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.

The End of Alchemy, Mervyn King, 2016

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The post-war confidence that Keynesian ideas – the use of public spending to expand total demand in the economy – would prevent us from repeating the errors of the past was to prove touchingly naïve. Expansionary policies during the 1960s, exacerbated by the Viet-Nam war, led to the great inflation of the 1970s, accompanied by slow growth and rising unemployment – the combination known as stagflation.

My own accounts of event (re the crises) will be made available to historians when the twenty-year rule permits their release.

Today we are stuck with extraordinary low interest rates, which discourage saving – the source of future demand – and, if maintained indefinitely, will pull down rates of return on investment, diverting resources into unprofitable projects. Both effects will drag down future growth rates.

Three bold experiments since the 1970s:  to give central banks much greater independence in order to stabilize the inflation; to allow capital to move freely between countries and encourage a fixed exchange rates (in Europe, between China and US); to remove regulations limiting  the activities of the banking and financial system (more competition, new products, geographic expansion) to promote financial stability.

Three consequences : the Good was a period between 1990 and 2007 of unprecedented stability of both output and inflation – the Great Stability with inflation targeting spreading to 30 countries; the Bad was the rise of debt level: eliminating exchange rate flexibility in Europe and emerging markets led to growing trade deficits and surpluses. Richer country could borrow to finance deficits and long term interest rates began to fall (too much saving). Low long term interest has an immediate effect: the value of assets (today’s value) – specially houses – rose. As value increased, more borrowing was needed to buy those assets – from 1986 to 2006, household debt increase from 90% of household income to 140% (in the UK). The Ugly was the development of an extremely fragile banking system. Separation between commercial and investment banking was removed. Trading of new and complex financial products among banks meant that they became closely connected: a problem in one would spread rapidly to others. Equity capital (funds provided by shareholder of the bank) accounted for a declining proportion of overall funding. Leverage (the ratio of total assets (liabilities) to equity capital rose to extraordinary level (more than 30 for most bank, up to 50 for some before the crises)

Total saving in the world was so high that interest rates, after allowing for inflation, fell to level incompatible in the long run with a profitable growing market economy.

No country had incentives to do something about imbalances. If a country had, on its own, tried to swim against the tide of falling interest rates, it would have experience an economic slowdown and rising unemployment, without having an impact on the global economy or the banking sector.

In 2002, the consensus was that there would eventually be a sharp fall in the value of the US dollar, which would produce a change in spending patterns. But long before that could happen, the banking crises of September and October 2008 happened.

Opinions differ as to the cause of the crises: some see it as financial panic as confidence in bank creditworthiness fell and investors stopped lending to them- a liquidity crises. Other see it as the outcome of bad lending decisions by banks – a solvency crises. Some even imagine that the crises was solely an affair of the US financial sector.

The story of the crises

After the demise of the socialist model, China, Soviet Union, India embraced the international trading system. China alone created 70 million manufacturing jobs, far exceeding the US 42 million jobs in US and Europe combined (in 2012). The pool of labour supplying the world trading system more than trebled in size (depressing real wages in other countries). Advanced countries benefited from cheap consumer goods at the expense of employment in the manufacturing sector. China and other Asian countries produced more than they were spending and saved more than they were investing a home (in the absence of social safety net, and a one child only policy in China preventing parents to rely on their children when retiring). There was an excess of saving, which pushed down long term interest rates around the world. Short term interest rate are determined by central banks but long term interest rate result from the balance between spending and saving in the world as a whole. IN recent times, short term real interest (accounting for inflation) have actually been negative (official rates have been less than inflation).  In the 19th century, real rates were positive and moved within 3% to 5%. It was probably 1.5% when the crises hit and since then has fallen further to around zero. Lower interest rate and higher market prices for assets boosted investment. It appeared profitable to invest in projects with increasing low real rates of return. For a decade or more after the fall of Berlin wall, consumer benefited from lower prices on imported goods. Confronted with persistent trade deficit, developed countries (US, UK, part of Europe) relied on central banks to achieve growth and low inflation by cutting short term interest to boost the growth of money, credit and domestic demand. This was an unsustainable path in many, if not most, countries. Saving in Asia and debt in the West produce major macroeconomic imbalance. Normally capital flow from mature to developing countries where profitable opportunities abound. Now emerging economies were exporting capital to advanced economies where opportunities were more limited. Most of these financial flow passed through the western banking system leading to a rapid expansion of bank balance sheets (all bank’s asset – the loans to customers – and liabilities – the deposit and loans taken by the banks). As western banks also extended credit to household and companies, balance sheets expanded. As asset prices increased, debt levels increased (more expensive to buy new houses, so more borrowing). With interest rate low, the bank also took more risk, in an increasingly desperate hunt for higher return. Central banks, by allowing the amount of money in the economy to expand, did little to prevent this better yield seeking behavior. In addition pensions funds and insurance were trying to find ways of making their saving more attractive. Banks created new financial instruments based (derived from ) basic contracts (hence ‘derivative’) such as collateralized debt obligation (CDO), more risky but with better return assets. Because return were higher (even if sometimes the financial instruments were very risky or even fraudulent) there was no shortage of buyers. Financial assets increased rapidly:  from ¼ of GDP in the US, it was 100% by 2007. It was 500% of GDp in the UK, even higher in Ireland. Bank leverage rose to 50 to 1 (for 1 dollar provided by shareholder, the bank borrowed more than 50). Substantial profits were made so regulators took an unduly benign view of these developments. The interaction between the macroeconomic imbalances (extra saving) and the developing banking system that generated the crises. Most policy maker believed that unsustainable pattern of spending and saving, would end with the collapse of the US dollar. The dollar was the currency in which emerging economies were happy to invest (the renminbi was not convertible – China in 2014 owned US$4tn). So the dollar remained strong and it was the fragility of the banks that first revealed the fault lines. First law of financial crises: an unsustainable position can continue for far longer than you would believe possible. The second law of financial crises: when an unsustainable position ends it happens faster than you could imagine.  In august 2007, BN Paribas announced it stopped paying investors on three funds invested in the sub-prime market. End of 2007 market liquidity in a wide range of financial instrument dried up: the banks were vulnerable to the US sub-prime mortgage – loans to households on low incomes who were highly likely to default. In September, central banks did not believe the problem could bring down large bank: the stock of mortgage was only US$ 1tn, so losses could not be large enough for the system as a whole. This time however banks had made large bets on sub-prime markets (derivative contracts). Although those bets cancelled out as whole, some banks were in the money, other were under water. Because it was impossible to tell those apart in the short term, all banks came under suspicion. They stooped lending to each other. Banks needed injection of shareholder’s capital (not new loans as central banks were offering). Two options: either to recapitalize or to drastically reduce lending – for the economy, the former was preferable. The system staggered for a year. In Sept 2015 Lehman Brothers failed, generating a run on the US banking system by financial institutions (such as money market funds). The run spread to other advanced economies: banks around the world found it impossible to finance themselves (because no one new which bank were safe. It was the biggest global financial crisis in history. With Bank unable to refinance themselves, the Central Bank had to intervene (with recapitalization of banks starting less than a month later). The problem was that government ended up guaranteeing all private creditors of the banks, imposing on future taxpayers a burden of unknown attitude.  Between autumn of 2008 and summer 2009, 10 millions jobs in US and Europe were lost, world trade fell more rapidly than during the Great Depression. In May 2009, the US treasury and Fed announced that banks could withstand the losses under different adverse scenarios. The banking crises ended but the economic crises remained. By 2015 there had still been no return to the growth and confidence experience earlier.

The strange thing is that after the biggest financial crisis in history, nothing much has changed in terms either of the fundamental structure of banking or the reliance on central banks to restore macroeconomic prosperity.

In practice buyers and sellers simply cannot write contracts to cover every eventuality, and money and banks evolved as a way of trying to cope with radical uncertainty.

In the middle of 2015, we were still searching for a sustainable recovery despite cuts in interest rates and the printing of electronic money on an unprecedented rate. Central banks have thrown everything at their economy and the results have been disappointing.

The sharper the downturn, the more rapid the recovery. Not this time.

From an imbalance between high and low-saving countries, the disequilibrium has morphed into an internal imbalance of even greater significance between saving and spending within economies.

Central bank had to create more money by purchasing large quantities of assets from private sector – the practice known as Quantitative Easing. QE was long regarded as a standard tool of monetary policy – but the scale on which it has been implemented is unprecedented.

Pounds, shilling and pence where already used in 1066 (Domesday book was the first inventory of wealth done at the time). The decimalization of anglo-saxon monetary unit happened on 1971.

The amount of money in the US economy remains stable at around 2/3 of GDP. The share of bank deposit in total has also been roughly constant at 90% (no less than 97% in the UK) (the rest is in coins and banknotes). The amount of money in the economy is determined less by the need to buy ‘stuff’ and more by the supply of credit created by private sector banks responding to borrowers.

The ability to expand the supply of money in times of crisis is essential to avoid a depression. The experience of emergency money reveals that the private sector will not always be able to meet the demand for acceptable money. [in short : Acceptable money is money accepted by all banks, based of confidence in these banks to meet their obligation if needed – what was missing in the early days of the crisis. In those days, only government was able to issue assets that were acceptable by all banks]

The creation of independent central banks with clear mandate to maintain the value of a currency in terms of a representative basket of goods and services, proved successful in stabilizing inflation in 1990s and 2000s. The conquering of inflation over the past twenty-five years was a major achievement in the management of money, and one, despite the financial crisis, not to be underrated.

5,500 tons of gold are in the vault of the Bank of England (worth US$235bn). 6,700 tons are in the Federal Reserve Bank of New York. The US hold 8,000 tons in reserve, 10,784 tons are in reserve in the Euro area, 1,000 tons in China, Uk only has 310 tons as reserve.(Wikipedia: est. 170,000 tons of gold mined on earth as at 2011).

Most money are created is private sector institutions – banks. This is the most serious fault line in the management of money in our societies today.

If before the crisis banks had exited the riskier types of lending, stopped buying complex derivative instruments they would, in the short term, have earned lower profit. Even understanding the risks, it was safer to follow the crowd.

It is remarkable how equal global banks are in terms of size. Among the twenty biggest banks, the ratio of assets of the largest to the smallest is little more than two to one. These 20 banks accounted for assets of US$42tn in 2014, compared with the world GDP of US$80tn, and for almost 40% of total world-wide bank assets.

Investment banks have been described as inventing new financial instrument that are “socially useless”. With their global reach, their receipt of bailouts from taxpayers, and involvement in seemingly never ending scandals, it is hardly surprising that the banks are unpopular.

Bank grew fast: JP Morgan today accounts for almost the same proportion of US banking as all of the top ten banks put together in 1960. Most of this has taken place in the last 30 years and has been accompanied by increasing concentration. The top ten banks in the US account for 60% of GDP (was 10% in 1960). In the UK, the assets of the top ten banks amount to over 450% of UK GDP, with Barclays and HSBC both having assets in excess of UK GDP.

In less than 50 years, the share of highly liquid assets held by UK banks declined from 33% of their assets to less than 2% today. The turning point came when the balance sheet of the financial sector became divorced from the activities of households and companies. Deregulation and derivatives in 1980 contributed to this divorce. Lending to companies is limited by the amount they wish to borrow. But there is no corresponding limit to the size of transaction in derivatives. The market for derivative in 2014 is just over US$20tn, about ½ of the assets of the largest 20 banks.

Since 1999 in the US, stand-alone investment bank that were previously organized as partnership (ie risk shared between partners – so more controlled) turned themselves into limited liability companies (where only assets are at stake, not borrowings to invest in shady business).

With a growing proportion of bank activity deriving from trading of complex instruments, it was difficult to work out how big the risks actually were. The banks themselves seemed not to understand the risks they were taking. And, if that was the case, there was not much hope for regulators could get to grips with the potential scale of the risk.

Whether selling oversized mortgage to poor people in the US, selling inappropriate pension and other financial product to millions of people in the UK, rigging foreign exchange and other markets, failing to stop subsidiaries  from engaging in money laundering and tax evasion, there seem no ends to the revelations about what bank had been doing. The total fines imposed on banks world wide since the banking crisis ended in 2009 amounted to around $300 billion.

Perhaps the enormous losses banks incurred in the crisis, and the fines levied by regulators around the world, will bring a change of heart in the banking sector.

Many of the substantial bonuses that were paid as a result of trading in derivatives reflected not profit earned in the past year but the capitalized value of a stream of profits projected years into the future. Such accounting proved more destructive than creative.

Someone who invested $1000 in Berkshire Hathaway in 1985 would by the middle of 2015 have an investment worth $161,000. A compound annual rate of return of 17%.

Limited liability  in a bank with only small margin of equity capital means that the owner have incentives to take risks – to gamble for resurrection- because they receive all the profits when gamble pays off, whereas their downside exposure is limited. Those who manage other people’s money are more careless than when managing their own.

Money market funds were created in the US as way to get around the regulation that limited the interest rates banks could offer on their accounts. They were attractive alternative to bank accounts. Such funds were exposed to risk because the value of the securities in which they invested was liable to fluctuate. But the investors were led to believe that the value of their funds was safe. Total liability at the time of the crisis repayable on demand was over $7tn.

All non-bank financial institutions have been describe has shadow banking. Special purpose vehicle issue commercial papers – not dissimilar to bank deposit – and purchase long term securities (such as bundles of mortgages. Edge funds are also part of this shadow banking, although because they do not demand deposit, the comparison with banks is less convincing. Financial engineering allows banks and shadow banks to manufacture additional assets almost without limits, with 2 consequences: first, the new instruments are traded between big financial institutions, more interconnection results and the failure of one firm causes troubles for the others. Second, many of the banks position even out when seen as a whole, balance sheets are not restricted by the scale of the economy. When the crisis started in 2007, no one knew which banks were most exposed to risk.

And in some country the size of the banking sector had increased to a point where it was beyond the ability of the state to provide bailouts without damaging its own financial reputation – Iceland, Ireland – and it proved a near thing in Switzerland and the UK.

Equity, debt and insurance are the basic financial contract underpinning our economy. The total global financial stock of marketable instruments (stocks, bonds) plus loans must be well over $200tn.  Over the last 20 years, a wide range of new and complex instruments has emerged (known as derivatives as elaborate combination of debt, equity and insurance contracts). Derivatives typically involve little up-front payment and are a contract between two parties to exchange a flow of returns or commodities in the future.(Wikipedia : total derivatives market value as at 2014: $1,500tn, 20% more than in 2007) .

Credit Default Swap (CDS): the seller agrees to compensate the buyer in the event of default; Mortgage Backed Securities (MBS): a claim on a payments made on a bundle of hundreds of mortgages; Collateral Debt Obligation (CDO) a claim on cash flows from a set of bonds or other assets that is divided into tranches so that the lower tranches absorb the losses first –with investor able to choose which tranche to invest in. A set of five pairs of socks – like a CDO – is a legitimate tactics by a sharp salesman to sell contracts of different value (there is always a pair of socks you would never wear….).

It was rather like watching two old men playing chess in the sun for a bet of $10, and then realizing that they are watched by a crowd of bankers who are taking bets on the result to the tune of millions of dollars.

Derivative also allowed a stream of expected future profits, which might or might not be realizes, to be capitalized into current values and show up in trading profits, so permitting large bonuses to be paid today out of uncertain future prospect. These trading, with the benefit of hindsight, were little more than zero sum activity generating little or no output.

By adopting accounting convention of valuing the new instrument at the latest observed price (marking to market) and including all changes in asset values as profits, optimism in the future, whether justified or not, created large recorded profits from the trading of these new securities. In effect, anticipated future profits were capitalized and turned into current profits.

Once markets realized that different banks had different risks of failure then the whole concept of single interbank borrowing rate (LIBOR) became meaningless. With few or no transactions taking place, it was difficult and at times impossible for banks to know what rate to quote. It matters because LIBOR is used as a reference rate in drawing up derivative contracts worth trillion dollars. The benchmark interest rate used in those contract had shallow foundations and in a storm it just blew away.

High frequency trading: trader have faster access to the exchange, the computer of such firm can watch the order flow and then send in their own orders microseconds ahead of other traders, so jumping the queue and getting to the market before the price turns against them.

The switch from a fixed rule, such as gold standard, to the use of unfettered discretion led to the failure to control inflation, culminating in the great inflation of the 1970’s. Attention turned to the idea of delegating monetary policy to independent central banks with a clear mandate to achieve price stability.

Monetary policy affects output and employment in the short-run and prices in the long run. There are lags in the adjustment of prices and wages to change in demand.

The method used to create money was to buy government bonds from the private sector in return for money. Those bond purchases were described as unconventional and known as quantitative easing (QE). But open market operations to exchange money for government securities have long been a traditional tool of central banks, and were used regularly in the UK during the 1980s.

The outbreak of the First World War saw the biggest financial crisis in Europe, at least until the events of 2008. Yet even after the assassination of Archduke Franz Ferdinand in Sarajevo on 28 June 1914, there was barely a ripple in the London markets.

Countries like Germany have become large creditors, with a trade surplus in 2015 approaching 8% of GDP, and countries in the southern periphery are substantial debtors. Although much of Germany’s trade surplus is with non-euro area countries, its exchange rate is held down by membership of the euro area, resulting in an unsustainable trade position.

The ECB would, Draghi said, ‘do whatever it takes to preserve the euro. And believe me, it will be enough’. It was clear that ECB would buy Spanish and Italian sovereign debt. 10 year bond yields started to fell. By end of 2014, ten-year yield in Greece had fallen from 25% to 8%. Spain from 6% to below 2%. By end of 2014, Spain was able to borrow more cheaply than the US. Draghi’s commitment had obviously done the trick.

The euro area must pursue one, or some combination of the following four ways forward:

  1. Continue with unemployment in the south until prices and wages have fallen enough to restore the loss of competitiveness.
  2. Create a period of high inflation in Germany, while restraining prices and wages in the south, to eliminate differences in competitiveness.
  3. Abandon the need to restore competitiveness within the euro area and accept the need for transfers from north to south to finance full employment in the periphery. Such tranfers can well exceed 5% of GDP.
  4. Accept a partial or total break up of the euro are


Some economist would like to return to the original idea of the monetary union – with a strict implementation of the no bail-out clause (which makes it illegal for one member to assume the debts of another) in the European Treaty. “Economically and politically, relaxing the no bail-out clause would open the door for a massive violation of the principle of no taxation without representation, creating a strong movement toward a transfer union without democratic legitimacy”.

Although the provisions of the European Treaty had the appearance of binding treaty commitments, in times of crisis the treaty was simply ignored or reinterpreted according to political needs of the moment.

Art 125: the no bail out clause which makes it illegal for one member to assume the debt of others.

Swiss dinars in Iraq: the value of the Swiss dinar had everything to do with politics and nothing to do with the economic policies of the government issuing the Swiss dinar, because no such government existed.

The tragedy of the monetary union in Europe is not that it might collapse but that, given the degree of political commitment among the leaders of Europe, it might continue, bringing economic stagnation to the largest currency bloc in the world and holding back recovery of the wider world economy.

The key to ending the alchemy is to ensure that the risks involved in money and banking are correctly identified and borne by those who enjoy the benefits from our financial system.

The toxic nexus between limited liability, deposit insurance and lender of last resort means that there is a massive implicit subsidy to risk-taking by banks.

Since the crisis, the minimum amount of equity a bank must use to finance itself – capital requirement – has been raised and banks must also hold a minimum level of liquid assets related to deposits (and other financing that could run from the bank within 30 days). Regulators also look at the shadow banking sector and conduct stress test. Countries such as UK and US have introduced legislation to separate, or ring-fence, basic banking operations from the more complex trading activities of investment banking. And most countries have introduced special bankruptcy arrangements (to protect depositors). Regulators have pursued cases of misconduct by bank employees and the banking system has changed a great deal:  Goldman Sachs balance sheet is 25% smaller in 2015 than in 2007. Many banks have turn to more traditional banking. Is all this enough? I fear not. More radical reforms are needed.

Since the bank bail outs in most advanced economies were huge, it is surprising that more has not been done since the crisis to address fundamental problem.

Irving Fisher : We could leave the banks free… to lend money as they please, provided we no longer allowed them to manufacture the money which they lend. In short nationalize money but do not nationalize the banks.

The prohibition on the creation of money by private banks is not likely to be sufficient to eliminate alchemy in our financial system.

It is time to replace the lender of last resort by the pawn broker for all seasons.  First ensure that all deposits are backed by either actual cash or a guaranteed contingent claim on reserves at the central banks. Second ensure the provision of liquidity insurance is mandatory and paid upfront. Third, design a system which imposes a tax on the degree of alchemy in our financial system – private financial intermediaries should bear the social cost of alchemy.


Keynes argued that when short term and long term interest rates had reached their respective lower bounds, further increases in the money supply would not lead to lower interest rates and higher spending. Once caught in this liquidity trap, the economy could persist in a depressed state indefinitely.

But the flaw with the great stability was that many people confused stability with sustainability. From the perspective of conventional macroeconomics, the situation looked sustainable. But the composition of demand was not, with disequilibrium resulting from China and Germany encouraging exports and trade surpluses. The consequence of those surpluses was significant lending to the rest of the world, with more savings invested in the world capital market. Long term interest rates started to fall (from 4% to 2% a year in 2008) and as a result asset prices (stocks, bonds, houses) rose (as future spending are discounted at a low long term rate). Household brought forward consumption and investment spending from the future to the present. GDP was evolving on a right path but the stability brought about was not sustainable: the demand was just unsustainably too high.

In 2014, Jaime Caruana, the General Manager of the Bank for International Settlements said ‘there is simply too much debt in the world today’. And Adair Turner, former chairman of Financial Service Authority, asserted that ‘ the most fundamental reason why the 2008 financial crisis has been followed by such a deep and long lasting recession is the growth of real economy leverage across advanced economies over the previous half-century’. Although such statements point to the great fragility resulting from high debt levels, debt was a consequence, not a cause of the problems that led to the crisis. Debt resulted from the need to finance higher value of stock of property. In turn, those higher values were a reflection of the lower level of long term real interest rates. The real causes of the rise of debt were the ‘saving glut’ and the response to it by western central banks that led to the fall of real interest rates.

Short term Keynesian stimulus boosts consumption, reduces saving, and encourages households to borrow more. But in the long term, US and UK need to shift away from domestic spending toward exports, to reduce trade deficit, to raise the rate of national saving and investment. The irony is that those countries most in need of the long term adjustment, the US and UK, have been most active in pursuing the short term stimulus.

By 2015, corporate debt defaults in the industrial and emerging markets economies were rising. Disruptive though a wave of defaults would be in the short run, it might enable a reboot of the economy so that it could grow in a more sustainable and balanced way. More difficult is external debt…Sovereign debts are likely to be a major headache for the world in years to come. Should these debt be forgiven? Greece encapsulates the problems. When debt was restructured in 2012, private sector creditors were bailed out. Most Greek debt is now owed to public sector institutions (ECB, IMF). There is little chance that Greece will be able to repay its debt (austerity in Greece cannot work because exchange rate cannot fall to stimulate trade).

In 1931, a crisis of the Austrian and German banking system led to the suspension of reparations. They were largely cancelled altogether at the Lausanne conference in 1932. In all Germany paid less than 21 billion marks (out of 132 billion original figure of the Reparations Commission), much of which was financed by overseas borrowing on which Germany subsequently defaulted. ‘ A debtor country can pay only when it has earned a surplus on its balance of trade, and …the attack on German exports by means of tariffs, quotas, boycotts etc. achieves the opposite result’ (Schaft, 1934)

One way of easy the financing problems of the periphery countries would be to postpone repayment of external debt to other member of the Euro area until the debtor country had achieved export surplus.

Debt forgiveness, inevitable though it may be, is not a sufficient answer to all our problems. In the short run, it could even have the perverse effect of slowing growth.

Resentment towards the conditions imposed by the IMF (or the US) in return for financial support has also led to the creation of new institutions in Asia, ranging from Chiang Mai Initiative, a network of bilateral swap arrangments between China, Japan, Korea and ASEAN, to the Chinese led Asian Infrastructure Investment Bank created in 2015.

Because the underlying disequilibrium has not been corrected, it is rational to be pessimistic about future demand. That is a significant deterrent to investment today. To solve this our approach must be twofold: to boost expected income through raising productivity and encourage relative prices, especially exchange rate, to move in a direction that support a more sustainable pattern of demand and production. The second element can be achieved through promotion of trade and restoration of floating exchange rates.

After the crisis, demand for Chinese exports fell away, and chines authority allowed credit to expand in order to boost construction spending. But before the crisis there was already excessive investment in commercial property. As a result, empty blocks of apartment and offices are a commonplace sight in new Chinese cities.

Chine now faces serious risks from its financial sector.  A policy of investing one half of its national income at low rates of return financed by debt is leading to an upward spiral of debt in relation to national income.

Germany will find that it is accumulating more and more claims on other countries, with the risk that those claims turn out to be little more than worthless paper. That is already true of some of the claims of the euro area as a whole on Greece.


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…


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.


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.

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.

Le dernier qui s’en va éteint la LUMIERE – Paul Jorion – 2016

Crise environnementale, crise de la complexité (les interactions augmentent entre des populations de plus en plus nombreuses dans un environnement de plus en plus mécanisé où nous confions nos décisions à l’ordinateur), crise économique et financière due au fait que nos systèmes sont une gigantesque machine a concentrer la richesse (alimentées par les intérêts de la dette et dont les effets délétères sont encore amplifiés par la spéculation (pari sur la hausse ou la baisse des titres financiers).

Nous croissons aujourd’hui a raison de 77 millions d’êtres humains supplémentaires par an.

Thomas Hobbes – la guerre du tous contre tous.

Depuis d’adoption du protocole de Kyoto visant a reduire les emissions de gas a effet de serre, les émissions annuelles de carbone sont passées de 6400 à 8700 millions de tonnes. On mesure la l’efficacité de nos efforts en la matière.

Il s’agit de réintroduire des notions telles que le bonheur, non pas mesuré puisqu’il est d’une nature qui ne se prête pas à la mesure, mais comme quelque chose de présent plutôt qu’absent.

Aristote : les valeurs et les prix relèvent de domaines absolument distincts. Il n’y a pas de valeur cachée derrière un prix, la seule chose qu’il y ait la est un rapport de forces entre êtres humains.

Trop de CO2 ou de dioxyde d’Azote, trop de phosphates….Aussi longtemps qu’il ne sera pas questions de qualités, tout calcul est condamné à n’être que comptes d’apothicaire dont aucune vérité profonde n’émergera jamais.

Gilens et Page, 2014 : ils ont comparé un catalogue d’objectifs politiques exprimés dans l’opinion publique (1779 en tout) et examiné si les mesures ont été, oui ou non, mis en œuvre. Conclusion : l’opinion de la majorité est ignorée : elle ne compte pas et n’est pas reflétée dans les mesures qui sont prises. Aux etats unis règne un système politique caractérisé par la domination d’une élite écconomique.

Lacordaire (1802-1861) avait dit « entre le fort et le faible, entre le riche et le pauvre, entre le maitre et le serviteur, c’est la liberté qui opprime et la loi qui affranchit ».

Les entreprises innovantes d’aujourd’hui exigent désormais une mise de fonds importante en capital, ne créent pour l’essentiel que des emplois très qualifiés en petit nombre par rapport au chiffre d’affaires. La firme WhatsApp ne comptait que 50 employes quand elle fut rachetée pour 19 milliard de dollars par Facebook. La technologie ne crée pas nécessairement d’emploi.

On progresse vers une économie ou le vainqueur emporte tout (the winner takes all) ou un très petit nombre de travailleurs très qualifies créent une part disproportionnée de la richesse.

Alain Supiot : L’imaginaire cybernétique tend à effacer la différence entre l’homme, l’animal et la machine, saisi comme autant de système homéostatique communiquant les uns avec les autres.  A ce nouvel imaginaire correspond le passage du libéralisme économique – qui place le calcul économique sous l’égide de la loi – à l’ultralibéralisme, qui place la loi sous l’égide du calcul économique. Etendu a toutes activités humaines, le paradigme du marché occupe désormais la place de norme fondamentale à l’échelle du globe.

L’invention du statut de la personne morale, calqué sur celui de la personne physique (la justification intuitive en étant que celle-ci dispose, comme souvent la personne physique, d’un patrimoine) prit place aux Etats Unis au milieu du XIXe siècle.

Au fils des ans, les droits des personnes morales ne cessèrent de croitre et leurs devoirs de se réduire, tandis que l’immortalité potentielle qui leur était dorénavant assurée leur permettait une accumulation quasi infinie de patrimoine et du pouvoir qui lui est associe.

La formulation juridique des principes ultralibéraux crée par anticipation le cadre de fonctionnement d’un univers peuplé seulement de robots.

Lord Adair Turner, patron du régulateur des marchés financiers au royaume uni qui dressa en 2010 la liste des activités inutiles, voire nocives, de la finance. Il est nocif qu’un secteur dépasse la taille correspondant à son véritable rôle économique. A un contradicteur prétendant que le secteur financier devait s’efforcer de devenir le plus gros possible, il avait répondu que l’on imagine pas des centrales électriques cherchant à excéder la demande du marché.

La promotion implicite du court termisme par la philosophie qui sous-tend la règlementation comptable date des années 1980 et est lié à l’internationalisation et la privatisation de la rédaction des règles comptables (grandes firmes d’audit et l’International Accounting Standard Board – qui est finance par ces mêmes firmes). IASB est domicilié dans l’état du Delaware qui constitue un havre fiscal. Conflit d’intérêt, puisque IASB est aussi finance par les mêmes firmes d’audit, et aucun contrôle démocratique….

La comptabilité moderne a évolué en trois temps : primo, début du XIX, les bénéfices ne sont comptabilises que lorsqu’ils sont apparus : pour distribuer des parts il faut d’abord  avoir couvert les coûts. Secundo au milieu du XIX, les bénéfices apparaissent anticipées en enkystant le passif, et ce pour ne pas décourager les petits investisseurs dont on avait besoin pour financer les grands projets de construction. Tertio, les années 1980, la comptabilité  « mark to market » au prix du marché, les bénéfices sont distribués à titre anticipé. Le moindre bénéfice est aussitôt partagée entre amis, et s’il manque de l’argent pour l’entreprise, on l’emprunte !

Les docteurs de l’Eglise, au Moyen Age, appelait « usure » ce que nous appelons « crédit à la consommation » et bannissaient le paiement d’intérêts sur des sommes empruntées pour la seule et unique raison que l’emprunteur y était forcé.

Au cours des premiers siècles de notre ère, la concentration de la richesse a condamné une part toujours croissante de la population au surendettement, entrainant l’apparition d’un statut social inédit : celui, devenu rapidement héréditaire, de serf attaché de génération en génération a la terre de son maitre.

Le système économique nécessite la croissance comme l’un de ses éléments constituants en tant qu’il est un système capitaliste, et qu’il est donc impossible de parler de décroissance sans remettre en question la nature capitaliste de notre système économique. Le système économique n’est pas monolithique : il est à la fois « capitaliste », « de marché », « libéral » voire « ultralibéral ».

Comptabiliser le travail comme coût (qu’il convient donc de minimiser pour augmenter les dividendes) et les dividendes comme part de profit est en réalité arbitraire : c’est l’expression d’un choix politique. Un juste partage exige la remise en cause des règles comptables qui traitent les salaires comme des coûts, et les bonus de la direction et les dividendes des actionnaires comme des parts de bénéfices, pour considérer tous ensemble comme avances faites au même titre à la production de marchandises ou de services.

Le coût de la crise des « subprimes » fut considérable : 8% du PIB de la zone euro. Les garanties des Etats de la zone euro au secteur financier équivalaient en 2014 à 2.7% du PIB en 2014.

Un article signé Vitali, Glattfelder et Battiston mettait en évidence en 2011 l’existence, en parallèle du réseau de pouvoir que forme les Etats, d’un autre réseau constitué en son cœur par un nombre restreint  (147) de compagnies transnationales dont la puissance économique est considérablement supérieur à celle des Etats.  Un nombre réduit d’individu (737) exerce le pouvoir effectif au sein de (80%) ces compagnies. Les trois quarts des 147 compagnies sont des établissements financiers.

Apple, jouant sur les ambiguïtés des codes des impôts nationaux, a même réussi la gageure de n’avoir aucune domiciliation fiscales pour les principales composantes de son conglomérat, et d’être ainsi pleinement déterritorialisé. Aucun devoir, aucun engagement ne lie (ces entreprises internationales) à une véritable communauté de citoyens en aucun endroit du globe.

Si l’on veut stopper le processus de destruction en cours, le choix est simple : il faut imposer à la finance, l’éthique qui prévaut dans les autres départements de nos sociétés : mettre fin le plus rapidement possible à l’extraterritorialité éthique dont elle bénéficie à l’heure actuelle.

The Economist 2012 : à la questions envers qui il conviendrait qu’il se sentent davantage responsables, les leaders de la finance considèrent : leur PDG (pour 48%), leur actionnaires (pour 44%)…les choix les moins populaires sont la société dans son ensemble (pour 25%) l’Etat (11%). Le monde financier reste convaincu du bien-fondé de son extraterritorialité sur le plan éthique.

Francois Debauche nous à enseigné des choses précieuses, consciencieusement retenues.

Rien ne permet d’exclure que les processus biologiques ne produisent eux aussi ultérieurement, par émergence,  un type de phénomène d’une nature inédite. Et que, du coup, ce qui nous avions imaginé à tort comme étant intervenu avant nous, la présence d’un Dieu démiurge ayant été la cause de notre monde, n’apparaisse en fait ultérieurement au sein du monde. Dieu non comme la cause mais comme la conséquence de cet univers.

Rees : « Notre ère d’intelligence organique constitue un triomphe de la complexité sur l’entropie mais un triomphe passager, qui sera suivi d’une période considérablement plus longue d’intelligence inorganique, beaucoup moins contrainte par son environnement.  Il est probable que les extraterrestres auront opéré la transition qui permet de dépasser le stade organique il y a déjà très longtemps ».  Proposition intrigante qui implique que nous perdons notre temps quand nous recherchons aujourd’hui des manifestations de vie intelligente. Devons-nous attrister que l’être humain ne soit pas le point culminent de l’évolution ? Que les humains ne soient que les précurseurs fugaces d’une culture dominée par les machines ?

Hegel – S’impose a nous la question de savoir si, derrière le vacarme, ne se trouverait pas une œuvre intérieur dans laquelle serait emmagasinée la force des phénomènes et à laquelle tout profiterait. C’est la catégorie de la Raison, celle de la pensée d’une fin ultime en elle-même. Le ruse de la Raison : la Raison s’accomplit, quelque que soit la représentation qu’en ont les hommes par le truchement de ce qui se réalise dans le monde. Mais pour Hegel toujours, ce n’est pas tant l’histoire qui réalise la raison, que nous qui la lisons dans son déroulement. La Raison est donc cette chose qu’on est à même de lire dans l’histoire, bien davantage qu’elle n’y est véritablement présente.

Justice, Michael J. Sandel (2009)

To acknowledge the moral force of the virtue argument is not to insist that it must always prevail over competing consideration.

Aristotle maintains that we can’t figure out what a just constitution is without reflecting first on the most desirable way of life. Law can’t be neutral on questions of the good life. By contrast, modern political philosophers (Kant to Rawls) argue that the principle of justice should not rest on any particular conception of virtue, or of the best way to live. Instead, a just society respects each person’s freedom to choose his or her conception of a good life.

Utilitarianism seeks the greatest happiness for the greatest number. Other theories connect justice to respect for individual rights, though they disagree about which rights are most important. Finally, some theories see justice bound up with virtue and good life, virtue often identified with cultural conservatives and religious right. But the notion that a just society affirms certain virtues has inspired political movements and arguments. Not only the Taliban, but also abolitionists to Martin Luther King…

Killing the three afghan goatherds would have saved the lives of his three comrades and the 16 US troops who tried to rescue them. He could not bring himself to kill unarmed civilians in cold blood (despite his team calling for it)

Plato’s point is that to grasp the meaning of justice and the nature of a good life, we must rise above the prejudices and routines of everyday life.

Two rival approach of justice. The first says that the morality of an action depends solely on the consequences it brings about. The second considers that certain duties and rights should command our respect, for reason independent of the consequences.

Bentham’s utilitarianism : there are no rights that are fundamental (‘nonsense upon stilts’). The right thing to do is to maximize utility, whatever produces pleasure or happiness. The most glaring weakness of utilitarianism is that it fails to respect individual rights. If only each person’s preference matter, norms of decency and respect can be violated. Throwing Christian to lions is justified if enough romans derive enough pleasure from the spectacle…

Philip Morris study: although smokers impose higher medical costs on the budget while they are alive, they die early and so save the government on health care, pensions, housing for the elderly. Once positive effects are taken into account – including cigarette tax revenues – the net gain to the treasury is $147million per year. A fuller cost-benefit analysis would add an amount representing the cost of dying early for the smoker and his family…

In the early 70s the cost of traffic fatalities in the US, taking into account future productivity losses, medical costs, funeral costs, and the victims pain and suffering, High Traffic Safety Administration arrived at $200,000 per fatality. In 2003 the US Environmental Protection Agency presented a cost-benefit analyses of new air pollution standard: $3.7 million per life – $2.3million for those older than 70. Today US government agencies us $6 million per life when setting pollution standards and health and safety regulations. Trading off certain levels of safety for certain benefits and conveniences is unavoidable, they argue, we should do so with our eyes open even if that means putting a price tag on human life.

It is not possible to measure and compare all values and goods on a single scale (critics of utilitarianism).


John Stuart Mill, a generation after Bentham, tried to recast utilitarianism in a more humane, less calculating doctrine and attempted to reconcile it with individual rights: people should be free to do whatever they want, provided they do no harm to others. Mill thinks we should maximize utility, not case by case, but in the long run. And, over time, respecting individual liberty will lead to the greatest human happiness. But since it appeals to moral ideals beyond utility – ideals of character and human flourishing – it is a renunciation of Bentham utilitarianism, despite claims to the contrary.

Bentham died in 1832, at the age of 84. His body has been preserved  and can be found at University College London in a glass case. International Bentham Society.

Libertarianism: taxing the rich to help the poor is unjust. It violates their liberty to do with their money whatever they please. Milton Friedman in 1962 argued that any widely accepted state activities are illegitimate infringements on individual freedom. Friedman reject social security or minimum wage law on such grounds. Libertarians sees a moral continuity from taxation (taking my earnings) to forced labor (taking my labor) to slavery (denying that I own myself).

Conscription ran against the grain of the American individualist tradition, and the Union draft (1862) made a striking concession to that tradition: anyone who was drafted and didn’t want to serve could hire someone else to take his place.

For those with limited alternatives, the free market is not all that free.

Proportionate to the population, today’s active-duty military establishment is about 4 percent of the size of the force that won World War II. This makes it relatively easy for policy-makers to commit the country to war without having to secure the broad and deep consent of the society as a whole.

Once you accept the notion that the army should use the labor market to fill its ranks, there is no reason in principle to restrict eligibility to American citizens – no reasons, unless you believe military service is a civic responsibility after all, an expression of citizenship.

The Indian city of Anand may soon be to paid pregnancy what Bangalore is to call centers. In 2008 more than fifty women in the city were carrying pregnancies for couples in the US, Taiwan, Britain etc. They earn $4500 to $7500, more than what they would make in 15 years.  At $25,000 for the parents, it is a third of what it would be for gestational surrogacy in the US.

Locke rejects the notion that we may dispose of our life and liberty however we please.

Kant offers an alternative account of duties and rights. It does not depend on the idea that we own ourselves. It depends on the idea that we are rational being, worthy of dignity and respect.  What we commonly think as market freedom or consumer choice is not true freedom, Kant argues, because it simply involves satisfying desires we haven’t chosen in the first place. Basing morality on interests and preferences destroys its dignity. It does not teach us how to distinguish between right and wrong, but “only to become better at calculation”. He argues that we can arrive at the supreme principle of morality through the exercise of “pure practical reason”. According to Kant, the moral worth of an action consists not in the consequences that flow from it, but the intention from which the act is done. He maintains that only the motive of duty confers moral worth of an action. The compassion of the altruist (compassion or taking pleasure to help the others) deserves praise and encouragement, but not esteem (reserved to moral behavior).

Kant “Act only on that maxim whereby you can at the same time will that is should become a universal law”.

For Kant, justice requires us to uphold the human rights of all persons simply because they are human beings, capable of reason, and therefore worthy of respect. This is the categorical imperative that requires us to treat persons with respect, as ends in themselves.

When we think ourselves as free, we transfer ourselves into the intelligible world as members and recognize the autonomy of the will together with its consequence – morality.

Science can investigate nature and inquire into the empirical world, but it cannot answer moral questions or disprove free will. Moral and free will can’t prove they exist, but neither can we make sense of our moral lives without presupposing them.

The categorical imperative requires that I treat all persons (including myself) with respect – as an end, not merely as a means (Kant).

Wouldn’t it be right to lie to a murderer? Kant says no. The duty to tell the truth holds regardless of the consequences.

Kant thought that there is a morally relevant difference between a lie and a misleading truth. The difference, I think, is this: a carefully crafted evasion pays homage to the duty of truth-telling in a way that an outright lie does not. Anyone who goes to the bother of concocting a misleading but technical true statement when a simple lie would do expresses, however obliquely, respect for the moral law.

The mere fact that a group of people in the past agreed to a constitution is not enough to make that constitution just.

 Rawls believes that two principles of justice would emerge from the hypothetical contract. The first provides equal basic liberties for all citizens, such as freedom of speech etc. the second concerns social and economic equality. Although it does not require an equal distribution of income and wealth, it permits only those social and economic inequalities that work to the advantage of the least well off members of society.

The veil of ignorance (of Rawls) ensures the equality of power and knowledge that the original position requires. By ensuring no one knows his or her place in society, his strength or weaknesses, his values or ends, the veil of ignorance ensures that no one can take advantage, even unwittingly, of a favorable bargaining position.

The difference principle (of Rawls) represents an agreement to regard the distribution of natural talents as a common asset and to share in the benefits of this distribution. Those who have been favored by nature may gain from their good fortune only on terms that improve the situation of those who have lost out.

Rawls reject moral desert as the basis for distributive justice on two grounds: 1st my having talents to enable me to be more successful than others is not entirely my own doing.2nd the quality the society happens to value at any given time is also morally arbitrary.

Can we ever have a moral responsibility to redress wrongs committed by a previous generation?

In 1922 Harvard’s president proposed a 12% limit on Jewish enrollment, in the name of reducing anti-Semitism. “the anti-Semitic feeling among students is increasing” he said, “ and it grows in proportion to the increase in the number of Jews”.

Debates about distributive justice are about not only who gets what but also what qualities are worthy of honor and reward.

For Aristotle, “the end of the state is not to provide alliance for mutual defense….or to ease economic exchange and promote economic intercourse”. Politics is about something higher. It is about learning to live a good life. Only in political association can we deliberate about justice and injustice and the nature of the good life.

The case went to the United States Supreme Court, where the justices found themselves wrestling with what seemed to one a silly questions, at once beneath their dignity and beyond their expertise: “ is someone riding around a golf course from shot to shot really a golfer?”

Anyone can deplore an injustice. But only someone who is somehow implicated in the injustice can apologize for it.  Critics of apologies correctly grasp the moral stakes. And they reject the idea that the current generation can be morally responsible for the sins of their forebears.

Kant: To be free is to be autonomous and to be autonomous is to be governed by a law I give myself.

The notion that we are freely choosing selves supports the idea that the principles of justice should not rest on any particular moral or religious conception; instead they should be neutral among competing visions of the good life.

MacIntyre we all approach our own circumstances as bearers of particular social identity. I inherit from the past of my family, my city, my tribe… a variety of debts, inheritances, expectations and obligations. These constitute the given of my life, my moral starting point. This however is at odds with modern individualism. Are we bound by some moral ties we haven’t chosen and that can’t be traced to a social contract?

Obligation of solidarity are particular, not universal, they involve moral responsibilities we owe, not to rational beings as such, but to those with whom we share a certain history. They do not depend on an act of consent. They derive from the recognition that my life story is implicated in the stories of others.

The capacity for pride and shame in the actions of family members and fellow citizens is related to the capacity for collective responsibility.

A politics emptied of substantive moral engagement makes for an impoverished civic life. It is also an open invitation to narrow, intolerant moralisms. Fundamentalists rush in where liberals fear to tread.

Kennedy: his religious faith was a private matter and would have no bearing on his public responsibilities. For Obama however it is a mistake to insist that moral and religious convictions play no part in politics and law because “addressing problems such as poverty and racism, the uninsured and the unemployed” would require changes in hearts and a change in mind.

Rawls’ test: To check whether we are following public reason we might ask: how would our argument strike us presented in the form of a supreme court opinion?  This is a way to make sure our argument are neutral in the sense that liberal public reason requires.

For abortion or stem cell research, it’s not possible to resolve the legal question without taking up the underlying moral and religious question. Regarding same sex marriages, three policies can be summarized as follows: recognize only marriages between a man and a woman; recognize same sex and opposite sex marriages; don’t recognize marriage of any kind (and privatize them, without state sanction or interference). The real issue in the gay marriage debate is not freedom of choice but whether same-sex unions are worthy of honor and recognition by community – whether they fufill the purpose of social institution of marriage.

We have seen three approaches of justice.  One says justice is to maximize utility or welfare; one says justice means respecting freedom of choice and one says justice involves cultivating virtue and reasoning about common good.