Wednesday, December 26, 2012

Trouble in Paradise

In a blog-post of mine back in September last year (2011 – House of Cards) I wondered whether Britain might be preparing to pull the plug on Cayman’s tax-haven, and maybe encouraging our local politicians to go independent. (Which would in effect transfer us to US administration, since the US would never allow an independent little village-state to exist in such a strategic spot.)

At the time, our local rulers had just passed a law exempting them from producing audited government financial statements for the preceding six years. Our colonial masters in London had instructed our Governor to give his formal assent to the Law.

I wrote: If the Governor’s assent didn’t signal Britain’s intention to let Cayman go its own way, nothing will. The disclosure in a lawsuit that our Monetary Authority was no longer monitoring the behaviour of hedge-fund directors constituted another sign... The UK’s meek response to all the open contempt shown to the Governor and his superiors recently, puts the matter beyond all reasonable doubt. In years to come, these won’t be remembered as straws in the wind so much as whole forests blowing away before our eyes.

In light of our recent political shenanigans, it is fair to wonder, again, whether our tax-haven is being set up for destruction. Our present minority government of five elected MLAs and three ex-officio Civil Servants, opposed by the other ten elected MLAs, must try to hang together for the next three months until the scheduled elections.

The recently dismissed Premier and his three MLA cronies seem to be blaming the FCO and its local agents (the Police and the Governor, mainly) for the coup: “Enemies of Cayman!” “British imperialists!” “We will not be told what to do by London!” It all sounds like the slogans of the 1960s, when demagogues led half the British Empire into independence – not abandoning Britain’s authoritarian system of colonial governance, but appropriating it holus-bolus.

That kind of sloganising puts our prosperity at risk. Half a century ago, Britain rarely resisted the demands for independence; one wonders whether she would resist now. Many FCO clerks in London must be muttering to their political masters, “Oh, for God’s sake, let the silly buggers go!”

Cayman has been useful to Britain. As hosts to Britain’s overseas intelligence services, these Islands have for forty years been her eyes and ears in the Caribbean region, and her bankers, too. But there are limits to her patience. From our side of the fence, Britain is crucial to Cayman. She guarantees all our government’s loans, and keeps the interest-rates much lower than they would be otherwise. Even more important: as our colonial power, her presence guarantees that “the rule of law” applies here, safe from any corrupt practices that our local officials might attempt. Well, that’s the theory...

Independence from Britain would kill our tax-haven stone dead, and our prosperity with it. We have a flourishing tourism industry, but it is not nearly enough to keep us in the style to which we have all become accustomed. Without the tax-haven, our Public Revenue would be a quarter of its present level, as would our Public Expenditure, and our population.

Without the tax-haven, we would quickly cease to be the richest little community in the region. We would become indistinguishable from all the other English-speaking Caribbean islands – except for this: that whoever remained here would never forget that they once had it all, and threw it away in a fit of pique. They would be inconsolable for a long, long, time.

Friday, December 21, 2012

Fiscal Cliff

The world’s governments are not coping at all well with their financial crises. Big and small, they are displaying the same incompetence that got them into the mess in the first place. They all borrowed more money than their taxpayers could ever repay – more, even, than their taxpayers’ children and grandchildren could repay.

With no spare money in the kitty, they must renew each loan as it falls due, at whatever interest-rate the creditors ask, or pay it back. Even to pay interest on the loans they must squeeze more money out of their constituents – and reduce the amount spent on government services. The term “fiscal cliff” describes the effect of that combination – each economy lurches from a plateau of prosperity to a chasm of recession: higher government expenditure, less loan-money coming in, and less revenue.

A thousand books have been written on how the world got into this situation: very few on how to get out of it. Bankers without conscience persuaded politicians without morals to borrow money for vanity projects and vote-buying projects, and/or to invest it in new types of securities (“derivatives”) endorsed by crooked rating agencies.

NINJA loans became famous. (N I N J A stood for mortgages granted to borrowers with No Income No Jobs or Assets.) Thousands of rubbish mortgages were diced and sliced and the pieces glued together in the same process by which bits of hooves and skin from slaughterhouse floors become sausages. The rubbish was advertised as Triple-A securities, the same rating as Swiss Government bonds. That’s how bankers became “banksters” – gangster-bankers.

The securities proved worthless. The loans that paid for them could have been defaulted on, but the banksters threatened to cut off all future loans to the borrowing governments, and politicians without morals will never agree to that. So the governments signed contracts to repay the existing loans as they fell due, and ended up in the same place.

Nations that fall off today’s fiscal cliffs will take generations to recover. Infrastructures will decay – Google “Detroit decay” for photos. Private companies will go broke: check the unemployment lines in Greece and Spain. Government services will shrink, except for the military (!). Pension Funds (private and public alike) will fail to cover retirees’ needs. Government employees will join their private-sector fellows on the dole, after it has been reduced to the bare minimum – or below.

How will nations ever climb out of the fiscal chasm, back up the fiscal cliff? There is a way; of course there’s a way. There is always a way. In this case, the way is inflation – maybe even hyper-inflation. But that’s a story for another day. Hyper-inflation is a very drastic solution – like cutting off a person’s gangrenous legs in order to save his life. Check out the Wikipedia entry for hyper-inflation.

Currency notes become worth less and less until they become literally worth-less. At some point some Central Bank invents a replacement currency – a hundred old dollars for one new dollar, say. In 1922 the German government of the day thought about doing this, but wasn’t quite brave enough. Two years later, when German workers were carrying their wages home in wheelbarrows full of near-worthless notes, the government finally authorised the Central Bank to make the switch – and by that time the rate of exchange was set at a trillion old marks for one new mark.

When I was a boy, I once had a German postage-stamp with a face value of fifty billion marks. It was worth a penny in the catalogue. It’s worth twenty-five cents today, with inflation.

Friday, December 14, 2012

Cayman’s uncertain future

This week our Premier was arrested, and his home and office were searched by the Police Commercial Crimes unit. For the next two months he will be “helping the Police with their enquiries”, as the saying goes. He has not yet been charged with anything, and is refusing to step down. Further, he has declared the British governor and the UK Government his enemies – and therefore Cayman’s enemies.

The anti-British stance is probably just a ploy to garner political support. There is some pro-independence sentiment among the native-born Caymanians, but most of them are fully aware that without Britain their prosperity would vanish. Our Offshore tax-haven – as structured – depends on Britain’s reputation for integrity. Without it these Islands would quickly revert to being “the lawless Caymanas”, as they were called in the bad old days of piracy and freebooting.

Britain is playing its cards close to its chest, for the moment. The most likely next step is to suspend our Constitution (a Mickey Mouse document cobbled together by the local illiterati a few years ago) and to impose direct rule from London, with our Governor administering day-to-day affairs, assisted by a team of helpers flown in from London. That’s what happened to Turks & Caicos in similar circumstances.

The arrest has been a long time coming. After all, it’s been at least a year since the Police announced that McKeeva was under investigation. Our Police and our Prosecution Service are both noted for their incompetence, so it’s quite possible that there will be no proper follow-through. We can only hope that the FCO really is determined to introduce good governance, at last. Good luck to them.

Unfortunately, the FCO itself has little credibility in an anti-corruption context. For the past forty years it has turned the blindest of eyes to endemic crony-corruption. It has allowed The Immigration Monster to flourish as the exploiter-in-chief of indentured migrant workers, especially the lower-paid of them.

In a crony-corruption regime, actual cash-corruption is not all that common. When government contracts at all levels are awarded to friends or family, there is no need for plain brown envelopes to change hands. Mutual back-scratching is what works best.

When government is an ever-expanding empire, the scope for corruption is also ever-expanding. When two-thirds of the workforce are foreigners, and all their Work Permits are issued as directed by political cronies, it is financially risky not to be a crony. That’s our situation here. Crony-government has been an integral part of the Caymanian community since slavery days, so there’s nothing new about it.

The only thing new about the economic environment in which it exists, is the quantity of revenue that flows into the Public Purse each year. In just 45 years or so, a little cowboy tuppenny-ha’penny money-laundry has grown into a hugely successful international financial centre that benefits from the taxes paid by hedge funds and other Offshore investment vehicles. I was working in Bahamas in the late 1960s when my employers were busy in establishing Cayman as a viable alternative to Nassau. I spent a weekend here in 1968. And I remember what an empty shell it was then. Not any more!

What prompts the FCO’s intervention now is the ineptness of our local community leaders’ money-management skills. You’d think that the legislators of one of the world’s most sophisticated financial centres would know how to balance their books – but no. They over-borrowed and over-spent like there was no tomorrow, with scarcely a nod of recognition for the principle of double-entry bookkeeping.

Well, tomorrow has arrived. Britain, the guarantor of all our Public Debt, is asking where all the Revenue went, and is demanding audited Statements of Account. They don’t even know how bad it is, yet.

Tuesday, December 11, 2012

McKeeva arrested

Breaking news this morning is that McKeeva (Cayman's controversial Premier) was arrested at his home at 7 a.m. and is in Police custody. He has not been formally charged, but the arrest relates to accusations of corruption.

At this early stage it’s difficult to predict what effect the arrest will have on Cayman’s Offshore tax-haven sector, on which our prosperity rests. The most likely next step is the suspension of our Constitution and the imposition of direct rule by decree from London via the Governor lasting two or three years. That’s what happened to Turks & Caicos under similar circumstances.

This post is purely an interim report. A proper commentary will follow. The full story is on the CNS website . It will be running hot for the next few days, I expect.

UPDATE 4th January: This interim report was followed by the posts titled Cayman's Uncertain Future and Trouble in Paradise. McKeeva has still not been formally charged, and any criminal trial may be years away. Our political representation will remain uncertain until the general elections scheduled for May, and it is anybody's guess what kind of government we will have after that. The Legislative Assembly will have three extra MLAs - making a total of 18 MLAs for an electorate of 18,000. Each of them draws a salary of over US$100,000 - an egregious extravagance for an Island government hasn't balanced its books for the past umpteen years.

Except for the several tribal loyalties, there is no confidence among the general public - and especially among the tax-haven expats - that the situation will be significantly better after the election. McKeeva is a very clever politician, and few of us would bet the farm against his regaining power sooner or later.

Tuesday, December 4, 2012

How to buy gold

Most financial pundits recommend that every investment portfolio contain some gold, especially retirement portfolios. I’ve written two blog-posts on the subject. Gold and other currencies, in March this year, gave a brief layman’s report on gold’s role as a yardstick, by which the sustainability of paper currencies can be measured. I imagined a new-born baby being given a $35 gift certificate in 1971 and his twin given a one-ounce gold coin (then worth $35), and I asked which of them would be the more pleased today.

Gold, silver & war, posted in October, gave a brief layman’s report on gold as a store of value and its relationship to paper currencies. All aggressive wars are, and have always been, fought for loot. Wars used to be financed by gold, and repaid in loot that was valued in gold. Today, wars are financed by paper money and repaid in loot (oil, etc) sold for paper money.

What the pundits don’t tell us is what form of gold should be in the retirement portfolios, and where it should be stored. Here is a brief layman’s summary.

1. Gold in the ground – shares in mining companies whose prices are quoted on some major stock exchange. Custody: the share certificates are most conveniently held by the bank or broker that carries out an investor’s instruction to buy; the gold itself stays with the mining company, naturally enough! Risk: the company’s managers might not be good at their jobs, or be honest; nor might their auditors.

(Mining companies customarily sell gold-in-the-ground for the current price, and promise delivery some months ahead – when the price may be much different. That practice partly explains the disconnect between the price-charts of the companies’ shares and of bullion.)

2. Gold in an Exchange Traded Fund (ETF) – units in mutual funds that are traded like shares. Custody: the certificates stay with the bank or broker as per #1 above, and the physical gold stays in the ETF’s vault. There are also ETFs that buy and hold shares in mining companies, and hold those certificates as per #1. Risk: gold-bullion ETFs might not physically possess all the gold they claim to own; some of it might have been lent out to professional speculators who won’t pay it back.

3. Gold in jewellery – self-explanatory. Custody: at home or in an outside safety deposit box. Risk: all that glitters is not 24-carat gold.

4. Gold bars of varying sizes and weights – bought through banks or brokers. Custody: usually at a bank or bullion-storage facility. Either specified numbered bars are identified as belonging to specific owners or a custodian holds an entire inventory of bullion for multiple owners and issues a formal certificate of ownership for each client for the weight held in his name. Risk: all banks and brokers aren’t 24-carat ones.

(Alternatively, one can take personal delivery of bars or coins and bury them in the back yard. The risk is the same as in #3 above. Gold-plated bars of other metals would fool most of us; even experts can’t always tell them apart without actually cutting them open.)

5. Gold coins – as #4 – bought through banks or brokers. Custody: as #3 & #4. Risk: Coins sell above the bullion price, at premiums that vary. Also, coins can be counterfeited, too.

6. Gold “futures” – contracts with other gold-owners to buy very large amounts of bullion, with a good-faith deposit that is only a small percentage of the value of the contract. In effect, it is a bet on the price of gold – a gamble, and not an investment suitable for retirement portfolios.

Most financial pundits suspect that Fort Knox has lent some or all of its gold to speculators who won’t ever pay it back. Yes, even Fort Knox! Who can one trust, these days? There is more risk in custody than in price, in these wicked days.