The Cypriot deposit confiscation has come and gone (and in a parallel world in which the global Bernanke-put never existed and in which bank shareholders were not untouchable, this is precisely how real-time bank restructurings should have taken place), but fears remain that the country’s “resolution” mechanism will be the template for future instances of “resolving” insolvent banks. That may or may not be the case: the only way to know for sure is during the next European bank bailout, but one thing is certain – Cyprus was certainly a template when it comes to how a world full of insolvent sovereigns (all engaged in currency warfare), where easing, quantitative or otherwise no longer works to boost the economy, will approach what is the last chance for monetary replenishment – taxation of financial assets, just as we warned (Read more…) back in 2011. Specifically, Cyprus showed the “template” for confiscating Russian oligarch billionaire “ill-gotten“, untaxed cash, which many in Germany demanded should be the quid for ongoing German-funded quo. And here’s the rub. There is more where said “ill-gotten” cash has come from. Much more… $32 trillion more.
An estimate by James Henry, senior advisor of Tax Justice Network, confirms that the Cypriot confiscation template will certainly be used again and again for one, or 32 trillion simple reasons: the amount of illicit, off-shore held wealth, to which the proprietors have zero recourse in a world in which the war against tax evaders has gone both nuclear and global, has grown to stupendous levels. To wit: “A significant fraction of global private financial wealth — by our estimates, at least $21 to $32 trillion as of 2010 – has been invested virtually tax-free through the world’s still-expanding black hole of more than 80 “offshore” secrecy jurisdictions.”
It hardly needs mentioning that to a Europe mired in years of painful “austerity” (which is what Europe inaccurately blames its sordid, depressionary fate on when in reality it is merely reverting to a state that is justified by reality when an unsustainable decade-long credit bubble finally pops), “tax-free offshore wealth” is the purest possible code word for “confiscation-eligible.”
Tying it all together, as a reminder a few days ago we noted that in the US alone there is a “high quality collateral” shortage of some $11 trillion. Extrapolating this to the entire world, the amount balloons to a little over $30 trillion…. or roughly the amount that is held in offshore tax shelters which may or may not be susceptible to confiscation. And while confiscated cash is hardly the collateral that banks need in order to preserve the illusion that a world rooted in repo and other shadow liabilities is stable, it will certainly extend and pretend the illusion for a little longer.
From this perspective, it becomes immediately obvious that the Russian oligarchs parking their cash in Cyprus were merely the Guniea Pigs, and the several billions or so confiscated (under the guise of bank resolution of course), will hardly be sufficient to fund Europe’s coffers, where insolvent nations and banks have become synonymous, which is why any incremental capital deficiencies will be cured precisely using the Cypriot tax confiscation weath-redistribution template.
But even that is just the beginning. Because in the Tax Justice report we immediately read that…
Remember: this is just financial wealth. A big share of the real estate, yachts, racehorses, gold bricks – and many other things that count as non-financial wealth – are also owned via offshore structures where it is impossible to identify the owners. These are outside the scope of this report.
On this scale, this – offshore economy – is large enough to have a major impact on estimates of inequality of wealth and income; on estimates of national income and debt ratios; and – most importantly – to have very significant negative impacts on the domestic tax bases of key “source” countries (that is, countries that have seen net unrecorded private capital outflows over time.)
(yes, we underlined gold bricks – soon to be confiscated from a bank vault near you all to fund “bank resolution”).
So for anyone who still hasn’t gotten the memo, and understood that “offshore tax-haven” is now the most dangerous oxymoron in an insolvent world, here is the intro from the 2012 Tax Justice report which is a must read for everyone confused about Europe’s confiscatory blueprint:
The 139-country focus group: who are the real debtors?
We have focused on a subgroup of 139 mainly low-middle income “source” countries for which the World Bank and IMF have sufficient external debt data.
Our estimates for this group underscore how misleading it is to regard countries as “debtors” only by looking at one side of their balance sheets.
Since the 1970s, with eager (and often aggressive and illegal) assistance from the international private banking industry, it appears that private elites in this sub-group of 139 countries had accumulated $7.3 to $9.3 trillion of unrecorded offshore wealth in 2010, conservatively estimated, even while many of their public sectors were borrowing themselves into bankruptcy, enduring agonizing “structural adjustment” and low growth, and holding fire sales of public assets.
These same source countries had aggregate gross external debt of $4.08 trillion in 2010. However, once we subtract these countries’ foreign reserves, most of which are invested in First World securities, their aggregate net external debts were minus $2.8 trillion in 2010. (This dramatic picture has been increasing steadily since 1998, the year when the external debts minus foreign reserves was at its peak for these 139 countries, at +$1.43 trillion.
So in total, by way of the offshore system, these supposedly indebted “source countries” – including all key developing countries – are not debtors at all: they are net lenders, to the tune of $10.1 to $13.1 trillion at end-2010.
The problem here is that the assets of these countries are held by a small number of wealthy individuals while the debts are shouldered by the ordinary people of these countries through their governments.
As a U.S. Federal Reserve official observed back in the 1980s: “The real problem is not that these countries don’t have any assets. The problem is, they’re all in Miami (and, he might have added, New York, London, Geneva, Zurich, Luxembourg, Singapore, and Hong Kong)”
These private unrecorded offshore assets and the public debts are intimately linked, historically speaking: the dramatic increase in unrecorded capital outflows (and the private demand for First World currency and other assets) in the 1970s and 1980s was positively correlated with a surge in First World loans to developing countries: much of this borrowing left these countries under the table within months, and even weeks, of being disbursed.
Today, local elites continue to “vote with their financial feet” while their public sectors borrow heavily abroad – but it is First World countries that are doing most of the borrowing. It is these frequently heavily indebted source countries and their elites that have become their financiers. In terms of tackling poverty, it is hard to imagine a more pressing global issue to address.
How this wealth is concentrated. Much of this wealth appears to be concentrated in the hands of private elites that reside in a handful of source countries – many of which are still regarded officially as “debtors.”
By our estimates, of the $7.3- $9.3 trillion of offshore wealth belonging to residents of these 139 countries, the top 10 countries account for 61 percent and the top 20 for 81 percent.
Untaxed Offshore Earnings start to swamp outflows. Our estimates also correct the sanguine view that since new outflows of capital appear to have recently declined from countries like Mexico and Brazil, capital flight is no longer a problem for these countries.
Once we take into account the growth of large untaxed earnings on accumulated offshore wealth, it turns out that from 1970 to 2010 the real value (in $2000) of these earnings alone may be has much as $3.7 trillion – equivalent to about 60 percent of the global total unrecorded capital outflows during this period. For Latin America, Sub-Saharan Africa and the Middle East that have long histories of accumulating offshore wealth and unreported earnings abroad, the ratio is close to 100 percent or more.
By shifting attention from flows to accumulated stocks of foreign wealth, this paper calls attention to the fact that retention of investment earnings abroad can easily become so significant that initial outflows are eventually replaced by “hidden flight,” with the hidden stock of unrecorded private wealth generating enough unreported income to keep it growing long after the initial outflows have dried up.
Offshore earnings swamp foreign investment. Another key finding is that once we fully account for capital outflows and the lost stream of future earnings on the associated offshore investments, foreign direct and equity investment flows are almost entirely offset – even for some of the world’s largest recipients of foreign investment.
Wide open and “efficient” capital markets: how traditional theories failed. Standard development economics assumes that financial capital will flow predominantly from “capital-rich” high-saving rich countries to “capital-scarce” countries where returns on investment are higher.
But for many countries the global financial system seems to have enabled private investor motives – understandable ones like asset diversification along with less admirable ones like tax evasion — to swamp the conventional theory. Reducing frictions in global finance, which was supposed to help capital flow in to capital-starved developing countries more easily and efficiently, seems to have encouraged capital to flow out. This raises new questions about how “efficient” frictionless global capital markets are.
The active role of private banks. Our analysis refocuses attention on the critical, often unsavory role that global private banks play. A detailed analysis of the top 50 international private banks reveals that at the end of 2010 these 50 collectively managed more than $12.1 trillion in cross-border invested assets from private clients, including via trusts and foundations. Consider the role of smaller banks, investment houses, insurance companies, and non-bank intermediaries like hedge funds and independent money managers in the offshore cross-border market, plus self-managed funds, and this figure seems consistent with our overall offshore asset estimates of US$21-$32 trillion.
A disproportionate share of these assets were managed by major global banks that are well known for their role in the 2008 financial crisis, their generous government bailouts and bountiful executive compensation packages. We can now add this to their list of distinctions: they are key players in many havens around the globe, and key enablers of the global tax injustice system.
It is interesting to note that despite choppy markets the rank order at the top of the private banking world has been remarkably stable – key recent trends have been for an increased role for independent boutique money managers and hedge funds, and a shift toward banks with a strong Asian presence.
Offshore Investor Portfolios. Based on a simple model of offshore investor portfolio behavior, data from the Bank for International Settlements (BIS), and interviews with private bankers and wealth industry analysts, this yields a “scale-up” factor that is also consistent with the aggregate range for 2010 noted earlier.
A simple model, based on a combination of BIS data on cross-border deposits and other asset holdings by “non-bank” investors, an analysis of portfolio mix assumptions made by wealth industry analysts, and interviews with actual private banks, suggests an overall multiplier of 3.0 to scale up our cross-border deposits figure to total financial assets. This is very conservative.
And the punchline, or where the “template” was literally spelled out for anyone seeking:
New Revenue Sources for Global Needs. Finally, if we could figure out how to tax all this offshore wealth without killing the proverbial Golden Goose, or at least entice its owners to reinvest it back home, this sector of the global underground is also easily large enough to make a significant contribution to tax justice, investment, and paying the costs of global problems like climate change.
Guess what Cyprus was: Europe finally “figuring out” how to tax all this offshore wealth. So the only thing needed to reapportion even more offshore wealth – more “bank failures” whose “resolution” will represent precisely the “ethically-justified” basis for German popular consumption to confiscate the money which to some 99.9% of the population should not have been accumulated in the first place.
Or, to summarize all of the above: with the middle class now wiped and tapped out, the wealthy have finally turned on themselves!
Finally, for those who find themselves at the top of these two wealth pyramids, we suggest you panic: