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GREENSPAN WARNS OF U.S. RECESSION - Associated Press - February 26, 2007
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Alan Greenspan, the former chairman of the U.S. Federal Reserve, warned Monday that the American economy might slip into recession by the end of the year. Speaking to a business conference in Hong Kong, Greenspan said that the U.S. economy had been expanding since 2001 and that there were signs that the current economic cycle was coming to an end. When you get this far away from a recession, invariably forces build up for the next recession, and indeed we are beginning to see that sign, Greenspan said via a satellite link. He cited the stabilization of profit margins as an early sign we are in the later stages of a cycle. While, yes, it is possible we can get a recession in the latter months of 2007, most forecasters are not making that judgment, he said. Rather than predict when the next shock would occur, Greenspan said, policy makers should create a global environment in which economies are capable of absorbing unforeseen events. He noted that the investor appetite for risk had led to low risk premiums on financial assets, which could pose problems in the future. We do not and cannot look into history without being very concerned when you see the absence of awareness and concern about risk that we see today, Greenspan said. Housing starts in the United States are down quite sharply, which is implicitly creating a reduction in the very high inventories of new unsold homes, he said.
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http://www.iht.com/articles/2007/02/26/business/gspan.php
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EDITORS NOTES: So, Al is now claiming we have a recession coming, but funny how he forgot to mention the recession that happened round about 2002-2003, which was answered by running the printing presses under his tutelage. Certainly there already has been much speculation as to a return of the so-called stagflation of the seventies (higher interest rates, inflation, stagnant economy, etc.). I guess we will have to wait and see. Regardless, you may find the following recent book of interest: BUBBLE MAN - Alan Greenspan and the Missing 7 Trillion Dollars - Published in 2006 By Peter Hartcher.
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But not be outdone by his former colleague, current Federal Reserve Bank Chairman, Mr. Ben Bernanke, had the following to say to the US House of Representatives (Congress) Committee on the Budget, on Feb. 28, 2007:
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Unfortunately, we are experiencing what seems likely to be the calm before the storm. In fiscal 2006, federal spending for Social Security, Medicare, and Medicaid together totaled about 40% of federal expenditures, or 8½% of GDP. By 2030, the federal budget deficit will approach 9% of GDP - more than four times greater as a share of GDP than the deficit in fiscal year 2006. The ratio of federal debt held by the public to GDP would climb from 37% currently to roughly 100% in 2030 and would continue to grow exponentially after that. The only time in U.S. history that the debt-to-GDP ratio has been in the neighborhood of 100% was during World War II. People at that time understood the situation to be temporary and expected deficits and the debt-to-GDP ratio to fall rapidly after the war, as in fact they did. In contrast, under the scenario I have been discussing, the debt-to-GDP ratio would rise far into the future at an accelerating rate. Ultimately, this expansion of debt would spark a fiscal crisis, which could be addressed only by very sharp spending cuts or tax increases, or both. The prospect of growing fiscal imbalances and their economic consequences also raises essential questions of intergenerational fairness. As I have noted, because of increasing life expectancy and the decline in fertility, the number of retirees that each worker will have to support in the future either directly or indirectly through taxes paid to support government programs will rise significantly. To the extent that federal budgetary policies inhibit capital formation and increase our net liabilities to foreigners, future generations of Americans will bear a growing burden of the debt and experience slower growth in per-capita incomes than would otherwise have been the case.
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CENTRAL BANKS CUTTING HOLDINGS OF U.S. DOLLAR
Bloomberg News - February 26, 2007
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Central banks around the world are continuing to diversify their reserves by cutting their dollar holdings, according to a survey sponsored by Royal Bank of Scotland Group. Italy, Russia, Sweden and Switzerland have made major adjustments in foreign-exchange holdings favoring the euro and the pound, according to the poll, which was conducted by Central Banking Publications between September and December 2006. China also plans to manage its reserves more actively, the report said. Central banks are open to saying they've been diversifying to improve returns and reduce exposure to any single currency, said Sean Callow, senior currency strategist at Westpac Banking in Singapore. There's no doubt that when they say diversification they mean selling dollars. Diversification of official reserves could make it more difficult for the United States to finance its current account deficit, the broadest measure of trade in goods and services, and cause yields on U.S. Treasury securities to rise. The dollar accounted for 65.6 percent of global currency reserves in the third quarter, according to the International Monetary Fund. The U.S. current account deficit widened to a record $255.6 billion in the third quarter of last year, according to the Commerce Department. When a country runs a deficit in the current account, it relies on overseas investment to offset a shortfall in savings. Net purchases of U.S. stocks, notes and bonds by investors from abroad fell to $15.6 billion in December, the lowest level in almost five years, according to the Treasury Department. Nineteen of the 47 central banks surveyed had cut their share of dollars, with 10 saying that they had increased holdings of the U.S. currency. Twenty-one respondents said they had increased their reserves of euros, compared with seven who said they had reduced their holdings of the currency.
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http://www.iht.com/articles/2007/02/26/business/reserves.php
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EDITORS NOTES: Many of our clients lately have been asking about the US Dollar and if they should start moving into other currencies. When the central banks of the world's major economies start dumping US Dollars, the answer is obvious. Interestingly enough, the Dominican Republic Central Bank announced previously that they would be moving into British Pounds as one of its key foreign reserve currencies instead of the USD. It would seem those Dominicans are not so dumb after all, and neither are many other nations as well.
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MEDICARE PREMIUMS MAY INCREASE RECORD AMOUNT NEXT YEAR
March 1, 2007
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Medicare Part B premiums are forecast to increase by $15.90 in 2008, the largest single-year hike in the history of the program, according to a new analysis by TREA Senior Citizens League. The 17 percent increase would bring the premium to $109.40, up from $93.50 in 2007. Medicare Part B pays for doctors' visits, tests, and outpatient hospital care. The large Medicare premium increase could mean that many will see no increase in their Social Security checks. The Congressional Budget Office (CBO) estimates that seniors will receive just a 1.5 percent Social Security Cost of Living Adjustment (COLA) in 2008. For the person with an average monthly Social Security benefit of $1,044, that would result in a $15.70 monthly increase than the increase in Medicare premiums. Almost all beneficiaries have their Medicare Part B premiums automatically deducted from their Social Security checks. The reason for the forecasted increase is the growing deficit in the Medicare program. In 2006, Medicare's Trustees announced that closing the deficit would require an 11 percent increase in Part B premiums for 2007, but the Bush administration, which sets the final rate for Medicare premiums, opted instead for a lower 5.6 percent increase.
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http://www.elderlawanswers.com/resources/
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STOCK SELLOFF IN CHINA HITS WALL STREET HARD
By Associated Press - Feb 28, 2007
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WASHINGTON -- A plunge in Chinese stocks rippled across global markets Tuesday, triggering a massive wave of selling in the United States that sent the Dow Jones industrial average down 3.3 percent, or 416 points, its biggest decline since March 2003. The news from Asia sparked the initial sell-off, but a confluence of other events, including news of rising real estate loan delinquencies, a surprisingly weak manufacturing report and a bombing near Vice President Dick Cheney in Afghanistan, made an already difficult day worse. For most of the morning the Dow declined steadily until it had fallen 300 points. Then, just before 3 p.m., it suddenly plummeted another 200 points before recovering slightly because of a trading glitch that led to a backlog of sell orders clearing at once. The Standard and Poor's 500-stock index, a broad measure of stock prices, also lost more than 3 percent by the close of the trading day, its biggest drop in three and a half years. From currency markets to blue-chip companies to international stock exchanges, no sector was left unscathed Tuesday. The day was reminiscent of when the Internet bubble burst several years ago -- traders and investors around the world stared at electronic boards and televisions showing markets falling deeper into the red. Todd Leone, head of trading at Cowen & Co., said he saw nothing but sellers. My whole screen is red. Every group is down. Adding to the market's woes, former Federal Reserve chairman Alan Greenspan warned in a speech Monday that the U.S. economy might slip into recession by year's end. I don't think a one-day (sell-off) is going to do justice for what's been going on, said John O'Donoghue, co-head of equity trading at Cowen. It wouldn't surprise me to see a total 5 percent correction and even more from here. A major long-term concern among analysts is whether the heady days of cheap debt is coming to an end. The ability to borrow money at low rates and with favorable terms has fueled much of the world economy in the past few years, including the record-topping leveraged buyouts on Wall Street, the global run-up in real estate prices and the surge of investments in emerging markets overseas. Signs surfaced Tuesday that the easy availability of debt may be ending.
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Moreover, investors fled emerging markets and took safe positions in the currencies of Japan and other countries where borrowing costs are among the lowest in the world. As emerging markets took it on the chin, the yen climbed 2.3 percent yesterday, the most in nearly a year, against the dollar. This occurred because investors sought to protect their money in case of a sustained downturn. During a growing global economy, these investors can take more risks and make higher returns by borrowing money and pouring it into emerging economies, such as China and India. To many investors, Tuesday's events were a stark demonstration of how the global economy, not just that of the United States, has vulnerable spots. That a sell-off in China could have such serious reverberations around the world was noteworthy, said Joseph Stiglitz, a Nobel Prize winner and former chief economist at the World Bank. China has been the engine for global growth, Stiglitz said. And a significant slowdown in China would have fundamental implications for commodity prices around the world. Oil prices have been sustained by high Chinese demand. Just think of what would happen if a significant part of China that had a slowdown.
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http://www.tdn.com/articles/2007/02/28/biz/news05.txt
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WALL STREET REBOUNDS BUT SLIDE IN EUROPE CONTINUES
By Keith Bradsher and Martin Fackler - February 28, 2007
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Stock markets fell sharply across most of Asia on Wednesday and continued declining in Europe in early trading, as investors worried about weaknesses in the American economy. But share prices rebounded in Shanghai and Shenzhen, the Mainland Chinese stock markets that had been the first to tumble during Tuesday's global market rout, falling nearly 9 percent then. Both mainland markets rose nearly 4 percent Wednesday as state-controlled media reported that the government might allow greater foreign investment in Chinese stocks and would not impose capital gains taxes on stocks soon. Stock markets elsewhere fared much worse on Wednesday. Rajat Nag, the managing director general of the Asian Development Bank, said in an interview in Hong Kong Wednesday that the economic fundamentals of most Asian economies were strong. But the region remains dependent on exports, especially to the United States, and China is among the most dependent of all, with international trade in goods equal to 65 percent of its economic output last year, he said. We are still fairly bullish on the Chinese economy's growth potential, Nag said, while adding that its dependence on exports is vulnerability. China's current difficulties are partly a case of getting what the government wished for, only to regret it. The Chinese government has limited the appreciation of the country's currency, the Yuan, to a very slow pace by buying dollars on a massive scale as they enter the country, accumulating more than $1 trillion in foreign exchange reserves. To pay for the dollars, the Chinese central bank has been issuing hundreds of billions of Yuan. The central bank has been able to sop up some of the extra money supply by selling more government bonds to Chinese banks and the public. The stocks of Asian exporters to the United States, like Sony, suffered particularly heavy losses on Wednesday following a report on Tuesday from the Commerce Department that orders for cars, washing machines and other durable goods dropped 8 percent in January. There is a worry that U.S. consumption could slow substantially, and that is a much bigger factor than China's stock market, said Tao Dong, the chief Asia economist in the Hong Kong offices of Credit Suisse.
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http://www.iht.com/articles/2007/02/28/news/stocks.php
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EDITORS NOTES: It used to be said that when the US sneezes, the rest of the world catches a cold. It would seem today that when China coughs, the rest of the world catches pneumonia. How things have changed. Which is to say, the US consumer makes up about 70 percent of the entire US economy, and 20 percent of the world economy. Therefore, while 20 percent is a substantial number, it is certainly not as high as 70 percent. The inference is that if the US consumer stops buying (or stops getting free for the asking, new shiny credit cards in the mail) to be sure, the world will feel it (and the average US citizen will really, really, really feel the pain - where is Bill Clinton when you need him?) But, will the rest of the world really be as bad off as the US in such a case? That depends, and not necessarily, is the answer. In terms of the recent events in the Chinese Stock Markets, a ten percent correction after a more than 100 percent run up in one year, is not so bad and to be expected (not to mention the 4 percent rebound afterwards). The fundamentals for China are still there, even though it is true that the previous growth has been contingent upon all those happy American consumers buying every-day low priced stuff at Walmart (made in China, naturally). As noted economic guru Dr. Marc Faber has indicated in the past (also known as Dr. Doom for his more, shall we say, sanguine predictions), China can really grow its economy without the US market, IF it has to. It may not grow at 10 percent per year, as it has for the last decade, but it can probably still reach 4 percent, 6 percent or whatever positive growth. Which is to say, if 60 percent of Chinas growth is directly attributed to the US, and if that 60 percent goes away, we are still talking about a positive 4 percent (10 minus 6 equals 4, just to be clear on the math). And aside from all of the other markets China does already sell to, it is also in the process of making inroads in many other markets (note the recent bilateral trade agreements China has been signing around the world recently, India as just one notable example). In addition, there are an estimated 300 Million people inside of China just waiting to be crowned middle class Chuppies (Chinese Upwardly Mobile Urban Professionals). That is a segment of Chinas population, and just a segment I remind you - that rivals the entire population of the United States.
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The United States on the other hand is an accident waiting to happen. I know that there are many Americans out there who will take offense to this comment. I also know that there are many US politicians along with people in the US financial services industry who continue to sing a happy tune, and praise the positive (the only notable exception is Stephen S. Roach, the lead economist at Morgan Stanley). However, this does not mean that the serious economic problems and pitfalls will go away, or are simply negative propaganda. In order to understand this, one must forget about nationalistic pride for just one moment and take out your calculator instead. In other words, let us look at things coldly, without passions or emotions involved, in terms of hard numbers. To be sure, we all know that stress and strains on the government welfare state programs are an upcoming fact of life, due to demographics. We also know, that the European Union nations and Japan will face the exact same problem. However, the difference lies with the economic condition of the average American consumer in comparison to his European or Japanese counter-part. Which is to say, the Unites States is addicted to debt, both in terms of government spending and individual consumer spending as well. And unfortunately that debt is largely externally financed (by foreigners, or foreign money, rather than through domestic savings). While some US companies have indicated record profits in recent years (and in some cases, other US companies cling an inch away from bankruptcy), those numbers are based on just two things, which are not sustainable. The first thing to understand is the fact that US companies have outsourced just about ALL their production or manufacture to lower wage foreign countries. This has allowed them to produce the same goods at lower cost, sold at retail inside the US for the same price as before (sometimes even cheaper) but with a now higher profit margin. However, that is a one off event. Meaning, after you move your factory to Mexico or China, and cut your labor costs, then what is the next hat trick? The only true way any company continues to grow and make more money is when they SELL more stuff, and or create new products (basically the same thing) each and every year going forward. So, the question is - Are US companies really earning profits directly from selling more stuff, or are they simply making more money temporarily because they have cut production costs? Next up is the American consumer buying that stuff. Where is he or she getting the money to buy? Is the US based consumer buying things will real or saved money, or is a vast majority of the buying being done with borrowed money (credit card debt and home equity loans)? I think you know the answer. So, what happens when the spigot gets turned off and the borrowing or line of credit gets shut down? To be sure, recent years of US financial prosperity are nothing more than an illusion, or better said propped up with borrowed money. We are already starting to see this daisy chain of borrowing unravel, as the number of personal bankruptcies and home foreclosures is on the rise (you should take note of recent comments made by HSBC, Citicorp and JP Morgan in terms of reduced earnings for 2006 and where the trouble is). In addition, the US personal savings rate has turned negative for the first time in almost 70 years (the last time that happened was during the Great Depression era). In short, the US consumer is becoming tapped out, is spending all his or her money, is saving nothing on aggregate and is now slowly being cutoff from credit (especially by foreign lenders who see the clear risk involved). Note the comment from one of the above news articles: Signs surfaced Tuesday that the easy availability of debt may be ending.
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Next up is the US government and how they may or may not finance their growing expenses and commitments as it pertains to social welfare programs (Social Security, Medicare, Medicaid, and so on). There are a number of problems already in existence (the trade deficit, the amount of government debt as a percentage of GDP and the fact that a good part of that debt is now foreign owned, etc.), yet even more disturbing are the options going forward as a means to cover the various increased costs or expenses on the horizon. One is to increase taxes, two is to cut government expenses which means in turn cut the social welfare benefits (reduce the pension check or reduce the health insurance benefits), three is to simply continue borrowing more money, and finally the fourth and usually most popular among the politicians - get more loot by simply printing it. None of these options are positive nor do they bode well for the next generation of younger people coming up (or the economy is general). Ben Bernanke basically laid all this out recently to the politicians, on public record. The question is: what will the politicians do? And regardless of what they do, how will that affect you and your children's finances or economic well being going forward? To be sure, there are other countries in the same boat, albeit they at least are trying to do something about it. Sweden is just one example. Sweden of course is a nation well known for very high taxes along with very generous social welfare programs, yet even the Swedes have made a systematic effort over recent years to reduce government debt and otherwise put their financial house in order. At least that makes one country on the list trying to prepare for the coming storm.
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CHINA CONFRONTS FINANCIAL DRAGON
By Stephen S. Roach - March 2, 2007
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Like nearly everything else in the world these days, it now appears that global stock market corrections are made in China. The rout Tuesday that began in China may have been an anomaly, or the start of something big. But I have long felt that something has to give in China. This may be the beginning of an important venting process. The basic story about China is that despite its remarkable successes on the economic development front, the nation has a seriously unbalanced economy. The main problem is a runaway investment boom. By Morgan Stanley estimates, fixed-asset investment - spending on housing, commercial buildings, factories, infrastructure and other property - exceeded 45 percent of China's gross domestic product in 2005. This is a record for China and, in fact, a record for any major economy in the world. By comparison, Japan's investment percentage in the 1960s - the period of maximum rebuilding from the destruction of World War II - never exceeded 34 percent of GDP. China's annual growth in fixed-asset investment has averaged 26 percent over the last four years. Should investment continue to run at this pace, it could lead to a Japanese-style deflation. That's the last thing China wants or needs. The Chinese government recognizes the perils of such a possibility. For nearly three years, it has conducted an on-and-off campaign aimed at cooling its overheated investment sector. Following relatively limited actions first implemented in the spring of 2004, Chinese authorities have upped the ante in the last eight months. The People's Bank of China has raised a key short-term interest rate twice, totaling slightly more than half a percentage point, and beginning in mid-2006, the central bank boosted bank reserve requirements five times, going from 7.5 percent to 10 percent, the latest such action taking effect last Sunday. The results have been mixed. Fixed investment growth has finally begun to slow, decelerating from near 30 percent at the start of 2006 to about 14 percent at the end of the year. Unfortunately, bank lending accelerated. That means China's central bank has been unable to get traction in reining in bank credit expansion at the same time that the central planners are finally gaining traction in orchestrating an investment slowdown. This has resulted in an excess of bank-funded liquidity that is undoubtedly spilling over into the financial system. As a doubling of the Shanghai A-share index over the last six months suggests, a bubble in the Chinese stock market appears to have been a major outcome of this development. In China, stability is everything. The leadership believes that it can't afford to lose control of either its real economy or its financial markets. Pure market-based systems can rely on interest rates, currencies, fiscal policies and other macro stabilization instruments to contain the excesses. With an undeveloped financial system and the still dominant influence of state ownership, a blended Chinese economy is much harder to control.
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http://www.newsday.com/news/opinion/
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A NECESSARY CORRRECTION IN A RISING TREND: Relentless Optimism Reigns Among Investors. By Larry Elliott and Jonathan Watts in Beijing - March 1, 2007
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It may have been the biggest fall since 9/11 but few people seem very worried by it. Dominic Rossi, head of global equities at Threadneedle Investment Services, summed up the City's insouciant mood after the biggest tremor in global markets since 9/11: Nothing has happened over the past 48 hours that affects our view of the world and the positive outlook for equity markets. The falls in stock markets were not a reaction to any economic event, he insisted. China was steaming ahead, in spite of Tuesday's drop of almost 9% in the Shanghai stock market. In short, the macroeconomic backdrop remains favourable, he said. Growth is robust and a lack of inflationary pressures prevents the need for substantial monetary tightening. With Wall Street recouping some of Tuesday's 415-point loss in early trading yesterday, the markets were last night reassuring themselves that February 2007 was more October 1987 than October 1929. A minor correction in an upward trend; nothing more. Ben Bernanke, chairman of the US Federal Reserve, helped calm markets by telling Congress that the bank still predicted moderate growth.
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Not everybody sees it that way. For many years, Stephen Roach, head of global economics at Morgan Stanley, was the bear's bear, who could always find the cloud to any silver lining. Last April, he recanted and said he was now more optimistic about the outlook. On Tuesday, just before Wall Street nose-dived, he had second thoughts. After four fat years, convictions are deep that nothing can derail a Teflon-like global economy. Investors, policymakers and politicians have now succumbed to a dangerous complacency. That's the time to worry the most, he said. Central banks have been issuing warnings for some time that markets are not fully priced for risk, and to ram home the point that strong global growth and soaring asset prices pose a threat to low inflation they have been pushing up interest rates as well. But until this week, the warnings have been blithely ignored by the markets. Now the hunt is on to explain the sudden spasm. Is it overheating in China, a looming US recession or just the fact that investors have made too many dumb plays in too many out-of-the-way locations?
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http://business.guardian.co.uk/story/
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EDITORS NOTES: So where do you invest, or otherwise stash your money? A valid question on the minds of many investors I would think. Certainly if you are someone that believes an economic slowdown in the US is imminent, then consider investing in and or holding currencies from countries that will be less effected. And speaking of this idea, if you take a look back into economic history, while it was true that markets around the world felt some pain from the so-called Great Depression, the two worst off countries were the US and Germany. Therefore, if you lived in say Egypt, Panama, Argentina, Thailand, and even the UK or Canada, things were not great, but they were not as bad as the US or Germany either. This reverts back to our comments that even if the domestic economy in the US becomes extremely negative, it does not necessarily mean other countries will be as bad off. Of course what other countries is the question. The answer is countries whose economy is primarily export driven (and not manufactured goods sold primarily in the US), countries with plenty of raw commodities (whose primary exports are raw commodities as opposed to manufactured consumer goods), countries whereby local consumers primarily operate on a cash basis (and not credit cards or borrowed money), and in turn where local banks do not give the money away (whereby borrowers actually have to qualify for loans, with substantial down payments, etc.). There is a long laundry list of countries that meet this criteria, but in general, many of them tend to be emerging markets or what are also called developing nations. Such places are starting to develop a middle class, albeit with the same lending practices and consumer mentality that existed before (paying cash). In addition, that is where you still are going to see some positive economic growth, even with an economic slowdown in the so-called wealthy industrialized nations. So, in summary, the name of the game going forward may be diversify investments away from the high tax welfare states with a plethora of problems looming on the horizon, and also seek out investments that in the least will maintain purchasing power (such as gold, commodities, and other currencies).
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READERS WRITE IN:
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John - As a long time reader - subscriber, have enjoyed your information and columns. I sent you a question a few yrs ago, but never got an answer, nor saw it printed in your columns. I will be retiring soon from a combination of 30 yrs of military - government civil service as soon as 6 months, or at the latest in 3 1/2 yrs. Is there any hope/suggestions for the many government workers who will be retiring, and can't just renounce their citizenship to enjoy the benefits of retiring in another country, as our pensions, etc are all tied into the U.S. government??
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EDITORS REPLY: Well, believe it or not, we have quite a few clients who are retired military and I have found that such people are very open to and keen on the idea of retiring to another country. Perhaps it is because they have traveled and lived in other countries so much, and do understand that living abroad is less expensive and not the negative experience often thought to be by the average American that has never ventured beyond the Florida Keys. In any event, I would not encourage you to renounce your citizenship, especially if you are beholden to Uncle Samuel for your government pension. Of course, becoming a legal resident in another country is a very different matter than obtaining another citizenship (or renouncing your existing citizenship) and in no way jeopardizes your current US citizenship. But this issue aside, certainly I think you have the same problem as any other retiree, which is, how to live as best you can on what you have - and also how to protect your purchasing power should the nice people at the Federal Reserve decide to go hog wild with the printing presses. In this regard, certainly having the capacity to hold savings accounts in other currencies is one part of that strategy. And yet another, the idea of simply living in a jurisdiction whereby your monthly pension takes you further in terms of lifestyle costs, property taxes (or hopefully lack thereof) and so on. However, this may mean consider retiring outside the US. If fact, considering such things as real estate taxes (some retirees are now leaving Florida to get away from the US$10,000 per year in annual property taxes being assessed for nothing more than a condo), I would say living outside of the US has probably almost become a necessity.
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ANOTHER READER WRITES:
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Hello I want to start by saying thank you for writing the Dominican Republic report. It is very informative. It is nice to have a current reference. Also I look forward to the newsletters. My husband and I have dreamed of moving out of the US for many years but various factors kept us from doing so. Now we are ready to make this dream happen, and we have decided the DR is our number one choice. Since first discovering the possibility of the DR a year ago I spend any free time I have looking at whatever I can find about the DR. This includes searching any web site I can find selling and or renting in all of the Dominican Republic. We have plans of working a few months out of the year in the US (we are definitely interested in enlisting your services for our move your knowledge of finance and how to protect the $ we earn from high taxes is invaluable) and living off of our earnings the rest of the year in the DR. I know you covered living expenses in your report and I know there are two different markets one for tourist and another for locals. This is why I have tried to keep my search in Spanish only. Thought I would have better luck finding the real bargains needless to say there aren't many that are advertising on the web. What I have found seems to be so much more expensive than stated in your report. I use the dr1 a lot and they have a link to super-casa.com there are tons of properties but not to many less than 3 million RD this seems like a lot considering what an average Dominican earns. Am I wrong? I also keep an eye on the listings in the Listin Diario again there seems to be a lot of high prices. Has things changed that much from last year or is it a matter of just being there pounding the pavement to find the bargains? Even the rentals 800, 900, 1000 a month is this what the locals are paying. I know the location makes a difference, and I am definitely not familiar with them I only know of the few you have mentioned and I know the best from the dr1 such as Bella vista .piantini and naco to name a few. So could you please give me you very informed opinion on what would be necessary to live a normal middle class life with one child in the DR. I only want a life equivalent to what I have in phoenix Arizona as a working class family. We are not sure were in the country we wanted to be but we would love to be able to walk to the beach. I can only say we don't want to be isolated. I am sorry this is so long I just wanted you to know where I was coming from. Only someone there living in it can give me a true idea and I need to know what my earning goals need to be. The last thing I want to do is be in a new place and run out of $. We will rent until we find the perfect place to buy. Thank you for taking your valuable time and I look forward to your reply.
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EDITORS REPLY: Well, as I have said many times before, there are some very nice upscale ocean front real estate projects going up in various parts of the country (Punta Cana, as just one example) BUT they are marketed primarily to foreigners and are NOT indicative of the local market in terms of cost. Which is to say, you can certainly find a very, very nice 2,000 square foot home in a middle class residential area for about US$150,000 to US$170,000 or you can find an upscale apartment in the same financial range also. With that said, there are of course also many higher priced and more luxurious properties on the market as well. There are also some new more economical but decent apartments for about US$85,000 on the market too, and certainly acceptable places to consider. It all depends upon what you want, where you want to live and so on. However, keep in mind that if you are paying the equivalent of US$200,000 or US$300,000 for a home in Santo Domingo, Santiago or some other areas, I can guarantee you your home in the US priced in the same range will be a shack in comparison. Which is to say, you will get more for your money in the Dominican Republic, but again, if you stay away from these mega priced projects. And by the way, I am not knocking such places - if you have the money and you really like it then by all means consider it. But do not think these are the only American or European standard homes on the market, and do not think you need to spend these sums either. Regarding rental costs, I can only assume you are talking about USD equivalents, but again, you can find very nice apartments to rent in middle class or upper middle class areas of Santo Domingo or Santiago for about 16,000 to 20,000 Pesos (about US$500 to US$600). Are there dopey people that over pay? Of course there are. Are rentals and properties priced much higher in a beachfront or tourist areas? Of course that is the case everywhere. The bottom line is, learn some Spanish and check out the local classifieds in the local newspapers. Learning Spanish can save you money.
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ANOTHER READER WRITES:
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Hello John, I am a US citizen living in Maryland. I am purchasing some undeveloped land in Costa Rica with my Uncle, a US Citizen who resides there, which we plan to subdivide and resell. I am looking into the tax responsibility that I would face as an American buying and then selling parcels in CR. I read an article that you wrote roughly 2 years ago in the Escape Artist entitled Buying Real Estate In Another Country: The Last Great Non-Reportable Investment Idea? In which you wrote, REAL ESTATE ownership is not reported, is not required to be reported, and is a non-taxable asset for Americans or Europeans in terms of any worldwide taxation reporting initiatives. Is that still the case? Does Senator Carl Levin's Stop Tax Haven Abuse Act affect this? I look forward to your thoughts.
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EDITORS REPLY: My thoughts are as follows. First off, the venerable Mr. Levin believes that US$100 Billion is lost each year in US government tax revenue due to various offshore holdings and so on (supposedly owned or controlled by US citizens, but not declared and not taxed accordingly) - But the truth of the matter is THEY DO NOT KNOW. They have no idea, and that is one part of the frustration. So, instead they make up a number. However, let us put this into perspective (the US$100 Billion that Carl is talking about). In 2006, the US Federal Government operating budget deficit was $248 billion, the difference between $2.654 trillion in spending and $2.407 trillion in revenue. In other words, let us assume there was all this tax avoidance going on and it added up to US$100 Billion each year - The politicians in Washington still continue to spend almost US$250 Billion more per year than are taken in from tax receipts. So where is the other US$150 going to come from? In 2004, the government budget deficit was $521 billion, so I guess they are making progress - but so far, they have not paid that down either. In fact, the US Government has now borrowed almost 9 Trillion Dollars - which comes out to about US$30,000 for every man, woman and baby still in diapers at the moment (based on the new census count of slightly over 300 Million people). Where is that money going to come from? Is Carl Levin planning on winning that money at Thursday night Bingo, or does he have something else in mind??
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Regardless, this new bill is meant to put the US Treasury into the mix as a sort of enforcement agent, and I will tell you what I think is coming down the line as a direct result of that (let us see how good I am at predictions). But before I do so, let me also say that the European Union is highly perturbed because the US is one of the best Tax Havens in the world for non-US citizens. Mr. Levin has complained about banking secrecy in other countries and or simply lack of cooperation regarding tax matters from other countries (presumably whereby information about what accounts or holdings US citizens have in other countries cannot be gleaned or found out), but ironically it is the US that has refused to cooperate with other countries as it pertains to foreign citizens who are banking or hold other assets inside the US specifically in regards to taxation matters. So, this is the hypocrisy at work.
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To answer your direct question, yes indeed the bill adds on the term real estate and other assets or holdings as well, although it would seem to be more directly pegged at so-called tax shelter arrangements, such as offshore trusts and the like. But that does not so much concern me really as does the larger picture. Which is to say, in my opinion, THEY ARE BROKE or they are going broke, and they know it. When trying to collect money, or otherwise work ones way out of the financial hole, the politically speaking low hanging fruit is the expatriate and so-called tax dodger. I mean, lets face it, most people will say it is a good idea to get all those tax dodging scoundrels - no? However, the joke is that many very wealthy people have gotten themselves and or their money out years ago (if they wanted to). It is NOT the mega-wealthy that are now leaving, but rather the middle-class. You know who they are - they are the group of people that really do pay all the bills, or better stated, pay most of the taxes anyway (and why all of a sudden Tax Havens are a problem, even though they have been around for decades and decades - BECAUSE the people that actually pay the taxes are starting to use them). The other immediate thing politicians can do without raising too much suspicion or complaint from the general masses is to run the printing presses (and devalue the currency as a result). That they have already been doing for some time now, and why the world's central banks are dumping US Dollars. And it is not as if the average consumer has not noticed. We commented towards to the end of last year that FOOD prices would jump in the US during the first quarter of 2007, and so they have (see recent news links below).
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In addition, the next phase is going to be increased taxation and not necessarily the political hot potato of direct income taxes. Thousands of middle class Americans will be hit with higher income tax rates BECAUSE of the AMT, which is not indexed to inflation. Of course there is speculation that the politicians, in conjunction with their get the tax dodgers initiative, will do something about this AMT problem, which will basically impose a higher income tax rate automatically upon thousands and thousands of middle class taxpayers. Personally I think you have a better chance of seeing pigs fly as the politicians can always blame that on predecessors (the AMT problem and not the flying pigs - which is why I think the AMT will be left as is- they need the money, don't-cha know). But something else has been happening on the state and local municipal level - higher real estate taxes. In part, this is due to cuts backs in US Federal Government funding to the states for a variety of things, including education. Ergo, you now have senior citizens living in Florida getting hit with a US$10,000 real estate tax bill for their retirement condo, not mention everyone else, everywhere else, who will be paying higher property taxes this year (which we reported on in a previous newsletter). In addition, you have heard talk about a national US sales tax supposedly to be put in place instead of an income tax or in exchange for a reduced federal income tax rate system. Forget it. I believe that if a national sales tax is implemented, the income tax will stay right where it is.
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Now then, what does all this other nonsense have to do with your question about the Tax Haven Abuse Act? Well, it gets the US Treasury involved (and the banking regulators) as an enforcement mechanism. So, it opens the door for currency controls by default. Why do I say this? Well, a Mr. Russ Fox of Clayton Financial has said: Americans might have even more difficulties in getting funds from the U.S. to the offshore (gambling industry). Let us substitute the term gambling industry with say, the term, jurisdiction. They currently have a list of 34 nations on this list (already directly mentioned in the bill). Incredibly enough, aside from all the usual suspected names, is Costa Rica. Tiny, idyllic, friendly Costa Rica - a nation that has no standing army, by the way and has not had one for years. So, are we to believe now that the definition of a rogue state is one that simply decides not to be a friendly collaborator regarding taxation matters? It would seem so. Therefore, how far of a stretch is it really to propose or imagine restrictions whereby you cannot wire money abroad any longer? Obviously there may be issues like this already with so-called terrorist states and so forth, but why not expand the list? Why not simply say, you cannot wire money anywhere? So, my main concern is not real estate and not Costa Rica, but rather restrictions of the ability of private citizens to freely move funds abroad in the future. Sound like a conspiracy theory? Perhaps, but then again, someone once told me, if you think things are bad now - just wait five more years (that was more than ten years ago). The problem is, I shudder to think what the next five years will bring. The same person also told me - forget tax havens and offshore companies - get your money out, get yourself out, and renounce your citizenship. That may not be such poor advice either, but you have to be domiciled somewhere. You have to be a resident of some place and if you have a business - the business may possibly have to be domiciled somewhere as well. Of course, why not become a citizen of, or set your company up, in a country that is not broke, and one that will not tax you to death? An interesting question to ponder.
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SOME NEWS ARTICLES OF INTEREST (US Economy):
March 14, 2007
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SHOCK JUMP IN US PRODUCER PRICES
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US producer prices have jumped by more than analysts forecast in February. The driving force behind the increase was a surge in the cost of food, energy and toys, the Department said.
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http://news.bbc.co.uk/2/hi/business/6454243.stm
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RECORD US TRADE DEFICIT IN 2006
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The US current account deficit jumped by 8.2% to a record $856.6bn (£444bn) in 2006, official figures show. The deficit for 2006 meant the US was borrowing more than $2bn daily to finance its trade gap.
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http://news.bbc.co.uk/2/hi/business/6450565.stm
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THE END OF THE AMERICA DREAM ?
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The US economy has been generating strong economic growth over the past few years as it has come out of recession. After growing at more than 3% a year in 2004 and 2005, the pace picked up to a blistering 5.6% annual rate in the first quarter of this year - although the pace has since then slipped back to 2.9%. So far, though, little of that growth has translated into the hands of the average worker, according to new research from the Economic Policy Institute (EPI). For real household incomes, the median point - the level at which half of households earn more and half less - has actually fallen over the past five years. Productivity - the measure of the output of the economy per worker employed - grew even more strongly, by 16.6%. But over the same period, the median family's income slid by 2.9%, in contrast to the 11.3% gain registered in the second half of the 1990s. The wages of households of African or Hispanic origin fell even faster. And new entrants to the labour market fared particularly badly. Average hourly real wages for both college and high school graduates actually fell between 2000 and 2005, and fewer of the jobs they found carried benefits such as health care or company pensions.
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http://news.bbc.co.uk/2/hi/business/5303590.stm
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