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Be Careful What You Wish For
Alettermock2
Wednesday, October 4, 2006
Vol. 8 No. 198
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In Today's Letter:
Comment:
Be Careful What You Wish For
Offshore:
Unintended Consequences
Wealth:
U.S. Debt Keeps Growing
Privacy:
Are You a Resident or Not?
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Be Careful What You Wish For
Today's comment is by Jack Crooks, Currency Director for The Sovereign Society and editor of The Money Trader.
Dear A-Letter Reader,
For years Stephen Roach, Chief Global Economist for Wall Street
powerhouse Morgan Stanley has talked about "global imbalances," and
"global healing." At the heart of this global "imbalance" is the
massive U.S. current account deficit. But now, Mr. Roach seems pleased
with the process of rebalancing that is now underway.
Mr. Roach should be more careful what he wishes for - it just may
come true. Improvement in the current account deficit could be
dangerous to a host of other investment assets, and boost the dollar in
the process.
According to Mr. Roach:
"Time has finally run out for an unbalanced world.
Just like the demise of the equity bubble over six years ago, America's
property bubble is now in the process of bursting. Moreover, a sharp
resurgence of equity markets is unlikely as corporate profit margins
now come under pressure. That means the days of asset-driven support to
U.S. consumption are coming to an end. For American households, that
spells a return to basics -- the need to draw support from income
generation rather than wealth creation. That points to a likely
increase in personal saving and, as a result, less of a need for
foreign saving -- setting the stage for a reduction in America's gaping
current account and trade deficits."
For years, many have suggested a falling dollar is the key to this
global "healing" process. The logic being we can export more if the
dollar is cheaper, and help close the current account gap. But in
reality, because the composition of manufactured goods to services is
much lower than it was in the past, a decline in the dollar won't
really benefit the current account deficit.
Thus, as Mr. Roach points out above, the major improvement to the
current account will come from two sources: 1) fewer imports, and 2)
more domestic savings. I would add a third - a stronger dollar. A
stronger dollar would reduce the cost of imports, especially oil which
is often a big component of the imbalance number. What's interesting is
that these three items can become self-reinforcing, and lead to
"improvement" faster than many expect.
But as the current account improves, any so-called "improvement"
effectively means there are fewer dollars spread around the globe.
After all, countries around the world stockpile dollars so they can buy
stuff like crude, gold, copper, silver, etc. An abrupt drop in dollar
supply (global liquidity) through a U.S. current account improvement
has led to financial accidents in the past. It makes sense, as
liquidity is the mother's milk of financial speculation for all asset
classes.
Bottom line: Tightening liquidity in a system highly leveraged to
"inevitable" global growth that doesn't materialize is an accident
waiting to happen. If there is a major accident, we could see U.S. fund
managers, with their trillions of dollars offshore leveraged for
growth, rush back home to the U.S. for safe keeping. And that could be
very beneficial to the dollar. Stay tuned.
JACK CROOKS, Currency Director
on behalf of The Sovereign Society
EDITOR'S NOTE: Over 200 of you dialed in yesterday
for Jack's take on currency trading and his number one currency pick
for October. If you missed it, the audio recordings of his commentary
will be available later this week.
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A CIA-based "New Intelligence" alert could make you $64,250
What began as a pattern-recognition theory developed by the U.S. Government,
U.S. Air Force, and the CIA, is now being used in the private sector
And starting next week, it's going to trigger a special email alert for a small
group of people scattered across the country.
If you receive it – and act quickly enough – you’ll have a chance to make $64,250
in the space of 48 hours.
But you have to be ready. To learn more about this situation, click here.
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Unintended Consequences
In
the face of a decade of anti-offshore pressures from the British Labour
government, the European Union and the OECD blacklisters, one might
have thought the Channel Island tax havens would have sunk under the
waves. Quite to the contrary, Jersey and Guernsey, Her Majesty's Crown
Dependencies, responded with innovative lower corporate tax laws,
tightened regulatory supervision and a host of new, sophisticated
offshore investment and asset protection programs. By all reports, the
Channel Islands are booming. In 2006 to the end of June, Jersey's
investment funds jumped by 42% to £160bn (US$301bn), while Guernsey
scored a 37% gain to £115bn (US$217bn). The EU tax directive has
brought new business to the Islands that do collect EU taxes but don't
share tax information. Many predict that the financial instruments
markets will deliver more business as mainland UK financial
institutions continue to be tangled in yet more UK and EU red tape.
BOB BAUMAN, Editor
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The U.S. Debt Burden Escalates
Total U.S.
foreign debt stood at $13.6 trillion dollars at the end of 2005, or
approximately $119,000 per household. Rising interest rates since June
2004 are coming home to roost as America pays more to its foreign
creditors than it receives from its investments overseas. Though this
gap is still relatively small, it is growing.
Some experts compare America's voracious borrowing to a massive
hedge fund, borrowing at low interest rates over the last several years
while overseas assets generate greater returns. It's a great trade
until the trend finally reverses. But alarmingly, foreign funding of
America's consumption habits could turn around. This would force the
nation to adopt a lower standard of living at some point. By purchasing
U.S. Treasury bonds, foreign investors put up more than four-fifths of
the $1.3 trillion dollars the federal government has borrowed since
2001. Tax cuts, the new Medicare prescription drug benefit and wars in
Afghanistan and Iraq have saddled the United States with massive
deficits.
Though long-term interest rates remain historically low, financing
America's gargantuan deficits has resulted in a 10% rise in debt
payments to foreign investors from April to June, or $36 billion
dollars. The size of the country's debt matters because it represents a
share of income that American consumers, companies and governments
won't be able to spend or save. Ultimately, rising debt payments drain
consumption, which reduce a country's living standards. U.S. foreign
debt might be high at 20% of gross domestic product (GDP), but other
regions and countries also sport high deficits, including the 12-member
Euro-zone (15% of GDP), the United Kingdom (17%) and Mexico at 44%.
Debts are a disease. Every great economic power that has ruled this
planet has ultimately succumbed to debauching the coin. Over the next
decade, if not sooner, the U.S. dollar and other currencies will
probably be revalued against gold, the only real money in circulation
that isn't someone else's liability.
ERIC ROSEMAN, Investment Director
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You Can be "Resident" in Some Countries Even if You Don't Live There
The
U.S. is the only major country that taxes its citizens no matter where
they live. However, other countries may consider you a
resident-and thus subject to tax on your worldwide income-based on very
tenuous connections.
For instance, under the Austrian "key rule," if you possess a key to
a residence that you have the right to occupy anytime, the tax
authorities may consider you resident in Austria even if you only spend
a few days a year there, particularly if they consider Austria to be
your "center of vital interests."
A recent case from Canada illustrates an even more extreme
interpretation of being "resident." An Air Canada pilot relocated from
Canada to The Bahamas, and met the Canadian requirements that he spend
more than 183 days outside of Canada each year to be classified
"non-resident." However, he continued working as a pilot, and made
frequent trips to Pearson International Airport in Toronto, which Air
Canada considered his "work base."
On that basis, the Canadian tax authorities assessed tax on his
worldwide income, and the assessment was upheld on appeal. The issue
wasn't whether or not the pilot was a resident of The Bahamas (which he
clearly was) but whether he was simultaneously a resident of Canada.
Because he had not sufficiently "divorced himself" from Canada,
according to the court, he remained taxable there even while meeting
the 183-day rule.
The bottom line: before you assume that you're not resident in a
country to which you have ties, however tenuous, be certain to obtain
expert tax advice from an advisor in that country as to your status!
MARK NESTMANN, Privacy Expert & President of The Nestmann Group
www.nestmann.com
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Your Life is an Open Book...If
- You've given out your SSN to anyone in the past 6 months...
- You belong to any church or organization...
- You hold 50% or more of your assets in any U.S. bank...
You're an easy target for unjust lawsuits, asset forfeitures and identity theft.
I'll show you 109 ways to protect your privacy and property rights -
and secure your wealth - using the secrets of the United States Witness
Protection Program...
LINK: http://www.isecureonline.com/reports/190SSWPP/E190GA19/
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