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Practical Perspective

Historical Perspective

 

The merchants, trusters, and shippers who first grasped the advantages of international trade operated in a world where messages about foreign investment situations had to be physically carried. Information had to be coded or memorized in politically sensitive situations. The ownership of even a few books was limited to the very wealthy classes. In many cases, carefully gathered and hoarded information was outdated before it could be put to use. Nevertheless, the early multinationals amassed the world’s first honest fortunes. Using the powers of information and exchange, they rivaled the wealth of the political empires.

To this day, there are only two ways to increase economic status. One is the initiation of coercion through means that include both military and democratic processes. Coercive activity is generally employed in the redistribution of existing wealth.

The other method of gaining wealth is through voluntary transactions among consenting parties. This differs substantially from political / coercive acquisition because it actually creates new wealth through capital, personal services, or entrepreneurial actions.

The proponents of the two methods have always struggled with each other. Merchants and financiers want the use of capital to create even more wealth. Governments want it for their consumption and to buy support. Some sort of equilibrium is usually established wherein merchants pay governments a portion of their wealth in return for some degree of protection from other redistribute agencies. True financial awareness is based on that knowledge.

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The Multinational Man

 

For the first time in history, economic sophistication is available to all who want it. The tools and perspective exploited by a relative few in the past are now available to anyone with the discernment to recognize them. Information can be obtained by anyone with access to a good library. Telecommunication and computer technology deliver that information wherever the Internet goes. Furthermore, the multinational man, (connoting the species, not the sex), can turn the confusion of twenty-first century changes to his own benefit. As a Chinese philosopher said, the worse things appear to be, the greater the potential for gain.

Most people, however, including professional financial planners and large corporations, are still operating from the limited perspective of the Old World commoner. Not many people have the vision to see the world as a global community and to grasp their international options. That men and women with the opportunity to enter a cosmopolitan, international age still choose the parochial perspective is a mystery that we will not address.

Multinational companies have flowered since the Second World War. They represent a transitional stage in the continuing evolution of the ancient international organizations. It may be more accurate to call these companies transnationals because they do, in fact, transcend national borders; they do not simply operate in a multinational environment. They are, in a very real sense, companies of the earth. Of the 100 largest economies of the world, 51 are corporations.

The next phase in the economic evolution has already begun. The most sophisticated transnationals are now individuals who are diversified on a global basis, playing government against government as they scurry to attract transnational capital wealth. This presentation will guide the reader toward achieving the ability to control his or her economic destiny. After all, the techniques used by the players in the international money game are really quite simple; the best players simply elevate the basic principles into an art form.

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Governments as Profit Maximizing Entities

 

One of the great falacies is the myth of monopoly. Although it is true that organizations sometimes corner the market on a product or service in the short run, the dynamics of such situations doom them to failure.

Economic historians point out that the only monopolies that last are those backed by weapons. By definition, government have the most weapons, literally and legally. Legislated franchises and legal barriers to entry, such as licensing restrictions, are the most common tools of the political monopolists. However, even they cannot stand forever because monopolies always raise prices above the natural market rate and the longer such a situation exists, the greater the temptation is for someone to cheat. These cheaters join the black market or simply move to a competing sovereignty and offer the market rate services from another jurisdiction.

In most parts of the world, trust is a quasi - governmental activity. American trusters, for example, report on their clients to the government and are required to act as tax collectors. Governments continually attempt to standardize international trust practices, thus making it more difficult for citizens to protect their assets in foreign trust accounts. The stakes are high. The more regulated and taxed a trust industry is, the more profitable it becomes for individuals to trust where they can freely control their assets.

Countries that provide benign tax and regulatory climates are known as tax haven countries and have non-existent or low taxes on foreign businesses that do not participate in the local economy. Generally, they are much more relaxed about organizational formalities and lack strong local economies.

Entities located in tax haven countries can play the international financial markets and accumulate earnings that aren’t taxed. These entities may even be able to invest in western countries and take advantage of the tax benefits that the tax laws grant to foreigners. By choosing among the tax laws of dozens of nations, transnational tax strategists can design investment programs that minimize individual tax liabilities. Multinational companies have taken advantage of these techniques for centuries.

The world’s governments compete for the international investment business. Even a high tax country like Great Britain exempts from taxation the dividend, interest, and capital gains income of foreign investors who base themselves in London and trade in international markets. The British government realizes that if it taxes these traders, they would move to a friendlier country and Britain would lose the income from transfer fees and real estate taxes paid by these investors. what is a tax haven or offshore changes with time and circumstances. During the 1980's and 1990's, the U.S.A. was the world's largest tax haven for foreign nationals not resident in the U.S.A.

Most of the excess foreign currency reserves, (those not needed for the actual conduct of business), are in tax haven countries. Those who control these reserves are the most sophisticated of the world’s financial strategists, and there is nothing to prevent the reader from becoming one of them.

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The Regulatory Burden

 

The problems associated with doing business in the developed western world are increasing on a daily basis. Promises of deregulation fade into the reality of new restrictions. Regulated financial markets make it difficult for new companies to secure the capital necessary to grow. The mountains of paperwork and years of delay that face those trying to raise capital for new ventures can kill entrepreneurial spirit. Those who persist pay high costs to determine out how to comply with ever - changing regulations.

Mandatory detailed financial reports reveal a firm’s inner operations to the scrutiny of its competitors. Some industries, such as trust, insurance, and securities brokerage, are licensed and protected monopolies, barred to those who lack the necessary money and political pull. Established companies use the regulatory system to keep upstarts out.

In many parts of the world it is a crime to offer financial privacy to clients. Businesses are expected to discuss the most intimate details of customers’ business affairs after the most casual of government requests. Detailed records and regular reports about clients, at the business’ expense, are required by a plethora of agencies. This generation of westerners seems to take such practices for granted, but things are different in some countries. In many places, privacy has the protection of law and tradition, and businesses keep their clients’ financial matters confidential without running afoul of the law.

It is impossible to do business in some countries without paying finders’ fees or consultants’ fees. Such payments are not unknown within the United States, yet it is illegal for a US corporation to make these sorts of payments anywhere else in the world. This puts American institutions at a competitive disadvantage with companies from more realistic nations who admit that it is sometimes necessary to pay off the deputy minister’s brother - in - law before his cousin will issue an export permit. Companies located overseas can avoid these US restrictions.

Although interest rate controls have weakened recently, there are still many restrictions on loaning money at an agreed rate of interest. Offshore lenders do not suffer from these problems and are able to maximize earnings on their assets. In highly competitive industries, the offshore razor’s edge advantage can be the margin of survival. In other cases, the advantage can make the difference between survival and real prosperity, doubling and even tripling the rate of return on capital investments.

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Capital Availability

 

Capital is the stuff that civilization is made of. It embodies, almost mystically, the financial efforts of past generations and the legacy of our ancestors. It provides enough extra fish to free the fisher while he makes another net. It is the extra seed corn that allows the planter to replant and buy a tractor. Human economic, medical, intellectual, political, and artistic advancement is dependent on capital.

Sophisticated international investors have been keeping their capital safe offshore for hundreds of years, away from the hands of those who would selfishly destroy the future by wasting capital on politically popular but economically unsound government programs. And that’s where we are today. The more onerous national taxation becomes, the greater the need for offshore security.

Two obvious advantages of the offshore capital markets deserve mention. The first is the increased availability of capital sources to the transnational financial operator. Eurocurrency, petrodollars, and so-called capital-flight money find their way to tax havens from unstable countries throughout the world.

The second advantage is that more capital is usable because it is not subject to taxation or tied up in required reserves. Thus, it is usually possible to get higher rates of return on trust deposits and lower rates of interest on loans internationally than domestically. For example, the Eurodollar is generally one-fourth of a point to three-fourths of a point higher than UD domestic time deposit rates. Haven-based trusts often offer even more dramatic differences.

There is another, less quantifiable aspect of international capital: by its very nature, it is high-energy money. It is the wealth that races from Hong Kong to Taiwan in reaction to news on American congressional action, hours before the New York Times has informed its jaded, anti-business readers that a new law has passed. It is money, fresh from South American mines, being exchanged for genetic-engineering stock in America. It includes insider money, controlled by government and industry leaders, transferred in coded, telexed secrecy. There is a spirit of adventure among transnational investors. With the Internet, transactions can be completed instantaneously in real time.

Investors who work on such a global scale are more accustomed to taking chances. Though some are conservative, others are more open to unusual investments. They expect to lose sometimes but to win more often. Domestic capital sources can’t afford much of this spirit of entrepreneurship. They are not as willing to take a chance on out-of-the-ordinary profit opportunities. This is not true in the international investment community.

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Peace of Mind (or Piece of Mine)

 

There’s an old joke about the client who has been told by his insurance broker that he isn’t protected from a ruinous disaster. Then why have I been paying insurance premiums all these years? he demands. The insurance agent answers smugly: Why, for peace of mind, of course.

When the Continental Illinois Trust and Trust Company ran into trouble in the mid-1970's, it had liabilities of $60 billion. At the same time, the total reserves available to the FDIC amounted to only $16 billion, barely a quarter of the money necessary to cover one trust’s liabilities. The truth is that the FDIC is incapable of handing a real trust run and that all investors in American trusts are exposed to a certain amount of risk. In a financial panic, the FDIC would be limited to burying the bodies.

America's subprime mortgage paper has been sold to financial institutions around the globe. The losses will exceed a trillion dollars. The bailout of the USA mortgage market menas that everyone holding USA$ denominated debt will pay for the losses.

There are other risks that are generally ignored in North America. These are political and military risks. Investors in the rest of the world take the possibility of war much more seriously than Americans do. An 80-year-old European has personally experienced 2 continent-spanning conflicts that killed millions of his fellow citizens. Asia has suffered war without a period of peace for more than 50 years. South America’s most recognizable political feature is the instability of its governments and few observers of the international scene expect an outbreak of tranquillity in the near future. Optimists hope that the problems will be restricted to episodes of terrorism rather than open warfare.

Americans had not suffered extensive domestic war damage since the Civil War and therefore did not usually factor war risk into their investment and business calculations. That was not prudent. Even the entanglements of allies can have profound effects on the American economy. Political change in Africa could cut off certain strategic metals from the North American market that would devastate high-tech, medical, and transportation industries within months.

The attack on 9-11 seems to have changed all assumptions. But even before September 11, 2001, terrorism brought political violence to American shores. Terrorist bombs have exploded in Senate quarters, the World Trade Center, universities, power plants, and abortion clinics. International terrorism is increasing as well, making the assumption of American invulnerability untrue. Investors whose assets are too localized would be helpless to rebuild after a major catastrophe, whereas internationally diversified investors have rebuilt in the rubble of other people’s financial mistakes over and over.

There are other forms of political tyranny, equally capable of destroying financial bases. American city and local governments have the legal right to exercise the powers of eminent domain. Interests opposed to private property have taken over communities in America and, through the exercise of police powers, have imposed rent controls, zoning restrictions, condominium - conversion bans, and hundreds of other coercive incursions against the use of private property. Through a variety of mechanisms including high taxes, some communities have eliminated development entirely. The fact that individuals, families, and companies in those communities had invested millions of dollars, believing that the areas would be free to develop, counts for nothing.

So-called environmentalist groups have used the power of the state to ban the development of mineral rich lands, without recompense to those who bought and developed the land. The global warming movement seeks to impose a worldwide carbon tax to be paid to the UN.

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Wealth and Privacy

 

The use of currency is one of the most noteworthy of human accomplishments, worthy of a place on the list that includes language and art. It is another example of society’s ability to agree on and use symbols. Without a tool to facilitate transactions, economic activity would be a burdensome process of endless barter chains; capitalism and civilization would not have progressed as far as they have.

Money is not wealth. It is a medium of exchange and a storage device. A person alone on an island with a billion dollars in currency or gold coins does not possess wealth unless he may trade it for goods and services. The integrity of a currency therefore is crucial.

Tax havens are known for trust confidentiality. This reflects an Old World attitude about wealth, unfortunately rare today. The term conspicuous consumption, coined by the economist Thorsten Veblen, refers to spending that is meant only to demonstrate affluence to others. Conspicuous consumption is an obvious sign of financial and emotional naiveté. To those who do not enjoy wealth unless they can impress others with it, money does not represent the freedom to control one’s own life. It becomes an end in itself and is not enjoyed unless others are aware of it. These people have little use for trust secrecy laws which allow men and women to keep their net worth discreetly to themselves while enjoying the advantages such a position brings.

Suspicion toward those who value their financial privacy is a peculiar attitude. The Vietnamese and Chinese who did business with Americans before communist regimes took over their countries have no trouble understanding why investors would choose to keep their portfolios secret. Both their lives and their fortunes were thus saved. Representatives of American interests in Cuba, Lebanon, Iran, Nicaragua, and Afghanistan undoubtedly could add to a discussion of the matter. The Jews who fled Germany in the 1930s were aided by illegally smuggled wealth and Swiss trust accounts. The writer and futurist Herman Kahn tells of a gift from his grandfather: a US $20 gold piece and the admonition. Keep this coin, never sell it. It is to be used to bride the border guards.

Another reason for official secrecy, (often under the pretext of national security), is the very real danger of politically motivated vandalism, kidnapping, and assassination. Details about high government officials and their family lives are jealously guarded by official agencies. Large multinational corporations have also begun to increase security for their top executives. All indications signal that the business of terrorism is still in a growth period.

It is an absurdly simple matter to buy credit - rating service reports or to ferret out where a person’s credit cards are used on a regular basis. The trust account balances, real estate holdings, business affiliations, magazine subscriptions, medical records, telephone call records, legal files, and physical characteristics of most Americans are available to anybody with a little determination. The telephone companies have been given retroactive immunity for illegally providing private information to government agencies.

Transnational investors have much more control over the information that is available to others. The mere fact that investments are international means that the cost of gathering information about them will be much greater than the costs of information about domestic investors. In addition, these investors operate through organizations based in countries with a tradition of discretion and legal penalties for even inquiring about the private financial affairs of others.

Furthermore, privacy protects ideas and techniques. In the United States, competitors in the hotel and supermarket business often track more successful firms’ real estate dealings and build near these sites. Some real estate agents discover one of those companies in the process of buying land, the agents attempt to secure crucial plots within those blocks and force the company to buy them out at very high prices. Confidentiality can make real differences in the purchase price of many properties and commodities.

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The Rules of the Game

 

This presentation to the international money game is a handbook on the basic principles and tools used at the highest levels of international finance. Practical instructions and resources are detailed on the most important finance. Practical instructions and resources are detailed on the most important areas of international economic tactics:

Diversification - Information about actual locations are detailed with suggestions on ways to choose among the many different offshore facilities and tailor their services to specific business and investment needs.

Tax planning - Instruction on becoming multinational to take advantage of the complexities of the Revenue Code without becoming vulnerable to changes in tax laws.

Innovative tools - Direction on establishing forms of organizations that are unavailable domestically, including international trusts that offer financial, insurance, and securities brokerage services. Of particular interest to most investors will be instructions on foreign trusts and joint venture companies.

This presentation contains general principles that are likely to apply for many years. It is only an introduction to a tradition that has been developing for centuries and it cannot replace experience. Laws are complex and continually changing. To keep up with the ongoing efforts of high-tax counties seeking hew ways to impede financial freedom, it’s important to investigate and plan investment strategies carefully.

After understanding the profound advantages that exist offshore, some readers will seek out professional advisors experienced in international transactions. Others will go on to become advisors themselves. Many will do neither. They are part of the majority who do not care if their assets are invested in productive activities that create employment, progress, and profits, or in bureaucratic activities. They do not, in any important sense, control their own finances, and those who do not control their own finances cannot claim to manage their own lives.

At some point in life it is necessary, if we want to wrest control of our own destinies, to take the first step.

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