It is high time to face this fact squarely and deal with it rationally.
On October 30, 2003, the New York Times reported: "American manufacturers have angrily complained that the Chinese yuan (renminbi) is artificially undervalued by about 40 percent."
If they are right and yuan is in fact undervalued 40 percent against dollar, it follows that dollar must be correspondingly overvalued 66.7 percent against yuan.
Dollar price of every Chinese product is 40 percent lower than it would have been if the exchange rate would be at the equilibrium level, and the yuan price of every US product is 66.7 percent higher than it would have been at the equilibrium level.
This means that US products are priced out of the Chinese market -- to compete in China, US exporters would have to reduce their prices by 40 percent -- while Chinese products have guaranteed market in the United States, because they offer up to two-third extra markup to their US importers and distributors. That's like paying 66.7 percent bribe to the store owners in America just for placing the Chinese rather than the American products on the shelves of their stores.
Wal-Marts of America are not different than "outsourcing" blue-chip corporations, they do not pass on to their customers the extraordinary discount they receive from dollar overvaluation (against yuan and against other currencies as well). They pass on only so many percentage points that may be necessary to beat domestic competition.
It's a myth that imported goods are cheap at the retail level; they are cheap only to their importers, who then... turn around and mark them up to just below the level of US made products and... pocket that windfall profit.
Yes, the profits from overvalued dollar are pocketed not by "the Chinese", as the skillful media innuendo tends to suggest, but by the new-world-order elite, the very same elite which owns the import rackets along with the crooked media, and which is pushing upon us its "free trade" system.
This is why US dollar is kept overvalued!
How many of you, my dear friends, were honestly angry at the Chinese for resisting the entreaties of US Treasury Secretary Snow to revalue their currency upward?
With due respect, your anger was the intended product of a skillful "snow job".
Just because yuan is at the present time 40 percent undervalued against dollar, it does not follow that revaluation of yuan 66.7 percent upward would be the correct remedy.
Why?
40 percent undervaluation of yuan against dollar may have been produced by one of the following causes:
1. Deliberate devaluation of yuan 40 percent downward;
2. Deliberate revaluation of dollar 66.7 percent upward;
3. Combination of 1 and 2.
For a thorough explanation, please see Euro and Gold Price Manipulation, Part I, www.gold-eagle.com/editorials_00/tlaga121100.html When IMF exchange rates were realigned as a result of a massive devaluation of the sterling bloc currencies in September 1949 , all IMF currencies across the board were given a head start of 29.3 percent undervaluation against US dollar by dollar's 41.4 percent overvaluation against gold. Some currencies helped themselves to additional percentage to accelerate their "economic miracles" by undervaluing their currencies beyond the allotted 29.3 percent (undervaluation of Japanese yen was exactly doubled by additional 29.4 percent to an astounding total of 58.7 percent, and undervaluation of Dutch guilder was increased by 14.9 percent to a total of 44.2 percent), while other currencies courteously left some of the offered undervaluation on the table by overvaluing their own gold parity in return (undervaluation of French franc was reduced by 5.5 percent to 23.8 percent and undervaluation of Belgian franc was reduced by 5.4 percent to 23.9 percent).
It was very easy to make those calculations because, however skewed, however manipulated the IMF currencies may have been, they were still defined in weight of gold. To account for the sources of yuan undervaluation with similar precision under conditions of a fiat standard and its dirty float is not so simple. Just for the sake of argument, let us therefore assume that both sides contributed to the existing yuan undervaluation equally.
If the problem was originally caused solely by devaluation of yuan 40 percent downward from 20 US cents to 12 US cents, it would be rational now to require China to rectify it by revaluing yuan upward 66.7 percent from 12 US cents back to 20 US cents.
And if the problem was originally caused solely by revaluation of dollar upward 66.7 percent from 5 yuans to 8.3 yuans, it would be rational now to require the United States to rectify it by devaluing dollar 40 percent downward from 8.3 yuans back to 5 yuans.
But if both sides contributed to the existing situation equally, it would be rational now to require China to revalue yuan upward 33.3 percent only, and to require the United States to devalue US dollar only 20 percent downward, so that yuan and dollar would thereby meet at their respective purchasing power parities of 20 US cents and 5 yuans.
If China alone would revalue 66.7 percent upward, her currency would be at the correct level of exchange vis-à-vis US dollar but 33.3 percent overvalued against other currencies (assuming they would maintain their purchasing power parities).
And if America alone would devalue 40 percent downward, her currency would be at the correct level of exchange vis-à-vis yuan but 20 percent undervalued against other currencies (assuming they would maintain their purchasing power parities).
Why US Treasury Secretary and ladies and gentlemen of the press have never presented the problems of trade deficit with China and other countries with similar clarity?
Because such a presentation would open a real Pandora's box of questions they are not prepared to answer for as long as they wish to keep their present jobs. Specifically they are unprepared to answer a very natural question why has US dollar been kept overvalued continuously for half a century.
Nearly everyone can understand why the people governing China are interested in keeping yuan undervalued against dollar, but why the people governing the United States are interested in keeping dollar overvalued is far more important a question...
... because keping your own currency undervalued is consonant with national interest, while keeping your own currency overvalued is contrary to the national interest.
It is natural that people governing China are acting in the best interest of the Chinese nation, and it is unnatural that the people governing the United States are acting against the best interest of the American nation.
Nothing illustrates this point better than a Chinese proverb:
"There are people who with their own teeth bite their own tongue."
On October 26, 2003, Warren E. Buffett, the world's second richest man, whose Berkshire Hathaway Inc owns substantial packet of shares in the entire roster of blue-chip corporations, treated us to his thirty-two-hundred word homily in Fortune magazine under oversized title...
America's Growing Trade Deficit Is Selling the Nation Out From Under Us.
Here's a Way to Fix the Problem -- And We Need to Do It Now.
This is what Mr Buffett actually proposes:
This is it. This is the entire proposal. Everything else is merely an explanation that itself needs explanation.
At the end of his presentation, Mr Buffett writes:
"Perhaps there are other solutions that make more sense than mine. However, wishful thinking -- and its usual companion, thumb sucking -- is not among them. From what I now see, action to halt the rapid outflow of our national wealth is called for, and ICs seem the least painful and most certain way to get the job done."
Mr Buffett is of course right that there are other solutions that make more sense than his, namely return to honest money, and he is of course wrong that his proposal is the most certain way to get the job done.
To illustrate and to justify his proposal, Mr Buffett is inviting us to...
---
"...take a wildly fanciful trip with me to two isolated, side-by-side islands of equal size, Squanderville and Thriftville. Land is the only capital asset on these islands, and their communities are primitive, needing only food and producing only food. Working eight hours a day, in fact, each inhabitant can produce enough food to sustain himself or herself. And for a long time that's how things go along. On each island everybody works the prescribed eight hours a day, which means that each society is self-sufficient.
"Eventually, though, the industrious citizens of Thriftville decide to do some serious saving and investing, and they start to work 16 hours a day. In this mode they continue to live off the food they produce in eight hours of work but begin exporting an equal amount to their one and only trading outlet, Squanderville.
"The citizens of Squanderville are ecstatic about this turn of events, since they can now live their lives free from toil but eat as well as ever. Oh, yes, there's a quid pro quo -- but to the Squanders, it seems harmless: All that the Thrifts want in exchange for their food is Squanderbonds (which are denominated, naturally, in Squanderbucks).
"Over time Thriftville accumulates an enormous amount of these bonds, which at their core represent claim checks on the future output of Squanderville. A few pundits in Squanderville smell trouble coming. They foresee that for the Squanders both to eat and to pay off -- or simply service -- the debt they're piling up will eventually require them to work more than eight hours a day. But the residents of Squanderville are in no mood to listen to such doomsaying.
"Meanwhile, the citizens of Thriftville begin to get nervous. Just how good, they ask, are the IOUs of a shiftless island? So the Thrifts change strategy: Though they continue to hold some bonds, they sell most of them to Squanderville residents for Squanderbucks and use the proceeds to buy Squanderville land. And eventually the Thrifts own all of Squanderville.
"At that point, the Squanders are forced to deal with an ugly equation: They must now not only return to working eight hours a day in order to eat -- they have nothing left to trade -- but must also work additional hours to service their debt and pay Thriftville rent on the land so imprudently sold. In effect, Squanderville has been colonized by purchase rather than conquest."
---
Our first order of business is to bring Mr Buffett's "fanciful trip" back to reality.
We can do it by translating his parable of Squanderville and Thriftville into the context of the Bretton Woods agreements of July 22, 1944, for that was where and when the seeds of America's trade deficit were sown.
Subsistence economies, such as those depicted by Mr Buffett in his parable, by definition have no accumulated reserves of wealth. They use barter for their modest trade needs or commodity money, a money of intrinsic value -- be it copper, silver, gold, wheat or cattle -- whose transfer, just like barter trade, automatically transfers the value it embodies.
For this reason, working 16 hours a day in order to sell their surplus produce to Squanders would not take Thrifts anywhere near their goal, simply because Squanders, living in subsistence economy, had no reserves in the form of commodity money to pay for the surplus produced by Thrifts.
In order to acquire additional commodity money to pay for imports from Thriftville aside from producing their own subsistence, Squanders would also need to work 16 hours a day and to sell their surplus to Thrifts -- "their one and only trading outlet" -- in exchange for the surplus the Thrifts have in the meantime produced themselves, because the Thrifts, also living in subsistence economy, had no reserves either. Does it make any sense? Let's face it, this is more than a "fanciful trip", and you can put your own label on it.
The conversion of economy of Squanderville into a system of buying consumables from Thriftville in exchange for Squanderville's IOUs -- like every other confidence game on the planet Earth -- would have to be introduced by stealth, not all-at-once but slowly, patiently, step-by-step.
The first step would be the introduction of a paper monetary unit, a Squanderbuck, circulating in lieu of the commodity monetary unit -- say 1/35th of a troy ounce of gold. Because 35 Squanderbucks could be exchanged on demand for one troy ounce of fine gold, Squanderbucks would therefore be declared "as good as gold".
Not to be outpaced by monetary "progress" in Squanderville, Thriftville would of course introduce its own paper money, Thriftbucks, also convertible to gold on demand at 35 Thriftbucks per one troy ounce.
Then, in a remote ski resort Bretton Woods, conveniently closed for the summer, a delegation of Squanders would make to delegation of Thrifts an offer they could not refuse:
"Because we intend to import your surplus production, and thus make you very rich, we think you should accept 35 Squanderbucks in lieu of every troy ounce of gold in settlement of our trade accounts, thus conferring upon our Squanderbuck the official reserve currency status "as good as gold". Your central bank should maintain the official rate of exchange at 1 Squanderbuck for 1 Thriftbuck by pegging Thriftbuck to Squanderbuck at that rate plus/minus 1 percent, and our Treasury would of course always stand ready to convert any and all destabilizing excess reserves of Squanderbucks into gold at 35 Squanderbucks per ounce.
Thrifts would accept the Squanders offer. They would think Squanders would buy more if allowed to pay in their own paper money, and no harm would result because excess reserves could always be exchanged at 35 Squanderbucks per one troy ounce of fine gold.
Squanderbucks would then be religiously converted to gold upon every request, no questions asked, no amount too small or too large. And once Squanderbucks convertibility would become in the eyes of the Thrifts as certain as sunrise and sunset, someone would suggest to the Thriftville central bank that converting excess Squanderbucks into Squanderville Treasury bills, notes and bonds would make more sense, because gold, like any other cash, earned no interest, and Treasury bills, notes and bonds did, while being instantaneously convertible to cash, paper or gold, whenever necessary. Thriftville central bank would duly test those representations, and when they would appear to work without fault, the Thrifts would stop exchanging their excess Squanderbucks into gold, and would begin to look with pride on the interest theywould be earning on Squanderville Treasury bills, notes and bonds.
Then, some twenty years later, the Thrifts would wake up with their hands in their night-pots:
The sum total of Squanderville bills, notes and bonds was seven times larger than the sum total of gold in Squanderville Treasury!
Once proven insolvent, Squanderville Treasury would of course close its "gold window" for good, but the no-longer-convertible fiat Squanderbucks would nevertheless continue as the official currency for international settlements simply because there was nothing else currently in place to keep the ever-expanding foreign trade in continuous motion.
Already by the time the Bretton Woods agreements were implemented, the Squanderville central bank would inject into circulation one-third more Squanderbucks than the supply of gold coins they were supposed to replace.
One-third higher money supply would of course lead to one-third higher price level in Squanderville. All the products of Squanderville would become one-third more expensive in terms of Squanderbucks than they were before. (In terms of gold the prices would remain the same, but all the business would already be transacted in Squanderbucks.)
Because by Bretton Woods agreement Thriftbucks would be pegged at 1:1 to Squanderbucks, Thriftville products would not only become correspondingly one-fourth cheaper in Squanderville, but they would stay one-fourth cheaper, while Squanderville products would stay one-third more expensive in Thriftville, provided the Thriftville central bank would not be inflating Thriftbucks more than Squanderbucks were being inflated themselves.
The market would not compensate automatically for this disparity, because the natural and elegant self adjustment mechanism had just been jammed by the Bretton Woods agreement! Squanders products were rendered more expensive not because their wages were increased but because their currency was artificially increased in value!
Being unable to sell their products at sufficient discount to beat the structural advantage of the Thrifts, the Squanders, one by one, would begin to go out of business. Rather than earning more by producing their own, the Squanders would now be earning less by distributing the goods imported from Thriftville.
Squanders with sufficient means and right connections would begin to move their business operations to Thriftville on massive scale in order to profit from dismantling the economy of their own country and in the process further impoverishing their fellow Squanders. In broad terms this could be characterized as massive short sale of Squanderville's production capacity. Some, with access to endless supply of Squanderville counterfeit money, would be buying bankrupt farms, and consolidating them into giant agro-business enterprises producing counterfeited "foods" with imported peon-like labor. And commercially challenged among the Quislings would join the growing ranks of secret police in order to spy on their disaffected friends and neighbors.
In the beginning the massive export of jobs from Squanderville to Thriftville would be interpreted as good business for Squanderville because the repatriated profits from the growing foreign investments would be greatly improving the Squanderville's overall balance of payments, so the Quislings would continue to argue that Squanderville was growing even as the fundaments of its economy were being dismantled and shipped abroad.
But in due time, things would begin to deteriorate at the accelerating pace because the more businesses and the more jobs would be relocated abroad, the smaller the local production and the bigger the need for additional imports would become (just to meet the necessities of life). Ultimately the "growth" resulting from "outsourcing" would be overwhelmed by greater and greater imports of daily necessities no longer produced in Squanderville. In the end, the Squanderville imports would snowball to such a proportion of its overall economy, that its Quisling elite would begin to worry about its own future.
Now Warren E. Buffett , one of the key figures in the Quisling cast of characters, who devoted his life to amassing the immense hoard of the shares of stock of the Quisling enterprises, comes forward and tells his fellow citizens that they brought this calamity upon themselves by deliberate choice to... "live their lives free from toil but eat as well as ever."
Hey, what kind of "life free from toil" it is when a family of four now needs three jobs to make ends meet while one decent paying job used to be sufficient?
Let us be unpleasantly direct: Who is living free from toil?
Most certainly not Jacks and Jennies whose decent paying jobs were shipped abroad and who now work longer hours on three ill paying jobs to make ends meet. It's the Quislings, who shipped Jacks and Jennies jobs abroad, who are living free from toil.
"America's growing trade deficit is selling the nation out from under us" -- cries the very same Mr Buffett who happened to be in control of the entire roster of the "outsourcing" blue-chip corporations which are actually doing the selling of our country from under us. "Here's a way to fix the problem -- and we need to do it now. "
Now? Why now? Where has Mr Buffett been ever since 1965 (when he began to collect the stocks of the "outsourcing" Quisling enterprises)?
Let us nail the closed door: Mr Buffett's innuendo, that at certain point in the past the industrious foreigners "decided to do some serious saving and investing and they started to work 16 hours a day" while lazy Americans became "ecstatic about this turn of events" since they could "live their lives free from toil but eat as well as ever", is on its face patently false.
By setting up US dollar as overvalued key reserve currency, Bretton Woods system in effect confronted all thinking businessmen of America with a clear ultimatum:
Go abroad, or go bankrupt!
Labor intensive industries, shoes and apparel, were exported first. Other industries were not exempted, only delayed. We are witnessing now the end of this half-a-century-long process, as top of the line, high-technology and even professional jobs are finally reaching their turn to be exported. Today, even when you call your bank, chances are you are talking to a banker in Bombay, India, who has your bank record on the screen and talks to you for dimes instead of dollars it would cost to employ a banker somewhere in America.
Ordinarily, foreign countries try to acquire an edge in foreign trade by way of competitive devaluation of their currencies. That's an equivalent of debasing their gold coins by a certain percentage. It makes their products cheaper abroad, and foreign products more expensive at home.
Bretton Woods system was set up on the reverse principle. Rather than devaluing the currencies of other countries downward, US dollar was revalued upward. It was done by pegging fiat dollar to the obsolete price of gold, pretending in effect that dollar was worth more than its actual purchasing power. As launched in 1947, Bretton Woods system overvalued US dollar one-third, and correspondingly undervalued foreign currencies one-fourth, which meant that every American product was automatically priced one-third more expensive abroad, and every foreign product one-fourth less expensive in America.
American industries were exported abroad not because Americans were lazy and eager to "live their lives free from toil", but because not moving abroad meant certain bankruptcy. Americans were caught in a finesse, designed by the bankers of London, and executed by the Quisling elite of the United States, in which Mr Buffett happened to be one of the most prominent players.
This is arithmetical fact, like 2 X 2 = 4. It's time to acknowledge it and move on to analyzing its consequences rather than to keep rediscovering it all over again till the end of time. Again, a thorough explanation of the Bretton Woods system can be found in www.gold-eagle.com/editorials_00/tlaga121100.html
To get to the bottom of the consequences of Mr Buffett's proposal, we must first understand the basic factors which determine the terms of trade:
Most emphatically, crusade for eliminating tariffs does not make the resulting "free trade" a fair trade, it merely deprives the nations attacked by the "free trade" rackets (via currency disequilibrium) of a useful weapon of defense. Currency disequilibrium operates as a tariff on exports and subsidy to imports fromabroad. Eliminating corrective tariffs perpetuates this fraud!
Currency disequilibrium affects the terms of trade more broadly than any other factor, a tariff comes next, and then a license. Mr Buffett's Import Certificate is a hybrid instrument. Technically, it is a license, but it is far broader in its scope of application than any tariff, and just as broad as currency disequilibrium itself.
Generally, a license is used to modify the terms of trade narrowly, i.e., without disturbing the existing tariffs and foreign exchange rates, but Mr Buffett chose to use it to reverse a massive, runaway foreign trade deficit -- the largest in history both in absolute numbers and as a percentage of gross national product - which happened to be primarily caused by structural misalignment of currencies. Rather than proposing realignment of world currencies at purchasing power parity level, Mr Buffett is proposing yet another open sewer of derivatives.
(US exports of $80 billion per month multiplied by 6 months lifespan of the proposed Import Certificates equal a float of up to $480 billion in notional value.)
Why the simplest rational solution of currency realignment is being ignored, and the openly irrational solution of Import Certificates is being proposed?
In Mr Buffett's own estimate, his Import Certificates will sell at about 10 cents on a dollar of the face value. This means US exporters will receive 10 percent subsidy, which is very nice, especially when we take into consideration that Berkshire Hathaway Inc owns the stock of all principal exporting corporations.
If you were devoted to accumulating the stock of all leading corporations only to find out at the end of your journey that the value of your hoard can only go down because the corporate earnings were structurally insufficient, would you not be interested in giving your corporations a ten percent subsidy?
This is what Mr Buffett says on the issue of who is going to pay for this subsidy:
"To see what would happen to imports, let's look at a car now entering the U.S. at a cost to the importer of $20,000. Under the new plan and the assumption that ICs sell for 10%, the importer's cost would rise to $22,000. If demand for the car was exceptionally strong, the importer might manage to pass all of this on to the American consumer. In the usual case, however, competitive forces would take hold, requiring the foreign manufacturer to absorb some, if not all, of the $2,000 IC cost. "
Hey, let us go beyond these platitudes to understand what is really happening in the real life:
In the real life, it will be the importers, here in the United States, who will buy Mr Buffett's Import Certificates. Foreign exporters needs importers in the United States who will pay for the goods and who will make all the arrangements. Importers have plenty of money to pay for these Certificates, they just pocketed the windfall profit from the previous shipload of foreign goods, remember?
When there is a new requirement -- to pay 10 percent import duty in the form of Mr Buffett's Import Certificates -- the importers will write their checks for the full amount and then automatically add up 10 percent to their prices.
If there is a viable domestic competition which will displace so overpriced an import, importers will not accept reduction of his currency windfall to meet this competition, no Sir! Instead, they will ask the foreign exporter to absorb this cost. And if the foreign exporters are not in the position to cut their costs still further, the problem is ironed out by the big boys in London by orchestrating further devaluation of the exporters currency, further revaluation of importers currency (dollar), or both.
And if a viable domestic competition is non-existent, which is the case in automobile industry, the higher price must be absorbed by Jacks and Jennies by taking yet another part time job. (Why is domestic competition absent from automobile industry? Because most of the parts are already manufactured abroad by "outsourcing".)
Thus the subsidy to the US exports will be paid in part by US consumers, which will increase their demand for cheaper foreign products to compensate for their additional expenses...
... and in part by deepening currency disequilibrium, which will accelerate deindustrialization of America still further by making it even more profitable.
And this is only the beginning of the problems we can see in Mr Buffett's unfortunate proposal.
In overall numbers, rounded off very broadly for the clarity of our argument, American annual exports are valued roughly at One Trillion Dollars, and American annual imports are valued at One-and-a- Half Trillion Dollars.
This means Half-a-Trillion Dollars worth of the present world exports will not be able to purchase the necessary Import Certificates to enter America.
Because hundreds of millions of people all over the world, who make a living -- however wretchedly inadequate, however miserable -- producing these exports, cannot commit mass suicide just because Mr Buffett's Import Certificates are not available for their products, they will be forced to accept drastically lower prices to squeeze their exports into available number of Import Certificates.
And we already know what it means...
... further devaluation of their currencies, and further acceleration of deindustrialization of America.
Mr Buffett of course knows that his "reform" spells the global catastrophe of immeasurable magnitude. So he proposes "some transition years":
"Were we to install an IC plan, we might opt for some transition years in which we deliberately ran a relatively small deficit, a step that would enable the world to adjust as we gradually got where we need to be. Carrying this plan out, our government could either auction 'bonus' ICs every month or simply give them, say, to less-developed countries needing to increase their exports. The latter course would deliver a form of foreign aid likely to be particularly effective and appreciated. "
The vision of government's monthly auction of Import Certificates is highly reminiscent of monthly auction of Treasury bills. Such a course of action could herald the opening of yet another cesspool of official corruption, drawing heavily for inspiration upon Mr Buffett's own experience in Salomon Inc scandal of 1991.
On February 21, 1991, Paul Mozer, Managing Director of government securities desk at Salomon Inc, acquired 57 percent of $9 billion issue of US Treasury 5-year note. Mozer circumvented US Treasury's 35 percent ceiling on any single bid by submitting fraudulent bids on S.G. Warburg and Quantum (George Soros' hedge fund) accounts without their knowledge. Once that racketeering became public, Chairman John Gutfreund, Deputy Chairman John Meriwether (of subsequent LTCM fame) and President Thomas W. Strauss resigned in disgrace, and Warren Buffett, Salomon's largest stockholder, stepped into Gutfreund's shoes to play the role of "honest Abe" for damage control purposes.
Five years earlier, in his classic distress deal, Mr Buffett acquired $700 million worth of Salomon's preferred stock, earning 9 percent dividend and convertible to common stock at $38 per share at any time during the next ten years. Gutfreund needed Buffett's $700 million to fend off takeover bid by Ronald Perelman of Revlon Inc and Michael Milken of Drexel Burnham Lambert Inc.
Now it was Mr Buffett's turn to fight for his investment. With ban on Salomon's bidding for government securities, ban on Salomon's participation in underwriting of World Bank loans, and with rescission of appointment of Salomon's subsidiary (Salomon Brothers) appointment as the Fed's "primary dealer", Mr Buffett's $700 million would be likely to dissipate just like the Enron stock a decade later.
Mr Buffett succeeded on the familiar argument that -- with $130 billion in short-term debt -- Salomon was too big to fail.
Whether Salomon was allowed to escape responsibility only with pro forma civil penalties of $290 million because the public officials honestly saw no legal recourse against corporate racketeers capable of hurting general public, or because the public officials were unduly influenced to act in this manner, was immaterial. Public officials virtue, like the proverbial chain, is only as strong as its weakest link.
What mattered was that in the end it was a Pyrrhic victory for Mr Buffett, because many of the holders of Salomon's commercial paper refused to do business with what they perceived to be a racketeering enterprise, and declined to roll their investments over upon redemption. Mr Buffett learned he could restore Salomon's operating licenses but not its reputation. Eventually, Salomon's losses were cut by merger into Smith-Barney -- who advertised themselves as gentlemen who "make money the old-fashioned way, they... earn it" -- and Smith-Barney-Salomon were in turn merged into Citicorp, with "Salomon" being then discreetly left out from the new subsidiary's name.
Why are we bringing up this old story?
Because Mr Buffett is reenacting it all over again. This time he is trying to rescue not just a seven hundred million dollars bundle of stock of one corporation, but his entire loot.
The primary exporters of America and primary importers of America are the very same multinational corporations whose stock Mr Buffett has been meticulously gathering throughout his life. Thus the bulk of Import Certificates will be issued to a handful of multinational corporations wearing exporters hats, who will then turn around and "sell" them to themselves, wearing importers hats.
The consequences can be grasped even by Austrian economists. Instead of conforming their trade to the rules of the free market, Mr Buffett's multinationals will officially convert the world trade to the rules of their private market.
Incidental problem that surfaces at this point is the existing practice of multinational corporations to use false prices of exports and imports for siphoning profits away from the tax axe, both via intra-company and affiliate transfers, and by broader reciprocal arrangements.
Tax is the fourth factor which determines the terms of trade (aside from currency, tariff and license).
The practice of abnormal pricing for tax avoidance and money laundering was documented already in 1992 by two finance professors at Florida International University, Simon J. Pak and John S. Zdanowicz. Nine years later, in view of the global expansion of this transfer pricing fraud, Pak and Zdanowicz received $2 million grant from US Congress to continue and expand their research; see: http://news.fiu.edu/releases/new2001/11-27intltrade.htm Now it appears somebody pulled the plug on that research when some "international" gentlemen became agitated about it; see: www.ofii.org/newsroom/press/110102pr.pdf
In the end, it is not so much the extra tax as the inquiry into the nature of their operations that these people fear. Buffett proposal, if implemented, would put an end to such inquiries once for all. The establishment's export-import operations would be self balancing and for this reason off limits to any public inquiry. The allocation of charity Import Certificates to "unaffiliated" exporters from the regions like sub-Saharan Africa, where people live on less than cattle in Europe, would be up to the government.
Now, purely technical questions:
The most logical place to maintain the list of current owners of Import Certificates would be the computer of Customs and Border Protection, the new "one face at the border", because it is up to CBP to allow or not to allow a foreign shipment into the United States, but...
The most logical place to issue the Import Certificates would be the Bureau of Census, because it collects SEDs (Shipper's Export Declarations), ergo it knows how many dollars worth of exports were shipped out and by whom. Actually, Import Certificate could function as a kind of electronic coupon attached to SED.
Because the bulk of both export and import operations is controlled by essentially the same entities, and export-import operations are often designed to defeat corporate taxes by fraudulent pro forma pricing, the bulk of Import Certificates would therefore be taken out of the market and allocated behind the closed doors of some exclusive club. We simply cannot see that "exceptionally liquid market" for Import Certificates Mr Buffett envisions. In effect it would be up to the members of the Quisling club to establish a mechanism by which CBP computer would be programmed to keep their traffic flowing.
The open market for Import Certificates would thus be highly reminiscent of the gold market, essentially a mockery market, shallow and volatile, primarily designed to keep import prices down and dollar value high. In fact, Mr Buffett openly states that his plan "would balance our books without there being a significant decline in the value of the dollar".
Where and how will US exporters sell their surplus Import Certificates? Will there be new specialized "Omaha IC Exchange" or the ICs will be sold just like other derivatives at stock exchanges, commodity exchanges, and over-the-counter?
These are rather moot questions in view of the fact that the only Import Certificates that may ever be available for public bidding will be created out of thin air by the government for the benefit of those who could not afford them anyway.
Conclusions
The present crisis is caused by the inability of the United States to serve as an importer of last resort to the whole world.
The establishment's solution is to consolidate Europe, US and Japan into one currency bloc www.gold-eagle.com/editorials_02/tlaga070402.html
Mr Buffett's proposal is apparently intended to serve as ad interim remedy to keep the fiat dollar system on respirator, and his own billions intact, until the new fiat super-currency, Euro-Dollar-Yen, eventually takes over.
Unfortunately, this remedy is likely to cause far greater problems than any it may hope to solve.
The only real solution is the resolute return to honest money and local economy.
www.gold-eagle.com/editorials_01/tlaga112801.html
www.gold-eagle.com/editorials_03/tlaga063003.html
Copyright 2003 J.N. Tlaga
December 1, 2003
jtlaga@bellsouth.net