Archives for category: geopolitique

Les salauds de l’Europe – Jean Quatremer – 2017

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D’ici 20 ans, plus aucun des pays européens du G7 n’en fera partie.

L’Europe et ses 500 millions d’Européens concentrent 50% des dépenses sociales de la planète de 7 milliard d’habitants.

L’euroscepticisme  prend sa source dans les demi-vérités et dans l’absence de mise en perspective.

Les salauds de l’Europe ce sont les élites nationales et Européennes, celles qui ont fait de l’Europe une post démocratie ou les citoyens sont tenus a l’écart, celles qui décident a Bruxelles de politiques qu’ils n’assument pas dans leur capitale…Mais ce sont aussi les démagogues, du Front National au Mouvement 5 Etoiles, en passant par l’UKIP, l’AfD allemand, le PVV néerlandais…Des démagogues qui mentent sans retenue, déforment les faits, attisent les haines et qui ne trouvent personne pour leur répondre, puisque personne l’assume plus l’Europe, notamment en France…ce sont ceux qui détruisent l’idée européenne que Barack Obama a vantée…comme l’une des plus grandes réalisations politiques et économique des temps modernes.

Personne ne conteste que l’unification politique du continent n’a pas été portée par un irrésistible mouvement populaire.  Aucun gouvernement n’a jamais pensé consulter les citoyens lorsque la construction communautaire a été lancée dans les années 50….il était politiquement impossible pour la France de convoquer une assemblée constituante européenne qui aurait adopté une Constitution à la suite d’un large débat citoyen. Une telle aventure aurait débouché sur un échec certain.  Schuman prône une Europe qui se fera par des réalisations concrètes, créant d’abord une solidarité de fait.

Entre 1950 et 1952, les projets de création d’une Europe des transports, d’une Europe agricole et d’une Europe de la santé publique, toutes trois gérées par des Hautes Autorités, échouèrent face aux oppositions du Parlement ou de tel ou tel gouvernement…parce qu’il n’avait pas la porté politique de la CECA et parce qu’ils n’avaient pas été préparés dans le secret, ce qui a permis une mobilisations des opposants…

Schuman indique en 1951 qu’il proposer au moment voulu la création d’une organisation politique européenne pour la formation d’une politique étrangère commune.

EN 1950 la France prépare la Communauté Européenne de Défense, une armée européenne. Elle sera ratifiée facilement par les partenaires de la France alors qu’elle est rejetée par le parlement Français. De Gaulle «  l’Europe sera construite sur le cadavre de la France »  en 1952.

Intéressée par une « communauté de l’atome » la France, pour l’obtenir, s’engage alors dans un Marché commun européen qui, lui, intéresse ses partenaires Allemand et au Benelux.

Raymond Aron – l’idée de l’unité européenne est d’abord une conception d’hommes raisonnable, ce n’est pas un sentiment populaire

Cette capacité du referendum à fédérer les « non » surtout lorsque les bénéfices du « oui » sont hypothétiques et lointains est telle connue que ceux qui réclament des référendums  sur l’Europe sont toujours ceux qui lui sont opposés.

L’Europe n’a pas été fondée contre ses peuples mais pour eux, en respectant les processus démocratiques internes. (Aucun état n’a jamais été fondé à la suite d’un référendum).

Les rois qui ont fait la France ont-ils  demandé aux Angevins, aux Lorrains, aux Alsaciens s’ils acceptaient de faire partie du royaume ? A la fin du XVIIIe siècle, le français est une langue minoritaires comprise par seulement 10 à 20% des habitants…ce n’est qu’après la première guerre mondiale que la majorité des français parle le français a la maison.

Le point Godwin : «  plus une discussion en ligne dure longtemps, plus la probabilité d’y trouver une comparaison impliquant les nazis s’approche de 1 » ; moment dans un débat ou les adversaires s’injurient et ou toute discussion constructive devient impossible.

Le Conseil européen est devenu dès les années 80 de facto l’institution qui préside aux destinées de l’Union. Les présidents de la Commission après Delors (Santer, Prodi, Barroso) ont transformé la Commission en un simple secrétariat exécutant servilement les ordres du Conseil. Apres la crise de l’Euro en 2010, son rôle est encore renforce avec des réunions quasi mensuelles…

L’exécutif européen dispose du monopole d’initiative législative – il peut ne rien faire même si les états souhaitent qu’il agisse, ou orienter la discussion, car celui qui tient la plume peut faire passer ses idées.

Il reste néanmoins qu’un pays peut se voir imposer une décision dont il ne veut pas. Mais souvent les gouvernements demandent à être mis en minorité pour pouvoir incriminer Bruxelles (alors qu’ils soutiennent la position mais ne peuvent la vendre politiquement dans leur pays…)

Majorité qualifiée : 55% des pays représentant 65% des Européens.

Il n’est arrivé que très rarement qu’un gouvernement tombe à cause de ce qu’il a décidé à Bruxelles. C’est arrivé à ma connaissance une fois en Slovaquie, en 2011, lorsque le Parlement n’a pas accepté le principe de solidarité financière avec la Grèce (pourtant accepté par la Première ministre).

Apres tout, cette absence de contrôle direct (des citoyens sur les institutions de l’Europe) est-elle si grave ? En France ou aux USA, le Président ne peut pas non plus être censuré ou contrôlé : ce qui est important, ce sont les contre-pouvoirs mis en place.

Une zone Euro échappant a tout contrôle : le Parlement (bien qu’ayant des pouvoirs de codécisions étendus et faisant jeu égale avec le Conseil -sauf dans certains nombre de domaine y compris le budget !- qui doit maintenant compter avec lui) n’a pas son mot à dire au sein de la zone Euro. Alors que la zone Euro ne se réduit plus uniquement à la politique monétaire, mais touche désormais a la politique économique et budgétaire, aucun contrôle parlementaire n’existe (sauf au niveau national ou ils exercent un contrôle sur la partie qui concerne leur pays  et non sur l’ensemble de la politique applicable à la zone Euro).

Neelie Kroes : sous la surveillance directe de Junker a cause de sa participation dans une vingtaine de conseils d’administration laissant craindre des conflits d’intérêt.

Canete :  a fondé deux compagnies pétrolières (désormais dirigées par des membres de sa famille) et conserve son poste de commissaire à l’énergie et au climat (car soutenu par le PPE qui a pris en otage la candidature Moscovici…)

Depuis 1999 (chute de la Commission Santer) la Commission ménage come jamais le Parlement qui est devenu un acteur important de l’Union. Il est indéniable que l’Europe est partiellement entrée dans l’ère de la démocratie parlementaire.

En France, le referendum est devenu la forme la plus achevée de la démocratie alors qu’il en est une forme dégradée, comme l’ont bien compris les Allemands qui l’ont interdit.

Les referendums sur l’Europe : 10 votes négatifs contre 29 positifs. Ce qui en dit long sur le soi-disant rejet de l’Europe par les peuples.

Le non au référendum de 2005 – le traité constitutionnel européen : la principal motivation du non était les risques qu’il faisait peser sur l’emploi…alors que le TCE reformait surtout les institutions (mais reprenait aussi les textes des traités précédents). Les principales modifications furent intégrées deux ans plus tard dans le traité de Lisbonne.

La Commission tend à devenir au fil du temps un problème pour l’intégration communautaire, sans doute supérieur à celui que représentent les Etats. L’exécutif Européen … a oublié ce qu’était l’intérêt général Européen. Je me demande sincèrement s’il y a encore quelque chose a sauver dans cette institution qui n’est plus que l’ombre de ce qu’elle fut.

Le chef d’Etats ont convenu qu’il ne fallait plus nommer a ce poste que d’anciens Premiers ministres afin de ‘rehausser’ la fonction. En réalité le but était de raccourcir la laisse de la Commission : un ancien Premier Ministre a été membre du Conseil européen et a tendance à se comporter comme tel – en clair il cherchera à ne pas déplaire à ses collègues et mandants.

La réforme de Neil Kinnock en 2004 a consisté à briser ce qui avait été à l’origine conçu comme un corps d’élite construit sur le modèle de l’administration française pour passer a une logique de management privé proches de normes anglo-saxonnes. Il y eu un affaiblissement de l’esprit Européen due à l’accroissement des taches de pure exécution. Le recrutement ne se fait plus sur la connaissance des affaires communautaires et leur engagement Européen. Faute de capacité interne, la Commission doit faire appel des consultants extérieurs, généralement britanniques ou américains….

Le commissaire à la concurrence veille a empêcher la constitution de monopole sur le marché européen, même si cela interdit la constitution de champions européens mondiaux (Apple, Amazon, Microsoft n’auraient jamais pu naitre dans l’Union.

La Commission est incapable de remplir sa tâche, qui est non seulement d’aider à la construction communautaire, mais aussi de faire aimer le projet européen. Elle est incapable de la moindre empathie, car dénuée de tout sens politique.  Cette absence de sens politique se fait sentir dans tous les domaines, comme le montre, par exemple, la négociation de l’accord d’association avec l’Ukraine qui a déclenché les foudres russes et entrainé l’annexion de la Crimée et la guerre dans l’Est du pays…la bonne approche aurait consisté à parler à Moscou avant toute négociation pour l’assurer que jamais l’Ukraine n’adhèrerait a l’Union ou l’OTAN, comme cela avait été fait avec l’Autriche avant 1989.

Le CETA était un accord mixte – et non pas purement communautaire, c’est-à-dire qu’il devait être ratifié par le Parlement Européen et l’ensemble des parlements nationaux

Guy Verhofstadt, président du groupe libéral, ancien Premier ministre belge, émarge dans pas moins de 7 conseils d’administration (pour 12,000 euro/mois en plus de son salaire d’eurodéputé.

Le traité de Lisbonne a introduit  la possibilité de réduire les compétences de l’Union : c’est un symbole fort, puisqu’il était acquis jusque-là que l’extension des compétences de l’Union était infinie.

En matière de politique sociale, l’union n’a rien à dire dans les domaines des salaires, du droit syndical, du droit de grève, du droit de fermeture temporaire d’entreprise. Elle peut simplement adopter à la majorité qualifiée des normes minimales en santé, sécurité et conditions de travail des travailleurs, consultation des travailleurs, lutte contre la discrimination et modernisation des systèmes de protection sociale. Pour les autres compétences, l’exigence de l’unanimité paralyse l’exercice.

L’union n’était que la spectatrice du traite de Lisbonne : les gouvernements ont même refusé que la Commission publie un tableau de bord des reformes accomplies et restant à accomplir.

Si on ajoute a cela la propension des Etats a communautariser les échecs et a nationaliser les succès européens, on comprend mieux la frustration qu’engendre la construction européenne.

Ce procès en ultralibéralisme de l’union, contre la concurrence libre et non faussée, est une spécificité hexagonale. L’union regroupe des pays qui ont en commun la démocratie et l’économie de marche. Mais une économie sociale de marché comme l’affirme les traites, l’union concentrant la moitié des dépenses sociales de la planète

La concurrence libre et non faussée, son but est double; réguler la concurrence sur les marchés et entre les états. L’exact contraire de l’ultralibéralisme.

La politique de la concurrence a une fâcheuse tendance à retenir une définition très étroite du ‘marche pertinent’ ; elle se limite trop souvent au marché européen, voire une partie de se marche, alors que la concurrence est mondiale. Avec la Commission, ni Google, Amazon etc. n’aurait pu voir le jour en Europe.

En 2014, les Etats Membres ont été autorisé à aider leurs entreprises à hauteur de 152 milliard d’Euro (y inclus 41 milliard pour le rail). La Commission n’a mis son veto qu’a 1,8 milliard d’aide jugées illégales.

Fonds structurels : les pays de l’Est reçoivent 4% de leur PIB en aide communautaire, comme cela a longtemps été le cas pour l’Ireland, le Portugal ou la Grèce.

On a oublié aujourd’hui ce qu’était une crise monétaire qui faisait perdre de sa valeur à une monnaie sans qu’on le souhaite et perturbait les échanges. Cela se chiffrait en point de croissance perdu, inflation et récessions.

Il y a, à la Commission et chez les états membres, puisque la première ne peut rien faire sans les seconds, une véritable religion libre-échangiste. 90% en volume des marches publiques sont ouverts à la concurrence en Europe, 32% au Etats Unis, 28% au Japon, 16% au Canada. On cherchera en vain un Buy European Act comme il en existe aux Etat Unis depuis 1933. L’instauration d’une préférence européenne pour les acteurs publiques est une possibilité, tout comme les l’utilisation ferme des instruments de défense commerciale.

Pékin concurrence l’Europe dans tous les secteurs. L’erreur de l’Europe est  d’avoir accepté d’entrer en concurrence avec un pays qui ne respecte aucune règle du jeu, qu’elles soient concurrentielles, environnementales, monétaires ou sociales (et de croire que toute la planète va accepter le jeu de concurrence ouverte qu’elle développe en Europe…)

Traite de Maastricht : la grande Bretagne a réussi à affaiblir, tout au long de la négociation, les articles sociaux avant de réclamer, lors du sommet de Maastricht de décembre 1991, un ‘opt out’, ce qui obligea ses partenaires à placer tout le chapitre, pourtant peu contraignant, dans une charte à part.

Les coopérations renforcées, qui permettent à quelques pays d’avancer plus vite dans certains domaines, n’ont débouché sur rien en matière fiscale. Le dumping fiscal et social est bien le résultat de la volonté des Etats, pas de l’Union.

 

 

 

 

 

 

 

 

 

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Swimming with Sharks – Joris Luyendijk (2015)

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In the years before the crash, commercial banks and mortgage providers lent far too much money to people who could not afford such debts – primarily in the US and the UK, mostly for mortages. This continued for a long period of time because the easy money drove up houses prices, making many people feel richer than they were. Commercial banks had no reason to worry about the risk of default on loans because they could sell them on to investment banks, which the chopped them up and repackaged them into ever more complex financial products. Assets managers at pension funds were keen to buy them because interest rates were low and these new instruments offered better returns. For protection, pension funds and others relied on American insurance giant AIG. In turn AIG trusted the credit rating agencies’ triple AAA ratings.

In 2007, millions of buyers would not be able to meet their financial obligations. Financial products that contained their mortgages began to lose value. Investors had to take big losses but banks, too, had kept some of these products. They had to write off huge sums but how much was difficult to estimate: not only some of the products where mind-bogglingly difficult to value but the same was true for the ‘vehicles’ in off-shore tax havens where banks had placed many of them. At Leman Brothers the buffers were not enough and the bank had to announce bankruptcy. Other banks and financial institutions stopped lending to each others (as none knew the financial solidity of the others). Suddenly the financial world was gripped by a paralysing fear. In response, Governments reached deep into the state coffers and central banks lowered interest rates and pumped unprecedented amounts of newly created money into the economy.  They had saved the system.

For bankers, the crash of 2008 was a perfect storm, or rather a black swam: unique and literally unforeseeable. But isn’t it all the more alarming if virtually nobody in the sector realised how dangerous these complex financial products could be?

The salaries of those who manage the risks in banks has always come from the revenues raised by those taking the risks. Historically, investment bankers worked in small partnership where management and owners partly overlapped. Partners were personally liable. From mid eighties these partnership started to list on the stock exchange or were taken over by publicly listed commercial banks who wanted to take advantage of the deregulation and move into investment banking. Those commercial banks took over dozens of other banks and became ‘too big to fail’.  In listed companies, the risk lies with shareholders rather than partners, while bankers are paid partly in shares and options. And a good way to raise the share price is to take risk (which ultimately the taxpayer will bear).  It was genuinely eye-opening to realise just how recently the investment banks had mutated in this way. Those who take the risks are no longer those who bear them.

If you can be out of the door in five minutes, your horizon becomes five minutes. That was the essence of zero job security. Not only does all loyalty evaporates, but continuity does too. Nobody can built on anyone else, the best can be poached at anytime and meanwhile there are swords of Damocles hanging over everyone’s head.

We need to get rid of the idea of ‘the bank’: that term implies a unity of action and purpose. There is no such a thing.

Perverse incentives: rewards for undesirable actions.

Traditionally there were separate firms for trading, for asset management and for deal making (mergers,listing of new companies etc.) . Since the 80’s, all three activities have been brought under the roof of one bank, through mergers and acquisitions in the financial sector. This is a conflict of interest of the highest order and banks have been asked to set up Chinese wall between their divisions and activities to avoid leaking of information and pressure from one sector to another (e.g. investing in companies whose listing is done by the same bank…)

Corporations can be hit hard by currency fluctuations (with increasing volatility in the 1970’s). So banks invented derivatives that allowed parties to protect themselves. This was a good idea that perform a useful service to the economy and society. But fast forward 20 years and you see the British bank Barings collapse as a result of a rogue trader using advance foreign currency derivatives.  A company or government can go bust, meaning investors lose money. Banks developed an insurance of sort: the Credit Default Swap (CDS). This was a good idea but a good decade later (in 2008) CDS played a crucial role in the financial crisisMortgages are good long term investments for pension funds but as a pension funds you are not going to by individual mortgages. Banks found a way to package those in instruments allowing investment by pension funds. 15 years later, those products would sank Lehman Brothers.

In 2012, a trader at JP Morgan (and his team) run up a 6.2bn loss. The year before, his pay came to 7m. He did not break any law and has never been prosecuted. (Bruno Iksil)

While doing research there are sometimes points at which lines of investigation suddenly coalesce into an insight.

Around 2000, the dot-com scandal revealed fundamental conflicts of interest between activities that used to be done by separate firms; taking company public, trading and asset management. The regulatory response was not to prevent those conflicts, it merely forced the banks to install Chinese wall – policed by their own risk and compliance staff.

Tony Blair is making 2.5M pound a year as adviser to JP Morgan. Hector Sants, chief regulator in 2008, has a top job at Barclays. His estimated compensation was 3M pound a year. The three major credit rating agencies have kept their de-facto cartel; as have the four accountancy firms who continue to do lucrative consultancy jobs for the banks there are meant to audit independently.

After quizzing interviewees on their motives, greed seemed a highly inadequate explanation of their behaviour. I have come to believe that the focus on greed is the biggest mistake outsiders have made in the aftermath of Lehman’s collapse. (The Wolf of Wall Street kept this popular). [The system was to blame in more general term, short termism etc.]

To think that blinkered bankers will one day wake up and decide to change finance from inside is wishful thinking.

Andrew Haldane, number 2 at English central bank told that the balances of the big banks are the blackest of black hole.

Four changes the laws should bring: banks must be chopped up into units so that they are no longer too big to fail; banks should not have activities under one roof that create conflict of interests; banks should not build or sell overly complex financial products, the bonus should land on the same head as the malus.

Political parties, politicians, regulators have come to identify themselves with the financial sector and the people in it. The term is ‘capture’. Politicians started to believe the world works in the way that bankers say it does.

As put by interviewee: The left insists on solidarity across the nation, with higher tax rates for rich people to help their less fortunate countrymen. But this solidarity is predicated on a sense of national belonging, to which the left is allergic; national identity comes with chauvinism and nationalism and creepy right wing supremacists.

Nobody is helped more by cynicism about politics than cynical politicians.

 

 

 

 

 

The Hidden Wealth of Nations, Gabriel Zucman, 2015

 

Tax havens are at the heart of financial, budgetary, and democratic crisis.

On a global scale, 8% of the financial wealth of households is held in tax havens. In the spring of 2015 foreign wealth held in Switzerland reached $2.3tn.  Since April 2009, when countries of the G20 held a summit in London and decreed the ‘the end of bank secrecy’, the amount of money in Switzerland has increased by 18%. For all the world’s tax havens combined, the increase is close to 25%. And we are only talking about individuals here. 55% of all the foreign profits of US firms are now kept in such havens.

To fight offshore tax avoidance, the first measure is to create a worldwide register of financial wealth, recording who owns what. Financial registry exist but they are fragmentary (Clearstream).

In France, on the eve of the 1914-18 war, a pre-tax stock dividend of 100 francs was worth 96 francs after tax. Throughout the 19th century, European families paid little or no tax. In 1920 the world changed. Public debt exploded. That year the top marginal income tax rose to 50%, in 1924 it reached 72%. The industry of tax evasion was born.

In 1920, the wealth was made up of financial securities: stock and bonds payable to the bearers. Owners looked for safe places to keep them.  The bank then took the responsibility for collecting dividends and interest generated by those securities. Many banks could do this but Swiss bank offered the possibility of committing tax fraud. Off-balance sheet activities are the holding of financial securities for someone else (they don’t belong to the bank but to clients). The most rapid growth of assets in Swizerland were in 1921-22 and 1925-27. Swiss bank secrecy laws followed the first massive influx of wealth (from France mostly), not the reverse.

For the most part, non-Swiss residents who have accounts in Switzerland do not invest in Switzerland – not today, not in the past. Swiss bank offshore successes owes nothing to the strength of the Swiss francs. It has to do with tax evasion.

Charles de Gaulle imposed a condition on the rapprochement between Switzerland and the allies in 1945: Berne was to help identify the owners of undeclared wealth. For Congress it was out of the question to send billions of dollars via the Marshall Plan without trying to tax French fortunes hidden in Geneva. Berne then engaged in a vast enterprise of falsification: they certified that French assets invested in US securities belonged not to French people but to Swiss citizens or to companies in Panama.

Recent policy changes are making it more difficult for moderately wealth individuals to use offshore banks to dodge taxes: for them the era of banking secrecy is coming to an end. The decrease of little account is more than made up for by the strong growth of assets deposited by the ultra-rich, in particular coming from developing countries.

In Switzerland, banks managed $2.3tn belonging to non-resident. $1.3tn belong to Europeans (DE,FR,IT,UK), mostly through trust and shell corporations domiciled in the British Virgin Islands. 40% is placed in mutual funds, principally in Luxembourg.  With more than $150bn in Switzerland – more than the US has, a country with a GDP 7 times higher – the African economy is the most affected by tax evasion.

If we look at the world balance sheet, more financial securities are recorded as liabilities than as assets, as if planet Earth were in part held by Mars. This amount to $6.1tn in 2014 and the bulk of the imbalance comes from Luxembourg, Ireland and Cayman Islands. This imbalance is a point of departure for estimate of the amount of wealth held in tax havens.  I estimate that $7.6tn (8% of global household financial assets) is held in accounts located in tax havens (this includes $1.5bn of bank deposits). The true figure, all wealth combined, is 10% or 11%.

It is one of the great rules of capitalism that the higher one rises on the ladder of wealth, the greater the share of financial securities in one’s portfolio. Corporate equities – the securities that confer ownership of the means of production, which leads to true economic and social power – are especially important at the very top.

On a global level, the average return on private capital, all class of assets included, was 5% per year during the last 15 years. Slightly decreased since the 1980-90, when it was closer to 6%. This is real rate, after adjusting for inflation.  Prudent funds, with 40% low risk bonds, have earned on average 6% per year. Those who invest in international stocks have returned more than 8%. As for Edge funds, reserve for the ultra-rich, their average performance has exceeded 10%.

Africa :30% of wealth held abroad; Russia:52%; Gulf countries: 57%; Europe:10%; US and Asia:4%

Foreign Account Tax Compliant Tax (FATCA): passed by Congress and Obama’s administration in 2010 – Financial institutions throughout the world must identify US clients and inform the IRS to ensure that tax on interest income, dividends and capital gains are paid. Foreign banks refusing to disclose accounts held by US taxpayers face sanctions: a 30% tax on all dividends and interest income paid to them by the US. Tax havens can be forces to cooperate if threatened with large-enough penalties.

To believe that tax havens will spontaneously give up managing the fortunes of the world’s tax dodgers, without the threat of concrete sanctions, is to be guilty of extreme naïveté.

The IRS signed a check for $104 million to the ex-banker of UBS, Bradley Birkenfeld, who revealed the practice of his former employer.  But one may well doubt the effectiveness of this strategy as to rely exclusively on whistle blowers to fight against tax-havens is not strong policy.

The EU saving tax directive, applied in the EU since July 2005 is to fight against offshore  tax evasion by sharing information between countries about clients. Yet this was a failure: Lux and Austria were granted favourable terms and do no exchange information with the rest of Europe. Lux could give the persistence of banking secrecy in Switzerland to block any revision of the directive. Lux and Austria instead of sharing information must apply a withholding tax (35%) which is less than the top marginal income tax in France. Then the tax applies only to EU owners, not to accounts held by shell corporations, trusts or foundations. And the directive applies only to interest income, not dividends. Why? This is a mystery. Was it incompetence? Complicity? The main effect has been to encourage Europeans to transfer their wealth to shell corporations (+10% in Switzerland, in the months that followed the entre into force of the Directive). Swiss bankers have deliberately torpedoed the saving tax directives. No sanctions, no verifications foreseen…it is high time to wake up to reality.

Currency Wars, James Rickards (2011)

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Applied Physics Lab : the Pentagon was about to launch a global financial war (simulation) using currencies and capital markets instead of ships and planes.

During the first part of the depression that began in 2007, sovereign wealth funds were the primary source of bailout money. SWF invested over $58bn (in Citigroup, Meryll Lynch, Morgan Stanley). These investments were decimated by the panic of 2008 – SWF lost vast amount of money (which propped the US government to step in later on to avoid those losses) yet influence that came with them remained. SWF could then be used to exercise malign influence over target companies, to steal technology, sabotage new projets, stifle competition, engage in bid rigging, recruit agents or manipulate markets (including those in strategic commodities such as oil, copper etc.).  Such activities were not common, let alone the norm, but they were possible.

The president has nearly dictatorial powers to freeze any accounts that try to disrupt the financial market (by dumping Treasury notes on the open market in vast quantities). Destroying confidence in the dollar would be far more effective than dumping a particular dollar denominated instrument. If the dollar collapse, all dollar denominated markets would collapse with it. And the president’w power to freeze accounts would be moot.

A currency war, fought by one country through competitive devaluations of its currency against others, is the most destructive and feared outcomes in international economics. It revives the ghosts of the Great Depression, the 1970s, the crises of the UK pound in 92, Russian rubles in 98 a.o.

Two currency wars : 1921 to 1936 and 1967 to 1987. Classic gold standard 1870-1914, creation of Fed 1907-1913 and WWI and treaty of Versailles 1914-1919.

1870-1914: golden age in terms of noninflationary growth coupled with increasing wealth and productivity in the industrialized and commodity producing world.

1907-1913: 1907 the failure of Knickerbocker Trust to corner the copper market led to a run on the bank in a market that was already nervous and volatile after massive caused by the 1906 earthquake. This led a more general loss of confidence, which led to a stock market crash and further bank runs and finally a full scale liquidity crisis and financial crisis. The threat was stemmed only by collective action of the leading bankers in the form of a private financial rescue organized by JP Morgan. A central bank to act as an unlimited lender of last resort to private banks was needed before panic arose.

Currency war 1 : Germany moved first in 1921 with a hyperinflation designed initially to improve competitiveness and then taken to absurd lengths to destroy an economy weighed down by the burden of war reparations. France moved next in 1925. The US moved in 1933…then England.  In round after round of devaluation and default, the major economies of the world raced to the bottom, causing massive trade disruption, lost output and wealth destruction along the way.

Germany destroyed it currency to get out from under onerous war reparations demanded by France and England. In fact, those reparations were tied to gold mark and subsequent treaty protocols were based on a % of German exports regardless of the paper currency value.

Hyperinflation in Germany:  diners offered to pay for meals in advance the price would be vastly higher by the time they finished. The demand for banknote was so great that, by 1923, the notes were being printed on one side only to conserve ink.  The currency collapse also strengthened the hand of German industrialists who controlled hard assets in contrast to those relying solely on financial assets. Hyperinflation can be used as policy lever: it produces fairly predictable sets of winners and losers and can be used to rearrange social and economic relations among debtors, creditors, labor and capital (while gold is kept to clean up the wreckage if necessary).

I don’t give a shit about the lira – Richard Nixon, 1972.

Although conceived in the form of a grand international agreement, the Bretton Woods structure was dictated almost single-handedly by the United States at a time when US military and economic power was at a height not seen again until the fall of the Soviet Union in 1991.

In Jan 1965, France converted $150 million of dollar reserve into gold and announced plan to cover another $150 million soon (that is equivalent to $12.8bn as at 2011). De Gaulle helpfully offered to send the French navy to the US to ferry the gold back to France. This came at a time when US businesses were buying up European companies and expanding operations in Europe with grossly overvalued dollars, something De Gaulle referred to as ‘expropriation’. The redemptions of dollars for gold had enable France to become a gold power, ranking behind only the US and Germany, and it remains so today.

In 1969 the IMF took up the ‘gold shortage’ cause and created a new form of international reserve asset called the special drawing right (SDR). SDR was manufactured out of thin air without tangible back up and allocated among members in accordance with their IMF quotas.  There were small issuance in 1970-72, then in 1981 (as a response to oil price and global inflation) and then in 2009, as a response the deep depression which followed the financial crisis of 2007-8.

On Sunday, august 15, 1971, President Nixon preempted the most popular show in America, Bonanza, to present a live television announcement of what he called his New Economic Policy consisting of immediate wage and price controls, a 10% surtax on imports and the closing of the gold window.  The announcement was referred ever since as the Nixon Shock.

Stagflation – a combination of high inflation and stagnant growth in the US – which lasted from 1973 to 1981 was the exact opposite of the export led growth that dollar devaluation was meant to achieve. The proponent of devaluation could not have been more wrong. The fact that the policy failed spectacularly in 1973 did not deter the weak-dollar crowd. The allure of quick fix for industries in decline and those with structural inadequacies is politically irresistible.

By 1987, gold was gone from international finance, the dollar had devaluated, the yen and the mark were ascendant, sterling had faltered, the euro was in prospect and China had not yet taken its own place on the stage. The relative peace in international monetary matters rested on nothing more substantial than faith in the dollar as a store of value based on a US growing economy and stable monetary policy by the Fed. These conditions largely prevailed through the 1990s.  Currency crisis did arrive (Sterling in 1992, Mexican peso in 1994, Asia-Russia crisis in 97-98) but did not threatened the dollar. The dollar was typically a safe haven when they arose.

 

The main battle lines being drawn are a dollar-yuan theater across the Pacific, a dollar-euro theater across the Atlantic and a euro-yuan theater in the Eurasia landmass.

Participation in currency war today is no longer confined to the national issuers of currency and their central banks. Involvement extends to IMF, World Bank as well as hedge funds, global corporation and private family offices of the superrich. (George Soros “broke the Bank of England” in 1992).

Today the risk is the collapse of the monetary system itself – a loss of confidence in paper currencies and massive flight to hard assets.

The low rate policy of the Fed was justified initially  as a response to challenges of the 2000 tech bubble collapse, the 2001 recession, the 9/11 attacks and Greenspan’s fear of deflation (the last being the main determinant for the Fed). China was now exporting its deflation to the world, partly through a steady supply of cheap labour and the low rate policy was to offsets the effects in the US.

Lower rates meant that all types of dubious or risky deals could begin to look attractive, because marginal borrowers would ostensibly be able to afford the financing costs. The sub-prime residential loan market and commercial real estate market both exploded in terms of loan originations, deal flow, securitisations …due to Greenspan’s low rate policies.

The process of absorbing the surplus of dollars entering the Chinese economy, especially after 2002, produced a number of unintended consequences. The yuan is pegged to the dollar, it does not trade freely and its use and availability are tightly controlled by the Central Bank of China. The Chinese central bank did not just take the surplus dollars, but rather purchased them with newly printed yuan. This meant that as the Fed was printing dollars, the Chinese central bank printed Yuans to maintain the pegged exchange rate.

The central bank of China (like all others) prefer highly liquid government securities issued by the US treasury. As a result, the Chinese acquired massive quantities of US treasury obligations. By 2011 Chinese foreign reserve were approximately US$2.85tr, US$950bn in US government obligations (32%).  (US$ 3.2tr in Nov 2016; US$1.15tr in US obligation – 36%). A monetary powder keg that could be detonated by either side if the currency wars spiraled out of control.

The principal accusation leveled by the US against China, since 1994, is that China manipulates its currency in order to keep Chinese export cheap for foreign buyers. But China’s export is not an end in itself. The real end of Chinese policy is jobs for the young workers in coastal factories, assembly plants and transportation hubs.

The US has now chosen the G20 as the main arena to push China in the direction of revaluation (Chinese are more deferential to global opinion than to US opinion alone. Chinese are attentive to the G20 in ways that they may not be when it comes to other forums.

The relationship between Euro and Dollar is better understood as co-dependence rather than confrontation.

Although the bankruptcy of Leman Brother was filed in US federal courts after bailed out attempt failed, some of the largest financial victims and worst-affected parties were European hedge funds that had done over-the-counter swaps business (ie. Directly between parties, without any supervision as provided by exchange trading for instance) or maintained clearing accounts at Lehman’s London affiliates.

Investors happily snapped up billions of euros in sovereign debt from the likes of Greece, Portugal, Spain, and Ireland at interest rates only slightly higher than solid credits such as Germany. This was done on the basis of high ratings from incompetent rating agencies, misleading financial statements from government ministries and wishful thinking by investor that a euro sovereign would never default.

2010 Euro debt crisis: banks would buy sovereign bonds in the belief that no sovereign would be able to fail. Sovereigns happily issued bonds to finance no sustainable spending.  European banks gorged also on debt issued by Fannie Mae and other collateralized debt obligations (CDO). The European banks were the true weak links in the global financial system.

In 2010, of the $236bn of Greek debt, 15bn was owed to UK, 75 to France and 45 to German entities. Of $867 billion of Irish debt, 60bn was to France, $188 to UK and $184 to Germany. Of the 1.1tn of Spanish debt, 114 was to UK, 220 to French entities and 238 to German. The mother of all inter-European debt was the $511bn that Italy owed to France.

The sovereign debt was owed to other countries’ banks. This was the reason for the Fed’s secret bailout of Europe in 2008. This was the reason Fannie Mae and Freddy Mac bondholders never took any losses when those companies were bailout by the US taxpayers in 2008. The European banking system was insolvent so subsidizing Greek pensioners and Irish banks was a small price to pay to avoid watching the all edifice collapse.

The relationship between euro and yuan is simply dependent. China is emerging as a potential savior of Greece, Portugal and Spain, based on self-interest and cold calculation. China has an interest in strong euro as EU is its largest trading partner: a devaluation of the Euro would be costly for China. China interest in supporting the Euro is as great or greater than its interest in maintaining the Yuan peg against the dollar. China’s motives include diversifying its reserve position to include more euros, winning respect of friendship in Europe, gaining access to sensitive infrastructure through foreign direct investment. By buying sovereign bonds from peripheral countries, China help Germany to bear the costs of European bailouts and avoid the losses it would suffer if the euro collapsed. China stabilize the Eurasia flank while it fights the US, its main front in the currency war.

The G20 is perfectly suited to US treasury secretary Timothy Geithner’s modus operandi, which he call ‘convening power’.

Government spending and business investment might play a role, but American consumer, at 70% or more of GDP, has always been the key to recovery.  In 2008, 2009 the G20 summits had also been preoccupied with plans to rein in the banks and their greed-based compensation structures, which provided grotesque rewards for short term gains but caused long term destruction of trillions of dollars.

The IMF: in the 1980s and 1990s it had assisted developing countries’ economies suffering foreign exchange crises by providing finance conditioned upon austerity measures designed to protect foreign bankers and bondholders. Yet with the elimination of gold, the rise of floating exchange rates and pilling up of huge surpluses in developing countries, the IMF entered the 21st century with no discernable mission. And suddenly the G20 breathed new life into the IMF….

Quantitative Easing which consist of increasing money supply to inflate asset prices and weakening the dollar through inflation. In its simplest form, QE is printing money. Fed buys treasury debt securities from a select group of banks called primary dealers. The primary dealer have a global base of customers, sovereign funds, other central banks, pensions funds, institutional investors and high net worth individuals. When Fed want to reduce money supply, they sell securities to the primary dealers. Securities go to the dealers and the money paid to the Fed simply disappears. Conversely, to increase money supply, Fed buy securities from the dealers and pay with fresh printed money (which then support further money creation by the banking system).

China’s policy of pegging the Yuan to the dollar was based on the mistaken belief that the Fed would not abuse its money printing privileges. Now the Fed was printing with a vengeance (through QE in 2009-10)

Collateral damage of the currency war:  through a combination of trade surpluses and hot money flows seeking higher investment returns, inflation caused by US money printing soon emerged in South Korea, Brazil, Indonesia, Thailand

This is the down side of Convening power. The absence of governance can be efficient if people in the room are likeminded of if one party has the ability to coerce the others, as it was the case when the Fed confronted the 14 families at the time of the LTCM bailout (Long Term Capital Management was a very successful hedge funds (40+% return) with almost $100bn investment in derivatives in 1998 when the default of Russia caused panic in the market.  LTCM highly leveraged investment started to crumble and banks and funds that had invested in LTCM wanted their money back. To save LTCM and avoid a collapse of the banking system, the Fed convinced 15 (or 14) banks to bail out LTCM (in return for 90% ownership of the Fund) with Fed lowering funds rate to make this easier. Once financial firms realized the Fed would bail them out, they become more willing to take risk, and this contributed to a situation that led to the financial crisis in 2007-8).

March 11, 2011 the earthquake in Japan. The yen surged against the dollar, bolstered by expectation of massive yen repatriation to fund reconstruction. Some portion on Japanese reserve outside the country ($2tn) would have to be converted back in Yen and brought back home: this led the price surge. This seemed to fit nicely with US goals but Japan wanted the opposite (a cheap yen would help promote japan export and help recovery). With no G20 to agree on a plan, the three US, Japan and European central banks would work together, under the banner of the G7 french minister Lagarde to coordinate an attack on the yen that consisted of massive dumping of yen by central banks and corresponding purchases of dollars, euros, Swiss francs etc. The attack continued across time zones as European and New York Markets opened. Lagarde deft handling on the yen crisis led her to replace Strauss-Khan as head of IMF in June 2011.

Keynes’s theory: stimulus programmes work better in the short term than the long term. They work better in a liquidity crisis than solvency crisis and better in mild recession than in severe one. And they work better in economies that have low debt level.

The Value at Risk is a method used by Wall Street to manage risk: it measure risk of a portfolio with certain risk offset against others. This is the VaR that gave the all clear to high leverage and massive off-balance sheet exposure before the crisis (and it is still in use today). But the flaws  and limitations were well known (notably it does not guarantee against all positions to fall at the same time) but were ignored as VaR permitted the pretense of safety that allows firms to use high leverage and make larger profit while being backstopped by tax payers when things went wrong.

The destructive legacy of financial economics is hard to quantify but $60tn in destroyed wealth in the months following the panic of 2008 is a good estimates. Derivative contracts did not shift risks to strong hands, instead it concentrated risk in the hands of the too big to fail.

Today government spending has grown so large and sovereign debt burdens so great that citizen rightly expect that some combination of inflation, higher taxation and default will be required to reconcile to debt burden with the means available to pay it.

Thought emerges from the human mind in the same complex, dynamic way that hurricanes emerges from the climate.

Between June 2000 and June 2007, the amount of over the counter foreign exchange derivatives went from $15tn to $57tn, a 367% increase. Interest rates derivative went from $64tn to $381tn, a 589% increase. Equity derivatives went from $1.9tn to $9.5tn, a 503% increase.

Actual mortgage losses are still less than $300bn. When derivatives and other instruments are included, total losses reached over $6tn, an order of magnitude greater than actual losses.

Next time it will be different. Based on theoretical scaling metrics, the next collapse will not be stopped by governments, because it will be larger than government.

It is well understood that the sun uses far more energy than a human brain. Yet the sun is vastly more massive than a brain. When differences in mass are taken into account, it turns out that the brain uses 75,000 times as much energy as the sun (in Chaisson’s standard units).

China would never dump it Treasury securities because it has far too many of them. The Treasury market is deep, but not that deep, and the price of Treasuries would collapse long before more than a small fraction of China’s bond could be sold. Resulting losses would fall on the Chinese themselves. Between 2004 and 2009, China secretely doubled it official holding of gold. China argues that secrecy was needed to avoid running up the price of gold… China’s posture toward the US dollar is likely to become more aggressive as its reserve diversification becomes more advanced.

Marc 30, 2009 AFP reports that China and Russia are cooperating in a creation of a new global currency. Dec 13, 2010 Sarkozy calls for the consideration of a wider role for SDR. Dec 15, 2010 Russia and China are launching a yuan-ruble trade currency settlement.

America has become a nation of guinea pigs in a grand monetary experiment, cooked up in petri dish of the Princeton economics department.

Easy money and dollar devaluation are designed to work together to cause actual rates low to get the lending and spending machine back in gear.

Fundamentally monetarism is insufficient as a policy tool not because it gets the variables wrong because the variables are too hard to control. Velocity is a mirror of consumer confidence and cand be highly volatile. The money supply transmission mechanism can from base money to bank loans can break down because of lack of certainty, lack of confidence on the part of the lenders and borrowers.

Because debt and deficits are now so large, the US has run out of dry powder. If struck by another financial crisis, its ability to resort to deficit spending would be impaired.

As long as profits continue on Wall Street, the hard questions will not be asked, let alone answered.

In 2011 US dollar is 61% of identified reserves. The next largest is the euro with just over 26%. The IMF reports a slow but steady decline of the dollar over the last 10 years (from 71%). [from internet in 2016: In 2014, USD dollar is up to 63% and Euro down to 22%].

Eichenberg research led to a plausible and fairly benign conclusion that a world of multiple reserve currencies, with no single dominant currency, may once again be in prospect. It is a world of reserve currencies adrift. Instead of a single central bank like the fed abusing its privileges, it will be open season with several central banks to do the same.  There would be no safe harbor reserve currency and markets would be more volatile and unstable.

SDR is world money, controlled by the IMF, backed by nothing and printed at will. Experts object to use the word money for the SDR as citizen can’t obtain them. They are a medium of exchange : nations can settle their local currency trade balances with other nations in SDR.

Smaller is safer – the correct approach is to break up big banks. Gold standard will bring more certainty, greater stability in inflation, interest rates and exchange rates . This will promote investment.

Early 2012, by unilaterally excluding Iran from the dollar payment system, the US caused the a currency collapse, hyperinflation and sky-high interest rate in a matter of days.  Later US pressured the SWWIFT governing board to exclude Iranian banks from its facilities.  While smuggling of dollars (from Iraq) to help make payment kicked in rapidly, this was only a fraction of the global commerce Iran lost. Iran was too important to remain a complete pariah and ideas for trade financing mechanisms that did not involve the dollar were proposed. And later in 2012 BRICs suggested the creation of a multilateral bank to facilitate lending and payments among emerging markets. An unintended consequence of US sanctions on Iran.

Treasure Islands, Nicholas Shaxson, 2011

Image result for nicholas shaxson treasure islands

More than half of the world trade passes, at least on paper, through tax havens. Over half of all banking assets and a third of FDI by multinational corporations are routed offshore. Some 85% of international banking and bond issuances takes place in the so-called Euromarket, a stateless offshore zone.  IMF estimated that in 2010 the balance sheet of small island financial centers added up to US$ 18 trillion, a third of world’s GDP.

A tax haven might offer a zero tax rate to non-residents but tax it own residents fully. This ring fencing between residents and non-residents is a tacit admission that what they do can be harmful.

Another way to spot a secrecy jurisdiction is to look for whether its financial services industry is very large compared to the local economy. The IMF uses this tool in 2007 to finger Britain as an offshore jurisdiction.

Transfer pricing : by artificially adjusting the price for internal transfer, multinationals can shift profits into a low-tax haven and costs into high-tax countries where they can be deducted against tax….Sometimes the prices of these transfers are adjusted so aggressively that they lose all sense of reality: a kilogram of toilet paper from China has been sold for US$4,121, a liter of apple juice has been sold out to Israel at US$2,052; ballpoint pens have left Trinidad values at US$8,500 each. Most example are far less blatant (unclear why unit price is high – transfer pricing works with product sold to offshore company at production price (to avoid taxes) and those product are resold to buying country at a price just lower the market price, so that profit in the selling country are small (and therefore not taxed much). The large difference between purchase and selling price is in the offshore country – not taxed).

Developing countries lose an estimated US$160 billion each year just to corporate trade mispricing of this kind.

The world contains about 60 secrecy jurisdictions, divide into 4 groups: Europeans, the British zone centered on the City of London, US influence zone and the fourth include some oddities (Somalia, Uruguay….)

In Europe, Switzerland, since at least the 18th century, sheltered the money of European elites. Netherland is a major tax haven. 20 times Dutch GDP ($18 trillion) flowed through Dutch offshore entities in 2008. Bono shifted his band’s financial empire to Netherland in 2006, to cut its tax bill.

Luxembourg is among the world biggest tax haven: North Korea Kim Jong Il has stashed some 4 billion dollars in Europe.  Luxembourg, South Korea Intelligence said in 2010, is a favoured destination for this money.

The second group, accounting for half of the world secrecy jurisdiction, is the most important and centred on the City of London. Jersey, Guernsey, Isle of Man, Cayman island, all substantially controlled by Britain, but also Hong Kong, Singapore; Dubai, Ireland, Vanuatu which are deeply connected to the City of London. This network account for almost half of the international bank assets.

The third group:  US is now, by some measures, the world’s single most important tax haven in its own rights, with a three tier system. At federal level: Tax exemptions, secrecy provisions, US banks may accepts proceeds from a range of crimes as long as the crimes are committed overseas. Individual US states offer a range of offshore lures: Florida, Wyoming, and Delaware with strong and unregulated corporate secrecy. And a network of islands such as Virgin Islands, Liberia, Marshall Islands (flag of convenience, managed by a private firm in Virginia, after a shipping registry was developed in 1986 with USAID support. Deep Water Horizon was registered in Marshall Islands. A small opaque tax haven grew alongside the shipping registry. Forming a Marshall Islands company can be done in a day for $650 and names of directors and shareholders are not mandatory in the registration process…),Panama, the biggest US influenced haven, a black hole that has become one of the filthiest money laundering sinks in the world.

Offshore finance has quietly been at the heart of the Neoconservative schemes to project US power around the globe.

The most important tax haven in the world in an island: the island of Manhattan. The second biggest is located on an island: London.

The difference between tax avoidance (legal but getting around the intent of elected legislature) and tax evasion (illegal) is the thickness of a prison wall.

US corporations paid about 2/5 of all US income taxes in the 1950’s; that share has fallen to 1/5. The top 0.1% of US taxpayers saw their effective tax rate fall from 60% in the 1960 to 33% in 2007. Billionaire Warren Buffet found that he was paying the lowest tax rate among his office staff, including the receptionist.  Overall taxes have not declined, the rich have been paying less and everybody else has had to take up the slack.

Russian dirty money favors Cyprus, Gibraltar, Nauru, all with strong British links. Much foreign investment in China goes via the British Virgin Islands.

A drug dealer may have money in a bank account in Panama. The account is under a trust set up in Bahamas. The trustees may live in Guernsey and the trust beneficiaries could be a Wyonming corporation with directors that are professional nominees who direct hundreds of similar companies. They have company lawyers, or trustees can be lawyers themselves, who are prevented by attorney-client privilege from giving out any details. Some trust may even have a flee clause: the moment an enquiry is detected, the structure flits to another secrecy jurisdiction and assets will automatically hop elsewhere.  Hong Kong is preparing legislation to allow incorporation and registration of new companies within minutes….

In 2005 Tax Justice Network estimated that wealthy individuals hold perhaps $11.5 trillion worth of wealth abroad. It is about ¼ of global wealth and equivalent to GNP of the US. This is $250 billion of taxes lost (2 or 3 times the size of the aid budget). And this is just individuals, not corporations…

http://www.taxjustice.net/

 

Global Financial Integrity programme (Center for International Policy in Washington) calculated that $1.2 trillion in illicit financial flows in 2008 from developing countries. For every dollar of aid money, the west has taken back $10 of illicit money under the table.

http://www.gfintegrity.org/

 

Eurodad has a book called Global Development Finance: illicit flow report 2009 which  seeks to lay out every comprehensive official estimate of global illicit international financial flows: every page is blank.

http://www.eurodad.org/taxjustice

The global offshore system helped generate the latest financial and economic crisis since 2007. 1 -By helping financial corporations to avoid regulation, offshore system helped them grow explosively, achieving “too big to fail” status and gaining the power to capture the political establishment in Washington and London. 2-As secrecy jurisdiction degraded their own financial regulations, they forced onshore jurisdiction to compete in a race towards ever laxer regulations. 3- huge illicit cross border flows (much of it unmeasured) have created massive net flows into deficit countries (US, UK) adding to the more visible macroeconomic imbalances that underpinned the crisis. 4- offshore incentives encouraged companies to borrow far too much. 5- As companies fragmented their financial affairs around the world’s tax haven, this created complexity which fed the mutual mistrust between market players that worsened the financial crisis.

Before WWI Britain did not tax profits made overseas. When war broke out, income taxes rose from 6% in 1914 to 30% in 1919 and Britain started to tax companies on their income worldwide.

The UN produced a draft model tax treaty in 1980 that was supposed to shift the balance back in favour of source countries and developing countries. The OECD intervened aggressively to stop this to ensure its own model treaty favoring rich country remained the preferred standard.  The rich country model has achieved a position of near-total dominance today. Not only is there double non-taxation, but plenty of tax that would in a fairer world be paid in poor countries is paid in rich country instead.

Trusts emerged in the middle ages when knights leaving for the crusades would leave their possessions in the hands of trusted stewards, who would look after them while they were away on the behalf of the knights’ wives and children. Trusts are secrets between lawyers and their clients. When a trust is set up the original owner of an asset in theory gives it away to a trust:  the trustee becomes the legal owner of the asset and must obey the terms of the trust deed. Even if the original owner dies, the trust remains and trustee is bound by law to follow its instructions. British upper classes feel comfortable separating themselves from their money and leaving it to be managed by trusted strangers (a cultural issue). Their education prepares them to recognize those would will respect their claims and whom they can trust.

Many of the structured investment vehicles that helped trigger the latest economic crisis were set up as offshore trusts, with several trillion dollars’ worth worldwide shrouded in deep secrecy.

A pervasive story exists that Switzerland put bank secrecy into place to protect German Jewish money from the Nazis. It is a myth. Amid the great depression (early 30s) workers called for more control over the banks. Bankers pressed fiercely for a new law to make it a crime to violate Swiss bank secrecy. The law was passed in 1934 making violation of bank secrecy a criminal offence. Swiss financial secrecy has existed for centuries. Catholic French kings valued Geneva’s bankers’ discretion highly – it would have been disastrous for it to be known they were borrowing from heretical Protestants.

‘It’s no use to pressuring the Swiss government, to get change, you must pressure the bank’, as demonstrated by the agreement between the US and UBS to share information on 4000 American account holders in 2010.

In 1929, culmination of a long period of deregulation and economic freedom, the richest 24,000 Americans received 630 times as much income on average as the poorest 6 million families, and the top 1% received nearly a quarter of all the income – a proportion slightly greater than the inequalities at the onset of the global crisis in 2007.

When bonds and shares are first issued, they flow into productive investment. This is generally healthy. Next a secondary market appears, where these shares and bonds are traded. These trades do not directly contribute to productive investment: they merely shuffle ownership. Well over 95% of purchases in global market today consist of this kind of secondary activity, rather than real investment. Shuffling ownership of bits of paper ought to help capital flow to those projects that offer the highest returns. A little speculative trading in these markets improve information and smooth prices. But when the volume of this dealing is a hundred times bigger than the underlying volume of trade, the result had proved to be a catastrophe.

From 1950 to 1973 annual growth rate amid widespread capital controls (and extremely high tax rates) average 4% in America and 4.6% in Europe. Per capita income in developing countries grew by a full 3% in the 60s and 70s, far faster than the rate since then. In the 80s, as capital controls were progressively relaxed around the world and tax rates fell and offshore system really began to flower, growth rates fell sharply. Countries that have grown most rapidly have been those that rely least on capital flow. Financial globalization has not generated increased investment or higher growth in emerging countries.

We msut be cautious about inferring too much from these facts, other reasons exists for high growth rates…but it shows that it is possible for countries to grow quickly while under capital control.

What has happening since the 1970s is financial liberalization on steroids: the offshore system has served as accelerator for flighty financial capital, bending capital flows so that they end up not where they find the most productive investment, but where they can find the greatest secrecy.

The Mont Pelerin society (1947, challenge to Keyne incubated in Switzerland –the world premier tax haven at the time): foundation of the global fightback against Keynes. “We must raise and train an army of fighters for freedom” Hayek. One attendee was Friedman, whose subsequent work inspired Thatcher and Reagan.

In 1957, the Pound Sterling still financed about 40% of world trade. With the empire crumbling and the pound sterling started to totter, this role was in great peril. Britain wanted to stop capital draining away by curbing bank’s overseas lending. The City objected and threatened to bankrupt the government. Curbing on lending would eventually apply to pound sterling loans by London merchant banks only. These bank – for which the international lending business was vital – simply shifted the international lending from pound to dollars. The Bank of England deemed that those transactions not to take place in the UK (as in foreign currency) and did not regulate those (as regulations would mean admission of responsibility, it was better not to regulate those markets!). While the Euromarket was undermining US control over the dollars, the US did nothing to stop its banks to work on the Euromarket. In the 1960, experts thought that the market would gradually disappear as soon as interest rates in the US would rise to European levels. In addition, the US banks wanted to keep this offshore system as quiet as possible – it was not a political issue before 1975…Eurodollars helped the US finance its deficits, fight foreign wars and throw its weight around. This was the birth of the Eurodollars and Euromarkets (which actually are not link to the Euro and exist in all main world currencies – not only dollars). Euromarkets are a booking exercise: banks would record onshore any transaction involving at least one British party, and would record of offshore operations where neither parties was British. Moscow Narodny Bank was the first on that market: Moscow was not comfortable keeping its dollars in New York in the middle of the Cold War and preferred to keep those dollars in London instead: a Marxist nation was nurturing the most unfettered capitalist system in history!  And as the sterling ship sank, the city was able to scramble aboard a much more seaworthy young vessel, the Eurodollar – the City transformed itself into an offshore island.  Before the 60s , countries were relatively well insulated against financial calamities that happen elsewhere, but the Euromarket connected up the world financial sectors and economies…as it grew, tides of hot money began to surge back and forth across the globe.

Starting with 200m in 1957, the euromarket kept booming. By 1970 it was measured at 46bn and by 1975 it was reckoned to have grown to exceed the size of the entire world’ foreign exchange. This market was the route through which the oil rich state surpluses (from the oil shocks) were routed to deficit plagued consumer countries. Market reached 500bn in1980, 2.6tn in 1988. By 1997, 90% of all international loans were made through this market. It is not anymore measured by the Bank of International Settlement…Every now and then government tried to tax this market – and failed. There are always technical details that allows the business to continue to flourish – it is considered a the most momentous financial innovation since the banknote, but it is very little researched.

In the Euromarket in London, the banks are not required to hold any reserve (it is unregulated, although most banks do have their own set of rules). Bank can create as much money as they want: the first $100 deposit will turn into a lending of $100, which turn into another deposit of $100 etc. etc. It never happened quite like that and there has been huge controversy about how much the Euromarket has really contributed to expanding the amount of money – since the Bank of International Settlement has stopped measuring it, we won’t know. With unlimited money creation, credit will expand into places where it was not previously able to, in more risky business. Euromarkets made it possible for credit quality to deteriorate out of sight of the regulators.

[ not a quote: In short an attempt to regulate the financial sector and control the flow of money lent to the rest of the world by London based banks led to the creation of the largest unregulated financial market (the euromarket) which contributed significantly to the financial crisis by allowing uncontrolled money creation and spread of the crisis to all financial sectors worldwide.]

The loan-back technique: mobster would move out money from the US in suitcases, put it in secret swiss account, the bank would loan back to the mobster in the US. The mobster can even deduct loan interest repayment from its taxable income…

The US Volcker commission probing the assets of dead Jews found an internal memo from a large Swiss bank that creaming off money from dead people’s account was the usual way to accumulate reserves. Not only this: in secrecy jurisdiction, depositors willingly accept below market interest rates, in exchange for secrecy. It is hardly a surprise that banks became so interested in offshore private banking.

Global Financial Integrity study (2010) between 1970 and 2008, illicit financial outflow from Africa were approximatively $854bn. Total illicit outflow may be as high as $1.8tn. Developing countries lost up to a trillion dollars in illicit outflows just in 2006 – that is 10 dollars for every dollar of aid flowing in.

Univerist of Massachussetts in 2008: real capital flight over 35 years in 40 african countries from 1970 to 2004 is about $420bn – $607bn with interest earnings. Yet the total external debt was only 227bn. Africa is a net creditor to the rest of the world and its assets vastly exceeds its debts. But these assets belong to a narrow elite, while public debt are born by the people.

The rise of the third world lending in the 70s and 80s laid the foundations for the global tax haven network that now shelter the most venal citizens. Some suggest that at least half of the money borrowed by the largest debtor countries flowed right out again under the table. Third world debt were match almost exactly by the stock of private wealth their elite had accumulated in the US (in 1990s). Loans to Russia to deal with nuclear safety in 1990’s all disappeared…For Mexico, Argentina, Venezuela, the value of their elites offshore wealth was several times their external debt. Today the top 1% of households in developing countries own an estimated 70-90% of all private financial and real estate wealth.

Wealthy foreign investors buy up distressed sovereign debt at pennies on the dollar – typically at a 90% discount – then reap vast profits when those debts are repaid in full. One trick is to make sure that influential locals are secretly part of the investor buying the discounted rate. They help make sure the debt gets repaid. Their involvement must be hidden behind the shield of offshore secrecy.

If we consider that $18tn flowed through the netherland in 2008, just one of the many conduit havens, it is not unreasonable to estimate to tens of even hundreds of bn dollars of tax revenue are at stake for developing countries.

In 2007, the two biggest sources of foreign investment in China were not japan or the US but Hong Kong and British Virgin islands. The biggest source for investment in India is not the US or Britain or China but Mauritius, a rising star in the offshore system. A wealthy indian will send his money to Mauritius, then disguised as foreign investment, is being returned to India. The sender can avoid Indian tax on local earnings, and also use the secrecy to build monopoly by disguising the fact that a diverse array of competitors in the market is in fact controlled by the same interest.

Delaware State, in the 80’s: Chase Manhattan and JP Morgan banks hired an expert to draft the tax law and help convince the state to adopt it. The law was drafted without any analyses of a Delaware official. The law was to remove interest rate ceiling (which were in place for 200 years, law against usury) on credit cards, on personal loans, car loans and more. Banks would have powers to foreclose on people’s homes if they faulted on credit card debts, they could establish places of business overseas or offshore, and they got a regressive state tax structure to boot. And crucially, this was to be rolled out across America. The fact that Delaware law could be enacted in other states is a sign of health competition…critics says this illustrates the ability of powerful private interests to pass laws with national ramifications by singling out and exploiting the weakest and most malleable states.

Because it is small, Delaware can take advantage of opportunities, they are small, they move fast and can fill the void. They can give bankers what they need faster than anyone else. Delaware’s legislature is for hire.

Credit card debt, money market funds and numerous other instruments that fueled the borrowing binge and the crisis – the deregulation of interest rates had effect that are incalculable and is seen as one the single most important cause of the 2007 crisis.

[Not a quote: in short, the removal of interest rate cap in Delaware, led banks to do better business there and the law to be exported to other states. This led to massive credit card debt ( e.g. consumers credit card debt and loans against homes to pay credit card bills) and creation of money market funds (which supplied banks with money) were key source of the 2007 crisis. ]

Delaware became a major player in the securitization industry – the business of parceling up mortgages and other loans, and repackaging the debt and selling them on. Delaware again simply established the exact legal framework that corporation desired.  The 1981 law contained a section exempting ‘affiliated finance companies’ from all state taxes. These company act like bank but are not formally banks so fall outside financial regulations. They are part of the global shadow banking system that dragged the world into economic crisis from 2007.

In 1988 the statutory trust act which provide protection of trust assets from creditors. This made Delaware the top jurisdiction for setting up so-called balance sheet CDOs (collateral debt obligations) which allowed banks to offload their assets onto other investors, another important contributor to the crisis.

Limited liability:  since the middle of 19th century: if a limited liability company goes bust, owners and shareholders may lose the money they invested, but their losses are limited to that: they are not liable for the additional debts the corporations has racked up. This was introduce to encourage people to invest. In exchange companies must have their account properly audited, and these audit published, to keep the risk manageable.

A partnership: responsibilities on losses and debt in full, lower taxes and accounts are private and undisclosed.

Jersey introduced the Limited Liability Partnership: the partnership allows less disclosure and the LL protection altogether. This is an example of having the cake and eating it. When debt are not covered, they end up being covered by the government, ultimately people’s taxes. With all audit company moving to LLP status (in UK, Aus, NZ…), it diluted auditor’s incentives to take care with their accounting. Had auditors personally faced getting into big trouble when they screwed up, they might not have been so hasty to sign off on all the off-balance sheet financing.

IMF 2010 report shows that funding flows related to Greece crisis from 15 main countries: barring France and Germany, all are major secrecy jurisdiction.

Banks achieved a staggering 16% annual return on equity between 1986 and 2006, and the banks are now big enough to hold us all to ransom. Unless taxpayers give them what they want, financial calamity ensues. This is the too big to fail problem- courtesy of offshore.

Remoteness between ownership and operation is an evil in the relations among men. (Keynes) This is the flaw in the grand bargain at the heart of the globalization project. [in relation to ownership that is transferred from owner to owner by finance institutions, with no link with the real operation in the economic world]

In 1998, the OCED new project was the first serious and sustained intellectual assault on the secrecy jurisdictions in world history.  The Coalition for Tax Competition, at the Cato Institute, was set up to counter the move.

A branch of economics known as public choice theory which rejects the notion that politicians act on the behalf of people and societies and instead look at them as self-interested individuals. James Buchanan and Vernon Smith, economists, studies this.

The rich have seen their wealth and income soar. They also shifted their income out of personal income tax category into corporation tax, to be taxed at far lower corporate tax rates.The richest 400 Americans in 1992 booked 26% of their income as salaries and 36% as capital gains. By 2007, they recorded 6% as salaries and 66% as capital gains. The same happened in all high-income categories and in all OECD countries since at least the 1970s. IN contrast, working population has seen its personal income taxes and social security contributions rise over the last 30 years.

Between 1990 and 2001, corporation tax revenues in low income countries fell by 25%. This is especially troubling because developing countries find it much easier to tax a few big corporations than millions of poor people.

IMF study in 2009 concluded that tax incentives, which are supposed to attract investors, slash tax revenues but do not promote growth.

In the golden age of 1947-1973 the US economy grew at nearly 4% a year, while top marginal tax rate was between 75 and 90%. Those tax rates did not cause that growth, nut high taxes didn’t choke it either.

It is inequality, rather than absolute level of poverty and wealth, that determines how society fare on almost every single indicator of well-being.

The low income countries that have been growing the fastest, like China, tend to be those that have exported capital, not imported it.

The best way for countries to share information is through the so-called automatic exchange of information, where they tell each other about their taxpayers’ financial affairs. This happens inside Europe and in a few other countries. But there is another way of sharing information, ‘on request’: a country will agree to hand over information but only on a case by case basis, only when specifically asked and only under very narrow conditions – the requested must be able to demonstrate why they need the information. In other word, the requester must already know, more or less, what it is [they are looking for]. No fishing expeditions are allowed.  You can’t prove criminality until you get the information, and you can’t get the information until you prove criminality.

The human factor of life of offshore: There is something about island life that stifles dissent and encourages the pervasive groupthink. ‘An enemy on an island is an enemy forever’ There is no blending into anonymous background, no neighboring society to shift toward. Islanders are required to watch their step, moment by moment. The ability to sustain an established consensus and suppress troublemakers makes islands especially hospitable to offshore finance. The local establishment can be trusted not to allow democratic politics to interfere in the business of making money [which in general benefit the islands but is to the detriment of the rest of the world]

In small jurisdictions – not necessarily islands- it is so easy for collective inferiority complexes to emerge, where residents come to see themselves as defenders of local interests against the predations of bigger, bullying neighbors.

In tiny states, everyone knows everyone else, and conflicts of interest and corruption are inevitable.

When Irish musician Bono, for years the world’s most prominent poverty campaigner, shift its financial affairs to Netherlands to avoid tax and is still warmly welcomed in society, the battle seems lost.

The shadow banking system: structured investment vehicles, asset-backed commercial paper conduits and other unregulated structures whose assets, by the time of the crisis in 2007, were greater than the entire $10tn US banking system, and which nearly brought the world economy to its knee.

In 1997, the Labour gave the Bank of England its operational independence, a gift of economic and political power to the City, the most radical shake up of the Bank in its 300-year history.

London has more foreign banks than any other financial center: by 2008 it accounted for half of all international trade in equities, 70% of Eurobond turnover, 35% of global currency trading and 55% of international public offerings. New York was bigger in areas like securisation, insurance, mergers and acquisitions and asset management, but much of its business is domestic, making London the world’s biggest international – and offshore – financial hub.

Richard Branson, who owns his business empire through a maze of offshore trusts and companies, said in 2002 that his company would be half its size if it had not legally avoided tax via offshore structures.

International Accounting Board Standard (IASB) sets the rules for how companies around the world publish their financial data. Over one hundred countries use these standards. Its rule let multinational corporations consolidate results in different countries into one single figure.  There is no way to unpick the numbers to work out profit in each country. Given that 60% of world trade happens inside multinational corporations, this is massive opacity.  The IASB is not a public rule-setting body, accountable to democratic parliaments; it is a private company registered in Delaware, financed by the big four accountancy firms and some of the world’s biggest corporations. This is an example of privatization of public policy making.

The City of London is the oldest continuous municipal democracy in the world, the Corporation boast. It dates from 1067 and is rooted in the ancient rights and privileges enjoyed by citizens before the Norman Conquest in 1066. It has remained a political fortress withstanding tides of history. Britain’s rulers have needed the City’s money and given the City what it wants in exchange.

The Bank of England, like other financial regulators, answers to Parliament, not to the Corporation, but its physical location at the centre of City reflects where its heart lies.

When the Government launched an inquiry in 2008 into the financial crisis, every single one of the team’s 21 members had background in financial services. It was hardly a surprise when the report recommended no real changes.

English libel laws are among the comforts for those with dirty money who come to London. There is no constitutional protection for free speech and the burden of proof is deposited squarely on the shoulder of the defendant, unlike nearly everywhere else. Libel litigation in England and Wales cost 140 times the European average. Many things in this book have been self-censored. Effective change in the law would significantly weaken Britain’s offshore empire.

In Britain, 0.3% of the population owns 2/3 of the land, in famously unequal Brazil, 1% of the population owns half of the land.

Until 1970’s offshore explosion, UK banks expanded their balance sheet cautiously, in line with spending in the economy, and combined they were worth half of the GDP. In the beginning of twenty-first century their balance sheets had grown to over 5 times of GDP.

Ancien regime in France fell in the 18th century because the richest country in Europe, which had exempted its nobles from taxation, could not pay its debt.

Recommendations: The veil of silence and ignorance can be lifted; blacklisting of havens; country by country accounting reporting for big corporations; automatic information sharing between countries; priorities the needs of developing countries; focus on improving tax systems in developing countries; confront the British spider web, the most aggressive single element in the global offshore system; new taxation approach based on the substance of what they do in the real world, rather than on the legal fictions its accountants have cooked up; Onshore tax reform with focus on land and land rental value which encourage the best use of land – and proof against offshore escape. Other focus should be on mineral rich countries with oil money sluicing into the offshore system, distorting the global economy; tax and regulate the financial industries according to an economy’s real needs – ignoring the threat of relocation offshore by companies; tackle the intermediaries and private users of offshore (e.g. pressure on banks, not only on governments); corporate responsibility – limited liabilities is a privilege for instance, corporations can be held to a set of obligations to the society (notably transparency). Offshore undermined this: privilege are still there but obligations have withered; Reevaluate corruption, it worsen poverty and inequalities. Parallels between bribery and the business of secrecy is no coincidence – we are talking about the same thing; change the culture: pundits, journalist, politician can not fawn over people who get rich by abusing the system. Professional associations of lawyers, accountants and bankers need to create code of conduct to prevent assisting financial crimes.

Six années qui ont changé le monde – Hélène Carrère d’Encausse – 2015

Le putsch. 19 Aout 1991.

Comment ne pas songer au précédent de Khrouchtchev, écarté du pouvoir en 1964 par un putsch « pacifique » ?  Entre 1964 et 1991, il y avait une différence considérable : la perestroika avait libéré la parole. Les putschistes savaient que la peur n’avait plus la même emprise sur les foules.

Dans la soirée, les membres du G.K.Tchepe (comité des putchistes) tiennent une conférence de presse destinée avant tout aux journalistes étrangers. Le ton des orateurs y est ferme, solennel, mais ne convainc pas.

Etrange putsch, en vérité, qui témoigne d’un certain amateurisme. Un matériel militaire considérable est pourtant déployé à Moscou, mais les frontières restent ouvertes ; le téléphone fonctionne et nulle arrestation n’est signalée ; la population commence à se rassembler et à ériger des barricades.

Gorbatchev est-il la victime du putsch ou son complice ? Après tout, c’est lui qui a installé au pouvoir les hommes du G.K.Tchepe et refusé d’entendre les avertissements prodigués par ses proches et Eltsine. Nombre de ses compatriotes ont fini par penser que probablement Gorbatchev savait et qu’il préféra se taire pour ensuite tirer parti du putsch, que celui-ci fut réussi ou manqué. Sa légitimité s’en trouva ébranlé.

Gorbatchev est en vacances à Foros, Crimée.  Une délégation du G.K.tchepe le prie de signer sur-le- champ le décret proclamant l’état d’urgence. Gorbatchev s’y refuse, tempête, exige des explications et n’obtient que des réponses confuses et contradictoires.  Les conjurés du Kremlin cherchent d’autres moyens de pression. Militaires d’abord : il faut que Gorbatchev comprenne qu’il est prisonnier. Des navires de guerre ferment la baie de Foros. En même temps Gorbatchev apprend par la BBC que les putschistes ont invoqué son état de santé déficient. Dès lors, il se force à apparaitre au balcon, à faire des promenades dans le parc dans l’espoir que quelques curieux l’aperçoivent et transmettent la nouvelle que le président est en parfaite santé.

Quand la télévision se remet à fonctionner, Gorbatchev constate que, dans les républiques, nul ne semble s’inquiéter ou évoquer un quelconque putsch.

Apres 73 heures de captivité, c’est Boris Eltsine, son adversaire de toujours, qui réussi à le joindre par téléphone ; il lui dit qu’il contrôle la situation et qu’il lui envoie une délégation russe – et non soviétique. A son retour a Moscou, il annonce «  je suis revenu de Foros dans un autre pays et, moi-même, je ne suis plus celui que j’étais… ».

Le putsch n’a pas pris Eltsine au dépourvu. Il entrevoyait de longue date qu’un tel complot serait un jour organisé. En janvier 1991, l’opération militaire contre la Lituanie lui avait semblé être un coup d’essai….Il avait élaboré avec son équipe militaire un plan de résistance, dit « Plan X ».

Une division spéciale du KGB, le Commando Alpha, très actif durant la guerre à Kaboul, est chargé de surveiller et d’arrêter le président russe.  L’arrivée tardive du Commando à la datcha du président, après son départ par la route, est le signe d’un certain désordre dans le camp des putschistes.  Si la division Alpha avait eu des instructions claires, elle eut pu réaliser un magnifique coup de filet.

Eltsine sort de la Maison Blanche (la maison de Soviets, aux murs de marbre blanc), grimpe sur un char arrêté là et harangue la foule, l’appelant à défendre la liberté. Le pays a trouvé son chef.

Eltsine savait qu’il pouvait être arrêté et il conclut à la nécessité de prévoir une relève pour assurer la continuité du pouvoir s’il en était un jour empêché. Deux gouvernements alternatifs sont prévus. Un gouvernement en exil doit être installé à Paris sous l’autorité du Ministre des Affaires Etrangère. L’autre doit fonctionner sur le sol russe, à Sverdlovsk, qui serait un « gouvernement de rechange ».

Le putsch est terminé trois jours après avoir commencé et les putschistes essayent de s’en tirer au mieux et rejoindre le camp adverse.  L’amnistie proposée aux militaires et collaborateurs des ministères qui ont suivi les ordres de leurs chefs contribuera à rallier des troupes à Eltsine.

Le 22 Aout fut une journée russe ou toutes les décisions furent prises par le président et le peuple russe. Interdictions des parties politiques au sein des armées, le drapeau historique de la Russie devient le drapeau officiel de la fédération russe. La Russie historique était de retour.  Le 23 Aout Eltsine suspend l’activité du Parti Communiste de Russie sur le territoire russe et le 24 il met sous séquestre les ressources financières du Parti et les archives du KGB.

Gorbatchev ne s’avoue pas vaincu : il prépare sa revanche, un traité d’Union, planche de salut pour l’URSS. Mais les obstacles sont à Moscou et en Ukraine.  Kravtchouk (président ukrainien) marque sans cesse sa différence : il s’est emparé des armes nucléaires et considère le Donbass et la Crimée sont à lui. Le problème ressurgira un quart de siècle plus tard…Eltsine craint dès cette époque une rupture de l’Ukraine avec l’Union et un glissement de la république vers le monde occidental.