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Our March 15, 2006 Newsletter Edition
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IN THE NEWS:
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SHUTDOWN LOOMS IF SENATE DOESN'T UP CREDIT - March 3, 2006
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WASHINGTON (Reuters) - A nasty budget fight is brewing in Congress as
Senate Democrats and some conservative Republicans said Friday that
they will not support efforts this month to increase U.S. borrowing
authority, a move needed to avoid a government default.
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http://money.cnn.com/2006/03/03/news/economy/senate_budget.reut/index.htm
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EDITORS NOTES:
Again? They are running out of money again, and need to increase
the debt again? There already is over US$8 Trillion worth of
debt. They need to borrow money to avoid a government
default? We are not even into half way through the calendar
year. What's next - A home equity loan on the White House?
.
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SLOW DOWN BIG SPENDER - By Kate Rice, March 3, 2006
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Hey, big spender! That's what a sultry chanteuse might well want
to sing to the American consumer. That's because, over the past 20
years, the average annual increase in U.S. retail spending has been a
steady 5.4 percent, according to the International Council of Shopping
Centers (ICSC). The exception has been the past two years, when the
growth in retail spending was 7.4 percent, the strongest since 1999 and
2000, when spending also increased at an average pace of 7.4 percent
annually. The reason has not been because prices are going up.
According to the Consumer Expenditure Survey released by the Bureau of
Labor Statistics (BLS) of the U.S. Department of Labor, the increase in
expenditures from 2003 to 2004 was greater than the 2.7 percent rise in
the annual average Consumer Price Index (CPI) for the same period.
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Is that good for retailers? Not necessarily, writes Michael Niemira,
chief economist and director of research at the ICSC and Veronica
Soriano, senior research analyst for the ICSC. In a recent report, they
point to their cause for concern: the fact that personal income grew by
about two percentage points slower than spending in 2003 and 2004. The
last time the growth in income lagged spending growth to that degree
was in 2000 and 2001. In fact, say Niemira and Soriano, personal income
growth can only support an average yearly increase of 5.5 percent in
consumer spending.
.
And that's not all. Greg McBride, senior financial analyst for
Bankrate.com, a major online aggregator of financial rate information,
points out that the household savings rate -- which is the percentage
of disposable income put into savings every month -- was negative in
the second half of 2005. In addition, he says, 2005 was the first
year since 1933 that consumer spending exceeded consumer income. It
happened then because income went away; it was the Great Depression. In
2005, it's a consumption problem. People are spending more than they're
making. They're either dipping into savings or borrowing against their
home equity or other assets to fund their consumption. With 70
percent of economic output tied to consumer spending, the big concern,
according to McBride, is when and by how much consumers will start to
retrench. If consumer spending were to cool, it would have some
negative economic ramifications, he says. McBride says that
continued growth is unsustainable, but that doesn't mean that it's
going to come to a screeching halt. But he expects a slowdown:
Ultimately, consumers are going to look in the mirror and realize they
can't keep spending at the same pace.
.
http://www.diamonds.net/news/newsitem.asp?num=14477&type=all&topic=all
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GLOBAL ECONOMY-BUSINESS THRIVING, CENTRAL BANKS ON ALERT
By Mike Dolan, Economics Correspondent - March 3, 2006
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WASHINGTON, March 3 (Reuters) - The global economy has accelerated
sharply again this year, according to worldwide business surveys, which
show many sectors in their best shape for several years. The
fresh surge in activity at manufacturing and service sector companies
in the U.S., Europe and Asia will only solidify plans by the world's
major central banks to further tighten credit conditions to head off
inflation, economists said. Compilations of monthly national
surveys of some 10,000 businesses around the globe show the world's
private sector economy at large expanded output in February at its
fastest rate since mid-2004. The rebound among euro zone firms
was most remarkable, with the region's long-struggling service sector
growing at its fastest pace since the peak of the worldwide information
technology boom in 2000.
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Expectations are also high that further interest rises are due from the
U.S. Federal Reserve despite 14 consecutive Fed rate hikes that have
brought official U.S. interest rates to 4.5 percent from 1.0 percent in
just over 18 months.
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http://today.reuters.com/news/
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EDITORS NOTES:
Hold the phone now, which is it? The US consumer has too much
debt and is running on empty, the savings rate went negative for the
first time since 1933, prices are NOT going up (so say the government
statistics), however the US government is running out of money (again),
and the central banks of the world are worried about inflation?
Inflation is supposedly indicative of an over heated economy (things
are too good or are growing too fast and need to be slowed down).
So, what is the deal here? The article of course does talk about
the GLOBAL economy in general and not the local economy of any
particular nation. So, perhaps the economy of some nations are
doing extremely well and others not? Maybe the following article
sheds some light.
.
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IS THE INFLATION CAMP ON THE BUBBLE? By Kevin Duffy
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For the past several years there has been an ongoing debate among bears
about how numerous U.S. imbalances would be resolved: debts, deficits,
under-saving, over-consumption, and asset bubbles. The deflationists
argue that bubbles always burst and when they do, debtors default.
Inflationists make the case that in a social democracy the government
will do everything in its power to bail out the debtor class, even run
the printing presses. Cynics point out the obvious: a central bank will
always try to mitigate the pain of its banking constituents. Their
contentions all have merit.
.
Four years ago deflation fears were rampant. The tech bubble was
bursting, the economy slipping into recession, and the Fed seemed
impotent to stem the slide. The Fed responded with a massive dose of
ultra-cheap credit which at first had little effect, but eventually
made its way into the next asset bubble: real estate. Today inflation -
particularly "asset inflation" - is the toast of the town; speculators
are bingeing on stocks, real estate, and commodities; professionals are
reaching for yield with exotic debt instruments; and the Fed
chairmanship has returned to rock star status. Meanwhile, expectations
for consumer price inflation remain guarded; U.S. economists predict a
2.4% rise in the CPI this year and inflation-indexed bond investors
expect the CPI to average 2.5% over the next 10 years.
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The inflationary side of the boat has clearly gotten crowded. What will
cause it to capsize? Dr. Faber offers two possible scenarios: a crash
in asset prices or an accelerating consumer price inflation in which
asset prices decline in real terms, though not necessarily in absolute
terms. Before exploring each of these scenarios, let's take a
closer look at the inflationary process.
.
What is inflation? Before World War II, the term was defined as an
artificial increase in the supply of money and credit (brought about by
a central bank in cahoots with the banking system). Since then,
inflation has been spun to mean a general increase in prices.
Inflation is the disease and rising prices are a symptom. Sometimes the
symptom goes undetected due to productivity gains from new
technologies, the dumping of commodities by a splintering empire, or
the entry of billions of capitalists into the global economy. Sometimes
the only rising prices are in assets, which no one ever seems to
complain about. Or if prices do start to rise at the checkout counter
or at the gas pump, economists can simply strip them out, leaving a
less volatile index of core prices.
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How exactly does our government create inflation? The Federal Reserve
does not literally "drop money out of helicopters" or "run the printing
presses," though these counterfeiting metaphors are apt. Instead, the
Fed engages in a clever two step process: 1) it purchases, or
"monetizes," assets with money created "out of thin air" and 2) it
allows the banking system to pyramid credit on top of this new money.
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Are investors overestimating the Fed's ability and will to inflate? For
at least the short- to intermediate-term, we believe that to be the
case. The Fed appears to be in a box. They have allowed the inflation
genie out of the bottle, leaving asset bubbles, a declining dollar, and
rising consumer prices in their wake. An aggressive easing - at least
at this point - would surely exacerbate the situation, and appears
highly unlikely. Further, newly anointed Fed chairman Ben Bernanke must
establish his inflation fighting credentials and paint a picture of
continuity with the previous regime.
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Meanwhile, the air is slowly leaving the housing bubble. Its deflation
appears to have plenty of room, perhaps for the next six months, to
gain momentum. By the time the Fed reacts to declining home prices and
rising defaults, it will be too late. Once a bubble starts to burst,
there is no stopping it, as the Bank of Japan proved from 1991-1995
with the Nikkei bubble and the Fed proved from 2001-2003 with the
Nasdaq bubble. In a post-bubble environment, the credit creation
machine becomes crippled, as lenders, borrowers, and speculators go
into post-traumatic shock.
.
At some point we would expect the debtor class to beg for inflation,
and for the Fed to give it to them. The Fed will probably be forced to
rely less on banks and other intermediaries and more on monetization -
purchasing various assets and paying for them with money created out of
thin air. Some have suggested that the Fed will branch out from buying
U.S. government securities, purchasing stocks, corporate bonds,
mortgage-backed securities, and even houses, if necessary. This is
certainly among Bernanke's contingency plans (as some of his academic
papers indicate), though it would be a radical departure from Fed
procedure. It will certainly not happen anytime soon and will come far
too late in preventing the housing and consumption balloon from popping.
.
Some in the inflation camp are convinced we are on the road to
hyperinflation. While we don't necessarily disagree, the path may take
more twists and turns than they expect. Mr. Market tends to follow the
course that inflicts the maximum amount of pain. A relative decline in
asset values would bail out the speculator, whereas an absolute decline
would take him and his creditor out to the woodshed. The investing
crowd would then likely react to the new deflationary reality by
selling off assets, paying down debt, and actually saving... just in
time to get smashed by a new wave of inflation.
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http://www.lewrockwell.com/orig5/duffy7.html
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SOME RECENT TIDBITS FROM BLOOMBERG:
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Feb. 28 (Bloomberg) -- The Commerce Department said fourth-quarter GDP,
the sum of all goods and services produced in the U.S., expanded at a
1.6 percent annual rate in the fourth quarter, up from the 1.1 percent
pace reported on Jan. 27. That was still the slowest since the same
period in 2002. The GDP price index, a measure of prices tied to the
report rose at an annual rate of 3.3 percent, up from the 3 percent
originally estimated. It's the worst of all possible worlds from
the market's perspective, said Philip Roth, a technical analyst at
Miller Tabak & Co. in New York. The economy is slowing but
not enough to make the Federal Reserve stop raising interest rates.
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http://www.bloomberg.com/news/
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March 1 (Bloomberg) - As you look at the economic setting, there is a
chance that inflation will start to drift higher, Michael Moran, chief
economist at Daiwa Securities America inc. said in an interview before
the report. Under this set of circumstances, the Fed will need to
tighten policy more. If officials have to decide between going a step
too far or a step too short, I think they'll decide to go a step too
far. In Greenspan's last interest-rate meeting on Jan. 31, Fed
policy makers said more rate increases may be needed because inflation
has been somewhat higher than acceptable, minutes of the session
released last month showed.
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http://www.bloomberg.com/news/economy/economies.html
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EDITORS NOTES:
The bottom line is this - there is no new economy, no new magical
formula or secret potion that would make current problems go
away. The sky is blue, water is wet, one plus one equals two, and
objects roll downhill due to gravity. Better said, the basic laws
of nature and economics have not changed. The ancient Romans had
inflation problems also (devaluation of the currency) due to crafty
politicians who attempted to clip coins (reduce the gold and silver
content, passing on coins said to be the real deal, but minus a few
grams here and there). Politicians will tell you what they think
you want to hear, or what they in fact want you to believe (regardless
of its validity). It is up to you to sort through the rhetoric
and make up your own mind based upon the facts and real economic world
that YOU live in (despite what the pundits and politicians tell you).
.
They claim that (official government statistics) the average inflation
rate (increase in consumer prices) over the past five years to be
somewhere between 2 and 3 percent. If we look at the average
annual GDP (the growth of the national economy) then that too
supposedly is a very, very low single digit number (on average less
than 4 percent and less than 2 percent at times as well).
However, if the official inflation rate is truly less than 3 percent
and if the economy truly is growing at say 4 percent (we want to be
generous here) then how do we explain the following increases?
Oil increased in price by 15 percent on average over the last five
years and 30 percent in 2005. Housing up 9 percent annual average
over the last five years and over 11 percent in 2005. Commodities
in general (coffee, sugar, cocoa, soy beans, beef, etc.) up almost 8
percent annual average last five years and up almost 17 percent in
2005. We will not even talk about gold because you know where
that has been going. And the money supply has been inflated by
more than 7 percent per year each year for the past six years
now. So, what are we missing? We think the truth regarding
the actual state of the economy, long-term economic projections and
what the wizards in government (and the US Federal Reserve) are quietly
doing about it (or not doing as the case might also be).
.
In this regard, Mr. Jean-Claude Trichet says: Actual consumer price
inflation is not a good early indicator to distinguish costly asset
price booms from more benign booms. Only in the last boom year is
inflation significantly higher in high-cost than in low-cost booms.
.
http://www.ecb.int/press/key/date/2005/html/sp050608.en.html
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So, Mr, Trichet, an economist, is telling us that rising asset prices
do not in and of itself indicate a painful retraction or boom that
could go bust very badly - EXCEPT
in those cases where there is a large spike in inflation during the
last year of the boom. If you look at the above statistics, you
will notice exorbitant jumps in price inflation during 2005. Is
this what Mr. Trichet was warning us about or telling us to look out
for?
.
Mr. Jean-Claude Trichet also says - For example, there is evidence that
during - and already in the two years before - asset price booms, real
(broad) money growth has been about two percentage points higher in
those booms that led to serious recessions than in those that did
not. Let us look no further than the 7 percent annual increase in
the money supply by the nice folks at the US Central Bank (Federal
Reserve) in regards to what could indicate or signal a severe recession
after a boom cycle.
.
Mr. Trichet also tells us: Economists at the Bank for International
Settlements have recently been arguing that the coincidence of low
consumer price inflation and high asset price inflation is not by
chance. They have labeled this the paradox of central bank credibility
and hinted at the possibility that due to central banks' success and
gained reputation in fighting inflation, inflationary pressures would
first show up in asset price inflation and increase the vulnerability
of financial systems. A recently conducted IMF study acknowledges
the importance of housing price booms and compares equity and housing
bust periods. It reaches the conclusion that although housing price
busts are overall less frequent, they are more likely conditional on
the existence of a boom. Historically housing price booms have been
followed by busts about 40% of the time - while equity price booms are
followed by busts only in 25% of the cases. Housing price
peak-to-trough periods are longer on average and, despite the fact that
the decline in prices is somewhat smaller - - the associated output
losses are notably bigger. The output losses incurred during a typical
housing price bust amount to 8% of GDP, which is double the average
loss during an equity price bust. The reason is a different exposure of
the banking system to mortgages than to shares. In this respect,
bank-based financial systems incur larger losses than more market-based
financial systems during housing price busts, while the opposite is
true for equity price busts. This finding is corroborated by the fact
that all major banking crises in industrial countries during the
post-war period coincided with housing price busts.
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Source: http://www.ecb.int/press/key/date/2005/html/sp050608.en.html
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Mr. Kevin Duffy says in his article that: The Fed appears to be in a
box. They have allowed the inflation genie out of the bottle, leaving
asset bubbles, a declining dollar, and rising consumer prices in their
wake. He also says that: Meanwhile, the air is slowly leaving the
housing bubble. Its deflation appears to have plenty of room, perhaps
for the next six months, to gain momentum. By the time the Fed reacts
to declining home prices and rising defaults, it will be too
late. Also: At some point we would expect the debtor class to beg
for inflation, and for the Fed to give it to them. The Fed will
probably be forced to rely less on banks and other intermediaries and
more on monetization - purchasing various assets and paying for them
with money created out of thin air.
.
So, expect the debtor class to beg for inflation? What else will
they beg for? We have argued before that social problems will arise
from economic problems - they almost always do. In addition, the
political solution will be driven by current economic situations and
such solutions may certainly NOT benefit those that have A. Stayed Out of Debt, B. Saved Money for Their Future (be it for retirement or whatever) and C. Generally Speaking have some Cash or Equity
(own their own homes outright). In this regard, it is interesting
to note that one past political solution in regards to the handling of
a certain economic situation involved former US President Roosevelt who
simply confiscated (by force) all the private gold holdings of US
citizens. As well, if you asked most people what they thought
about this at the time, they had no opinion or did not care. What
was the common reply? This did not affect me because I did not
own any gold. Think about a scenario or case today whereby there
is a corollary. Which is to say, what if the overwhelming
majority of your fellow citizens have debt up to their eyeballs, have
no equity, have no savings, have no cash and maybe even have no income
(no job). In other words, what if a large number of people
(except you) are broke. Will such persons support government
confiscation of those people that do have assets (liquid or otherwise),
or will they argue that such actions are unfair and unjust? Is it
not true that the prudent and sensible few (those that have been smart
enough to stay out of financial trouble) are usually sought after to
solve the misgivings and foolishness of the many?
.
I know what you are probably thinking. You probably think I sound
like a modern day chicken little, warning of a coming disaster.
The truth of the matter is it can be very difficult to predict exactly
where some of these things are headed. But, in the least, we can
make some sensible and rational predictions of what might happen and
then take evasive action for ourselves accordingly. Home
insurance is not something you purchase after the house catches
fire. Similarly, being prepared to weather any kind of economic
or social storm is not a foolish idea, and one that may be a necessity
going forward.
.
For example, if we do have inflation, then we know that hard assets
(gold, real estate, commodities) usually will at least keep up or hold
value versus fiat paper money. Dr, Marc Faber predicts a coming
bull market for commodities and thus a possible windfall for many
so-called Third World nations (where most of the global commodities
happen to be located, along with most of the outsourced manufacturing
jobs as well these days).
.
If we have a case of deflation, then we know it might be time to take
profits now while prices are still where they are. On the other
hand, we might very well have a sort of bastardized economy predicted
by some economists - stagflation. What is stagflation?
Basically rising prices, higher cost of living yet at the same time -
very low (if not negative) economic growth, high unemployment and a
generally speaking not very enjoyable environment for the average
middle class person. Very contradictory stuff really. What
good are high prices or values for real estate if many people are
either out of work or cannot afford the housing prices
regardless? Your real estate agent may tell you that your home is
now valued at or worth one million dollars. Great - but what if
you cannot find any buyers that can afford one million dollars,
regardless of a no money down interest only mortgage - or not.
What if the banks are suddenly stuck with a large number of non-paying,
non-producing mortgages and cut back on all that no money down easy
credit they were promoting in the past? One argument or
possibility we have heard is that the Central Banks (government in
general) will end up stepping in to buy up all those debased assets and
debt. Sounds great, but who is going to pay for that?
Either way, the American consumer makes up 70 percent of US economic
activity - if he or she stops spending for whatever the reason, watch
out.
.
Despite the talk or idea that the Federal Reserve will simply run the
printing presses (which we have no doubt is on the table as a game
plan), we still think two old clichés will be the key to
survival. Get Out of Debt and Cash is King. However, with
that said, if you are going to have cash, we will give you one more:
Over There is Better than Over Here. Meaning, are you going to
put that cash into other hard assets (gold as one idea, real estate
another) as a hedge against further currency devaluation? If so, then
thinking about other non-inflated markets makes the most sense.
For example, let us say you can find a buyer and get out of your
existing home with some equity. Are you going to put that money
right back into another inflated property, or would it be better to buy
low for cash some place else? We think the later makes for a
sounder idea. After all, you need to live to somewhere, so why
not own your home for cash (no mortgage) and do so in a country or
place whereby less than half the price buys the same thing in
comparison to the home you had previously? Not to mention, the
indicators point to a decline in the standard of living for the middle
class in most of the so-called wealthy, industrialized OECD nations -
AND an increase in the standard of living plus increased prosperity for
the Third World. But, I do not have to tell you that. If
you have traveled to China, India, Latin America, Thailand, and a host
of other so-called down and out places, you already know they are not
so down and out any more. This is where the growth will be.
This is where you can still purchase real estate for a fraction of the
cost, at un-inflated prices. This is where labor costs and other
costs are still cheap. To be sure, all of this is a work in
progress, but look at the new construction, the new infrastructure,
etc. We reported to you that a new subway - monorail system is
being built as you read this in Santo Domingo, The Dominican
Republic. That's right - a modern mass transportation system in
the so-called banana republic. No so banana any more.
Infrastructure in the so-called modern wealthy nations (bridges,
highways, etc.) are crumbling or falling down because there is not
enough money to maintain it. New bridges, new roads, new subway
systems are going up in the third world. One need not have an
advanced degree in economics to figure out where the money
is.
.
The real problem though is not going to be planning and investing to
hedge our-selves against inflation, deflation, whatever. Rather,
it would seem that the real goal by these nations or governments in
crisis is to stop the cash from leaving altogether. This more
than anything else would seem to be the challenge going forward, and it
should be noted indeed that this is the real concern the powers that be
seem to have. Better said, moving your money to another market,
and or another country (preferably a safer one or one without some of
the same problems) will be your real difficulty in the future (which is
why there is no time like the present to consider banking abroad and a
second citizenship to go with it). What are the politicians up
to? Who knows? We have already seen what seems to a trend
for law enforcement to use forced asset confiscations as a way to fund
their particular agencies, so why not fund other forms or agencies of
government in this fashion as well? This idea seems far-fetched
does it not? But if so, why then does something as innocent as
paying your bills or the transference (the spending) of cash, one way
or another, such a concern these days? See the next news article below.
.
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PAY TOO MUCH AND YOU COULD RAISE THE ALARM
By Bob Kerr, The Providence Journal - February 28, 2006
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PROVIDENCE, R.I. (SH) - Walter Soehnge is a retired Texas schoolteacher
who traveled north with his wife, Deana, saw summer change to fall in
Rhode Island and decided this was a place to stay for a while. So
the Soehnges live in Scituate now and Walter sometimes has breakfast at
the Gentleman Farmer in Scituate Village, where he has passed the test
and become a regular despite an accent that is definitely not
local. And it was there, at his usual table last week, that he
told me that he was madder than a panther with kerosene on his
tail. He says things like that. Texas does leave its mark on a
man. What got him so upset might seem trivial to some people who
have learned to accept small infringements on their freedom as just
part of the way things are in this age of terror-fed paranoia. It's
that everything changed after 9/11 thing. But not Walter - We're
a product of the '60s, he said. We believe government should be
way away from us in that regard. He was referring to the recent
decision by him and his wife to be responsible, to do the kind of thing
that just about anyone would say makes good, solid financial
sense. They paid down some debt. The balance on their JCPenney
Platinum MasterCard had gotten to an unhealthy level. So they sent in a
large payment, a check for $6,522. And an alarm went off. A red
flag went up. The Soehnges' behavior was found questionable.
.
And all they did was pay down their debt. They didn't call a suspected
terrorist on their cell phone. They didn't try to sneak a machine gun
through customs. They just paid a hefty chunk of their credit
card balance. And they learned how frighteningly wide the net of
suspicion has been cast. After sending in the check, they checked
online to see if their account had been duly credited. They learned
that the check had arrived, but the amount available for credit on
their account hadn't changed. So Deana Soehnge called the
credit-card company. Then Walter called. When you mess with my
money, I want to know why, he said. They both learned the same
astounding piece of information about the little things that can set
the threat sensors to beeping and blinking.
.
They were told, as they moved up the managerial ladder at the call
center, that the amount they had sent in was much larger than their
normal monthly payment. And if the increase hits a certain percentage
higher than that normal payment, Homeland Security has to be notified.
And the money doesn't move until the threat alert is lifted.
Walter called television stations, the American Civil Liberties Union
and me. And he went on the Internet to see what he could learn. He
learned about changes in something called the Bank Privacy Act.
The more I'm on, the scarier it gets, he said. It's scary how
easily someone in Homeland Security can get permission to spy.
Eventually, his and his wife's money was freed up. The Soehnges were
apparently found not to be promoting global terrorism under the guise
of paying a credit-card bill. They never did learn how a large credit
card payment can pose a security threat. But the experience has
been a reminder that a small piece of privacy has been surrendered.
Walter Soehnge, who says he holds solid, middle-of-the-road American
beliefs, worries about rights being lost. If it can happen
to me, it can happen to others, he said.
.
http://www.projo.com/
.
EDITORS NOTES:
Here is where things really get interesting. It would seem that
ONLY crooks, criminals and other social malcontents are the persons
that presumably have any money these days - no? I mean, after
all, the inference is that if you have a few dollars (and not that much
of it really) then you must be a criminal. How else is it
possible you have six thousand dollars to pay your credit card
bill? You must be a crook or otherwise someone of suspicion -
no? Is that not what they are telling us? Since when is
something as innocent as paying bills or transferring money something
of concern?
.
The average Ford Car in 1955 cost between US$1,600 and US$3,000 all
depending upon the model of course. However, if you walked into a
car dealership in 1956 and paid US$3,000 by check or better yet in
cash, instead of being accused of criminality, chances are the salesman
would kiss you. Today of course, it is another matter.
Buying a new car for US$21,000 (roughly the equivalent today of our
Ford Car in 1955 in terms of relative price) today and paying by check
for the whole thing could result in an FBI tail, a tax audit, the
seizure of your bank account and who knows whatever else. So, it
would seem that if you bought a car for cash or other wise just paid in
bills in 1955, it was not such a problem. Today, the very same
thing smacks of criminality. So, are we saying having assets or
having money will be a criminal offense going forward? If so,
then explain why? What is the reason or agenda? The world
has always had criminals, drug dealers (of one kind or another) and
political activists of all sorts as well. Remember, Al Capone
existed long before any militant Arabs. He was responsible for
car bombs, murders, illegal activity, and so on. Why is it some
of the restrictions on liberty and the movement of money not instituted
before? We are told things are different today? Are they
truly?
.
Currently we are constantly reminded in every airport in the wealthy
free democratic nations that we need to declare any cash over and above
US$9,999 when we are traveling, and of course the suspicious
transaction limit as it pertains to banking or credit card payments is
now any amount over US$3,000 (most Americans probably do not know this,
but this is why the gentleman's six thousand dollar payment caused the
panic alarm to go off). So then, some 50 years later, we are told
that any money movement, payment or transfer today in 2006 that would
be roughly equivalent to about US$450 in 1955 terms, is suspicious
(US$450 in 1955 is equivalent to US$3,000 in 2006 calculating for
inflation if you wondered where we came up with that amount). Go
figure. Is this really all about chasing the less than one
percent of the population that might be involved in some nebulous
activity - or is it something else? Why would any government be
so concerned about what you do with US$3,000? What is US$3,000
worth anyway? Not much, or better said, it is a bit more than the
cost of a new super duper 50 inch plasma television set, but not that
much more. No, it does cause ones mind to wander in thinking
about what the politicians are up to - and why.
.
We reported to you before that many banks (in Canada especially) now
require all sort of hoops to jump through, restrictions on transfers to
certain countries in some cases (often enough the so-called tax
havens), and a tax ID number for a recipient of any wire
transfer. So, is this all leading up to the restriction of you
possibly sending your own money somewhere else in the near
future? Why are they so concerned about amounts over US$3,000
going somewhere? Are there really that many middle-class people
jumping ship or is all this truly about chasing drug kingpins or
religious radicals? Are the politicians really so concerned
because they will not so able to snatch the funds later on if it is out
of sight, and out of reach? Is that what they are planning as the
way to balance the budget - snatch and grab? As Mr. Ripley would
say: Believe it or Not. In the least, examine all sides of these
issues completely before you make up your mind. However, having
your funds safely secured elsewhere (and maybe even yourself via
another dual citizenship) certainly does no harm. As Moishie from
Panama likes to say - Couldn't Hurt.
.
.
WESTERNERS FOLLOW OUTSOURCING TO INDIA TO WORK AT CALL CENTERS - Siliconeer, News Feature, Siddharth Srivastava, Mar 06, 2006
.
They have been labeled as adventure workers who have been joining the
Indian work force from the U.S. and Europe. It has been sometime since
India's outsourcing and information technology firms have been hiring
foreigners at higher and middle levels for their expertise. However,
workers from abroad are seeking lower-end jobs as well, such as
answering phones at call centers, for a pittance of what they earn in
their home countries.
.
It's a win-win situation, said Sreeram Iyer, chief executive of Scope
International, a Chennai-based human resources and software development
outsourcing operation of Standard Chartered Bank. The workers
don't only come for adventure. Many have trouble getting jobs back
home, he said, in an interview with The Economic Times. Over time
people been profiled by the media represent a diverse cross-section of
the West: Norwegian Even Eng, Swiss Myriam Vock (call center
Technovate), Japanese Miki Chiba, American Joshua Bornstein (Infosys),
Polish Magdalena Gazewska (Siri Technologies), Brits Paul King and
David Eddison (ITC Infotech), Swiss Patrick Schapper (travel
consultant), Scotsman Kenny Rooney (GTL, Pune). Rooney has been quoted
as saying: India provided me a growth opportunity that wasn't there
back home.
.
http://news.ncmonline.com/news/view_article.html?article_id=
3f3f3a50d77b2ada4c588ce3f85f98ec
.
EDITORS NOTES:
Americans and Europeans moving to India for work at Third World
wages? Say it isn't so. Well, as they say, if you cannot
beat them, then join them. The man does say: The workers don't
only come for adventure. Many have trouble getting jobs back
home. Many are having trouble getting jobs back home? We
are talking about people from the US, UK, Norway, Spain, Scotland (and
other such countries). At least Citibank customers will be
pleased once again to speak with Jeff, Mary or Frank instead of Babu or
Rajish on the banks help line. It is interesting to note that
many of these firms in India do indeed pay lower wages than in the US
or Europe, HOWEVER, many of the employment deals come with free housing
supplied by the company. With a general overall lower cost of
living and free apartment, could it be true that in reality - less is
more? The Third World: It's not just for public television
documentaries on poverty and hunger any more. It's a place to
find a job.
.
.
READERS WRITE IN:
.
Hi John - I just completed your article on "The New Expatriate of the
21st Century". Wow what a great article and it is exactly how I
am feeling and it was very profound to see it in black and white.
I own an employment agency in mid-town Manhattan and wanted to email
you the new rates for 2006. It is truly amazing how they continue
to escalate and I thought you would like a copy of it. For 2006, the
base wage limit is now $94,200! It is legal robbery.
.
EDITORS REPLY:
Well, most Americans do not really understand that 7.65 percent of
their salaries ALONE is being deducted for the so-called Social
Security and Medicare Tax today (that amount for sure will be
increasing in the future). However, since this is broken out as
an item separate and apart from other so-called standard income taxes,
one really has to combine the two in order to truly realize how much
total tax one is paying.
.
Regardless, one way to increase tax revenues is to up the tax rate for
such social welfare services but another way is to increase the amount
of wages subject to this tax. As you indicate, the salary amount
subject to the social security tax has been increased by 5
percent. I have no doubt what so ever that this will continue to
increase in the future (both the amount of salary subject to tax AND
the amount of tax itself by percentage of income). In addition,
according to a very recent book titled: RUNNING ON EMPTY
By Peter G. Peterson (2004), we are told that a study was done during
the Clinton Presidency that predicted Social Security payroll
deductions would need to increase by anywhere from 30 percent possibly
up to 50 percent in the future (and that was based upon a time when the
government actually had a supposed surplus). If we assume that
other regular income tax rates stay the same, regular income tax
payments together with these higher social security tax payments
indicate that US citizens could be paying up to 80 percent (or more) of
their income in total payroll deduction taxes going forward.
Knowing this, could this be the reason politicians are so frightened
about middle-class people jumping ship now (with their own
money)? One way or another, you can be sure that if you are
complaining now about an increase in monies taken out of your paycheck
to support various social welfare insurance programs, you probably will
look back to the day when there were ONLY taking 8 percent with fond
memories.
.
.
ANOTHER READER WRITES:
.
Hi John - I have contacted you once in the past concerning offshore
corporations. I am a reader of your newsletter and agree with you on
most everything you have been predicting. You must have a good crystal
ball. I am a small business owner. I liquidate technology
when company's upgrade or just plain go under. I get to see first hand
our so-called economic growth in person. I will never understand how I
see empty office buildings and they are building new ones across the
street. I can only conclude that our economy is based more on B.S. than
reality.
.
I am happy with Panama as a banking center the only problem for me is I
think that I may be better off changing everything over to the D.R. If
Panama's economy is based upon the US dollar would they not suffer also
if the dollar takes the very often predicted downfall?
I have read your articles about the PESO Vs Dollar returns and the
current economic situation in the Dominican Republic. Keeping money in
Peso's looks good to me.
.
EDITORS REPLY:
Well, on the crystal ball part, I could only say that numbers do not
lie. Politicians lie and the spin machines they use to promote
various creative financing figures for the general public, but
somewhere - somehow the money has to come from some place or
someone. An economy based on internal consumer spending alone,
and with that, a consumer that is buying with borrowed money rather
than saved cash is headed for some serious trouble. In addition,
no government can continue to finance itself with borrowed money
forever either. Some day that money has to be paid back, and has
to be procured somehow to indeed pay it back. The real question
is what are these guys up to? Will they simply create the money
out of thin air by running the printing presses? Will they simply
take the money from its own citizens via higher taxes or dare we think,
forced confiscation? Will they do a little bit of both?
.
Many middle class people are indeed expatriating in droves, and we are
seeing more and more younger people as well. Which is to say, we
used to see a very high proportion of retirees or those near
retirement, who were considering relocating to a lower cost country so
they could survive on their pension or other assets. Today, we
are seeing more and more people in the 30 to 45 year old age bracket
who are seriously concerned about what kind of economic future they
(and their own young children) are going to have in 15 to 25 years from
now. This brings me to tie this conversation into your questions
about the US dollar. One argument from some people is that it
might be better to live in a country that uses the US dollar as its
national currency, in order to avoid any currency exchange and supposed
instability issues. However, it is a double-edged sword. On
the one hand, nations that have adopted the US Dollar in place of the
previous currency will basically be able to latch onto whatever happens
in the US economically. This is fine if things are going
well. If not, if the decision is made to run the printing presses
(and or whatever else) then of course such a nation will have a problem
along with the US also (with respect to trade with other nations that
have a stronger currency). So, as you insinuate, latching on to a
rising star has its benefits, just as latching on to a sinking ship has
its downfall.
.
We have talked about the benefits of living in a country that has
another currency and possibly a weaker currency than the US dollar
before. Which is to say, while there is a very strong and likely
possibility that a devaluation of the US Dollar may be the order of the
day in the future, on the same token, there still are some small
countries whose currencies will remain weaker. So, how do you
benefit? Basically, while buying products or traveling to say,
the European Union or any country (or group of countries), that has a
currency that increases in value versus a declining dollar will be more
costly or expensive, your boon in going to be in a country where the
opposite takes place. In other words, if your current assets or
savings are in US Dollars, where can you go and how can you keep up
with inflation (at least in part)? The answer is a country where
doing something as simple as continuing to keep your assets in Dollars
(or Euros), allows you to constantly year in and year out exchange your
dollars for more and more of the local currency (thus keeping up to
some extent). Also, in many such countries (Costa Rica, Thailand,
Dominican Republic, Venezuela, etc., etc.) it might be possible that
interest rates for deposits in the local currency might be as high as
18 or 20 percent and such interest might also be locally tax-free also
- allowing you to live off your bank account interest.
.
Using the Dominican Republic as an example, let us say you had about
US$70,000 five years ago that you converted to Pesos at an exchange
rate of 28. Let us also say you invested the money in a bank
certificate of deposit or commercial paper paying 20 percent annual
interest. That original 2 Million Peso amount (about US$70,000
converted at a rate of 28) would today have grown to about 5.2 Million
Pesos today with compounded interest earnings, almost triple your money
is Pesos. If we calculate the US Dollar value of your holdings at
the current exchange rate, you would have about US$162,000 in value
today - all within 5 years. In real value terms, you can
certainly buy yourself a very, very nice single family home (2,500
square feet or more) in the Dominican Republic with this amount of
money (and some left over to buy new furniture to boot). What can
you buy in the US today with the accumulated proceeds of a US Dollar
bank Certificate of Deposit you opened up five years ago with US$70,000
at 3 percent (or whatever the interest rate)? My guess is not
much.
.
Here is another key point to consider or understand. The US
Federal Reserve (as does some other Central Banks, but not all)
artificially manipulates interest rates for political and or economic
policy agendas, but in doing so, they often severely hurt the average
citizen in the process. How so? Because as we have just
seen in our example, the average citizen has not had a chance for his
cash holdings to keep up with the TRUE price inflation and especially
the cost of housing. In other nations, where the Central Bank
does not have the capacity (or even the will) to monkey around with
Keynesian economic theories, the market sets the interest rates.
When the free market sets the interest rate, then the true cost of
capital is revealed on both sides of the equation. Meaning, the
cost to borrow money could be quite high (forcing consumers to think
twice about how much debt they take on, if any) and the flip side of
course is the interest earned on deposits high as well also (good for
savers or people with liquid assets).
.
I did not mean for this to turn into a complicated economics lesson,
and the truth of the matter is, there is risk and periods of turbulence
with currency exchange markets at times. This certainly has been
true in the Dominican Republic where the exchange rates went from about
20 or so all the way up to 52, and back down to 32 where it is at the
moment. In addition, it all depends upon what your goals are and
where you are economically in your life. The previous example I
just offered probably would have been applicable to a younger person
looking to set aside some money with the intent of retiring in the
Dominican Republic within 5 to 15 years down the road. If you are
currently retired or near retirement, then you goal is going to be
current income, not compounded growth. I do not suggest clients put all
their funds into either currency, but rather a mix and a strategy is in
order all depending. For example, if you are retired, you
probably would do well putting only perhaps US$62,500 into pesos (RD$2
Million Pesos) and living off the monthly interest. At the same
time, keep the rest of your assets in US Dollars so you can dollar cost
average into more pesos later on as the exchange rate might allow or be
of better benefit (when the exchange rate hits 40, 45 or whatever later
on) and subsequently increased your certificate of deposit holdings and
give yourself an even higher monthly income as the years go by.
In any event, all of this involves a sensible plan, dividing up your
assets by currency in way that offers the best overall benefit.
However, in the least, being able to take advantage of two or three
different currency options certainly gives you more choices and
opportunities than if just one. As we have seen in the previous
example, keeping your money in US Dollars domestically inside the US
alone over the past five years did not give the same kinds of returns
as elsewhere. Why? Simply because the US Central Bank (Federal
Reserve) decided to play games with the economy and consumers, leaving
many people behind the eight ball as a result. But aside from
that, I do think it interesting that in the Dominican Republic one has
the option of banking (and switching between) in US Dollars, Euros and
Pesos, all without restriction or any kind of currency controls.
What is this not possible in the US banking industry? Having all
your faith in one country and one currency has its own risks as well.
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