W.I.L. Offshore News Digest :: June 2009, Part 1

RIOHACHA, COLOMBIA: THE BEAUTY AND THE BEACH

No place is perfect. But, if you are looking to live large on a limited budget, Riohacha, Colombia, may come close.

The previous “Clews’ Views” – a column regularly appearing in Caribbean Property Magazine which features Latin American “best buys” for “middle-income” people – extolled the virtues Corozal, Belize. This time around Mr. Clews cannot say enough about the Columbian coastal town/city (population 160,000) of Riohacha. The living sounds easy and cheap, but you need to like warm weather. The year-round climate features “90 degrees throughout the day and drop to the upper 70s at night.”

Mention Colombia to most people, and they immediately conjure up visions of Pablo Escobar, “Colombian neckties,” and roving gangs of masked bandits. And that is too bad – especially since Escobar has been dead since 1993 (when the Colombian army killed him), Colombian neckties have long since been relegated to the trash heap of noise rock, and the immensely popular Colombian President Alvaro Uribe has made the streets in Colombia safer than those in most American cities.

So, let us take a look at what is there now – and maybe, just maybe, you will decide that you should be, too.

Colombia is the northernmost country of South America, nestled between Venezuela to the east and Ecuador and Peru to the west. It is the only country on the continent with beachfront coastline on both the Caribbean Sea and the Pacific Ocean.

About twice the size of Texas (with just under twice as many people), Colombia is a land of dramatic contrasts – from its verdant river valleys to its towering, snow-capped mountains and its pristine white-sand beaches.

Generally speaking, the country is divided into four fairly distinct regions. Each offers its own enticements, depending upon the tastes of the tourists – or, with “Clews’ Views” readers potential investors and re-settlers.

Colombia’s Guarjira Peninsula (“Guarjira” apparently being the Spanish word for “What the hell?!”) is a 7,000 square mile desert-like scrubland jutting out into the Caribbean Sea at the northern-most tip of South America. It is sparsely settled, and always has been, largely due to its torrid climate, barren soil, and lack of potable water. So, does this desolate region have any allure?

Well, yes, actually, it does – if you are an avid fan of the History Channel’s Wild West Tech, or an avid reader of Louis L’amour. In short, Colombia’s Guarjira Peninsula could best be described as the kind of place where you and your Smith & Wesson can live for next to nothing ... with next to nothing.

Ironically, in just a moment, I am going to take you back to the very outskirts of the Guarjira Peninsula for a quick look at a quaint, hospitable town you may one day wish to call home. But, first, let us finish our Cook’s Tour of Colombia’s remaining three regions.

Colombia’s Caribbean Coastal Region consists largely of beautiful pristine beaches mosaically punctuated with a myriad of quaint colonial towns and cities. With 21% of Colombia’s population living in this region, it is the country’s second most populated area. And, understandably so.

The weather is splendid year round. The port cities of Barranquilla, Cartagena, and Santa Marta lend the area a cosmopolitan flair. And beyond these cities lie banana, pineapple, and sugar cane plantations, cattle ranches, and a plethora of small farms – all offering a cornucopia of dining delights. Simply put: life does not get much better than here.

The Pacific Coastal Region of Colombia was made for those whose idea of a good time is to “boldly go where no man has gone before” in hopes of carving out a thriving civilization. Imagine Coral Ridge, Florida, before Henry Lyons bought that low-lying marshland in the early 20th Century and developers later turned it into a high-priced planned community.

Right now, the Pacific Coastal Region is a largely uninhabited hodge-podge of tropical forests, thick swamps, and deserted beaches. Wait, let me correct that: It actually is inhabited – mostly by tapirs, giant anteaters, and rodent-eating bush dogs. So, why would anyone want to invest in such a place? For the same reason Henry Lyons bought up 20,000 acres of South Florida swampland: “Tomorrow, tomorrow, bet your bottom dollar that tomorrow they’ll be sun.”

And that brings us to the Andean Region of Colombia. 80% of Colombia’s population lives in the Andean’s Region’s lush valleys and basins. The longest high-mountain range in the world cuts through this region, the highest peak reaching to a staggering 18,865 feet. The area is rich in gold, silver, emeralds, coal, and oil.

Sugarcane and coffee – two of Colombia’s primary exports – are also plentiful. The Andean Region is home to Colombia’s two most populous and prosperous cities: Bogota (the capital) and Medellin. Though both cities were once riddled with drug-related crime, each now is relatively peaceful; the former being a major banking and insurance center, the latter renowned for its fashion and textile industry.

So there you have the bird’s eye view of Colombia – a country of which esteemed historian David Bushnell (author of The Making of Modern Colombia: A Nation in Spite of Itself) has written, “Colombia is the least studied and perhaps the least understood (by outsiders) of all the countries of Latin America.”

“Colombia is one of South America’s most stable economies ... (with) economic growth of over 5 percent in recent years.”

Twentieth (and now, Twenty-First) Century Colombia, as Bushnell observes, has – unlike Mexico, Cuba, or Nicaragua – remained free of revolution. Unlike Brazil, Chile, or Argentina, it has not fallen prey to significant military intervention.

And, at least since World War II, it has been relatively stable economically, without the volatility suffered by other countries of the region, such as Peru, Brazil, and Argentina. Indeed, today, according to the Heritage Foundation’s Index of Economic Freedom, “Colombia is one of South America’s most stable economies ... [with] economic growth of over 5 percent in recent years.”

Politically, Colombia has been a democratic republic for nearly two centuries. For most of the modern era, the Liberal and Conservative Parties have alternately dominated the political scene, though their differences to most observers seem minuscule.

Indeed, in one of his most famous novels, Colombian Nobel Prize-winning writer Gabriel Garcia Marquez has one of his characters exclaim, “The only difference today between the Liberals and Conservatives is that the Liberals go to mass at five o-clock and the Conservatives at eight.” In 2002 and again in 2006, the immensely popular Alvaro Uribe was elected president, and we have no idea what time he goes to mass.

The bottom line, then, is that geographically, climatically, economically, and politically, Colombia is one of Latin America’s most winsome locales. So, where, specifically, would this writer recommend you look to light should you decide to resettle there? Well, how about the picturesque coastal town of Riohacha?

Large enough to accommodate all of your modern wants and needs, yet close enough to the middle of nowhere for you to escape the madding crowd in only a matter of minutes.

Riohacha, Colombia, is located at the mouth of the Rancheria River on the Caribbean Sea. With a population of more than 160,000, it is large enough to accommodate all of your modern wants and needs. Yet, positioned on the southern edge of the Guarjira Region, it is close enough to the middle of nowhere for you to escape the madding crowd in only a matter of minutes.

It has its own airport, with regular flights to Bogota. And it is only a few hours’ drive (over well-paved roads) from the big, bustling city of Cartagena (population 900,000).

But, the fact is, once you have settled into the good life at a great price in beautiful Riohacha, you may forget all about running off to Bogota, Cartagena, or any other points north, south, east, or west. For, Riohacha is as self-contained, convenient, and comfortable as just about anywhere you would want to be.

As to the weather, if you were in Riohacha right now (June, 2009), it would probably be around 90 degrees throughout the day and drop to the upper 70s at night. Were you to visit in September, it would probably be around 90 degrees throughout the day and drop to the 70s at night.

And were you to wait until next January to take your trip to Riohacha, it would probably be around 90 degrees throughout the day and drop to the upper 70s at night. The wind would probably come in at about 7 to 10 MPH. And you would have visibility of about 6 miles, or so.

All of which is simply divine, since you will probably want to spend at least part of each day sifting the sand or wading in the water along Riohacha’s broad, expansive, palm-lined beachfront. Stretching as far as the eye can see, only a sea-shell’s throw from the boulevard, the Riohacha beach is as relaxing as a cloudless sky and as festive as a city park.

Here, you can lay back, close your eyes, and let the rolling waves of the turquoise Caribbean lull you to sleep amidst the gentling sounds of children at play. It is paradise found. And now, it can all be yours.

But, take my advice and do not spend all of your time at the beach – because the tree-lined Plaza Almirante Padilla town square is almost as enticing as the waterfront. Here, you can sip coffee (or wine) at a sidewalk café, feast on some of Colombia’s finest home-cooked cuisine at quaint family-owned diners, and shop for all of your needs at well-stocked boutiques. Or, if you wish, you can simply relax with your friends on a shaded park bench and while away the wistful hours.

First rate health care costs about 1/10 what it does in the U.S. Household help may cost $10 a day.

Sound almost too idyllic? Well, one thing you need to keep in mind is that should you decide to settle in Riohacha (or just about anywhere else in Colombia for that matter), you likely will not have to devote most of your waking hours to making a living. In Colombia, the average per capita income is just over $8,000 a year.

First-rate health care costs about 1/10 what it does in the U.S. Household help may cost $10 a day; skilled labor about $25. Utilities may come to $60 a month. Food (dining in and occasionally out) should not come to more than $300. And top quality housing within walking distance to the beach should be well under $800 a month.

So, there you have it – the “Clews’ Views” long and short, the highs and lows, and the ins and outs of living in Colombia in general, as well as my personal pick for “the life of Riley with a twist of lime”: the seaside city of Riohacha. No place is perfect. But, if you are looking to live large on a limited budget, Riohacha, Colombia, may come close.

Check it out – and then check back next month, when we will take a trip to Uruguay.

CRISIS HIT LATIN AMERICAN REAL ESTATE?

We all know the story of the housing market north of the border, but has the crisis had the same affect on real estate in Latin America?

Domenick Buonamici, author of an article on cheap beachfront property in Ecuador featured a couple of months ago in these pages and the e-Book The Insiders Guide to Ecuador Real Estate, investigates the extent to which the U.S. and European property market crash has washed over into Latin America. His answer is “it depends.”

It depends on the country, location and property type. It has not been across the board. And given that credit has always been expensive and hard to obtain in Latin America, property transactions are often in cash, minimizing the affect of the credit crunch. Gee, how about that. Without credit prices do not go up as much or down. What is next? Some commies questioning fractional reserve banking?

An important question, indeed, for anyone staring out their frosty window with a sore throat dreaming of their big leap south.

After investigating the housing market in several Latin countries, the best answer I can give you is “it depends.”

I know what you are thinking. “It depends.” What a nice, safe cop out. But it is true. Let me explain. It is a little more complicated down here.

First and foremost, the Latin market has not had across the board drops in prices as seen in the U.S. and Europe. In Latin America, it has depended on the country, your location within the country, and the type of property you own.

For example, for a rather undiscovered, under-priced country like Ecuador, the crisis has actually increased demand in some areas by as much as 20-30%. According to one owner of a prominent real estate website in Ecuador wishing not to be revealed, traffic arriving from Google nearly doubled as the crisis intensified in the last quarter of 2008 and the first quarter of 2009.

His theory is that with the crisis up North, more and more people have begun to look for cheaper places to reside, and with new technologies like the internet and Skype, many people can continue to work from remote locations.

Whereas in the Dominican Republic, a country that has already experienced a recent market boom, the consensus from local agents seems to be that prices have taken a noticeable drop in the touristy, foreigner-dependent areas like Punta Cana, but in less touristy places like Santo Domingo, the prices have remained relatively stagnant through the crisis. Although, even in the touristy places, prices have not fallen as much as they have in the U.S.

Which brings me to my next point: Your actual location is also important. As Dr. Christoph Sieger, a real estate attorney in the Dominican Republic with the firm Guzman Ariza pointed out, one of the main factors people look for when moving to Latin America is security. This may be the reason why prices for properties in gated communities and posh condo buildings have not felt the effects of the low market as much compared to similar properties located outside guarded areas.

Another important observation is that in both countries, Ecuador and the Dominican Republic, prices of beachfront property have not gone down. For beachfront, they never do.

One possible reason for the softer impact of the crisis on the housing market of Latin America is that, let’s face it, the traditional investors in Latin America have been the world’s rich, and the rich have not been nearly as affected by the world economic crisis as the middle class.

Another important observation is that credit has always been expensive in Latin America, so people, foreign and local, normally buy in cash, minimizing the affect of the credit crunch as well.

With that understood, with a little due diligence, there is no better time than now to start taking a gander south of the border.

THE COMPLEXITIES OF MOVING A MARRIAGE

Any expat couple who has watched their life’s treasures being wrapped and double wrapped for protection during a relocation would do well to stop for a moment and wonder: Why is their relationship – which is also being transferred – not being equally safeguarded against breakage?

Some advice for couples, married or not, who are considering a move abroad. With all the logistical considerations involved in such a move it is easy to neglect the abstract but perhaps more important issue of how to “move” the relationship. According to this article’s author, anecdotal evidence indicates that many relationships do not survive the move. So obviously a good time to think about the issue is before the move.

Most couples simply do not consider that their relationship is also being shipped to a new country where the impact of a variety of pressures and shocks can take a heavy toll, often leading to a divorce court.

Anecdotal evidence (because there is not much else when it comes to moveable marriages) would indicates that many expat marriages simply do not survive a relocation.

In a survey I conducted as research for my latest book, A Moveable Marriage: Relocate Your Relationship without Breaking It, almost half of the people contacted admitted they had not given their relationship much thought in the moving process. The reason?

“Before they relocate, couples tend to focus on the externals of the move, such as where they will live, what schools their children will attend, or where they will buy groceries,” says Dixie Wilson, who works in the Employee Assistance Program for the Houston-based energy company ConocoPhillips.

“They entirely ignore the internal challenges, so many of which are the keys to the successful relocation of a relationship. They are in complete denial about the changes which lie ahead for their marriage,” says Wilson, who believes a renegotiation of the marriage agreement needs to be undertaken if a couple is going to understand each other’s needs during relocation.

Among other things, that means understanding the role each partner will play in the relocation in the first instance, and later, in building a new life together abroad. Often, from a working spouse’s perspective, the pressure on the non-working spouse in a new city or country can appear minimal because it is often attached to trivial matters.

“Right after a move, feelings of disorientation and isolation are usually brought to light by something such as a woman not being able to find a mop in a new city or even knowing what store would sell one, how to get there or how to ask for it,” according to London-based marriage therapist Phyllis Adler.

“The lack of control and power this represents is not easily conveyed. Talking about it can be tedious and boring to a working spouse who is busy trying to reorganize a multimillion-dollar division of a company,” says Adler. She adds that the situation can be much worse for a couple who have had no experience of moving and have not done any preparation.

“In that case, the couple may not even be aware of what they are feeling, beyond increased levels of confusion and discomfort. Relationships are not ‘manageable’ in the way companies are manageable, so a marriage cannot operate like a business.”

Using the language of business is sometimes not a bad way for couples to communicate about the relocation. An expat wife relocating to Latin America, for instance, told me that the only way she could communicate her own needs to her working partner was by using non-emotional, matter of fact, case-in-point scenarios.

“I did everything short of break out an overhead projector and flowchart!” she confessed.

And how has the idea of a move abroad been raised in the first place? Within the answer to that question lies a possible key to understanding how a moveable marriage can develop tense dynamics in its early days; if a woman feels coerced into a move, or says “yes” when she really means “no”.

So here a few quick tips to keep the marriage on track during a relocation:

Think like a team: A team sticks together through thick and thin. Sit down with your partner to ask one another about individual goals and to set common objectives for yourselves as a couple or perhaps, as a family. Listening to each other’s hopes and dreams can be a positive experience if you create a sense that you are both working towards the same end and want to support the other in achieving his or her goals.

Regularly engage in “end of the day” conversations: these conversations help partners feel connected to each other, but pick a time that is suitable for your family. So often, in the process of moving, couples are not aware that an “emotional disconnect” is building a wall that will grow higher with each passing day if neither partner attempts to scale it.

Finally, in order to restore and maintain harmony when a relationship moves, it helps to be knowledgeable about the emotional part of the relocation – all the ups and downs. Otherwise, the moving boxes may be emptied and the household goods put away, but a couple’s feelings for each other may be left out in the cold.

This is reprinted by kind permission of ExpatExpert.com where you will find similar useful articles and expat information

WHY IT IS SMART TO PASS ON THE FAMILY BUSINESS NOW

The time to transfer a business or other assets to your kids is when the economy is a wreck.

The logic behind the headline claim is pretty simple: When asset values are depressed that is a good time to give the assets away. Gift taxes will be lower, and various trust and annuity structurings used to avoid taxes are simpler to implement. More details on this basic idea herein.

In 1999 William Capers, then a 28-year-old Pfizer sales rep, bought a tired restaurant, worked around the clock to revive it and after two years sold it for a profit. But he kept the building where the eatery was housed, bought more real estate and within a few years owned 28 rental properties. He sold most of them in 2004. These days the Blue Bell, Pennsylvania resident is focused on building child care centers. He has built two so far.

Capers is also focused now on his own kids. He still owns nine properties, most in ungentrified parts of downtown Baltimore, and has decided to put a big chunk of them in a trust for his three children, aged 3, 7 and 10.

Capers gets it. So does Peter Kleinknecht, 63, owner of a startup that produces Mythic Paint, a toxin-free paint brand, in Hattiesburg, Mississippi he is revamping a family limited partnership to pass corporate assets to his three grown children. “We are doing it now. Great opportunity,” he says.

That is right – opportunity. Often the best time to pass a family business or investments on to a younger generation is at the nadir of a recession. Many recession-shocked families are still too “catatonic” to seize this opening, says Gary Moriwaki, an estate planning lawyer at Fox Rothschild in New York. But others are waking up and acting.

The reason for action now is simply that gift tax is owed on large intrafamily transfers, and at the moment the values are depressed. That means the annual gift tax exclusion – good for $26,000 per recipient for a donor couple – goes further now. Say your business was worth $500,000 two years ago but is now worth only $260,000. Give away 1/10 of it to a son or daughter and you and your spouse do not eat into your lifetime $1 million gift tax exclusions. Or you could sell the whole thing, taking back a $260,000 note that you forgive at the rate of $26,000 a year, incurring no gift tax consequences along the way. This works even if the value rebounds to $500,000 down the road.

Presto. A wealth transfer that would have eaten into the couple’s $1 million per person exemption or, if they had used that up, triggered gift taxes was conducted tax free and without a lot of lawyers’ bills. “The silver lining of the times,” says Matthew Brady, head of Barclays Bank’s wealth advisory business.

Of course, there are some dark clouds here, too. Families who transferred assets during the go-go years may now be stuck with relatively larger gift and estate tax bills or other, more dire complications. For example, retiring business owners often sell to the next generation through a promissory note, with the children paying off their parental obligations over time and out of the businesses’ earnings. In meltdowns such earn-out agreements come under pressure.

James R. Grimaldi, a partner at accountants Citrin Cooperman & Co. in New York, describes the kind of discussions his real estate investor clients are having: A Brooklyn house split into three rental units has been sold from father to son on an installment plan. The son comes to the father and says, “Dad, you sold me the property for $1 million. It is now worth only $800,000.”

Grimaldi is advising the father to say, “Look, as long as the rents are still covering the installment payments, like we structured it, don’t worry about it. You know that is a depressed value. It will come back up. You are going to hold the property a long time.

So far, says Grimaldi, rents are still covering his clients’ installment plans, and the family peace has held. The danger is a prolonged downward spiral of tenant departures and rent reductions. It is possible that a year from now some of these once sturdy family installment sales will implode. Forgone payments might turn into a taxable gift. Treating the kids at arm’s length – seizing the asset – would make family meals rather frosty.

But for new wealth transfers, these are sweet times, and depressed asset values are not the only reason. The exemption from federal estate tax has climbed steadily from $1 million per person in 2001 to $3.5 million in 2009 – a level that even President Barack Obama supports. (Any part of the $1 million “lifetime” gift tax exclusion that is used counts against the $3.5 million.)

There is something else going on. Today’s low interest rates boost the tax benefit from some estate planning gimmicks, notably the “grantor retained annuity trust,” or GRAT.

Here is how it works: Say a father owns shares of a publicly traded company whose stock has taken a dive and now trades at $10. He is optimistic about its prospects. So he puts 50,000 of the company’s shares into a GRAT for his children and receives back from the trust an annuity of $259,000, payable for two years. What has Dad given the kids? The IRS answers that question by assuming the assets in a GRAT earn a certain interest rate – for a GRAT set up in May, only 2.4% a year. At that low rate virtually all the assets in the trust will be paid back to Dad, and his gift to the kids comes to 99 cents. (Note that he can take his annuity payment in returned shares.)

But if the stock rebounds he can be paid his $259,000 with the return of far fewer shares; those left in the GRAT go to the kids, and as far as the IRS is concerned, there is still no taxable gift. What if the stock falls instead of rises? The father takes back his stock at the end of the GRAT term, and that is the end of that.

CRITICS CALL DELAWARE A TAX HAVEN

The U.S. state of Delaware functions effectively identically vis a vis other states as the much-pilloried offshore tax havens do vis a vis the U.S. A description of the operations of a Delaware corporate paper mill sounds an awful lot like those of the Cayman Island holding company headquarters warehouses.

Now the other states are crying foul as they try to reclaim what they think of as unfairly lost tax revenues. And Switzerland and the Caymans have claimed that Delaware promotes tax evasion and money laundering, thus qualifying the United States as a tax haven. The federal government’s response? Federal officials “view the issue as a state matter and are not pushing for changes in Delaware” – the home state of Vice President Biden.

How surprising. Not.

Wall Street, Sand Hill Road, LaSalle Street: Some corporate addresses scream money. Then there is North Orange Street, which whispers it.

North Orange, a ho-hum thoroughfare in Wilmington, Delaware, is, on paper, home to more than 6,500 companies. Many of them are empty shells. They make nothing and sometimes employ just a lone clerk. But all are there for the same reason: To help corporations avoid paying taxes in other states.

The Obama administration has riled corporate America by cracking down on secretive offshore tax havens. But now a big onshore refuge – Delaware – is drawing scrutiny, too.

Squeezed by hard times, states are pushing to collect taxes that corporations are avoiding through Delaware shell companies. Maryland has reclaimed $267 million in such taxes, including interest and penalties, and has assessed an additional $143 million.

About 20 states have adopted laws that would effectively keep companies from using the decades-old tax loopholes in Delaware. At stake are tens of billions of dollars in annual tax receipts, funds that states say they need during this recession.

Critics of the arrangement in Delaware say it cheats state governments out of money. Delaware, these people say, has created its own onshore Cayman Islands. Even the Swiss are complaining, claiming that the United States is letting this homegrown haven flourish even as the I.R.S. pursues offshore shelters.

Defenders of the arrangement – corporate executives, tax lawyers and, unsurprisingly, Delaware officials – rebuff such criticism. Mailbox subsidiaries like the ones along North Orange Street do nothing to minimize companies’ federal tax bills, they say. Corporations must still pay Uncle Sam. Moreover, these people say, many companies are drawn to Delaware for its business-friendly laws and courts, not to save on taxes.

That is certainly the view at 1209 North Orange Street, a nondescript low-slung building at the corner of West 13th Street. This address serves as a tax minimizer for dozens of brand-name companies, among them Dillard’s, the department store chain based in Little Rock, Arkansas, and Kentucky Fried Chicken, which is part of Yum Brands of Louisville, Kentucky. All of them, and nearly 2/3 of the Fortune 500, have tax-exempt subsidiaries at this address to reduce their state tax bills.

Jerry Daniel, the vice president for government relations at the Corporation Trust Company, which runs 1209 North Orange, does not see what all the fuss is about. After all, the arrangements are legal.

“The image of Delaware as a tax haven is totally unfair,” Mr. Daniel said. “Even if you incorporate here, you still have to pay a full federal tax bill.”

That argument does not sit well with David E. Brunori. A professor at George Washington University School of Law and a specialist in state taxes, Professor Brunori said the Delaware loophole was not harmless.

“It is a vehicle for avoiding otherwise legitimate tax liabilities at a time when states need money badly,” Professor Brunori said.

Note how an academic sides with the government. The response is all but automatic. States “need” the money they steal “badly.” The implication is that the people and companies they take the money from need it less badly.

Shirley Sicilian, the general counsel of the Multistate Tax Commission, an intergovernmental state tax agency, said that “states increasingly want to make sure that income that is earned in their state is actually taxed in their state, particularly in a bad fiscal situation like now.”

At the center of the dispute are legal entities known as Delaware holding companies, which have been around for decades but took off in the 1990s, when accountants began pushing them aggressively. Corporations are allowed to establish these shell companies in Delaware, as well as in Nevada and Wyoming.

Typically, they then transfer to these subsidiaries ownership of things like trademarks, patents and investments. Delaware does not tax holding companies set up to own and collect income from such lucrative intangible assets.

The parent companies of these shells usually pay royalties to the Delaware subsidiaries to lease back those assets. By doing so, they can claim income tax deductions in states where they actually do business. The shells also funnel profits, tax free, back to their parents, in the form of dividends and loans.

Some corporations have abused the system. Before WorldCom collapsed in 2002, it shifted $19.4 billion in intellectual property tied to “management foresight” to a Delaware holding company.

Emboldened by recent court decisions that have challenged such arrangements, a growing number of states are moving aggressively to claim taxes that they say are rightfully theirs.

It will not be easy, tax experts say. Many corporations have found new ways to exploit the loophole, said Michael Mazerov, a senior fellow at the Center on Budget and Policy Priorities. The moves include creating “embedded royalty” companies, in which corporations set up Delaware holding companies that license their assets to other Delaware entities. The secondary Delaware entities buy goods or services from other parts of the company, add in the price of the royalty, and sell them back to the operating company, giving it a tax break on the royalty.

In recent months, the Delaware loophole has drawn heated criticism from the world’s leading offshore tax havens, including Switzerland and the Cayman Islands.

In April, a senior official of the Cayman Islands Financial Services Association asserted that Delaware, along with Nevada and Wyoming, promoted tax evasion and money laundering, thus qualifying the United States as a tax haven. Federal officials view the issue as a state matter and are not pushing for changes in Delaware, the home state of Vice President Joseph R. Biden Jr.

Oh the irony. Money laundering and state tax evasion are not concerns of the U.S. federal government, as long as it is all kept under the big tent. Not even a hand-slap for the misbehaving child.

In any case, Delaware officials dismiss the idea that their state is some sort of shady tax haven. Richard J. Geisenberger, Delaware’s assistant secretary of state, said that the loophole “is simply a state tax law.” It does not enable tax evasion, he said.

Still, the loophole – and potential for companies to abuse it – worries Peter L. Faber, a prominent lawyer specializing in state tax at McDermott Will & Emery in Washington. In some cases, a single clerk may tend dozens of shell companies. Even the paperwork associated with these companies is back at the home office.

“I’ve seen a lot of companies with solid structures, and more with not,” Mr. Faber said of the Delaware entities.

ACCOUNTANTS: BAHAMAS IN FISCAL CRISIS

Sources of economic growth needed beyond tourism and finance.

Like the U.S. and many other countries writ small, the Bahamas government is facing a major fiscal crisis. Part of the problem is the evisceration of their financial services industry, effectively forced on it the by the U.S. and OECD. But undoubtedly the larger issue is the world economic implosion, as tourism revenue is off as well.

The government cannot increase taxes to cover its deficits, say two accountants, because that would hurt already hurting businesses still more. The time has come for more cutbacks, and more creative thinking, they say.

Accountants Raymond Winder and Dionisio D’Aguilar both believe that the Bahamas is in a fiscal crisis. They are also of the view that government must brainstorm ways to diversify the economy beyond tourism and banking.

Winder, the Managing Partner at Deloitte and Touche and D’Aguilar, the outgoing president of the Bahamas Chamber of Commerce who is also trained as an account, were special guests Sunday on the Love 97FM Jones & Co. radio talk show hosted by Wendall Jones.

“I think we are in a fiscal crisis,” Mr. D’Aguilar said in response to this question posed by the talk show host. “The level of debt as a percentage of GDP has gone over the threshold of 40 percent and it is now at 43 percent. We are running horrendous deficits, and we are at a loss on how to realize additional monies.”

Mr. D’Aguilar said the government also cannot introduce any new taxes because such a move would drastically affect businesses at a time when they are already hurting. He noted, however, that there is still a major need for the government to spend money on infrastructure to soften the blow of the economic downturn.

Mr. D’Aguilar added. “There are people who are being thrown out of work and now the government is introducing this unemployment scheme, which in time will bleed them quite significantly. I think that as more people come out of work the demand for social programs to assist them is going to increase and the government is going to find itself in a very difficult position where there is a huge demand for expenditures but there is no additional revenue coming in.”

Mr. Winder, who also agreed that the Bahamas was in a fiscal crisis, explained that most of government’s revenue is generated when the citizens spend. He said while the average citizen should be more prudent in their spending habits, the government’s revenue base suffers as a result.

“This clearly identifies a hold that has been there for a long time in terms of the taxation system, and when one looks at the situation, it is clear that we cannot continue with the same system because even going forward, if Bahamians do not begin to spend more money we are going to have the same problem even if the economy improves,” Mr. Winder said.

“I believe that the average citizen is not going to spend the way they did prior to this [economic] situation, which would mean that the government’s revenue would not be coming in to the extent that it did before this happened.”

Mr. D’Aguilar noted that despite the economic downturn, Bahamians must continue to make purchases so that the Bahamas can increase its imports and thus its revenue.

“This is where the vast majority of our money is coming in and people need to buy stuff so that we can import stuff, so that the government can raise revenue,” he said, adding that unless the government broadens its tax base, they will continue to find themselves in a “Catch 22 situation.”

“This is the time for hard decisions and the situation as it is presented allows them [the government] to make hard decisions,” Mr. D’Aguilar said.

Mr. Winder, who also commented on the 2009/10 budget communication that was presented in the House of Assembly last week, said he was happy that the government recognized the severity of the economic situation and realized that they could not continue with the same level of salaries, increases and new government programs.

“The fact that the government sought to bring down some of those expenses was a good idea as well as the fact that the government did not put in any real new taxes,” he said. “It was also interesting to learn that even though the government had retired so many of our civil servants, it was only saving $29,000 per employee, which says a lot.”

Mr. D’Aguilar, on the other hand, said that he was shocked that the government’s revenue was down from its budgeted amount by $260 million.

“I was not expecting it to be quite so severe and I thought it was good for the Prime Minister to bring that to the nation and let us know exactly where we stood. He took a long time explaining the severity of the situation and I think it was good that he let people know that things are tough. We heard it and now it was reflected in the numbers.”

The former Chamber chief noted, however, that he was a little disappointed that the prime minister did not really stress the severity of the existing fiscal crisis.

“I would have thought that it would have been a little bit more of “we are in a major crisis and this is a war-time budget,” Mr. D’Aguilar said. “I expected a little bit more vision. I expected more cuts in programs that bleed the treasury day in and day out. I would have thought that this was the time [to make these cuts] and the excuse was there to make the necessary cuts that needed to be made in programmes that year after year lose money for the treasury.”

DOLPHINPLASTY AS A PRINCIPLE OF GOVERNANCE

As life imitates art, the Obama administration takes its lessons from South Park.

The biggest enemy of the world improvers turn out, in practice, not to be the (true) conservatives – who usually just want to be left alone and do not raise up a fuss until it is too late – but reality. The fantastical visions in the improvers’ minds is so overwhelming that they just cannot conceive that life might not work the way they want.

All humans are prone to a confusion between what is and what they think ought to be. What is a complaint, that most common of human conversational gambits, if not an pointed observation that reality really should be other than it is? The world improvers are just willing to steal, and kill, in order to bridge the is/ought-to-be gap. And the Obama adminstration, David “Spengler” Goldman observes, is infused with this mentality. He has no shortage of evidence.

“When I argue with reality, I lose – but only 100% of the time,” observes Byron Katie. Well thank God there is some chance, then.

You can define a mythical creature with precision, observed St. Thomas Aquinas, but that does not make a phoenix exist. To be there, things actually have to have the property of existence. St. Thomas would be a party-pooper in today’s politics, where “yes, we can” means that we can do whatever we want, even if it violates custom, the constitution or the laws of nature.

The television cartoon South Park offers a useful allegory for the administration’s flight from realism. In one episode the children’s teacher, Mr. Garrison, gets a sex change, little Kyle gets negroplasty (to turn him into a tall black basketball star), while Kyle’s father undergoes dolphinplasty, that is, surgery to make him look like a dolphin.

Looking like a dolphin, of course, does not make you one. Sadly, the Barack Obama administration has not figured this out. Out of the confusion of its first 100 days, we can glimpse a unifying principle, and that principle looks remarkably like the sort of plastic surgery practiced in South Park.

Like dolphinplasty and negroplasty, it has given us cosmetic solutions that we might call civitaplasty, turning a terrorist gang into a state; fiducioplasty, making a bunch of bankrupt institutions look like functioning banks; creditoplasty, making government seizure of private property look like a corporate reorganization; matrimonioplasty, making same-sex cohabitation look like a marriage; and interfecioplasty, making murder look like a surgical procedure.

There is a consistent theme to the administration’s major policy initiatives: Obama and his advisors start from the way they think things ought to be and work backwards to the uncooperative real world. If reality bars the way, it had better watch out. In the South Park episode, the plastic surgery underwent catastrophic failures too disgusting to recount here. Obama’s attempt to carve reality into the way things ought to be will also undergo catastrophic failure, perhaps in even more disgusting ways.

Consider the reorganization of Chrysler, perhaps the most traumatic event to afflict the credit market in living memory. In 2007, Chrysler borrowed US$10 billion secured by its assets – real estate, brand names and other collateral. According to the U.S. Bankruptcy Code, senior creditors have first claim on assets in the event of failure. The Obama administration, though, offered the senior creditors just 33 cents on the dollar, but gave a group of junior creditors, the United Auto Workers Union, 55 cents on the dollar. Most of the senior creditors are banks receiving federal assistance, and they of course did not object. Some creditors did object, and Obama denounced them on the airwaves as “speculators.” Some of the creditors received death threats, and other creditors report that the White House threatened to destroy their reputations.

This is not a credit market, but creditoplasty. What is it that gives existence to a credit market? “Credit” derives from the Latin verb credere, to believe. We trust other people with our money because we believe that they will repay it with interest, and because we believe that the courts will uphold our contractual rights in the event of a dispute. Credit markets do not exist in most of the world’s countries because faith is absent in the good will of counterparties and the impartiality of the law. In most countries, might makes right: The ruling clique takes what it wants, as King Ahab took Naboth’s vineyard. There is no rule of law. No one invests except through a corrupt deal with the ruling clique. No firm grows beyond what the members of a family can manage, and no excess capital remains in the country. Labor languishes for lack of capital.

A few countries, notably those blessed with a heritage of English common law, have credit markets. Savings turn seamlessly into investment, prospective retirees lend their savings with confidence to young people building families, homes and businesses, and tomorrow’s prospective income is transformed into today’s wealth through the power of faith in the future.

Obama’s handling of the Chrysler bankruptcy has destroyed this faith. No investor remains in the Chrysler deal out of belief in the company’s future, or out of faith in the legal system to uphold contractual rights. The big banks are there because Obama has them on life support. The smaller creditors are there because Obama has threatened them with reputational ruin, and persons unnamed have threatened them with violence. The UAW is here because it has a political deal with the White House. Violence, fraud and corruption hold together Chrysler Motors, in the sad template of Third World finance – not faith or belief. Force and fraud destroy faith, in fact, erase the possibility of faith for a very long time to come.

Apart from Chrysler, no investor trusts America’s largest banks. They can borrow money in the markets because the federal government guarantees it – nearly a quarter of a trillion dollars of bank bonds guaranteed by the Federal Deposit Insurance Corporation have come to market this year. They can make profits if and when the government says they can, for the government tells each bank how much capital it must raise and by how much it must dilute its shareholders’ equity.

The banks depend on Treasury funding to securitize assets, and on the balance sheet of the Federal Reserve to provide a bid for their assets. They are not fiduciaries, but the product of fiducioplasty, the mere cosmetic appearance of banking. Cynical calculation about the administration’s political goals replaces assessment of bank business models, as I have chronicled at my finance blog, “Inner Workings.”

The analogy to plastic surgery holds in the field of foreign policy as well, where the president’s special ambassadors have fanned out to solicit the good graces of the world’s terrorists. The White House wants to get Iran involved in Afghanistan, offer the Taliban a power-sharing arrangement in Afghanistan, give Syria a key negotiating role, and pitch a Palestinian state with involvement from Hamas. Out of this witches’ cauldron, the administration hopes to conjure up a Palestinian state – call it civitaplasty. Giving guns and money to a collection of individuals on a given spot of ground, though, does not make a people, much less a state.

What does constitute a state? Cicero defined a people as an assemblage with common interests. In the City of God (XIX, 23), St. Augustine took issue with the great statesman of the Roman republic: “A people [rather] is the association of a multitude of rational beings united by a common agreement of the objects of their love ... to observe the character of a particular people we must examine the objects of its love.” He continued:

God rules the obedient city according to His grace, so that it sacrifices to none but Him, and whereby, in all the citizens of this obedient city, the soul consequently rules the body and reason the vices in the rightful order, so that, as the individual just man, so also the community and people of the just, live by faith, which works by love, that love whereby man loves God as He ought to be loved, and his neighbor as himself – there, I say, there is not an assemblage associated by a common acknowledgment of right, and by a community of interests. But if there is not this, there is not a people, if our definition be true, and therefore there is no republic; for where there is no people there can be no republic.

What is it that Hamas loves? According to numerous of its spokesmen in repeated statements over the years, what it loves is death. “We love death more than the Jews love life,” Hamas says. Hamas leader Ismail Haniya told an American interviewer last year that his fighters were willing to die, whereas “the Jews love life more than any other people, and they prefer not to die.” The leader of Hamas’s ally, the Iranian-backed Shi’ite organization Hezbollah, Sheikh Hassan Nasrallah, said, “We have discovered how to hit the Jews where they are most vulnerable. The Jews love life, so that is what we shall take from them. We will win because the Jews love life, and we love death.”

A people held together by a common love of death is a contradiction in terms. It is a non-people, that is, a people dedicated to its own destruction. It cannot form a state. In my view, the love of death evinced by Islamist authorities expresses despair about the future of Islamic civilization in a modern world.

This year’s most-cited book on Islam, Ali Allawi’s The Crisis of Islamic Civilization, makes the case poignantly. The Palestinians cannot resign themselves to the misery of their circumstances as a backward and poorly adapted people in a modern world. Many of them, including a very large number of their young men, would rather die. Civitaplasty can produce only the cosmetic imitation of a state, but not the genuine article.

By the same principle, the anti-realists of the Obama administration believe that they can define marriage to be whatever they want it to mean. Matrimoniaplasty makes same-sex cohabitation look like a marriage, on the premise that marriage is a right. That is just what the Spanish government intends in giving transgender men the “right” to be women, with a passport to prove it. In social-democratic Spain, a man can don high heels and lipstick, and obtain a passport certifying himself to be a herself. Men, however, do not have a right to be women; they can obtain a “female” ID, but not a date for Saturday night. Marriage is not a right, but rather a state, in which two people become one flesh.

Simply because we set out the parameters of a market, a corporation, a bank, a state, or a marriage does not mean it has any more claim on reality that St. Thomas’s phoenix. Some combination of natural capacity and sense of sanctity, melded by many years of human experience, give existence to such things. The flight from realism will leave us with neither credit, nor civility, nor domesticity. Like little Kyle’s knees in the cited South Park episode, these substitutes for reality will blow up in our face

False Issue

What in the world is all this flap and hullabaloo about homosexual marriage licenses? Who cares?

Here is a great short article from Charlie Reese that cuts through all the anti-gay “marriage” cant. His basic points: (1) Granting a state license for homosexuals to join in a civil union does not hurt anyone. (2) If anyone wants to call these civil unions “marriages” that is their business. (3) If you are a Christian and object to homosexual marriages, no one is forcing you to join in or sanction one. “[Y]ou have a personal obligation to obey the commands of the Christian religion. Whether someone else does or does not is of no concern to you.” MYOB, as Ann Landers used to say. (4) If you think that state recognition of homosexual marriages will cause the whole of Christian morality to collapse, look around and duly note that traditional Christian morality collapsed in this country long before homosexuals came out of the closet.

The conclusion after the conclusion: Do not get distracted by red-herring issues like gay marriage while the politicians are stealing the country right out from under your noses.

This is another of those inconsequential red-herring issues designed to distract you while the politicians steal the country right out from under you. You had better worry about why one euro costs $1.19 rather than whether two homosexuals can get a piece of paper at the county courthouse.

Logically, to forbid something, one must demonstrate that the forbidden act will cause harm to others. OK. What harm will befall you and me and our children if two homosexuals get a marriage license? Well, I am waiting. I am sorry I have nothing to contribute. I cannot think of any harm it will cause to anyone.

The fact that the state has intruded itself as a third party in every marriage does not add to the sanctity of the marriage. It is just a state license, like a license to be a plumber. As far as the state is concerned, a marriage license is a license for a civil union, since the state does not care whether a preacher or a notary public marries you.

“Civil union” is a political euphemism for marriage. It allows the politician to get votes from both sides. The politician can be in favor of civil union but not marriage. That is like a legislator being “personally opposed” to abortion but voting to legalize it. We already have a surplus of hypocrisy in this country. Let is not add to it with euphemisms.

Well, homosexual acts are against God’s law, you say. OK, presumably God will enforce his own laws. You will not find in the Christian Bible any passage that says the responsibility for enforcing God’s laws rests with the secular state. There are several acts denoted as sins that are not illegal.

Furthermore, Christianity is a personal religion, not a tribal or state religion. If you wish to be a Christian, then you have a personal obligation to obey the commands of the Christian religion. Whether someone else does or does not is of no concern to you. You can be a devout, scrupulously pure Christian in the midst of the most outrageous sinners. Your obligation is to obey God’s commandments, not to compel someone else to do it.

Protestants in particular have a problem. It was the Protestants who said: “We don’t need no Pope or priest to interpret the Bible. Everybody can read it and interpret it for themselves.” Well, everybody includes homosexuals. Protestants have been arguing and even fighting over interpretations of the Scripture for centuries, but again, that is a private affair and no concern of the secular state.

Some people have acted as if state recognition of homosexual marriages will cause the whole of Christian morality to collapse. I hate to be a bearer of bad news, but traditional Christian morality collapsed in this country long before homosexuals came out of the closet. This is a secular, decadent, even freaky society, or have you not noticed? Watch MTV or go to the movies or watch prime-time television. The elites in this country definitely do not practice morality, Christian or otherwise. You are already living in the dawn of a new Dark Age – or whatever the 21st-century equivalent will turn out to be. Don’t sweat homosexual marriage licenses. That is the least of our problems.

Since I am not a plumber, the state’s policy on plumbers’ licenses is not an issue for me. Since I am not a homosexual, the state’s policy on homosexual marriage licenses is not an issue for me. But as a libertarian, I cannot for the life of me understand why so many people have an incurable itch to control other people’s lives.

If homosexuals want a marriage license, give it to them. It will not have any effect whatsoever on our lives or the life of the nation or the course of world history. And a word to homophobes, most of whom are latent homosexuals themselves: Denying them a marriage license does not convert them into heterosexuals.

THE “NO PROBLEM” MINDSET: GUARANTEED DESTRUCTION

Do you have a real plan to deal with what is obviously an unfolding disaster?

We here at W.I.L. can well attest that most people do not want to hear about big problems coming down the pike, never mind act now to minimize the damage when it arrives. We ascribe it to a basic ingrained human mindset to think about today and not put much weight on events which we have never experienced. We are also overoptimistic about our ability to deal with problems over the board when they arrive – the “no problem” philosophy.

Gary North says a “tsunami” is coming, as foretold by “rising government ownership, massive deficits, rising unemployment, falling house prices, busted retirement pensions, rising interest rates (falling corporate bonds), and Federal Reserve inflation on a scale never seen in American history.”

Gary does not extend the tsunami metaphor, but we cannot help but recall reports of the real tsunami which occurred in the Indian Ocean in late December 2004. Tourists observed water receding from the coast, some time before it returned in the form of up to 100 foot high waves. Many people scratched their heads and wondered about the odd phenomenon, not thinking about the fact the water would be back. It had to come back. But the observation fell outside their experience and outside their capacity to imagine. Today, the water has receded. Enough said?

Most people will not change. Too radical. Not going with the flow. Not betting against the herd.

The best examples in the 20th century were Jews in Germany in 1933. They stayed. This included Jewish bankers, all of whom could have left. They thought they could deal with Hitler. They did not read Mein Kampf. They did not take it seriously.

About 7% did leave early: 38,000 out of 523,000. More left after 1938. By 1941, about 160,000 remained in Germany. Then emigration was closed by the Nazis. Earlier, it was encouraged. The data are here.

At some price, almost all could have left. There were countries that would have let them in. They would have had to learn a new language. They would have arrived in poverty. But Jews had faced those options ever since the Assyrian captivity in the eighth century B.C. So what?

They all would not have escaped the Nazis. Some would have moved to other European countries that were overrun by Germany after 1939. But they could have tried to get away. They stayed. They refused to acknowledge the warning signals. “It can'’ be that bad.” It got worse.

Jews had an answer for worrywarts. “No problem. We can handle it.”

The Armenians went through the same thing. The Turkish massacres of 1895 were a foretaste. Most stayed behind. Then came the genocide of 1915.

NO PROBLEM!

Look back at the economy in October 2007. The Dow was at 14,000. The banks were booming. Real estate was down a little, but the experts gave no warning. They were wrong. All of them.

The U.S. government is running a $1.8 trillion deficit this year. Federal tax receipts are down 34%, which means that the deficit will go above $2 trillion. No one cares. No one says, “This is the end. The American economy will never again be what it was.”

Think “2007.” Would you have believed that Chrysler and GM were both headed for bankruptcy? In October 2007 GM shares were at $43. Now they are at $1. There was an industry called investment banking. Bear Stearns, Lehman Brothers, and Goldman Sachs were not part of the commercial banking system. To survive, a few made the transition in September 2008. Some did not make the cut.

Merrill Lynch is gone. Bank of America and Citigroup were bailed out by the government. They would have gone under. They sell for a fraction of what they did in 2007.

And what do most people say? “No problem.”

There is no problem for which their answer is not “no problem.”

Medicare will go bust. Social Security will go bust. “No problem.”

The unemployment rate keeps rising. “No problem.”

When people refuse to face reality, because reality is going to be more painful than anything they have experienced, they look for signs that the problems they cannot avoid without changing are really not that bad. They look for offsetting good news.

They think the status quo ante will return. The U.S. government is about to spend another $30 billion to buy a dead carcass of a company. It has already spent $20 billion. “No problem.”

The government will let the company stiff bondholders for $27 billion in exchange for 10% of the company, 72% owned by the government and 17% by the United Auto Workers medical insurance fund. “No problem.” Bondholders were originally told that it would take a 90% vote to authorize this. The government has changed the rules. It will determine after the May 30 vote by bondholders what percentage must approve. “No problem.“

The company will never return to what it was. “No problem.” People will not buy as many cars as before from a company run by the government and the United Auto Workers. “No problem.”

The Dow rose 100 points on the rumor that the largest bondholders will accept the deal. The deal is a disaster, but investors are in “No problem” mode. Somehow, the wipeout is less of a wipeout.

Who is going to buy a GM car instead of a Japanese car? Here is a company that is about to break its contracts with thousands of its dealers. “No problem.” Yet buyers are expected to trust a GM warranty.

Oldsmobile is gone. “No problem.” Pontiac is going. “No problem.” Cadillac sells its cars with an ad of a flash model putting the pedal to the medal. Hot stuff! The company thinks people with money will not see through this ad. The Cadillac division has lost its way. “No problem.”

The price/earnings ratio for the S&P 500 is over 120. Traditionally, 20 was regarded a sell. The investor pays $120 on the hope that the stock will retain a dollar of earnings, and pay investors some minimal percentage of these earnings as dividends. “No problem.”

We are watching the investment world adopting a lemming mentality that has always produced losses. “This time it’s different. No problem.”

CONSUMER CONFIDENCE

The Conference Board announced that consumer confidence is up to 55. The 50 figure is neutral. Yet consumer confidence is a lagging indicator historically. When it rises, the stock market usually falls.

The indicator is a reflection on what the stock market has done recently. To use consumer confidence as a justification for buying stocks is nonsense. This is like saying, “I will buy stocks because the public is confident, which based on the fact that stocks have risen.” If that strategy worked, stocks would never stop rising.

Even hard-money newsletter readers are beginning to doubt that the recent good news is in fact “less worse than expected” bad news. This is the stuff of dreams that do not come true.

Readers look at the reports, and the reports look awful: falling home prices, rising unemployment, an astronomical Federal deficit. But the media say we are close to a bottom – the bottom of a crash that none of them forecasted.

Readers think, “by the standards of late 2007, what we are seeing daily was inconceivable.” Optimists speak of a slow, weak recovery. Pessimists speak of hyperinflation and depression simultaneously. But as the chorus proclaims “No problem,” the public mindlessly picks up this refrain.

“We have nothing to fear but ... fear itself!” Yet as FDR delivered those words, Hitler was consolidating power in Germany. Stalin was beginning the purges. A quarter of the U.S. work force was unemployed. But Roosevelt began the refrain: “No problem.” Four years later, unemployment was still 20%. The Federal deficit had ballooned. Happy days were not here again.

Your friends do not want to hear your pessimism anymore. They do not want to change. They will refuse to change.

In 1934, Ludwig von Mises realized that Hitler, an Austrian, would seek to bring Austria under German hegemony. He warned Jewish economists to leave. They had been his students at his famous seminar in Vienna. Fritz Machlup believed him, and came to the U.S. So did Gottfried Haberler. Mises went to Switzerland as a professor, leaving his great personal library behind. He fled to the U.S. in 1940, after France had fallen. He never got a full-time teaching job again.

A few listened. Most did not. “No problem.”

HEARING, THEY WILL NOT HEAR

People count the costs of making a change. This is wise. Jesus taught:

For which of you, intending to build a tower, sitteth not down first, and counteth the cost, whether he have sufficient to finish it? Lest haply, after he hath laid the foundation, and is not able to finish it, all that behold it begin to mock him, Saying, This man began to build, and was not able to finish. Or what king, going to make war against another king, sitteth not down first, and consulteth whether he be able with ten thousand to meet him that cometh against him with twenty thousand? Or else, while the other is yet a great way off, he sendeth an ambassage [ambassador], and desireth conditions of peace (Luke 14:28–32).

In short, count the costs. This is what people have refused to do. They have counted the cost of doing something radical. It is high. They have counted the immediate cost of doing nothing new. It seems low. They prefer doing nothing.

But what about the long term? What about:

1. Retirement (no Social Security or Medicare)
2. The Federal Deficit ($1.8 trillion this year)
3. Federal Reserve’s monetary base (doubled)
4. Falling house prices
5. Rising unemployment
6. The war in Afghanistan (forever, until our defeat)

“No problem!”

How do you reason with these people? Answer: you don’t, if you value your time and your privacy. If you turn out to be wrong, you will be ridiculed or at least treated as a child. If you are correct, you will be hated. You will also be hit up for money. If you are a Christian, you will be told you are heartless. You will become a line of credit for those whose mantra was “No problem!”

They do not want to change. They will not change. They will not listen to you.

And when things turn out much worse than even most newsletter writers are forecasting, you will be hated. Are you prepared for this?

Do you have a real plan to deal with what is obviously an unfolding disaster: rising government ownership, massive deficits, rising unemployment, falling house prices, busted retirement pensions, rising interest rates (falling corporate bonds), and Federal Reserve inflation on a scale never seen in American history?

Or do you think you can delay. “No problem!”

CONCLUSION

We live in today’s world. It is bad, but it is not a catastrophe. We must keep our heads above water.

A Tsunami is coming. In such a scenario, you have got to get out of the water and off the beach. But few people ever do, unless they have seen a tsunami. Few have.

Allocate some percent of your wealth to tsunami-avoidance. Do it quietly. Do not discuss this with your big-mouth brother-in-law.

What do you really think is likely to happen? Not what you would prefer will happen.

Think, “General Motors in October 2007.”

Think Chrysler, Merrill Lynch, and Lehman Brothers.

No one saw it coming. It came.

Problems. Big, big problems.

FIGHT DOWNHILL BATTLES: LET LAZINESS AND INERTIA MAKE YOU MORE PRODUCTIVE

Start good habits and you will be too “lazy” to change them.

Stepcase Lifehack is a site built around the idea of “lifehacks” – basically any shortcut that effects greater productivity and ease, although some of the articles delve into the more philosophical and transcendent aspects of life as well. This piece is a good example.

Surely everyone understands all too well the human tendencies towards inertia, to keep doing whatever we have been doing however counterproductive and obsolete the pattern. Here the suggestion is to turn that tendency around. You have to forcefully interpose and substitute in productive and appropriate habits, but only for a short while. Once they are in place inertia will work in your favor. Simple in theory, and hard in practice only briefly.

Did you know that you can cancel a magazine subscription at any time? Return unwanted Book-of-the-Month Club selections? Cancel unused credit cards? Put an end to unwanted junk mail?

You probably did know that, and yet you still receive magazines you do not read anymore, have a stack of books or CDs from membership clubs that you have never even opened, pay yearly fees on credit cards you neither use nor want, and open your mailbox several times a week to a flood of flyers, catalogs, and local papers – all of which go straight to the trash.

Why is that? There is almost no work involved in doing any of these things – a phone call, a “return to sender” scrawled across the package, maybe a letter, and you are free! The time, money, and hassle you would save would be more than the cost of a few minutes on the phone.

The sticking point, though, is the “almost” in “almost no work involved.” We humans have a tremendous capacity for keeping on doing whatever we are already doing – even when it does not make sense anymore. Remember your physics? An object in motion will tend to stay in motion – unless acted on by an outside force.

That’s inertia. In behavioral terms, it means that once we settle into a course of action, it becomes harder and harder to change it. All that little stuff, especially, is so easily procrastinated, so easily forgotten, so unlikely to be subject to the kind of outside forces that might lead us to make a change, that lots of companies have created successful business models out of it.

Don’t believe me? Take a look around your neighborhood and see how many yards have more than one newspaper sitting in them. Maybe your own yard has a few days’ worth of newspaper buildup. Every day you or your neighbors think “I really need to cancel that newspaper subscription” – and then they move on. Three months later, the bill comes. And is paid! And the cycle repeats itself ...

I am not going to tell you how to break the cycle. You know how – sit down, make a list of all the little annoyances in your life that could easily be stopped, and spend an hour or two stopping them. No big deal.

What interests me more, though, is the basic behavior itself — and how we can turn it to our benefit. An easy example comes to mind: automatic bill payment. Once you set up automatic payments, it becomes more of a hassle to stop them than to adapt to them — which is the whole point. Your bills get paid by inertia.

What are some other ways that your innate laziness can work for you?

• Automatic savings: 10% of your paycheck goes into a high-yield account with withdrawal penalties. Get used to it.
• Set your alarm clock 20 minutes earlier: Yeah, like you will remember to change it. Too bad, you have to wake up now.
• Subscribe to groceries: Amazon has a Subscribe and Save program that allows you to set up a subscription to common household goods (diapers, toilet paper, toiletries, non-perishable foods, etc.). You set up how many you want and how often, and they bill you when each new order is shipped. Plus, subscribed items are 15% off. Not everything is a great deal – your local grocery store might still be cheaper for a lot of things – but for things you need on a regular basis, a subscription can save you some last-minute dashes to the store (and shorten your regular shopping trips, since you will not need to buy as much). And canceling a subscription is just enough work that you probably won’t.
• Accountability partners: This is a good one for people working towards long-term goals – find someone to ask you regularly how you are doing. Someone you will not be able to lie to easily. It will eventually be more stress to not do something than to just do it. And won’t that be awful?
• Habits, of course: Building any positive behavior into a habit — whether it’s writing first thing in the morning or going to the gym after work or always leaving your keys by the front door — is a great use of inertia. Once established, it becomes harder to break your habit than to just do it.

It seems to me there is a great deal of power in inertia, if we could figure out how to take advantage of it. All too often we get stuck in negative inertia, those ruts that prevent us from fulfilling our potential. Why not turn that to our benefit and make our own laziness an asset?

Do you take advantage of inertia in your life? What does laziness help you accomplish?

THE ART OF LEARNING REVIEWED

Book Review: The Art of Learning: An Inner Journey to Optimal Performance, by Josh Waitzkin.

Joshua Waitzkin was the chess prodigy protagonist in the marvelous 1993 movie Searching for Bobby Fischer. He went on to become a chess International Master (the category below Grand Master). More recently he has focused on the martial art Tai Chi Chuan, and has won several tournaments in that field. Now he has written a book titled The Art of Learning. Given his success in two difficult fields which involve a lot of learning, the author clearly has some credibility with regard to the subject.

In this book review, the reviewer concludes by saying the book “has much to teach us regardless of our field. ... The insights are numerous and applicable, and the fact that Waitzkin has used the principles he now teaches to become a world-class competitor in two very demanding competitive enterprises makes it that much easier to read. I recommend this book to anyone in a position of leadership or in a position that requires extensive learning and adaptation. That is to say, I recommend this book to everyone.”

Josh Waitzkin has led a full life as a chess master and international martial arts champion, and as of this writing he is not yet 35. The Art of Learning chronicles his journey from chess prodigy (and the subject of the movie Searching for Bobby Fischer) to world championship Tai Chi Chuan with important lessons identified and explained along the way. Marketing expert Seth Godin has written and said that one should resolve to change three things as a result of reading a business book; the reader will find many lessons in Waitzkin’s volume. Waitzkin has a list of principles that appear throughout the book, but it is not always clear exactly what the principles are and how they tie together. This does not really hurt the book’s readability, though, and it is at best a minor inconvenience. There are many lessons for the educator or leader, and as one who teaches college, was president of the chess club in middle school, and who started studying martial arts about two years ago, I found the book engaging, edifying, and instructive.

Waitzkin’s chess career began among the hustlers of New York’s Washington Square, and he learned how to concentrate among the noise and distractions this brings. This experience taught him the ins and outs of aggressive chess-playing as well as the importance of endurance from the cagey players with whom he interacted. He was discovered in Washington Square by chess teacher Bruce Pandolfini, who became his first coach and developed him from a prodigious talent into one of the best young players in the world.

The book presents Waitzkin’s life as a study in contrasts. Perhaps this is intentional given Waitzkin’s admitted fascination with Eastern philosophy. Among the most useful lessons concern the aggression of the park chess players and young prodigies who brought their queens into the action early or who set elaborate traps and then pounced on opponents’ mistakes. These are excellent ways to rapidly dispatch weaker players, but it does not build endurance or skill. He contrasts these approaches with the attention to detail that leads to genuine mastery over the long run.

According to Waitzkin, an unfortunate reality in chess and martial arts – and perhaps by extension in education – is that people learn many superficial and sometimes impressive tricks and techniques without developing a subtle, nuanced command of the fundamental principles. Tricks and traps can impress (or vanquish) the credulous, but they are of limited usefulness against someone who really knows what he or she is doing. Strategies that rely on quick checkmates are likely to falter against players who can deflect attacks and get one into a long middle-game. Smashing inferior players with 4-move checkmates is superficially satisfying, but it does little to better one’s game.

He offers one child as an anecdote who won many games against inferior opposition but who refused to embrace real challenges, settling for a long string of victories over clearly inferior players (pp. 36-37). This reminds me of advice I got from a friend recently: always try to make sure you are the dumbest person in the room so that you are always learning. Many of us, though, draw our self-worth from being big fish in small ponds.

Waitzkin’s discussions cast chess as an intellectual boxing match, and they are particularly apt given his discussion of martial arts later in the book. Those familiar with boxing will remember Muhammad Ali’s strategy against George Foreman in the 1970s: Foreman was a heavy hitter, but he had never been in a long bout before. Ali won with his “rope-a-dope” strategy, patiently absorbing Foreman’s blows and waiting for Foreman to exhaust himself. His lesson from chess is apt (p. 34-36) as he discusses promising young players who focused more intensely on winning fast rather than developing their games.

Waitzkin builds on these stories and contributes to our understanding of learning in chapter two by discussing the “entity” and “incremental” approaches to learning. Entity theorists believe things are innate; thus, one can play chess or do karate or be an economist because he or she was born to do so. Therefore, failure is deeply personal. By contrast, “incremental theorists” view losses as opportunities: “step by step, incrementally, the novice can become the master” (p. 30). They rise to the occasion when presented with difficult material because their approach is oriented toward mastering something over time. Entity theorists collapse under pressure.

Waitzkin contrasts his approach, in which he spent a lot of time dealing with end-game strategies where both players had very few pieces. By contrast, he said that many young students begin by learning a wide array of opening variations. This damaged their games over the long run: “[M]any very talented kids expected to win without much resistance. When the game was a struggle, they were emotionally unprepared.” For some of us, pressure becomes a source of paralysis and mistakes are the beginning of a downward spiral (pp. 60, 62). As Waitzkin argues, however, a different approach is necessary if we are to reach our full potential.

A fatal flaw of the shock-and-awe, blitzkrieg approach to chess, martial arts, and ultimately anything that has to be learned is that everything can be learned by rote. Waitzkin derides martial arts practitioners who become “form collectors with fancy kicks and twirls that have absolutely no martial value” (p. 117). One might say the same thing about problem sets. This is not to gainsay fundamentals – Waitzkin’s focus in Tai Chi was “to refine certain fundamental principles” (p. 117) – but there is a profound difference between technical proficiency and true understanding. Knowing the moves is one thing, but knowing how to determine what to do next is quite another. Waitzkin’s intense focus on refined fundamentals and processes meant that he remained strong in later rounds while his opponents withered. His approach to martial arts is summarized in this passage (p. 123):

“I had condensed my body mechanics into a potent state, while most of my opponents had large, elegant, and relatively impractical repertoires. The fact is that when there is intense competition, those who succeed have slightly more honed skills than the rest. It is rarely a mysterious technique that drives us to the top, but rather a profound mastery of what may well be a basic skill set. Depth beats breadth any day of the week, because it opens a channel for the intangible, unconscious, creative components of our hidden potential.”

This is about much more than smelling blood in the water. In chapter 14, he discusses “the illusion of the mystical,” whereby something is so clearly internalized that almost imperceptibly small movements are incredibly powerful as embodied in this quote from Wu Yu-hsiang, writing in the 19th century: “If the opponent does not move, then I do not move. At the opponent’s slightest move, I move first.” A learning-centered view of intelligence means associating effort with success through a process of instruction and encouragement (p. 32). In other words, genetics and raw talent can only get you so far before hard work has to pick up the slack (p. 37).

Another useful lesson concerns the use of adversity (cf. pp. 132-33). Waitzkin suggests using a problem in one area to adapt and strengthen other areas. I have a personal example to back this up. I will always regret quitting basketball in high school. I remember my sophomore year – my last year playing – I broke my thumb and, instead of focusing on cardiovascular conditioning and other aspects of my game (such as working with my left hand), I waited to recover before I got back to work.

Waitzkin offers another useful chapter entitled “slowing down time” in which he discusses ways to sharpen and harness intuition. He discusses the process of “chunking,” which is compartmentalizing problems into progressively larger problems until one does a complex set of calculations tacitly, without having to think about it. His technical example from chess is particularly instructive in the footnote on page 143. A chess grandmaster has internalized much about pieces and scenarios; the grandmaster can process a much greater amount of information with less effort than an expert. Mastery is the process of turning the articulated into the intuitive.

There is much that will be familiar to people who read books like this, such as the need to pace oneself, to set clearly defined goals, the need to relax, techniques for “getting in the zone,” and so forth. The anecdotes illustrate his points beautifully. Over the course of the book, he lays out his methodology for “getting in the zone,” another concept that people in performance-based occupations will find useful. He calls it “the soft zone” (chapter three), and it consists of being flexible, malleable, and able to adapt to circumstances. Martial artists and devotees of David Allen’s [work-life management system and book] Getting Things Done might recognize this as having a “mind like water.” He contrasts this to “the hard zone,” which “demands a cooperative world for you to function. Like a dry twig, you are brittle, ready to snap under pressure” (p. 54). “The Soft Zone is resilient, like a flexible blade of grass that can move with and survive hurricane-force winds” (p. 54).

Another illustration refers to “making sandals” if one is confronted with a journey across a field of thorns (p. 55). Neither bases “success on a submissive world or overpowering force, but on intelligent preparation and cultivated resilience” (p. 55). Much here will be familiar to creative people: You are trying to think, but that one song by that one band keeps blasting away in your head. Waitzkin’s “only option was to become at peace with the noise” (p. 56). In the language of economics, the constraints are given; we do not get to choose them.

This is explored in greater detail in chapter 16. He discusses the top performers, Michael Jordan, Tiger Woods, and others who do not obsess over the last failure and who know how to relax when they need to (p. 179). The experience of NFL quarterback Jim Harbaugh is also useful as “the more he could let things go” while the defense was on the field, “the sharper he was in the next drive” (p. 179). Waitzkin discusses further things he learned while experimenting in human performance, particularly with respect to “cardiovascular interval training,” which “can have a profound effect on your ability to quickly release tension and recover from mental exhaustion” (p. 181). It is that last concept – to “recover from mental exhaustion” – that is likely what most academics need help with.

There is much here about pushing boundaries; however, one must earn the right to do so: As Waitzkin writes, “Jackson Pollock could draw like a camera, but instead he chose to splatter paint in a wild manner that pulsed with emotion” (p. 85). This is another good lesson for academics, managers, and educators. Waitzken emphasizes close attention to detail when receiving instruction, particularly from his Tai Chi instructor William C.C. Chen. Tai Chi is not about offering resistance or force, but about the ability “to blend with (an opponent’s) energy, yield to it, and overcome with softness” (p. 103).

The book is littered with stories of people who did not reach their potential because they did not seize opportunities to improve or because they refused to adapt to conditions. This lesson is emphasized in chapter 17, where he discusses “making sandals” when confronted with a thorny path, such as an underhanded competitor. The book offers several principles by which we can become better educators, scholars, and managers. Celebrating outcomes should be secondary to celebrating the processes that produced those outcomes (pp. 45-47). There is also a study in contrasts beginning on page 185, and it is something I have struggled to learn. Waitzkin points to himself at tournaments being able to relax between matches while some of his opponents were pressured to analyze their games in between. This leads to extreme mental fatigue: “This tendency of competitors to exhaust themselves between rounds of tournaments is surprisingly widespread and very self-destructive” (p. 186).

The Art of Learning has much to teach us regardless of our field. I found it particularly relevant given my chosen profession and my decision to start studying martial arts when I started teaching. The insights are numerous and applicable, and the fact that Waitzkin has used the principles he now teaches to become a world-class competitor in two very demanding competitive enterprises makes it that much easier to read. I recommend this book to anyone in a position of leadership or in a position that requires extensive learning and adaptation. That is to say, I recommend this book to everyone.

SHORT TAKES

Bermuda bids to lure rich families with change in trust laws.

The Bermudan government has changed its laws in a bid to make itself more attractive to multi-generational wealthy families seeking to establish trusts in offshore trust jurisdictions, following the example of other offshore jurisdictions Jersey and Guernsey.

The Bermuda Parliament passed the Perpetuities and Accumulations Act 2009, which abolishes the rule against perpetuities for Bermuda law trusts, which requires interests in property to vest within a certain period and which effectively imposes a maximum life span on trusts.

John Goodchild, a partner at lawyer Permberton Greenish, said: “My view is that this is a step taken by Bermuda in order to remain competitive with those other jurisdictions in appealing to potential international clients who wish to tie up assets indefinitely within family trusts (as opposed to charitable trusts).”

Bermuda law trusts established after 1 August 2009 will no longer be required to limit their duration to 100 years, whether they are trusts for beneficiaries or for charitable or non-charitable purposes. Trusts already in existence on that date will be able to apply to the Bermuda court for an extension of their trust period.

Offshore law firm Conyers Dill and Pearman believes the flexibility which comes with the removal of the perpetuity period for all trusts enhances the attractiveness of Bermuda as a trust jurisdiction for wealthy families.

Increasingly, clients are looking to trusts as part of their long term wealth preservation strategy rather than for any short term advantage, said the lawyer.

The new rules will not apply to Bermuda real estate.

Caribbean leaders schedule brainstorming session at major summit.

A high-level tourism “think tank” session is a new component of the Caribbean Tourism Summit, set for June 8 to 10 at the Hyatt Regency in Washington, D.C. The business-focused summit is organized by the Caribbean Tourism Development Co., the marketing and business unit owned equally by the Caribbean Hotel & Tourism Association and the Caribbean Tourism Organization (CTO).

The brainstorming session on June 8th will include ministers of tourism, hotel and airline representatives, financial services members, tourism industry partners and representatives of the Caribbean Hotel & Tourism Association.

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