wulfgar

Neighborhood Bully - America Recklessly Throws its Weight Around

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One wonders how far the US will go with this one. This is another issue that could see the demise of the USD as world reserve.

http://www.safehaven.com/article/34829/neighborhood-bully-america-recklessly-throws-its-weight-around

 

 

Neighborhood Bully - America Recklessly Throws its Weight Around
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On June 30, U.S. authorities announced a stunning $9 billion fine on French bank BNP Paribas for violations of financial sanctions laws that the United States had imposed on Iran, Sudan and Cuba. In essence, BNP had surreptitiously conducted business with countries that the United States had sought to isolate diplomatically (sometimes unilaterally in the case of Cuba). Although BNP is not technically under the jurisdiction of American regulators, and the bank had apparently not broken any laws of its home country, the fine was one of the largest ever issued by the United States and the largest ever levied on a non-U.S. firm. The Treasury Department and the Federal Reserve made clear that unless BNP forks over the $9 billion (equivalent to one year's of the company's total earnings), the U.S. will prevent the bank from engaging in dollar-based international transactions. For an institution that makes its living through such transactions, that penalty is the financial equivalent of a death sentence. The fine will be paid.

It is widely rumored that Germany's Commerzbank will be the next European institution to face Washington's wrath. It is rumored that it will face a penalty of at least $500 million, an amount that is roughly equivalent to one year of the bank's income.

As if choreographed by a financial god with a wicked sense of humor, the very next day marked the official implementation of the Foreign Account Tax Compliance Act (FATCA), a new set of laws that will require all foreign financial institutions to routinely and regularly report to the U.S. Internal Revenue Service all the financial activities of their American customers. The law also requires that institutions report on all their non-American customers who have ever worked in the U.S. or those persons who have a "substantial" connection to the U.S. (Inconveniently the law fails to fully define what "substantial" means). Failure to report will trigger 30% IRS withholding taxes on any dollar-based transactions made by clients who the U.S. has determined to be American...either by birth, marriage, or simply association.

Given that the United States is one of only two nations in the world (the other being Eritrea) that taxes its citizens on any income received, regardless of where that income was earned and where the tax payer lived when they earned it, the FATCA laws are an attempt to extend American tax authority and jurisdiction (by unilateral dictate) to the four corners of the Earth. The Economist magazine, which is not known for alarmist reporting, described FATCA as "a piece of extraterritoriality stunning even by Washington standards." (For those of you who did not pay attention during world history class, "extraterritoriality" is an attempt by one country to enforce its own laws outside of its own borders).

What's worse is that many accountants and analysts have estimated that the compliance costs that the United States has imposed on these non-constituent banks (which have limited ability to lobby or influence U.S. lawmakers) will far outweigh the $800 million in annual revenue that the law's backers optimistically estimated. In a June 28th article, The Economist quotes an international tax lawyer saying that FATCA is about "putting private-sector assets on a bonfire so that government can collect the ashes." The laws are particularly irksome to many because the United States typically refuses to subject itself to the same standards it requires of others. When foreign governments ask Washington for financial information from its citizens, the U.S. government hypocritically trots out privacy laws and poses on the altar of civil liberties. In fact, despite its war on foreign tax havens, for non-Americans the United States is by far the world's largest tax haven.

But as is the case with BNP, the foreign banks will have little choice but to comply. Given the importance that U.S. dollar-based transactions play in daily banking operations, U.S. authorities call the tune to which everyone must dance. However, the complexity and opacity of the laws have at least generated some mercy from the U.S. which has allowed foreign banks more time to implement compliance procedures. In many ways this is similar to how the Obama administration has extended Obamacare mandates to a persistently confused and overwhelmed public. This is cold comfort.

The FATCA and the BNP developments have occurred just a few months after the U.S. has finished tightening the screws on a variety of Swiss banks that had attempted to follow the bank privacy laws that exist in their home country. Through heavy-handed tactics, U.S. authorities made it impossible for the Swiss banks to transact business internationally unless they played ball with Washington and turned over all information the banks possessed on U.S. customers. Not surprisingly, the U.S. prevailed. Additionally, June marked the end of Germany's farcical campaign to repatriate the hundreds of tons of gold that are supposedly on deposit at the Federal Reserve Bank of New York. After asking for its gold back two years ago, and after having only received the smallest fraction of that amount over the ensuing years, the Germans have decided to make a virtue of necessity and drop its demands to receive its gold. (see Interview with Peter Boehringer)

But the fate of BNP appeared to kick up a storm that went beyond the usual grumblings that American financial muscle-flexing usually inspires. A few days after the fine was announced, French Finance Minister Michel Sapin questioned its legality by pointing out that the offending transactions were not illegal under French law. (The Obama Administration reportedly ignored requests by French President François Hollande to reduce the fine). Going further, Sapin appeared to bring into question the entire monetary regime that has granted the U.S. its unique unilateral power: "We have to consider...the consequences of pricing things in dollars when it means that American law applies outside the U.S.....Shouldn't the euro be more important in the global economy?" (Bloomberg, 7/5/14) Politicians, French or otherwise, rarely deliver such explicit statements.

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As if on cue, a few days later Christophe de Margerie, the CEO of French national energy company Total SA, raised eyebrows when he made repeated comments at a conference in France that the euro should be used more often in international oil transactions, saying "Nothing prevents anyone from paying for oil in euros." Perhaps these are the opening salvos in what may be a long war.

The anger is particularly acute in Germany where the United States has already come under criticism for a series of surveillance and espionage revelations, including illegally tapping Chancellor Merkel's cell phone, and planting spies in the upper echelons of Germany's military. Bloomberg recently compiled a selection of frustration with the United States' actions from Germany's leading newspapers. Among the highlights:

  • "The EU should think about introducing similar senseless rules and then punishing U.S. companies for violating them" (Frankfurter Allgemeine Zeituing).

  • "The United States is not really our friend. Friends treat each other with respect, the way Russia and Germany treat each other, and they do not try to order each other about" (Handelsblatt).

When Germans hold up Russia as a better ally than America, you realize how fundamentally the world is changing. And as we know, Vladimir Putin is doing all that he can to construct a post-dollar financial system (see related article).

These types of frictions should be expected now that America finds its economic and diplomatic influence to be waning. The failures of the American military to create stability in Afghanistan and Iraq, of American diplomacy in heading off crises in Syria, the Ukraine and Palestine, and most importantly the culpability of the American financial system in bringing the world to the brink of financial ruin in 2008, have left the United States with few good options with which to exert her influence. The predominance of the dollar and its reserve status around the world provides the leverage that America's other failed institutions no longer can.

This power is magnified by the ridiculous Keynesian notion that a strong currency is a liability and a weak currency is necessary for a healthy economy. This means that every bad move by the Federal Reserve needs to be matched by its counterpart bank in Frankfort and London. As such, America can debase its currency and serially acquire debt while avoiding the consequences that lesser countries would inevitably encounter.

For the moment the backlash against these laws has been limited to those Americans living abroad who are increasingly finding themselves to be financial lepers. Many local banks and mortgage companies are seeking to avoid the heavy hand of the IRS and FATCA by simply closing their doors to Americans. Even non-financial firms abroad have shown increasing reluctance to hire Americans as a result of the tax complications. As a result, it is well documented that the number of Americans renouncing their citizenship has skyrocketed in recent years.

The real danger of course is that the United States overplays its hand and arrogantly goes too far. While many would believe that that milestone has come and gone, the truth is that the U.S. has yet to pay a price broadly for its actions. The dollar's reserve status is as yet intact, and U.S. Treasury debt is being sold at generationally low yields. But the longer this goes on, the greater the danger becomes.

Arrogance breeds contempt. The more reckless the United States becomes in throwing its weight around, the greater the temptation will become for the rest of the world to jettison the dollar like an unwanted house guest. If that happens, the value of U.S. dollar-based investments, and the living standards of all Americans, will pay a very heavy price.

 

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At which point in the future will renminbi become the global reserve? It still seems a long way off to me. Euro will also struggle for a long time to come. Booking a holiday in Vietnam and all prices are quoted in USD. There's a certain amount of irony in that don't you think?

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If all the global warming / peak X and so happen then I can't see how a single currency could be the global reserve, the very idea of a global reserve depends on stability and massive amounts of resources being consumed in one central place doesn't it?

 

Seems more likely there would just be a new idea of how to put your countries money somewhere to make it relatively safe.

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FACTA is hillarious.   Passed initially with view to enforce drug and terrorist money laundering (and catch a few big fish, as well) it is currently clogging the IRS with hundreds of thousands of Accidental Americans  http://www.theglobeandmail.com/report-on-business/are-you-an-accidental-american-pwc-alerts-customers-to-us-tax-obligations/article19832567/ in Canada trying to get compliant with a regime they do not understand using language that is not aligned with the Canadian income tax vernacular.   The accountants are thriving but no additional US tax is being paid as Canada has a higher tax regime that offsets via US tax credits.   Paper, paper, paper and no income.

 

You could argue that the people who drafted that law never understood what they were actaully doing.   Which might explain the new G19 focus on figuring out how to effectitvely tax companies like Apple.

 

If I was hiding money I certainly would not be hiding it in a bank!    Fortunately this is an issue I do not need to worry about.

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Surely any country with comparable tax rates to the US that has a tax agreement with the US there is no point at all in the law is there?

 

Any USians here that are not paying tax here are hardly going to get caught by something this basic as they are already actively avoiding the system. Any USian paying tax here won't have to pay anything of consequence to the states.

 

In this case it does seem a bit "bureaucracy gone wild".

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At which point in the future will renminbi become the global reserve? It still seems a long way off to me. Euro will also struggle for a long time to come. Booking a holiday in Vietnam and all prices are quoted in USD. There's a certain amount of irony in that don't you think?

 

The Yuan, I don't think so. It takes decades for a currency to gain favor and the Yuan hasn't been on the block for long enough.

 

The only serious challenge for the USD is the Euro.

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This is worth a watch. Provides a perspective you won't find in these parts (i.e. Oz media).

 

 

Edit: there is an option for English sub-titles.

Edited by Mr Medved

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If all the global warming / peak X and so happen then I can't see how a single currency could be the global reserve, the very idea of a global reserve depends on stability and massive amounts of resources being consumed in one central place doesn't it?

 

Seems more likely there would just be a new idea of how to put your countries money somewhere to make it relatively safe.

 

Or does the entire system rely on a single point of trust?

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The Yuan, I don't think so. It takes decades for a currency to gain favor and the Yuan hasn't been on the block for long enough.

 

The only serious challenge for the USD is the Euro.

 

Likewise the euro has yet to get the runs on the board. Single currency but no central authority for the currency. The US can deflate their way out of debt?

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I think there are two aspects to the US dollar.

 

First as a transactional currency. Makes things easier if everyone is talking in a single currency. As an example my brother runs a bike shop and knows he will be transacting in US$ with his suppliers so he has only one currency to hedge against which is pretty easy to keep up with. I don't think there is much advantage to the US in their dollar being used as the transactional currency and if the US started trying to take huge advantage of the fact it would be easy enough for most people to switch to an alternate currency. Just take a while for everyone to agree.

 

Secondly as a relatively safe place to dump your countries savings. For many people they are going to want to put the bulk of this into really safe investments. The US government debt is pretty safe for this as

1. They consume way more than they produce and so will always have some more debt available for purchasers

2. A big military means they are unlikely to be invaded

3. The high consumption and military spending means there is a status quo with lots of vested interests. Politicians with any dream of changing the status quo don't stand a chance

 

The advantage for the US in this case is they can slowly deflate their debt away so they get the best interest rates in the world and can consume more, concentrate more wealth etc.

 

To supplant the US a country would need to sell a lot of debt. The chinese are better at buying debt currently so won't be fighting for that space. The euro doesn't have a uniform consumer culture or a single government which could encourage one. The vested interests would have to deal with 30 odd governments which would be harder and so on.

Edited by tor

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Tor you've been reading Martin Armstrong. Or maybe Tor is Martin Armstrong! :)

 

Since I've met Tor, I can vouch that he is not Armstrong ... though he did a good job plagiarising him!  :yes:

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I am not sure I am plagiarising Armstrong. I think he might actually disagree with me.

 

He doesn't like the government interfering but I think he likes the US dollar being the world reserve. I don't think he would agree that to keep the reserve you need a largely ineffectual government. Never seen him complain about consumerism either (which is required I think).

 

He did talk about FATCA pushing people into using other currencies for transactions but he linked that to what a bad thing FATCA is and how that is proof that the politicians are ruining the system.

 

I don't see why the transactional change is necessarily bad for the US. It is bad in terms of publicity as people will no longer have the US$ in mind as the most powerful currency but I don't think that is hugely beneficial to the States.

 

FATCA is, in my opinion, a stupid idea and, were it to affect me, I would do anything to avoid creating those links with the US but it is only a bad idea in that it reduces the desire to create links with the US. I doubt buying Microsoft products will count. It'll affect bankers maybe but I see it more as another tool  which politicians can use to punish bankers with in order to tell their populace they are "going after the bastards that caused this".

 

Armstrong also hates obamacare for various reasons but has never pointed out that the reason obamacare is a bad thing for the states is that it reduces government debt which reduces the ability to be the world reserve. (I figure they can spend the extra cash easily enough so it won't be a concern, it'll change the concentration of wealth from the pharma industry to whatever they spend the savings on is all which will piss off the people making money from pharma)

 

About the only thing he might agree with me on is that the US can deflate away their debt. I doubt he would phrase it the way I did though :)

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There is a sense of Imperialism that comes from a law like this.   In some situations completely legitimate businesses are going to have to choose which country's laws to break.  And the USD, in this day and age, wins.   

 

I doubt Armstrong is the child of an American parent born overseas having to deal with the hassle of sending in IRS forms to the USA under threat of having lifelong home bank accounts frozen.   That said, this is one of those laws that is so crazy something will break.  Will be interesting.

 

Just for fun…if you are an "American" who was born overseas and continued to live and work overseas…who is your representative to contact to air concerns about this law?

 

Taxation without representation.  A tad, err, ironic.

 

The Biff pic is awesome.

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Likewise the euro has yet to get the runs on the board. Single currency but no central authority for the currency. The US can deflate their way out of debt?

 

The Euro is a third of the worlds reserve currency. It has been and remains a very credible alternative to the USD.

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The Euro is a third of the worlds reserve currency. It has been and remains a very credible alternative to the USD.

 

I can see a couple of issues with the euro presently. Confidence is key where currency is concerned. I know you know this wulfgar. Too much disparity between member nations and a willingness to overlook the entry conditions for member countries degraded the euro. No central authority has made it difficult to inflate europe out of debt in the same way as the US can do and has done. The competing interests will continue to make a central policy problematic.

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No central authority has made it difficult to inflate europe out of debt in the same way as the US can do and has done. The competing interests will continue to make a central policy problematic.

The lack of confidence around the euro is only in the member states themselves. The eu has shown it will sooner allow a member state go broke / into poverty than allow it to dissolve its debt through inflation. This is not a negative for the euro currency as an exchange mechanism, its a positive.

Meanwhile the us uses massive qe to bombard the world with US dollars.

For me the surprise is that so much trade does remain priced in US dollars.

I guess as tor pointed out though in an above post you can always hedge the US dollar back to your currency of interest anyway, though this can no doubt be done with just about any two currencies on the planet anyway though I would expect the cost may be higher for two obscure currencies like say aud v Vietnam dong.

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The lack of confidence around the euro is only in the member states themselves. The eu has shown it will sooner allow a member state go broke / into poverty than allow it to dissolve its debt through inflation. This is not a negative for the euro currency as an exchange mechanism, its a positive.

 

 

That's the point though. The USD nor the RMB don't have the baggage... German interests aren't the same as those of France, Italy and certainly not Greece. The rise of anti european parties like UKIP, Front national and Golden Dawn from within show the fragility of the union. If as Germany desires the union enters a Japanese like extended period of austerity then I doubt it will survive. It's only been a few years since the GFC and the cracks are already showing. Do you really think the euro can survive twenty years a la the Japanese experience?

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I can see a couple of issues with the euro presently. Confidence is key where currency is concerned. I know you know this wulfgar. Too much disparity between member nations and a willingness to overlook the entry conditions for member countries degraded the euro. No central authority has made it difficult to inflate europe out of debt in the same way as the US can do and has done. The competing interests will continue to make a central policy problematic.

The question is the relative quality of the fiat muck.

 

The FED has a balance sheet that's climbed well over 4 trillion dollars. Over the last year the FED has net purchased a trillion worth of paper to hold interest rates down(modern QE). The ECB has done the opposite and recent times unloaded a trillion of paper (opposite of QE). Presently the ECB balance street stands at  2 trillion euros.

 

So the FED has 3 trillion USD worth of QE on its books and the ECB only a trillion worth of OE on its books. QE being the amount of instruments they've purchased beyond what need to back their currency issue. Furthermore the FED directly purchases paper whereas the ECB operates exclusively on repo for its QE.

 

One of the boats is in vastly better trim than the other. If interest rates were to rise then the FED is in trouble and needs a vast injection from the taxpayer. The ECB has much more room for dealing with market issues whereas the HDD of the FED is running out of room.

 

The factor here of course is the US and Europe sport vast world central market places. China doesn't, that job is done by Hong Kong on a vastly smaller scale than the US or Europe.

 

Analyses, Staringclown, analyses.

 

One of these can handle rising rates vastly better than the other.

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Correct me if I am wrong but is your argument that the euro can become the de facto reserve because it can handle an increase in interest rates better for it's own people?

 

I am just thinking that would make the euro a more volatile currency compared to other currencies which seems the opposite of what a treasurer from a country following the US would want, they would want a guaranteed 3% or whatever so they look good at their job and don't have to do much work. A 10% return would be great but a 1% means they lose their job.

 

A crazy arse country that was making its own rules (and rewarding treasurers that were successful but not punishing what were valid choices that ended in failure) would want the better return. I don't think there are many of those countries around. Especially after the US investment banks burned the hell out of them with RMBS's

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Correct me if I am wrong but is your argument that the euro can become the de facto reserve because it can handle an increase in interest rates better for it's own people?

 Yes. At basic level the central bank issues currency and backs it by purchasing treasuries. The FED has 1.3 trillion USD in circulation, so it has a stock 1.3 trillion treasuries to back it. If it was just that it wouldn't be so bad. 

 

  In modern QE the Central Bank takes deposits from the main banks who nothing better to do with the money and buys more treasuries and now ordinary market paper as well. The FED now has a balance triple the size of what it customarily had. Now it buys the assets out right, so interest rate rises would see the FED sitting on massive losses. Which means a taxpayer funded bail out from a treasury up to its eyeballs in debt.

 

The ECB "buys" assets via repo. Essentially it lends money and only takes the assets as security. Those that borrowed are still on the hook for the full value of the loan. The ECB shrank its balance sheet from over 3 trillion euros worth to 2 trillion euro worth. It's currency issuance stands at 1 trillion euros. Compared to the FED, the ECB now has a war chest.

 

Since the GFC the FED has been devaluing the USD at 6.6% pa. Oddly, gold has risen at an average 6.6% pa since the GFC. If you buy rotating 90 days bills in the US you get SFA interest, meaning your holding is losing value at up to 6.6% pa. Gold beats that long term easy.

 

In reality if there has a currency that is volatile over the years, it has been the USD. 

 

You might want to check the world reserves in the USD.

 

  http://www.treasury.gov/ticdata/Publish/mfh.txt

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