Wednesday, September 02, 2009

How the US is burning the furniture without even realizing it

The US budget deficit has reached astronomical proportions. Admittedly, the same holds true in European countries. However, European economies attract less of the world's savings than the US does.

According to various sources, in 1945 only 10% of the US government's spending was deemed incompressible, in 2009 approx. 80% of government spending is qualified as such. Given that it is politically unacceptable to raise taxes, and given that by definition incompressible spending cannot be reduced, the US government needs to find alternative ways of reducing its deficit in order to keep the ballooning budget deficit under control. If not, the whole financial system is menacing to crumble. One politically cheap way to raise money is to go after tax evasion.

In the latest revision of the Greenbook, the Obama administration proposes new measures to track down and eliminate tax evasion. To keep it short, various financial institutions referred to as "Qualified Intermediaries", even if they are based outside the US, if they serve US persons or deal in US titles (shares and derivatives), are now required to abide by strict and cumbersome rules. For a bank and its clients based outside the US, it is increasingly impractical to deal in US titles or the US banking system in general.

In addition to the Greenbook, the Patriot Act makes it unpleasant to have a banking account in the US. For example, when a person living, say in Denmark, wants to transfer funds from her US account to an account in her name at her home town in the Denmark, she has to justify the transfer with a signed letter (email won't do). From the US view point this is justified by the need to combat terrorism. However, from the view point of that Danish person living in the Denmark, the administrative overhead is cumbersome at best, and plain ridiculous at worst.

For a country which in the past managed to attract 85% of world-wide savings, the Patriot Act combined with latest steps described in the Greenbook, carefully engineered to stop tax evasion under the "no escape" principle, instead of raising more money for the government, are likely to precipitate America's continued impoverishment.

The irony of it all is that various governmental actors are all acting rationally in the best interest of the US but the end result might well be a new world order with the US playing a lesser role.


Claude Vedovini said...

And here comes China :)

Ceki said...

China is not as "international" as the US. For one, there is the language barrier. I don't see China becoming a financial centre in our lifetime. Singapore (dominated by ethnic Chinese) is a good counter example though.