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The "Wealth Tax" Contagion Is Rapidly Spreading: Switzerland, Cyprus And Now ….

It was only yesterday that we wrote about comparable problems to those which Russian depositors may (or may not be?) suffering in Cyprus right, this time impacting wealthy Americans and their Swiss bank accounts, where as a result of unprecedented DOJ pressure the local banks will soon breach all client confidentiality and expose all US citizens who still have cash in the former tax haven under the assumption that they are all tax evaders and violators. And in the continuum of creeping wealth taxes which first started in Switzerland, then Cyprus, and soon who knows where else, there was just one question: “The question then is: how many of the oligarchs, Russian or otherwise, who avoided a complete wipe out and total capital controls in Cyprus, will wait to find out if the same fate will befall them in Switzerland? Or Luxembourg? Or Lichtenstein? Or Singapore?” Today we got the answer, and yes it was one of the abovementioned usual suspects. The winner is…. Lichtenstein.

Yes: the little principality that is an even greater tax (evasion) haven for the world’s ultra wealthy, even more so than Zurich, Geneva or Zug, is now under Big Brother’s microscope.

But fear not. All the other tax havens listed above are quite certainly about to meet the iron, resolute fist of the US Department of Injustice. After all, unlike TBTF banks, depositors are hardly “systemic”, and thus Eric Holder and his henchmen will have zero reservations when pursuing the full extent of the (selectively crony) US laws against them.

From Bloomberg:

The U.S. has asked Liechtenstein to hand over data on foundations that may have been used to hide untaxed American money from the Internal Revenue Service, a step that may threaten Swiss banks. 

 

The U.S. wants to know the number of foundations set up by fiduciaries — lawyers, accountants, financial advisers and asset managers — for American taxpayers, according to a letter sent by the Department of Justice to authorities in the Alpine principality. A “formal request” to fiduciaries will follow, the DOJ said. 

 

“Seeking documents from the Liechtenstein fiduciaries is an important investigative step,” which will shed light on “the roles of banks, of bankers outside of Liechtenstein,” the Justice Department wrote in the letter, adding that it looked forward to receiving the data by March 29.

 

The DOJ is investigating at least 11 financial firms, including Credit Suisse Group AG (CSGN) and Julius Baer Group Ltd. (BAER), for allegedly helping Americans hide money from the IRS. The Liechtenstein request will add to the information the IRS garnered as 38,000 Americans avoided prosecution through an amnesty program, which involved paying back taxes and penalties and disclosing their offshore accounts and bankers. 

 

“It’s a further evolution of the Department of Justice using third-party fiduciaries to gather more information on these structures and the banks involved,” said Milan Patel, a former IRS trial attorney who is now a partner at Zurich-based law firm Anaford AG. “This could be bad news for Switzerland, as the information could be used against more Swiss banks.”

In case anyone is still confused about what is going on, here is the summary: any geographic venue that for whatever reason was once considered a global tax haven in the “Old Normal“, be it Switzerland, Greece, Luxembourg, Singapore, or as the case may be Lichtenstein, is now fair game for confiscation and otherwise expropriation of local capital. 

Alas, as this money will not be enough to plug what is not a liquidity but global insolvency black hole, which is made worse daily by the endless interventions of central planners, once the deposits of the wealthy at these small, powerless to defend themselves countries is concluded, next come the entities with the really big deposits: the US, the Eurozone, and the grand daddy of them all: China.

In other words, the forced ~30% wealth tax on all financial assets is coming. Just as foretold here first in September of 2011 and as was recapped last weekend.

Guest Post: Say Goodbye To The Purchasing Power Of The Dollar

Submitted by Adam Taggart of Peak Prosperity blog,

On a long solo car trip last week, I listened to several podcasts to pass the time. One was a classic: The Invention of Money, originally released by NPR’s Planet Money team back in January of 2011. I highly recommend listening (or re-listening) to it in full.

The podcast is an effective reminder of how any currency in a monetary system is a fabricated construct. A simpler way to explain this is to say it has value simply because we believe it does.

Through the centuries in historic cultures like that of Yap Island who used giant, immovable stone disks for commerce, to today’s United States, whose Dollar fiat currency exists primarily in digital form “money” is able to be exchanged for goods and services because society agrees to accept it (at a certain rate of exchange).

But what happens when a society starts doubting the value of its money?

Fed, the Great & Powerful

The podcast goes into the mind-blowingly simple process by which new money is created in America by the Federal Reserve (or the “Fed”). That is to say:

  1. The Fed holds a meeting
  2. Those in the room decide how many more dollars they think the world needs
  3. Someone walks over to a computer and adds that many dollars to the banks, with a few clicks of the keyboard

The banks then, if they want to, lend this new money out into the economy on a fractional basis, adding even more “thin air” dollars to the nation’s money supply.

This unique ability in America lends the Fed enormous power. The power to create new money from nothing. With no limit.

And with that power, the Fed can control and/or influence economies and markets the world over.

Should such power exist? And if so, should a single private entity owned by the major players in the banking system be allowed to wield it?

Such power certainly has its dangers.

Back in 2011, the Planet Money team described the normally staid Fed as having “gone to central-bank Crazytown”. Panicked by the global credit contraction, the Fed began a series of programs intent on combating the deflationary force of credit defaults. It essentially force-fed liquidity (a.k.a. freshly-printed dollars) to the world, using ham-fisted tactics that it had fastidiously eschewed over the previous century:

As the financial crisis unfolded, the Fed created…trillion[s of] dollars, which it lent out as emergency loans to all the big names on Wall Street: Goldman Sachs, Morgan Stanley, huge banks like Citigroup and Bank of America. The Fed lent money to private equity firms, hedge funds, and even regular companies like Verizon, GE, and Harley Davidson.

And it wasn’t just the recipients of that cash that were new. It was also what the Fed was requiring in return: the collateral.

 

In the past, in the rare instances that the Fed used its powers to serve as the lender of last resort, it demanded the highest quality collateral in return. Assets that were safe and would hold their value.

 

But in 2008, the Fed started accepting all sorts of…collateral that just months ago it never would have touched.

 

The sheer amount of new money that the Fed created was unprecedented. From the time we went off the gold standard of 1933 until 2008, the Fed had created a net total of $800 billion. In the months after the financial crisis, that number nearly tripled to almost $2.4 trillion.

 

[The Fed was] spending more newly created money in just 15 months than [it] had created in its entire history up until 2008.

And what effect did this fast-and-loose money-printing bonanza have? The big banks were able to recapitalize their damaged balance sheets while continuing to pay themselves record bonuses. Commodities, priced around the globe in U.S. dollars, became much more costly as many more dollars competed for the same amount of real assets. And financial assets, like stocks and bonds, marched upwards, raised by the unrelenting rising tide of Fed liquidity.

Notice however, that the economy itself did not fundamentally improve in the way the Fed had hoped it would. While a collapse of the system was averted (delayed?), economic growth has remained sluggish, unemployment high, and real wages stagnant or worse.

Of course, the reason for this is simple. Money is not wealth. It is merely a claim on wealth.

You can’t print your way to prosperity. History is abundantly clear on that. 

With the clarity of hindsight, it’s now obvious how the Fed has now painted itself into a corner. Here’s how the stock market has fared during the Fed’s rescue efforts:

They say a picture is worth a thousand words. In this case, the picture above is worth several trillion dollars (some would argue as much as $9 trillion).

The financial markets have become dependent on new Fed dollars. If you look at the few gray segments of the chart, the stock market swoons nearly immediately once the Fed halts its balance-sheet expansion.

For whatever reason (perhaps because it’s owned by banks?), the Federal Reserve has chosen to use the price of financial securities as the signaling device that its efforts are yielding results. But the markets, like any junkie, demand greater and more frequent infusions to reach new highs. Note how the trend of successive Fed programs yields smaller and shorter-lived boosts.

The Fed lives in fear of re-entering recession while unemployment and wealth inequality remain stubbornly elevated. With so many families teetering at the edge, things could get ugly very quickly if a fall in asset prices were to create a “reverse wealth effect” that triggered another recessionary slowdown. So as long as low single-digit GDP growth persists, the Fed’s hands are tied. It must continue to print.

No matter that the rising price of financial assets grossly benefits the top classes namely the 1% who own 40% of the entire nation’s wealth. In stark contrast, the bottom 80% of Americans own only 7%.

No matter that the Fed’s money tsunami is creating asset bubbles (again) in stocks, bonds, college tuition, housing, commodities, etc. further eroding that bottom eighty percent’s ability to form capital to fund its future.

The Fed has gone “all in” here. There is no Plan B.

Should We Place Our Faith in the Fed?

Perhaps I’m being overly pessimistic.

Perhaps the Fed has just the right talent and tools we need to finesse our way out of the challenges we face.

Unlikely.

As for the talent, the key body that makes decisions on the money supply is the Federal Open Market Committee (FOMC). Many of its members have only had academic and/or government positions throughout their working careers. Voting members with actual business operating expertise, or experience running a commercial bank, for that matter, are rare.

And as for tools, the Fed only really has one: the interest rate. It can move it up or down. But the effects take time to be felt in the markets. And it is a blunt, imprecise tool, at best. Again from the Planet Money podcast, where interviewer Alex Blumberg is talking with Gerald O’Driscoll, former vice president of the Dallas Regional Federal Reserve:

Alex Blumberg: I sort of think of it like a joystick. You move it too far in one direction, you get out-of-control inflation. You move it too far in the other direction and then you can really sort of put the brakes on the economy. Is that too simplistic a way of thinking about it or is that?

 

Gerald O’Driscoll: I mean, it’s okay to think about it that way. I winced a little when you said that, because the joystick presumes a very precise control, which is exactly what they don’t have.

 

Alex Blumberg: Right.

 

Gerald O’Driscoll: It’s more like you’re moving a super tanker and you start moving the wheel and there’s no effect that you can see for quite a while.

In fact, the inner sanctum itself, where the all-important FOMC meetings takes place, seems much less like the rarified Olympian god-chamber we’d expect, and more like the conference room from Office Space:

Whatever you imagine the room looks like where you can create one and a quarter trillion dollars, this is not it. It is not grand. It is not ornate. It is not ceremonial. It has four grey cubicles, it has computer screens, and there’s no other way to say this: It’s a mess. There are papers and notes scattered around. There is a yoga ball someone has been sitting on. And there is a basketball net, possibly Nerf brand. This is where the magic happens.

The reality is, the Federal Reserve is like any other organization. Human. And fallible.

And like any other organization, it makes its best assessment of what the future holds and places its bets accordingly.

For those who want to argue that the Fed, with its cadre of hyper-degreed academics and its insider access, has superior information and thus the ability to predict the future with unparalleled accuracy; I humbly ask you to watch the following:

 

 

Cyprus: Are Things Different This Time?

In Hollywood, they say you’re only as good as your last movie. By that metric, the Fed’s latest sanguine prognostications should be taken with a huge amount of salt(ed popcorn):

Cyprus does not pose a threat to the U.S. economy or financial system and there are no signs of stock market bubble, Fed Chairman Ben Bernanke said on Tuesday.

 

The Fed chief told reporters that the central bank was monitoring the situation in Cyprus. “At this point, we’re not seeing a major risk to the U.S. financial system or the U.S. economy,” he said.

 

And while the cheap money supplied by the Fed has pushed up stock prices, Bernanke said the central bank isn’t measuring the success of its policies against moves in stocks.

 

He also said the recent advance was not out of line with historical patterns. “I don’t think it’s all that surprising that the stock market would rise given that there has been increased optimism about the economy and…profit increases have been substantial,” he said.

Sound familiar? Are you feeling comforted yet?

So, how much confidence can we really have in the Fed to navigate these yet uncharted monetary waters, with so many variables and unknowns, and its less-than-spot-on record? Honestly, we’d be fools to assume much.

Cyprus has awakened the world to the reality that central planners can appropriate their money with the bang of a gavel. And while we don’t yet know with certainty how things will unfold in Cyprus, we can project that events there have shaken society’s confidence in the soundness of fiat currency in general. If we know it can be confiscated or devalued overnight, we are less likely to unquestioningly accept its stated value. This doubt that strikes at the very foundation of modern monetary systems.

Cyprus is meaningful in the way that it shines a light on both the importance of hard assets and the risk it poses to market stability. It certainly increases the risk of our prediction of a 40%+ stock-market correction by September, as investors begin to realize that current high values are simply the ephemeral effect of too much money, instead of a sign of true value.

At this point, prudence suggests we prepare for the worst (by parking capital on the sidelines, investing in our personal resilience, etc.) and add to our hard asset holdings (like precious metals bullion, productive real estate, etc.) as insurance to protect our purchasing power. The dollar may strengthen for a bit versus other currencies and perhaps the financial markets, but the long-term trend is a safer and surer bet: Dollars will be inflated. There will be more of them in the future than there are today. So, while our dollars still have the purchasing power they do, we should use the window of time we have now to exchange paper money for tangible wealth at today’s prices.

Those with a shorter time horizon, higher risk tolerance, and capital to spare may want to start considering a strategy for going short the financial markets.

Next stop: Crazytown!

Cyprus: The Unique Template in Nine Theses

 

Based on the latest discoveries, such as seen in the recent pictures from the European Space Agency, scientists are concluding that the universe is not inflating quite as fast as they previously thought. And so too, back here on Earth, we are finding things are not quite as they may have appeared.  The attempt to reflate the world economy is proving more difficult.  

Many European officials had recently been congratulating themselves that the European crisis had passed.  The Outright Market Operation facility, brandished but not triggered, and forbearance by EU officials appeared to have turned the corner.   Yet this was just another swing of the European pendulum.  Each time unresolved issues flare up, officials put it out and in doing so think they have put the fire out.  They have not. 

After relatively easily absorbing the inconclusive Italian elections and the rejection of the terms of the first aid offer to Cyprus and the brokering of another deal, the markets had a more dramatic reaction to the suggestion that Cyprus may be a template for future aid packages.   This spooked market participants who sent Italian and Spanish equities, and especially bank shares, sharply lower.  European peripheral bond markets sold off.  The euro fell to new five month lows against the dollar.

 

1.  Many observers continue to under-estimate the political will of the European elite for EMU to succeed.   As Fed Chairman Bernanke observed, there are no ideologues in a crisis.  European officials are willing to sacrifice many sacred cows on the alter of EMU.   It is an evolving situation, and as more institutional capacity is innovated, the range of the policy response can be enlarged.   There remains among the commentariat class a profound skepticism of the EMU’s viability, especially it seems in the Anglo-American traditional and social media.  Many thought Greece was going to be jettisoned in 2011 and 2012.    Some gave it weeks or months to survive a year ago.  They greet each problem and official misstep with a cry that the end is nigh.   Yet there is no Plan B and without a compelling alternative vision, Plan A persists.  

2.  In order for EMU to survive, it will be shaped by the most powerful interest, which is Germany.  As the US pivots toward Asia and the UK threatens to leave the EU, the centuries-old balance-of-power politics is giving way to a German-led block.  Its ideology of ordo-liberalism advocates a strong state and strong markets, as opposed to the Anglo-American neo-liberalism, which allows for a smaller role for the state.   There is a sense in some of the local press that Germany is fatigue of aid and it is not coincidental that the Bundesbank just made public a report that has been available to several weeks showing that, due to home ownership rates, many European, include Spaniards on average, are richer than Germans.  Of course, political sensibilities are running high as the national election draws nearer (in September), and the first German party to officially advocate leaving EMU, has been launched.  At the same time, the cost to Germany has thus far been quite limited, and what de minimis funds it has had to raise, has been more than offset by the lowering of  government’s  borrowing costs and interest on its loans.    

3.  We have arguing for some time that the Troika is not the united front it previously was.  The Cypriot crisis has brought this issue to the surface and many now share our insight  The EC would seemingly be content for Europe to deal with the issue alone, which is easy enough after the IMF has generally assumed the funding of roughly a third of the aid packages.  Germany, which initially did not want to include the IMF, now see it as an ally.  The ECB has shown itself to be willing to use the leverage it has (such as granting Emergency Lending Aid by the national central banks and definition of acceptable collateral) to pursue its interests.  

4.  Germany and the IMF have long wanted to increase the private sector burden sharing when aid is needed.  Brussels has been a reluctant party.  Germany and the IMF are winning that fight.  There is an established order of seniority (in practice if not in law) for cases of insolvency.  In Cyprus, the initial plan, proposed by the newly elected Cypriot President, and agreed to by the Troika and Germany, was a violation of this by taxing small depositors while equity investors and unsecured creditors were kept whole.  However, the new plan exempts small depositors and hits shareholders, bondholders and uninsured depositors.   European officials seem to have greater confidence increasing the role of the private sector in aid programs.  

5.  It is not yet clear the extent or duration of the capital controls.  Some observers are arguing that capital controls are a violation of the governing treaties, and because one cannot take unlimited amount of funds out of Cyprus at the moment, it means that this marks the end of the monetary union.  They suggest that now the euro in Cyprus worth less than the euro elsewhere.  We do not find that logic compelling, based on what we currently know about the controls.  We accept that there may be unintended consequences, and the situation can evolve into something different, but presently, we do not see these administrative measures, as inconvenient as they are, to be tantamount to the introduction of Cypriot euro.  

6.  Cyprus is going to face a deep and prolonged adjustment process.  In the global division of labor it was a entrepot, providing commercial and financial services.  Broadly understood to include finance and insurance (9.2% of GDP), real estate and construction (17.8%) and wholesale and retail trade (23.2%), it accounted for nearly half of the Cypriot economy in 2012.  Manufacturing only counted for 5.9% of the value-added of the economy, which is down from 9.5% in 2000 and 7.2% before the financial crisis.  It simply does not have the manufacturing capacity to export its way to growth.  This suggests that whether inside EMU or out, there is a painful restructuring process ahead.  What ails Cyprus is not that its currency is too high.  It is that its developmental model, which leaves aside whether it is a low tax jurisdiction (complying with the global standard for tax cooperation and fully aligned with Code of Conduct for Business Taxation of the EU and the OECD) or a tax haven, as the German narrative suggests, is broken.   

7.  As has been the case since the crisis first erupted, European officials, the IMF (and many private sector economists) have over-estimated growth in the stricken countries.   This has serious implications for trying to stabilize the debt/GDP ratio, which seems the official goal–putting countries back on sustainable fiscal trajectories.  The risk is that adjustment in the Cypriot economy  is so severe that the economy contracts sharper than officials forecast.  The bottom line is the downside risks to the economy mean that this aid package may not be the last for Cyprus.  

8.  What appears to be large natural gas and oil fields on its continental shelf suggests the way forward.  However, this may prove more mirage than reality for years to come.  The problem is arguably more about politics than economics.  One of the strategic errors of European officials was allowing Cyprus to join its clubs (EU and EMU) without united the island.  That should have been one of the prerequisites but that would have forced European officials into compromising with Turkey, perhaps over EU membership, which it was not prepared to do.  In addition, getting the gas to market is more difficult and costly (relative to the size of the Cypriot economy) than often acknowledged.  

9.   Cyprus 2.0 was constructed in a way that allows an end-run around parliament.  This is a shame and ultimately counter-productive.  The lack of democratic legitimacy means that it will always taste like foreign imposition.  It means that parliament will not take ownership for the program.  It also shows that European officials to be still tone deaf, seemingly failing to realize monetary union is a elitist project and without strong public support is vulnerable to various populist movements from both the right and left.  

Have The Russians Already Quietly Withdrawn All Their Cash From Cyprus?

Yesterday, we first reported on something very disturbing (at least to Cyprus’ citizens): despite the closed banks (which will mostly reopen tomorrow, while the two biggest soon to be liquidated banks Laiki and BoC will be shuttered until Thursday) and the capital controls, the local financial system has been leaking cash. Lots and lots of cash.

Alas, we did not have much granularity or details on who or where these illegal transfers were conducted with. Today, courtesy of a follow up by Reuters, we do.

The result, at least for Europe, is quite scary because let’s recall that the primary political purpose of destroying the Cyprus financial system was simply to punish and humiliate Russian billionaire oligarchs who held tens of billions in “unsecured” deposits with the island nation’s two biggest banks.

As it turns out, these same oligrachs may have used the one week hiatus period of total chaos in the banking system to transfer the bulk of the cash they had deposited with one of the two main Cypriot banks, in the process making the whole punitive point of collapsing the Cyprus financial system entirely moot.

From Reuters:

While ordinary Cypriots queued at ATM machines to withdraw a few hundred euros as credit card transactions stopped, other depositors used an array of techniques to access their money.

 

No one knows exactly how much money has left Cyprus’ banks, or where it has gone. The two banks at the centre of the crisis – Cyprus Popular Bank, also known as Laiki, and Bank of Cyprus – have units in London which remained open throughout the week and placed no limits on withdrawals. Bank of Cyprus also owns 80 percent of Russia’s Uniastrum Bank, which put no restrictions on withdrawals in Russia. Russians were among Cypriot banks’ largest depositors.

So while one could not withdraw from Bank of Cyprus or Laiki, one could withdraw without limitations from subsidiary and OpCo banks, and other affiliates?

Just brilliant.

And if there was any doubt that the entire process of destroying one entire nation was simply to punish Cyprus, it can be completely cleared away now:

ECB officials contacted Latvia, another EU country that has received large Russian deposits, to warn authorities against taking in Russian money fleeing Cyprus, two sources familiar with the contacts said.

 

“It was made clear to our Latvian friends that if they want to join the euro, they should not provide a haven for Russian money exiting Cyprus,” a euro zone central banker said.

If one thinks there is any material Russian cash therefore left in Cyprus with this epic loophole in place, we urge them to make a deposit in the insolvent nation. One person who certainly will not be allocating any of his money into Bank of Cyprus is German FinMin Schaeuble:

German Finance Minister Wolfgang Schaeuble said the bank closure had limited capital flight but that the ECB was looking closely at the issue. He declined to provide figures.

Perhaps because if he did, it would become clear that the only entities truly punished by this weekend’s actions are not evil Russian billionaires, but small and medium domestic companies, and other moderately wealthy individuals, hardly any of them from the former “Evil Empire.”

Companies that had to meet margin calls to avoid defaulting on deals were granted funds. Transfers for trade in humanitarian products, medicines and jet fuel were allowed.

The stealth withdrawals by Russians of course means that the two megabanks are now utterly drained of capital, and that the haircuts on those who still have unsecured deposits with the two banks will be so big it will likely mean a complete wipeout of all deposits. As in 0% recovery on your deposits!

In other words, by now any big Russian funds in Cyprus are long gone, and the only damage accrues to the locals: for one reason because their money over the critical EUR100K threshold has been “vaporized”, and for another because the marginal driving force and loan demand creator in Cyprus, the Russians, are gone and are never coming back again.

This is what passes for monetary real-politik in the New Normal – an entire nation becomes collateral when pursuing a wealthy group of people. And the “wealthy group” is victorious in the end despite everything…

If we were Cypriots at this point we would be angry. Very, very angry.