L. Todd Wood

   The Organization for Economic Co-operation and Development, or OECD, maintains a ‘black list’ of jurisdictions it considers uncooperative in the global fight against money laundering and terrorism finance.  The organization also has a stated goal of fighting tax crime.  Undeclared revenues are frequently hidden offshore in these countries.  The objective may be to stamp out illegal activity but also has the fringe benefit of stamping out tax competition.  Governments don’t like the fact that individuals can keep assets away from the tax man.  It tends to reduce their ability to “provide for the general welfare” by taking other peoples money. 

    Enter Bitcoin. This digital currency is exploding across the financial universe.  Released a few years ago by an unknown person or group, the genius behind this concept is decentralization.  There is no controlling authority.  Bitcoin ‘miners’ are spread around the globe and compete to ‘mine’ Bitcoins by validating transactions and therefore providing price discovery.  No government yet can be involved; ie, collect taxes, regulate, or monitor those who are using the currency to conduct commerce. 

    So what does this mean for global finance?  Well, both side of the aisle are embracing Bitcoin.  You have anarchists on the left and libertarians on the right extolling the virtues of Bitcoin.  For those willing to take the risk of investing in this medium of exchange, they are provided with a completely anonymous way of buying and selling.  This anonymity allows for freedom but also opens the door for financial crime. As of today, the float is too small for large transactions; however, this could change as the value of a Bitcoin unit is rising rapidly.  The actual number of currency units will be capped but the value will fluctuate based on demand.  After the Cypriot banking crisis, the price of a Bitcoin increased dramatically as investors saw their assets taken to fund a bailout of bad financial management.

    There is no doubt that money hungry government agencies will try and regulate Bitcoin at some point to combat crime and halt the loss of tax revenue.  However, this will be extremely difficult to accomplish as there is no ability to crack down on a central authority.  The flip side is with no government intervention, there is no possibility of debasing the currency through reckless spending or monetary policies. 

    There are risks to digital currencies obviously.  These include crime, hacking, coding issues and the like.  There also has been and will be extreme volatility.  This is not a vehicle for grandma to put her retirement savings.  There is also no banking agency insuring the assets, so it’s not for the faint hearted.

    One thing for sure, digital currencies are here to stay and Bitcoin won’t be the first.  Let’s hope that a way can be found to enjoy the freedom and value associated with Bitcoin while guarding against the criminal aspects which are surely already involved.  To thread this needle would be a good thing for human freedom and economic development. 

    The troika of the European Union, the European Central Bank, and the International Monetary Fund have imposed a solution on the Cypriot banking crisis.  The last minute deal closes the second largest bank in Cyprus permanently and imposes upwards of forty percent losses on uninsured deposits over one-hundred thousand Euros.  There is more to this deal than meets the eye.

    Let’s look at the history here.  It is no secret that a large part of the money deposited in Cyprus by wealthy Russians is dirty.  There are rumours that officials of the Russian government have siphoned off around 2.5% annually from public coffers.  This money typically ends up in an offshore financial haven like Cyprus.  This is due to the confidentiality afforded as well as protection from creditors enshrined in many offshore jurisdiction’s financial legislation.  There are also funds taken offshore from Russia by the oligarchs, people who became fabulously wealthy from the fall of the Soviet Union and the privatization of state owned industrial assets.  

    Capitalism has its ups and downs.  The basic tenet is that a person can employ his capital in a risky asset and obtain a return commensurate with that risk.  The key word here is risk.  Investors and depositors in Cypriot banks earned an above market rate of return due to the aggressive investment stance of these offshore banks.  The banks, in order to pay that above market rate of return, invested in Greek sovereign and corporate bonds which were paying much higher interest than other “safe” European banks.  When the Greek crisis hit, these investments lost much of their value.  However, the banks were stuck paying the higher rates of interest; they became insolvent.  Hence the need for a bailout.  

    The market should have no sympathy for investors who lose money chasing above market returns.  The returns are higher for a reason.  The EU should have been forcing more losses on depositors throughout the European debt crisis.  The problem has been that their own banks were investing in each others bonds and therefore they could not impose these losses.  In the Cypriot situation, this was not the case.  It was the Russian’s money.  So, they were not so squeamish about forcing haircuts on depositors.  

    It was also extremely telling that Cypriot politicians were willing to trade their sovereignty (oil rights), to Russia for money. It seems this will not be the last time we see this phenomenon.  

    The Germans certainly did not want to force their taxpayers to bail out the Russian mob.  This is certainly understandable.  

    However, what worries me is that in Europe, there are long memories. One of those memories is the battle of Stalingrad. Over one million Russians died in that battle.  We Westerners cannot fathom that amount of loss over a few days.  You are seeing old hatreds on the rise against the economically triumphant Germans.  

    As Europe becomes weaker economically and militarily, and Russia and China become stronger, I just hope Europe doesn’t get an offer it can’t refuse.

I learned years ago trading on Wall Street that I was not so good at picking out the day to day minutia of the market.  It seemed I came out 50/50 when trying to time the market and day trade.  I won some and I lost some. 

What I was good at was spotting macro trends, putting on the long trade.  Would high yield bonds climb over the next few years?  Would interest rates rise? 

Today I’m not trading but looking at things in a more global geopolitical sense as a journalist and a writer.  I don’t like what I see. 

We’ve got Iran on the brink of having nuclear weapons.  We’ve got Israel (that has nukes) that won’t allow that to happen.  We’ve got Islamist Jihadists hell bent on destroying the Western world and establishing Sharia Law.  We’ve got a President who wants to shrink from a leadership role in the world and reduce our military capability.  We’ve got Europe which is impotent due to the debt crisis.  China and Russia are run by gangsters and are growing their military capability. 

All in all, it makes me nervous.  Gotta find something to short. 

Oh man, wouldn’t this make a great Bond flick?  Let’s lay out the screenplay. 

Western nations are awash in debt as the consequences of the welfare state play themselves out.  The European Union establishes a common currency with no political union and the fruits of financial mismanagement threaten to break the economic alliance apart.  Historical hatreds simmering from WW2 and before raise their ugly heads.  The reserve currency the world has used since WW2 is threatened with devaluation as United States spending is uncontrolled and unsustainable.  Previous communist countries buy gold at record rates as their cash reserves from their export capitalism build.  Gold looks to be the lone store of value that world governments can trust.  Countries no longer need to keep gold reserves in Washington as the USD may not be how they balance trade payments in the future. 

Germany is the lone financially prudent player in Europe and their gold reserves are significant.  But wait, their gold is in Washington, France, and elsewhere since WW2!

We have to return the gold they say.  But SPECTRE gets wind of the shipments of tons of gold. 

How does it end? 

Stay tuned.  And buy gold.

Marlon Brando utters these words as his life ebbs away in the climax of Apocalypse Now.  After the last few days, I can truthfully say I can relate.  The Horror of what happened in Newtown is slowly sinking in.  People feel guilty putting up Christmas decorations- there is a general feeling of despair.  The town will never be the same.

I’m a fiscally conservative person.  I believe in freedom.  I think less government is better for all concerned.  I believe in being able to enjoy the fruits of your labors and not having them confiscated by the government to an inordinate degree. 

But I can’t get the image of the little six year old daughter of a guy I know, riddled with bullet holes, out of my mind. 

I know all the arguments.  Forty-thousand people a year killed by cars, hundreds of thousands a year dying of cigarettes, are you going to ban those as well? 

Well, these are accidents and choices of free will.  Her death was not an accident.  So I’m going to say it, even though I will incur anger from some of my colleagues.

We have to change the way weapons are dealt with in this country. 

I believe in the right of self defense.  I believe in the right to hunt for sport.  I believe in the concept of a population being able to defend against a tyrannical government as the Founders did.  But, the line between freedom and the safety of six year old children has to move. 

We can never erase evil from the world.  But, if this monster did not have access to high powered, high capacity weapons, would the death toll have been less?  You are not able to have anti-tank rockets in your home.  What’s the difference between that and a weapon that can fire hundreds of hollow point rounds in a few seconds?  If the guy had fired an anti-tank rocket at the school, would 26 people have died?  I am not ignorant to the arguments that the last ban on assault weapons had no measurable effect.  I am not ignorant to the fact that most mass shootings occur where people are not armed and able to defend themselves.  I’m not ignorant to the reality that the gun bans in Chicago and Washington, D.C. are a joke - only the criminals have guns.

This should not be an emotional response. 

There should be a well thought out process to reduce the ease of conducting mass murder in this country.  This should include many issues.  The prevalence of violence in entertainment, the availability of weapons of war, the treatment of mental illness, all should be included in this analysis.

My four year old daughter overheard me talking with a friend about the shooting yesterday.  As I put her to bed last night she asked, “Daddy, nobody can hurt us right?” 

I lied and told her, “No, of course not.”

I read with amazement the fact that the EU was awarded the Nobel Peace Prize today.  My first reaction was, Is this a joke?, as I had posted fictional articles from the Onion on my Facebook page the day before. 

The EU is drowning in debt.  Portugal, France, Spain, Ireland, Italy, and least of all Greece, have real problems and it is quite possible that these states will not be able to deal with the crisis.  This has led to riots in the streets, old nationalistic hatreds being reborn, and the loss of a decent standard of living for millions of people who now have no hope.  This is how Hitler came to power. Did you see the Nazi propaganda being paraded about when Merkel visited Greece?

The nanny state governments of all of these countries simply cannot face the fact that their way of life has to change.  The market will see to that.  Or, they will be forced to live in a society with restricted freedom that will ignore the free market.  This could be even worse than the Nazis. 

Why doesn’t anyone speak about the over 70 million people killed by Stalin and Mao? 

Scary times that are anything but peaceful.  Maybe it was a joke.

I can relate to Rodney King after the last few days.  After being pummeled by L.A. cops he uttered those famous words. 

Ok, I wrote a story about the debt-really the national security consequences of the debt.  So what?  Isn’t it something that needs to be talked about? (by the way it’s a thrilling read)

It’s very interesting, the flaming, soaked in dung, poison tipped arrows that have come my way from many directions now that the book is “out there.”  Some people really don’t like the conversation. 

The book was meant to get people thinking of the consequences.  If you don’t know history, you are doomed to repeat it.  I intentionally made it non-partisan.  But, yes it lays out the possible outcomes if we don’t deal with this issue.  It will affect our children, no matter what side of the aisle you are on. 

But hey, guess what, we are talking about it aren’t we?

The warnings in the media about Israel launching a strike against Iran have been increasing as of late.  Obviously some of them are leaked to ratchet up the tension.  Here is the latest example I have seen:

Israeli Minister Warns of 30-day Iran War

Israel has every right to defend herself.  The threat is real.  I don’t think Americans can understand the fear of having the next town over armed with chemical weapons and thousands of rockets, threatening to wipe you off the face of the Earth.  Here is the latest comment from the Iranian President a few weeks ago.

Ahmadinejad Calls Again to Destroy Israel

My concern is that in our weakened economic position, we are inviting trouble around the world from regimes and other entities that may gamble that we do not have the money nor the will to fight another war anytime soon.

I don’t believe Iran will stop their nuclear program.  At some point the Israelis will be forced to act.  This could become a very serious global situation. 

We have got to get our economic and fiscal situation under control.  What happens if we are drawn into a devastating conflict in the Middle East and then North Korea decides to take a chance?

The best war is the one not fought.

As former Comptroller General of the United States from 1998-2008, the Hon. David Walker had a bird’s eye view of the debt problems this country faces. 

As CEO of the Comeback America Initiative, he is trying to do something about it. 

Mission:

To promote fiscal responsibility and sustainability by engaging the public and assisting key policymakers on a non-partisan basis in order to achieve solutions to America’s fiscal imbalances.

Please support his 10MillionAMinute bus tour across the United States which launches early this September.  Find an event in a city near you and attend!

http://keepingamericagreat.org/10-million-a-minute-tour/

As I mentioned in an earlier tweet, there are big layoffs coming to the bond market.  We are in the midst of a radical transformation of our capital markets.  The extreme levels of new regulation, the continued malpractice by Wall Street (Facebook IPO the latest example) are going to cause a fundamental change in the way Wall Street does business. 

The consequences for Mom and Pop remain to be seen.  With the Fed printing money and masking the true desires of free capital markets, the end game of all of this is quite fuzzy at this point.

At a minimum there is already reduced liquidity.  There is less confidence in our capitalistic system.  That is not a good thing.

Capital markets are an integral part to a capitalistic society and they need to be healthy.  Ours are not.  They provide a much needed way for entrepreneurs to finance their risk oriented ideas. 

I hope whomever is elected to govern in November can figure all of this out and make it all ok.