Low-Tax Jurisdictions Are Not Money Laundering Havens
- Center for Freedom & Prosperity
Dirty money is more likely to be laundered in high-tax nations than in tax havens. That is the conclusion of an article released by the Center for Freedom and Prosperity. The article cited reports of the State Department, Central Intelligence Agency, and Internal Revenue Service, all of which independently assess whether countries are money laundering centers and/or have systems that make them vulnerable to dirty money.

By Daniel J. Mitchell
In the aftermath of September 11, many policy makers assumed that terrorists were hiding their money in so-called tax havens. Investigators have since discovered, however, that the terrorists relied on the banking systems of the United States, the United Kingdom, Germany, and various nations in the Middle East for the vast majority of their financial transactions.

In spite of stereotypes formed by reading John Grisham novels, tax havens do not attract a significant portion of the world's dirty money. The State Department, the Central Intelligence Agency (CIA), the Financial Action Task Force (FATF - of which the U.S. is a member) and the Internal Revenue Service (IRS) each independently assess the extent to which a jurisdictions attracts - or has the potential to attract - dirty money. Some low-tax jurisdiction are on these lists, but the accompanying table shows that they are clearly outnumbered by high-tax nations.
21/01/2001
Low-Tax Jurisdictions Are Not Money Laundering Havens - Center for Freedom and Prosperity

Dirty money is more likely to be laundered in high-tax nations than in tax havens. That is the conclusion of an article released by the Center for Freedom and Prosperity. The article cited reports of the State Department, Central Intelligence Agency, and Internal Revenue Service, all of which independently assess whether countries are money laundering centers and/or have systems that make them vulnerable to dirty money.

By Daniel J. Mitchell
In the aftermath of September 11, many policy makers assumed that terrorists were hiding their money in so-called tax havens. Investigators have since discovered, however, that the terrorists relied on the banking systems of the United States, the United Kingdom, Germany, and various nations in the Middle East for the vast majority of their financial transactions.
In spite of stereotypes formed by reading John Grisham novels, tax havens do not attract a significant portion of the world's dirty money. The State Department, the Central Intelligence Agency (CIA), the Financial Action Task Force (FATF - of which the U.S. is a member) and the Internal Revenue Service (IRS) each independently assess the extent to which a jurisdictions attracts - or has the potential to attract - dirty money. Some low-tax jurisdiction are on these lists, but the accompanying table shows that they are clearly outnumbered by high-tax nations.

As the table indicates, every money laundering rating system finds that non-tax havens outnumber tax havens. It is especially instructive to examine the numbers in parentheses. These figures indicate the number of jurisdictions in each category that were given a clean bill of health by the IRS, and they show that the so-called tax havens received significantly better grades than their high-tax brethren.
There is no evidence to suggest that tax havens are a magnet for dirty money. This does not mean every low-tax jurisdiction has a perfect track record. After all, no country with a significant financial services sector is immune to money laundering. But it is clear that tax havens are neither the source nor the destination for a disproportionate share of the world's criminal proceeds.

Tax Havens and Money Laundering
Tax havens attract wealth, but most of the money is institutional investment. Bermuda, for instance, is a leading center for the insurance industry. Luxembourg and Switzerland are world leaders in managing mutual fund assets. The Cayman Islands is near the top in almost all facets of financial services and also draws a substantial amount of bank-to-bank deposits. American corporations make extensive use of offshore regimes, earning almost one-third of their profits in low-tax jurisdictions.

Individual investors also utilize tax havens, but very little of this money has criminal origins. Instead, it represents legitimate investment by people seeking sound money management, asset protection, and lower tax bills. This last feature is controversial, to be sure, but only because many high-tax nations assert the right to tax income earned outside their borders and get upset when low-tax nations do not help them enforce their tax laws.

There are several reasons why criminals are unlikely to rely on tax havens. On a practical level, it is very difficult to transfer money to a low-tax jurisdiction unless the funds already are in a financial institution. Yet if the criminal money is in a bank, the laundering already has taken place. So why bother going "offshore?" Criminals also avoid tax havens because of the added risk. Shifting money across borders-and then back "onshore" when the funds are needed-significantly increases the probability of detection. The United Nations has even acknowledged that criminals avoid so-called tax havens because they are a "red flag" for law enforcement. Terrorists are even less likely to utilize tax havens since they are motivated by hate rather than tax minimization and/or asset protection.

High-Tax Nations and Money Laundering
By its very definition, money laundering is hard to measure, so any effort to pinpoint where it takes place necessarily involves speculation. Nonetheless, many "onshore" experts acknowledge that the real problem is in their own backyards. The FATF admits, for instance, that criminal "funds are usually processed relatively close to the under-lying activity; often...in the country where the funds originate." And since most of the world's criminal activity takes place in North America and Europe, it should come as no surprise that tax havens are not major money laundering centers.

Unfortunately, the same thing cannot be said about high-tax nations. According to a recent article in Government Executive, a publication for U.S. policy makers, "The International Monetary Fund estimates that about $600 billion is laundered each year globally. Estimates of U.S. money-laundering traffic hover at $300 billion, including about $60 billion in drug money alone." A more recent article in the FBI's May, 2001 Law Enforcement Bulletin comes to a similar conclusion. The author noted that "...not only does the amount [of money laundered] lie somewhere between $500 billion and $1 trillion, but that half is being laundered through U.S. banks." And a recent report issued by one of the top fraud recovery firms in Europe estimates that the United States is the source of nearly 50 percent of the world's dirty money. The same study reveals that there is only one so-called tax haven among the top 10 jurisdictions where dirty money is invested.

High-tax nations, like their low-tax counterparts, do have laws against money laundering. Unfortunately, they are not very successful. The U.S. Treasury Department estimates that 99.9 percent of the criminal money in the United States is laundered successfully. Other OECD nations have equally poor records. Dirty money in Germany almost always escapes detection, while the United Kingdom admits that more than 99 percent of criminal money in the City of London is successfully laundered.

High-Tax Nations Versus Low-Tax Nations
None of the government bodies that rate money-laundering vulnerability include representation from low-tax jurisdictions. Three are agencies of the U.S. government and the fourth - the FATF - is part of the OECD, which is notorious for its anti-tax haven initiative. Yet these four groups independently have concluded that low-tax jurisdictions do not attract a disproportionate share of dirty money.
Indeed, they almost surely have better track records than high-tax nations.

Consider, for example, the CIA's list of money laundering centers. According to the agency, only four out of the 41 OECD-identified "tax havens" fall into this category. This is considerably less than the 11 non-tax havens that received this label from the CIA - including the United States and the United Kingdom. Even if the list is expanded to jurisdictions that merely are considered "vulnerable" to money laundering, there are only five more "tax havens" on that list compared to another six high-tax nations.

The State Department's list is much bigger than the CIA list, but the results do not change. The diplomats estimate that 14 tax havens are a primary concern for money laundering vulnerability. That may sound like a lot, but it is insignificant compared to the 38 non-haven jurisdictions that are on the list. Once again, the United States and United Kingdom receive the lowest possible grade.
Looking at the State Department's list of "secondary" jurisdictions, the pattern remains. Sixteen low-tax jurisdictions are listed, but this is less than one-half the number of high-tax countries that are in this category.

Even the Financial Action Task Force (FATF) list contains a number of surprises. There are eight "tax havens" on the FATF blacklist, but this is fewer than the 11 non-havens that are on the list. The FATF list is especially interesting because the organization is an adjunct body of the OECD. As such, the FATF list is widely viewed as being politically tainted by a desire to target low-tax jurisdictions.
Yet even with this biased perspective, FATF branded more high-tax nations than low-tax nations as being "non-cooperative" in the battle against money laundering. The balance would have been even more weighted toward high-tax countries if FATF was willing to list its own members as "non-cooperative." According to the organization's recent self-assessment survey, only 10 of 29 members met all of FATF's criteria, and four members - the United States, Canada, Japan, and Mexico - received failing grades.

Last but not least, the Internal Revenue Service determines whether a jurisdiction has effective know-your-customer laws when deciding to grant "qualified intermediary" status to foreign financial institutions. Of all the agencies, the IRS would be most likely to be hard-nosed, yet 19 of the OECD's supposed tax havens have received the agency's blessing, with another two awaiting approval (most, if not all, of the others have not bothered to apply). Every major financial center has received QI status, including the Cayman Islands, the Bahamas, the Channel Islands, Panama, Liechtenstein, the British Virgin Islands, Monaco, Gibraltar, Barbados, and the Netherlands Antilles.

Conclusion
The International Monetary Fund recently announced that it wants to help a country upgrade its money-laundering laws. But the nation the IMF is targeting is not Liechtenstein, Panama, or the Bahamas. It is the United States. This does not mean, of course, that anything is wrong with American laws. The bureaucracies that review money-laundering laws, after all, seem oblivious to cost-benefit analyses. They also seem to completely disregard the value of personal privacy and legal protections against unreasonable search and seizure. And perhaps most important, they apparently do not assess whether new laws will help catch criminals. A former Treasury Department official recently admitted, for instance, that the money-laundering provisions in the new PATRIOT legislation in the United States would not have detected the September 11 terrorists.

Punishing criminals and deterring future crime is a core responsibility of government. To properly carry out this function, however, lawmakers should make reasoned decisions using the best data. Several U.S. government agencies and one international bureaucracy have analyzed the problem of money laundering and these groups have unambiguously concluded that low-tax jurisdictions are neither the source nor the destination for a disproportionate share of the world's dirty money. It remains to be seen, however, whether this reduces the amount of demagoguery against tax havens.

Daniel J. Mitchell is the McKenna Senior Fellow in Political Economy at The Heritage Foundation.
The Center for Freedom and Prosperity Foundation is a U.S. based public policy, research, and educational organization operating under Section 501(C)(3). It is privately supported, and receives no funds from any government at any level, nor does it perform any government or other contract work.

17/11/2001
PREPARATION FOR THE NEXT WAR: A NEW MINDSET NEEDED

By Edwin J. Adams
International Economic Consultant

The news review
From all TV accounts, the war in Afghanistan has gone rather well what with the Taliban finest desperately departing Kabul without the much feared possibility of house to house combat. Alas, oh that the news were half as good in the next war. The very last event that the airline, hotel and other tourist-dependent industries needed was an airline crash but that is what they got on November 12 with a high lost of life and a few, for good measure, on the ground as well. This, coming on top of earlier news that the US economy had contracted in the third quarter and unemployment had soared to 5.4%. Clearly, the time has come to take this war against depression every bit as seriously as the one against terrorism.

Situation report
On no front was the news especially encouraging. While Greenspan announced the tenth cut in the Fed Funds rate to an amazingly low 2 percent, no one could discern that these cuts had made any impact so far. Many observers remarked, however, that these cuts always needed 9-11months before they could hope to impact the economy. But neither was the news good from Japan. The Bank of Japan projects contracting output and falling prices into the year 2003. Not surprisingly, there were many analysts expressing total dissatisfaction with this state of affairs. More immediately ominous was the widespread concern for Argentina. Almost all have somewhat belatedly agreed that the current situation is unsustainable. The bigger difficulty, however, is to agree a solution: is it to be dollarisation, devaluation, default or any of a myriad options proposed by global experts? The critical issue is that with a $132 billion national debt and most other debt designated in US dollars any monetary policy change is sure to lead to considerable financial chaos. Finally, the World Bank reported that it expected growth in developing countries to fall from 5.5% in 2000 to as low as 2.9% this year.

Diagnosis remains
Regular readers of this column would, of course, not be surprised by these turn of events. For I have already made it clear that the monetary and financial systems at work are flawed and such chaos is to be expected. Until we agree a global monetary standard with an appropriately devised monetary order we shall remain vulnerable to the growing economic setbacks that we continue to observe across the world.

Next society: new institutions/ theories
In the midst of it all, The Economist newspaper (November3, 2001) has provided us all with the views of that great man of letters and extraordinary vision, Peter Drucker. The subject: The next society, a survey of the near future. He warns us that: "It will be quite different from the society of the late 20th century, and also different from what most people expect. Much of it will be unprecedented. And most of it is already here or is rapidly emerging." He concludes by confidently asserting that: "The central feature of the next society, as of its predecessors, will be new institutions and new theories, ideologies and problems." (Emphasis mine) My essential thrust over the last six months or so has been to hammer home the message that in this hour we need to discover and implement the new economic paradigm. But what do we observe? In the face of declining economic performance do we intensify and extend our search to discover the new? No! Most economists have shamelessly returned to Keynesianism en masse speaking positively about the plethora of such initiatives launched or pending in the US and elsewhere.

Change, however, is inevitable. The difficulty is that it need not be gentle. For it to be so, there must be greater effort at looking afresh at the world’s economies and paying a greater attention to those providing new pathways to the future. Your columnist just happens to be one of those with an architectural design for our economic future. You shall shortly get an opportunity to learn of this new pathway. In the meantime let the period of new institution building based on new theories begin.November 16, 2001.

24/10/2001
THE WAR AGAINST GLOBAL DEPRESSION
By Edwin Adams
Economic Consultant

HYPOTHESIS
The war on terrorism against Afghanistan, by all second hand accounts, seems to be going quite well. The war on the other front, as the October 29 issue of Fortune magazine refers to it, is not going so well at all. That is, the battle to revive the US, and indeed the world economy, has failed to respond, so far, to the energetic ministrations of the Federal Reserve. We can expect more from him in the future though with far less irrational exuberance about the efficacy of the FOMC’s actions in turning the economy around. As for the actions of the US legislators, it is reported that they are working on a package of tax cuts and benefits of the order of $155 billion. The problem is that the US economy GDP is over $ 10,000 billion. The hope, no doubt, is that being the patriotic folks that all Americans are; they will proceed to do their bit to multiply the impact of Congress’ largesse. Herein lies the problem; when one allow one’s eye to gratuitously and carelessly drift from the tightly scripted play on stage to the several unwelcome actors in the wings of the stage impatient to have their turn, one gets distinctly uncomfortable. Could we be heading into a depression of 1930s proportion? I hope not; but there are unmistakable signs. We need to declare a war against this.

THE EVIDENCE
In the face of so many professional economists confidently assuring their audiences that an up-turn should be on the way by the second half of next year your columnist, I am afraid, cannot concur. There is simply too much evidence pointing to a contrary state of affairs. It is necessary to stress, in this period of general gloom, that I believe that we have an opportunity as never before to shape the 21st century. To paraphrase President Bush’s position taken in his major speech after the disaster: the issue is whether one is committed to a war against global depression or one is indifferent to its looming presence and therefore against our planned retaliation.

CRITICAL DIMENSIONS
There are macro, micro and institutional dimensions to this incipient crisis.

The macro element
While the plans of official Washington are to stimulate spending, the more responsible economists remind us that America’s businesses and households are already deeply in hock. The private deficit at 6 percent of GDP is said to be exceptionally high on a historical basis. Indeed, household debt at the end of the first quarter had risen to 101.5% of disposable income even while their net worth had shrunk by 3.4trillion dollars.
The US itself had a net international debtor position of -$2,187 billion at the end of 2000. We could also itemize the situations in Japan and Argentina as well which are even gloomier but I believe you have gotten the picture.

The Micro element
What should be even more disturbing to the general public, and is not, is the fact that there are ever fewer sectors of the economy where we confidently know how to create value and or provide the desired quality at an affordable cost. This is particularly so in the economies of the US and the UK. I list below the economically defective sectors:

SECTOR COUNTRY COMMENT
Healthcare US and UK Unable to meet the needs of 40 million; those who have recently lost their jobs will most likely have lost their health care.
The quality is cause for widespread concern as was made manifest at the last general elections. Its worst aspect is the lengthy wait for surgical treatment.
Education US and UK The well off and the teachers’ union are the only groups not complaining about the education system.
Air transportation US What can one say that has not been said already except that the industry now have the Sept. 11, event as the perfect cover.
Telecom US and UK Even the businessmen’s organs-Fortune and Businessweek- have finally admitted the Telecommunication Act 1996 has been a disaster. There remains a growing unmet need for broadband services.
Electricity US and UK The Californian deregulation disaster should at least bring some measure of sanity to this sector for a while.
Rail UK Railtrack, the privatised rail-network infrastructure company after many accidents in its short life has collapsed into bankruptcy five years later.
Agriculture US After farmers were given the freedom to farm back in 1996, the US Congress now feels it necessary to sign into law a $173 billion-ten year farm-aid package.
E-commerce US One hopes the future is more profitable than its recent past.
Financial services US There are many, many unhappy clients.

Though the bulk of mainstream economists pretend not to notice, I suggest that the foregoing table tells a rather grim story. The foundation and basis for economic growth are broken beyond simple repair. To begin the turnaround process, however, we must at least admit that we have a problem. Would they, would you?

The institutional element
If you were one of the optimistic ones who invested in the emerging markets of the world since 1994 you would certainly be sadder and wiser at this time. You have had to contend with stock market crashes, bank runs, government collapses, currency collapses and debt defaults. This experience just confirms that globalisation is simply a philosophical wish list, what remains to be accomplished is the crafting of an institutional framework necessary for the achievement of such wishes.

THE WAR AGAINST GLOBAL DEPRESSION
In every democratic society, the people’s representatives should be given the opportunity to express their viewpoint before any war is declared let alone fought. Accordingly, I shall give you the opportunity to have your say before I proceed. Be warned it is unlikely that many institutions will be left standing in their current shape when this war is over. On the other hand, you and your children can look forward to years of prosperity, unparalleled with any thing we have experienced in the 20th century. Note, however, that I shall take your silence as consent to proceed with the presentation of my battle strategy. E-mails to neweconmodel@hotmail.com.

10/08/2001

GLOBAL ECONOMIC WOES WORSEN: ECONOMICS IN THE DOCK

By Edwin J. Adams,
Economic Consultant

OLD FASHIONED ECONOMIST
In Keynes’s effort to dethrone the ideas and sway of classical economists in the 1930s, he reportedly mocked those so called practical men of affairs who felt they were totally free of the influence of economic theories when in fact their beliefs were based on those of some long defunct economist. A number of events over the past week have caused me to reflect on this. Only this time it is not practical men that are the cause for concern but more ominously, the economists of our time.

NEW DIFFICULTIES, OLD SOLUTIONS
Everywhere one looks where there are economic difficulties, you are sure to hear some economist or policy maker complacently proposing the same routine, increasingly ineffective, solutions. Nevertheless, the September 11, atrocities have rather quickly deepened our economic woes so that I do not expect it will be long before ever more people realize that the economic emperor has no clothes. More specifically, if we believe our public officials, there are no problems that confronts any major economy that cannot be remedied by aggressive interest rate cuts or higher levels of fiscal expenditure or relief. Though economists in recent times pay little attention to Keynes, they are, however, firmly wedded to the solutions he proposed over six decades ago. Yet if we are to escape economic disaster, it is necessary that economists be more open to the need for a fresh perspective in the new circumstances that now prevail.
It is not often one gets the opportunity to observe a respectful adult relationship between a G7 country and a developing country let alone between such and an Offshore Financial Centre (OFC). But this was the occasion September 26, 2001 when Mr. Howard Davies, Chairman, Financial Services Authority(FSA) of the United Kingdom spoke to a gathering in Douglas, Isle of Man (IOM). What came across clearly, is that from what he said to his IOM audience, the powers that be seem intent on using OFCs as scapegoats for every financial evil that they confront in their country or the world economy.

SCAPEGOAT
This is one of the many issues Mr. Davies addressed: "In short, offshore centres will need to do much more in the coming years to demonstrate that they can and do meet international standards of best practice. If that does not happen, then the future is bleak." This seems reasonable until you realize that it does not represent the best way forward. Standards are important and necessary but it is not a requirement that we should all follow one level of quality standard.
He had more to report, however, and it was even more disturbing:
And pressure is not solely related to the tragedy at the World Trade Center. 3 weeks ago, before the hijackings, the FSA hosted the most recent meeting of the Financial Stability Forum. The Forum was set up a
couple of years ago, on an initiative from Gordon Brown…. The agendas cover a broad front, from the activities of highly leveraged institutions like hedge funds, through the financial situation in crisis-hit emerging markets like Turkey and Argentina, to the health of the Japanese banking system.

But it was striking that, at this month’s meeting, the subject which generated the most heat was the role of offshore centres. A number of representatives believed that such progress as has been made towards higher regulatory standards was simply inadequate, and that more political measures needed to be taken. (Emphasis mine)
Regular readers of this column will no doubt understand my consternation at such a viewpoint. It is not that regulatory standards are not to be improved, but as I have said in previous articles, it is just not the most important item on the world’s agenda. Is this any different than officers having the sailors rearrange the deck chairs on the decks of the ill-fated Titanic.

NEW SOLUTIONS REVEALED
Your columnist believes that he may have the opportunity to finally confront this dangerous thinking. There shall shortly be available for sale a report that, I believe, will be quite vital at this time. In preparation since before the September 11 incident, it is being revamped to reflect current events. The report is entitled: The U.S. Economy 2002 Economic Forecast: Identifying the Paradigm Shift. It brings together all our previous research to show that a robust recovery from this slowdown on the basis of the usual Keynesian inspired fiscal and monetary policies will prove unequal to the task at hand. After all, how many Japans do we need to demonstrate this? Let me have your observations, orders, and responses sent to neweconmodel@hotmail.com.


09/27/2001
THE WAR ON TERRORISM: WHAT ARE OFCs TO DO?
By Edwin J. Adams,
Economic Consultant

There is no doubt about it, we live in a very uncertain, and I might add, an increasingly unsafe world. Your columnists was excitedly dealing with the ramifications of his findings in economics and its potential implications when I, like so many others, was rudely stunned by the dastardly acts of the terrorists in America on September 11. If nothing else, it has forced me to undertake a critical review of all my assumptions and outlook for the future. As these relate to the Offshore Financial Centres (OFCs), there can be no doubt that there will be more changes ahead.

The US Treasury Secretary has made it abundantly clear that his administration was prepared to financially strangle the terrorist networks around the world. This means, in part, that wherever the terrorists hold offshore bank accounts, the US and its allies were likely to bring pressure on the authorities in these OFC jurisdictions to have such accounts sequestrated. One fears that in the post-WTC era that there is likely to be strong worldwide support for such actions. President Bush, at any rate, has made it absolutely clear in his speech last night, to paraphrase him, that those who are not seen to be actively supporting his country’s efforts in this venture would be considered as part of the problem.

This column has as one of its major objectives, as regular readers would be aware, a strong desire and interest in supporting regulatory fairplay so that our caution would be that any action contemplated be applied across the entire breadth of financial centres worldwide. In the short term though, given the rapidly emerging events in the US and global economies any action against terrorism needs to be analysed to assess its impact on our fragile global financial system. This should come as no surprise, the OFCs play a vital part in the global financial system and by extension I am interested in any issue that impacts the financial system. My last article, accordingly, looked at the adverse impact of the lack of a global monetary standard on the global financial system and the failing attempt to forge a new global financial architecture.

In this regard the news is not very good, the events of September 11 have severely impacted what is said to be the world largest industry: The tourism and travel industry. US hotels now complain of low occupancy rates, airlines are laying-off workers, some travelers are reacting by completely avoiding cruise ships. For an economy that was already showing signs of slowing this seems ominous. To add to it all, the continuous announcements of job cuts across the US economy and the ongoing plunge in the stockmarkets in the US and elsewhere will depress the US consumers’ confidence and spending. Clearly, the complacent confidence policy makers continue to display in Keynesian type answers to the economy’s woes is misplaced. I strongly suggest that new approaches will be needed to secure an economic turnaround on this occasion.

I believe my column can be of tremendous use in this area because I am now engaged in producing the a report entitled: "The US Economy 2002 Economic Forecast: Identifying the Paradigm Shift." The essence of the report is that the recovery cannot be achieved simply by interest rate cuts and deficit spending. As we should have learned from Japan, the situation cries out for new approaches. Excerpts will appear in the next column. I look forward to your comments; I can be contacted at: "neweconmodel@hotmail.com.

BREAKING COMMENTARY
07/09/2001
THREAT TO THE INTERNATIONAL FINANCIAL SYSTEM: NOT THE OFCs, BUT KEYNES’S ERROR
By Edwin J. Adams,
Economic Consultant

While preparing a paper recently to coincide with the thirtieth anniversary of the collapse of Bretton Woods, your columnist stumbled upon what I refer to at this time as a major finding. That is that, the man himself, none other than John Maynard Keynes, he of "General Theory of Employment, Interest and Money" fame, had made a major error. He had misdiagnosed the cause of the terrible economic and employment slump in the 1930s. But before you move on thinking this is a bit of economic minutiae that only an academic can enjoy, be warned! This issue, in fact, goes to the heart of the matter of whether you will still have a job next year and the security or otherwise of your pension savings.

You will recall, as I have addressed often in this column, my view that the world’s financial authorities are somewhat misguided in their wholesale attack on Offshore Financial Centres (OFCs). If we are to believe the OECD and the IMF, they, the OFC, are the biggest current danger to the stability of the international financial system. The recent findings I made, however, will expose how truly misguided these bodies are. How can one achieve stability in the international financial system before you achieve global monetary order? An historical review will demonstrate this only too clearly.

In the period prior to the First World War there was tremendous global trade and capital flows, so much so that Great Britain exported capital to the tune of 9% of her GDP. And the glue that held it all together was the global monetary order of the time geared to satisfy the demands of the gold standard. Equally, in the world economic boom of the post-WW II era that lasted for a quarter century, we had, once again, a global monetary order, this time mediated by the IMF, geared to satisfying the demands of the gold exchange standard. What global monetary standard do we have in place in this era of globalisation?

There is no global monetary standard at this time; what we have at this time, everywhere we look, are countries in dire economic distress because of the absence of such a monetary standard. Argentina is about to begin its fourth year of recession even as they seek to undertake yet more painful reforms to comply with the terms of the latest IMF US$8 billion loan. This will clearly not fly while they continue with a monetary system suffocating within their currency board straitjacket. But isn’t it the responsibility of the IMF to ensure the on-going suitability of countries’, and the world’s monetary order? Isn’t this more important that another large financial rescue package? On this note, what is the IMF going to advise about Japan which has been in an economic slump for over ten years?

Here is a country that sorely needs a robust global monetary standard and order. Her banks are under great strain because of large loan losses compounded by low profits caused in part by nominal interest rates that are close to 0%. Clearly, the Japanese people need to have the freedom to export their savings and so enjoy a much higher return, leading in turn to higher domestic interest rates and higher bank profits. This would not happen unless the world enjoys and we are all confident and comfortable with a credible global monetary standard and order.

This is where I have to return to Keynes’s error. If he had properly diagnosed the cause of the collapse of the gold standard and the ensuing employment slump in the 1930s, he would have proposed a different arrangement for the Bretton Woods monetary order in 1944. As it is, that order was doomed to fail and fail it did in 1971. Now we see even the largest economies: the US, Europe and Japan, are now facing major economic dislocations because of this error. Realistically though, what is the road ahead?

It is very much up to you out there! Your columnist can only do so much; the last time I sought your response you were slow off the mark. This, however, is far more important. Even as I write, and as you are very well aware, the world’s economic and financial systems are under great strain. Its my intention to provide a public service through the holding of an International Monetary Conference, October 25-26, 2001 where you would have the opportunity to respond to my "Theory of Production Discontinuity" which furnishes the theoretical basis of my arguments concerning Keynes’s error. The findings of the conference can then be sent to the IMF to assist them in their efforts on the way to a new international financial architecture.
Next week I shall provide more on this new path breaking theory and further details of the proposed conference. Until then you can reach me at neweconmodel@hotmail.com
(See website: www.worldoffshorebanks.com for previous issues.)

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