Michael Hudson on tax havens ("Offshore Banking Centers"); F. William Engdahl on the politics of the Gold Standard; Henry C.K. Liu on Trade Deficit, Loss of Manufacturing, and GDP Growth - Peter Myers, date March 29, 2004; update May 25, 2009. Write to me at contact.html.

You are at http://mailstar.net/tax-havens.html.

In Michael Hudson's interview with Standard Schaefer on Tax Havens (item 1), he says,

"Companies now file two sets of annual accounts. One is for their stockholders, and another is for the tax collector. The tax account shows no profit, because companies don't want to pay taxes. The report to stockholders shows a maximum profit, because companies want to boost the price of their stock." www.counterpunch.org/schaefer03252004.html

I asked him , "Does the Treasury know about this?" and "Is that GDP counted as America's, or credited to the Tax Haven?"

He replied:
From: Michael Hudson <michael.hudson@earthlink.net> Date: 27.01.2009 06:49 AM Subject: Re: two sets of books
Yes, the Treasury knows.
GDP ignores tax havens, assumes they are foreign.

It follows that GDP of the US & other western countries is understated.

(1) Michael Hudson on tax havens ("Offshore Banking Centers")
(2) Nicholas Shaxson: Tax havens are the most important single reason why poor people and poor countries stay poor
(3) F. William Engdahl on the politics of the Gold Standard
(4) Henry C.K. Liu on Trade Deficit, Loss of Manufacturing, and GDP Growth
(5) Michael Hudson writes, "Yes US debt is the new world currency."
(6) Stephen Zarlenga on Seigniorage and the Gold Standard

(1) Michael Hudson on tax havens ("Offshore Banking Centers")

Professor Michael Hudson is an independent Wall Street financial economist.

He explains that a "foreign investor" is likely to be a local oligarch operating out of an offshore account. The complicity of the US Government in setting up such centres. "Much of America's net foreign debt, along with that of countries such as Argentina, is owed to these flight-capital centers." They provide "a cloak of invisibility for the wealth built up by embezzlers, tax evaders, a few drug dealers, arms dealers and government intelligence agencies to use for their covert operations." How they increase the tax burden on ordinary people. How they can be shut down.

An Interview with Michael Hudson: An Insider Spills the Beans on Offshore Banking Centers

by Standard Schaefer

March 25, 2004


The oil industry created the practice of countries (SHIPS?) flying "flags of convenience" as a means of avoiding income taxes nearly a century ago. Since the 1960s the U.S. Government itself has encouraged American banks to set up branches in Caribbean hot-money centers and more distant islands as a means of attracting foreign money into the dollar. The initial aim was to help finance the Vietnam War by turning America into a new Switzerland for the world's hot money.

This policy succeeded in turning the United States into a flight-capital center for third-world dictators, Mexican presidents and Russian oligarchs. The former Soviet Union now finances a substantial portion of the U.S. balance-of-payments deficit with the flight capital that neoliberal "reformers" facilitated by backing the kleptocrats. The result has grown into a full-blown system enabling multinational corporations to evade taxes everywhere, including the United States itself. It enables domestic investors to globalize their operations by setting up offshore affiliates Enron-style in the Cayman Islands, Dutch West Indies or some small and newly notorious Pacific Island of their choice.

The permissive regulatory system relating to these offshore beachheads of tax avoidance has evolved to a point that enables U.S. and European investors to shed taxes simply by hiring a lawyer to set up a boiler-place office and finding an accounting firm willing to take its records at face value--which is good enough for the tax authorities to accept in these days of downsized fiscal operations. The resulting plunge in the ratio of corporate tax obligations to national income has been a major factor in America's soaring federal budget deficit. Businesses--and especially the financial sector--establish dummy companies and adjust their transfer pricing (e.g. on sales of raw materials to refineries, and of refined or semi-manufactured products to their final distributors in the industrial nations) so as to take all their profits in these tax-free enclaves.

Flight capital would not leave countries without having somewhere safe to go. A rising number of tax-avoidance islands have made use of the fact that they are small enough to adopt whatever tax code they wish. Lawyers acting on behalf of financial and business lobbies in North America and Europe have drawn up laws to turn these banking centers into what Prof. Hudson calls anti-states.* * *

SS: In earlier interviews you described how the economy has been "financialized" in ways that free companies from taxation. What role do offshore tax havens play in this?

MH: Companies set up trading companies in tax-avoidance islands and declare whatever income or capital gains they earn on real estate, stocks or other investments to be made by these shells. This has led to the quip that taxes have become purely voluntary for modern businesses.

SS: How does this affect the domestic U.S. economy?

MH: Un-taxing business income--and financial income in particular--leaves individual taxpayers to bear the fiscal burden through wage withholding for Social Security, Medicare and pension-fund contributions. Consumers also bear a rising burden through the sales tax and other local taxes.

SS: Do the statistics confirm this?

MH: Offshore tax havens enable multinational companies to give an impression that they do not earn any income on business done in countries where taxes are levied at European and North American rates. The reality is that U.S. companies make a lot more money than they report. However, offshore banking centers free them from having to pay taxes on this income, or on capital gains. That's why we're running such high budget deficits today.

SS: I understand you have had a forty-year experience with these offshore banking centers and tax-free enclaves.

MH: I was taught the ropes in the course of my work as a balance-of-payments economist, and later as a mutual-fund manager. My first clue to how these enclaves were set up came when I worked for the Chase Manhattan Bank in 1965-66 and was assigned the task of writing a report on the oil industry's impact on the U.S balance of payments. After reading the usual books about how the cartel operated worldwide, I still had difficulty making my way through the oil industry's income-and-expense statements and the statistics published by the Department of Commerce.

My main problem was to find just where oil companies made their profits. Was it at the production end where crude oil was drilled out of the ground, at the processing stage where the oil was refined, or at the distribution end where it was sold to its end-users to heat buildings, run cars, fly airplanes and make into petrochemicals and plastics?

David Rockefeller arranged for me to meet one afternoon with Jack Bennett, the treasurer of Standard Oil of New Jersey (the old Esso before it changed its name to Exxon). "The profits are made right here in the Treasurer's office," he explained, "wherever I decide." He showed me the broad leeway a vertically organized global conglomerate enjoyed in being able to assign "transfer prices" so as to report the overall profit at whatever point taxes were lowest on oil's statistically labyrinthine journey from wellhead to gas station.

Taxes were lowest (in fact, non-existent) in Panama and Liberia, where the oil industry's tankers duly registered their flags of convenience. Standard Oil priced its crude oil low to these shipping affiliates, and sold it at a high, nearly retail price to refineries and marketing outlets in the industrial oil-consuming nations.

SS: How can someone use the statistics to trace what is happening?

MH: It is not easy to find transactions with these flag-of-convenience countries in the U.S. balance-of-payments statistics. Instead of being listed as bona fide countries in Africa or Latin America, they appear under a rather obscure column heading called "international." Cursory viewers tend to overlook it, as it does not indicate a specific country or region. Some people may imagine that it even refers to venerable international organizations such as the United Nations, IMF or World Bank. But what "international" means is, quite simply, "international shipping" registered under flags of convenience. Quite properly, it doesn't really belong to a foreign nation's economy at all, because it is a legal fiction that U.S. companies simply make use of to produce tax filings on an unrealistic "as if" basis.

SS: You're saying that the statistics are translated into a language of unreality.

MH: A carefully structured unreality--and one that has real-world consequences, to be sure. The essence of this game is that Esso and other oil majors were able to "game" the world's tax systems by selling their crude oil at so low a price to their tanker companies as to leave little income for Saudi Arabia, Venezuela or other oil producing countries. This discouraged them from taking control of their mineral wealth, especially as they had no tanker fleets to move this oil. The corporate shipping affiliates turned around and sold their oil to their downstream refineries. These generally were located safely offshore in different political jurisdictions (e.g., Trinidad for Venezuelan oil). The oil was transferred at so high a price that despite the heavy capital investment in these facilities, the refiners and distributors reported losses year after year, decade after decade.

SS: How could the tax authorities in Europe and America not catch on to what was happening?

MH: That's where the political lobbying power of major vested interests came into play. Their ability to avoid having to declare earnings on which taxes would be due reflected the passivity of tax collectors in Europe and North America where most downstream facilities were located. One might think that such governments would have imputed a minimum tax, on the principle that any investment must expect to earn at least a normal rate of return; otherwise it would not be made or kept in place. Turning a blind eye to this logic, governments accepted the profit-and-loss statements as company accountants submitted them. They permitted the profits from oil drilling, refining and marketing to disappear down the statistical black hole of international shipping.

Mining companies followed a similar accounting practice with their shipping fleets and refineries. These oil and mineral companies were among the largest multinationals.

SS: You are saying that profits fell statistically, but not really. What does this mean for the theory that market prices allocate resources efficiently by reflecting supply costs and demand?

MH: The development of tax shelters in flag-of-convenience countries to record corporate profits hardly can be viewed as a merely marginal phenomenon. For nearly a century it has played a central role in the U.S. and European economies. But the prices are fictitious rather than a result of being based on actual costs or on supply and demand. Only the immense political power of these extractive sectors could have induced their governments to remain so passive in the face of the fiscal drain they entail--a favorable tax treatment denied to other taxpayers.

Gradually, however, other sectors learned to emulate the strategy of avoiding taxes by using offshore banking centers.

SS: Apart from transfer pricing, were other accounting gimmicks used?

MH: Parent companies consolidated their oil fields in the Near East, Africa and South America into their domestic U.S. balance sheets by organizing them not as corporately distinct foreign affiliates but as "branches." This technicality allowed them to take the full U.S. depletion tax credit against their income. Depleting the resources of other countries was treated as if they were part of the American economy--except that the profits were taken in Liberia and Panama.

SS: Did you have any conflicts working for Chase and the oil companies to produce this report?

MH: I was given free rein. I was told to come up with the best statistics possible. They made it clear that if the answers were not what they and the oil industry expected, they would not publish my report, but at least they wanted to know what the statistical situation was. I accepted the assignment on these terms.

How the Russian and U.S. Governments nurtured offshore capital-flight dollar centers

SS: How did these flag-of-convenience tax havens evolve into offshore financial centers independent of corporate shipping operations?

MH: The common denominator is tax avoidance, but the proliferation of offshore banking centers has taken on a life of its own, based on flight capital and hot money.

SS: Did this also occur as a result of corporate tax maneuvering?

MH: That was not the main motivation. Switzerland and Liechtenstein would have sufficed for the level of flight capital and criminal savings that characterized the 1950s. In order for modern-type hot-money havens to emerge, an institutional set-up had to be created to hold dollars or other hard currencies outside their countries of origin--somewhere that would provide the same degree of "privacy," "confidentiality" and hence immunity from the authorities that Switzerland provided with its notorious bank secrecy laws.

The oil and mineral companies did not break the laws or do anything illegal, and hence did not need this kind of privacy. They simply wrote and amended the tax laws to insert loopholes in their own favor. The actual money was kept in their home offices. But offshore banking centers aimed at a different source of deposits--those which needed to be kept outside the reach of U.S. or European authorities.

SS: So how did the offshore vehicles for dollar deposits develop?

MH: Actually, the great catalysts were the Soviet and U.S. Governments themselves. The story starts with the creation of the Eurodollar market during the Cold War years.

In the late 1950s the Soviet Union had a problem. It needed bank accounts denominated in U.S. dollars to defray its various spending programs in the West. But as the Cold War heated up, it feared that the U.S. Government might confiscate its U.S. bank accounts (much as Chase Manhattan would do to Iran after the Shah was overthrown). Russia therefore approached a number of British banks and suggested that they establish accounts enabling Soviet agencies to keep their dollar receipts denominated in U.S. dollars (rather than converting them into sterling), and to use these dollar accounts to pay dollars various suppliers in the West (not to mention more nefarious agents). British banks agreed, and the Eurodollar market was born--a market for dollar deposits held outside of the United States.

SS: So a great finance-capital innovation was established by the Soviets themselves. Did they realize what they were dong? And by trying to evade U.S. control, did they end up helping or hurting U.S. global interests?

MH: Nobody grasped the implications at first. As so often happens, this financial innovation bred a train of unanticipated consequences. U.S. multinationals found it helpful to hold dollars offshore to facilitate their own transactions, especially as they began to buy European and other foreign firms and establish their own overseas branches.

U.S. banks set up branches in London and other money centers to serve these companies. When monetary policy was tightened during the Vietnam War years, these banks found the easiest supply of money to come from their foreign branches. Bank regulatory agencies had not foreseen this development, and had not imposed any requirement that head offices set aside reserves against the deposits that came from these foreign branches. So Eurodollar deposits became a great source of deposits for the large international U.S. banks to lend out when money was getting tight as a result of the Vietnam War's balance-of-payments drain.

How the U.S. Government urged Chase to set up branches in hot-money centers

SS: What was the most remarkable experience you had with these institutions?

MH: The Vietnam War was pushing the balance of payments into deficit, draining the gold supply that backed the currency. Gold had been America's lever of international financial power since World War I, and now it was flowing out to pay for the war in Southeast Asia.

The Johnson and Nixon administrations knew that if fighting the war meant less consumption at home, voters would oppose the war. So they pursued a guns-and-butter policy, promoting heavy domestic consumption and deficit spending, leaving little to sell abroad. The United States was not willing to permit key economic sectors to be sold to foreigners to balance its international payments, although this is what it directed other debtor countries to do after 1980.

U.S. officials sought to attract foreign exchange in any way they could, but their options were limited. One great possibility remained: attract foreign flight capital. This could be done without raising interest rates at home, but providing a safe haven for foreign hot money. Therefore, what U.S. geopolitical strategists were willing to accept were foreign bank deposits, regardless of where they came from.

In balance-of-payments terms, foreign money being converted into dollars and kept in foreign branches of U.S. banks would do just as well as money in U.S. banks, as long as these deposits were held in dollars rather than in foreign currency.

SS: Was this an explicit policy?

MH: Pretty explicit. This was at a time when so much hot money was going to Switzerland that its franc was becoming the world's hardest currency. American financial strategists sought a policy to support the dollar in much the same way. The State Dept. and Treasury approached the nation's leading international banks with a proposal to do something that they would have feared to do without official inducement. They were to establish and expand their own branches in the world's major capital-flight centers--and perhaps to help establish some new ones. Not only would this attract foreign flight money, it would keep at home the substantial sums were being sent abroad by U.S. tax evaders.

In 1996 a former State Dept. employee who had become a Chase officer asked for my opinion of a memorandum outlining the common interest between U.S. economic diplomacy and the nation's international banks with regard to establishing offshore branches aimed at attracting some of the world's hot money away from Switzerland and other flight-capital centers.

The US is probably the second major flight center in the world, but with little probability of rivaling Switzerland for the foreseeable future. Like Switzerland, flight money probably flows to the US from every country in the world. It is handled almost exclusively by the major New York and Miami brokers, lawyers, and leading commercial banks. Officers of CMB International Department and Trust Department confirm that CMB Home Office itself handles a reasonable amount of foreign flight money. However this is insignificant relative to the total potentially available.

There is general consensus among CMB officers and both US and European experts in the field that US-based and US-controlled entities are badly penalized in competing for flight money with the Swiss or other foreign flight-money centers over the long run. This is because of the following interrelated factors:

(a) The demonstrated ability of the US Treasury, Justice Department, CIA, and FBI to subpoena client records, attach client accounts, and force testimony from US officers of US-controlled entities, with proper US court back-up.

(b) The restrictive US investment and brokerage regulations and policies, which limit the flexibility and secrecy of investment activity.

(c) The US estate tax and US withholding tax on foreign investments.

(d) The role of the US as a major contestant in the Cold War, and resulting likelihood that investments through a US entity may be exposed to any hostility or freeze of assets occurring as a result of the Cold War.

(e) The generally held (and partly unwarranted) view of many sophisticated foreigners that US investment managers are naïve and inexperienced in manipulation of foreign funds, especially in foreign markets.

Despite the above limitations, the US has brought appeal to flight money holders in other respects. These include: The largest and most active securities markets in the world, assuring both liquidity and diversification. Ease of transfer and mechanical handling of investments, partly through US banks' worldwide network. The world's leading reserve currency, the US dollar. In recent years, the unmatched financial stability and one of the highest levels of economic growth of any major industrial nation. Finally, negligible probability of revolution or confiscation, and low probability of inconvertibility.

The memo cited Beirut, Panama, Switzerland and other centers from which the U.S. Government invited Chase to attract international flight capital by placing its services at the disposal of the existing and prospective patrons of dictators, drug dealers, criminals and even Cold War adversaries.

Chase and other major U.S. money-center banks responded by setting up a network of offshore centers to turn America into a high-level Switzerland.

SS: Did this actually occur, and did the government go along with it?

MH: The government and banks were well aware of the fact that crooks are the most liquid people in the world, for the simple reason that they fear to hold property in plain sight of the authorities--except in cases where their actual ownership can be laundered through a maze of dummy companies and name-plates on legal folders in the offices of the offshore lawyers who make their livelihood by managing such financial stratagems. The major American accounting firms, law firms and investment advisors soon got into the business of advising corporations and wealthy clients how to set up offshore bank accounts in the name of paper companies.

SS: This would seem to be a bombshell. Have you ever published this?

MH: I showed it to the Canadian economics professor and journalist Tom Naylor, who reproduced it in 1987 in his book Hot Money, pp. 33-34. The book has been translated into many languages and reprinted numerous times. It is about to be reprinted again this year by McGill-Queens University Press up in Canada, and in fact I'm writing an introduction to the newest edition. But there hasn't really been much discussion, because the topic of hot money remains outside the concerns of most academic economists.

SS: Was there any debate over whether this was the right thing to do?

MH: Yes, a series of Congressional hearings were held, and many excellent reports were included. But right-or-wrong morality didn't play much of a role. One of the main policy issues was simply whether the government should impose a 15 percent withholding tax on foreign holdings of Treasury securities, on the ground that this would probably be the only tax revenue it would recover. Government spokesmen (WHO, WHAT DEPARTMENTS?) convinced Congress not to impose the tax, on the ground that this would discourage foreign hot money--and also U.S. hot money, for that matter--from holding Treasury bonds. The United States needed every market it could create for its bonds at this time, to stem the gold outflow. So the foreign withholding tax was abolished.

SS: In other words, the Treasury permitted domestic U.S. tax avoidance to occur in order to get a balance-of-payments inflow into the dollar, and to hold down domestic interest rates.

MH: Yes. The I.R.S. already had permitted tax avoidance to occur under pressure from the large multinationals such as the oil and mining companies. Vertical integration enabled them to administer transfer pricing in a way that minimized their global tax liability. Refraining from taxing the interest paid on U.S. Treasury bonds favored U.S. hot money.

By the late 1960s the United States was well on the way to making America the leading haven for the world's flight capital. Citibank, Chase and others established or expanded operations for their "private banking" subsidiaries offering "confidentiality" to clients ranging from Mexico's leading politicians to Russia's kleptocrats in the 1990s.

SS: But the price was to give international law-breakers a better tax treatment than law-abiding and tax-paying citizens.

MH: Yes, and there's a reason for that. The striking thing is that the most liquid savers in today's society are criminals and tax evaders. They have a good reason to avoid real estate or other tangible property. It is too visible to prosecutors and tax authorities. That is why balance-of-payments statistics classify capital movements as "invisibles." Prestigious accounting firms and law partnerships busy themselves devising tax-avoidance ploys and creating a "veil of tiers" to provide a cloak of invisibility for the wealth built up by embezzlers, tax evaders, a few drug dealers, arms dealers and government intelligence agencies to use for their covert operations.

SS: So all this made finance capital more cosmopolitan and less subject to national regulation and government control.

MH: Yes, and by the late 1980s U.S. money managers were incorporating offshore mutual funds to tap global capital markets.

How hot-money centers turn capital flight into a market for government debts

SS: What was the effect of these tax havens and banking centers on the economies of other countries?

MH: Just as the U.S. authorities hoped, the world's hot money found it most convenient to go into dollarized offshore banking centers.

SS: Can you give an example of how this worked?

MH: In 1989 I was hired by the Boston money-management firm of Scudder, Stevens and Clark to spend a few months of my life organizing a sovereign-debt fund, that is, a fund investing in the bonds of third world governments. This was the world's first such fund, and it started what would become a torrent of issues in the 1990s. But at that early stage Scudder was unable to find American clients willing to put $75 million into a region where they had been burned badly in the aftermath of Mexico's 1982 insolvency.

On the other hand, that traumatic event had pushed borrowing rates up to nearly 45 percent annually for Argentine and Brazilian dollar-denominated government bonds, and about 25 percent for Mexico's dollar-denominated medium-term tesobonos. These rates enabled the fund to be more successful in finding foreign buyers. Incorporated in the Netherlands Antilles (Dutch West Indies) as the Sovereign High -Yield Investment Co. N.V., its shares were listed on the London Stock Exchange. The underwriter, Merrill Lynch, sold them mostly to well-connected Argentine families through its Buenos Aires office, with the balance taken mainly by Brazilian and other Latin American buyers.

Their money was invested in the high-yielding bonds of their own governments. The irony was that the exorbitant interest payments being made in 1990 were largely due to Argentine flight capital and to Brazilian families operating offshore as a "Yankee fund." The fact that it was set up offshore meant that no U.S. investors were allowed to buy its shares.

The biggest investors were political insiders who had bought into the fund knowing that their central banks would pay their dollar debts despite the high risk premiums. While these local oligarchs appeared in the statistics as exploitative "dollar creditors" to their countries, domestic demagogues blamed the Yankees, the IMF, the World Bank and British bankers for enforcing financial austerity on their countries. Yet the dollar debt of Argentina in the early 1990s was owed mainly to Argentineans operating out of offshore banking centers. The major beneficiaries of foreign-debt service were their own flight-capitalists, not bondholders in North America and Europe.

To Argentina, a "foreigner" was likely to be a local oligarch operating out of an offshore account invisible to their government (which consisted largely of their own families). One finds the same phenomenon in Russia today, where a "foreign investor" tends to be a Russian with an offshore account operating out of Cyprus, Switzerland or Liechtenstein, perhaps in partnership with an American or other foreigner for political camouflage.

SS: How did the fund do?

MH: In its first year of operation it became the second highest-performer worldwide. (An Australian real-estate fund was in first place.) Global investors soon got into the act as they watched Latin America's financial oligarchy recycle its own dollarized flight capital back to its countries of origin via offshore enclaves.

However, the fund with which I had been associated was limited to only a five-year duration, because in 1989 it seemed to me that this was all the leeway available to keep siphoning off third-world income until a new crisis loomed. By the time this period was up, in 1994, Mexico's tesobonos had become such an investor favorite that their interest rate fell below 10 percent. The country was selling off its telephone system and other public enterprises whose sale proceeds temporarily were filling the central bank's foreign-exchange reserves--the PRI dictatorship's last act in office before it lost the presidency.

But Mexico teetered on the brink of default in that year's peso crisis, just a dozen years after it had triggered the Latin American "debt bomb" of 1982 by announcing that it could not service its foreign debt. The Clinton administration "rescued" Mexico, or rather, Treasury Secretary Robert Rubin rescued its creditors.

SS: So ultimately, speculators in third world dollar bonds lost.

MH: They weren't the only ones. The process involved flight capital being turned into a legacy of foreign official debt. Argentina even was convinced to join the ranks of Panama and Liberia by dollarizing its economy. Rather than creating domestic credit itself by running budget deficits as other nations do, its government issued an enormous volume of bonds payable in dollars. Their interest rates fell below the 10 percent level as investors in the creditor nations wanted to believe that the secret of monetary solvency had been found. Foreign dollars were borrowed to finance domestic policies.

Meanwhile, the decline in interest rates resulting from the rise in "confidence" in Argentina's folly provided rich capital gains for investors who had bought the bonds at so low a price that they yielded four or five times as high a return. But what is confidence, after all, but an opportunity to play the confidence game--a game at which financial underwriters have honed their skill for centuries! The Scudder fund and other early investors sold off their bonds to the new mutual funds and other buyers inexperienced with international risk during the bubbling '90s when everyone tried to top the returns of others, regardless of where the long run was leading.

This promoted a needless foreign indebtedness, whose collapse today threatens to split Argentina away from other nations. Then in 2001 the debt pyramid collapsed, and the bonds have now plummeted. This wiped out a substantial portion of "bad savings" that were the book-keeping counterparts to these bad debts.

Some policy alternatives

SS: How much money in these centers is illegal flight capital and savings out of tax evasion?

MH: The remarkable thing is the extent to which investors have made the use of these centers legally. In sponsoring the Eurodollar, for instance, the British government encouraged the creation of tax-avoidance entrepôts on some of the islands located in the otherwise inhospitable English Channel and North Sea. By the simple act of registering ownership of their real estate in one of these islands, British property owners are permitted to avoid paying capital gains taxes, as these are not charged on "foreign" investors.

SS: What's the difference between a tax avoider and a tax evader?

MH: It's legal to make use of existing laws to minimize one's tax liability. A tax evader is someone who violates the law by making false statements or engages in complex financial operations that have no economic function except to avoid paying taxes.

SS: So Britain's logic was much the same as America's in the 1960s: It needed the money, regardless of where it came from. The cost ended up making it easier to avoid taxes.

MH: The logic was that sterling needed foreign investment to support its exchange rate. The main effect, however, was to provide tax favoritism to large domestic investors as opposed to home owners or small investors who did not establish foreign accounts. A British investor can set up a dummy corporation in these enclaves and avoid paying taxes on resale gains on their land and buildings, stocks and bonds or other assets.

It is all perfectly legal, as any country has the right to levy--or not to levy--taxes on wealth, capital gains or income. Inasmuch as capital gains tend to outstrip the growth of earned income, the economic role of such offshore centers is central to global wealth accumulation. As global asset-price inflation gained momentum during the 1980s and '90s, the attractiveness of such centers has increased proportionally. This means that economists hardly can analyze the growth and polarization of national and global wealth without taking into account the web of financial claims and liabilities associated with these centers.

SS: But there is a growing overlayer of illegality, isn't there?

MH: Certainly, but it's been merged into "invisibles" as far as economic statistics are concerned, and economic theory too for that matter. Crime is one of the key sectors for which no estimates are made. Yet it is perhaps the most liquid, as dictators and kleptocrats, embezzlers and drug dealers fear to tie down their assets in visible form. The newest additions to the world's rentier class, they have become a fount of liquidity for today's economies.

Russia has suffered $25 billion in flight capital annually since 1990. Its IMF bailout loan of August 1997 disappeared into an obscure bank in Britain's Channel Islands, from whence it was forwarded to Cyprus, Switzerland and the United States. Most IMF lending to Africa and Latin America has been fully absorbed by capital flight, subsidizing it under the euphemism of "currency stabilization." What is being stabilized is mainly the rate at which this flight capital is exchanged for hard currency (if one still can call dollars a hard currency).

SS: How might governments counter this ploy to tax this money?

MH: That is what is being debated in Russia these days. It seems that the only kind of tax that can be collected from multinationals today is to tax what is visible, not what is invisible--that is, invisible to the national economic statistician and tax-collecting office. Russians are discussing a rent tax levied in the form of an excess profits tax on oil and mining exporters.

SS: If we look at the balance sheets as they stand, the offshore banking centers appear as net creditors, and the rest of the world's countries are net debtors?

MH: Not quite. The "savers" who have accounts in these offshore banking centers have claims on them that, in turn, represent the liabilities of these enclaves that offset their claims on the rest of the world. But the financial claims held by these havens are owed in turn to their offshore "savers."

What is missing from the data that should be there are the claims by these "savers"--the tax avoiders, criminals and so forth--on these offshore havens, classified in terms of their country of origin. These surreptitious savings get lost in the IMF's "errors and omissions" line. This is because the Dutch West Indies, for example, may owe money to a Panamanian shell, which owes money to an Isle of Man shell, and so on. The ultimate hot-money claimants are hard to identify. Deposit inflows to these enclaves find their balance-sheet counterpart in their own rising indebtedness to tax avoiders and dodgers in Europe, North and South America, Asia and Africa. But the statistics are silent as to just who these invisible savers actually are and where they really reside.

An Argentinean or Russian exporter sells at a fictitiously low invoice price, asking the buyer to deposit the difference in an offshore bank account. Needless to say, the Argentinean or Russian will not declare this holding, so it doesn't appear in the official accounts. But it exists in reality. This is why the world's reported debts exceed the locatable savings by an "errors and omissions" margin.

SS: How exactly does this false invoicing work?

MH: In two ways. The simplest is for importers to claim to pay more for imports than their true economic price. This is what the oil companies do when they price crude oil so high to their refineries that the refineries have no room to report a profit, decade after decade.

The mirror image of this fraud occurs when exporters claim to receive less than they actually are paid. The margin is what they are able to embezzle. The buyer typically pays the difference to a "private" account in one of the offshore banking centers, facilitated by one of the U.S. or British or Canadian banks set up for this helpful purpose. This is the meaning of bank "privacy." It is how Russian exporters of oil, aluminum and other raw materials conceal their actual income from the Russian government. It explains the emergence of so many post-Soviet multi-billionaires benefiting from "unexplained enrichment."

SS: Doesn't the Russian government still raise most of its taxes from oil and other raw-materials exports?

MH: Yes, but it fails to tax the actual income. If it did, Mr. Khodorkovsky and other kleptocrats would not have suddenly risen to join the ranks of the world's wealthiest individuals in merely a single decade, and would not now be under prosecution for criminal tax evasion. It is significant that the financial press in the West writes anguished editorials accusing this of representing nothing less than brown-shirted fascism, nationalism and totalitarianism. Bush administration hacks such as Secretary of State Powell publicly express their worry that this threatens the very foundations of "private enterprise." This show how little they think of punishing tax evasion in their own countries.

SS: I assume that we'll get to cover these machinations in greater detail in our up-coming interview on Russia after its March 14 presidential election. Returning to the topic of offshore banking centers, are you describing a technique that has been developed simply by individuals, or has it been institutionalized on a higher, economy-wide plane?

MH: The largest accounting and law firms of North America and Europe have got a rising proportion of their income for providing advice to companies seeking to make use of these tactics. The primary users are money managers and leading corporations to conceal their profits (or losses, in the case of Enron and Parmalat) from oversight by the authorities in their own countries. By the 1990s, Enron, Parmalat and other giant corporate criminals were able to organize the largest financial frauds in history by using structured finance involving hot-money havens.

SS: Isn't there a U.S. law against arranging a complex business practice solely for the purpose of evading taxes?

MH: The law is indeed on the books, and the IRS has complained specifically that the KPMG firm has organized systematic tax-evasion schemes. But the neoliberals have placed their own ideological administrators in these agencies, men who have bragged to me that they simply refuse to regulate to "kill the beast," that is, government, which is supposed to be the economy's guiding brain. Their non-action has corrupted the national legal and regulatory system by disabling it. Power is being wielded by campaign contributors whose wealth has convinced politicians to give tax evaders the right to blackball any regulatory agency who shows himself or herself to be too conscientious in applying the law, above all the tax code.

SS: What about New York Attorney General Eliot Spitzer?

MH: He obviously recognizes what is going on, and seems to have been astounded to discover how far the rot has spread. What he found while bringing criminal charges against Arthur Andersen in the Enron case was that every major accounting firm was engaging in the same fraudulent practices. This created a practical problem for him. Was he going to close down every accounting firm by applying the law across the board?

If he had done this, who would have audited the books of America's companies? It would have crashed the stock market and the entire economy. So he settled for fining the banks and financial and accounting firms a very small portion of their gains, leaving their partners with their comfortable retirement takings and making them promise to stop breaking the law in the future.

On the other hand, I think that even if he closed down these firms--and remember, I used to work for Arthur Andersen and found it thoroughly venal already in the 1960s--the system would have healed itself almost overnight. The existing firms as such would have been wiped out and many of their leading partners would have gone to jail--probably not more than a few hundred--or at least would have lost their retirement payoffs. But most of the remaining accountants would have gotten together to create new firms, free of the taint of corruption that has characterized Deloitte Touche in the Parmalat case, KPMG for its tax-evasion schemes, and the other accounting firms right down the board.

SS: How deeply can the problems be traced?

MH: The path leading to this state of affairs was opened up at the close of World War II. U.S. diplomats brought pressure on the International Monetary Fund to free capital movements, at a time when it was clear enough that most capital flight would be into the dollar, out of economies that were regulated. Euphemized as "economic reform" and "freedom of choice," the move toward financial decontrol cleared the path for the development of offshore havens. That was part of the fatal flaw built into the DNA of the postwar Bretton Woods system.

The U.S. Government remained in control, and as I explained earlier, when the Vietnam War pushed the balance of payments into deficit, the government encouraged the large money-center banks to set up branches in these island enclaves to act as enablers facilitating global theft, fraud and other criminal activity. It has been through their user-friendly operations that the non-criminal world--the world of honest men and women, industry, commerce and even sovereign governments--has become increasingly indebted to lawbreakers, just as taxpayers are increasingly indebted to tax avoiders.

Much of America's net foreign debt, along with that of countries such as Argentina, is owed to these flight-capital centers. This has become the meaning of "globalization" in its financial dimension.

I pointed out above that deposit inflows to these havens are matched in the official statistics by other countries' "errors and omissions." The world's most important economic phenomena that determine exchange rates today have been relegated to the unseen "black" economy--not only crime, but what is becoming the dominant mass of corporate and personal wealth. It is more "invisible" today than ever, in order to avoid the eyes of prosecutors and tax authorities.

What is remarkable is that neoliberals praise rather than denounce this phenomenon. The upshot has been to create a situation in which, if one must own land, other tangible assets, or financial securities, the best way to avoid taxation or seizure is to register them in the name of offshore proxies.

The next step for these offshore entities is to loan this money back to oneself, charging enough interest to absorb the erstwhile taxable revenue. Operators large enough to set up their own insurance company can charge off the remainder of their income as tax-deductible insurance payments to their offshore entity created for this purpose, along with the usual skimming charge for management fees to owners and senior managers.

Financially sophisticated operators send their money offshore and then borrow it back, paying enough interest, insurance and management fees to themselves to absorb their earnings and thus render themselves free of taxes. These payments expensed to oneself appear in national income and tax statistics as a cost of doing business, while balance-of-payments statistics report them as an international outflow for "services" under the rubric of "invisibles." So statistics become increasingly fictitious.

SS: You have described how the rise of these centers has led to economic statistics losing their value. How can the economy be analyzed and quantified under these conditions?

MH: Financial havens help income and capital gains disappear from the statistics of national economies as flight capital, only to reappear as debts owed by victimized economies to "foreigners" operating out of these enclaves. Their balance-of-payments transactions appear as "errors and omissions." Most economists know that this is a euphemism for "short-term capital movements," which itself is a euphemism for capital flight and tax evasion.

The basic perception is that what one can avoid reporting to national authorities will not be regulated, taxed or prosecuted. Strategy along these lines reflects decades of lobbying by the world's wealthiest companies and individuals to disable their governments' ability to tax them. Accounting firms, law firms and global banks help them by using "structured finance" to conceal their income and wealth--as well as their debts and financial fraud. The more crooked the client, the larger the fee that can be charged for the advice being orchestrated to guarantee privacy. In a society where crime pays better than most honest professions, financial and banking expertise is for hire. The experts will happily go to work for Enron and Parlamat, salving their conscience by believing that this is all part of the free market impelling civilization forward and leaving Communism by the wayside in the world economy's struggle for existence between competing systems.

The symbiosis between offshore banking centers and oligarchic, kleptocratic and criminal wealth can be traced in the lawsuits that have graced the front pages of the international press in recent years. The largest bankruptcies in recent years have involved machinations via such centers. In Parmalat's bankruptcy the legal defense by the company's auditors, Deloitte and Touche, is that they had no reasonable way of knowing that the $4 billion in alleged deposits in an offshore Bank of America hot-money account did not really exist. Other poster boys for this predatory universe of flight capital are the offshore entities created by Arthur Andersen and Citibank for Enron, the Swiss banks renowned for serving Idi Amin and other warlords, and the Bank of New York and its brethren that helped Russia's oligarchs embezzle $250 billion in the 1990s.

Once the fiscal ploys are spelled out in detail, attentive readers may recognize that what is being described is how today's multinationals typically are structured to extract revenue and minimize (that is, to avoid) taxes. Economists since John Maynard Keynes have used the word "leakage" to describe funds withdrawn internationally from the domestic income stream. The term implies that money is being lost, and of course it is lost to the tax collector. But it does not simply disappear. Placed in the world's anti-government centers, flight capital takes on a creditor power that is indebting North America, Europe, Asia and Africa, siphoning off their financial surplus in ways that remain invisible to most statisticians and economists, politicians and voters.

SS: You paint a discouraging picture. What is the point in trying to tax corporate and financial income at all, if transactions with these islands are not simply closed down?

MH: A choice is indeed being forced. If these tax-cheating havens are not closed down, the only people left to tax will be the middle class and employees.

Companies now file two sets of annual accounts. One is for their stockholders, and another is for the tax collector. The tax account shows no profit, because companies don't want to pay taxes. The report to stockholders shows a maximum profit, because companies want to boost the price of their stock. Voters have elected politicians whose electoral campaigns are paid for by lobbies who are hired to mobilize support for this policy, while academic chairs are endowed to hire well-meaning fools or "useful idiots" to teach this anti-government philosophy as representing positive "reform" rather than depicting it as outright parasitism.

The public is being misled in two ways. First of all, governments are given tax returns that show profits as shrinking, through artificial book-keeping that becomes the basis for official statistics. Meanwhile, stockholders are being given stories of fictitiously high profits, at least in the cases of Enron and Parmalat.

The clients of this floating island world use a system that has been put in place by pillars of business integrity representing the global economy's core, not merely a peripheral underworld constituency. These enclaves belong at the center of economic analysis, yet they usually are treated as an anomaly rather than as an integral organ of modern wealth accumulation.

SS: How might these offshore centers be shut down? The law says that you cannot punish or fine people following the laws that apply in their own day. You cannot lay down penalties retroactively.

MH: You don't have to. Laws against fraud, embezzlement and tax evasion have been on the books for many years, although many of these laws have not been seriously enforced. One of the easiest laws to enforce is the principle of "unexplained enrichment." This is, by the way, how the world's great fortunes were created--and what Putin is applying against Mr. Khodorkovsky.

Banks in the United States, Canada, Europe and Asia would agree not to recognize deposit transfers from these centers. Companies and brokerage houses would refuse to pay dividends to addresses in them. Countries would lay down rules for legitimization of ownership of these deposits, corporate shares or other financial claims.

One standard question no doubt would be to ask how one came to obtain holdings in these centers. Was this wealth obtained out of one's normal income? If not, how?

A broader solution would be simply not to recognize banking and creditor claims from these centers. This would be a start repudiating the world's bad debts.

SS: This would have to be done suddenly, of course. We'd better leave this broader context for a future interview.

Professor Michael Hudson is an independent Wall Street financial economist. After working as a balance-of-payments economist for the Chase Manhattan Bank and Arthur Anderson in the 1960s, he taught international finance at the New School in New York. Presently, he is Distinguished Professor of Economics at the University of Missouri (Kansas City). He has published widely on the topic of US financial dominance. He has also been an economic adviser to the Canadian, Mexican, Russian and US governments. His books include Trade, Development, and Foreign Debt (Pluto, 1992, 2 vols.). He is the author of Super Imperialism.

Standard Schaefer is an independent economic journalist, a cultural historian, literary critic, poet and short-story writer. He teaches at Otis College of Art and Design. He is the non-fiction editor of the New Review of Literature. He can be reached at ssschaefer@earthlink.net.


Michael Hudson's home page is http://www.Michael-Hudson.com

(2) Nicholas Shaxson: Tax havens are the most important single reason why poor people and poor countries stay poor


Treasure Islands: Tax Havens and the Men Who Stole the World

by Nicholas Shaxson

"From the start, the Mont Pelerin Society had strong links to the City of London"

Tax havens are the most important single reason why poor people and poor countries stay poor. They lie at the very heart of the global economy, with over half the world trade processed through them. They have been instrumental in nearly every major economic event, in every big financial scandal, and in every financial crisis since the 1970s, including the latest global economic downturn.

Without understanding tax havens we will never properly understand the economic history of the modern world.

Nobody disagrees that Britain sits, spider-like, at the centre of a vast international web of tax havens, hoovering up trillions of dollars' worth of business and capital from around the globe and funnelling it up to the City of London.

Despite some vigorous efforts, nobody has come close to overturning the research or analysis showing the sheer scale of the harm wreaked on the world by these elitist, criminal-infested libertarian paradises; these silent battering rams of tax-cutting and financial deregulation.

(3) F. William Engdahl on the politics of the Gold Standard

This is a caution for those promoting a return to the "Gold Standard".

F. William Engdahl may use this material in a book, so I have restricted myself to a short extract.

"Der Kampf um Europa..." All rights reserved from F. William Engdahl July 1996

"Gold and Empire"

... With the German defeat of France in 1871, London became the center of significance in the world, for fluid international capital to find refuge. France had been its major rival in its efforts to become the premier international financial center. In the aftermath of the Franco-Prussian War, the Bank of England became what Walter Bagehot, the influential editor of "The Economist," identified as, "the only great repository in Europe where gold could at once be obtained."

In fact, the City of London was the only repository in the entire world, as there were no rivals after the defeat of France. Germany's financial system was still in its infancy, the Reichsbank having only been established in 1876. The United States was still dependent on huge inflows of borrowed capital, mostly from London, to finance its large industrial and railway expansion after its Civil War.

The monetary role of gold had become the centerpiece for the domination by the City of London of world finance and banking, and with it, of world politics, by the late 1870's. More and more, London bank loans and bond issuance, to areas of the world not formally part of the British Empire, were seen in British policy circles as a far more effective lever of world policy influence and control--in short, of power--than the traditional colonial methods of direct administrative and military occupation.

Countries with no formal colonial ties to the British Empire, such as Argentina, Uruguay, Russia, Italy and, increasingly, even the former colony, the United States, were becoming effectively bound to Britain through ties to the financial houses and credits of the City of London.

At the same time, England's monetary ties to existing colonial areas such as India, were reinforced, with gold reserves transferred to the vaults of the Bank of England from the colonial areas, and credit dependency on London banks to finance chronic trade deficits with England.

An "informal Empire" was beginning to emerge towards the turn of the century, one of far more significance, ultimately, than Empire colonies, an invisible empire of finance.

The implications of this transition to an informal empire for the City of London, were to be realized only over a period of decades, and with often violent clashes within the English policy elite circles. Clashes took place between the traditional factions of "old Empire," and those forward-looking "new Empire" advocates, whose most effective voices were centered in the influential Round Table grouping of Cecil Rhodes, Lord Milner, Philip Kerr and others.

The emerging informal empire, centered in the banks of the City of London, rested on a thin veneer of gold reserves, gold intended to sustain confidence in the City of London's supremacy as the world's pre-eminent bankers. The idea was universally accepted that, "Sterling is as good as gold."

The French government had been forced to finance payment to Germany of France's war indemnity of 1871, primarily through London. Even Germany had opted to keep its gold banked with the Bank of England in London at that time. The British Gold Standard had emerged after 1871, as the centerpiece of world finance and credit.

Under the terms of this London-centered Gold Standard, a nation's bank credit was directly linked to the size of available monetary gold controlled by that nation's central bank or by its banking system. If foreign creditors demanded repayment in gold, the debtor nation was forced to raise its interest rates to try to stop gold outflow, cutting its domestic credit accordingly, often triggering recession or, worse, industrial depression and financial failures.

Little wonder, then, that the supply of gold and control of that supply, became a subject of great concern to British policy-makers, most especially those powerful interests centered in the City of London.

That nation which could control future world gold supplies, had the power to control future world credit. Conversely, those nations adhering to the international gold standard, but which lacked gold reserves of their own, became dependent for expansion of their national credit, and thereby the growth of their national economies, on those who had gold. London's financing worldwide of major gold mining companies was an integral part of the strategy to keep gold, even that far outside English colonies, firmly in British control.

By the 1880's, growing demand for gold to back rapid industrial expansion, especially in Germany, and above all in the United States, catalyzed a worldwide search for new reserves of the precious metal.

The new German Reichsbank in Berlin in that period had already begun accumulating its own large gold reserve in Berlin, as German industrial export surpluses grew. As well, by 1878 the Bank of France was also able to resume accumulation of its gold reserves, as French industry recovered from the effects of the Franco-Prussian war.

Increasingly, the Bank of England was faced with a growing scarcity of new gold to expand its reserves. British industry, which already by the early 1870's was assuming a second order of importance, to the growing power of the City of London, this industry had been the victim of severe credit austerity from the Bank of England beginning in 1873, a credit contraction primarily designed to keep England's gold stock intact.

That year, the Bank raised interest rates to what were deemed "panic levels" of 9%, in order to defend the City of London from capital outflight and loss of its gold. The high interest rate policy and the severe price deflation which followed after 1873, had such an impact on British industrial production over a period of years, it came to be called the Great Depression. In that depressed period of the 1870's into the mid-1990's, other industrial nations, notably Germany, began to emerge as collosal production factors on the world market, absorbing an increasing share of the world's monetary gold in the process. For Britain, the situation was reaching a crisis point. (1).

In this circumstance, the fortunes of Cecil Rhodes, an eccentric British mining operator, whose activities across South Africa were financed by London's Rothschild bank, became entwined with the City of London's future as world finance center.

"A war against stubborn farmers over gold"

In 1886 the world's largest known gold reserves were discovered, the Main Reef, on the Witwatersrand in the Transvaal region of South Africa, an interior region well inland from the British port of Cape Town, and one which had few English settlers. As soon as the vast size of the Transvaal gold find was grasped in London, powerful British financial interests had concentrated on how to get control over the huge new gold find. The inhabitants of the Transvaal had recently fought and won a bitter war with Britain, when England had tried to declare the Transvaal as part of the British Empire. The Dutch-descended Boers who populated Transvaal, had won their independence in 1880, led by Paul Kruger. That independence was to last two decades, that was, until gold changed the strategic significance of the region.

Following the news of the vast gold find in Transvaal, Cecil Rhodes and others with City of London financial backing, proceeded to grab every possible farm or property in the Transvaal to control the gold output. Notable about who emerged as the most powerful gold mine owners after 1886, was that they were dominated by the core financial backers of what became the secretive British Round Table group, including Cecil Rhodes, his business partner, Alfred Beit, and Abe Bailey.

{Carroll Quigley on Rhodes' Round Table group, a secret society for expanding the British Empire: quigley.html; Rhodes' will, furthering this goal: rhodes-will.html; the Rhodes Scholars (Bill Clinton, Bob Hawke, Naomi Wolf et. al.) endowed by Rhodes' will: rhodes-scholars.html}

In 1887 Rhodes established the London-registered Gold Fields of South Africa Ltd., which in 1892 became Consolidated Gold Fields of South Africa Ltd. By 1888 gold output from the Transvaal had increased over the previous year by tenfold, and there was no end in sight. The Transvaal was on its way to become the world's largest gold producing region. As one English commentator stated the London view of this situation, the Transvaal was "an anomoly which, in a properly ordered world, ought to be governed by Englishmen."

The problem for Rhodes and his friends in London, was the fact that the world was not entirely properly ordered. Political control of the Transvaal was firmly in the hands, not of Englishmen, but of the fiercely independent and anti-British Boers, with Paul Kruger as their leader. To deal with this obstacle, in 1895 Rhodes decided, with secret backing from London, to organize a coup, the ill-fated Jameson Raid.

Notable about the raid, was that every principal figure involved, up to the editorial writer of the influential "Times" of London, who backed the fiasco, were members of the Round Table group. Rhodes and Alfred Beit financed the uprising, which was led by Cecil Rhodes' brother Frank, and Abe Bailey. Their initial action was to be followed by an "invasion" from Rhodesia, by a force led by another Rhodes lieutenant, Starr Jameson. In the event, the planned popular uprising against the Boer rule fizzled, and the Boers captured Jameson.

To divert attention from the blatant fiasco and its implications for the role of the British Government, editorials in the London "Times," tried to turn attention to alleged meddling by the German Kaiser in Transvaal business. The "Times" was the most influential newspaper of Britain, whose editorial policy was fully controlled behind the scenes by the Round Table group. The paper played up, to the point of a national hysteria, a telegram sent to Kruger by Kaiser Wilhelm, congratulating Kruger on "preserving the independence of his country without the need to call for aid from his friends."

Turning attention to alleged German designs on Transvaal, the "Times" managed to divert attention in the world outside South Africa, from the obvious fact that Rhodes and company, with full backing from London, had attempted a violent coup d'etat against the duly-elected government of a state which England had recognized as independent 15 years earlier. That had been, of course, before London had realized the area's vast gold wealth.

By 1897 Alfred Milner, the moving spirit of the secretive Round Table circle, was made British High Commissioner for South Africa. At the same time, a young Jan Smuts, a Cambridge University graduate who had been Cecil Rhodes' agent in the Kimberley diamond interest in 1895 and who remained a member of the Rhodes-financed Round Table to his death, went to the Transvaal. There, Smuts openly profiled himself as "anti-British," by publicly defending Transvaal nationalist leader, Paul Kruger, against political attacks. Through this, Smuts soon insinuated himself as principal political adviser to President Kruger. The stage was being set for the Boer War, with Round Table figures in control on both sides.

When Milner learned in 1898 that the Kruger government of Transvaal was seeking to borrow money from Europe to strengthen its defenses and improve its public infrastructure, he directly called on the British Colonial Office to blacklist Transvaal's government. Through the Colonial Office's close links with Lord Rothschild, they were able to block the Transvaal from access to London and Paris money markets.

But German banks, not at the time beholden to Lord Rothschild, loaned Kruger's government two million Pounds equivalent. With its vast gold deposits, the Transvaal Republic had the resources to make its political independence viable.

Kruger's government then began exploring the prospects of building a railroad link to the neighboring Portugese port, Laurenco Marques, which would give Transvaal a sea link independent of British ports in South Africa. The Kruger-led Transvaal had become a strategic problem for London, and Milner, with Rhodes and his secret network, took the matter in hand. When push-came-to-shove, and it involved strategic interests of Empire, Milner was more than ready to drop noble rhetoric of defending democratic rights. A bloody imperial war was to be the path to resolve the Transvaal problem.

Milner, as High Commissioner, ordered a deliberately provocative series of British troop movements on the Boer Transvaal borders in 1899. In response, Jan Smuts, as adviser to Transvaal President Kruger, drew up an ultimatum. It insisted on removal of the British troops, which, of course, was rejected by Milner, precipitating what came to be known as the Boer War, a bloody guerilla war lasting until 1902.

British interest simply dictated the takeover, by force, of the vast gold reserves of the Transvaal. In such case, rhetoric of democratic ideals gave way to British strategic reality. The British Colonial Secretary, Joseph Chamberlain, declared in a September 1899 internal memorandum defending the war, "What is now at stake is the position of Great Britain in South Africa--and with it, the estimate formed of our power and influence in Colonies throughout the world."

London had launched the South African war, convinced the inferior Boer farmers would be no match for the trained forces of the British military. In the event, British military prestige suffered a severe blow, when the world realized that a force of 40,000 Boer farmers was able to hold off a trained British military force ten times their size, and that, for some three years, delivering a series of defeats to British forces in the period. That fact alone had profound consequences around the world, undermining the prevalent illusion, notably in other colonies of the Empire, that the British Army was invincible.

In the end, the Boers were finally defeated, and Transvaal was annexed along with the Orange Free State, into the British Empire in 1902. With it, the world's largest gold production in the Transvaal became a firm asset of the City of London and the British Empire. The role of the City of London as the world's financial mecca, seemed secure. The South African currency, the Rand, was tied to the Pound Sterling, and South Africa's gold went to London. The City of London's control at last appeared complete.

Rhodes had died in 1902 as the war neared its end, but Milner, Jan Smuts, and the influential, informal circle which later was to be called the Round Table group, immediately set about to co-opt the Transvaal into what in 1910 became the Union of South Africa. ...

"London, the world's banker"

With the world's largest known gold reserves firmly in its hands after 1902, London continued its unchallenged domination of world banking and financial markets, until the eve of the Great War in 1914. No other power could threaten to control that same gold for their own interest. Gold of South Africa would continue to be bought and sold through the City of London's gold market, centered at the Rothschild bank headquarters. ...

Ever since Britain had first gone on to the Gold Standard in 1821, gold had been at the heart of British power and influence globally, not merely within her Empire. The City of London had been the world's principal money clearing center, where Pounds could be exchanged for Reichmarks, or dollar for Franc. No other center before 1914 could rival London's role. Britain had ensured its supply of the various foreign currencies through her domination of world trade and shipping. And to ensure confidence of the rest of the world in her role, the Bank of England backed the entire money exchange edifice, ensuring that the City of London was also the world's leading gold market.

The private gold market, set daily at the fixing room of Rothschilds' bank, was guaranteed by the Bank of England, who would buy or sell whatever amounts of gold, to the private market through the Rothschild's gold fix, in order to maintain the fixed Sterling price. Should a British clearing bank fail to have enough of a specific currency or banknote, it could always back its transaction in gold. This was the essence of the pre-war Gold Standard. It was centered in the London gold market, and it had become so successful that by 1914, every major industrial country in the world had joined it, including Germany and the United States.

Well before the First World War, England's merchant fleet was the world's largest, and it brought not only goods but also checks, securities and cash from all points, into London banks. The profits from this trade in money exceeded any profits from industry.

But mere financial profit was not the only reason behind their decision to make London into the nerve center of world finance. The City of London, in its role as the "clearing house" to world trade, had a more sensitive reading of economic and financial intelligence on rival countries, than any other nation could even imagine. The exact terms of German machinery sale to Brazil could be known, information which could allow a British firm to undercut an important rival bid. The specific economic and financial situation in every country was known in the City of London, as no where else. The Governor of the Bank of England, as the center of this pyramid of informal financial power, could thus affect the credit of every nation on earth, through his statements and deeds.

The City of London was the heart of Britain's entire worldwide informal intelligence network, and the secret to its phenomenal power. Maintaining that central role, and regaining its position as the center of the postwar Gold Standard as soon as possible, had become an obsession in Britain during the early 1920's.

The fact that two-thirds of the world's gold supply was in English colonies, most of it in the Union of South Africa, figured most prominently in England's policy calculations. ...


Just as, in those days, those who had the Gold ran the world, so, today, restoring the Gold Standard would not put power in the hands of the people. A return to the Gold Standard is not the answer.

F. William Engdahl is the author of A Century of War: Anglo-American Oil Politics and the New World Order: engdahl.html.

A New American Century? Iraq and the hidden euro-dollar wars, by F. William Engdahl: http://williambowles.info/guests/dollar_euro.html.

Stephen Zarlenga on the Gold Standard, PLUS Financing Sustainable Development, by John H. Hotson: money.html.

(4) Henry C.K. Liu on Trade Deficit, Loss of Manufacturing, and GDP Growth

(41) Subject: GDP has replaced GNP

Date: Wed, 21 May 2003 22:38:48 -0400 From: "Henry C.K. Liu" <hliu@mindspring.com>

Trade wars are fought through volatile currency valuations. The dollar enables the US to use its trade deficit as the bait for its capital account surplus. Trade is no longer a valid measure of global competition. Today, transnational firms compete with unparalleled success in the global marketplace through foreign affiliate sales instead of exports. This has created a gap between gross domestic product (GDP) and gross national product (GNP). To mask this tilted playing field and unfair monetary regime, GNP has been quietly replaced by GDP as a statistical measure for growth.

GDP measures the total value of a country's output, income or expenditure produced within the country's physical/political borders. GNP is GDP plus "factor income" - income earned from investment or work abroad. With globalization, these two technical measurements have taken on new meanings and relationships. In 1991, GDP replaced GNP as a standard statistical measure for growth - a quiet change that had very large implications as the 1990s were the decade of rapid globalization. GNP attributes the earnings of a transnational firm to the country where the firm is owned and where profits would eventually return as factor income.

GDP, however, attributes the profits to the country where factories or mines or financial institutions are located, regardless of ownership, even though profit and investment may not stay there permanently. This accounting shift has turned many struggling, exploited economies into statistical boomtowns, while seducing local leaders to embrace a global economy. The rich nations at the core are walking off with the periphery's resources and profiting obscenely from local slave wages while calling it a statistical gain for the periphery, with the help of the local elite - a new compradore class whose members are celebrated by the neoliberal press as national heroes.

GDP figures are "gross" because GDP does not allow for the depreciation of physical capital or environmental degradation, let alone the abuse and depreciation of human resources. When the value of income from abroad is included, then GDP becomes the GNP. A declining GNP is particularly damaging for economies with large trade sectors, which includes many developing countries that have been forced to rely on exports financed by foreign direct investment as the sole development path.


(42) REPLY (Peter M):


It follows that the statistics for national debt may not be what they seem.

Australia, for example, has a foreign debt (gross or net? I'm not sure which) of about A$350 billion.

This alarms the Mums & Dads, but not the corporates. They have used it as an excuse to demand further sales of government assets.

My guess is that the corporates have shifted their factories offshore, & count their products as foreign products whose import increases our foreign debt - while all the while they own these factories and are pocketing the profits.

This means that a portion of the foreign debt owed by Australians is to other Australians - rich ones whose assets are nominally "foreign".

If ever a government of the people came to power, these "foreign" assets, being "offshore", would be untouchable.

But such a government could repudiate the debt to such oligarchs.

(4.3) Trade Deficit and GDP Growth, by Henry C.K. Liu

Date: Sat, 21 Feb 2004 15:07:05 -0500 From: "Henry C.K. Liu" <hliu@mindspring.com>

The following appeared in the print version of the Hong Kong Standard, which has a new editorial staff and in the process of upgraded the paper. The new editors have invited me to write a short (750 words) weekly column. The on-line version will not carry my column until next month. A longer verion of this will appear in Asia Times on line soon.

What is interesting is that globally, wealth is being transferred from those with dollar liquidity preference to dollar asset holders, through low interst rate and a falling dollar, which pushed up an asset price bubble denominated in dollars, which in turn provides more collateral for more dollar debt. Wealth effect has replaced income, favoring those who own over those who earn, or capital over labor in the dollar economy. Debt is structurally being forgiven big time with asset inflation but money retains it value through income stagnation. Consumption is sustained by welath effect rather than earned income (wages) rise. It is a massive global leverage-buy-out (LBO) not just of corporations, but of whole economies.

Trade Deficit and GDP Growth

By Henry C.K. Liu


... The high yields on workers' pension fund investments are robbing the same workers of their jobs. ...

Imports from low-wage countries such as China are resold in the US at a greater profit margin for US importers than that enjoyed by Chinese exporters. Thus a $2 toy leaving a US-owned factory in China is a $3 shipment arriving at San Diego. By the time a US consumer buys it for $10 at Wal-Mart, the US economy registers $10 in final sales, less $3 import cost, for a $7 addition to the US gross domestic product (GDP), yielding a ratio of GDP gain to import value of two-and-a-third. Chinese GDP gain to export value ratio is zero if the $2 export price becomes part of the US capital account surplus. If half of the $2 export price is used for paying return to foreign capital, then the ratio is in fact negative. The numbers for other product types vary, but the pattern is similar. The $1.439 trillion of imports to the US in 2002 were directly responsible for some $3.35 trillion of US GDP, almost 32 percent of its $10.45 trillion economy. That is why US policy-makers have no incentive to reduce the trade deficit. But during a presidential campaign, blaming it on China's undervalued yuan gets votes.

Henry C.K. Liu

(4.4) Loss of Manufacturing and GDP Growth

By Henry C.K. Liu

In 2003, Chinese exports reached US$430 billion with imports of US$410 billion, yielding only a US$20 billion surplus. Since Chinese export value constitutes only 20% of its final market price, economies that buy from China enjoy a greater GDP growth from trade (US$2.15 trillion) than China does. Since China imports at full market price with little mark-up, China does not enjoy any GDP add-on from its imports. ...

The transition to offshore production is the source of the productivity boom in the US. While published government figures of the productivity index show a rise of nearly 70 percent since 1974, the actual rise is between zero and 10 percent in many sectors if the effect of imports is removed from the calculation. The lower values are consistent with the real-life experience of members of the blue-collar working class and the white collar middle class who have to work longer hours to service their debts. Neither the recovery nor the recent correction of the exchange rate of the dollar will restore manufacturing jobs in the US, unless the US is prepared to see its GDP drop by 25%.

(4.5) $10 toy at Wal-Mart

Date: Sun, 22 Feb 2004 12:46:02 -0500 From: "Henry C.K. Liu" <hliu@mindspring.com>

> Òa $2 toy leaving a US-owned factory in China is > a $3 shipment arriving at San Diego. By the time > a US consumer buys it for $10 at Wal-Mart, the > US economy registers $10 in final sales, less $3 > import cost, for a $7 addition to the US gross > domestic product (GDP)Ó

> Might that $10 puchase also increase the foreign > debt of the US? > > Might some of the middlemen in the transaction be > nominally based offshore, in tax havens? What > about Wal-mart? What about the bank or > finance company which loans the customer the $10?

If Wal-Mart registers a $10 sale with a cost of $3 off shore, it adds $7 to US GDP. What you mention may affect GNP, but not GDP. If the consumer buys with debt, it adds to the GDP. I am being conservative by not counting the debt part because debt is the same whether it is used to buy imports or domestic products as long as it occurs within US juridiction. For Wal-Mart, there is no middleman.

(4.6) Wal-Mart retail, China imports, & the American Productivity Miracle myth

Date: Sun, 11 Apr 2004 18:26:31 -0400 From: "David Chiang" <chiang.d@worldnet.att.net>

Wal-Mart, China, & the American Productivity Miracle

April 9, 2004 Mukund Sheorey is president of Modelytics Inc., a Customer Value Management services company.


Let's face it. Recent U.S. productivity growth has been nothing short of amazing. From a 3.8% annual pace in the early 60s, productivity growth slowed to 2.4% in the late 60s and 1.8% in the 70s and 80s. But after growing at an abysmal 1.5% in the early 90s and a stronger 2.6% in the late 90s, it has averaged a muscular 3.9% over the last 3 years ... best in over four decades! ...

U.S. Productivity, as you know, is U.S. GDP divided by the total number of labor hours worked in America. Let us take the case of Wal-Mart. In 2003, it imported about $ 15 Billion worth of goods from China. Suppose that in 2004, it identifies an additional $ 10 Billion worth of goods that it will source from China. Why would they do such an "unpatriotic" thing? So that they fulfill their mission - make more money and offer more compelling value ("everyday low prices") to their customers. Let us see how the math works out.

These goods, which sold for $ 10 Billion, were manufactured in the U.S. for $ 7 Billion (price to Wal-Mart), giving Wal-Mart a gross margin of $ 3 Billion or 30% ... fairly typical for a retailer. Let us say the U.S. manufacturers' productivity was $ 50/hr and so 140 Million labor hours ($ 7 Billion/$ 50 per hour) were consumed in their production.

Aggressive, ingenious Wal-Mart buyers have now found Chinese manufacturers who are ready to offer the same products for a paltry $ 1 Billion. With wages less than 1/20 the of the U.S. rate, this is not hard to do! Wal-Mart's gross margin can now shoot up to $ 9 billion (90%). However, given how conscientious they are in providing value to the customer, they decide to sell the goods for $ 8.5 Billion, passing on $ 1.5 Billion of margin (15%) to the consumer. So the consumer wins (15% price reduction), Wal-Mart wins (profit increases from $ 3 Billion to $ 7.5 Billion), and the only losers are the U.S. suppliers.

Let us see how this transaction affects U.S. productivity. Note that before the switch to the Chinese suppliers, Wal-Mart's contribution to the GDP was $ 3 Billion. This was the amount of their "value added" to the $ 7 Billion worth of merchandise purchased from the U.S. supplier. U.S. GDP was the "final" value of goods sold, or $ 10 Billion. Wal-Mart's retail "productivity" is approximately $ 25/hr, and so the number of labor hours they consumed was 120 million ($ 3 Billion/$ 25 per hr).

We are now ready to examine what happens to U.S. productivity in this scenario.

65% Increase!


1. U.S. GDP falls to $ 7.5 billion because from the total final value of goods sold ($ 8.5 Billion) we subtract the $ 1 Billion paid to the Chinese supplier (it is not domestic product any more!) 2. Wal-Mart still uses the same number of labor hours to sell the merchandise. 3. We assume here that the U.S. supplier shuts down and all the people are laid off.

Notice what has happened to U.S. productivity. It has zoomed from $ 38/hr to $ 63/hr ... an increase of 65%!

I know what skeptics are thinking. This is just a hypothetical case with made up numbers. Yes, but can anyone deny that the numbers, while hypothetical, are eminently reasonable?

But, we shall not stop with a hypothetical case. Having illustrated the principle with an example, let us move to the national level.

Our hypothesis rests on a simple assertion - the seeming acceleration in U.S. productivity growth is due to the substitution of U.S. made goods with significantly cheaper imports. We can readily test this hypothesis with data.

If our hypothesis is correct, we should see two things.

1. An acceleration in imports over the recent period. 2. Import volume increases commensurate with the productivity increases witnessed.

The following shows that we do see what we would expect to see ... a correlation of U.S. productivity growth with the magnitude of imports (as a % of GDP).

Now the other test: Are the import volumes of significant enough size to create the magnitude of impact we are seeing on U.S. productivity?

In the Wal-Mart example, 140 Million labor hours disappeared and GDP shrunk by $ 2.5 Billion for $ 1 Billion in imports. Let's scale these numbers up to the national level. In the recent past, imports have risen by about $ 100 Billion per year. This should translate into 14 Billion labor hours lost and GDP shrinkage of $ 250 Billion (scaling factor of 100). Currently the U.S. GDP is about $ 11 Trillion with roughly 220 billion hours worked (110 Million workers @ 2000 hours per worker per year). A productivity increase of 4.4%!

So now we know the secret of how to increase U.S. productivity. Stop producing things in the U.S. and let the foreigners do it for less! But wait - we have always known this, haven't we? Isn't that why, when we don't want to get our hands dirty cleaning our houses or yards, we typically hire people for whom English is not the first language?

It's a Brave New World, dear reader. No wonder it's said, there are lies, damn lies, and then there are statistics!

(4.7) Euro cf Dollar economy

Date: Wed, 25 Feb 2004 13:49:56 -0500 From: "Henry C.K. Liu" <hliu@mindspring.com>

> Does Euro trade & finance operate like Dollar > trade & finance?

No, because there is no euro-hegemony. Central banks hold euro by choice to protect against the fall of the dollar and to try to escape from dollar hegemony by settling the trade account with the EU direct with euros rather than going through euro-dollars. Another reason is that euro-euro is very small, compared to euro-dollars, thus preventing the emergence of euro hegemony. I trust you know that the terms 'euro-dollars' and 'euro-yens' and 'euro-euros' have to do with off shore currencies not expected to return to the country of issuance, even though such currencies may have nothing to do with the EU or euro.


(5) Michael Hudson writes, "Yes US debt is the new world currency."

(5.1) Poland, the Euro, and the Dollar's Double Standard, by Michael Hudson

Date: Mon, 30 Aug 2004 13:55:40 +0200 From: "cresscourt@chello.at" <cresscourt@chello.at> From: Hudsonmi@aol.com To: gang8@yahoogroups.com

This article is to be published in the magazine supplement of Fakt (Warsaw) on Wednesday, Sept. 1.

For those of you who do not read Polish or subscribe to that paper, an English version is provided below.

Michael Hudson

Poland, the Euro, and the Dollar's Double Standard

Prof. Michael Hudson

Poland's vote to join the European Community has put an end to the centuries of military rivalries that have long devastated the nation and its neighbors. Entry into the EC makes future internecine wars unthinkable.

That was the easy decision to make. Poland now must confront the financial issue dividing Europe: the European Central Bank's destructive monetarist ideology, and the constraint against running budget deficits of more than 3 percent of Gross Domestic Product (GDP). If obeyed, this 3% budgetary constraint would depress business conditions by preventing member countries from using the traditional counter-cyclical policy that has pulled economies out of recession since the Great Depression - budget deficits. For the past 75 years, governments have "primed the pump" by running budget deficits when business cycles have turned down. By acting as the employer of last resort in many instances, governments have created jobs (preferably, useful ones) and helped restore market demand to get the economy growing again.

Not all ECB members are willing to abandon this pump-priming policy. Germany and France are ignoring the 3% budgetary constraint, because the price of obeying it would be falling investment and employment levels that would shrink market demand and lower profits for industry across the board. In Britain, opponents of joining the Euro fear that the Central Bank's tight-credit preference will hurt business as well as labor.

Over the past two centuries the British public has come to realize that every axiom of central-bank management is controversial. Most central bankers have gone through a brainwashing education that leads them to believe that preventing even a modest rate of inflation is more important than promoting full employment. By depressing business conditions, tight credit, high interest rates and budget surpluses shrink labor markets. Central bankers who don't agree with this monetarist ideology find themselves passed for promotion in favor of more pure-minded true believers, whose preference for monetary austerity is more ideological than scientific.

Monetarists demand that central banks be made "independent" of politics precisely so that they can maintain under-employment austerity despite the democratic will to the contrary. But this is a case in which the people are right and the technocrats wrong. Most politicians and voters prefer to keep the economy growing. A modest rate of inflation has become normal in most economies, and statistics show that labor in nearly every country does best in inflationary periods, because wages tend to rise more than prices for the commodities that it buys. In the United States, real wages peaked 26 years ago, in 1978 during the peak of the Vietnam War inflation.

Instead of providing a larger economic surplus to finance trade deficits, budget surpluses do just the opposite. They starve the economy for credit, shrinking it and hence making it even more dependent on foreign suppliers and creditors. Debtor countries sink deeper into foreign debt as monetary austerity slows down their production capacity.

The failure of this policy to sustain long-term growth is clearest in third-world countries that have adopted the International Monetary Fund's austerity programs. Argentina and Russia are the two most notorious victims that have been forced run budget surpluses in order to squeeze out more income to pay creditors.

European versus American fiscal and monetary policy

In recent months there has been a growing belief in the United States that its foreign policy simply can ignore Europe. As EC output and exports grow more slowly, its population will shrink along with new investment. Europe will commit geopolitical suicide if its politicians believe that they do not have a choice when it comes to monetary and fiscal policy.

But this feeling of being boxed in is merely an illusion. Europe has been hypnotized by the monetarist theories - so-called theories of wealth and capitalism - that have been exported from the University of Chicago via the Washington Consensus and imposed by the International Monetary Fund (IMF) as gospel.

What is so remarkable is that this monetarist fiscal policy is purely an export item that benefits America, which has pursued a much more successful domestic policy at home. Domestic U.S. economic policy is diametrically opposite to the Washington Consensus that it broadcasts abroad with fervor. The U.S. policy is to "ignore the foreigner." Ever since World War I, America has refused to join any international organization in which it does not have veto power, so that it can go its own way whenever it chooses. And the present administration has gone its own way in its decision to run government budget deficits of historically unprecedented size, along with balance-of-payments deficits now amounting to half a trillion dollars annually.

This policy has enabled the U.S. economy to get a free ride internationally. The free ride comes mainly from Asia (China and Japan) and Europe. It has been built into the international monetary system ever since the United States went off gold in 1971. At the time this occurred, it was viewed as a weakness. After all, the United States had fought hard to keep the dollar "as good as gold" - until the costs of its military spending in Vietnam, Asia and elsewhere in the 1960s broke the linkage.

But severing the link to gold left the world's central banks in a no-man's land. What were they to invest their growing international reserves in, if not gold? What was OPEC to do with its oil money?

Central banks invested in U.S. Treasury bills because they were not able to find an alternative to gold or dollars for their balance-of-payments inflows. This meant that the larger their export surpluses to the United States grew, the more dollars they had to invest in U.S. Treasury bonds.

In this way, central banks have financed America's balance-of-payments deficit year after year, and decade after decade for the past 34 years, since 1971. For the United States, running a balance-of-payments deficit turned out to be a way to finance its own domestic budget deficit. Foreign central banks rather than Americans bought up the bonds issued to finance these deficits.

Nobody back in 1971 expected the United States to run budget deficits of a size that now amounts to half a trillion dollars annually. But it has done so, in order to spur its own economy. The U.S. Government debt has doubled and redoubled, yet Americans have not had to finance these deficits with their own money. Foreign central banks are doing this - including that of Poland with its own dollar reserves.

The result is that when American companies or money managers buy European stocks, companies and government assets that are being privatized, the countries doing the selling find themselves obliged to turn around and send surplus dollars back to the United States, where they earn a much smaller rate of return on U.S. Treasury bonds. If a country's central bank did not do this, its currency would rise, which would price their exports out of world markets, leading to unemployment.

The alternative is for countries to turn more to their own domestic market. This calls for more active government spending and income-transfer policies - precisely the policies that the ECB prohibits on anything more than a merely marginal scale.

A Free Ride for the United States

The Dollar Standard gives the United States a free ride by transferring export and sales proceeds for European and Asian firms to the U.S. Treasury in the form of U.S. Treasury bonds. This asymmetry in global monetary arrangements does not bode well for Poland. If it exports more and attracts more foreign investment, the Central Bank will find itself obliged to lend these inflows to the U.S. Treasury at only about 3 percent interest - or else see its currency pushed up, stifling any boom.

Matters would be even worse if Poland fell into deficit and had to borrow to cover the cost of its imports. If Poland needs to borrow, the IMF will tell it to raise its tax rates to discourage imports, and sell off more of its public enterprises to pay foreign creditors. Higher taxes lead to yet more unemployment Latin-America-style, while selling public enterprises (privatization) gives global investors a rising stream of income to move out of Poland. This would make the nation even more dependent on foreign borrowing, obliging it to raise taxes, cut investment and employment even more, and sell off what remains of its public domain.

Is this what Poland voted for when it elected to join the EC? It seems absurd for Poland's work force to finance America's budget deficit by running surpluses to lend to the U.S. Treasury. But this is the problem the ECB has imposed on its members by following the Washington Consensus which the United States itself has happily ignored when it comes to its own domestic policy.

Unlike the United States, European countries are prevented from running deficits that are more than marginal, even for good reasons such as increasing demand and helping employment recover. The result is that unemployment threatens to get worse, while Europe transfers its economic surplus to the United States. I doubt that this really is what Poland voted for.

The Solution

The Euro must establish itself as an international reserve currency that central banks will accumulate as well as dollars. There is only one way to do this: There must be a substantial volume of government debt denominated in Euros. Central banks only buy government bonds, not corporate bonds and stocks - largely because these are deemed to risky and hence inappropriate as a medium for holding international reserves. But if governments are blocked from running budget deficits of more than 3 percent of their GDP, as called for by the EC's monetarist constraints, there will not be enough government bonds available to establish the Euro as a major currency alongside the dollar.

The only practical way for governments to issue and sell bonds is to run budget deficits financed by bond issues. This public debt represents the cumulative deficits that the government has run up. If the "austerity" rule limiting budget deficits to just 3 percent of GDP is not changed, it will prevent Europe from building up a volume of government debt to serve as international monetary reserves. This would leave the dollar as the only practical reserve currency for central banks to hold.

While deficits are needed to help promote thriving business and employment conditions in Poland and other countries, they are not all that is needed. Economic infrastructure needs to be modernized and upgraded - and provided to the economy as a whole at as low a cost as possible in order to make it competitive.

The United States has pursued a policy of budget deficits and active government subsidy to achieve full employment and its present position of world dominance. There is no inherent reason why Poland and the rest of Europe cannot do the same thing. All that is needed is to adopt the alternative doctrine that America itself has long followed, rather than to retain the obsolete monetarist austerity philosophy pursued by EC central bankers and, unfortunately, those of many other countries. In item 2, Professor Michael Hudson writes, "Yes US debt is the new world currency."

Item 5 is from Captain Eric H. May, who says he is from US Army Intelligence:

"They were very interested in the numeric oddity that there were 911 days between 911/2001 and 311/2004 {the Madrid bombing} ? and that the media were not reporting it. It was at this point that Capt. May changed his view of the 911 event, which he had previously believe to be a foreign terror event, and came to believe that it was a staged event ... "

(5.2) To Michael Hudson, from Peter Myers:


You portray the US Government's foreign debt as a defacto world currency (in place of gold). By implication there is no need for US citizens to worry about paying it back. What about the foreign debt of Britain & Australia?

One factor you omit is the US military. Do they not intimidate would-be debt-collectors? And can the EU establish a regional currency block without a regional military force? Does not NATO thwart that?

Here are two alternative solutions that occur to me (as a layman).

1. Given that privatisation in the EU exacerbates the problem, why not halt privatisation, and reverse it - renationalising industries?

2. The EU could give up exporting to the US, given that the US will never pay.

As to the objection, "our factories will lose market share, & have to shed workers" - well, if the US doesn't pay its debts, those workers won't get paid anyway - in the long run. Their wages are, in effect, part of America's debt which it will never pay.

If export markets are lost in the US, then to make up, US exports to the EU could be penalised, so that the Eurozone aims at self-reliance rather than interdependence with the US. Much like the Soviet-bloc economy.

The US could be told that if it wants a return to interdependence, it has to pay its way.

(5.3) Reply from Michael Hudson

Poland, the Euro, and the Dollar's Double Standard Date: Sun, 5 Sep 2004 16:52:42 EDT From: Hudsonmi@aol.com To: myers@cyberone.com.au

Dear Peter,

Yes US debt is the new world currency. But it's a DOUBLE standard. Australia and Britain are on the hook, and THEIR debt forces privatization, ostensibly to pay off their debts. The US simply ignores foreign claims.

To break with this system, foreign countries would have to produce for their own market, not for the US export market.

Why not indeed roll back privatization? I'm all for it. But people have fallen for the neoliberal doctrine, and ideas are not newsworthy items to discuss.

Neoliberalism only works if you have total censorship control of the curriculum, such as the Chicago Boys achieved in Chile under Pinochet and try to replicate in the US. But they seem to be losing in Russia.


(5.4) More from Michael Hudson

the rest of my answer

Date: Sun, 5 Sep 2004 16:54:10 EDT From: Hudsonmi@aol.com To: myers@cyberone.com.au

Yes, the system is cemented by US military power. But the US hardly could use this power against Europe -- or it WOULD not. And it fears to use it in China or Asia these days. For Iraq at least has given the rest of the world a respite, probably even Iran.


(5.5) A Comment from Eric Walberg

Poland, the Euro, and the Dollar's Double Standard, by Michael Hudson

Date: Sun, 5 Sep 2004 12:38:46 +0500 From: "Eric Walberg" <eric@albatros.uz>

>this monetarist fiscal policy is purely an export item that benefits America, which has pursued a much more successful domestic policy at home.

Ha, ha! Friedman's confidence trick - make us all worship a totally false monetarism, which really exalts the US $ and US imperialism (the ability of the US $ as world currency to be created at will by printing presses), and using FISCAL policy (budget deficits resulting from money and debt creation) to finance its wars and greedy stealing of the world's wealth for its own enjoyment. We are all suckers in this legere-de-main. Well done Shylock!

>If Poland needs to borrow, the IMF will tell it to raise its tax rates to discourage imports, and sell off more of its public enterprises to pay foreign creditors. Higher taxes lead to yet more unemployment Latin-America-style

The IMF is Satan's handmaiden. Its 'cures' are INTENDED to create GREATER poverty and degradation in the patient. Ha, ha! A kind of 'divine (in)justice'.

>It seems absurd for Poland's work force to finance America's budget deficit by running surpluses to lend to the U.S. Treasury.

That's the whole POINT. The IMF is the US's tool to extract super surplus from its satellites.

>The Euro must establish itself as an international reserve currency that central banks will accumulate as well as dollars

This was clear long ago and probably the intention of Schuman etal in planning for the common currency. Too bad Euro politicians are such quislings.

>issue and sell bonds is to run budget deficits financed by bond issues

Of course. The 3% budget deficit limit was and is absurd. This must have been an IMF clause (or else Euro politicians are stupider and more craven than even I thought).


Michael Hudson's home page is http://www.Michael-Hudson.com.

(6) Stephen Zarlenga on Seigniorage and the Gold Standard

Stephen A. Zarlenga, The Lost Science of Money, published in 2002 by the American Monetary Institute, Box 601, Valatie NY 12184; http://www.monetary.org

{p. 531} It must be pointed out that the Federal Reserve System turns over 90% of its net income to the U.S. government, from the interest it earns on money creation. However, most of the money in the system is created by the Fed's member banks, and they keep the net interest income they get from that process. This is referred to as seigniorage, and it rightfully belongs to society. If the reserve requirement is 10%, individual banks can loan 90% of the amount deposited with them. But then those loans go out and become further deposits in the banking system, so that new loans are made on them, etc. Eventually, system wide, a rule of thumb is that the deposits are multiplied about 10 times.

It must also be pointed out that despite demands from time to time, Federal Reserve System has never been independently audited.

{p. 605} The Knights Templar organization could clear payments across borders without shipping metal, by balancing credits and debits in different countries. From the early 1700s the Bank of England could be drawn upon to effect payments around thw world.


... the international gold standard dominated from the mid-1800s to 1931. ...

In theory, when a country's imports and exports got out of balance, it would have to import gold to bring them into balance. For example, if a country imported more than it exported, enough gold to make up the difference would be shipped abroard.


There is one indisputable aspect of the international gold standard that economists recognized but ignored: the control of a country's internal credit policy - whether there would be contraction or expansion - was ultimately in the hands of those who could move gold into or out of the nation. So long as a country's balance of payments were cleared through a gold standard system, forces outside the country could quietly bring on a depression and thereby a (likely) change of government within the country.


... WWI also led to the formation of the first truly international monetary organization, the Bank for International Settlements, known as the BIS, which was organized as a result of suggestions by the Experts Committee on German WWI Reparations as a way to facilitate reparation payments.

As the first international monetary organization, the BIS was not organized as an authority superior to central banks, nor was it to engage

{p. 607} in the banking business. Its purpose was to establish an international gold clearing system, balancing credits and debits between member countries, thereby reducing the necessity of actual gold shipments. The BIS was also to assist countries to go back to the gold standard after leaving it in WWI.

Organized at the Hague Conference in 1930, the BIS is situated in Basel Switzerland and has a SWiss charter but as an international organization under international, not Swiss, law. It was founded by six central banks, and a group of three private U.S. banks: J.P. Morgan, First National Bank of New York, and First National Bank of Chicago. ...

While the Bank was primarily set up as a gold standard institution to facilitate German war reparations, by 1931 England was forced to abandon its ill-conceived gold standard and many other countries followed (see chapter 20).

{p. 608} One change the Bank made was to actually engage in the banking business, but as a bank whose depositors are confined almost exclusively to central banks. As such, the Bank holds a significant part of the world's foreign exchange reserves; 113 billion dollars in such deposits were held in March 1997, representing 7% of all foreign exchange reserves. It is also probably the world's largest single holder of gold.

Though the BIS states that it doesn't advance money to governments or open accounts in a government's name, most of the BIS deposits are held in short term government securities.


The BIS has no formal money creation powers, and is not a bank of issue. ...

The Bank promotes itself as an important meeting place for central bankers to "Facilitate international co-operation in areas of common interest in particular as regards to monetary matters and support to the international financial system," especially its stability. ...

In the 1988-1992 period, it fostered an international agreement on how to evaluate the adequacy of a bank's capital and set minimum requirements that internationally operating banks are expected to follow. These "regulations" are now having a greater effect on how banks operate than is realized - arguably more than local regulators have. ...


... Confident of victory, planning for the post-war monetary system began in 1941. The central institution of this reform would not be the BIS but the International Monetary Fund (IMF), which took shape at the 1944 conference at the Hotel Mount Washington in Bretton Woods, New Hampshire. Seven hundred and thirty persons descended on the hotel for the conference.

The Englishman John Maynard Keynes, whose theories had encouraged governments to borrow money to get out of the Great Depression, wanted to go all the way and create an international central bank - a central bank of central banks - with the power to create money and international reserves based on a new monetary unit which he called the "Bancorp." But world conditions were not ready for this. In practice it would require the member states to give up a part of their sovereignty to the new central bank, and it was unrealistic to expect the U.S. to cede sovereignty - to give up power - just when it had emerged as the world's only financial superpower.

The IMF would be much more limited. Formulated mainly by the

{p. 610} American Henry Dexter White, it would reflect the fact of American power. ...

{p. 611} The U.S. dollar held a special position in the system, reflecting U.S. strength. Dollars were given equal status with gold, as reserves for currency creation. This meant that U.S. gold reserves counted twice in

{p. 612} creating world reserves. First they could be used to create dollars, then those dollars could be used as reserves to create other currencies. So at least twice as much money would be created worldwide than if gold alone were the reserve. The IMF was a mixed system of gold and a privileged paper dollar.

... The paper nature of the system was slightly hidden because the United States (and only the U.S.) undertook to maintain the dollar convertible into gold for other members, at $35 per ounce.

But from the founding of the IMF, U.S. gold holdings were in a downward trend, until they reached a level around $11 billion in 1971, at the 35 valuation. ...

Use of the dollar for reserves by other central banks allowed the U.S. to run large balance of payments deficits, prompting leaders like Charles De Gaulle to attack Dollar Imperialism - the use of American dollars to buy up European assets in the 1960s. ...


This author proposes three simple changes which would greatly reduce the ability of speculators to manipulate national currencies which endangers the livelihoods of millions of persons.

A tax on currency transactions

For some years economists have called tor placing a small tax on all speculative currency transactions and using the proceeds to better service

{p. 615} the markets involved. This is a fine idea, but does not go far enough because it will not stop the large currency debacles, where a small tax won't be enough to stop currency manipulators.

Prohibit speculative short-selling of currencies

The currencies of some developing areas (for example Southeast Asia during the 1997 crisis) could have been placed into a category of no short selling allowed, or setting low position limits for short sales. ...

Settlement should be in "kind" instead of in "cash"

Economists still haven't recognized the potential importance of settlement of futures and forward contracts in "kind," rather than allowing settlement in "cash." Settlement in cash means that when it comes time for short sellers to deliver the currency they sold, they have the option to value the contract in dollars, and then pay in dollars. Thus they need only the ability to deliver dollars, to protect their position.

{end of quotes} - to buy the book: http://www.monetary.org.

The Money Masters: How International Bankers Gained Control of America, by Patrick S. J. Carmack and Bill Still: money-masters.html.

How Greenbacks won the Civil War - The Lost Science of Money, by Stephen Zarlenga: money.html.

Werner Sombart on the history of money-lending: sombart.html.

Write to me at contact.html.