushering in measures such as a federal law mandating that every state create National ID cards is ironic on multiple levels. But numerous states – the latest being Montana (after Idaho, Arkansas and Maine) – have enacted laws refusing to comply with these requirements on the ground that they infringe on the privacy of the citizens of that state and/or on the ground that the law violates federalism principles by taking over areas (i.e., regulating driver’s licenses) traditionally preserved for the states. For those reasons, many other states, particularly in the Mountain West and even the Deep South, are on their way to enacting similar laws refusing to comply.

It is simply no longer news when the “conservative” movement violates every “small-government” and states’ rights principle it pretended to embrace. Apparently, we need to empower the federal government to maintain comprehensive dossiers on all Americans, otherwise our freedoms might be at risk from The Terrorists. It is hardly worth pointing out that the idea of the Federal Government engaging in massive surveillance of innocent American citizens is about as far away from the core beliefs of the American Founders as one can get. Anyone who does not realize that is likely beyond the realm of persuasion.

The only people who would think that it is fine to have the Federal Government compiling dossiers like this are those who place blind faith in our Leaders not to abuse their power. But that is the ethos that is the exact opposite of the one on which the country was founded, but which has come to dominate so much of our political culture. Whatever else one can say the modern-day Republican Party stands for, individual liberty is plainly not it. Democrats could do themselves – and the country – a great service by devoting themselves to a defense of the core liberties which are being eroded so rapidly by “conservatives” in the name of Protection from the Terrorists and The Glorious, Endless, Epic War of Civilizations.

INTERNATIONAL IDENTITY OF ISLE OF MAN RECOGNIZED

A landmark declaration recognizing that the Isle of Man has its own identity and interests in the international arena has been announced. The framework of principles agreed by the governments of the UK and the Isle of Man reinforces the Island’s separate status within the context of its constitutional relationship with the UK.

Chief Minister Tony Brown MHK, who signed the document on behalf of the Manx Government, said, “This is a significant step forward in the Isle of Man’s evolution as a mature and responsible democracy. It confirms in writing that the Island has its own distinct and legitimate interests on the world stage, which may differ from those of the United Kingdom.

“The understanding that has been reached should help the Isle of Man to flourish as a reputable center for international business. There is now greater clarity about the Island’s position, which will be useful in dealing with governments, organizations and businesses around the globe.”

The UK has ultimate responsibility for the Isle of Man internationally and historically all international matters affecting the Island were handled by the UK. In recent years – with the rise of Island as an international business center and its increasing involvement with global issues – it has started to deal directly with other governments and organizations, and there has been growing awareness that it has distinct interests internationally.

THOSE IRRESISTABLE HEARTS OF DARKNESS

“The horror! The horror!” ~~ Heart of Darkness, Joseph Conrad

The trouble with vacations is that they are much too serious. Instead of war, depression, bankruptcy, and hyperinflation, we are dealing with things where the stakes are really high. Instead of reflecting on trade deficits and subprime credit markets, we have to think about things we actually know something about, and issues over which we might actually have some influence.

One daughter has a boyfriend covered with an exterior of colorful tattoos, and an interior as dull as airplane cutlery. Another daughter has a boyfriend who seems gentlemanly and ambitious. The latter is almost too good to be true, while the former is almost too bad to be false. One son wobbles between medical school in the U.S., and business school in France. The other is wondering whether to pursue a career as a bank manager ... or a bank robber. The point is, every decision is important. Every bit of parental advice has to be carefully considered. And judiciously administered. Even good advice is likely to be taken badly. Like a zoologist giving antibiotics to a sick polar bear, he is lucky to avoid having his limbs torn off.

So for us, it is a great joy to be back from our vacation, back in work-a-day world, where we can get some rest, and have a good laugh or two. We noticed that the outrageous trends that were going on when we left, have become even more outrageous. Seeing a disaster coming, investors are rushing to get in on it before it is too late.

China is clearly in a bubble. Shanghai stocks are up 250% since 2005 – and 35% this year alone. Still, investors are so eager to get in at these prices – while they can still get hurt – that they take up Chinese bank IPOs at twice the PE ratios of banks in developed countries. And what do they actually get when they buy a share? What exactly is a bank chartered and regulated by communists? They have no clue.

But so much foreign money is elbowing its way into China that, in 2007, the central bankers are getting bruised just trying to keep up with it. China is expected to accumulate more than half a trillion dollars in foreign exchange reserves. How does it get that money? It prints up currency of its own to buy the foreign currency from businessmen and investors, who are selling Chinese made goods (including stock certificates) to foreigners at a breakneck pace.

Everywhere, extravagant amounts of cash are flooding into overpriced investments in absurd places. Local central banks are printing money at a furious pace (lifting the great global tide of liquidity) to keep from increasing the value of their own currencies. This freshly minted cash comes into the world like a newborn baby – ready to claim its fair share of resources all its life while being a burden in the long run, but at the crib it is a joy to everyone.

And now we enter the dark heart of this whole cockamamie tale. China is not the only place investors can get themselves into trouble. More than a third of the money that trades hands on the Brazilian stock exchange comes from overseas investors. Brazil has always been the “country of the future,” but six years ago, Brazil’s future was so dismal it looked like it would default on foreign loans. Now, foreigners give it so much money it does not know what to do with it all.

Meanwhile, who would have thought that investors would scramble to buy Hugo Chavez’s paper? But, then again, if they will buy banking stocks in a country organized on Marxist-Leninist principles, why not the slippery bonds of a Latin American strong man who professes to be a follower of Trotsky? Investors not only take up the Venezuelan bonds happily, they do so at less than 7% yield ... barely 200 basis points more than the sovereign debt of the USA. Officially, the Venezuelan Bolivar is quoted at 2,150 to the dollar. On the black market it trades for 3,750 to one. And it is sinking fast – down 15% so far this year. No wonder. The money supply is increasing at 65% per year while the inflation rate is, officially, 20%. And Chavez is still increasing government spending by 50% a year.

But Venezuela has oil. It is to the black goo, not to Hugo Chavez, that investors look for security. But just as investors often search for ways to turn a silk purse into a sow’s ear, so do governments more than occasionally strive to turn their good fortune into national catastrophe. Caracas seems to be doing so in classic manner, spending more than even his country’s oil revenues will permit. What will happen when the Venezuelan treasury runs out of cash and credit? Will Hugo Chavez cinch up the nation’s belt in order to honor his commitments to the foreign capitalists he despises? Two months ago, Ecuador threatened to default on its bonds. Chavez cheered it on.

Even long-dated dollar-denominated bonds issued by Iraq trade at yields less than 10%. In that heart of darkness, too, investors are counting on oil to make sure they get their money. The trouble is, whether in the jungles of South America or in the deserts of the Middle East, the politicians above the ground can destroy a nation’s credit faster than the oil below ground can salve it.

Back in the U.S.A., one of the good things investors are intent upon getting too much of, is in Las Vegas. “Excess” is an old word, but it seems to have been invented in anticipation of modern Las Vegas. Nothing about the city is modest or restrained. Over on The Strip, Goldman Sachs is buying Carl Icahn’s four casinos ... for $1.3 billion. The city had a total of 35,000 hotel rooms in the 1970s, which seemed like more than enough to us. Now it has 151,000. But “too much” has dropped from the English vocabulary in Nevada, and perhaps in the rest of the world too. The Venetian alone is adding 3,200 new rooms. And the owners of the old Stardust Casino judged it too small, so they blew the place up last month to build a new development, Echelon Place, with more than 5,000 rooms. Meanwhile, MGM’s new City Center development is supposed to cost $7 billion, making it the most expensive development in Las Vegas history.

Everywhere you look, it is the same. Intrepid investors push deeper and deeper into the jungle ... exploring ... searching ... reaching ... for some way to ruin themselves in style.