Switzerland Attacked!

[Ed Hudgins]

Switzerland Attacked!
by Edward Hudgins

May 15, 2009 -- Most Americans know peaceful and prosperous Switzerland—America's "sister republic"—for its beautiful mountains, tangy cheese, decentralized political system, and banks that pride themselves on protecting the absolute security of their depositors. Indeed, it's illegal in Switzerland for banks to violate that privacy.

But the U.S. government recently forced the Swiss government to make an exception, under threat of criminal prosecution in the United States against UBS, Switzerland's largest bank. That bank must reveal information about as many as 300 of its American depositors who the U.S. government claims are guilty of tax evasion. Further, UBS must pay $780 million in fines.

This is not some minor, soon-to-be forgotten dispute. Rather, it is part of a broad attack against productive individuals that is the logical consequence of big-government economic policies and mixed economies in the West. That's why President Obama has now declared war on all so-called "tax havens." In the end, the victims will be the citizens of United States and other countries as well as those of Switzerland.

Wealth security.

One might think of "wealth security" as the business of Switzerland. It is estimated that some $7 trillion worldwide is deposited "off-shore," meaning in the banks outside the countries of which the depositors are citizens. Swiss banks hold an estimated one-third of those deposits.

Many foreigners, including Europeans of modest as well as substantial means, hold Swiss francs in Swiss banks as a hedge against inflation of their own currencies. Entrepreneurs keep money in those banks to facilitate international transactions. Others deposit funds to avoid confiscatory taxes or even outright expropriation by their home governments.

Some have criticized the Swiss banks as too secure; as in the movies, they're seen as places for criminals to hide their ill-gotten-gains. But the Swiss banks and government do cooperate with other governments in serious cases of money laundering, fraud, and Bernard Madoff-type scams. Yet they generally don't consider foreign governments' charges of tax evasion to warrant violation of bank secrecy.

Not legal laws.

Tax laws vary from country to country; the United States is the only major country to tax income that its own citizens earn abroad. In any case, it's not illegal for Americans to hold Swiss bank accounts. And it is appropriate that Swiss banks refuse to be deputized by the U.S. government to sort out and enforce American tax laws that don't apply in Switzerland, not least because the United States will not allow other governments to deputize American private enterprises to enforce foreign laws that don't apply in America.

More fundamentally, the fact is that no American can figure out America's tax laws and the U.S. government cannot apply them fairly. U.S. Treasury Secretary Geithner didn't pay taxes because he couldn't figure them out, nor could other would-be Obama administration appointees. These laws are an arbitrary patchwork of weapons that politicians to use to extort as much wealth as possible from citizens, combined with tax breaks that various citizens managed to get into the law to defend themselves. Of course the Swiss won't get in the middle of this mess.

So why is America leading an assault on Swiss banks at this time?

Governments gone wild.

Over past decades, the industrialized countries swung back and forth from outright government ownership and control of industries to privatization; from high taxes to low; from heavy-handed regulation to more Reagan-Thatcher type laissez-faire regimes.

Today all major economic powers have politicians in office who want maximum power to redistribute wealth and engineer their societies in light of their ideologies rather than allowing their own citizens economic freedom. Yet they must take care not to be so punitive that Atlas shrugs. They don't want to destroy any entrepreneurial drive their citizens might have left, or cause their citizens to hide their wealth or take it out of the country.

Globalization has complicated this balancing act. The reduction or elimination of barriers to the flow of goods and capital in past decades mean production can take place where it makes the most economic sense, for example, with labor intensive, low-skilled production going to places like China or India. Leaders in advanced countries want to preserve the higher skilled, higher-valued industries and jobs for their own countries. But high taxes and heavy-handed regulations chase out those industries and jobs to freer countries, along with capital.

Thus the big-government leaders of these countries want to "harmonize" their taxes and regulations, not downward to allow for more individual liberty but upward, to allow more government control.

And that's why they attack Switzerland. That's why French President Sarkozy said, "We want to put a stop to tax havens." That's why British Prime Minister Gordon Brown and German Chancellor Angela Merkel joined him in vowing action against such sanctuaries. And that's why the Obama administration is leading the assault.

An affront and a sanctuary.

During the Cold War, West Berlin, the free and prosperous city in the midst of Communist East Germany, was an affront to the enemies of freedom, a reminder of how the world could and should be, and a sanctuary for the impoverished subjects of Red tyranny who could escape through barbed wire, bullets, and an infamous wall to its safety. Today Switzerland is an affront to the pro big-government leaders who want to tighten the government vice on their own citizens and sanctuary for those who want to keep the wealth they've earned.

Friends of freedom throughout the world should appreciate and defend the Swiss banking system. If it and other such sanctuaries are eliminated, freedom may have no home in these troubled times.
-----
Dr. Hudgins directs advocacy for The Atlas Society, the Center for Objectivism in Washington, D.C.

For further reading:

*Edward Hudgins. "Atlas Chased." August 6, 2004.

*Edward Hudgins, "Ragnar Shrugged." May 24, 2006

*Alan Greenspan, "The Crisis Over Berlin." The Objectivist Newsletter, Vol. 1, No. 1, January, 1962.

[Ed Hudgins]

By the way, one might say that the U.S. government id trying to "make the world safe for socialists."

[Michael Stuart Kelly]

Ed,

I fear there might be a humongous trade going on.

The way I understand international banking from my involvement in the world of South American bonds, you have BIS (Bank for International Settlements, located in Basel, Switzerland), which is the Central Bank of all the Central Banks in the world, and then you have the USA Federal Reserve, which is the only exception and essentially stands outside the sphere of BIS.

Ties are made between foreign banks and USA banks through correspondent accounts and private banking.

I have recently read (but I don't recall where) that the USA is entertaining stronger ties between BIS and the Fed. If that happens, the dollar really will go down the tubes, but I suspect the people around President Obama think they will be able to thus spread the new USA debts throughout the world as a trade-off.

I see the USA government's attack against UBS as testing the waters to see if a small issue will take before moving on to the real goal. The idea is that if this works, BIS will get the Fed and the world will get President Obama's debts and he—and all those with him—will be made to look like conquering heroes who outsmarted the world.

The idea of expanding government is fundamental to all this, as you rightly point out, but I strongly suspect there is a Ponzi scheme at the root, also.

Michael

[Ed Hudgins]

MSK - Very interesting observations. It fits in with my understanding that statists will always need to expand control over the economy and that in a world more economicslly integrated they will need to expand control over foreign actors, whether by "coordinating" policies, that is, agreeing to loot-sharing schemes, or by intimidating or crushing those who remain free. FED control of BIS would be a disaster.

[Michael Stuart Kelly]

FED control of BIS would be a disaster.

Ed,

As I understand it, this has been going on already since the Bretton Woods conference in the 40's right after WWII when the world's currencies got pegged to the dollar and the dollar was designated as the official currency for international trade agreements between non-USA nations. (Prior to this, international settlements were negotiated in English pounds or French francs.)

I especially find the concept of "eurodollars" interesting. A eurodollar is a dollar in a bank account in a non-USA country (it doesn't have to be a country in Europe, either, for this currency to be called eurodollar). This means that the USA government can print money to pay debts, but spread it around the world instead of injecting it here in the USA. Thus inflation here does not happen—at least nowhere near the extent it should—since the USA economy does not reflect the increase in the USA money supply. The USA essentially exports inflation and uses the rest of the world as its financial garbage dump.

This can't go on forever, though, as the institution of the euro proved. Perception of this got clouded and offset by the world's financial sucker, China, which will buy anything, or so the clever ones in our hi-finance corridors of power think. But that's coming to an end, too.

Now that China is starting to balk at buying more TB's, my concern is that the crafty boneheads in Washington will try to run a scam on the crafty boneheads in Basel, i.e., try to export the Obama-debt and spread it over the world similar to how USA inflation is exported, then fall into a trap (maybe even one rigged by China) and end up with BIS controlling the FED.

That, I believe, would result in a disaster to the USA economy that would make the mortgage-security financial bust look like a picnic.

One thing all sides agree on, however (except people who think like us, of course): governments must be in charge of the economy. Bankers especially like to pump that line because they all know how easy it is for bankers to own politicians.

I fear that part of the lack of concern with how to pay for the gargantuan new debt demonstrated by the present administration officials is rooted in this "scam the world" thinking—by both politicians and bankers. (They call it other things, of course, and the jargon is as thick as molasses.) I suspect they are going hog-wild with so much gusto because they think they will get away with it in the end. Old Ponzi must be cackling in his grave.

Michael

[Brant Gaede]

FED control of BIS would be a disaster.

Ed,

As I understand it, this has been going on already since the Bretton Woods conference in the 40's right after WWII when the world's currencies got pegged to the dollar and the dollar was designated as the official currency for international trade agreements between non-USA nations. (Prior to this, international settlements were negotiated in English pounds or French francs.)

I especially find the concept of "eurodollars" interesting. A eurodollar is a dollar in a bank account in a non-USA country (it doesn't have to be a country in Europe, either, for this currency to be called eurodollar). This means that the USA government can print money to pay debts, but spread it around the world instead of injecting it here in the USA. Thus inflation here does not happen—at least nowhere near the extent it should—since the USA economy does not reflect the increase in the USA money supply. The USA essentially exports inflation and uses the rest of the world as its financial garbage dump.

This can't go on forever, though, as the institution of the euro proved. Perception of this got clouded and offset by the world's financial sucker, China, which will buy anything, or so the clever ones in our hi-finance corridors of power think. But that's coming to an end, too.

Now that China is starting to balk at buying more TB's, my concern is that the crafty boneheads in Washington will try to run a scam on the crafty boneheads in Basel, i.e., try to export the Obama-debt and spread it over the world similar to how USA inflation is exported, then fall into a trap (maybe even one rigged by China) and end up with BIS controlling the FED.

That, I believe, would result in a disaster to the USA economy that would make the mortgage-security financial bust look like a picnic.

One thing all sides agree on, however (except people who think like us, of course): governments must be in charge of the economy. Bankers especially like to pump that line because they all know how easy it is for bankers to own politicians.

I fear that part of the lack of concern with how to pay for the gargantuan new debt demonstrated by the present administration officials is rooted in this "scam the world" thinking—by both politicians and bankers. (They call it other things, of course, and the jargon is as thick as molasses.) I suspect they are going hog-wild with so much gusto because they think they will get away with it in the end. Old Ponzi must be cackling in his grave.

Michael

The only way to sell significant US debt going forward will be with higher and higher interest rates. That brings dollars back to the US, not spread dollars around the world. To spread dollars the US consumer must spend them on foreign goods. Therefore the US will sell its bonds to itself and flood this country with dollars and the consumer will spend them. More likely the consumer will use them to retire extant debt. When the tipping point is reached and the economy improves enough for the consumer to buy that stuff we will once again be spreading the dollar around the world and within the US and we will have an avalanche of price inflation. All most foreign countries can do with our bonds--the big holders--is try to sell them for what they can get, but mostly they have to hold them to maturity because there aren't many buyers out there. Basically the US will have to monetize a 2 trillion dollar deficit because it cannot really sell bonds to itself. It has to print dollars or make computer entries. In a few years the US will have to spend 2 trillion a year just to service the interest on the national debt. We are adapting the Argentina model. Right now, the band plays on with false tunes of economic recovery. The recovery won't last long. What we now have won't last long. It is doubtful we will get it back. Soon there will be more freedom in Communist China for economic activity. Perhaps there already is. Learn Mandarin; move to Shanghai.

--Brant

[Michael Stuart Kelly]

The only way to sell significant US debt going forward will be with higher and higher interest rates. That brings dollars back to the US, not spread dollars around the world. To spread dollars the US consumer must spend them on foreign goods.

Brant,

This is not accurate, but this is what many people who do banking in the USA are led to think. You should visit a foreign central bank sometime.

The money world in the USA is one thing. In the rest of the world it is different, including how dollars are obtained. (Research the underbelly of Brady Bonds if you get the time, for instance, for a good indication of just one way the monkeyshines work.)

Michael

[Brant Gaede]

The only way to sell significant US debt going forward will be with higher and higher interest rates. That brings dollars back to the US, not spread dollars around the world. To spread dollars the US consumer must spend them on foreign goods.

Brant,

This is not accurate, but this is what many people who do banking in the USA are led to think. You should visit a foreign central bank sometime.

The money world in the USA is one thing. In the rest of the world it is different, including how dollars are obtained. (Research the underbelly of Brady Bonds if you get the time, for instance, for a good indication of just one way the monkeyshines work.)

Michael

As far as I can tell Brady Bonds were issued to bail out US commercial banks who over-extended themselves lending to (mostly) Latin American countries who were defaulting on their loans in the form of their own bonds sold to the banks circa early 1990s. The original bonds thus had pulled US dollars out of the United States which would shore up their foreign currency reserves. This cannot match up very well with US T-Bills in the trillions and US dollars held by foreign governments consequence to trade imbalances (esp. China and Japan) although quite a lot of money had to have been involved. Most of the Brady bonds seem to have been retired by those governments, but that could only have happened by sending US dollars back to the US. These Brady Bonds were issued by the defaulting governments. Since the US guaranteed them, they were worth more to the banks that accepted them in exchange for the original bonds turning liabilities into assets on their books. I don't know if I am being entirely correct. I do not know about the underside of this situation except as welfare for the banks and those governments. Reminds me of the Chrysler bailout years before. Probably the template.

--Brant

[Michael Stuart Kelly]

Brant,

Think secondary market and you will find the yellow brick road...

In some really nasty cases, think counterfeit, too (with "official sanction" but with deniabilty firmly in place). The most famous case is the Shah of Iran.

Some day if you really get interested in this, start adding up all the money in dollars that you can find reported outside the USA. Things stop making sense after a while. There is way too much.

In fact, if all the dollars outside the USA came back in, we would have instant hyperinflation Germany-style.

Michael

[Brant Gaede]

Brant,

Think secondary market and you will find the yellow brick road...

In some really nasty cases, think counterfeit, too (with "official sanction" but with deniabilty firmly in place). The most famous case is the Shah of Iran.

Some day if you really get interested in this, start adding up all the money in dollars that you can find reported outside the USA. Things stop making sense after a while. There is way too much.

In fact, if all the dollars outside the USA came back in, we would have instant hyperinflation Germany-style.

Michael

I believe there is substantially more US paper money in circulation abroad than in the US. The latest iteration of the 100-dollar bill is the most popular. Old bills tend to be refused or heavily discounted, especially in Russia. I think the Euro is available in 500 and 1000 denominations. This threatens dollar dominance abroad somewhat. The dollar is frequently considered a safer currency than the local one. There is little danger of these dollars coming back to us except in dribbles. Dollars abroad as computer entries are another matter.

--Brant

[Michael Stuart Kelly]

Brant,

According to what I understand from what I have seen and read, you are 100% correct (except I'm not sure about the €1000 note).

Michael