October 31, 2014
John Anderson, an American tourist from San Clemente, California, was driving down a poorly-maintained highway when he saw flashing lights in his rearview mirror.
After a brief exchange with the local police officer, Anderson was shocked when the cop started searching his vehicle.
Anderson had $25,180 in US dollar cash in the car, which by the way was not a crime according to the local laws.
When the cop saw it, he told Anderson that we would take it and threatened him with arrest if he protested.
Anderson couldn’t believe it. This is the sort of stuff you always hear about in these third world countries—corrupt cops and state robbery.
Ultimately Anderson gave in; the cop let him go and did not charge him with a crime, but took every last penny in the vehicle.
And for the last two years, Anderson has been trying to unsuccessfully fight it in the country’s Kangaroo court system.
Clearly we should all avoid going to such dangerously corrupt third world countries.
Except in this case, Anderson was in the United States of America. And he is far from being the only victim of this highway robbery known as Civil Asset Forfeiture.
Since 9/11, police forces in the Land of the Free made over 62,000 seizures without charging anyone with any crime, stealing $2.5 billion in cash alone.
The cost of taking legal action against the government is so high, that only about 17% of the victims actually challenged the seizures.
And even then, only 41% of those that challenged have been able to get their money back.
This means that the government has a better than 93% success rate in outright theft.
This is worse than mafia—it’s blatant theft with impunity from the people that are sworn to protect and serve. It’s the kind of thing that is thought to only occur in heinously corrupt countries.
Here’s the good news: many people are waking up to the reality that they’re not living in a free country.
They are starting to understand what I call ‘the criminalization of existence.’
Every last detail of our lives is regulated—what we can/cannot put in our bodies, whether we can collect rainwater or unplug from the grid, how we are allowed to educate our own children, etc.
Driving this point home, a Tennessee woman was actually thrown in jail earlier this month for ignoring a city citation to trim some overgrown bushes in her yard.
This isn’t freedom.
The irony is that, even though many people are starting to realize this, they’re looking to the very institution that has enslaved them to solve the problem.
It is their own government that has created this system.
It is the government that passed US Code section 983 (Rules for Civil Forfeiture), allowing the police to commit highway robbery.
It is the government that continues to arrogantly, brazenly spy on every citizen despite overwhelming public outcry.
It is the government that continues to bring forth new regulation at an absolutely astounding rate.
Just today (this is 100% true), the US federal government published an eye-popping 490 pages of new rules, proposals, and regulatory notices.
To give you a little taste, today’s regulations include:
- Stringent requirements for properly handling spearmint oil;
- New tolerance specifications for a-alkyl-w-hydroxypoly sulfate
- Additional powers awarded to the Department of Education to decide “whether certain postsecondary educational programs prepare students for gainful employment.”
- A decision to centrally manage the 2014 ‘total allowable catch of Pacific Cod’ in the Bering Sea.
There’s even a new rule upholding fines for unauthorized playing of digital recordings.
You can’t make this stuff up—they are regulating nearly everything.
It’s government that does this. They are the problem, not the solution.
Looking to government to solve the problem that they themselves created is completely irrational. They are incapable of righting themselves.
The solution – the power – is with the individual.
On one hand, there’s always the possibility of leaving. The American Dream is still alive and well… it’s just no longer in the United States. Not to mention all the financial, business, investment, and lifestyle opportunities for the taking.
But even if you stay, there are dozens of ways to take back your freedom.
For example, why hold 100% of your savings and assets in that jurisdiction when they could easily confiscate everything?
There are so many great, safe jurisdictions in the world to bank, to invest, to own property, and to store assets. And you can set all of this up without leaving town.
The solutions are out there. It’s time to consider them before becoming a statistic.
P.S. Here’s more proof that the official inflation numbers are completely phony… yet another market that has reached an all time high.
October 31, 2014
The new NBA season started this week. And with it the new salary cap for 2014-15 entered into force. It increased by 7.5% and is now at a record high of $63 million.
Yet another “all time high” in a world where everything seems to be hitting the moon.
NBA’s salary cap increased only marginally in the previous seven years. It went from $55.6 million per team in the 2007-08 season to $58.7 million for 2013-14, an increase of 5.6%.
Now it more than made up for it. Similar increases have been happening across the board in sports. Let’s look at the most popular sport around the world, soccer (or as it’s know in most places, football), as a credible example.
Transfer and wage amounts in soccer have risen markedly especially since the European Central Bank President Mario Draghi vowed to do “whatever it takes” to save the euro two years ago and since the Bank of England has been flooding the market with pounds at an annualized growth rate of more than 20% in recent years.
Everyone expected that it was a giant aberration when Real Madrid paid 94 million euros for Manchester United’s Portuguese star Cristiano Ronaldo in 2009 and that the record will hold for years to come.
Yet it was swiftly broken last year when Real spent 100 million euros on Gareth Bale from Tottenham. Of the ten highest transfers in soccer of all time, seven happened since last year’s summer.
20 clubs in the English Premier League spent a record $1.3 billion on transfers during the latest transfer window in July and August. That blew away the previous high of just over $1 billion set a year earlier.
What’s especially striking is how amounts in the tens of millions have spiraled and are now easily spent on players considered nowhere near the top of the game, such as the combined 100 million euros spent by Zenit Saint Petersburg on Axel Witsel and Hulk from Porto.
Or 32 million euros spent by Real Madrid on a virtually unknown Asier Illaramendi last year, and 40 million euros spent by Manchester United this summer on 19-year old Luke Shaw, making him the most expensive teenager in world soccer, who’s now earning about $200,000 a week at United.
Rapidly increasing sport salaries and transfer fees are just another indication of how much money has been injected into circulation by the world’s central banks in recent years.
According to the Bureau of Labor Statistic’s Consumer Price Index, inflation in the US is at 1.7%.
Instinctively you know that’s nowhere near the truth. The price of everything is going up. Food. Tuition. Health Care. Movie tickets.
Curiously, wage growth hasn’t kept up (unless you’re a pro-athlete). Adjusted for inflation, the average guy is worse off than he was 14 years ago.
And that’s using the official rate of inflation. If inflation rates were still tracked the same way they were until the 1980s, then the actual number today would be closer to 9.4%.
The government has changed the way they track inflation twice since then because a number of government programs include automatic payment adjustments for rises in inflation.
They’re deliberately keeping people misinformed and screwing them over.
And the biggest losers are those that actually, you know, save and produce more than they consume, as well as those on fixed incomes—they get hit the hardest as the purchasing power of their dollars constantly declines.
October 30, 2014
Do you remember all the great economic forecasts that ever came out of the Fed? I don’t either.
My favorite one was when 9 months before the Great Recession kicked off, the Fed Chairman, Ben Bernanke, remarked: “The Federal Reserve is currently not forecasting a recession.”
We all know of course what happened next. These people have a horrible track record. This is not a dig at anyone personally, it’s just simply a fact of how the system works.
So yesterday the Fed, under Chairwoman Janet Yellen, announced that they’re bullish on the economy. That the economy is doing well, so they’re going to stop their asset purchase program a.k.a. Quantitative Easing.
First of all, QE should never have happened. It was the single worst policy decision for the US dollar. The Fed expanded its balance sheet by more than a factor of five using QE in only a few years.
What effect has it really had? The whole world is starting to ditch the dollar, banks have been recording record profits, US and worldwide debt has surged to astronomical figures, and asset prices across the board have reached record highs.
Everything, from house prices, stocks, bond prices and collectibles is simultaneously at all time highs. This is NOT normal.
It has enormously benefited those at the very top. Yet for the average people it has largely been destructive by ruining the purchasing power of their dollars.
So while it’s good that the Fed is ending its destructive program, the reasons behind it are completely screwed up. Their analysis whether the economy is healthy starts from a wrong premise.
We discuss this in today’s podcast.
How wealth can’t be conjured out of thin air. How GDP growth figures aren’t important at all. The three factors that really matter to measure wealth on an individual and macro level. And what you can own that will do well in an inflationary OR deflationary environment.
October 29, 2014
Region VII, Chile
Among the masterpieces of the Italian Renaissance, Leonardo da Vinci’s “La Scapigliata” stands out distinctly from the rest.
The unfinished painting is of a common woman with disheveled hair. It’s remarkable particularly for depicting not the exceptional, but the real.
Part of da Vinci’s genius was the way he was able to capture life—genuine, unaffected reality, often intense detail. His notebooks reflect the same.
Leonardo, in fact, passed on to posterity great details of his finances. We know, for example, that around the time he painted La Scapigliata in the early 1500s, the great master was living in Milan and earning a salary directly from the king.
Leonardo’s journals state that in a ten-month period, he was paid a total of 240 scudi and 200 florins from the king.
The Italian gold scodo at the time was 3.42 grams of gold, and the florin was 3.54 grams. As of today’s gold price, that adds up to an annualized salary of $72,153.24.
Bear in mind, this was Leonardo’s ‘take home pay’ as there was no income tax, meaning his gross salary in today’s world would be just over $100,000 to account for income tax and FICA.
If we were to extend this analogy even further, given that Leonardo was on the government payroll back then as an artist/engineer, we can look up the US government employee pay scale today.
Da Vinci was an accomplished professional to say the least. His age, experience, and job title in the early 1500s would make him the equivalent of a GS-13 rank today (based on current US government pay scale).
And today’s salary for a GS-13 government worker? You guessed it. Right around $100,000.
It’s incredible how effective precious metals are as a long-term store of value. Even going back over 500 years, we can match up Leonardo da Vinci’s salary as being similar to what he might receive today.
Imagine for a moment that time travel were possible, and Leonardo could transport himself to today’s time—he would still be able to spend those coins. Or at least trade them for currency at the same purchasing power.
Now that is a store of a value. This is the real stuff.
Could you imagine the same if you were transported 500 years into the future? Imagine taking your pieces of paper to people of the future and trying to trade for goods and services.
Our paper today would mean nothing to them.
Today’s currency relies on everyone in the system having confidence in it. Or at least being fooled into having it.
But confidence in fiat money is ebbing away with each passing day.
If you want your money to be worth anything at all for your kids and even for yourself later in life, you’ll want to own real assets—productive businesses, land, and yes, precious metals.
As Leonardo’s story shows, these asset classes have been proven to maintain their value over the centuries.
October 28, 2014
Region VII, Chile
The killer lurked outside in the rainstorm, his axe still dripping with the blood of his last victim.
Inside, the sorority girls gossiped about their missing sisters who had mysteriously disappeared the week before.
–Stop me when this sounds familiar… it’s the standard plot of hundreds of b-rated horror movies–
Suddenly one of them hears a noise. It’s the killer, lying in wait to chop her up into kibbles n’ bits. The music heightens, and the audience shouts ‘Don’t go out there!’
We all know what’s about to happen. It’s so obvious.
The girl on screen senses that something’s wrong but she goes anyway, by herself, to ‘investigate’ the noise… and ends up face-first into the killer’s blade.
Ugh. It’s unbearable to watch… not necessarily for the cinematic gore, but for the sheer stupidity of the soon-to-be-victim falling into the killer’s trap, completely oblivious of the warning signs.
Yet as insufferable as much of the genre may be, perhaps it’s true that art is a reflection of life. Just look around—the alarm bells are sounding for anyone paying attention.
Entire nations are insolvent, including many of the bedrocks of Western Civilization itself. Many police forces have turned into violent, abusive paramilitaries. And with civil asset forfeiture on the rise once again, bankrupt government agencies are sinking their teeth into taxpayers’ flesh in record amounts.
Then there’s the banking system, another ticking time bomb in many jurisdictions.
Just like a bad horror movie, there’s no real mystery in how this is going to play out, regardless of whether it happens tomorrow or years from now. The information is out there as plain as day.
In Europe, the ECB just wrapped up its asset quality review (AQR) of eurozone banks, so the data is very fresh.
As you can imagine, there’s a lot of carnage. Some of the largest banks in Europe are in major distress.
Italy’s largest bank (Unicredit) is bleeding cash, having lost roughly 14 billion euros last year. Most of the other large banks in Italy, along with Unicredit, are posting serious capital deficits.
In other words, the banks don’t have strong enough balance sheets to be able to repay depositors’ funds and weather a financial storm.
In Ireland it’s even worse, with some banks there (like Ulster Bank) having a non-performing exposure (NPE) up to 40%. This means that a substantial portion of the bank’s loans aren’t paying up.
The situation is similar in Cyprus where, despite having frozen depositors’ funds last March and establishing capital controls for a year, the banking system there is still pitifully capitalized.
Bank of Cyprus has a whopping 45% NPE ratio and lost 2.1 billion euros last year. Other Cypriot banks aren’t doing much better.
Greece, Slovenia, Portugal, etc. All the usual suspects are there, still posting substantial capital deficits. There are even banks in Germany that are in trouble.
This situation isn’t exclusive to Europe. Across the water there are a number of cracks in the system.
Just last Friday, the Office of the Comptroller of the Currency shut down National Republic Bank of Chicago, costing the FDIC insurance fund $111 million.
And there are a number of banks in the US (including Bank of America) that didn’t fare well in the Fed’s recent stress tests.
Of course, these stress tests are a total farce. Banks get to count US Treasuries as ‘risk-free’ assets even under the most adverse scenarios.
Nothing could be further from the truth. It’s a total absurdity to view the greatest debtor that has ever existed in the history of the world as risk-free.
In fact, given that US Treasury yields are well below the rate of inflation, holding these bonds is actually destructive to bank balance sheets.
Whether you realize it or not, you’re taking a significant risk holding US dollars in a poorly capitalized US bank, or holding euros in a poorly capitalized European bank, and these hazards should not be underestimated.
There are places in the world where extremely well capitalized banks are backed by governments with zero net debt. Some of them actually pay a reasonable rate of return, or allow you to hold stronger currencies.
It makes sense to consider these options soon. Why wait until your bank ends up on some list of failed institutions? Why take the chance when there are so many better options out there?
October 28, 2014
Region VII, Chile
In the early days of human civilization during the time of hunter-gatherers, every day was a struggle.
Satisfying an empty stomach was the primary function of life. Thus, every waking moment was devoted to finding food.
Everyone was simply living from one kill and gather to the next.
This all changed however with the advent of organized agriculture. For the first time in human history, people didn’t have to worry about what they were going to eat all the time. They no longer had to move around constantly.
By cultivating land, human beings could suddenly reap a huge bounty once or twice a year.
Far less effort and risk were required for much greater returns. And people’s energy could be devoted to other things.
Large harvests meant an excess of food could be saved for later consumption. This was, in effect, the first time that humans experienced the concept of ‘savings’.
This ‘food savings’ enabled people to trade; they had excess capacity to barter for the goods they didn’t have. Productivity blossomed and economies prospered.
By then, just a few people working in agriculture could cover the sustenance needs of the whole society.
By trading with those in agriculture, the energies of the rest could be devoted to other pursuits—manufacturing, housing, clothing, recreation, to name just a few.
This is how civilization was able to develop and progress. In fact, everything we have today was made possible by the ability of our ancient ancestors to accumulate savings through agriculture.
It was based on one simple rule: produce more than you consume. This is the foundation of civilization.
Today we turned that completely upside-down. The ‘rich’ countries of today consume far more than they produce.
Governments act as if they can spend interminably without consequence, and they make up the difference by indebting future generations and having central banks print money.
Even for individuals, debt is considered normal. Living off of credit cards is considered normal.
And instead of producing and saving, the high priests of economics tell us to spend our way out of recessions and borrow our way out of debt.
This is a massive departure from our roots. Human beings are not meant to live to such excess.
This is just another indicator that the present debt-based, consumption-driven, paper money system is a major abnormality on a long historical timeline, and it goes against the core tenants of human civilization.
It seems clear that this is due for a change back to more conservative traditions. Even those in charge are recognizing this and taking steps to do something about it.
All over the world, foreign governments and central banks are starting to hold other currencies beyond the US dollar.
Wealthy producer nations are beginning to align themselves with one another and overtake bankrupt, consumptive, debtor nations.
This system is due for radical change; it’s already happening. It won’t reset itself overnight. But like going bankrupt, it’ll roll out gradually, then suddenly.
This makes conventional paper assets far riskier than they appear.
Like our ancient ancestors, the best investment right now are real assets like productive land and profitable operating businesses… not paper claims on the empty promises of government.
October 28, 2014
Region VII, Chile
The Treasurer of Australia (equivalent to the Secretary of the Treasury in the US, or Finance Minister in most European countries) has made a stunning admission.
Joe Hockey stated that the policy of ultra-low interest rates hasn’t spurred economic growth; instead it has mainly had one effect—making rich people richer.
“Loose monetary policy has done its work and unfortunately made the rich richer through rising asset values.”
Even those in charge are recognizing and admitting what devastating effects the voodoo magic of money printing and manipulating the price of money has.
Mr. Hockey also admitted that the alternative of ramping up government spending was limited as well because most countries around the world did not have the money or the ability to “put it on the credit card for ever.”
He said the only way to generate growth in the future was by having “a more competitive world with deregulated labor markets,” reduced barriers to trade and budget reform.
At least someone gets it.
Years of ultra-low interest rates by central banks of US, Japan, UK, Europe etc. have pushed bond and stock markets to record levels, even though the underlying economy is still flat.
Those on top are doing great, the middle class is being squeezed out, and the standards of living for average people are decreasing.
People are starting to understand what kind of charade this is.
They realize that the world’s largest debtor cannot be entrusted anymore with the role of the world’s reserve currency.
The whole world is screaming for a change. Even “friends” are looking for a way out of dependency on the US dollar. The French Finance Minister said recently that an alternative to the dollar is urgently needed.
The European Central Bank is now considering holding some of its reserves in Chinese renminbi, while UK just became the first Western country to issue government bonds denominated in renminbi.
The Europeans, the Chinese, the Russians, the Canadians, the Koreans, the Singaporeans… everyone is recognizing what’s going on. And they’re preparing for a new system.
This is happening. Even the establishment is pushing for it.
Of course, nothing happens overnight. Right now we’re seeing an orderly exit from the US dollar based system.
Just as with bankruptcy, this happens gradually, then suddenly.
Bottom line—we have a front row seat to experience this. The solutions are out there for people who recognize the trend. As with most things in life, it’s better to be years early than a moment too late.
October 27, 2014
Region VII, Chile
This morning some of the biggest financial news of the year made huge waves all over Asia.
Yet in the Western press, this hugely important information has barely even been mentioned. (CNBC.com, for example, has yet to report on this story as of 11:45am Eastern…)
So what’s the news?
The Chinese government announced that the renminbi will become directly convertible with the Singapore dollar… effective tomorrow morning.
It’s clear this deal has been in the works for a while, and it’s another major step towards the continued internationalization of the renminbi and unseating of the dollar as the world’s dominant reserve currency.
For decades the renminbi has been a tightly controlled currency. It’s only been in the last few years that the Chinese government started loosening those controls, primarily in response to the obvious need for a dollar competitor.
The entire world is screaming for an alternative to the dollar and the US government.
Since the end of World War II, the US has been in the driver seat. The Fed essentially sets global monetary policy. Foreign banks are forced to rely on the US banking system. Nearly every nation on earth must hold US dollars and buy US government debt just to be able to trade with one another.
These were sacred privileges entrusted to the US government. And they have been abused time and time again.
The US government spies on its allies. It uses its banking system as a weapon to threaten foreign companies. It fines foreign banks billions of dollars for doing business with countries it doesn’t like.
They discredit themselves by continuing to indebt future generations and failing to make tough fiscal decisions.
And the Fed has printed so much money that major foreign institutions are left with no choice but to seek an alternative. Enough is enough.
China is taking the lead in providing the world with another option. And they’re not exactly doing this under cover of darkness. These moves have been widely telegraphed, at least to anyone paying attention.
For the last few years the Chinese government has entered into new ‘swap agreements’ at blazing speed, allowing other nations’ central banks and governments to hold the renminbi in reserve.
They’ve concluded direct trade arrangements (notably with Russia) to settle oil and gas deals in renminbi.
This summer we saw the establishment of a Chinese-led supranational bank intended to compete directly with the IMF.
Just last week the British government issued a new government bond denominated in renminbi.
And now this– direct convertibility between China and the #1 financial center in Asia, making it possible for ANYONE to trade and hold renminbi through Singapore.
It’s so obvious where this train is headed.
But again, this story is hardly covered in the Western press. They’re living in a dream world where King Dollar still reigns and the US is the only superpower in the world.
Nonsense. It’s imperative to stop listening to the propaganda and start paying attention to facts:
The US government has accumulated more debt than any other nation in the history of the world… and is in a position where they must borrow money to pay interest on the money they’ve already borrowed.
The Federal Reserve (which issues the US dollar) continues to erode its balance sheet. According to last Wednesday H.4.1 report, the Fed’s capital base is a minuscule 1.26% of its total assets.
A year ago it was 1.42%. That was bad enough. But on a proportional basis, the Fed has lost another 11.3% of its capital in the last twelve months.
And according to the Society for Worldwide Interbank Financial Telecommunication (SWIFT), international bank payments denominated in renminbi have nearly tripled in value in the past two years.
These are all objective facts which point to the same conclusion: this current dollar/debt-based system is on the way out.
It’s not going to happen overnight, but we’re already seeing a slow and orderly exit. And we can see the rest of this trend unfolding years in advance.
Ignoring this could be very hazardous to your financial well-being. And while the Western media might be totally clueless, there are plenty of options for forward-thinking individuals.
- Consider holding Hong Kong dollars in addition to US dollars. Hong Kong dollars are currently pegged to the US dollar, so the currency risk is minimal. But if the US dollar declines sharply, Hong Kong (controlled by China) could easily de-peg. This mitigates your downside risk.
- Consider trading paper currency savings for productive REAL assets like farmland and private businesses which capitalize on key growth trends.
There are dozens of other solutions out there. You’ll be able to find some that are just right for your circumstances.
October 27, 2014
[Editor’s note: This essay was penned by Tim Price, a London-based wealth manager and editor of Price Value International.]
Shortly before leaving the Fed this year, Ben Bernanke rather pompously declared that Quantitative Easing “works in practice, but it doesn’t work in theory.”
There is, of course, no counter-factual.
We’ll never know what might have happened if the world’s central banks had not thrown trillions of dollars at the banking system, and instead let the free market work its magic on an overleveraged financial system.
But to suggest credibly that QE has worked, we first have to agree on a definition of what “work” means, and on what problem QE was meant to solve.
If the objective of QE was to drive down longer term interest rates, given that short term rates were already at zero, then we would have to concede that in this somewhat narrow context, QE has “worked”.
But we doubt whether that objective was front and centre for those people – we could variously call them “savers”, “investors”, or “honest workers”.
As James Grant recently observed, it’s quite remarkable how, thus far, savers in particular have largely suffered in silence.
So while QE has “succeeded” in driving down interest rates, the problem isn’t that interest rates were / are too high.
Quite the reverse: interest rates are clearly too low – at least for savers.
All the way out to 3-year maturities, investors in German government bonds, for example, are now faced with negative interest rates. And still they’re buying.
This isn’t monetary policy success; this is madness.
We think the QE debate should be reframed: has QE done anything to reform an economic and monetary system urgently in need of restructuring?
We think the answer, self-evidently, is “No”.
The answer is also “No” to the question: “Can you solve a crisis of too much indebtedness by increasing debt and suppressing interest rates?”
The toxic combination of more credit creation and global financial repression will merely make the ultimate endgame that much more spectacular.
To Jim Rickards, simply printing money and gifting it to the banks through the somewhat magical money creation process of QE is like treating cancer with aspirin: the supposed “solution” does nothing to address the root cause of the problem.
The West is trapped in a secular depression, and “normal” cyclical solutions such as monetary policy measures, are not just inappropriate, but damnably expensive for the rest of us.
Only widespread economic restructuring will do. And that involves hard decisions on the part of politicians.
Thus far, politicians have shown themselves predictably not up to the task. Or in the words of Jean-Claude Juncker, “We all know what to do; we just don’t know how to get re-elected after we’ve done it.”
And let’s not forget that other notable Junckerism, “When it becomes serious, you have to lie.”
So, back to the debate:
1. Yes, QE has driven down long-term interest rates.
2. But the problem wasn’t the cost of capital. The problem was, and remains, an oversupply of debt, and the risk, now fast becoming realized, of widespread debt deflation.
To put it another way, the world appears to be turning Japanese after all, despite the best efforts of central bankers and despite the non-efforts of politicians.
3. The solution is fundamental economic restructuring. Government spending cuts will not be optional, although tax cuts might be. The expansion of credit must end – or it will end in an entirely involuntary market-driven process that will be extraordinarily messy.
This is where we start to view the world, once again, through the prism of investments – not least since we’re not policy makers.
Markets have become that much more volatile recently (and not just stocks – see the recent wild trading in the US 10 year government bond).
Moreover, inflation (other than in financial asset prices) seems weirdly dormant in certain parts of the world.
Understanding these phenomenon is best explained by both Jim Rickards and by the good folks at Incrementum through the pertinent metaphor of tug of war.
The blue team represents the markets. The markets want deflation, and they want the world’s unsustainable debt pile to be reduced.
There are three ways to reduce the debt pile. One is to engineer sufficient economic growth (no longer feasible, in our view) to service the debt.
The second is to default (which, in a debt-based monetary system, amounts to Armageddon).
The third brings us over to the red team: explicit, state-sanctioned inflationism, and financial repression.
The reason why markets have become so volatile is that from day to day, the blue and red teams of deflationary and inflationary forces duke it out, and neither side has yet been convincingly victorious.
Who ultimately wins? We think we know the answer, but the outcome will likely be a function of politics as much as markets.
While we wait for the outcome, we believe the most prudent and pragmatic course of action is to seek shelter in the least overpriced corners of the market.
For us, that means explicit, compelling value and deep value equity.
Nothing else, and certainly nothing by way of traditional government or corporate debt investments, makes any sense at all.
October 24, 2014
I’m going to make you a deal.
For the rest of your life, I’m going to be your silent partner. You’re going to pay me 20% of everything you ever make. Forever.
In return, I’m not going to do anything. I won’t add value to your life or your business. In fact, I’m actually going to be destructive.
For the rest of your life, I’m going to make you fill out a bunch of stupid forms. If you own a business, I’m going to make you hire employees that you don’t need and incur all sorts of costs just to handle all the excess paperwork.
And because I’m your partner, people all around the world won’t want to do business with you. You’ll definitely miss out on all sorts of opportunities because I’m your partner.
Of course, should you decide that you don’t want to pay me my fair share anymore, I’ll send a bunch of goons to drag you out of your home in the middle of night at gunpoint and throw your ass in jail.
And if you want to terminate this relationship altogether, you have to pay me a huge sum up front.
Sounds like a great deal, right?
Of course, no rational human being would ever willingly enter into such a one-sided, ruinous financial relationship.
But this is precisely what taxes are– a completely one-sided, ruinous financial relationship that we’re stuck with by accident of birth.
Everyone knows how draining taxes can be to their personal finances, and an entire industry exists to help people reduce their tax burdens.
Some of these tactics are completely irrational. In financial markets, people often deliberately sell stocks at a loss simply for the tax benefit. Or they’re forced to set up incredibly complex and expensive structures just to ensure the government doesn’t take half of their stuff when they die.
Tax mitigation strategies are important. In a zero interest rate environment where returns paid by most bank deposits, money market funds, and government bonds fail to keep up with inflation, cutting your tax bill can be one of your best returns on investment.
Think about it– if you can save 20% on your taxes, it puts as much money in your pocket as making a 20% investment return. (actually more like a 25% investment return… because you get taxed on your capital gains…)
Earlier this week I briefly mentioned one strategy known as the Foreign Earned Income Exclusion (often called the foreign income tax exclusion).
This is a way for you to earn up to $99,200, tax free. And if you include your spouse and housing benefits, the tax-free earnings can easily exceed $250,000.
Here’s how it works–
US citizens are taxed on their worldwide income no matter where they live. (This is almost entirely unique to the Land of the Free).
If you’re a US citizen living in Bangladesh and earning money in Pakistan, and you’ve never set foot on US soil, Uncle Sam still expects its fair share of your income.
The key exemption, however, is that non-resident US citizens (i.e. Americans living abroad) can earn up to a certain amount each year, tax free.
This amount varies from year to year. In 2013, for example, the exclusion was $97,600. For 2014, it increased to $99,200.
This means you can earn nearly $100,000 in income while living overseas and not have to pay a dime of income tax on those earnings.
To be clear, the IRS is very particular what qualifies as ‘earned income’. This includes things like salaries, commissions, bonus income, and professional fees, as well as certain allowances and reimbursements like cost of living allowances and moving expenses.
(It’s also possible to set up a business overseas and receive a salary which would be exempt from US individual income tax.)
One of the primary qualifiers to claim this benefit is that your ‘tax home’ must be in a foreign country. And the IRS has two ways for you to demonstrate this.
First is what’s called the Physical Presence Test. In order to qualify, you must have spent 330 full days outside of the United States in a 12-month period, i.e. you can only be in the US for 35 or 36 days in a year.
Note- “full day” means a consecutive 24-hour period from midnight to midnight. So if you depart New York today and arrive to London tomorrow morning October 25 at 10am, your first ‘full day’ won’t be until Sunday.
The other way to qualify for the exclusion is to be a ‘bona fide resident’ of a foreign country for an entire tax year.
This is a much more subjective approach than simply counting the days you spend outside of the US.
Through this test, the IRS looks at a number of circumstances. Are you really living overseas? Do you have a home, bank account, and local ties to a foreign country? Are you a legal resident, or at least going through the process? Is your family living with you?
Even more important– do you maintain a home in the US? Do you stay there when you’re in the US? Are your household goods and personal property still in the US?
Unlike the physical presence test, qualifying under this bona fide residency option means that you can spend more than 35 days in the US… so there’s a bit more flexibility to spend time with friends and family.
And again, both you AND your spouse can qualify, meaning EACH of you can exclude $99,200 of your foreign earned income. This can potentially save you $43,018 or more in federal tax.
Taxes are an enormous benefit of living overseas. Your life can be MUCH richer. In addition to having more freedom and greater lifestyle opportunities, you can save a boatload of money… and stop financing war.
It’s definitely something to consider.
October 23, 2014
When I was growing up, my father was able to support his family of four on a single income. And when he was growing up, his father could do the same.
This sort of security simply doesn’t exist anymore.
These days, it typically takes two working parents just to be able to afford a comfortable standard of living. And even then, just barely.
Today people have to borrow on their credit cards just to get by. And young people are forced to indebt themselves decades into the future simply to pay for an increasingly worthless university degree.
In 1970, general tuition at the University of Pennsylvania was $2,550 per year, roughly 33% of the median household income at the time ($7,559).
Bear in mind this was at a time when most households were still supported by a single income.
By 2012, however, general tuition at the same school had risen to $42,734—over 86% of the median household income ($49,486) at a time when many households had become dual income.
This means that the price of a piece of paper from university went from 33% of a single income to 86% of two incomes combined.
This is unbelievable cost increase that illustrates a very clear divide that’s forming in the West.
Yes—inflation exists. It’s hidden. It’s long-term. But it exists. And over a period of years… even decades… it changes the very fundamentals of civilization.
There are two primary forms of inflation. On one hand, there’s asset price inflation. This is when the value of stocks, bonds, and real estate goes up.
But if you’re a typical family that has to spend 95% of your household income just to get by, asset price inflation doesn’t really give a huge boost to the measly 5% of your income that you manage to save.
No, instead, the typical family suffers from the other inflation—retail price inflation.
This is when the cost of goods and services outpaces their wages year after year.
People easily lose track of this. But enough time passes and they find that now two parents have to work just to afford a basic lifestyle, quality food, medical care, and education that one parent used to provide.
Asset price inflation is something that primarily benefits the ultra wealthy.
When you only have to spend 5% of your income on living expenses, and 95% on investments, you stand to gain substantially when your investments increase in value.
This phenomenon has created one of the greatest transfers of wealth in history: one class of citizens getting richer at the expense of everyone else.
A new report just released by two academics at the London School of Economics and UC Berkeley shows just how rapidly the middle class is collapsing in the Land of the Free.
The top 0.1% (160,00 families with total net assets of more than $20 million in 2012) owned 7% of all wealth in late 1970s. That jumped to 22% in 2012.
The bottom 90%, on the other hand, went from a 36% share to a 23% share in the same period.
Now, this letter isn’t intended to rail against wealth inequality, or to suggest that we should be more ‘equal’.
Equality is a dangerous and impossible ideal to strive for. Every human being alive is different, and to suggest that we should all be the same or live according to the same standards is absurd.
No matter what, there are always going to be poor people and rich people. There are always going to be folks who choose to work harder, and those who choose to work less.
And there’s nothing wrong with that. Wealth is a noble ideal; it’s nothing to apologize for.
The accumulation of wealth is supposed to mean that you have done something to create value in the world—that you have created a useful product that people desire, or that you have created wealth for others.
But that path to accumulate wealth is now all but dead.
The Land of the Free used to be a place where you could work hard and build wealth for yourself, either by starting a business, taking some investment risk, or working your way up the chain.
Yet today, authorities chase away children who have the audacity to operate a lemonade stand without a permit.
The nanny state legally bars most grown adults from investing their own savings in lucrative private enterprises, forcing the masses into overheated, central bank- manipulated stocks and bonds.
And today you’re lucky to work for the same company for more than a few years. As a colleague told me a few months ago, few people have careers anymore.
Instead, human beings are ‘rented’ by companies to perform tasks. There’s no longer a career track, growth, or significant advancement.
All of the old capitalist ideals have been replaced with compliance, obedience, and subservience to the state. They’ve managed to completely hollow out the middle class.
The ultra rich, meanwhile, continue to get rich.
Central bankers print money, and it pushes up the value of assets that the rich already own, making them even richer.
In other words, if you’re born rich, you stay rich. If you’re not, it’s becoming harder to attain wealth. Talent and hard work matter less and less with each passing year.
This is dreadfully, terribly wrong.
The people in charge of this system have completely broken what capitalism is supposed to be. And they’ve replaced it with a new form of feudalism.
This is something that can’t possibly last.
You no longer have to live, work, and play in the same country where you were born.
You no longer have to hold the heavily manipulated, degraded currency that they destroy, or use the banking system that they control.
You no longer have to educate your children in the state-controlled school system, or feed your family the genetically-modified crap that the corn lobby bribes onto the store shelves.
You can break free. It’s a matter of choice.
October 22, 2014
The US government’s debt is getting close to reaching another round number—$18 trillion. It currently stands at more than $17.9 trillion.
But what does that really mean? It’s such an abstract number that it’s hard to imagine it. Can you genuinely understand it beyond just being a ridiculously large number?
Just like humans find it really hard to comprehend the vastness of the universe. We know it’s huge, but what does that mean? It’s so many times greater than anything we know or have experienced.
German astronomer and mathematician Friedrich Bessel managed to successfully measure the distance from Earth to a star other than our sun in the 19th century. But he realized that his measurements meant nothing to people as they were. They were too abstract.
So he came up with the idea of a “light-year” to help people get a better understanding of just how far it really is. And rather than using a measurement of distance, he chose to use one of time.
The idea was that since we—or at least scientists—know what the speed of light is, by representing the distance in terms of how long it would take for light to travel that distance, we might be able to comprehend that distance.
Ultimately using a metric we are familiar with to understand one with which we aren’t.
Why don’t we try to do the same with another thing in the universe that’s incomprehensibly large today—the debt of the US government?
Even more incredible than the debt owed right now is what’s owed down the line from all the promises politicians have been making decade after decade. These unfunded liabilities come to an astonishing $116.2 trillion.
These numbers are so big in fact, I think we might need to follow Bessel’s lead and come up with an entire new measurement to grasp them.
Like light-years, we could try to understand these amounts in terms of how long it would take to pay them off. We can even call them “work-years”.
So let’s see—the Social Security Administration just released data for the average yearly salary in the US in fiscal year that just ended. It stands at $44,888.16.
The current debt level of over $17.9 trillion would thus take more than 398 million years of working at the average wage to pay off.
This means that even if every man, woman and child in the United States would work for one year just to help pay off the debt the government has piled on in their name, it still wouldn’t be enough.
Mind you that this means contributing everything you earn, without taking anything for your basic needs—which equates to slavery.
Now, rather than saying that the national debt is reaching $18 trillion, which means nothing to most people, you could say that the debt would currently take almost 400 million work-years to pay off. Wow.
When accounting for unfunded liabilities, the work-years necessary to pay off the debt amount to astonishing 2.38 BILLION work-years…
And the years of slavery required are only growing.
As an amount alone the debt is meaningless, but in terms of your future enslavement it can be better understood.
To put this in perspective even further—what was the situation like previously?
At the end of the year 2000, the national debt was at $5.7 trillion, while the average yearly income was $32,154. That’s 177 million work-years.
So just from the turn of the century, we’ve seen the time it would take to pay off the national debt more than double. That means that more than twice as many future generations have been indebted to the system in just 14 years.
It sounds terrible, and it is. But remember, your future generations will only be indebted if you let them be.
What the US government does may affect everyone, but it’s up to you whether or not you and your children are directly enslaved and tied to the system.
Break your chains while you can and set yourself and your offspring free.
October 21, 2014
I walked in the door this morning to my apartment in Santiago, happy to be back in Chile after a week away.
(One of the things that I really love about this place is the weather. The weather forecast in the entire central region of Chile is typically just a string of yellow circles. Yet it’s not so hot that you need air conditioning. I love it.)
But my mood was quickly spoiled when my maid handed me an envelope.
“It looks official,” she said, staring at me to gauge my reaction. She was right. The sender was the United States Department of Treasury.
Clearly my first thought was wondering why the US government was sending me anything, especially to my apartment in Santiago. My second thought was utter astonishment that the US Postal Service had managed to get it here!
I ripped it open and found… a check. Made out to me. It was my tax refund.
As an aside, I’ll tell you that living overseas has a lot of huge benefits. One of them is that your taxes are almost always going to be lower.
If you’re American, you can earn up to $99,200 in foreign income, tax free. This amount goes up every year (not that there’s any inflation).
If you’re married, you and your spouse can BOTH claim the foreign earned income exclusion, meaning you can earn nearly $200,000 as a couple, tax free.
And when you include the additional deduction you can receive on foreign housing, your total tax benefit living overseas can easily be upwards of $250,000 or more.
Just imagine being able to put an additional $250,000 in your pocket each year, instead of giving that money to a bankrupt government to finance drones, bombs, and body scanners. (More on this in another letter…)
In my case, I have income from other sources, including certain investment income that still gets taxed. And just to be on the safe side, I ALWAYS overpay my taxes, so our friends at the IRS send me a refund each year.
This is the first year in ages that I remember receiving a physical check; I must have forgotten to fill out the direct deposit section of the 1040.
And while checks seem like vestigial relics of a financial era long gone, it’s not a big problem to deal with down here. Chileans really like checks, and it turns out that a number of Chilean banks we deal with are more than happy to immediately clear foreign checks from the US.
Then I glanced back at the envelope. It said, “Forgery or endorsements on Treasury checks is a Federal crime. Maximum penalty is a $10,000 fine and ten years in imprisonment.”
Wow. In the Land of the Free, you can’t even deposit a tax refund check without being threatened with fines and imprisonment. It’s unreal.
We’ve talked about this before. Even the most basic, innocuous tasks now involve threats and intimidation.
If you apply for a passport on form DS-11, the government threatens you with “fine and/or imprisonment under U.S. law including the provisions of 18 U.S.C. 1001, 18 U.S. C. 1542, and/or 18 U.S.C. 162.”
Applying for a social security replacement card threatens you with “penalty of perjury”.
Applying for a driver’s license in my home state of Texas threatens me with “five years in prison and/or a $250,000 fine.”
And of course, the instruction book for IRS form 1040 includes an entire section threatening anyone about to file his/her taxes with civil, criminal, and administrative penalties.
There’s very little you can do in the Land of the Free that doesn’t involve the threat of fines and imprisonment anymore, including simply depositing a check.
They’ve criminalized almost every aspect of existence. EVERYTHING—how your children are educated, the purchasing power of your savings, the privacy of your email, what you can/cannot put in your body– is regulated by the state.
Any deviation from the standards that they establish is criminalized. And they shove these threats in our faces at every opportunity.
The idea of a government for the people, by the people, of the people… has long been lost. They don’t even pretend to serve the people anymore… it’s just threats and intimidation.
This is not how a free society is supposed to operate. And as we explored in yesterday’s podcast, it’s a sign of the top.
We have reached peak government. Like any bubble, this one is about to burst.
For every crisis that strikes, the government springs up to “save” us.
Introducing new bureaucratic agencies or an “Ebola Tsar” as Obama has just done, they are constantly adding to the already over-bloated expanse of government today.
But when a real danger happens, they completely fail. Repeatedly.
The reality is, we don’t need the government to save us from anything. All the tools and technology that are necessary for society to function without government are there.
I invite you to listen to this week’s podcast, where I discuss some of the tools that are immediately available to you as you take back your freedom.
October 17, 2014
New York, USA
At present, US dollar accounts for roughly 61% of the world’s foreign exchange reserves.
It’s still a safe bet for most, not because the currency is actually strong, but because so many others are already so reliant on it.
Between those with reserves in and pegs to the US dollar, many countries have given their allegiance, and now have a vested interest in the health of the currency.
Due to this common interest, a sort of unofficial, involuntary alliance has been formed between them all.
Together, they’re all playing along, pretending that everything is fine. If the dollar collapses, they’re all screwed, so they’ve got to get each other’s backs.
From the throne of the world’s reserve currency, the Federal Reserve, with the power to print the US dollar, feels dangerously omnipotent.
They can get away with just about anything. For now.
The central bankers get to print dollars and spend them at current prices, before the stuff hits the wider market and diminishes its overall value.
And for the time being they don’t really face any consequences. The whole world just absorbs it. Other countries really have no other choice.
But they’re getting tired of putting up with this abuse, and the unrest is growing. New alliances are being made, this time to dethrone the dollar.
Just this week yet another currency swap agreement was made between the Chinese and Russian central banks. This time for 150 billion renminbi.
Trade volume between China and Russia will reach $100 billion (600 billion renminbi) next year, and is expected to reach $200 billion in 2020. This latest currency swap agreement will greatly reduce the need for dollars in their transactions.
Currently, 75% of trade between the two countries is settled in dollars. When they signed the agreement for the bilateral currency swap, Russian deputy Prime Ministers said this will “encourage companies from the two countries to settle trade in local currencies and avoid the use of a third country’s currency.”
Who do you think that was aimed at?
Threatened by the growing strength of China and Russia, the US is actively working to vilify the two. Between the headlines of war, both cyber and military, the government is unsubtly trying to bring back the days of yellow peril and the red scare.
However, it can’t use the same tactics on its longstanding ally—Europe.
Even the European Central Bank has started discussions on the possibility of including the renminbi as one of its reserve currencies.
On Tuesday the UK also became the first country besides China to issue a sovereign bond in renminbi.
This coincided with the issuing of 180 million renminbi of corporate bonds by China’s ICBC in South Korea. Another first. South Korea is firmly on the renminbi train as renminbi deposits in the country jumped 55-times in just one year.
It’s very clear where the trend is going. All these news items are pieces of the same puzzle. The US dollar’s throne is shaking as it’s losing its importance and status as the preeminent currency in the world. Renminbi is on the way up.
The whole existing order of a single ruling currency is currently being challenged.
A new financial era is coming.
October 16, 2014
New York, USA
For a casual observer of the US economy (most “experts”), you could say that things look pretty good. Unemployment is at its lowest rate in six years. Earnings of S&P 500 companies are higher than ever, while their debt is lower than it’s been in the last 24 years.
Nonetheless, rather than getting excited for good economic times, the big commercial banks are all battening down the hatches. They’re preparing for bad times ahead.
I often stress the importance of being prepared, so in theory, that should be a great sign.
But then, you look at what they are “defensively” investing in, and you see that what they consider as prudence is simply insanity.
What banks are stockpiling these days are US government bonds, and they’re not doing this casually, they’re going nuts for them.
In just the last month alone American banks increased their holdings of US treasuries by $54 billion, to a record $1.99 trillion.
Citigroup, for example, held $103.8 billion worth of bonds at the end of June, up 19% from the end of last year.
This is like preparing for an earthquake by running out and buying whole new sets of porcelain dishes and glass vases.
All it’s going to do is make things more dangerous, and even if you somehow make it through the disaster, you have a million more shards to clean up.
With government bonds you are guaranteed to lose both in the short-term and the long-term. Bonds keep you consistently behind inflation (even the deceptively named TIPS—Treasury Inflation Protected Securities), so the value of your savings is slowly being chipped away.
But that’s nothing compared to the long-term threats of the US government not being able to repay the loans.
Facing $127 trillion in unfunded liabilities – which is nearly double 2012’s total global output – and with no inclination to reduce those numbers at all, at this point disaster for the US is entirely unavoidable.
Never before in history has a government stretched itself so thin and accumulated anywhere close to this amount of debt.
So when the day comes, it won’t be a minor rumble. It will be completely off the Richter scale.
These facts about the US government are in no way secret. Every bank out there knows it, yet they keep piling in.
Why do they keep buying bonds that they know the government will never be good for?
Even though people know in their guts that the government has no earthly possibility to ever repay its debt, on paper it’s a no risk investment.
The US government’s sovereign debt has an AA+ rating after all. They might not make money off it, but no fund manager and investment banker is going to get fired for investing in “risk-free” US government debt.
Under the rather arbitrary Bank of International Settlements Basel capital adequacy rules government debt rated at least AA continues to carry a “zero risk” weighting. Meaning that banks do not need to set aside capital against it.
Beyond that, regulations imposed after the last crash to reduce risk require banks to hold $100 billion in liquid assets, which of course includes bonds. Thus, they are not only encouraged, but actually forced to buy government bonds.
With a combined position of nearly $2 trillion in US government debt, against which they hold little or no capital buffer, US banks are now EXTREMELY vulnerable to a bond market sell-off.
In the aftermath of the meltdown of 2008, banks were made to pay multi-billion dollar fines for having “knowingly sold toxic mortgages to investors”. Will politicians and central bankers ever be held responsible for not only “knowingly selling” their toxic debt to investors, but actually forcing it on the banks?
The global economy shivered when the consequences of lending to subprime homebuyers came to fruition. Just imagine how it will quake when the US government – the largest subprime borrower in history – eventually defaults (or hyperinflates) its debt away.
There’s nowhere in the world the tremors won’t be felt.
More on how you can protect your savings from this folly next time.
October 15, 2014
En route to New York
“John Galt is Prometheus who changed his mind. After centuries of being torn by vultures in payment for having brought to men the fire of the gods, he broke his chains—and he withdrew his fire—until the day when men withdraw their vultures.”
Sick of the overbearing regulation, taxation, and entitlement mentality in society—in the book Atlas Shrugged, John Galt went to one entrepreneur after another to convince them that they just didn’t need to put up with it anymore.
They didn’t need to keep propping up a system that was trying to destroy them. Where’s the point in continuing to feed a parasitic system?
So one by one, these innovators and producers simply closed up shop, deciding to just “shrug” and abandon what they were providing thanklessly to the looters.
Today many companies are doing the same. They may not be abandoning their businesses altogether, but they are moving them out of the hands of the parasites by moving their tax bases abroad.
In Ayn Rand’s book, the Economic Planning Bureau dealt with this by legislating that no businesses could leave: “[a]ll the manufacturing establishments of the country, of any size and nature, were forbidden to move from their present locations, except when granted a special permission to do so.”
In real life today, we have a string of policies being proposed to similarly discourage companies from leaving, or failing that, to try to claw as much money as possible from them first.
First, take the H.R. 5278: No Federal Contracts for Corporate Deserters Act, which bars federal contracts for American companies that have gone overseas for tax purposes.
Then take the H.R. 5549: Pay What You Owe Before You Go Act, which seeks the seizure of unrepatriated corporate revenue.
Even the language used by these bill’s supporters is eerily similar to the novel, as politicians call for corporations to pay their “fair share” and bemoan that Americans have to “pick up the tax burden inverted companies shrug off.”
At the time, Rand might have thought that she was writing about an extreme, fictional society. But it seems that the Land of the Free is eager to exceed even her worst expectations.
When she wrote about the “Economic Emergency Law”, which forbade any discrimination “for any reason whatever against any person in any matter involving his livelihood”, she was likely thinking about criteria such as race, gender, and age.
She might have even considered they would try to prevent employers from making judgments based on a person’s ability, though I’m sure she would not have even imagined what politicians have actually come up with in the US.
Try the S. 1972/ H.R. 3972: Fair Employment Opportunity Act that proposed to prohibit discrimination according to a person’s history of unemployment.
Or even worse, the S. 1837: Equal Employment for All Act that would have prohibited employers from even looking at prospective employee’s credit ratings.
The literary similarities don’t just stop with corporations either. Compare the fictional Project Soybean, designed to “recondition” people’s dietary habits to the actual H.R. 4904: Vegetables Are Really Important Eating Tools for You (VARIETY).
Tell me, which one sounds more ludicrous to you?
With each new piece of legislation being proposed in the Land of the Free, Atlas Shrugged seems to be ever more prophetic.
While even the most terrifying elements of the book are coming true, so are the reactions.
People and companies are leaving, refusing the put up with the looting of their efforts any longer.
Despite politicians’ desperate attempts to stop it, Atlas is already shrugging.
October 15, 2014
En route to New York
One of our SMC members just received a package from HSBC giving him and his wife a deadline to comply with FATCA—US’ global tax law.
As Canadians they’d long felt bad for Americans having to deal with the overbearing burden of FATCA. Never did they think it would affect them.
But suddenly they had just four weeks to prove that they were not US taxpayers, all because at one point they had purchased a service that gave them a US phone number.
And now they, as Canadian citizens and residents, have to submit a fully completed W8BEN IRS form, along with a government issued photo ID and a detailed letter of explanation to make it very clear that they were not in fact Americans.
It used to be that foreigners were vying to become US citizens, but today they’re begging not to be confused as one.
In aiming to make itself the warden of the world, the US government has become very comfortable with reaching beyond its borders.
Historically, the pursuit of global dominance involved taking over others’ territories with guns blazing. Today, there’s more finesse, but the intentions are the same.
FATCA, the new Manifest Destiny, is probably the most arrogant piece of legislation ever enacted, at least in modern times.
Assuming that the entire world should be subject to its own arcane and excessive tax legislation, FATCA requires foreign banks to sabotage their relationships with their clients and breach their own privacy standards to comply with the US government’s will.
This overreaching piece of legislation demands that they reveal the information of US citizens with accounts over $50,000.
Otherwise the banks will be frozen out of the US banking system and slapped with a 30% withholding tax—effectively killing their business.
Those that resist can even face criminal charges.
Which is what happened in 2009, when the IRS accused Swiss bank UBS of aiding tax evasion, imposing on it a $780 million fine. The fines have been piling up and increasing ever since, with Credit Suisse having to pony up $2.6 billion this year.
Thus, everyone is complying. They can’t afford not to.
With the Swiss banking system in particular in the crosshairs of US authorities, the Department of Justice “offered” a deal to Swiss banks to avoid prosecution before the end of last year, and over 100 Swiss banks rushed to take it before the December 31st deadline.
However, the actual terms of this deal didn’t come out until now. It turns out that, from its position of dominance, the US government is demanding “total cooperation” from Swiss banks.
This means an open, one-way flow of information of American account numbers, balances, names, addresses and identification numbers. In addition, they must reveal all cross-border activities and close the accounts of any Americans said to be evading taxes.
Doing otherwise, the banks are breaching the deal and thus immediately face prosecution.
This is the economic equivalent of a military occupation.
Between compliance documentation, and facing massive fines and potential criminal charges, it’s no mystery as to why foreign financial institutions are going out of their way to avoid US customers.
And increasingly they’re looking for alternatives to the whole system as well. If you’re a foreign bank that gets reminded constantly of the potential penalties, breaches and charges that you could face simply for doing business, it’s only prudent that you hedge your bets and look to minimize your exposure to the US dollar and the US banking system.
It really just isn’t worth it anymore.
The US thus just continues to shoot itself in the foot.
October 15, 2014
En route to New York
A strong community of other entrepreneurs and mentors makes all the difference for a young startup.
Through a community, and through mentors in particular, you can gain access to their networks. This might be just what it takes to turn your fledgling idea into a reality.
For those looking for a place to launch their startup with a solid community for support, Nairobi, Kenya, is nearly unmatched.
Here, the sense of community is simply remarkable. Successful Kenyan entrepreneurs are exceptionally passionate and willing to mentor the next generation of entrepreneurs.
As a result, there is a constant stream of events in Nairobi geared toward entrepreneurs or budding business leaders. Everywhere from students to top-level business leaders, the desire for personal and business development is fierce.
International and domestic capital and mentorship programs abound, as there is great interest in funding businesses that could potentially transform the whole continent. Mobile technology, agriculture, and infrastructure are some of the main focuses.
Seeing the country’s strong growth and potential, many individual Kenyans who have been raised and educated in top universities in the UK and US are now coming home, bringing knowledge, experience, capital, and global networks back with them.
Add to that the fact that Nairobi is one of the headquarters of the UN, and it’s clear why the city is home to such a vibrant international community. One with a lot of money at that.
Co-working spaces and startup incubators like 88MPH, Fablab, and iHub in Nairobi provide great communities for entrepreneurs who come from across the country and the world seeking to break into the massive, fledgling African market. They are working hard to establish Nairobi as the major tech hub of the region.
In 3 years of operation, 88MPH has invested nearly $2 million in startups, with a number of the businesses that have gone through their incubation programs already seeing wide use across the country.
One example being MDUNDO, a sort of Kenyan version of iTunes, which has been adapted to suit the predominance of mobile rather than computer browsing in the country.
As the country’s market is less developed, basic services like this can really take the country by storm.
This is no more apparent than the case of M-PESA, a mobile phone based money transfer and microfinance service. Launched in 2007, the service has already revolutionized business and every day transactions in the country.
Everybody and their grandmother uses it on a daily basis, and you can pay from anything from your groceries to your taxi instantly by mobile.
Though things are modernizing quickly, living in Nairobi can still have its challenges. Done right, however, and you can live particularly well. Very nice accommodation can be easily a quarter of what you can find in New York or California, and with fantastic, temperate weather all year long, you just can’t complain.
For the entrepreneur with a sense of adventure not only in business but in life, the proximity of Nairobi to incredible safaris and beautiful beaches just can’t be beat.
As the country is on a clear upward trajectory, the potential is absolutely huge. We’re not talking a few thousand downloads of your app, but changing the lives of millions across the continent.
In Kenya, you can truly dream big.
October 14, 2014
Buenos Aires, Argentina
In the pantheon of utter political stupidity in our time, the competition is pretty fierce to see who ranks #1.
But I have to imagine that, even with so many rivals, Argentina’s Cristina Fernandez de Kirchner makes a pretty compelling argument to be the champion.
And though the productive class of Argentina is no stranger to being vilified by a populist government whose grasp on power rests on praising the dignity of poverty, Cristina has managed to take things to an entirely new level.
Exhibit A: Argentina’s new ‘supply law’, or Ley de Abastecimiento, due to take effect in December next year.
Under this new law, the government will have the honorable burden of defending consumers from greedy producers.
Companies are now prohibited from setting their prices too high, generating too much profit, or producing too little.
And unlike the country’s astronomically high taxes (which at least have defined numbers and penalties), the new supply law doesn’t even say what is meant by too high, too many, or too little.
It simply reinforces the government’s unchecked power to arbitrarily audit, fine, shut down, and expropriate production of private companies.
Argentina’s government has already been maintaining “voluntary” price controls on over 400 consumer products for the past year, all in the name of combating the inflation that they themselves created.
And as any high school economics student can tell you, price controls create… SHORTAGES. Duh.
Needless to say, local production of these staple consumer products has dropped as a result of price controls. And given the pitiful state of the peso, they’re too expensive to import.
And anyone who can actually get their hands on these products—sugar, cooking oil, canned fruits, cleaning products, etc. often strolls across the land borders into Paraguay and Brazil where they are sold at competitive market prices.
Argentina’s new law of clamping down supply-side control echoes Venezuela’s 2011 “Fair Price and Cost Law”, which instead of reigning in inflation has reduced the Bolivarian state to the continent’s preeminent example of failure
Throngs of Venezuelans now line up around the block for days to buy single-ply toilet paper at a “fair” price. Argentina is not far behind.
This isn’t even about the country being “leftist” or “socialist”.
What has destroyed the country is not the high taxes or government waste (although that certainly doesn’t help). Argentina shoots itself in the foot by passing laws that call into question legal certainty and basic property rights.
All of this exacerbates unquantifiable country risk and the inability for businesses and individuals to plan ahead—in any environment.
If you think Argentina is an aberration, think again.
Just as Argentina used to be one of the richest places in the world and Buenos Aires competed with New York for the brightest and most talented minds on the planet, many Western countries are going down the same road.
They create absurd and confiscatory tax systems and regulations. They condemn companies who have a fiduciary responsibility to their shareholders – not governments – and follow THEIR OWN LAWS to legally minimize their tax obligations.
The seize, steal, kill and regulate every aspect of our private and economic lives. And they even have to resort to such comical measures as in Europe where they now count illegal activities such as spending on drugs and prostitutes as part of the GDP to maintain the illusion of economic growth.
All this uncertainty pushes people and businesses out the door. No one wants to deal with long-term stability issues when the next debt-ceiling debacle is always just around the corner, and when you have to look out for any number of three-letter agencies to reprimand you for doing business.
Argentina is a sign of things to come. Are you willing to wait for when your government decides that your profits are too high?