TradecoHoldco

Killing it like a hooker in Hong Kong

Greece: You can never escape taxes…

Watching Greece, which is no doubt a prologue to this decade’s saga of sovereign defaults, has made me thing of a couple of things.

Firstly, the Greeks don’t like paying their taxes. In a country of 10 million, less than 6 people reported income of over EUR 1 million last year. Only something like 30% of its citizens pay their taxes, and a vast grey economy exists in the country.

Secondly, the so called obvious solution that many rational economists are crying out for, is for devaluation of some sort. This comment by Simon Johnson in the WSJ is fairly typical:

If Greece (and the other troubled countries) still had their own currencies, it would all be a lot easier. Just as in the U.K. since 2008, their exchange rates would depreciate sharply. This would lower the cost of labor, making them competitive again (remember Asia after 1997-’98) while also inflating asset prices and helping to refloat borrowers who are underwater on their mortgages and other debts. It would undoubtedly hurt the Germans and the French, who would suffer from less competitiveness—but when you are in deep trouble, who cares?

Since these struggling countries share the euro, run by the European Central Bank in Frankfurt, their currencies cannot fall in this fashion. So they are left with the need to massively curtail demand, lower wages and reduce the public sector workforce. The last time we saw this kind of precipitate fiscal austerity—when nations were tied to the gold standard—it contributed directly to the onset of the Great Depression in the 1930s.

Now what he doesn’t mention is that the process of refloating borrowers through devaluation is also a process of robbing savers whose money is in the banks. Anyone who had the good sense to save gets to watch the value of their of their savings decline.

Now the question is, where does that value go? It goes to everyone who has payments due in the local currency, but has access to external currency revenues or borrowings.

So in effect its going to the exporters, and to the government who collects taxes from these exporters, ie increasing competitiveness.

You can actually think of devaluation as a massively regressive tax, which forces middle class savers to ante up to save their government and large companies.

In effect, nations which are politically unable to balance their budgets through taxes and reduced spending can then use exchange rate devaluation to unilaterally tax their citizens.

What genius!

This is precisely the reason libertarians like Ron Paul want to bring the gold standard back, because they are fighting the good fight for the middle class. Force politicians to make tough decisions earlier, force companies to go bankrupt and change hands when they’ve made fatal mistakes, rather than bailing out the elite business owners by in effect taking dollars from the pockets of middle class to give them to the ultra rich. Devaluation is the ultimate regressive tax.

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February 14, 2010 Posted by | Uncategorized | , , , , | 3 Comments

Investment Banking and Oligarchies

One of my favorite alltime articles is Simon Johnson’s piece The Quiet Coup in The Atlantic. His thesis is basically that investment bankers have become the oligarchs of Western society, extracting rents by manipulating politics.

One of the funny things that has occurred to me over the last year is that this is precisely the reason there is boom in investment banking across Asia now, where oligarchies are being legitimized by investment banking.

The Asian’s who have long been branded with the red letter of corruption and cronyism,  are now moving into the more sophisticated legitimate financial nepotism which has been the hallmark of Western capitalism for the last two decades.

The signs are there if you care to interpret them. In Hong Kong, Singapore and most of the other stock exchanges in Asia, insider trading is widespread and rarely if ever prosecuted.  Stock pools to manipulate prices are present on a level similar to the 1920s in the US. The regulatory bodies of these countries exist to hoodwink the populace and maintain the facade of fairplay,  allowing middle class money to be channelled en masse into the market.

Related party deals to channel profits out of public companies are present in many of the family owned businesses which are now public. Amankudari, the Japanese practice of bureaucrats joining companies that they regulate post retirement is present to a large degree in China and most of the North Asian countries. This is becoming blended with the Government Sachs model which is being adapted across Asia.

The Asian elites have become more experienced at hiding nepotism through the mask of meritocracy. Most tycoons and even upper middle class professionals in Asia pack their kids off to Australia, the US, and the UK for education. The much higher high school educational standards in the elite Asian high schools ensures that these kids outperform their peers in Western institutions. A mediocre student from the Island School in Hong Kong or Raffles Junior College will probably be in the top of his class at USC or Cornell as long as he avoids engineering.

Tycoons then cycle their kids through a couple of years of investment banking and a couple of years at the family business and then pack them off to  HBS  or Stanford GSB. The desks of Credit Suisse and Citi in Asia used to be filled with sons-and-daughters. Don’t even get me started on Goldman.

You want to look at the prototype:  here’s the Bakrie heir’s facebook and linked in profile

Grad School:
College:
High Schools:
  • Finance Analyst

    Solmon Brothers Inc, New York

    (Investment Banking industry)

    July 1996 — June 1997 (1 year )

    Investment Banking

If I have one definition of investment banking, it’s legal rape. It’s about figuring out loopholes in laws and contracts and policies to extract low risk persistent profits. Investment bankers and hedge funds specialize in the fine print and plausible deniability. And this is the great gift that Western civilization has given the East. The old stigma of corruption and envelopes under the table, has been replaced by “consulting” arrangements and offshore transfers. Nominees and power of attorney are used to hide the ownership of assets, and every tycoon understands the use of SPVs (Special Purpose Vehicles) in BVI (British Virgin Islands), HK, Singapore etc.

What surprises me now is that Western MSM reporters are still enormously biased against these nepotistic arrangements in Asia, all the while ignoring what happens in Western markets on a daily basis. The FT has no problem identifying shady goings on in Indonesia (say in the Dipasena/Red Dragon) transaction, while shoving shadiness in say Sbir Energy to the Alphaville blog. I mean are they even able to come to terms on how corrupt the AIM market is? Once upon a time, every single shady two bit company with a license for something that I would come across in Asia would say they plan to list on AIM.

February 6, 2010 Posted by | Uncategorized | , , , , , , , , , , , , , , , , | 1 Comment