Who knew? …

… well, Chris Ferrrara knew, because that’s where I discovered this little oddity on my way to finding something else.

Did you know that according to British Common Law, money deposited in a bank is not your money? A bank deposit is not a “bailment” (an entrustment of your property to the bank for safekeeping) but rather an “investment” in the bank.

This bit of common law is why “fractional reserve” banking is legal. Banks can legally lend out many multiples of money they have on deposit. If a bank has $100,000 on deposit, it can loan out nine times that, or nearly a million dollars. This fractional reserve system allows banks to create money out of thin air.

The fractional reserve system is the government-sponsored ponzi scheme that is the basis for the various housing and property bubbles in our history. But I had no idea that it was rooted in British common law saying that bank deposits were investments in the bank!!!

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Good News for the Grandchildren

Here’s a wonderful excerpt from David Einhorn’s speech at the Ira Sohn Investment Research Conference.

I have titled today’s talk Good News for the Grandchildren. By that, I mean that I do not believe that there is a need to worry that today’s debts will be passed on to our current youth…I believe the government response to the recession has created budgetary stress sufficient to bring about the crisis much sooner. Our generation – not our grandchildren’s – will have to deal with the consequences. If we do one thing, let’s stop bemoaning the fate of our grandchildren on this topic. We might take the issue more seriously if we realize that our own future is at risk.

Another Word on Retirement Funds

Yesterday I posted something I considered quite ominous about the FDIC’s involvement with private citizen’s IRA funds in relation to their takeover of the failed 1st Regional Bank of L.A.

Turns out there’s more to the story. Today former congressman Bob Bauman wrote a blog post delineating some other even more ominous items in relation to the possibility of nationalizing pensions and some of the implications of this thinking. Read Bob’s post entitled, “Will Obama Nationalize U.S. Pensions?”

Oh, and yes, the Sovereign Society is always trying to sell something, but they’re good people and I’ve never heard of them abusing their mailing lists.

Land of the Less Free and Home of the “Whatever”

Anecdotal evidence indicates Americans who are able are leaving the country in droves. Among those that are leaving, a significant percentage are also expatriating (that is, giving up the U.S. citizenship). The eastern Caribbean country of St. Kitts/Nevis, which has for years had an economic citizenship program (ie, a way in which a person can purchase their citizenship in St. Kitts/Nevis after a careful and very thorough background check by the authorities there) which they are now considering doing away with because it has become so popular it threatens to destabilize the islands’ sense of identity.

I am acquainted with a few people in this business, among them, Mike Cobb, owner and CEO of ECI Developments, which has created communities primarily for North Americans in Venezuela, Nicaragua, Belize, and Panama, Peter Zipper, Swiss banker who now runs Caye International Bank in Belize, and Doug Casey (whom I can’t say I know, but whom I have met), who is in the process of creating La Estancia Cafayate, an upscale development in Salta, Argentina aimed primarily at North Americans.

All three say that business is booming beyond what they imagined possible before the last U.S. election. If, for instance, you are a banker, administrative assistant in the banking industry, or even a bank teller and are interested in working in Belize, Peter Zipper is in desperate need of people who are experienced in the industry, speak English, and are willing to live in Belize. Business has exploded and he can’t keep up. Even as real estate continues to flounder in North America, real estate companies such as ECI, Coldwell Banker, etc, are expanding in Central America and the Caribbean as fast as they can find experienced agents. Although I don’t have connections in Asia I’m told that a similar influx of Americans (as well as Canadians and Brits) is being experienced by Singapore, Bangkok, Kuala Lampur, and to a certain extent, Hong Kong.

Even Canada is getting an influx of Americans. Newsmax observed, “… [I]mmigration [from the US] into Canada is running at a 4 percent annual rate and foreign applications at Canadian universities surging at a 7 percent annual rate at this time – the reverse brain-drain is in.”

What is driving this flight from the United States to other parts of the world? Two things: the systematic looting of America’s wealth through the printing money and sale of government bonds, and the systematic expansion of government, which has the unpleasant effect of criminalizing everything. (If the health care bill passes in its current form, not having health insurance will be a criminal act, for instance.)

I have contended in my essays over the years that the meaning of being an American is quite different than the meaning of being a Brit, or a German, or a Russian, etc. Countries with a history have a motherland to which the people are committed. American identity, on the other hand, has far more to do with an ideal than a place or a people. What defines America is not its ethnic identity (a melting pot of a variety of ethnic identities) nor the land itself (other than its expansiveness), it’s rather the ideals of freedom and liberty, and their corollary of limited government.

What has happened since late 2001 is a concerted attack on the very sense of what it means to be American. This attack has taken the form of a breathtaking expansion of government, the criminalization of almost every facet of American life, and the inevitable devaluation of wealth that such an intrusive bureaucratic expansion involves (the USDollar is currently at all time historic lows, making our pay and savings many percentage points less than it was even a year ago). As a result, an increasing percentage of Americans have come to the conclusion that to be American in principle (that is, to stay true to the ideals of America), one must abandon the United States of America.

For the last couple of centuries people came to America for the sake of freedom and liberty. In the new millennium they are leaving America for precisely the same reason.

And this is indeed the problem with a nation that is based on an ideal rather than an ethnic identity or an historic rootedness to the land. The very people who would most likely defend the American identity of freedom and liberty and demand reform are leaving instead. This process skews the remaining population to those who would rather rely on government than self or family for their well-being. Eventually there will be no one left to speak out for the persecuted principles of freedom and liberty and those two founding principles of this grand experiment will be put out of their misery.

Hopefully it won’t come to that, but the future of “the land of the free and home of the brave” is looking bleak indeed. What’s needed now is for those of us who remain to come to the defense of freedom and to begin to seriously oppose the unbelievable expansion of government that has occurred this decade. If we don’t step up and be counted, it may soon be too late.

I Highly Recommend This Article on Economics

I know several of my readers read Gary North’s newsletter. I also know that at this point some of my readers will roll their eyes and smirk because North has had some famous predictive misses, the most infamous being his prediction of a Y2K disaster. He moved to the back woods of Arkansas and stocked up on water, food, and gold. His prediction was so far off, he stayed holed up and below the radar for a couple of years and then moved to the other end of the state. He’s still an Arkansas resident but now lives in the Memphis area.

In spite of some of his more wild-eyed predictions, he’s generally a good economist and forecaster, IMHO. But with his latest exposition on money he has returned to the wild side. Briefly, he contends that we need to return to the gold standard because fiat money is ultimately worthless.

A definition is in order. All currencies in the world at this time are “fiat currencies.” That means their value is set arbitrarily and that they have no intrinsic value. Even the Swiss Franc, which is fractionally backed by gold, is fundamentally a fiat currency because the Swiss occasionally change the percentage that is back by gold, so the “Swissy” is back by less gold today than it was a couple of years ago, and therefore has no intrinsic value, only an arbitrary relationship to gold.

Gary North is an alarmist with an acutely apocalyptic sense of the near future. He also sees the world in black and white. The last several issues of his newsletter have been on the topic of, “What Is Money?” and in this series he makes the claim that the only sensible thing to do is to return to the absolute gold standard.

While I agree with him in broad principle, as do all Libertarians and everyone who accepts the principles of the Austrian school of economics, there is a fundamental flaw in the gold standard. The flaw is that the world economy is bigger than the amount of gold available (about $5 trillion at current US$ levels). If all accounts were settled in gold it would constrict the world economy to the point that commerce would come to a standstill.

It’s a Scylla and Charybdis problem. If the unlimited expansion potential of fiat money is the Scylla of modern economics, then the absolute constriction of the gold standard is the Charybdis. And as the ancient Greek myth reminds us, if you focus exclusively on one monster as you pass through the Strait of Messina you are bound to veer off course and run into the other monster. Gary North is so focused on Scylla, he’s headed directly into the jaws of Charybdis – arguing for a monetary policy that is so constrictive that it would bring about an economic slowdown (or even a stoppage) of historic magnitude.

While it’s clear that Gary North has once again wandered into very dangerous waters, I’m neither smart enough nor knowledgeable enough to explain it well to anybody else. But Paul Tustain recently gave a lecture that explains both the Scylla of fiat money and the Charybdis of the absolute gold standard brilliantly. Tustain was a very successful commodities and currency trader who retired from trading a few years ago to start a company called BullionVault.com (a company I advertise on my site just because I think the service they offer is so important). He was kind enough to post his lecture on the website. It is entitled Towards Hyperinflation and can be found here.

Why am I blathering on about this? I believe that American monetary policy is disastrous and that the disaster is coming sooner than later. But Gary North’s wild-eyed rantings about it tend to cause people to do nothing: who wants to follow the advice of a crazy man? Gary North makes the phrase, “the coming economic disaster” sound crazy, and therefore not worth doing anything about.

In contrast to North, I offer Paul Tustain’s analysis as a level-headed and sensible analysis of what’s coming down the pike in hopes that I can encourage folks to make sensible financial decisions in preparation before the full effect of the actions of the Treasury Dept, the Federal Reserve, Congress, and this (as well as the previous) administration come to fruition.

The Kiss of Death?

[P.S. (I guess this is a “pre-script”). Dot5 Hosting, my hosting site, was down yesterday. I wrote this post Thursday morning (Oct. 1) about an hour before the markets opened, but have been unable to publish it. The S&P dropped 27.23 yesterday – over 2.5% – a massive freefall. We’ll see what happens today.]

I try to avoid financial subjects, especially if they’re of a technical nature. But I the following chart too beautiful (in a frightening sort of way) not say anything. It charts the S&P 500 through the end of September.

Classic bear markets typically follow an A-B-C pattern. The “A” is the first down-leg. It puts a bit of fear in people. That is followed by “B” – a bear market rally which is typically characterized by over-exuberance and hope in spite of the evidence. (By the way, there’s little evidence that things have actually recovered: The next set of home loan resets and another – bigger – round of foreclosures are coming this quarter. The Baltic Dry Index continues to look disastrous. Commercial real estate is teetering on the brink at the moment. In other words, we are suffering classic symptoms of over-exuberance at the moment.)

“B” is followed by “C” – another big and typically vicious down wave which typically takes the market far below the previous low. This leg is often called the “wash out.” On the last day of September the S&P rose up to touch its 20 day moving average. Look at the last two times it did that. In Oct 2008 the market went down 700 pts. The time before that (when things were moving the opposite direction) in Oct 2003, the market went up 500 pts. And one more thing … Notice how often the big, scary moves happen in the month of October?

But don’t try to get greedy and try to short the market on this chart alone; this is no recommendation. This tells us where the market’s going, not how it’s going to get there. When the trend reverses the line often does a “double kiss” of the moving average, so this next move might take a month or a quarter to sort itself out and make up its mind. And, it could just blow through the moving average like it did in June 2003, but world economic indicators indicated that that would happen. This time around world economic indicators are indicating that the bounce is over. All I have to say is, “Look out below!”

Derek and the Bad Men, pt 2

Over the last many months the United States has been putting a great deal of pressure on offshore financial centers—what the politicians prefer to call tax havens. Supposedly, the point of all this pressure is primarily to stop the flow of money to terrorists and secondarily to find Americans who are not paying their taxes.

But stopping money laundering and tax avoidance isn’t as easy as that. The problem with money laundering is not that certain jurisdictions allow it, but rather that every jurisdiction has loopholes which can be used if the terrorist is smart enough to figure out how to do it. The more complicated a jurisdiction’s tax code, the easier it becomes to launder money.

This means that, in spite of the politicians’ rhetoric, shutting down a supposed tax haven has little effect on money laundering or tax avoidance and almost everything to do with publicity in an election cycle. In fact, the draconian pressures brought against some of the famous “tax havens” in the Caribbean have had the effect of putting islanders out of work and sometimes into situations of dire poverty without having any meaningful effect on either money laundering or tax avoidance. When one cuts through the rhetoric and double speak and shines the light of day on what’s really going on, what we find is that American politicians are playing a shell game with ordinary people’s lives while the real problem lies elsewhere.

To illustrate, Nancy Pelosi brought a list of around a hundred corporations with American owners whose headquarters were located in Bermuda. “None of these corporations had paid any U.S. income tax in 2007!” she stormed from the microphone. What she conveniently failed to say is that 85 of those companies lost money in 2007 and that’s why they paid no taxes. (Even American corporations like General Motors lost money in 2007 and didn’t pay any taxes.) Another percentage had invested in tax reduction programs such as natural gas exploration, which receives a huge tax credit that Pelosi strongly supports because so much natural gas drilling occurs in California. In other words, all those corporations didn’t file taxes because of the American tax code. It had nothing to do with their location in Bermuda.

And this brings me back to Derek Sambrook, who I mentioned in yesterday’s post. His firm, Trust Services, S.A., has an investment newsletter called The Offshore Pilot Quarterly. As Bob Bauman brought to my attention (a link to his blog can be found on the right side panel), in the current issue he writes the following about the jurisdiction that is the king of the world when it comes to money laundering and tax avoidance practices:

I had read about one financial services jurisdiction whose companies had been involved in the laundering of some $36 billion from the former Soviet Union; that is an amount that could finance the present Panama canal expansion project at least six times over. In this same jurisdiction, Russian officials had used companies to unlawfully divert $15 million in international aid meant to fund a safety upgrade of former Soviet nuclear power plants and in another case an individual had set up more than 2000 companies, established bank accounts for them without disclosing identities, and then passed some $1.4 billion through the accounts. It turned out, in fact, that one of those companies had received over 3,700 suspicious wire transfers which, during a two-year period, added up to just over $81 million. But the authorities could not pursue this case because they were unable to discover who owned the company due to the lax laws of the jurisdiction.

Don’t we wish Congress would go after this jurisdiction and stop their illegal activities instead of trying to shut down the tiny players in the financial services game such as Caribbean nations like Bahamas, Turks and Caicos, etc?

The problem is, the financial services jurisdiction Mr. Sambrook is talking about is the United States.

And this gets to the heart of the lie that is being foisted on the American people during this election cycle. Money laundering and tax avoidance is not rooted in the jurisdictions that promote this sort of thing. Every country tied into the international financial system is very careful to not knowingly allow illegal practices. (Well, there may be a couple of exceptions, such as Cyprus and the Marshall Islands, but even those historically loose jurisdictions have been busy kicking out the bad guys in the last several years.) But it’s a cat-and-mouse game. The crooks come up with a new scheme and the various countries come up with a new way to block the scheme, so the crooks come up with another scheme, etc.

And the dirty little secret is that the more complex the tax code, the easier it becomes to find a loophole and use that jurisdiction to do illegal things. Guess who has the most complex tax code in the world, and thus, the easiest to scam? (It’s a rhetorical question, but in case you don’t know, it’s not Turks and Caicos, it’s the U.S.) So it is that on a comparative scale, very little illegal financial activity goes on in places like Turks and Caicos, or Switzerland, Bermuda, or even Panama. It is simply too difficult to get away with it in the modern world. No, the crooks and terrorists go to the places where they can hide in the many cracks, folds, and dark places the tax code allows, such as the U.S. and Britain.

But the legacy of the post 9/11 world is that the United States is only making its own tax code more complex while it goes about trying to destroy every tiny financial services jurisdiction it can bully in the name of fighting terrorism.

If those who were killed so tragically seven years ago knew this was the legacy of their tragic story, I suspect they would be ashamed and upset at how those events have been used to take away American freedoms and frighten hard working people around the world. I know I would be.

Derek and the Bad Men, pt 1

One of the more memorable evenings of my life was spent with Derek Sambrook and his family in a downtown motel ballroom on a steamy hot night in Panama City, Panama. Derek is Managing Director of Trust Services, S.A., in Panama City. He is English but has spent most of his adult life in “the colonies” (various African countries, and now Panama). Granted the Brits never had a significant colonial presence in Panama, but Geoffrey Rush, who played the tailor in The Tailor of Panama (the movie adaptation of John LeCarré’s novel of the same name) was so very colonial British in that role, and an evening with the Sambrooks felt like it came right out of the movie.

The LeCarré book is a spy novel, full of government intrigue where individual lives are held in the balance by arbitrary and faceless governments halfway around the globe. My conversation with Derek had some of the same feel. For the last seven years companies like Trust Services, S.A. have been under a great deal of pressure by the United States to do illegal things. (Specifically, to turn over information about clients that is specifically forbidden by law in their various jurisdictions. Often the punishment is loss of license and prison sentences that are counted not in months, but years.) But in order to understand the full irony of the U.S. demanding that foreigners become felons in their own countries, a bit of history is in order.

Modern international privacy and banking law (as epitomized by Switzerland, Panama, etc.) grew directly out of the two World Wars. Switzerland had a history of banking privacy long before the mid-twentieth century, but during this period the United States and United Nations promoted this body of law as a fundamental human rights issue. During WWII, for instance, both Germany and Italy were freezing all the assets of people (especially Jews) who didn’t agree with government policies. Even when they allowed dissidents to leave the country, they charged them huge “exit taxes,” which were in reality legalized thefts of these people’s life savings. In this way these countries were able to control their wealthy citizens who had the means to speak out against the atrocities that were going on.

After WWII, under pressure from the United States, these practices—huge exit taxes, not allowing citizens free access to foreign bank accounts, etc.—were, if not formally declared violations of human rights, certainly classified as such by the United Nations. It was in this environment that Derek Sambrook entered the international financial business. He was one of the good guys, going to some of the hot spots in the world (first Africa, and then Latin America) helping people protect their lives from the bad guys—those that would blackmail them to gain international support or notoriety.

But all that changed with a stroke of the pen some time after September 2001. In one of the great acts of Orwellian double speak, the United States government declared this whole area of human rights advocacy a shady business primarily interested in supporting terrorism. Sambrook, his company, and companies like it—some of the brave good guys of the world who were carrying out the will of the post-World War human rights agenda of the United Nations—had suddenly become suspects and targets in the U.S. war against terror.

Over the next seven years these very things that the United States had pushed as basic human rights in their fifty year old fight against Fascism and Communism—huge exit taxes and free access to foreign bank accounts, for instance—were made virtually illegal in “the land of ‘the free’ and home of the brave.” Pretty soon IRS and SEC officers (the Secret Service of the modern economic state) were poking around Sambrook’s office and harassing anyone who walked through the front door at Trust Services, S.A.

But Mr. Sambrook is British, and with a stiff upper lip, a cup of tea in the morning and a shot of whiskey at night even these terrors foisted upon him from American officials could be faced. His work must go on! (I kept glancing at the door, waiting for the debonair but creepy Pierce Brosnan (Andy Osnard the MI-5 agent from The Tailor of Panama) to come walking in. But he never did.

Sambrook was a great storyteller. Even if only half his story was true, it was a frightening tale. The next day I visited briefly with former Congressman Bob Bauman (who is a good friend of Sambrook’s) and he assured me that while Derek has been known to embellish a bit for the sake of a good story, what he told me in the ballroom was more true than I could know.

I have a point to this story, and I’ll make that point tomorrow.