War on Cash Spreads to India

Our weekly commentaries provide Euro Pacific Capital’s latest thinking on developments in the global marketplace. Opinions expressed are those of the writer, and may or may not reflect those held by Euro Pacific Capital, or its CEO, Peter Schiff.

By: 

John Browne

Wednesday, December 14, 2016

Over the past year, central banks, commercial bankers and prominent economists have expressed the view that digital money and transfers should replace large denomination cash and cash transactions. This dramatic transition has been fostered under the guise of the public interest in an effort to curb terrorism, tax evasion and criminal activity. Many observers contemplate more sinister motives that involve increased government control of economic activity. The latest country to engage in this ‘war on cash’ is India.
 
In a TV announcement on November 8th, India’s Prime Minister Narendra Modi announced that the Reserve Bank of India’s large denomination 500 and 1,000 rupee bank notes, worth some $7.5 and $15 respectively, would lose their status as legal tender on midnight on December 31, 2016. That meant holders of those notes (which represent 86 per cent of the value of all outstanding rupee notes) had less than two months to exchange the notes for smaller new notes, or lose out completely. The government also mandated than any large exchanges had to be accompanied by tax returns in order to prove that the cash generated had already been taxed.
 
The shock waves from this announcement fueled fear and panic among the Indian population which is heavily cash-oriented. As few people have bank accounts and banks are thinly spread in rural areas, many Indians have been left holding paper currency redeemable only in banks which often are difficult to access. To make matters worse, banks soon ran out of small denomination notes. The result was chaos, rioting and trauma-induced deaths. Millions of poor Indians were unable to buy necessities or transact business. Many merchant shops had no alternative but to close.
 
The BBC’s website notes that India, the world’s seventh largest economy “…is overwhelmingly a cash economy, with 90% of all transactions taking place that way.” At a sudden single stroke a socialist Prime Minister has converted most of the nation’s private cash into bank deposits subject to direct governmental controls including spending and withdrawal limitations. Furthermore, the new bank deposits can be leveraged up as bank loans to government and to allow banks to purchase government bonds to finance social programs.
 
It remains to be seen how severely India will be hit and what effect it will have on the international economy. With much of the world focused on the U.S. Presidential election, this Indian currency event was little reported in the western media.
 
The Indian action was a largely unexpected escalation of the ‘demonetization’ movement that has been spreading through the U.S. and Europe. This past year, Larry Summers proposed the withdrawal of the $100 bill and the ECB announced an end to printing 500-euro notes. The idea has been supported widely. With the notable exception of The Wall Street Journal, major news media including The Economist, The New York Times and a recent Harvard paper have called for the elimination of high denomination currency.
 
It could hardly be coincidental that just this week Nicolas Maduro, the bumbling socialist dictator of Venezuela, surprised his nation with monetary changes that are nearly identical to those being pursued by India. The collapsing Venezuelan economy already had the highest inflation rate in the world, and its starving citizens have had to transact what little commerce they can with ever larger stacks of nearly worthless currency. But to add insult to injury, Madura just deactivated the 100 Bolivar note, the country’s largest note denomination, which until recently had a value of just 3 U.S. cents. Although the government predictably claimed that the move was aimed at speculators and foreign capitalists, it will be the poorest Venezuelans who will suffer most acutely.
 
As in India and Venezeula, the reasons given for the elimination of cash is to protect citizens from terrorism, tax evasion and crime. Of course, when all financial transactions have to flow through banks, they can be monitored easily. Undoubtedly this does hinder some aspects of terrorism, tax evasion and crime. But the real reasons for demonetization are given far less oxygen. The move is spurred by the need to protect the ever larger “too big to fail” banks and the ability of governments to control and even legally utilize the private wealth of citizens. Cash can be sheltered from government, bank deposits cannot.
 
The advent of zero and negative interest rates has reduced investment reward and resulted in a tax on savings. In a low, or negative, rate environment, those with cash have little if any financial incentive to hold money in banks. Cash hoarding is the logical alternative. In economic terms, hoarded cash becomes dead moneyOutside the system it contributes nothing to economic activity. Specifically, it deflates the velocity of monetary circulation, a vital element of economic growth. Perhaps more importantly to a technically insolvent banking system, deposits withdrawn from banks, especially when combined with a rising rate of non-performing loans, can result in potentially fatal capital shortages. In today’s over-leveraged and derivative-infused financial markets, a serious banking failure could escalate like lightning and threaten the entire international financial system.
 
In their 2015 rescue of Cypriot banks, the IMF, ECB and western politicians effectively devised the ‘bail-in’ as a new, less visible alternative to politically unpopular citizen bank bailouts. In a bail-in, it is the shareholders, bondholders and, ultimately, bank depositors who are called upon to fund an insolvent bank rather than injecting public funds. Despite the precedent of Cyprus, it remains surprising how many citizens remain blissfully unaware that when they open an account, they become creditors of the bank. Despite retaining rights to the funds, they no longer own the monies.
 
In addition, if excessive government borrowing results in a collapse of government bond markets and a potentially crippling rise in interest rates, legislation mandating that each citizen hold a certain percentage of their wealth in government bonds would not be unrealistic. With digital money, bank computers can execute such commands quickly and easily. The depositor has no recourse other than the ballot box.
 
While cash hoarding may offer added security to cash holders, as dead money it results in politically harmful damage to economic growth rates rendering banks more vulnerable. It follows that the increasingly ferocious and aggressive war on cash is a sign that central banks may see a dangerously deteriorating situation, one that has led to a feeling of desperation by governments and a strong wish to establish a legal means to control the wealth of citizens. They appear to be using political statements by banks, economists and the mass media to secure a meek surrender to a cashless society and the potential utilization of citizens’ accumulated cash wealth by legal means.
 
Cash is an efficient, free, and private means of payment for ordinary citizens, particularly those without the funds to pay ever-increasing bank charges. Following the January 2016 World Economic Forum in Davos, the war on cash appeared to intensify. At that meeting, PayPal’s CEO, Dan Schulman, claimed that 85 percent of transactions, by volume rather than by value, are in cash. Regardless, at the same conference, Deutsche Bank co-CEO, John Cryan, described cash as “terribly inefficient.” He predicted that we would “probably” see no more cash within the next ten years.
 
Already, some major countries have limited cash transactions for law abiding citizens. In Italy, the legal limit for cash purchases is some $1340, in France the limit is 1,000 euros. Even in the UK, any cash transaction above some 15,000 pounds must be reported to the Inland Revenue. In the U.S., the mandated reporting figure to the Internal Revenue Service is $10,000.
 
Some notably highly leveraged banks including Deutsche and UBS have called for the elimination of cash, while Citibank has eliminated cash in some of its Australian branches. As early as 2015, JPMorgan Chase warned that it would no longer accept cash in its safe deposit boxes. Separately, Chase said it was restricting cash payments for credit cards, mortgages, equity lines and auto loans.
 
The Indian government’s capture and compulsory transfer into bank accounts of some 86 percent of its citizens’ cash was a shock to Indians and to informed people around the world. It will be studied for lessons learned by the western nations as they pursue their own wars on cash. Likely they will take a more gradual approach, supported by mass media and senior bankers’ statements to support their assaults on the cash of compliant citizens. Whereas recently impoverished Indians may turn to silver, those in the developed world may look increasingly to gold as a store of wealth.
 
The extent and speed of the exercise of governmental power to restrict the use or to control the accumulated wealth of citizens never should be ignored or underestimated.
 
John Browne is a Senior Economic Consultant to Euro Pacific Capital.


Source: John Brownes Market Commentary

Trump Triumphs as Brexit Faces a Serious Threat

Our weekly commentaries provide Euro Pacific Capital’s latest thinking on developments in the global marketplace. Opinions expressed are those of the writer, and may or may not reflect those held by Euro Pacific Capital, or its CEO, Peter Schiff.

By: 

John Browne

Tuesday, November 15, 2016

Brexit and the Donald Trump presidential victory should rightly be viewed as the most significant international developments of the last decade. Both events illustrate a breaking down of globalist order and they both threaten the entrenched elite that has so ruthlessly and painfully hurt the middle and working classes. But as Trump supporters revel in the largely unanticipated victory, Brexit faces a serious new challenge.
 
On November 3, 2016, The English High Court ruled that the UK’s withdrawal from the EU would affect substantially the “rights of individuals within the UK.” As a result, the Court concluded that despite the referendum, and the “Crown prerogative” that grants the Government considerable leeway, particularly in matters of foreign affairs, the decision to leave the EU must be made by Parliament. Given that the government has made many decisions to increase the UK’s “ever-closer” integration into the EU over the years, which clearly affected the “rights of UK individuals,” it is curious that the Court would finally decide to step in when the government was moving in the other direction.
 
The May Government has announced that it will appeal to the UK’s Supreme Court. Some lawyers advise that should the Supreme Court overrule the High Court, the Claimants might appeal still to the European Court of Human Rights under the Human Rights Act 1998. Whether this Court would accept jurisdiction is unclear.
Regardless, the current Government and the Brexit camp are shocked and angry at the High Court’s ruling. They are joined by powerful sections of the UK’s mass media including the Daily Mail which has labeled the High Court as being “Enemies of The People” (James Slack, 11/3/16).
 
If the Supreme Court upholds the High Court decision, it is likely that Prime Minister May will have to consult Parliament. She is unlikely to find there a receptive audience. According to Business Insider some 73 percent of the 650 Members of the House of Commons, and probably a greater percentage of Peers in the House of Lords, were and probably are still in favor of remaining in the EU (Jim Edwards, 11/3/16). This means that the members of Parliament can easily rise up and vote to restore the order that they so clearly believe should be restored. But will they be prepared to defy the will of the people? This is a tall order for every politician.
They could argue that the public will has changed since the vote and that the win was not all that decisive to begin with. Such arguments will be politically perilous.
 
By 51.9 percent to 48.1 percent the British people voted for Brexit (BBC News). However, this seemingly small margin led to 61 percent of the UK’s Parliamentary constituencies to vote for Brexit, according to data from the University of East Anglia. It will take very brave Conservative Members of Parliament to vote their conscious to remain, thereby defying both their party whips, who control their promotions within the Party, and the expressed will of their constituents who control their continued membership in Parliament. Even Labour members who may desperately want to remain in the EU, may be reticent to oppose the clear wishes of their voters to leave. The fractured leadership of the Labour Party may not be able to bring much pressure on wavering members to cast a “remain” vote. The remain sentiment in the House of Lords appears even stronger than in Commons. But if Prime Minister May were to add the threat of enacting further reform of the House of Lords, it might bring enough peers into line.
 
The remain case has been further weakened by the lack of post-Brexit catastrophe forecast by Cameron and his allies before the vote. Recent headlines confirm the return of optimism: the Telegraph published, “UK jobs market ‘thriving’ after summer pause.” City AM reported “Retail sales up in best month since January.” Meanwhile, financial markets appear to have stabilized.
 
Based on all this, it is hard to imagine that UK parliamentarians will stage a quixotic last minute stand to resist the independence of the UK.
 
Regardless, the EU negotiators may insist that to retain access to EU markets the UK must open its boarders to EU immigrants, largely from the Middle East. If unacceptable to the UK government, likely it will result in a so-called “Hard Brexit” whereby the UK will be expelled. Should this occur, it will not be the first time England has been expelled from most of Europe. Should this occur, Britons should rejoice as history has shown that England does well when it does not yoke herself too closely to the Continent.
 
When King Henry VIII broke with the Church of Rome, England was forced to trade worldwide. This put England into the exploration and colonization business, which proved to be quite fruitful. When Napoleon’s influence spread across the Continent in the early 19th Century, Britain shut down European ports and looked to trade elsewhere. This resulted in the largest accumulation of empire in England’s history, allowing the small island nation to garner wealth, political influence and military power on a global scale.
 
Under Brexit, I believe the UK will be free to trade worldwide on terms that suit the UK’s economy rather than that of the 28-nation EU, which has still no effective trade treaties with the U.S., China and Japan.
First Brexit and now Trump have exposed powerful popular feelings of deep resentment. An increasing number of voters feel ignored by what they perceive as self-serving, uncaring and unresponsive rulers who have created a political class that is cocooned away from the financial realities which plague normal citizens. It is not a political party but, as Trump describes, “it’s a movement.” Likely, it will threaten the unraveling of conventional party politics in the U.S., the UK and the EU.
 
Brexit and the U.S. election have clearly given momentum to the anti-globalist world view. Such forces are also gaining ascendency in Italy and France. However, the forces of globalization are extremely powerful and deeply entrenched. They will surely fight back. The first round will be in the UK Parliament. But no one knows where the fight will progress.
 
John Browne is a Senior Economic Consultant to Euro Pacific Capital.


Source: John Brownes Market Commentary

Globalization Faces Challenges

Our weekly commentaries provide Euro Pacific Capital’s latest thinking on developments in the global marketplace. Opinions expressed are those of the writer, and may or may not reflect those held by Euro Pacific Capital, or its CEO, Peter Schiff.

By: 

John Browne

Wednesday, October 26, 2016

For much of the second half of the 20th Century, and even into the new millennium, “Globalization” was the dominant theme used to describe the drift of the world economy. It was widely considered both natural and inevitable that the world economy would continue to integrate and that national boundaries would become less constraining to commerce and culture. And with the exception of the eternal “anti-globalization” protesters, who robotically appeared at large gatherings of world leaders, the benefits of globalization were widely lauded by politicians, corporate leaders and rank and file citizens alike. But a casual glance at the world headlines of 2016 suggests that the belief in globalization has crested, and is now in retreat. What are the consequences of this change?
 
International trade has existed for millennia. But few modern historians would characterize the trade caravans that crossed the Himalayas and the Sahara as sources of international conflict. Rather, they are widely seen as a useful means to bring goods that were plentiful from one region to other regions where they were scarce. Along the way, routes like the Silk Road in Asia created a great number of positive secondary benefits in culture and politics. But relatively modern developments such as ocean-going sailing ships, modern navigation, and steam and diesel power, have greatly increased the size and scope of trade. Globalism was also boosted rapidly by technological advances in communications, including intercontinental jet travel, fax machines, satellite telephones, the Internet, real time money transfers and massive investment flows to international and emerging markets.
 
Since the end of WWII, the establishment of international reserve currencies and the rise of supranational organizations, such as the United Nations, The World Bank, and International Monetary Fund, has saddled trade with more political baggage. The rise of bi-lateral and multi-lateral trade negotiations, which are often shadowy and bureaucratic affairs conducted behind closed doors, have further eroded support for trade. Oftentimes these efforts have resulted in deals that clearly favor politically connected players and have given rise to  justified accusations of cronyism. By opening larger markets and reducing costs, certain corporations have amassed shocking wealth. The benefits to workers are far more diffuse and difficult to quantify.
 
The Harvard Business Review of May 13, 2016 published an article by Branko Milanovic about the unequal distribution of wealth generated by globalism. Milanovic comments that, since the mid-1980s, globalism has resulted in the “greatest reshuffle of personal incomes since the Industrial Revolution. It’s also the first time that global inequality has declined in the past two hundred years.” Milanovic points to two main conclusions. First, he highlights the massive percentage gain in wages in Asia, particularly among the middle classes. In some cases, percentage wage gains in the Asian middle class have eclipsed the percentage gains experienced by the top one percent in the richer Western economies.
 
In stark contrast, the U.S. and Western lower and middle classes have enjoyed almost no percentage wage increases, while their top one percent was the only group to experience significant income gains, based on available household surveys from 1988 to 2008. A recent unpublished paper by John E. Roemer, a political scientist at Yale, suggests that the diminishing of global inequality made possible by trade is far less potent politically than the relative increases in national inequality. In other words, the benefits of globalism are obscured while the costs are highly visible.
 
The agricultural revolution that occurred in the United States in the early 20th century greatly diminished the need for farm workers. But the change spanned two generations and allowed time for migration and adaptation for factory jobs. The globalism that we have seen in the last 20-30 years has been even more rapid and transforming.
 
Enabled by their wealth and past successes, the developed nations have, over the past few generations, adopted labor policies that have made them less able to compete against lower cost manufacturers in the developing world. This has widened the divide between white collar and blue collar workers. Long-term unemployment among normally hard-working people can lead to the loss of a sense of worth, depression and to dangerous dependencies on drugs and alcohol, even to suicide. It poses risks to social and political stability. These concerns are now expressing themselves politically.
 
Nowhere has globalization been championed harder than in the European Union. Lingering devastation from two world wars led many to look to greater integration, both within Europe and without, as a means to achieve lasting peace. However, the creation of the EU super state has trampled the local autonomy of once proud nations, and has convinced voters there that globalization is fundamentally undemocratic. This erosion of trust in government elites, and the free trade they promote, has led to a backlash. The successful Brexit vote was the clearest manifestation of this trend. But it is likely not the last.
 
More recently, a high profile trade agreement negotiated by 27 governments over seven years (that would have theoretically benefited 500 million citizens of the EU and 35 million Canadians) was killed by the objections of 3.5 million Belgian Walloons (B. McKenna, The Globe and Mail, 10/25/16). Notably, the Belgians’ reluctance did not appear to stem from their desire to protect a specific domestic industry but from their general views about how globalization supposedly punishes workers. The New York Times had reported last Friday the Canadian International Trade Minister, Chrystia Freeland, as saying, “…the EU is not capable now to have an international deal, even with a nation with such European values like Canada.”
 
Much will depend upon how the EU adapts to the new political climate precipitated by Brexit. If it fails to do so adequately, its euro currency could become suspect. As the world’s second currency, this would have serious implications for the international monetary and investment communities.
 
A similar populist angst has evolved in the U.S. giving rise to the unanticipated voter appeal of Presidential candidates like Bernie Sanders and Donald Trump. Ominously, anti-trade rhetoric is on the rise on both the left and the right of the political spectrum. Even the Clintons, once the standard-bearers of the free trade center, have turned against the principles of Globalism. As a candidate, Hillary Clinton has turned against the Trans Pacific Partnership that she backed as Secretary of State, and has even fallen into criticism of NAFTA, one of the signature achievements of her husband’s presidency.
 
The recent episodes with Apple Computer and Deutsche Bank also offer potentially dark previews of how anti-globalization forces could impact corporations and economies. While they remain separate issues on paper, the government confrontations that currently embroil the two companies have led many to determine that they are linked.
 
In September, Apple Computer, perhaps the U.S.’ premiere technology and industrial company, was fined a staggering $14 billion by the European Union for having supposedly transferred taxable income, derived throughout the European Union, to the low tax jurisdiction of Ireland, thereby evading taxes that should have been paid to many other EU nations. Although the tax structures had been created by the Irish government (that fought hand in hand with Apple against the EU), Brussels nevertheless held Apple liable. The decision also invoked howls of condemnation from Washington, where many claimed Europe was capturing taxes that rightly should have been shipped back across the Atlantic.
 
Just two weeks after the broadside against Apple, the U.S. Department of Justice announced a $14 billion fine leveled against Deutsche Bank, Germany’s premiere financial institution, stemming from “irregularities” in the bank’s mortgage finance business in the years leading up to the financial crash of 2008. While many U.S. banks were hit with similar fines for similar conduct, the size of the Deutsche Bank fine was much larger than had been anticipated. The Bank claimed that it did not have the resources to pay and the German government has voiced its own displeasure at the heavy-handed treatment from Washington. Many have suggested a quid pro quo related to Apple. If so, such disputes in the future could threaten global economic cooperation.
 
Pressures on politicians likely will rise dramatically to ensure more equitable sharing of new national wealth, and the protection of traditional domestic industries. This will inspire them to suggest popular sounding protectionist policies, further exacerbating the economic stagnation on display in the West, and perhaps increasing global instability and mistrust.
 
Those countries that embrace free and fair trade with new technologies stand to reap great rewards. Those who do not, and revert to trade protectionism, could experience economic recession and monetary adversity accompanied by serious social and financial upheaval. But like everything else in the world today, the trends do not look benign.
 
John Browne is a Senior Economic Consultant to Euro Pacific Capital.


Source: John Brownes Market Commentary

Apple Tax Grab by EU Invades IRS Airspace

Our weekly commentaries provide Euro Pacific Capital’s latest thinking on developments in the global marketplace. Opinions expressed are those of the writer, and may or may not reflect those held by Euro Pacific Capital, or its CEO, Peter Schiff.

By: 

John Browne

Thursday, September 15, 2016

On August 30th, the European Union (EU) Commission ordered the Irish government to reclaim some $14.6 billion of so-called back taxes plus interest from Apple Inc. The order challenged sovereign tax authority within the EU and well-established international tax rules. The aggressive stance of the Commission set off a furor of high level political argument among taxing authorities and multinational companies accustomed to complex but legal international tax planning. Apple’s case was big enough to place it at center stage in a simmering problem for governments in striking a balance between attracting businesses, creating jobs, generating taxes and deciding precisely what type of earnings can be taxed.
 
In a testament to how strange the taxing regimes have become, the Irish government has protested loudly and is reluctant to take the nearly 15 billion the EU says it is entitled. When small countries turn down such sums, it should be clear that the stakes are much higher.
 
With uncontrolled socialism and Keynesian monetary policies killing economic growth around the world, governments have ever greater need to wring revenue from the relatively stagnant pool of corporations and wealthy individuals. While the crackdown on personal tax havens, in Switzerland and the Channel Islands for instance, has been largely successful, corporations have become extremely adept using legal loopholes and creative international accounting to move revenues from high tax jurisdictions to countries where rates are lower. As of October, Reuters reported that U.S. based companies have some $2.1 trillion parked abroad in order to avoid high domestic taxes. Apparently Apple, the world’s largest company by market capitalization, accounts for over $180 billion of this total.
 
The U.S. corporate tax rate of 35 percent is widely considered to be uncompetitive and even excessive when compared with Ireland’s 12.5 percent rate (and even the 20 percent in the UK). It is an old adage that capital flows to where it is treated best. Ireland rolled out the red carpet for Apple, a decision that greatly benefited both.
 
Apple established a company in County Cork, Ireland in October 1980, sometime before Apple blossomed financially. Since then, Apple has become one of the largest taxpayers in the world and, according to its CEO, Tim Cook, the largest taxpayer in Ireland where it employs almost 6,000 people, mostly in high paying jobs, adding great benefit to the Irish economy both directly and by encouraging copycat corporations. (A Message to the Apple Community in Europe, 8/30/16)
 
In the last quarter, Apple paid nearly $3 billion in taxes or about $12 billion at an annual rate. Naturally, by using such mechanisms as licensing, pricing differentials and overhead allocations, profits, unlike sales revenues, are somewhat mobile. This is so especially since high value commerce evolved from trading physical goods to intellectual property.
 
The World Bank reports that in aggregate (2015) the EU is the world’s second largest economy. However, despite its population of over 510 million, the EU has failed to spawn new technology giants such as Apple, Google, and Amazon. Many observers blame the socialist and over-regulated nature of the EU. Certainly these factors provided reasons for the Brexit vote in June 2016. Many feel that the Brexit vote may have persuaded EU officials to soften their regulatory aggression, out of fear of encouraging other countries to seek the exits. Regardless, for some two years, the unelected EU Commission has been investigating the theoretical tax liabilities of U.S. companies such as Apple, Google, Amazon, McDonald’s and Starbucks.
 
Until August 30th, all EU member countries were free to establish their own tax regimes. The EU’s order for Ireland to demand some $14.6 billion in ‘back’ taxes from Apple was an unexpected and unabashed power grab by unelected EU regulators over the democratic government of Ireland. The assessment did not result from the non-payment of an actual tax but on a theoretical tax that the EU Commission felt should have applied. This is a bold move.
 
EU Competition Commissioner Margrethe Vestager described the prior arrangements made between Apple and the Government of Ireland as an “inconsistency” or state aid, illegal under the EU rules. The Irish finance minister, Michael Noonan, said that his government would appeal the decision, adding that it was “…necessary to defend the integrity of our tax system; to provide tax certainty to business; and to challenge the encroachment of EU state aid rules into the sovereign Member State competence of taxation.” (Lexology, Ronan Daly Jermyn, 8/31/16)
 
Understandably, the Irish government is balking at what it sees as EU overreach into Ireland’s sovereign right to administer its own tax affairs. They maintain there was no ‘special’ or ‘sweetheart’ deal. Meanwhile, some UK government ministers, soon to negotiate their freedom from the EU, reportedly told The Daily Mail that they see the Commission’s demand as representing a significant “opportunity” for the UK to attract more international companies.
 
The U.S. government is faced with somewhat of a conflict. Bloomberg reported a U.S. Treasury spokesman illustrating this point when he said, “We believe that retroactive tax assessments by the [EU] commission…call into question the tax rules of individual [EU] Member States. …” That all sounded very fair and pro free enterprise. But then, in a stinging globalist sentence, the Treasury spokesman added, “…we will continue to work with the [EU] commission toward our shared objective of preventing the erosion of our corporate tax bases.” (Nate Lanxon, 8/30/16)
 
The U.S. Treasury has described the EU ruling as “deeply troubling.” The U.S. Congress is bringing pressure on Treasury Secretary Jacob Lew, urging him to consider retaliation including taxes on European companies and individuals. Meanwhile, Secretary Lew maintained in a speech at the Brookings Institution that the EU Commission “is using a theory to make tax law, is doing it in a way that is retroactive and that overrides national tax law authority.” (Alan Rappeport, The NY Times, 8/31/16)
 
Apple is just one of the companies holding profits offshore to avoid paying U.S. taxes. According to Bloomberg, Apple has $232 billion in cash, of which about $214 billion is held outside the U.S. with its 35 percent corporate tax rate. The thought that the EU might grab some of the offshore money may reinvigorate Congress to revise the complex U.S. tax code. In other words, allow repatriation now to avoid the grasping claws of foreign governments later. It may even pressure Congress to bring the U.S. corporate tax rates down to more competitive levels.
 
It is conceivable that the litigation will continue over the next three or four years. Whatever the EU court decides ultimately, the ramifications for international commercial tax planning could be profound. It might lead to major changes in corporate structures. Investors should be aware that this issue could affect corporate profitability to an important degree.
 
Most importantly, the affair provides a clear example of how high taxes kill growth. Regrettably, those lessons appear to be lost on regulators on both sides of the Atlantic.
 
John Browne is a Senior Economic Consultant to Euro Pacific Capital.


Source: John Brownes Market Commentary

UK’s Prime Minister Commits to Successful Brexit

Our weekly commentaries provide Euro Pacific Capital’s latest thinking on developments in the global marketplace. Opinions expressed are those of the writer, and may or may not reflect those held by Euro Pacific Capital, or its CEO, Peter Schiff.

By: 

John Browne

Thursday, August 4, 2016

On June 23rd, despite months of fear mongering by former Prime Minister David Cameron and his allies, doomsday global economic forecasts offered by the International Monetary Fund and the Obama Administration, and a steady drumbeat of anti-Brexit news stories by the BBC, The Economist and the Financial Times, the British people delivered an unexpected event to the global financial system by voting to take Britain out of the European Union. Despite the forecasts of doom and gloom, the people voted for freedom, democracy and common law.

Most of the elites continue to warn of dire consequences for Britain and many believe that the separation process will be long, messy, and perhaps even farcical. Many argue that Britain will seek some sort of reconciliation once it realizes the true costs of its hubris. A July visit to the UK convinced me otherwise.

While in England, I had the good fortune to attend the first parliamentary question session with newly minted Prime Minister Theresa May. Those fiery exchanges convinced me that she will take her time to negotiate a sensible and mutually beneficial Brexit treaty. Provided she can control the civil service apparatus (dominated by interests that leaned heavily toward the “remain” camp), May appears set to achieve Parliamentary approval and Royal Assent.

Tickets for in-person attendance to Prime Minister’s Questions (or PMQ’s as they are known) are typically hard to come by. This is particularly true when a new Prime Minister is being tested in the ring for the first time. Sitting on a special bench on the floor of the House in the immediate vicinity of Members afforded me the rare opportunity to sense the mood and ‘music’ of the House. It had been 37 years and one month since as a Member of Parliament I had listened to Margaret Thatcher tackle her initial PMQ’s as the UK’s first female Prime Minister. The comparison was not only interesting, but it influenced my outlook for the prospects of Brexit.

As Big Ben struck noon on July 20th, Mr. Speaker called “Questions to the Prime Minister.” Theresa May rose to Conservative cheers. Like Thatcher, she radiated composure and authority. With long experience as Home Secretary, she was very confident at the dispatch box even congratulating one Brexit questioner, Sir Edward Leigh, on his birthday. Most importantly, she established the central theme of her initial EU strategy by saying: “…Yes, the United Kingdom will leave the European Union, but the United Kingdom is not leaving Europe and our cooperation will continue.” (Sputnik International, UK-EU Security Cooperation, 7/20/16) Subsequently, other ministers echoed this pivotal position.

As PMQ’s continued, one could not help contrasting May with Thatcher. Like Thatcher, May appeared utterly convinced of her cause. She is tough and unafraid to shed blood. She cut swathes in Cameron’s cabinet, even sacking Chancellor Osborne. However, rather than exhibiting a Thatcher-like delight in verbal combat, May preferred persuasion as the vehicle to bring House and country together, saying: “… The Conservative party will be spending those [recess] months bringing this country back together.” (Reuters, Kylie MacLellan & William James, 7/20/16) To a considerable extent May is a mirror of Thatcher, but with some important updated improvements. Less verbally combative, she has the ability to inject humor, which Thatcher found somewhat difficult.

I went to London deeply skeptical that, as a ‘remain’ voter, May would negotiate a Brexit treaty that she would then allow to be defeated piecemeal by the civil service or by the House. I came away feeling somewhat less skeptical. Apparently, May intends to play a long game to allow Chancellor Angela Merkel, the EU’s effective leader, to encourage cooler heads to prevail in negotiating a workable, mutually acceptable treaty. Such a delay would allow time for other nations to push for changes within the EU (like those urged by Italy for other nations to rescue its failing banks). Such suggestions of intraEU changes might strengthen the UK’s negotiating position.

Following PMQ’s, I spoke to Boris Johnson and some former Brexit colleagues. They agreed with this analysis and although I did not discuss it with Johnson, all the others thought May’s performance was outstanding and that the UK would flourish under her leadership. Doubtless, the Brexit vote came as a shock to the British Establishment and resulted in some immediate uncertainty and alarm. In the medium term it can be expected to delay some investment and business decisions.

For example, the Common Agricultural Policy (CAP) lavished considerable sums on certain large farms in return for their commitments to reduce crop production. Of course, the CAP was designed in part to subsidize French farming and to reduce competition from larger more efficient farmers.

With Brexit, British farmers will be free again to farm all their land and so reduce not only the UK’s contributions to the CAP, but also help decrease Britain’s balance of payments! Furthermore, unrestricted by the absence of EU trade agreements with the U.S., Japan and China, the UK will be free to negotiate treaties with three of the world’s largest economies tailored to its own productive strengths, as opposed to those benefitting Germany and France. Already, Britain’s new trade negotiations with China are causing ruffled feathers in the U.S.

In an article appearing in The Washington Post on June 24 on Brexit, economist Larry Summers said: “…the prospects for Europe may in some ways be worse than for the UK.” He is not alone in this opinion. At a weekend house party in the English countryside attended by a Member of Parliament, a senior investment banker, a former IBM executive, a former member of MI5 and a graduate of INSEAD, the leading European business school, I found a consensus that implementing Brexit was in the best interests of the UK.

Later, I had an interesting exchange with a highly successful businessman who told me that in retrospect he should have voted for Brexit instead of the “remain” vote that he had cast.

If Theresa May continues to enjoy good chemistry with the German Chancellor while inspiring parliamentary and civil service support, it may be that, following a period of uncertainty, Brexit will succeed and prove beneficial to the UK. If this happens, it is possible that Sterling, currently at $1.31, will be seen as undervalued. The same could hold true for British stocks, many of which sold off sharply following the Brexit vote. 

Conversely, if the EU fails to respond positively to the challenges presented by Brexit, the euro could be seen as overvalued, if not flawed fatally. But a successful British disengagement from the EU may encourage other European nations to also seek exit, which could further weaken the euro. In other words, I believe Brexit does not offer a good outcome for the euro in just about any scenario.

If there is a major move out of the euro, it may result in a stronger pound sterling and possibly a stronger dollar. This would likely push the prospect of a Fed rate hike even further into the future as the Fed has already voiced concern that the dollar is valued too highly. The economic catastrophe promised by those who opposed Brexit may have been nothing but a smoke screen.

John Browne is a Senior Economic Consultant to Euro Pacific Capital.


Source: John Brownes Market Commentary