FATCA, Debt And The New Economic War
A few years
back (well more than just a few actually) there was a female
American comedienne from the Boston area that had a monologue
about the strange attributes of men. One thing she observed
was that men spend their entire lives looking, searching for that
one wonderful and perfect woman that will just leave them
alone. Most men will get that joke and think it quite funny
because there is an element of truth to it, whereas some women
might not. But, the point to be made is that this also
applies to organized ethnic groups, societies and nations.
In other words, in general, it is human nature that we want to be
governed by our own, close to home, with the least amount of
interference or hassle as possible. This is just human
nature and something that crosses lines culturally. Just
like the men referenced in the monologue, people might like to be
married so to speak (or better said a citizen of a country or
member of a community) but with the least amount of demands (for
lack of a better way to say it).
A historical reference is of course the American Revolution and
pretty much any other revolution for independence from a foreign
ruling power. In terms of the Americans (or the colonials as
some of the British still like to call them), the molestation was
what they interpreted as unfair abuses of power by the British
monarch of the time in terms of civil liberties, not to mention an
economic choke hold on free commerce from the monopoly of the East
India Company (and mercantile trade policies in general). In
more recent years we have seen the trend of self rule cut across
ethnic and social divides, with perhaps economics taking a back
seat. The former Yugoslavia comes to mind in this regard,
and some of the other Eastern European nations as well (these
nations were in fact artificial constructs resulting from map
redrawing that occurred after the first world war).
Looking at more contemporary events, there was a very recent
referendum voted upon in Scotland whereby full independence was
the topic on the table. So we can conclude that this idea or
concept of desirous self rule is alive and well even today.
And of course both the past and current issues still involve taxes
(and what comes back in terms of services versus what is paid out
in taxes), and perhaps what are perceived as inequitable dictates
from a seated government far, far away that may or may not be
beneficial for the ruled in the other country.
The idea of a European Union attempts to buck this natural trend
by creating a super state comprised of many different nations
containing peoples speaking different languages, and with
different ethnicities in some cases. The economics of it all
are a difficulty as well considering the diverse composure of
local economies in these varied countries. Interestingly
enough, a few economists at the time warned that the idea of a
European Union would not work unless ALL facets of economy,
banking, politics, regulatory matters with one central regulatory
entity, law and trade were fully intertwined and directed by one
central governing body. The various European politicians at
the time admitted that they could not get the other
politicians and general citizenry to go along with such a
radical change all at once, but they figured they could at least
get a monetary union through, and thus the Euro Currency was
born. However, as we have already witnessed, varied
countries with varied needs and interests make the construct very
difficult to manage.
New World Order or Just New World?
The overall
general theme and inherent conflict comes down to those that might
espouse the idea of some kind of centralized government (and maybe
currency as well) and those that would prefer self rule and
independence albeit with friendly cooperation and growth in terms
of relations with others. And in this light we are not
talking about the EU per say but rather a general war of the
worlds as we would call it. The combatants is such a war are
the so-called wealthy developed social welfare states attempting
to maintain their status quo and the emerging or developing market
countries attempting to come into their own. And the weapons
in such a war are economic, rather than military armaments.
The United States especially has been criticized (and we think
rightly so) for playing dirty through all this, although the old
saying is that all is fair in love and war. Spying on friend
and foe alike, debasing their own currency (at the expense and
detriment of other trading partners), attempting to control other
nations through indebtedness and government manipulations of the
free markets either directly or through proxies (equities, bond
markets, gold, and so on) are some of the dirty tricks
employed. All of this reminds me of an old sports coach that
once said if you cannot win fairly, do not play at all.
The emerging or developing markets on the other hand, after having
some varied success at seeing their economies grow (and witnessing
an increase of their own citizens into the ranks of the middle
class and those better off economically in general) want that
paradigm to continue. Indeed one of the things we have
witnessed in recent years has been a rush of US and European
retail chains eager to stake a presence in the Dominican
Republic. Even a US based super market chain has quietly
bought into a local supermarket chain in the Dominican Republic as
well. And why? Because the middle class has increased,
there is more disposable income and the economy is still growing
(and has been since 2008) albeit at rates less than the 8 percent
annual GDP that was the case more than a decade ago (but still
positive none the less).
So what we have then is a clash of two different general economic
policies or ideas confronting each other for dominance, or a clash
of the developed world versus the emerging world. Dr. Paul
Craig Roberts, the former Assistant Secretary of the Treasury for
Economic Policy when Ronald Reagan was President and Ms. Catherine
Austin Fitts, former managing director of the Wall Street firm
Dillon, Read and former Assistant US Secretary of Housing, gives
us some similar insights. Both would seem to suggest that
the existing so-called developed world has their own ideas and
agenda about how the paradigm of capitalism, banking and economy
should work FOR THEM, and the emerging markets or developing world
with yet another set of goals or agendas for their own
benefit. The question then becomes which one of these sets
of ideas and goals is better overall for the world populace in
general?
The conclusion is the emerging market view because it basically
espouses expanding economic growth to raise the global tide in
order to lift all boats (using an old economic metaphor) under an
honest, free and fair trading paradigm. The policies and
activities of the United States and the developed world are in
contrast one of ever increasing debt, corporate welfare,
artificial market and currency manipulations and economic activity
from government stimulus rather than true free market capitalistic
growth. To be very fair, emerging market nations such as
China have been criticized for it's own form of corporate welfare
or playing favorites in terms of local Chinese companies, so our
comments are not meant to seem naive or portray the developing
world as playing more fairly than the rest. Nor is it
correct to say that politicians and central bankers in these
emerging markets are necessarily that much wiser than their
developing world counterparts. But, simply put, the
developed world is engaging in capital destruction (with the
policies they are following) whereas the emerging markets want
true capital growth (that is the basic difference between the
two). Debt issuance and an economy that has activity because
of government stimulus (funded with debt issuance) will not result
in any kind of viable long term success. Economic
growth that comes from private investment, trade and true market
activity is the longer term sustainable path.
The so-called modern wealthy developed nations have some very
serious problems to contend with, with demographics and stress to
make good on all the social welfare promises just one of many
issues they are facing. However, they have chosen the path
of transferring previous bad private debt onto the balance sheets
of their own respective central banks and governments while
attempting to convince the public that they can economically grow
their way out of this debt. That is not going to
happen. In addition, both the individual tax base and
the manufacturing tax base has been pushed abroad, leaving a
permanent long term reduction in tax revenues at a time when
government costs and expenditures (public social welfare pension
programs and the like) are going up. And this leads us to
revisit our Trading Places analysis that we talked about more than
a decade ago.
Trading Places: The Middle Class Migration
Awhile ago, in fact what probably is
more than 15 years at this point, we previously opined that there
will be a trading of places in terms of the solvent well educated
middle class in the developing world with the poor and uneducated
in the emerging markets. We developed this theory by simply
looking at the various things going on, such as outsourcing,
demographics, the huge baby boom generation heading for
retirement, government policy in the developing nations at the
time and a host of other data points. In short, we contended
that the financially able in the developed nations will move to
other emerging market jurisdictions whereby the tax rates are
lower, cost of living is less, and growth opportunities
better. We believed they would do so as a means of survival,
as such persons surely will be the scapegoats as such governments
scramble to tax whomever is still standing to cover their own
proliferate spending. Some will call this selfishness on the
part of those looking to escape the government leviathan but what
are the other options? Stay and go broke?
In contrast we believed the poor and uneducated from those very
same emerging markets would continue to attempt migration to the
developed countries still believing the myth and fairy tale of
fortune and economic opportunities. Of course the poor and
uneducated usually do not read foreign newspapers nor have access
to the Internet and thus still have no idea what is really going
on (the well off and well educated in the emerging markets do, and
for that reason have no interest at all in moving to the US or
Europe). In fact, in the Dominican Republic, I still to this
day have locals asking me why so many foreigners are coming to
their country when they (mainly the poor and uneducated local
citizens) still want to go there (to the US or Europe). I
cannot convince them differently because when I try to do so they
think my motivation is to deprive them of the opportunities they
think they will find. In any event, because of this
phenomena (which has been going on for quite some time already) we
now have the push back from the tax hungry so-called developed,
industrialized modern nations (and the joke is that the industry
has gone to China, Mexico, Malaysia and many other low wage
jurisdictions, so the developed countries are no longer that
industrialized in terms of the manufacturing that remains).
But the point to be made is that the well heeled and well educated
have been leaving for many years, and their replacements are the
foreign poor and not very well educated (on the whole or
aggregate). If you extrapolate that out over a few decades,
the taxes paid by the person earning minimum wage does not equal
the taxes paid by the person earning say US$100,000 or the
equivalent in Euros or Pound Sterling. So, this is another long
term drag down on the tax revenues for the respective
governments. And thus we now have the respective world wide
taxation chase game by the United States as the first major player
in all this. In other words, if they cannot get them stay
and if the new immigrant replacements are not paying in enough
taxes to replace what was lost, chase them globally to pay up
regardless. Which of course leads us to this FATCA nonsense
and similar initiatives, but such an idea is in essence an attempt
to take money OUT of the smaller emerging markets (and or
so-called tax havens) and sending the tribute back to the
respective leviathans. You were wondering when I was going
to get to FATCA, didn't you (considering it was mentioned in the
title)?
FACTA
In terms of FATCA and some other
more recent initiatives (you were born here, so we own you),
apparently the United States now holds the opinion, like the
Mafia, that once you are in there is no getting out. They
have now taken it so far as to make the birth place of a person
the single issue in determining tax liabilities (just ask London
Mayor Boris Johnson, who is a British Citizen that happened to be
born in the US because his mother was pregnant while his parents
were temporarily stationed there, and was recently chased by the
American IRS for taxes because of it). Of course it is
interesting to note that after pressuring an extended list of
countries to sign on to the FATCA reporting initiative, the US
suddenly got cold feet when it came to reciprocity in terms of
signing the related G-20 GATCA reporting initiative (which would
have required US based banks to report foreign accounts to their
respective governments). In any event, once again, the
intended benefit of world wide tax report (and collection as the
next step) is only a one way street, in as far as the US is
concerned. Which brings us to the point of why we think it
will eventually be negated by more than a few foreign nations
going forward (and yes I know the Philippines just recently signed
onto FATCA, making my immediate argument seemingly weak).
The teeth or spanking in terms of foreign nation non-compliance to
FATCA is a 30 percent appropriation (with-holding is the more
polite term) of any income or earnings generated by the respective
foreign banks inside the US. Where or how would they do
this? Well, if you understand how correspondent banking and
international wire transfers actually work, the money never leaves
the home country, it just gets retitled. So, a Swiss Bank
for example, offering any kind of accounts and or transactions in
US Dollars would have what is known as a correspondent account
with some US based bank or financial institution where at least
some of it's customers US Dollars are parked (but the US
correspondent bank does not know the respective owners of such
funds, rather the account is in the name of the foreign bank and
only the foreign bank knows who owns what). So, in theory,
with the threat of the US Government going in and helping
themselves to the foreign bank's US Dollars held with the US based
correspondent bank, many of these foreign banks (and or respective
governments) have signed onto FATCA out of such a fear.
After all, who wants to be subject to a robbery?
But, what if no one wanted the US Dollar any longer and there was
no such accounts (or they still had them with fairly small
balances)? This is the Aha moment you have been waiting for,
because if world trade is now conducted in Yuan, Rubles, SDR
electronic funny money or anything other than the US Dollar, the
jig is up (and why we think the IMF was recently pressured NOT to
allow the Yuan into the SDR currency basket). The
confiscation threat goes away because theoretically there probably
would be nothing in these accounts to confiscate. But in
addition to that, what is the incentive for an emerging market
country to discourage foreigners from investing in their
respective banks (and in their country in general)? Why
bother to conduct some banking in Toga-Toga when even though the
interest rate might be good, when there is no tax savings or tax
advantage? Granted, in our hypothetical nation of Toga-Toga,
all bank account interest might be tax-free, but if they are going
to report it someplace else and maybe even be forced to act as tax
collection agent for another government, what is the point and
benefit for the investor? So, while such initiatives chasing
citizens around the world for taxes (as a mother might run after
an active 3 year old toddler in the shopping mall that decided to
suddenly do a try out for the New York City marathon with said
young mother as catch me if you can referee), what is the benefit
for the rest of the world?
In summary, all these things come down to the mature developed
market nations in conflict with the emerging market nations in
terms of how and what the future economic landscape is going to
look like, and yes it is a conflict, struggle or economic war of
sorts. The emerging markets want real GDP growth because
they have very large populations comprised of young people that
will need jobs when they enter the work force as adults (not to
mention the desire to pull up more of the existing populace into
the middle class). On the other side we have the US and the
developed world that are seemingly on a slash and burn viking
rampage using economic policy instead of Swedish steel, and are
working on a money – asset grab paradigm to stave off insolvency
(stealthily brought about by trying to in-debt the smaller nations
first, then grabbing the assets when they cannot pay). Hard
to say at the moment how exactly this will all pan out, but our
instinct is to bet on the emerging markets. They have
already experienced some economic growth success and have learned
to organize themselves in order to band together as one political
collective. And their desirous economic growth model is a
better one. Growth is always better than debt – n'cest pas?
