Sunday, March 23, 2008

inspector crow wonders

It's no secret we're in the midst of some very serious economic difficulties and questions have arisen as to who is to blame. Over the course of the past weeks I've read some very valid posts pertaining to the fact that we are responsible and, while that fact has a certain ring of truth in that we in the western democracies, and the US in particular, do indeed buy the most stuff and waste irreplaceable resources to an extraordinary degree, we are victims of a system and sometimes enablers of a system whose roots are deep and dark. We are not to blame because we need money to live. There are many factors about why you might choose to buy a particular house in a particular neighborhood and if the house down the street from your parents now costs $250k rather than the $25k they paid for theirs, you aren't the one who made that happen. Not even George Bush, nasty as he is, is responsible for the monetary system that is grinding all of us in the direction of economic collapse - although he certainly has lots to answer for (details can be found on any of your March 19th Blogswarm posts).

Yesterday I read an article from the London Telegraph titled: Foreign Investors Veto Fed Rescue. Er.. how can they do that? Well, it turns out they can and I recommend you read the article yourselves if you can find any time but I'll try to explain what I'm coming to understand. The point being made by the business editor was essentially 'what if you hold a sale of 10 year US Treasury notes and nobody comes to buy?' Big problem. The thing hinges on the fact of the US dollar (petro-dollar) being the world's reserve currency and it's dropped a lot in value just recently which means that other countries are going to drop the value of their own currencies in order to keep down with us.

'Overall credit conditions could tighten into a world-wide slump (like 1930). It's the stuff of bad dreams.

As of June 2007, foreigners owned $6,007bn of long-term US debt. (Equal to 66pc of the entire US federal debt). The biggest holdings by country are, in billions: Japan (901), China (870), UK (475), Luxembourg (424), Cayman Islands (422), Belgium (369), Ireland (176), Germany (155), Switzerland (140), Bermuda (133), Netherlands (123), Korea (118), Russia (109), Taiwan (107), Canada (106), Brazil (103).'

Okay, I read that list and then went back and looked at it again because something seemed weird about the first five countries. Japan, China, UK - okay no surprises there but how about numbers 4 and 5? Luxembourg? Aren't there about 57 people who live in Luxembourg? It's so small even I would have a hard time finding it on a map without a magnifying glass. Cayman Islands? Have you ever met anybody from the Cayman Islands? Do they arise each morning with hands over hearts and pledge allegiance to the sovereign Isles of Cayman? Do they go to work? or school? do they play ukuleles? do they eat bananas? Why is it that Saudi Arabia, Abu Dhabi and the UAE aren't even on the list? Could there be a connection?

Now I'm getting suspicious. Those two countries (?) seem to have more money than the next eleven and I've been wondering why. If you add them together it's almost as much as the first two countries on the list and double the UK at number three. This may be a bigger subject than one post will allow but I'll keep on investigating and will be back soon with my next report.


Scarlet W. Blue said...

Yes, Inspector, come back with more. Disturbing and strange.

grannyfiddler said...

when i studied business and finance, there was a very large investment component to the program. the biggest impression it left on me was how abstract and artificial the world of finance is.... the stock market, for example, is built around the construct that certain people anticipate that certain companies will, or will not be more desirable for certain other people to own, thus making them more 'valuable'. stocks and bonds and money are only worth the paper they're printed on, so to speak, when push comes to shove. you can't eat them, wear them, or live in them. i'm no financial wizard, and maybe i'm oversimplifying, but meeting those basic needs on a worldwide basis seems more important to me than stockpiling abstract commodities that won't feed, clothe or house anyone. we've put our eggs in a pretty basket made of spun glass, and it's slipping out of our grasp.

i'll be interested to hear more from Inspector Crow.

susan said...

scarlet - the Inspector is on the case.

GFid - There's definitely something scandalous afoot and although I've never studied finance in any shape or form other than the practical work related to being a bookkeeper and bank teller long ago, I will follow up my suspicions and report back. Now to don the disguise but before I slip away I did learn this:
A corporation is a pretty interesting concept. A corporation is a "virtual person." One incredibly interesting characteristic of this "virtual person" is that it has an indefinite and potentially infinite life span.

Anonymous said...

There is a simple explanation for the presence of Luxembourg and the Cayman Islands on the list: they are two of the most popular off-shore financial centres. Popular because companies and individuals using them can avoid tax and regulation by being located legally in them. To quote the CIA website (!) ... More than 68,000 companies were registered in the Cayman Islands as of 2003, including almost 500 banks, 800 insurers, and 5,000 mutual funds...

grannyfiddler said...

one reason for the 'personification' of corporations is they, as entities unto themselves, then take responsibility for any wrong doing, bankruptcies, etc.... meaning no REAL people have to take the hit. even senior board members are not legally responsible for decisions made by the board, so long as the letter of the law is followed. our dear Conrad Black is a fine example of who that can be abused.

susan said...

anon - 68,000 in the Caymans alone? That must be quite the party when they get together for their annual picnic. Do they produce ANYTHING other than imaginary money - for themselves?

GFid - I'm shocked. Sorry, gotta go - my disguise is coming unglued.

Anonymous said...

Susan, Anon is quite correct and it matters not how many people inhabit these two countries. Their lax financial laws allow these "save havens" to be set up so that they are free of any tax or tariffs that may arise from the gains. I am terribly over-simplifying this explanation, for sure, but this has been my understanding of the situation.

Seraphine said...

The German government has been investigating financial institutions in their country for enabling citizens to "hide" money in Luxembourg to escape paying taxes.

susan said...

spartacus - the Inspector begins to think there should be some oversight and regulation of these predators for surely they can't be a natural part of our human condition.

sera - Yes, a government actually looking into these practices would surely be a good first step in a judicious and worthy attempt to curtail their nefarious schemes.

lindsaylobe said...

You post raises a number of interesting questions about what I think are very complex issues and it is suffice to say that all of your commentators raise valid points, let us say how we view it will depend very much from which lenses’ in the camera we are looking at this big unfolding picture.

Tax havens have operated for a long time to frustrate countries tax revenues. Most Countries, (but naturally not those who allow tax havens), have double tax agreements and the respective countries regulators cooperate to investigate and uncover tax evasion. The money that is in these tax havens is often referred to as ‘Hot Money’ and is laundered into respectable investments.

The tax haven economies of those countries benefit from all of that murky activity, so you might say they are having party of sorts on the fees and economic activity involved in the process of tax evasion at the expense of countries whose taxation revenue is thereby curtailed. Even so authorities are continually investigating. But its difficult if the country involved has privacey laws which resrict the flow of information.

Insofar as the Telegraph Article is concerned the figures are quite alarming. The increased debt of the US and the reluctance of foreigners, who are large net creditors to the US to further finance the twin deficits of public and private sectors I think is understandable given a free falling dollar against all currencies and the contagion of the sub prime fiasco.

Notwithstanding the US still has some excellent assets and great institutions, particually its people, and bearing in mind it was just 10 years prior its fiscal budget was in surplus I don’t think the position can’t be remedied in the long term. I certainly hope so as the US is still the largest economy in the world to day.

What I predict will happen will be more and more Sovereign wealth funds from outside the US will take up equity positions in the larger distressed US companies.
This is aleady happening to a relatively small degree.

Best wishes

Seraphine said...

The whole premis of a successful capitalist society is that it is a level playing field. Everyone should have an equal and fair opportunity. Finance and Government and Business should be transparent and ethical.
The notion that one can exploit the system without repercussion and expect a taxpayer bailout is rotten.
When one group distorts the system, they need to be held accountable.

Randal Graves said...

I need to get on this worldwide scam. I'm going to start my own tax shelter. Everyone, send me your money, I have very low rates!

Anonymous said...

Hello, Susan.
I remember reading somewhere last year that China's central bank had arrived at a decision to diversify its central bank holdings away from the dollar.
It seems reasonable, if not likely, that other foreign reserve banks would follow suit.

I heard a show on the radio not long ago about pressure against the gov't of Luxembourg sue to their policies regarding taxation.
Reforms are in the works, I suppose, but it seems likely that it will take some time.

As for Grand Cayman, I can tell you that, by far, most of the inhabitants are extremely poor.
Land is incredibly expensive there, and to own any of it practically ensures that one is a millionaire. Most of that class are partial-year residents.
The year-round residents are the underclass, the servants to the wealthy.
Everything is expensive there, because they have little in the way of natural resources. Everything is imported. Again, this makes building very expensive.

Not so sure if you remember Paul Volker. He was the Fed chairman under Carter, and then Reagan. A strict monetarist. He raised the interest rates up into the low 20's back in the early 80's.
Part of the reason for this was Reagan's tax cuts washing excess of currency through the economy.
Not a popular thing to do, and it led to his resignation.

Something similar will come sooner or later. It's inevitable.

susan said...

lindsay - Thanks for another well thought out comment to my post. One of the points you raise toward the end is really the most disturbing aspect of the situation and that's the fact that the US still does reatain a number of valuable assets. Along with the possibility of infrastructure (like highways, bridges, railway lines etc.) being taken over by third parties who who then make their profits by charging tolls and tariffs for their use we're also looking at tight money policies the like of which haven't been seen since the Depression. The difference now of course is that physical resources have also become part of the mix. What about the water, minerals and forests? Who will own and control them.. or is the Inspector getting too paranoid?

sera - I agree completely and the more people understand that the closer we'll get to some kind of equity.

randal - here's the $2,000,000,000,000. Now please look after it carefully since it's all I've got.

pt - the seagull flock I asked to check into this have also informed me that you're correct about the Cayman's - no picnic or ukuleles today.

I remember making mortgage payments when Paul Volker was in charge. Those were very different days and not really all that long ago. Ben Berneke is probably not up for the challenge.

Ingrid said...

INteresting..I'll tell my mom who's visiting from the Netherlands that the gov't owns a 'few billions' in dollars.. she complains bitterly about all the devious ways the Dutch gov't makes people pay taxes for this and that and breathing! (well, slight exageration on the latter). She said that they pay 5 something Euros for one liter of gas.. that is not per gallon! She said, of course the gov't pockets most of that money!!
No wonder they were able to afford buying those dollars...hmmmm...