Offshore News Digest for Week of November 5, 2007

SINKING CURRENCY, SINKING COUNTRY

The euro, worth 83 cents in the early George W. Bush years, is at $1.45. The British pound is back up over $2, the highest level since the Carter era. The Canadian dollar, which used to be worth 65 cents, is worth more than the U.S. dollar for the first time in half a century. Oil is over $90 a barrel. Gold, down to $260 an ounce not so long ago, has hit $800.

Have gold, silver, oil, the euro, the pound and the Canadian dollar all suddenly soared in value in just a few years? Nope. The dollar has plummeted in value, more so in Bush’s term than during any comparable period of U.S. history. Indeed, Bush is presiding over a worldwide abandonment of the American dollar.

Is it all Bush’s fault? Nope. The dollar is plunging because America has been living beyond her means, borrowing $2 billion a day from foreign nations to maintain her standard of living and to sustain the American Imperium.

The prime suspect in the death of the dollar is the massive trade deficits America has run up. In 2006, that U.S. trade deficit hit $764 billion. The current account deficit, which includes the trade deficit, plus the net outflow of interest, dividends, capital gains and foreign aid, hit $857 billion, 6.5% of GDP. As some of us have been writing for years, such deficits are unsustainable and must lead to a decline of the dollar. A sinking dollar means a poorer nation, and a sinking currency has historically been the mark of a sinking country. And a superpower with a sinking currency is a contradiction in terms.

What does this mean for America and Americans? As nations realize that the dollars they are being paid for their products cannot buy in the world markets what they once did, they will demand more dollars for those goods. This will mean rising prices for the imports on which America has become more dependent than we have been since before the Civil War. U.S. tourists traveling to the countries whence their ancestors came will find that the money they saved up does not go as far as they thought.

U.S. soldiers stationed overseas will find the cost of rent, gasoline, food, clothing and dining out takes larger and larger bites out of their paychecks. The people those U.S. soldiers defend will be demanding more and more of their money. U.S. diplomats stationed overseas, students and businessmen are already facing tougher times.

U.S. foreign aid does not go as far as it did. And there is an element of comedy in seeing the U.S. going to Beijing to borrow dollars, thus putting our children deeper in debt, to send still more foreign aid to African despots who routinely vote the Chinese line at the United Nations. The Chinese, whose currency is tied to the dollar, and Japan will continue, as long as they can, to keep their currencies low against the dollar. For the Asians think long term, and their goals are strategic.

China – growing at 10% a year for two decades and now growing at close to 12% – is willing to take losses in the value of the dollars it holds to keep the U.S. technology, factories and jobs pouring in, as their exports capture America’s markets from U.S. producers. The Japanese will take some loss in the value of their dollar hoard to take down Chrysler, Ford and GM, and capture the U.S. auto market as they captured our TV, camera and computer chip markets. Asians understand that what is important is not who consumes the apples, but who owns the orchard.

Other nations that have kept cash reserves in U.S. Treasury bonds and T-bills are watching the value of these assets sink. Not fools, they will begin, as many already have, to divest and diversify, taking in fewer dollars and more euros and yen. As more nations abandon the dollar, its decline will continue.

The oil-producing and exporting nations, with trade surpluses, like China, have also begun to take the stash of dollars they have and stuff them into sovereign wealth funds, and use these immense and growing funds to buy up real assets in the United States – investment banks and American companies.

Nor is there any end in sight to the sinking of the dollar. For, as foreigners demand more dollars for the oil and goods they sell us, the trade deficit will not fall. And as the U.S. government prints more and more dollars to cover the budget deficits that stretch out – with the coming retirement of the baby boomers – all the way to the horizon, the value of the dollar will fall. And as Ben Bernanke at the Fed tries to keep interest rates low, to keep the U.S. economy from sputtering out in the credit crunch, the value of the dollar will fall.

The chickens of free trade are coming home to roost.

Hegemony’s Cost

“See, in my line of work you got to keep repeating things over and over and over again for the truth to sink in, to kind of catapult the propaganda.” ~~ George Bush, at Greece Athena Middle and High School, Rochester, New York, on May 24, 2005

When he departs the White House on January 20, 2009, the current resident will bequeath to the American people and the next administration an interminable war in the Middle East and a depreciated currency. That assumes there is a successor administration and that no Cheney-contrived “national emergency” will make it possible for Bush to test drive National Security Presidential Directive/NSPD-51 and Homeland Security Presidential Directive/HSPD-20 to cancel the 2008 election.

Neoconservatives led by vice president Dick Cheney remain determined to effect “regime change” in Iran. The allegation of weapons of mass destruction falsely brought against Iraq is now being deployed against Iran.

The “Cakewalk War” in Iraq was supposed to be over in a few weeks and to pay for itself out of Iraqi oil revenues. The war is now five years old and has cost American taxpayers, and those left dependent on government programs by decades of a welfare state, $1 trillion in out-of-pocket and already incurred future costs. As large and troublesome as this cost is, it pales in comparison to the damage the war has done to the value of the dollar and its role as reserve currency.

The U.S. dollar is losing its reserve currency role when the euro, the currency of a nonexistent country – Europe – becomes so much more desirable than the dollar that it rises 60% in value. The euro is a monetary unit that has run far ahead of the political entity whose currency it is. Europe still consists of separate sovereign states, and many of them are unhappy with the euro. Yet, since 2001 people throughout the world have been shifting from dollars to Euros. It is not normal for people to flee from the reserve currency. It only happens when people believe it cannot continue to fill that role.

The transformation of the Iraq “cakewalk” into an interminable war has run up a $1 trillion price tag, and an even larger war with Iran is looming. U.S. generals and neoconservative ideologues predict a decade or multi-decade long war in the Middle East. Washington’s bankers are waking up to the reality that they will not be repaid. The only reason the dollar has not already lost its reserve currency role is that the only alternative is the currency of a non-existent political entity. Yet, even the euro, a virtual currency, may have taken the dollar’s role by the end of 2008.

Full of hegemonic hubris, the U.S. government does not understand that U.S. power and hegemony have always depended, not on missiles and military force, but on the financial power conveyed by the dollar’s role as reserve currency. The reserve currency is world money, good in any country to pay any bill. The reserve currency country is not a debtor in the usual sense. As the reserve currency can be used to settle international accounts, the reserve currency country can borrow at will until lenders lose confidence in the currency. There is abundant evidence that the loss of confidence in the dollar is underway. When it is complete, the U.S. will no longer be a superpower.

The decline in American power and influence could be dramatic. Part of America’s power results from European countries going along with Washington. However, the sharp rise in the euro’s value has hurt European exports, squeezing profit margins, wages, and encouraging offshore production. Fights over monetary policy between European capitals could doom both the EU and the euro, leaving the world with no reserve currency and America with embittered former allies.

By going to war for hegemony, the Bush Regime has brought about American decline. While the neocons have spent two administrations trying to deracinate Islam, real threats to America’s power have been neglected. Offshoring, which turns U.S. GDP into imports and larger trade deficits, together with war debts, has eroded the dollar’s status as reserve currency, undermining the foundation of American power.

Their dollar at par, Canadians are spending big in the U.S.

On September 20, the Canadian dollar, known as the “loonie” for the fowl that adorns it, became equal in value to the American dollar. The last time the loonie hit parity was 1976, but more important, it meant a 30% discount for anything bought in U.S. dollars compared with four years ago. In recent weeks, the U.S. has been looking like Canada’s answer to Mexico. Citizens from the Great White North have been traveling south to gobble up everything from steak dinners to multibillion-dollar banks on the cheap.

The most voracious shopper so far has been Ed Clark, CEO of Canada’s Toronto-Dominion Bank. Days after the currencies hit par, his company said it would pick up New Jersey-based Commerce Bancorp for $8.5 billion. That must have seemed like a fire-sale price. Clark began talks in June, when the loonie was worth 90 cents to our dollar. By the time he unveiled the deal, the price had dropped by $1 billion Canadian. “All the planets perfectly aligned to bring this deal to fruition,” Clark told investors in a conference call. More deals may be coming soon – especially from Canadian banks, which since 1998 have been forbidden by the government from merging with each other.

Border towns across the country, meanwhile, report an uptick in free-spending Canadians. Philip Pantano, spokesman for the Seneca Niagara Casino & Hotel in Niagara Falls, says the resort has seen a 200% increase in Canadian traffic in recent months. In Bellis Fair mall in northern Washington State, Canadians are descending in force. “I’ve walked the parking lot, and it seemed like 75% of the cars had Canadian license plates,” says Bethany Lyons, assistant store manager at the center’s Target.

Days after the currencies became equal, Walt Disney ran ads in Canadian papers trumpeting “Parity ... a dream come true” to lure Canadians to its theme parks. Florida tourism officials say they expect a banner winter thanks to Canadian snowbirds. They probably will not be disappointed. “Every Canadian I meet on the golf course who goes to Florida has a smile on his face from one end to the other,” says Joe Revell, a retiree from Prince Edward Island who winters in Daytona Beach Shores. “It’s like they all just got a 20% to 30% discount.”

7 countries considering abandoning the U.S. dollar (and what it means).

It is no secret that the dollar is on a downward spiral. Its value is dropping, and the Fed is not doing a whole lot to change that. As a result, a number of countries are considering a shift away from the dollar to preserve their assets. These are seven of the countries currently considering a move from the dollar, and how they will have an effect on its value and the U.S. economy.

• Saudi Arabia
• South Korea
• China
• Venezuela
• Sudan
• Iran
• Russia

Countries are growing weary of losing money on the falling dollar. Many of them want to protect their financial interests, and a number of them want to end the U.S. oversight that comes with using the dollar. Although it is not clear how many of these countries will actually follow through on an abandonment of the dollar, it is clear that its status as a world currency is in trouble.

Obviously, an abandonment of the dollar is bad news for the currency. Simply put, as demand lessens, its value drops. Additionally, the revenue generated from the use of the dollar will be sorely missed if it is lost. The dollar’s status as a cheaply-produced U.S. export is a vital part of our economy. Losing this status could rock the financial lives of both Americans and the worldwide economy.

PREMIER WARNS CHINA WILL DO WHAT IT TAKES TO REIN IN STOCK MARKET

China’s Premier Wen Jiabao has warned his government will do what it takes to prevent bubbles and fluctuations in the stock market. “Preventing asset bubbles is like preventing inflation and it is the government’s responsibility to ensure a fair, healthy and transparent stock market,” Wen said.

Wen’s statement could signal a more active approach to reining in the stock market after last month's 17th Communist Party Congress, China’s most important political event for the past five years, analysts said. They argued that prior to and during the week-long congress, politicians had been reluctant to tamper with the stock market for fears of a plunge in share valuations could have triggered unrest. The premier said all measures will be market-oriented options rather than administrative actions.

Wen said the stability of a stock market relies on two basic factors, including the quality of listed firms and a transparent market which protect not only the interests of enterprises, but also those of consumers. “With more people having entered the stock market, abnormal fluctuations affect both the national economy and the interests of shareholders, so the government will closely watch developments," he said. China’s stock market has more than doubled so far this year, after surging about 130% in 2006.

HONG KONG DEFENDS CURRENCY PEG

Hong Kong Monetary Authority Chief Executive, Joseph Yam has refuted reports that HKMA officials lobbied Mainland authorities to allow changes to the way the Hong Kong dollar is linked to the U.S. dollar. The Hong Kong dollar has been the object of speculative activity in recent days, but Yam stressed that the government is determined to defend the currency peg.

The HKMA injected HK dollars into the market on October 31 to purchase $1 billion as the HK dollar exchange rate persistently hit HK$7.75 to the U.S. dollar, the upper limit of the trading band. Noting that the action will make interbank rates fall, he expressed the belief that local banks will lower their interest rate following the U.S. Federal Reserve’s rate cut.

In his regular “Viewpoint” column published on the HKMA’s website, Yam argued that it is a matter of judgment for the Authority whether or not there is a need to take action within the Convertibility Zone. He acknowledged that Hong Kong has in the past seen periods in which the exchange rate was stronger than 7.8, but there was a significant interest-rate premium for the Hong Kong dollar over the U.S. dollar. Conversely, there were periods in which the exchange rate was weaker than 7.8, but there was a significant interest-rate discount.

“Such anomalies may be quite temporary and the market may adjust, without the need for us to take action. But they may be quite persistent ...,” Yam observed. “There may therefore be a case for action within the Convertibility Zone to normalize the relationship between the exchange rate and interest rates so as to minimize the possibility of abrupt adjustments in the latter.”

The HKMA chief observed that it may be that the strong-side Convertibility Undertaking will further be triggered, requiring the authority to buy in more U.S. dollars passively and inject more Hong Kong-dollar liquidity. “The government has also reiterated that there is no plan or intention to change the system in any way (such as re-pegging at a different level or widening the Convertibility Zone),” he claimed.

A NEW ASIAN SMALL-CAP MARKET, ALL THE WAY FROM LONDON

Scheduled to come online by 2009, it will make capital cheaper for small Asian companies.

The Tokyo Stock Exchange Group (TSE) and the London Stock Exchange Group (LSE) have entered into an agreement to form a new market for emerging Asian companies. The new market is still without a name, but its purpose is clear – create funding for small and startup ventures in Asia. The agreement is to be a joint venture. The TSE brings its knowledge and expertise of local Asian markets and companies, and LSE brings its experience from the Alternative Investments Market (AIM).

The AIM is an international market for small, growing companies based in London. It was started by the LSE in 1995, and through seeing some 2,500+ companies trade, the AIM has helped raise upwards of £34 billion for these small enterprising companies. To put it in perspective, the size of the average company’s market cap falls between that of the Toronto Venture Exchange (TSX-V) and the NASDAQ.

This new market has significant implications for all small-cap investors. For one, any small-cap market in Asia is bound to attract many U.S. investors. One of the most frustrating realizations of the past few years has been how difficult it is for small-cap investors to invest in the growing markets of Asia. Many foreign investors are skeptical of Asian small-caps – especially Chinese ones. Many Chinese companies currently do not meet the requirements of the larger exchanges. They rarely release financial information in English and, when they do, it is not consistent enough.

Many Asian startups trade over the counter, which is an unregulated practice that scares many would-be investors away. A new exchange gives these companies a new place to raise capital, and investors to put their money. Although the new market will not have as many regulations as the NASDAQ does, it will have many more requirements than are currently in place.

For now, we only have the AIM to speculate on how the new market will play out. The AIM has fewer requirements than most growth markets, but it does require timely financial releases of a listed company’s performance, expected performance, recent activity and financial condition. These new requirements for Asian small-caps should boost foreign-investor confidence.

By boosting investors’ confidence, the new market will allow for much more money to flow into smaller enterprises in Asia, which will add to competition worldwide. Until now, if a Western company is working on the same technology an Asian one is, the Western one has had the advantage of raising capital quickly, whereas the Asian company could not. Which means it would usually lose out to its Western counterpart.

The new market should come online at the end of 2008. However this plays out, it is big news for us small-cap guys.

THE EXPATRIATE’S PATRIOT

Ron Paul gives the more than 5 million Americans living abroad the opportunity to hold their heads higher.

Having spent 12 of the last 14 years abroad, in Chile, Malaysia, and South Korea, this writer, for one, has never felt prouder to be an American than in the recent months since Dr. Paul of Texas launched his presidential bid. And if this incomplete list of Ron Paul blogs is any indication, our foreign hosts and friends are catching on as well:

• Asia for Ron Paul
• Brits for Ron Paul
• Canadians for Ron Paul
• Chile for Ron Paul
• French for Ron Paul
• Europe 4 Ron Paul
• Ron Paul Spanish
• Indian & Pakistani Friends of Ron Paul
• Poland for Ron Paul

Many of my fellow American expatriates and our foreign friends find in the good doctor the embodiment of what makes America beautiful – its original traditions of self-government and non-interventionism. These are now all but lost save for that quixotic figure, Dr. Ron Paul. While he may not be as well known (yet) overseas as Obama, Hillary, or Giuliani, these three are known mostly for who they are (or, in last case, for where he was), rather than for what they believe.

Dr. Ron Paul, quite simply and radically, stands for the principles stated in our founding documents. The Declaration of Independence has inspired countless peoples the world over in the grip of tyranny. Similarly, the Constitution of the United States, described by the régime as “quaint”, has been a model for governments the world over, including even the Swiss, who, in imitating American federalism, are more Catholic than the Pope.

While the ideals upon which our country was founded are lauded by many, no one wants them imposed at the barrel of a gun. The wave of spontaneous sympathy and solidarity from Paris to Tehran that followed the attacks of September 11th, 2001 was quickly squandered by an administration that took a “you’re-either-with-us-or-against” approach to diplomacy, that has alienated us from our allies and further alienated us from our enemies. The adoption of the neocon “Democracy on the March” ideology has only made matters far worse.

In the last six years, ours has become the opposite of the “humble nation” Mr. Bush promised in the debate of October 12th, 2000. Indeed, Dr. Paul has publicly stated that his foreign policy is the one the future president promised on that day: “If we are an arrogant nation, they will resent us; if we are a humble nation, but strong, they will welcome us.” We have become an arrogant nation, more arrogant than ever, and we are resented more than ever.

Merely entrusting the presidency to the other wing of The War Party will do nothing to restore our ravaged image abroad. Mr. Bush made his “humble nation” remark to the vice-president of a régime whose secretary of state has called ours the “indispensable nation”, implying that all the rest just cannot get by without us. She also infamously called “worth it” the deaths of 500,000 Iraqi children under the régime sanctions. This, and Mr. Clinton’s cruise missile diplomacy, his wagging of the dog to divert domestic attention from his numerous scandals, and his bombing of Serbia, caused a great deal of hatred for America and Americans.

Of course, the history of interventionism and its blowback goes back much further than the era of the Bush and Clinton dynasties. What is the American Century if not a century of American interventionism in the four corners of the globe? We have to go back to the end of the 19th Century to find a president who recognized this to be “every bit as odious as imperialism and misguided nationalism” and who advocated that “we never get caught up in conflict with any foreign state unless attacked or otherwise provoked.” That president was Grover S. Cleveland, whom Thomas J. DiLorenzo called the “great libertarian from Buffalo” (and from whose article The Last Good Democrat come the quotes in the preceding sentence). His presidency ended in 1897, the year before the Empire began. It is time for the “great libertarian from Texas” to take the White House.

Dr. Ron Paul stands for non-interventionism. They don’t hate us for our freedoms. They hate us for our Wilsonian foreign policy as advocated by the other candidates in both parties. Oderint dum metuant (let them hate as long as they fear) is the order of the day under the current régime. It has succeeded in that they do, indeed, hate us. But they do not fear us as much as they did because they realize we are broke and perhaps in the terminal decline that has destroyed all empires. They have even grown to resent us in allied countries.

While most people understand that people are individuals, not representatives of their governments, it becomes tiresome for an expatriate to need to incessantly explain his self and his country to his hosts, although with Dr. Paul’s candidacy it has become easier and more enjoyable, which is the starting point for this essay.

But it is not to make our lives easier that Paulistas abroad support the man. Most Americans abroad hope to return home someday, and we hope to return home to a country that we recognize. It is even becoming doubtful whether we will even have country to which to return, a possibility pondered by Michael S. Rozeff in his recent essay, On Track for U.S. Collapse. Ron Paul is the only candidate who speaks of turning things around. Your fellow Americans abroad want to come home someday! Support Ron Paul!

HONDURAN LIVING – ANATOMY OF A TRANS-PAT

If you give up your citizenship to replace it with another, maybe “ex-pat” might be appropriate, but when you retain your citizenship and have legal residency in another country, “trans-pat”, or trans-patriot might be more appropriate.

Try telling your friends and family that you are considering moving to a Caribbean island and see what the responses are! This will certainly separate the risk-takers from the conservatives, the adventurous from the timid, the global-thinkers from the local-thinkers, and – perhaps – the weak from the strong. When my husband and I made the announcement to our friends, you would think we had just parted the Red Sea. On one side were the cheerleaders, encouraging us at every stage. On the other side were the pessimists, those who were convinced everything would go wrong and we would never be seen again!

As it turned out, everyone was right – to a degree. We had a few disasters, but we overcame them and are still here on Roatan, a 49 square mile island off the north coast of Honduras, after 9 years ... and happy to be in such a beautiful and friendly country. So do not think you are crazy for even entertaining an idea like this. It can be done, and it can be the best move you ever made. Or not.

Certainly, if you are looking at relocation as an opportunity to make a real estate investment and return on that investment, you are not crazy. But what kind of person actually does this?

One such “trans-pat” is a young, attractive, single woman from England. Louise started thinking about relocating at age 21. The cost of living, the weather, the opportunities ... these were all fuel for the fire. When she was 21, Louise spent 6 months in Australia, and determined that yes, she was inspired to relocate to a more relaxed way of life, and Australia certainly was a good choice. But Australia has a daunting points system to satisfy for anyone wanting to live there. Ironic, really, when you consider Australia was originally colonized with the criminals and outcasts that England considered undesirable.

Once back in Jolly Old England, Louise started working on a career. At 29, Louise started to wonder – where was that excitement, that passion and desire she had in Australia? She started to focus back on Australia and found she was bitterly disappointed that she had not pursued the dream, that she had joined the rat race. The dream seemed just out of reach because now she felt responsible to her family. She had commitments to fulfill, but the pull of relocation was strong.

Louise had a close circle of friends, all with like interests, all of whom were global travelers. They found their social conversations revolved around escape. All were in an upper wage bracket with homes and responsibilities. Together, they started going to travel expos. Their focus was still on Australia, but the difficult application system and the length of time it took to wade through the process and qualify to apply took the continent off the radar screen. One Sunday, at a weekly gathering, they all brought their laptops and searched “islands of the world”. Although all of the friends had visited Asia, Australia, India and extensively in Europe, none had been to Central or South America.

Finally, someone landed on a web site offering tours to Roatan. They called and booked a tour. What was the down side? The worst case scenario was that they had a great holiday! In June 2003, 6 of the friends got on a plane for Roatan. Between January, when the plan was hatched, until June, they became voracious researchers and read everything they could find on Roatan. On the plane, Louise picked up a Roatan island publication, Bay Islands Voice, and read an article about an unfortunate event which had occurred to an American couple on Roatan.

They panicked. “Were we heading for a barbaric island, never to see our families again?”, Louise remembers thinking. They gathered in the rear of the plane and formulated an exit strategy, in case they hated it or felt frightened when they got off the plane. That strategy was to immediately go to Costa Rica. As soon as they landed, their fears melted away. The property manager they had contacted to rent a house was there to meet them. A rental car was produced and the friendliness of everyone made them immediately feel at home. The group spent 2 weeks exploring, one week with the tour provider, and another on their own. They looked at business opportunities, land and houses.

By now you know that this is a savvy group, so it will not surprise you that they went home to regroup and make a decision. In the end, 2 of them decided that Roatan was not for them (one is now in Australia and one in India), and the other 4 bought a home under construction on the west end of the island. Louise and Max moved to Roatan full time in 2003, the other two bought for investment and holidays. Last year they sold the house and Louise and Max bought a lot in a different development, Lawson Rock, and then started building another house. The 2 investors who took their money out of the sale doubled their investment.

Last month, Louise and Max went to Portugal to scope out the lifestyle there. They love their adopted home on Roatan and will probably keep an investment here. But they are ready for another adventure and may make another change in the near future. Being single in a tourist region is not conducive to lasting personal relationships. Most of the young population is transient, so the appeal of a more stable population is pulling them elsewhere.

Louise embodies the term “trans-pat”. She is willing to reinvent herself many times over. You should consider this story as you contemplate whether relocating is for you. Just remember you can always return to your roots, or you can change again.

WHAT TAX HAVENS TEACH US ABOUT THE BENEFITS OF LOW-TAX ECONOMIES

What are the three richest countries in the world? You might be tempted to answer America, maybe Switzerland, or perhaps even Ireland. The right answer, however, is Luxembourg, Bermuda and Jersey in that order.

The CIA, which as well as spying on people collects economic data, recently published its annual ranking of global wealth, measured by gross domestic product per capita, adjusted for the purchasing powers of different currencies. What is striking about the list is not only that none of the big economic powers are that near the top, but that so many of the leading places are taken up by tax havens or low-tax countries. Of the 20 wealthiest nations, 13 of them are low-tax territories. Luxembourg, Bermuda and Jersey might lead the way, but the top 20 also includes Equatorial Guinea, Guernsey, Ireland, the Cayman Islands, Andorra, Hong Kong, the British Virgin Islands, the Isle of Man, San Marino and Switzerland.

The wealth of some of those territories is striking. Luxembourg and Bermuda have a GDP per capita of $71,400 and $69,000 respectively. By contrast, America, the wealthiest of the mainstream industrial economies, has a GDP per capita of $44,000. Even the worst-off low-tax nation, Switzerland, has a GDP per capita of $33,000. And Britain, despite the endless boasting from Gordon Brown about the brilliance of its economic record, ranks only 28th in the world, on $31,800, slightly below Germany, and just a tiny bit above France. (London would belong to the top 20 if it declared independence and with 112,000 non-domiciled residents paying virtually no tax, it is a bigger haven than Monaco and Andorra combined.)

In the past few years, politicians from the developed world have led a determined assault on tax havens. Norway has just launched an investigation into their role in sheltering development aid stolen by corrupt dictators. The OECD has led a series of attacks on the world’s tax havens, accusing them of complicity in money laundering and of lacking transparency. At one point the French government advocated an international boycott of tax havens, arguing that EU banks should refuse to deal with them. As U.K. Chancellor, Gordon Brown led constant campaigns against tax havens, looking for new ways to raise revenue out of them.

Even the Vatican has joined the campaign. Pope Benedict XVI was reported last month to be working on a doctrinal pronouncement that will condemn tax evasion as socially unjust, while the planned encyclical – the most authoritative statement a pope can issue – will denounce the use of tax havens and offshore bank accounts by wealthy individuals, on the grounds that they reduce the tax revenues raised for the benefit of society as a whole. (Although curiously the Vatican has not reacted so well to proposals by the Italian government to curb the Catholic church s own tax break.)

But instead of attacking tax havens, other countries should be trying to learn from them. The way they lead the global wealth rankings is testament to the power of lower taxes to raise overall living standards. The Bahamas manages to be far richer than any of its neighboring Caribbean islands, Luxembourg is wealthier than France or Belgium, while Jersey has pulled well ahead of near-by Britain.

Of course, you can object that these are all tiny places, with minuscule populations floating on top of an ocean of tax accountants and brass-plate companies. There is some truth in that. But the list also includes low-tax nations such as Ireland, Hong Kong and Switzerland – all mid-sized trading territories which levy significantly lower taxes than most of their rivals.

You might say, as well, that the tax havens are rich because they are corrupt – they are refuges for corrupt dictators and drug dealers and tax evaders, who are allowed to launder their illicit gains through their banks and trust companies. But though money laundering through the Cayman Islands may be a staple of popular fiction, there isn t much evidence for it in the real world. Most criminals launder the proceeds of the crimes domestically, since they are well aware that moving their money across borders only increases the chances of detection. Terrorists use traditional networks of money changers, not banks in Jersey.

Governments should spend more time worrying about why it is that so much development aid ends up lining the pockets of a corrupt elite than where the money ends up. There is always going to be a bank somewhere that will take their money. Even if there was not, they would stash it away in gold or diamonds.

Low-tax territories provide an alternative to the high-tax world. They impose some discipline on governments elsewhere, restricting the amount they can raise in taxes by providing an escape route. But more importantly, they demonstrate the ability of lower taxes to consistently raise living standards, even in the most unpromising locations. Maybe it is time to stop hammering the tax havens and start trying to learn from them instead.

SWISS GOVERNMENT REPORT CRITICAL OF EU TAX AND STATE AID POLICIES

A new report approved by the Swiss government has highlighted how the EU continues to stifle tax competition and sanction state aid, despite Brussels’s claims to the contrary. The report, entitled “State aid to companies: company taxation and tax competition – developments in the European Union”, was approved by the Swiss Federal Council this week. It comes to the conclusion that the EU pursues the approach of restricted tax competition, which, despite being banned under EU law, is complemented by an extensive policy of state aid, in contrast to Switzerland’s “positive” stance on tax competition and “sparing use” of direct state aid to individual companies.

The report was produced in response to a request made by the Committee for Economic Affairs and Taxation of the Council of States, which instructed the Federal Council to present a report on “new company taxation models applied in other countries, in particular those of important trading partners, and on aid provided to companies.” The report confined itself to an analysis of the EU’s policy on state aid, as it is Switzerland’s most important trading partner. It concludes that “all forms of state aid constitute an intervention in the free workings of the market and can therefore as a rule not be competition neutral.”

“This is why European competition policy provides for a fundamental ban on state aid. However, the EU’s policy on state aid allows numerous exceptions which are deemed to be compatible with the Single European Market,” the Swiss government said in a statement released on the report’s publication.

The Swiss government noted that it is “less inclined to provide direct aid, preferring instead to ensure the existence of a business-friendly economic framework.” ... “Part and parcel of this is a moderate tax burden for companies as well as for individuals,” the statement explained.

OECD CRITICIZES LATIN AMERICAN COUNTRIES’ TAX POLICIES

Latin American countries need to invest more public funds in health, education services, infrastructure and innovation, but to afford this they will have to make major changes in the way their tax systems operate, according to the OECD’s newly published Latin American Economic Outlook.

The OECD urges Brazil and Mexico to improve the efficiency of public spending. Both Brazil, which collects tax revenues equivalent to around 35% of its GDP, and Mexico, where tax revenues amount to only 15% of GDP, score badly in such areas as access to basic services like clean water and electricity. At present, surveys show, fewer than one in four Latin Americans believes that money from taxes is being well spent. With more than 200 million people – nearly 40% of the population – living in poverty, the region has the highest levels of inequality of any region in the world.

Presenting the report at a conference in Santiago de Chile, OECD Secretary-General Angel Gurría noted that Latin America is becoming an increasingly important player in the world economy. However, he stressed the need for further economic reforms in order to underpin improved prosperity.

Publication by OECD’s Development Center of its first-ever report on the economic outlook for the region follows a decision by OECD countries in May to engage more closely with major emerging economies world-wide. Mexico is already a member of OECD, and Chile has been invited to open membership negotiations. In parallel, OECD has launched a process of “enhanced engagement” with Brazil and other major emerging economies such as China, India, Indonesia and South Africa, with a view to strengthening mutual links and possible future membership.

For further information about the report is available here.

IRS PUBLISHES FOREIGN TAX GUIDES

The IRS has announced the availability of five new publications to help foreign-language communities understand federal tax forms and publications that are written in English. The new glossaries of tax terminology will help to meet increased demand for tax-related resources in languages other than English. The five new publications are new versions of Publication 850 for Chinese (simplified), Chinese (traditional), Korean, Russian and Vietnamese. A Spanish version was previously available.

The Virtual Translation Office of the IRS helped create these glossaries of tax terminology to help taxpayers and the professionals who assist them. The publications were developed in cooperation with professional translators and editors to establish uniformity in language usage in IRS tax products, and to function as reference materials for these products.

Although the publications are not legal documents, the IRS hopes that these glossaries will be useful to members of the U.S. Chinese, Korean, Russian and Vietnamese communities in understanding IRS documents and clarifying tax-related issues.

IRS AND STATES TO SHARE EMPLOYMENT TAX DATA

Officials from the IRS and more than two dozen state workforce agencies have announced that they have entered into agreements to share the results of employment tax examinations. The agreements, part of the Questionable Employment Tax Practice (QETP) initiative, provide a centralized, uniform means for the IRS and state employment officials to exchange data. So far, 29 states have entered into individual information-sharing agreements with the IRS.

“These agreements present a united front for the IRS and its state partners to improve compliance in the employment tax arena,” explained Kathy Petronchak, Commissioner of the IRS Small Business/Self-Employed Division. “Combining resources will help IRS and the states reduce fraudulent filings, uncover employment tax avoidance schemes and ensure proper worker classification.”

“As the first state to sign a memorandum of understanding, Michigan has already begun to forge a much closer working relationship with the IRS, which has significantly increased the sharing of tax and audit information between the IRS and our unemployment insurance program,” added Keith W. Cooley, Director, Michigan Dept. of Labor & Economic Growth. “The exchange of data is helping to strengthen employer compliance with our unemployment insurance tax law by reducing the ability for some to manipulate the system, which burdens honest taxpaying employers with extra costs. Our objective is an unemployment tax system that is fair for all employers.”

The states that have signed partnership agreements with the IRS thus far are Arizona, Arkansas, California, Colorado, Connecticut, Hawaii, Idaho, Kentucky, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Nebraska, New Hampshire, New Jersey, New York, North Dakota, Ohio, Oklahoma, Rhode Island, South Carolina, South Dakota, Texas, Utah, Vermont, Virginia, Washington and Wisconsin.

U.S. SUPREME COURT JUSTICES LEAN TOWARDS KEEPING STATE BOND TAX BREAKS

U.S. Supreme Court justices have indicated that they may uphold tax breaks offered by dozens of states on municipal bonds. Observers have suggested the alternative would cause colossal disruption in the $2.5 trillion muni bond market if the court chose to overturn the practice.

Ruling in the case of the Department of Revenue of Kentucky vs. Davis, the court must reach a conclusion as to whether Kentucky can allow tax breaks on interest from municipal bonds sold within its borders, while taxing interest earned on bonds sold in other states. Chief Justice John Roberts announced, “This is an area where Congress can regulate if it wants to, and it has never shown the slightest interest in interfering with state tax exemptions for their own bonds.”

Justice John Paul Stevens reportedly responded, “The victims under your approach are the 49 other states, and all of them seem to support your opponent,” a reference to a court brief filed by the 49 states in support of Kentucky.

Justice Anthony Kennedy reportedly commented, “All states want to protect their residents and make it look like they are doing something for their residents. And that is exactly the purpose of commerce clause prohibition against explicit discrimination, which is what this is.”

Justice David Souter hinted at worries about the impact that reversing such a widespread practice would have, concluding, “We have an enormous market, the effect of interrupting which we really, as a court, cannot tell very much, and that seems to me a very good reason to give the nod to Kentucky.”

U.S. TRUST INVESTORS CHALLENGE CANADIAN TAX

The Canadian government is facing a NAFTA (North American Free Trade Agreement) challenge by two American trust investors over its controversial decision last year to slap a tax on distributions made by income trusts. Their Notice of Intent to Submit a Claim to Arbitration under NAFTA is based on Finance Minister Jim Flaherty’s announcement on October 31, 2006 of plans to eliminate the tax advantages then enjoyed by income trusts compared with companies, as part of the Conservative government’s “Tax Fairness Plan”.

The action has been brought by Chicago couple, Marvin and Elaine Gottlieb, who allege that the Canadian government discriminated against Americans when they imposed the new measures, in breach of the terms of NAFTA. “We are the first Americans to launch a NAFTA action related to the taxation of energy trusts,” Marvin Gottlieb said in a statement announcing his intent to submit an arbitration claim.

The income trust distribution tax, which was devised largely without consultation and announced without warning, caused consternation in Canada’s business and investment sector. While companies that had converted to trusts before the announcement have until 2011 before the new tax regime comes into force, new conversions immediately fall under the new regime, and several corporations with well-advanced plans towards converting to trust status have been forced to rethink their strategies.

Mr. Flaherty says the tax is designed to tackle a “growing trend toward corporate tax avoidance” caused by the vehicle’s more favorable tax treatment – income trusts do not pay corporate tax – compared with the more conventional company structures

A Toronto-based trade specialist informed Canada’s National Post that the claim has little chance of succeeding, because the NAFTA excludes investment disputes over taxation except where there is clear discrimination against investors in a certain member country. “None of that exists here. The government’s income trust measures apply across the board,” said Lawrence Herman, a lawyer at Cassels Brock law firm. “When you have to go through complex legal gymnastics to make out a case, as here, I think you are in for a rough ride before any arbitration panel. ... The NAFTA landscape is littered with the wrecks of these kinds of Chapter 11 investment claims that didn’t go anywhere.”

INSTITUTE OF CHARTERED ACCOUNTANTS THROWS ANOTHER PUNCH AT THE COMMON EUROPEAN TAX BASE

Unanimous approval requirement makes such a possibility less likely.

At the recent annual dinner of the ICAI in Ireland, Vincent Sheridan, President, said that membership of the ICAI now exceeded 16,000, and took the opportunity to launch another salvo at the growing consensus in favor of a Common Consolidated European tax base.

“Any such move, if successful,” he said, “would be a major threat to one of the main planks of our economic strategy. It must be left open to all member states – and to the smaller countries in particular – to put together a competitive package to enable both domestic and international companies operate from within its borders. This is essential if countries like Ireland are to remain competitive not just within Europe but in the ever more important wider global economy. On this point the Government is to be congratulated on securing the retention of unanimous voting on taxation issues.”

PROSECUTORS ARREST SOUTH KOREA’S NATIONAL TAX SERVICE CHIEF

South Korea’s tax chief and head of the NTS, Jeon Goon-pyo, was arrested earlier this week amid allegations that he accepted bribes from a regional tax officer who wanted a promotion. According to reports, Jeon received in the region of 60 million won from the junior official in the period between August 2006 and January 2007.

Despite denying the allegations, Jeon has offered to resign. This represents the first time that such a state of affairs has arisen involving a currently serving NTS chief, and coming in the wake of a number of other corruption scandals, has caused public outrage in Korea.

THE IRS TAKES AIM AT THE HEDGIES

Who may already be planning their escape to friendlier jurisdictions.

The IRS announced that it is targeting seven areas for possible tax abuse at hedge funds and private-equity firms, explaining, “The service seeks to identify any areas of possible non-compliance in the income tax reporting of hedge fund and private equity fund investors and managers, as well as possible non-compliance in the reporting of withholding obligations.” The IRS listed the seven areas:

• Compliance with filing requirements;
• Issues related to investor, trader, dealer and business activities, including loan origination;
• Income recognition;
• Characterization of income as ordinary or capital gains;
• The flow of funds between onshore and offshore entities;
• The allocation and timing of incentive payments and other income;
• The accounting methods used to reflect income.

IRS officials have reportedly said that the enquiry was particularly focused on the use of derivatives to avoid withholding taxes.

Much discussion in Congress over the perceived need to rein back the high incomes being achieved by hedge fund managers culminated last week in the launch of Representative Charles Rangel’s Tax Reduction and Reform Act of 2007, which seeks to pay for populist tax cuts by cutting back a numnber of corporate tax breaks, including a change in the tax treatment of “carried interest” for fund managers, so that they will no longer receive the lower 15% capital gains tax rate for what is, according to Rangel, “essentially a management fee or payment for services, which generally are taxed as ordinary income.” The bill would, however, continue to tax carried interest at capital gains tax rates to the extent that carried interest reflects a “reasonable return” on invested capital.

These is also more bad news for hedge fund managers in the legislation, in the shape of curbs on the the use of offshore corporations and other structures to defer taxes on compensation received for providing investment services. The measure is also designed to eliminate the incentive for tax-exempt entities to invest in hedge funds and other investment funds through so-called offshore “blocker” corporations.

Rangel’s bill may stand no chance of success, despite its focus on the AMT, but faced with a probable eight years of Democrat Congressional savaging, many hedge fund managers are probably already packing their bags for the friendlier climes of Switzerland, Luxembourg, London and Dublin, in what may turn out to be a rerun of the suicidal Eurobond fiasco of the 1960s.

NEVADA BUSINESSMAN TRUMPS IRS BY CHALLENGING AMERICA’S DUAL MONETARY SYSTEM

On a 106º May afternoon in 2003, government agents raided several establishments belonging to Southern Nevada businessman Robert “Bobby” Kahre. With guns drawn, officials held more than 20 handcuffed workers in the sun without water as agents collected records and other materials.

Kahre had not committed a crime. He had upset the IRS by paying his workers based on the face value of gold and silver coins, versus the market value in the Federal Reserve system (the value of the coins in U.S. paper dollars). Even though the coins were in circulation, displayed a face value, and were regulated by Congress, the IRS’s confusing and endless tax code did not determine how to handle these gold and silver coins if used for payroll. The tax code only references dollars. It does not distinguish between coined money and paper money.

Kahre did not opt for the precious metal bullion system without first doing his homework. He consulted monetary experts, engaged in extensive research, and even met with congressmen. Kahre’s conclusion was simple. While the currency in the precious-metal system was greater in value than the currency in the other system, as money and a medium of exchange, the law knows no difference between the face value of both currencies.

The IRS expected Kahre to report his workers’ earnings based on the coins’ market value in the Federal Reserve system. Instead, he did not report or pay anything at all because the face value of the coins fell below the reporting threshold. The IRS alleged that Kahre and the other defendants paid at least $114 million (based on the Federal Reserve system) to workers. The use of these coins in trade is a direct challenge to the fiat money system now in place.

While the purpose of the case was to identify the intent of the defendants, the trial that followed tested America’s dual monetary system and further validated that the U.S. greenback is quickly becoming more and more a worthless piece of paper.

In 1985, Ron Paul and other congressmen successfully pursued the Gold Bullion Coin Act, which required the U.S. government to mint and place gold coins in denominations of $50, $25, $10 and $5 into circulation based on demand. The coins are made of 91.67% pure gold. The ultimate purpose of the act was to allow Americans to invest in gold. However, it also brought sanity back to this country’s monetary system by establishing a dual system. Instead of the Federal Reserve solely providing the money supply by endlessly printing FRNs, the U.S. government now minted and circulated precious metal coins.

In the mid-‘90s, Kahre began exercising this alternate system. He compensated workers for their labor in the form of these gold and silver coins instead of FRNs. The workers calculated their income and tax liability based on the face value of the coins. One gold coin with a face value of $50 currently equals $806 in FRNs. If a worker earns a $50 gold coin each week, that person takes home an annual income of $2,600 based on the precious metal system, which is below the income-tax reporting threshold for an employee. However, the value of the coins in FRNs – $41,912 – is not. That is the basic idea.

The IRS did not fancy Kahre’s gold-and-silver payroll system, and after seven years of operating his family businesses in this fashion, he and eight others found themselves as defendants in a Las Vegas federal courtroom. Kahre was charged with 109 counts of tax-related crimes, varying from tax evasion to willful failure to file and conspiracy to evade taxes. 52 other counts were divided among the other defendants.

While the case was about the intent of the defendants, it raised several issues. There was the issue of whether or not Kahre’s workers were considered independent contractors, who are responsible for paying their own taxes, or employees, who have their taxes withheld by their employer each pay period. Then there is the issue of America’s dual monetary system. If there are two monetary systems, and the value of one system’s currency is greater than the other beyond its face value, what is the standard for determining the value of taxable income? No Federal Court of Appeals has ever ruled that the gold coins in question must be reported to the IRS based on FRN market value.

In addition to operating his businesses via the gold-and-silver payroll system, according to testimony at the trial, Kahre helped 35 other contracting companies do the same. Even though Kahre and his colleagues followed the dual monetary system mandated by Congress, the IRS did not care. To them, the bottom line was Kahre’s workers were not taxed enough for their labor.

Based partially on cases that pre-dated the 1985 Gold Bullion Coin Act, the judge in the case did not allow defense attorneys to argue that Kahre was justified to pay workers based on the face value of the coins. Based on case law, the court concluded that income had to be calculated based on the FRN fair market value, rather than upon the face value. A flaw with some of those cases was that each referred to double-eagle gold coins, which Franklin D. Roosevelt outlawed in 1934. Those coins are no longer in circulation like the coins minted by the U.S. government following the 1985 Act. The double-eagle coins were deemed to be property for tax purposes in those old cases.

Nevertheless, attorney Joel Hansen, under the good faith belief defense, was able to present evidence that his specific client, Alex Loglia, who performed research work for Kahre, did not have intent to commit tax crimes. This interesting twist allowed jurors to still hear the argument that Kahre was justified to pay workers based on the face value of the coins. The U.S. Supreme Court had long before ruled, in the Cheek case, that a good defense in a tax-evasion case is a person had good faith in not following certain tax laws. “That doesn’t mean you don’t have to pay the tax, but it means you didn’t commit a crime and won’t go to jail for a felony,” Hansen explained.

In 2005, Loglia penned a paper that earned him an “A” from his law school professor (who just happens to also be a 9th Circuit judge) on the gold-coin issue and the separation of powers. His paper took the position that, under Article 1, Section 8, Clause 5 of the Constitution, Congress alone had the power to coin money and set its value. Loglia’s position was that the judicial branch does not have this power.

“The judge applied those old court cases, but we were still able to make the argument that Alex was not criminally liable because he believed in good faith in the use of the face value of the gold and silver coins for tax purposes,” Hansen said. “Loglia’s 100-page legal paper was great evidence for the jury of his good faith belief.”

On September 17, after four months of trial and days of deliberation, the Las Vegas federal jury returned with its verdicts. Hansen was uncertain of what to expect. He just hoped that the jurors listened closely to the evidence presented. “I think the government, because it had packed the courtroom, was confident they were going to get numerous guilty verdicts,” said Hansen. Rather, jurors delivered zero guilty verdicts. Three defendants, all workers, were acquitted as well as Kahre’s mother, who worked as a runner for her son’s businesses. Two other defendants were partly acquitted – the jury hung on one count each. The jury also hung on all counts faced by Kahre, Loglia and Kahre’s sister, resulting in mistrials. “I’m telling you that I have never seen such a dejected group of people leave a courtroom in my life,” Hansen said of DoJ and IRS officials. “The thing is, they had 161 counts and they did not get a guilty verdict on a single one. They got a big goose egg.”

The IRS was supposed to notify the judge in late October if the agency intended to retry the five defendants on the charges that resulted in a hung jury. The government waffled, indicating they would pursue another grand jury and issue superceding indictments. More information will be known by mid-November.

Looking back, Hansen recalls what may have been a key turning point in the trial. The government called three accountants to testify. The defense asked each one, “What is the proper way to calculate income for purposes of the Internal Revenue Code if you are paid in a gold coin that has a $50 face value on it?” All three of them responded, “I do not know. I will have to research that. ... If accountants ... don’t know the answer to this question, how in the world can they expect anything different from an ordinary person who is confronted with a dual monetary system created by Congress?”

Hansen believes it was uncalled for to prosecute Kahre and the other eight defendants criminally. The case revolved around a complicating and confusing legal issue. It should have been handled civilly, Hansen said, but the IRS wanted to make an example of these defendants because the federal government simply does not want anyone paying a lower tax than what the feds determine should be paid.

“If a coin says it is a $50 gold piece, and it says ‘In God We Trust,’ and the law says that it is legal tender, and it is in circulation, isn’t it reasonable for people to think that they can calculate their tax liability based on that?” Hansen asks. “If a tax accountant can’t answer that question, how can a common worker be guilty of a crime? The outcome of this case is a magnificent victory for those of us who believe that the United States of America should have an honest monetary system.”

INVESTORS IN FAILED BEAR STEARNS HEDGE FUNDS JOIN FORCES FOR INDEPENDENT INQUIRY

Investors who lost hundreds of millions of dollars when two Bear Stearns hedge funds collapsed in August are joining forces to replace Bear Stearns affiliates and designees as managing parties of the failed entities and set the stage for a thorough independent inquiry.

Institutional and private investors have joined together seeking the necessary proxies from investors representing at least 50.1% of holdings in each of the funds. Two separate votes are scheduled – first for the U.S. fund, then for the overseas, Cayman-based fund. Shares held by Bear Stearns or its affiliates cannot be voted in the elections.

The campaign is aimed at replacing Bear Stearns affiliates and designees with FTI Capital Advisers, LLC, a wholly-owned subsidiary of FTI Consulting, Inc. FTI specializes in forensic accounting and investigations, and would conduct an independent investigation into how the two funds, which once had equity value in excess of $650 million, were decimated and appear to have been rendered worthless. To augment FTICA’s expertise, Bart Schwartz, former Chief of the Criminal Division of the U.S. Attorney’s Office for the Southern District of New York, has been nominated to serve alongside FTICA in managing the overseas fund.

Lance Gotthoffer, a partner with the law firm Reed Smith, which represents shareholders with over 25% of the two funds, noted that “from the feedback we are getting, we believe we are close to having the necessary support to make it happen, but it is critical that every investor’s vote be counted.”

According to Mr. Gotthoffer, if this unprecedented campaign is successful, FTICA and Bart Schwartz would assume legal responsibility to act in the best interests of all investors – not just the group that nominated them. “It is too early to speculate on what FTICA and Mr. Schwartz might find, but we are confident that they will work diligently to maximize recoveries for creditors and investors of the funds,” Gotthoffer observed.

UBS BANKER ARRESTED OVER MONEY LAUNDERING

Brazilian authorities launch investigation into Swiss banks UBS and Credit Suisse and U.S. insurer AIG.

A banker from UBS’ wealth management group was one of 19 people arrested by Brazilian police last night in connection with an anti-money laundering investigation that is also targeting the rival Swiss bank Credit Suisse and AIG, the U.S. insurer. The arrest was made during an investigation into an alleged scheme that allowed Brazilian companies to avoid taxes by laundering money through Swiss banks and the U.S. insurance group, a detective from Brazil’s federal police said.

Clariden Leu, a private banking subsidiary of Credit Suisse, confirmed that one of its employees had also been detained. Credit Suisse decline to comment. Brazilian police said that they arrested 19 people and recovered more than $4 million in cash during raids on 44 sites across the country yesterday. None of the 19 – two Swiss nationals and 17 Brazilians – has been charged. Under Brazilian law they can be held for five days without charge.

The arrests came less than a month after Brazilian authorities arrested four employees from Cisco Systems over allegations that the U.S. technology giant had participated in a tax dodging scheme. All four were released without charge. Cisco denied any wrongdoing.

RFID CHIPS IN SCHOOL UNIFORMS TRACK U.K. STUDENTS

Ten schoolchildren in the UK are being tracked by RFID chips in their school uniforms as part of a pilot program. If the program proves successful as a way to hasten registration, simplify data entry for the school’s behavioral reporting system, and ensure attendance, Trevor Darnborough, whose company, Darnbro, filed for a patent on securing RFID tags to clothing, hopes other schools will be interested.

The chipped children are enrolled at Hungerhill School in Edenthorpe, England, a secondary school for ages 11 to 16. David Clouter, a parent and founder of Leave Them Kids Alone, a children’s advocacy group, condemned the plan. “With pupils being fingerprinted and now this it seems we are treating children in a way that we have traditionally treated criminals,” he said.

“The system is not intrusive to the pupil in the slightest,” according to Hungerhill teacher Graham Wakeling. He also said that all the parents of the children in the trial supported the tracking effort.

Video surveillance is already commonplace in the UK, and a growing number of schoolchildren are fingerprinted for administrative and security reasons. Since 2001, nearly 6,000 pupils have been fingerprinted in the UK, with 20 new schools embracing the practice every week.

In a blog post about the report, security expert Bruce Schneier quipped, “So now it’s easy to cut class; just ask someone to carry your shirt around the building while you’re elsewhere.”

THE INQUIRER’S GUIDE TO FREE ANTI-SPYWARE

Spyware is nasty. As insidious as a virus, it sneaks onto your PC, slows it to a crawl then sits in the background watching what you do and ensuring that you get even more spam – as well as other dubious pleasures such as pop-up adverts.

Most spyware gets unknowingly installed in the guise of something useful. For instance, you get a free program which includes adware. Often, they do tell you, but it is buried deep in the licence agreement that nobody reads anyway, for instance. Before installing a freebie, look it up on Google. See if anyone’s reported problems. Sites like download.com or Tucows often have user reviews – badly written and unreliable, but they will give you a hint. Another common vector is browser toolbars for Internet Explorer. These are usually more trouble than they are worth. Avoid them. In fact, avoid IE altogether, but that is another story. Some “freeware” apps are ad-sponsored. It is seldom worth it – look around and you will usually find something just as good that is genuinely free. In the same category but more directly evil are Trojans, which pretend to be legitimate programs with the aim of stealing passwords or other confidential information.

A thoroughly infested PC will slow to a crawl and there is little you can do. Some adware does have an uninstaller. If you can find it, often they are additional add-ons. Chances are it will not work anyway. Most of the really nasty stuff simply conceals itself out of sight. About the best option is, as ever, to backup, nuke, reinstall and reload. But prevention is better than cure.

The official way.

Allegedly, it has even affected His Billness himself, which is possibly why he bought antispyware company Giant at the end of 2004. Giant Antispyware is now “Windows Defender” and forms part of Vista, but if you are on XP, it should be your first port of call.

It may not be the most powerful, but it is non-intrusive and it spots many of the nasties. Most of the third-party offerings warn you about non-threatening junk like browser cookies and MRU (Most Recently Used) lists, for instance, chiefly because showing lots of suspects makes them look like they are keen and really doing their job. You can safely ignore this stuff. Just worry about actual programs that they find. For once, the Microsoft offering has a lead here – it does not sweat the small stuff because that would make tit look bad, so it only shouts when it is important.

There is a snag if you are still on Windows 2000, though. When Microsoft released the final version of Defender, it nobbled the program so that it will not install on 2K. It actually works just fine – the installer just will not run. On W2K, Defender is still a good bet – it is small, fast, simple and does not nag you. (You can tell Microsoft bought it in, can’t you?) All you need to do is make a one-character change to the installer ...

The best of the rest.

Spyware programs tend to be paranoid. Not only do they report every last “Recent Document” and cookie as a threat to your privacy, but the resident scanners will all too often pop up little warning boxes asking you if it is all right for programs to make Registry changes or to install themselves to run automatically. If you are a privacy freak or are really worried about this stuff, fine, but most of us probably do not want to be molested with prompts all the time. (In this sounds like you, you had better avoid Vista.)

Incidentally, if you are annoyed by unnecessary programs which automatically run when you boot or log on, Mike Lin’s Startup Control Panel is an easy way to disable them. It is not much help against stealthed spyware, but it is an easy way to turn off redundant Quicktime icons and other little resident helpers you do not actually want. It just adds an extra icon to the Control Panel, allowing you to see – and optionally disable – all the half a dozen or so different categories of auto-running programs.

There are two well-known names in free antispyware. One is a one-man effort, given away pro bono publicum, and the other is a freebie taster of a commercial product, complete with nagging.

Tip: Unlike firewalls and anti-virus, it is generally safe to run multiple anti-spyware programs at once. You just get more warnings. You probably ought to be running Defender anyway, but you might want to add another for extra protection.

Spybot Search & Destroy is the work of lone coder Patrick Kolla and he offers it for free – although he does, perfectly reasonably, request a donation if you find it useful. It is pretty good at rooting out many lurking horrors and has a handy “immunize” function that can, at least theoretically, act as a prophylactic. It comes with two optional resident bits, one to watch for suspicious Registry changes and one that keeps an eye on Internet Explorer. If you have Defender installed and want a quiet life, you can skip these and save yourself a lot of scary warnings.

AdAware 2007 Free comes from German vendor Lavasoft and is the free version of a commercial product, AdAware Pro. Like Spybot it offers a very thorough scan, though if you run both scans at once, apart from being dog-slow, they can erroneously flag one another as being suspicious. Beware.

If it is too late and you are already infected, HijackThis could help. It is recently changed hands from its original developer over to security vendor Trend Micro, but it is still around, still useful and version 2 is in beta. It lets you lift the lid on Windows and both see and manipulate what is going on underneath – all the various Browser Helper Objects and so forth. The snag is that it is an intimidating list and you need to be a Windows guru to spot anything that is out of line, but take a look anyway. It is certainly informative.

Once again, sadly, although there are lots of freebies, few are open source. Spyware just does not happen on Unix, mostly because of strict authentication and user accounts that cannot install software – and on Linux, an absence of closed-source commercial “freeware”. There is an interesting offering from France, though – WinPooch. This can run as a background monitor, alerting you to suspicious activity. It also integrates with ClamWin, giving that FOSS antivirus program the ability to act as a background monitor as well as an on-demand scanner. Worth a look if you favor open source and do not mind doing a little manual configuration. But there are reports of Windows crashes due to it, so exercise caution.

FEDS FIGHT RULING ON PATRIOT ACT

Claims they should not have bother with getting annoying little warrants.

The U.S. government has appealed a ruling that it should not be able to get personal phone, e-mail and financial records without a judge’s approval, as now allowed under the USA Patriot Act.

The decision to appeal the September ruling by U.S. District Judge Victor Marrero prompted the ACLU to put out a release quoting the unidentified plaintiff in the lawsuit. Identified only as the president of a small Internet service provider who has faced a gag order for more than three years, the plaintiff complained that the statutes in the act “give the government far too much power and that the secrecy surrounding the statutes is excessive.”

The Patriot Act prevents Internet service providers and others from telling their customers – here or abroad, citizens or not – if the government has demanded private information from them. The law also lets the government, by means of a so-called national security letter, or NSL, to impose gag orders that prevent the recipients of the letters from acknowledging the probes.

That provision makes “it difficult or impossible for people like me – people who have firsthand experience with the NSL statute – to discuss their specific concerns with the public, the press and Congress,” the plaintiff, called John Doe by his lawyers, said in the press release.

In March, the government released a report showing the FBI issued approximately 8,500 NSL requests in 2000, the year before the passage of the Patriot Act. The number of requests rose to 39,000 by 2003 and to 56,000 in 2004 before falling to 47,000 in 2005. Most of the requests sought telephone billing records, telephone or e-mail subscriber information or electronic communication transactional records.

The judge said the NSL statute was so improper that to let it stand might turn the law into “the legislative equivalent of breaking and entering, with an ominous free pass to the hijacking of constitutional values.” Marrero stayed the effect of his ruling so it could be appealed. He wrote that most companies and other recipients of the security letters have little or no incentive to challenge them, and only two cases have been filed in federal court. The letters let the government unmask Internet users who speak anonymously online and obtain lists of all e-mail they send and receive, Marrero wrote.

THE WAR ON TELEPHONE PRIVACY

A perfect example of the integrated threat that U.S. foreign policy and federal domestic regulations pose to the freedom, privacy, and well-being of the American people is the current telecommunications controversy. Soon after the 9-11 attacks, the feds approached various U.S. telephone companies and asked them to illegally share private information about their customers. The argument, of course, was “national security” and the “war on terror,” the magic words that have come to justify all sorts of federal wrongdoing since 9-11 (e.g., torture, the invasion of Iraq, cancellation of habeas corpus, indefinite incarceration, and denial of due process).

In a lawsuit filed in U.S. District Court, the plaintiffs are alleging that some of the telephone companies agreed to cooperate with the feds, illegally and secretly sharing their customers’ private information with them. If the allegations are true, the obvious question arises, Why would these companies choose to become secret informers for the feds rather than fight to protect the rights and interests of their customers?

One possibility, of course, is that they fell for all the “national security, war on terror” nonsense, just as many other Americans did, failing to recognize that such nonsense has always been the time-honored way that governments seduce people into giving up their rights and freedoms for the pretense of security.

But there is another possibility, as former Qwest CEO Joe Nacchio can attest. Unlike the other telephone-company CEOs, Nacchio refused to play ball with the feds, deciding, correctly, that the federal request was illegal and deciding, correctly, that he had a duty to protect the privacy of his customers. What was Nacchio’s reward for such heroic action? The feds indicted him and convicted him of a federal crime, for which he has been sentenced to serve six years in a federal penitentiary. What was the heinous crime that Nacchio was convicted of? Insider trading, that heinous economic crime in which there are no victims.

In other words, the message delivered by the feds to the telephone companies after 9-11 was, “You need to play ball with us, or else.” Some of the other companies, in an act of extreme cowardice, apparently folded, kneeled, kissed the rings of federal officials, and did what the feds wanted them to.

Not Nacchio and Qwest, for which they deserve the praise and accolades of every freedom-loving American. At Nacchio’s trial, the federal judge refused to permit him to introduce evidence that his prosecution was retaliation for his refusal to go along with the federal request to violate the law and the rights of his customers. The judge said the evidence was not relevant. All that was relevant, the judge said, was whether Nacchio had sold some of his Qwest stock as a result of insider information he had acquired as a Qwest executive.

There are two important points to note about what is going on here. First, the real purpose of the regulated society is not any protection it provides to people. All that protection talk is just a sham. The real purpose of the regulated society is to keep the business and banking community in line – meaning in conformity with federal policy. The real purpose of the rules and regulations is to serve as a Damocles sword, ready to fall on any business or bank that refuses to go along with the feds.

The feds would argue that the law is the law and that Nacchio broke it and therefore has to pay the price. That is not the point. The point is that in the regulated society, everyone breaks the law, one way or another, which then provides the feds with the option of prosecuting anyone they want whenever they want.

Consider the IRS code. Despite never-ending railing among political candidates about how complex the code is, the feds love the complexity. Why? Because they know that no one can ever file a perfect income-tax return – and especially not wealthy and influential businessmen. If the feds looked hard enough, they could prosecute anyone they wanted at any time for income-tax violations. It is the same with insider-trading laws, Sarbanes-Oxley, hiring illegal aliens, or a multitude of other economic crimes. If they had not gotten Nacchio on insider trading, they would have undoubtedly gone after him for other things. The point is, he refused to go along with illegality and wrongdoing, and they went after him for it.

To add insult to injury, President Bush and some of his federal cohorts in Congress are seeking to give civil immunity to the telephone companies that allegedly chose to become federal informers. They are trying to get Congress to pass a law that would prohibit the customers of the telephone companies from suing for the companies’ allegedly wrongful (and cowardly) misconduct. In other words, become a federal informer and we will protect you. Refuse to do so, and we will send you to jail.

What is the difference between neighborhood captains in Castro’s Cuba, who report people’s activities to their government, and U.S. telephone companies who report people’s activities to their government?

FEDERAL PROSECUTORS WITHOUT CONSCIENCES

Stealing lives because they can.

“There’s no way to rule innocent men. The only power any government has is the power to crack down on criminals. Well, when there aren’t enough criminals, one makes them. One declares so many things to be a crime that it becomes impossible for men to live without breaking laws. ~~ Dr. Ferris, a bureaucratic parasite, explains the governing principle of “soft totalitarianism” to industrialist Hank Rearden in Atlas Shrugged

The April 28, 2006 press release from Randy G. Massey, Acting U.S. Attorney for the Southern District of Illinois, emitted the familiar stench of bureaucratic self-congratulation. It announced the indictment by a federal grand jury of 27-year-old Katie R. Heath for “conspiracy to manufacture, distribute, and possess with intent to distribute over 500 grams of methamphetamine in Saline County and elsewhere in the United States.”

Miss Heath, the announcement explained, was taken into custody by bold and heroic law enforcement officers during a “pre-dawn sweep.” Some measure of the seriousness of the crimes allegedly committed by Heath, we are to understand, can be found in the maximum prescribed penalties: Up to life imprisonment and a $4 million fine. Katie Heath’s case does present one substantial problem. At the time of her arrest she was neither using nor distributing drugs. She had been paroled from prison just three months earlier after serving one year of a 4-year sentence for the same acts listed in the federal indictment.

The plain and obvious meaning of the Fifth Amendment’s prohibition against double jeopardy dictates that what Massey seeks to do here is impermissible. Then again, the division of labor described by James Madison in Federalist Paper number 45 – with the scope of federal criminal prosecutions limited to “few and defined” matters, none of which deals with narcotics – almost certainly means that Massey should not have his job in the first place.

In the 1922 case U.S. v. Lanza, the Supreme Court devised a way to nullify the Fifth Amendment’s guarantee against double jeopardy. It created a perverse variant of the concept of federalism by describing the states and the federal government as different “sovereignties ... deriving power from different sources, capable of dealing with the same subject matter within the same territory.”

Appropriately, the “subject” of the enforcement action leading to this decision was the demented effort to prohibit production and consumption of alcohol, the direct antecedent to our contemporary “war on drugs.” It might be remembered that this “dual sovereignties” concept was employed in the early 1990s to justify a federal “civil rights” conviction of officers involved in the Rodney King arrest, after they had been acquitted by a local jury.

Notwithstanding the tortured sophistries offered by people who subsist on unnecessary human misery – that is, servants and employees of Leviathan – it is clear that Katie Heath was facing double jeopardy. Of that troubled young mother, Federal Judge J. Phil Gilbert has said, “She is no saint. She got caught up in drug addiction and made bad choices that resulted in her spending a year in state prison.” Once she was paroled (the term “parole”, by the way, is a synonym for “acquittal” and close kindred of the verb “to forgive”) Katie went to school, held down a job, and tested clean for drug use. Judge Gilbert points out that after her indictment Katie made a good faith effort to cooperate with federal prosecutors.

Nevertheless, Massey decided to “enhance” the charges against Heath so that she would face a mandatory minimum sentence of 20 years in prison. That “enhancement” must be viewed by honest people as the creation, after-the-fact, of a new offense from the raw materials provided by the same acts for which Heath had already been punished.

Why did Massey and his comrades in the U.S. Attorney’s Office do this? “Because they can,” answers Judge Gilbert. That phrase, and variants of it, is the final answer of the bully, the thug, the tyrant, the torturer. It would serve quite nicely as the official motto of the emerging Homeland Security State.

Judge Gilbert does not have a reputation for leniency. Yet this spectacularly corrupt and abusive decision provoked him to resist. When Heath attempted to plead guilty to the manufactured federal conspiracy charge in the forlorn hope of receiving a relatively light sentence, Gilbert simply refused to accept the plea. Gilbert’s apparent hope – as forlorn as Heath’s – was that a there was a human being inside the officious, power-intoxicated creature called Randy G. Massey, and that said human being would be susceptible to a sense of decent shame over this act of gratuitous official sadism.

But federal prosecutors appear to be drawn from a pool of beings immune to such decent and elevated sentiments. Additionally, federal sentencing guidelines given prosecutors broad and unaccountable discretion in these matters. So Massey and his comrades applied successfully to the 7th U.S. Court of Appeals for a writ of mandamus, which would compel Judge Gilbert to impose the desired sentence. Gilbert responded by doing something perilously close to the honorable thing. He recused himself from the case, rather than accepting Heath’s guilty plea and thereby sealing her fate. The unambiguously honorable thing would be for Gilbert to resign and join the movement to end the “war on drugs.” Perhaps in time the judge will do so.

“Prosecutors are driven by statistics and a desire to prevent judges from exercising any control over the sentencing process without regard for the individual,” observes Gilbert. “Although not rising to the level of mean-spiritedness, the words ‘arbitrary’ and ‘capricious’ come to mind.”

Well ... no. “Mean-spiritedness” is a term used to describe criticism, not the theft of two decades of a woman’s life on a patently dishonest pretext. Katie Heath was not able to utter a syllable to criticism, lest she be accused of “non-cooperation” with the Feds. Gilbert – as far as I know – is under no similar restraints. He ought to rummage around in his rhetorical nap-sack in search of more potent imprecations and hurl a few of them in Massey’s direction.

THE WAR ON THE UNEXPECTED

We have opened up a new front on the war on terror. It is an attack on the unique, the unorthodox, the unexpected. It is a war on different. If you act different, you might find yourself investigated, questioned, and even arrested – even if you did nothing wrong, and had no intention of doing anything wrong. The problem is a combination of citizen informants and a CYA attitude among police that results in a knee-jerk escalation of reported threats.

This is not the way counterterrorism is supposed to work, but it is happening everywhere. It is a result of our relentless campaign to convince ordinary citizens that they are the front line of terrorism defense. “If you see something, say something” is how the ads read in the New York City subways. “If you suspect something, report it” urges another ad campaign in Manchester, UK. Administration officials from then-attorney general John Ashcroft to DHS Secretary Michael Chertoff to President Bush have asked us all to report any suspicious activity.

The problem is that ordinary citizens do not know what a real terrorist threat looks like. They cannot tell the difference between a bomb and a tape dispenser, electronic name badge, CD player, bat detector, or a trash sculpture. Or the difference between terrorist plotters and imams, musicians, or architects. All they know is that something makes them uneasy, usually based on fear, media hype, or just something being different.

After someone reports a “terrorist threat”, the whole system is biased towards escalation and CYA instead of a more realistic threat assessment. Watch how it happens. Someone sees something, so he says something. The person he says it to – a policeman, a security guard, a flight attendant – now faces a choice: ignore or escalate. Even though he may believe that it is a false alarm, it is not in his best interests to dismiss the threat. If he is wrong, it will cost him his career. But if he escalates, he will be praised for “doing his job” and the cost will be borne by others. So he escalates. And the person he escalates to also escalates, in a series of CYA decisions. And before we are done, innocent people have been arrested, airports have been evacuated, and hundreds of police hours have been wasted.

This story has been repeated endlessly, both in the U.S. and in other countries. Someone – these are all real – notices a funny smell, or some white powder, or two people passing an envelope, or a dark-skinned man leaving boxes at the curb, or a cell phone in an airplane seat. The police cordon off the area, make arrests, and/or evacuate airplanes. In the end the cause of the alarm is revealed as a pot of Thai chili sauce, or flour, or a utility bill, or an English professor recycling, or a cell phone in an airplane seat.

Of course, by then it is too late for the authorities to admit that they made a mistake and overreacted, that a sane voice of reason at some level should have prevailed. What follows is the parade of police and elected officials praising each other for doing a great job, and prosecuting the poor victim – the person who was different in the first place – for having the temerity to try to trick them.

For some reason, governments are encouraging this kind of behavior. If you ask amateurs to act as front-line security personnel, you should not be surprised when you get amateur security. Encouraging people to raise an alarm every time they are spooked only squanders our security resources and makes no one safer.

We do not want people to never report anything. A store clerk’s tip led to the unraveling of a plot to attack Fort Dix, and an alert Southern California woman foiled a kidnapping by calling the police about a suspicious man carting around a person-sized crate. But these incidents only reinforce the need to realistically assess, not automatically escalate, citizen tips.

Equally important, politicians need to stop praising and promoting the officers who get it wrong. And everyone needs to stop castigating, and prosecuting, the victims just because they embarrassed the police by their innocence. Causing a city-wide panic over blinking signs, a guy with a pellet gun, or stray backpacks, is not evidence of doing a good job. It is evidence of squandering police resources. It causes its own form of terror, and encourages people to be even more alarmist in the future. We need to spend our resources on things that actually make us safer, not on chasing down and trumpeting every paranoid threat anyone can come up with.

SUBPOENAS IN AIPAC SPY CASE COULD HELP AWAKEN U.S. TROOPS ON WHO THEY ARE REALLY FIGHTING FOR

Paul Wolfowitz, the first person to suggest to George W. Bush that the U.S. use the 9-11 attacks as an excuse to remove an old enemy of Israel – Iraq – is among those who will receive subpoenas to give their testimony in the ongoing and under-reported case of two American Israel Public Affairs Committee employees, Steve Rosen and Keith Weissman. Rosen and Weissman are accused of conspiring to receive and disclose classified U.S. defense information over a five year period from 1999 to 2004.

In addition to neoconservative former Defense Secretary Wolfowitz, current Secretary of State Condoleezza Rice, former Deputy Secretary of State Richard Armitage, former Undersecretary of Defense Doug Feith and 11 other former and current high ranking government officials and neocons will receive subpoenas to give their testimony that it is standard operating procedure for U.S. government officials to work closely with AIPAC and the Israel lobby.

The judge made public his decision to issue the subpoenas on November 2. To date, I have not seen this important decision mentioned on any electronic news sources. I have only seen it online and in mostly Jewish sources. According to the Jewish Telegraphic Agency, the global news service of the Jewish people, if the subpoenaed neocons and government officials do give their testimony, “they could end up shedding unprecedented light on the Bush administration’s inner workings and the government’s dealings with the pro-Israel lobby.” If this happens, and if the media gives it the attention they are morally obligated to give it, but never do, those who fill the ranks of the government’s military machine, as well as all Americans, will see how the government really works! They will see a very obedient herd of gutless politicians serving their masters regardless of the cost to their constituents and country.

Some points likely to come out could bring us to an honest understanding of why 9-11 happened in the first place. It was not because the Muslims hate our “freedom,” or because they hate the fact that women are allowed to drive in America. I believe the biggest reason is U.S. support for Israeli aggression. This is the reason most overlooked, ignored and lied about by the media and government.

Another fact that would be made evident is the raw hypocrisy of Bush, the government and Israel. All three make claims that they want to see democracy take root and flourish in the Middle East. The lie of this pretension is painfully evident when we look at the Palestinian elections.

One thing I sincerely hope this spy trial will do is shed enough light on the Israeli lobby to weaken it so it cannot get a new war started with Iran. AIPAC has been pushing the U.S. government to war with Iran for over a decade. It now seems that 2/3 of American Jews want war with Iran, while half of Gentile Americans also do. This shows the power of AIPAC and the Israel lobby to manipulate peoples’ thinking to the point of their own destruction.