Saturday, February 21, 2009

The global revolution

Definition: A Revolution is a fundamental change in power or organizational structures that takes place in a relatively short period of time.

Theorists see the development of revolutions as a two-step process:

1. Some change results in the present situation being different from the past.
2. The new situation creates an opportunity for a revolution to occur. In that situation, an event that in the past would not be sufficient to cause a revolution (ex. a war, a riot, a bad harvest), now is sufficient – however if authorities are aware of the danger, they can still prevent a revolution (through reform or repression).

Back to reality:

We have a financial crisis a lot bigger than anyone ever believed.
Following the financial crisis, we have an economic crisis, bigger and bigger every day.
These two together are largely enough to fulfill the criteria for a first step towards Revolution. Things are definitely not what they used to be one year ago. At this stage we are yet, still far from the worst.

Since few days ago, we have an event that could definitely cause major changes in the near future:

U.S. authorities forced UBS to disclose the banking records of 250 american clients suspected of fiscal evasion. After complying and paying some $780 million fine to the U.S. authorities, UBS is now summoned to hand in 52.000 records of american clients, suspected to total about $15 bilion of un-taxed assets.

So far so good, the tax laws should be applied to each and everyone, but...:

1. The US has long tolerated offshore fiscal paradises, for many objective or subjective reasons.
2. The UBS decision to comply came after a serious threat by the U.S. to cancel the Swiss Bank's license to conduct its hundreds billion operations on Wall Street.
3. Many other states that thrown huge amounts of money on financial markets in the desperate attempt to saving or relaunching their economies, are now seeking to re-balance their accounts by fighting tax fraud and tax havens by the same oportunity.

Let's now start analyzing the consequences of the above facts.

By accepting the US claims in spite of the Swiss constitution that guarantees the banking secret, UBS and the Bern government give a significant blow to the myth of Switzerland as a safe place for money of any kind.
The impact could be huge, as one third of worldwide offshore money (money hold in accounts outside their country of origin) is actually deposited in Switzerland and totals about 5 trillion dollars.
Typicaly, the holders of Swiss bank accounts are wealthy individuals or organizations likely to react and transfer their (significant) wealth to other destinations, more rapidly than the average person.

By taking such measures against a Swiss bank and especially blackmailing with the removal of Wall Street license (a scenario similar to Ukraine's blocking of the russian gas trafic), United States put the Wall Street stock exchange in a very bad light. It will be only legitimate for many institutional investors to think that their dependence on the NYSE is harmful in the long term and seek for diversification.
If transactions on the NYSE decrease, quoted companies could start looking for better financial markets, thereby further decreasing America's power on global finance level.
With an estimated $70 billion yearly loss due to tax evasion and several trillions invested by fiscal paradises in the american stock exchange, the game may not be worth the candle for the U.S..

At this moment, the major shareholder of UBS is the Government of Singapore (Singapore being a tax haven and banking haven itself).
With the American "attack" on UBS, there will certainly be increased presure for massive migration of funds towards alternative havens, like Singapore for instance.

The nowdays increased speed of circulation for financial information and transfers make it almost impossible to address the question of tax havens otherwise than at global level.
For as long as one single tax haven will remain operational in the world, fighting against the others will only be detrimental for the country who does that.

After all, the existance itself of tax havens and their enormous turnover, only prove that taxation systems and the management of state budgets are still far from being optimized in many countries, including the U.S..


Back to the Revolution:

If up to this moment the financial crisis was the result of bad financial management and lack of good regulation, the future economic revolution could be even more dramatic, with large amounts of capital fleeing from one region to the other and generating impossible to calculate effects.
The lack of trust and the greediness of governments to recover losses generated by the greediness of investors and banks which were not let die at the right moment, could throw our whole world in an economic war quite similar to a world war that we had over the last century.


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