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China and Japan’s war of words reveals a larger struggle for regional influence akin to a mini Cold War. Last week’s tempestuous pissing contest in Davos, which The FT’s Gideon Rachman notes, left people with the belief that “this is not a situation that is getting better; it is getting worse.” Following Abe’s analogies to WWI, China’s Yi compared Abe’s visit to the Yasukuni shrine to Merkel visiting the graves of Nazi war criminals and as the rhetoric grows the US has asked for reassurance from Abe that he will not do it again. So we have two countries, each building up their militaries while insisting they must do so to counter the threat of their regional rival. Added to this, a deep distrust of each other’s different political systems coupled with a history of animosity makes the two nations deeply suspicious of each other. Each country insists it loves peace, and uses scare tactics to try to paint its opponent as a hawkish boogeyman. Sound familiar to anyone else?
U.S. officials say they are seeking assurances from Japan that Prime Minister Shinzo Abe won’t repeat a visit to a war shrine that angered China and South Korea and will ask Mr. Abe to consider reaffirming Tokyo’s previous formal apologies over World War II in a bid to ease tensions in East Asia.
But even as Washington looks for calm, Seoul and Beijing bristled again this week over new comments by Mr. Abe on his shrine visit, underscoring the challenges the U.S. faces in its diplomatic push.
The FT sums up the tensions in Davos last week…
Lately, it seems that Japanese officials can’t sneeze without incurring the wrath of the Chinese — and vice versa. So it’s no surprise that even conciliatory statements from Shinzo Abe have been soundly rebuffed. On Thursday, Abe wrote a message, published in local Chinese-language papers, conveying greetings for the lunar new year. According to Reuters’ translation of the Japanese-language version, Abe insisted that Japan has “taken the path of peace” since World War II, and “nothing has been changed in the policy of continuing to uphold this position.”
Friday, Abe further extended the olive branch. According to Channel NewsAsia, Abe told a parliamentary session that “Japan and China are inseparable.” He also expressed his desire for the two countries to restart diplomatic meetings. “Instead of refusing to hold dialogue unless issues become resolved, we should hold talks because we have issues,” Abe said.
China flatly rejected these overtures. Responding to earlier requests for a bilateral dialogue, Qin Gang responded with bitter sarcasm: “Such kind of dialogue will be of no effect. Chinese leaders are very busy. Let them spend more time on things useful and effective.” China has repeatedly expressed its position that no diplomatic meetings between China and Japan can be held until Shinzo Abe proves his sincerity. During Friday’s press conference, Qin Gang laid down a specific path for restarting dialogue: Abe should declare that “I will pull back from the precipice, immediately admit and correct mistakes and make no more visits to the Yasukuni Shrine.”
As I wrote earlier, at this point it seems impossible that anything Abe will do will satisfy Chinese leaders (the things he could do, like apologizing for his visit to Yasukuni and/or Japan’s imperialistic past, are incredibly unlikely). To Chinese officials, Abe is “self-contradictory,” as an editorial in China Daily put it. Unless Abe apologizes for and refrains from repeating actions that upset China (from visiting Yasukuni to building up Japan’s military), China will dismiss as insincere his rhetoric about dialogue and peace. Meanwhile, from the Japanese perspective, were Abe to devote the rest of his administration to proving his friendship to China, it would have obvious negative repercussions for Japanese interests.
So we have two countries, each building up their militaries while insisting they must do so to counter the threat of their regional rival. Added to this, a deep distrust of each other’s different political systems coupled with a history of animosity makes the two nations deeply suspicious of each other. Each country insists it loves peace, and uses scare tactics to try to paint its opponent as a hawkish boogeyman. Sound familiar to anyone else?
Ever since the Cold War ended, strategists have been warning leaders to drop the “Cold War mentality.” But it apparently hasn’t worked, because that is exactly what we have right now between China and Japan. The two countries identify so strongly as rivals that it’s impossible for either country to do or say anything without triggering a response from its counterpart. The tensions pop up in the most unexpected places – during Abe’s Africa tour, during a global economic summit in Switzerland.
Even the strong economic ties between China and Japan haven’t helped forestall tensions. In fact, it’s the other way around – tensions are eroding the economic relationship. The Telegraph recently reported that, according to a poll, 60 percent of Chinese business leaders are unwilling to work with Japanese firms. In 2012, China-Japan tensions even erupted into outright calls to boycott Japanese products, with rioters targeting Japanese businesses and restaurants. While Japan’s business view of China is less affected (according to The Telegraph, 80 percent of Japanese are willing to continue trade with China and South Korea), economic interests are shifting to other regions, notably Southeast Asia. Economic ties are likely to continue worsening. It’s certainly hard to see the next round of negotiations on a trilateral China-Japan-South Korea free-trade agreement going off as planned in February 2014.
As with the Cold War, part of the problem is that both China and Japan willfully read each other’s every move as a challenge or threat. For all the distrust between China and the United States, the problem hasn’t reached this level (yet). The U.S. has too many potential enemies (Russia, Iran, North Korea) and too many global interests for China to realistically interpret every diplomatic or strategic maneuver as somehow anti-China (although certainly some hawks within China do try). Japan, with its more limited global presence and strategic interests, is a different story. Meanwhile, as China is currently limiting its military build-up and strategic goals to the near seas, it’s easy for Tokyo interpret each move (for example, a new air defense identification zone) as directly aimed at Japan.
My colleague Zachary wrote Friday that one byproduct of the United States’ decline could be the emergence of regional hegemons. We might be seeing the beginning of this process now, with China and Japan in a Cold War-style battle, not for global power but for regional dominance. The territorial dispute highlights this by increasing the possibility of military conflict, but even if the Diaoyu/Senkaku Islands were to sink into the ocean tomorrow (one possible benefit of global warming) the tensions would remain. It’s a regional Cold War, currently being fought with words but with an arms race looming on the horizon. And, like the Cold War, tensions are unlikely to end until one country claims victory.
Over a three-hour lunch in Davos yesterday, Carlyle Group LP (CG) co-founder David Rubenstein told a group of investors and bankers his biggest worry: nobody appeared to be worried about anything at all.
Less than 24 hours later, the devaluation of the Argentine peso accelerated the worst selloff in emerging market stocks in five years, unnerving delegates at the World Economic Forum in Switzerland. As they shuttled from meetings to meals, losses were piling up by the minute as developing nation currencies slid with equities.
“I don’t want to look,” Daniel Loeb, billionaire founder of hedge fund Third Point LLC, said of the financial markets as he walked between meetings at the Congress center in Davos.
After recent gatherings were dominated by crises from Lehman Brothers Holdings Inc. to Greece, this year’s had begun to reflect a mood of optimism as economies and stock markets recovered. That enthusiasm waned today as the rout in emerging markets exacerbated concern that the engines of global growth since the crisis have now stalled.
Attendees at the Davos lunch included Larry Fink, chief executive officer of Blackrock Inc. (BLK), the world’s largest money manager, Blackstone Group LP (BX)’s Steve Schwarzman andUBS AG (UBSN) Chairman Axel Weber. They were briefed by Treasury Secretary Jacob J. Lew and Bank of Japan Governor Haruhiko Kuroda.
“Over the last couple of years people have gotten a lot less worried, but there are always things like black swans that come around,” Rubenstein said in an interview today. “I just wanted to make sure everybody remembers that and that we are likely to have some bumps along the road.”
Emerging market stocks have suffered their worst start to a year since 2009 as signs of weakness in China’s economy add to concern about the impact of cuts to the U.S. Federal Reserve’s stimulus program. The MSCI Emerging Markets Index fell 1.5 percent today, extending this year’s slump to 5.3 percent.
Argentine policy makers devalued the peso by reducing support in the foreign-exchange market, allowing the currency to drop the most in 12 years to an unprecedented low. Turkey sold dollars to prop up the lira and South Africa’s rand declined to a five-year low.
Goldman Sachs Group Inc. (GS) CEO Lloyd Blankfein told Bloomberg Television’s Erik Schatzker and Stephanie Ruhle today he would “wait a while before saying there is a complete reversal” in markets, noting they were due a consolidation having “gone up very far in a single direction.”
“Davos Man is probably right in thinking 2014 will be a nice year, with more growth than last year,”Jean-Claude Trichet, former president of the European Central Bank, said in an interview. “But of course risks are still there.”
Forcing the reappraisal is the Fed’s tapering of monetary stimulus, which had previously covered all ills by prompting investors to chase returns in emerging markets.
With the U.S. central bank now cutting its monthly asset purchases from $85 billion, money managers are refocusing on the fundamentals of economies, punishing those with weak policies or imbalances such as large current account or budget deficits.
The shift was underscored this week by the International Monetary Fund, which released new forecasts showing emerging markets will outpace advanced nations by the smallest margin this year since 2001.
“Investors have been overly complacent in emerging markets,” Davide Serra, founder of London-based Algebris Investments LLP, said in Davos. “In 12 to 18 months, as real rates rise in the U.S. we’ll see which emerging markets were swimming naked.”
Other emerging economies are displaying faultlines, with investors mainly focused on the so-called fragile five of Brazil, India, Indonesia, South Africa and Turkey.
China is also struggling to contain $4.8 trillion in shadow-banking debt, while Brazil is trying to rein in inflation fuelled up by a falling currency and higher public spending. A corruption investigation is embroiling Turkish Prime Minister Recep Tayyip Erdogan’s cabinet and deadly protests in Ukraine and Thailand are eroding confidence in their stability.
“We’re in a volatile era and anyone who doesn’t think that is overly complacent,” said Tim Adams, president of the Institute of International Finance, which represents more than 400 financial firms, and the U.S. Treasury’s former undersecretary for international affairs. “The re-pricing of risk will continue and there will be peaks of convulsions and complacency.”
The announcement came less than 24 hours after UN chief Ban surprised the US and others by inviting Iran to the Syria peace talks [AP]
|The UN secretary-general has withdrawn his invitation to Iran to join this week’s Syria peace talks, saying he is “deeply disappointed” by Iran’s statements on Monday.
A spokesman for Ban Ki-moon announced the withdrawal less than 24 hours after Ban surprised the US and others by saying he had invited Syria’s closest regional ally.
The withdrawn invitation came shortly after Iran’s UN ambassador declared the Islamic Republic wouldn’t join the Syria talks if required to accept 2012 Geneva roadmap.
“The statement today in Tehran by the foreign ministry spokesperson fell short by some measure of what the secretary-general expected to hear,” said UN spokesman Martin Nesirky, adding that the UN has been in close contact with the US and Russians over the weekend.
Nesirky said senior Iranian officials had assured Ban that Iran understood the terms of his invitation.
“The Secretary-General is deeply disappointed by Iranian public statements today that are not at all consistent with that stated commitment,” Nesirky said.
“He continues to urge Iran to join the global consensus behind the Geneva Communiqué.”
The talks are set to begin Wednesday in the Swiss city of Montreux, with delegations from the United States, Russia and close to 40 other countries attending. Face-to-face negotiations between the Syrian government and its opponents, the first since the three-year civil war began, start Friday in Geneva.
‘Return to focus’
But Ban’s announcement on Sunday night that Iran was invited to Montreux angered Syria’s main Western-backed opposition group, which over the weekend had announced it would join the talks after intense international pressure.
The United States said on Monday it was hopeful after the UN withdrew Iran’s invitation and that all parties could refocus their efforts to end the Syrian civil war.
“We are hopeful that, in the wake of today’s announcement, all parties can now return to focus on the task at hand, which is bringing an end to the suffering of the Syrian people and beginning a process toward a long overdue political transition,” State Department spokeswoman Jen Psaki said in a statement.
Psaki said the purpose of the conference was to implement a 2012 plan to establish a political transition in Syria.
Many of us in the Long Emergency crowd and like-minded brother-and-sisterhoods remain perplexed by the amazing stasis in our national life, despite the gathering tsunami of forces arrayed to rock our economy, our culture, and our politics. Nothing has yielded to these forces already in motion, so far. Nothing changes, nothing gives, yet. It’s like being buried alive in Jell-O. It’s embarrassing to appear so out-of-tune with the consensus, but we persevere like good soldiers in a just war.
Paper and digital markets levitate, central banks pull out all the stops of their magical reality-tweaking machine to manipulate everything, accounting fraud pervades public and private enterprise, everything is mis-priced, all official statistics are lies of one kind or another, the regulating authorities sit on their hands, lost in raptures of online pornography (or dreams of future employment at Goldman Sachs), the news media sprinkles wishful-thinking propaganda about a mythical “recovery” and the “shale gas miracle” on a credulous public desperate to believe, the routine swindles of medicine get more cruel and blatant each month, a tiny cohort of financial vampire squids suck in all the nominal wealth of society, and everybody else is left whirling down the drain of posterity in a vortex of diminishing returns and scuttled expectations.
Life in the USA is like living in a broken-down, cob-jobbed, vermin-infested house that needs to be gutted, disinfected, and rebuilt — with the hope that it might come out of the restoration process retaining the better qualities of our heritage. Some of us are anxious to get on with the job, to expel all the rats, bats, bedbugs, roaches, and lice, tear out the stinking shag carpet and the moldy sheet-rock, rip off the crappy plastic siding, and start rebuilding along lines that are consistent with the demands of the future — namely, the reality of capital and material resource scarcity. But it has been apparent for a while that the current owners of the house would prefer to let it fall down, or burn down rather than renovate.
Some of us now take that outcome for granted and are left to speculate on how it will play out. These issues were the subjects of my recent non-fiction books, The Long Emergency and Too Much Magic (as well as excellent similar books by Richard Heinberg, John Michael Greer, Dmitry Orlov, and others). They describe the conditions at the end of the cheap energy techno-industrial phase of history and they laid out a conjectural sequence of outcomes that might be stated in shorthand as collapse and re-set. I think the delay in the onset of epochal change can be explained pretty simply. As the peak oil story gained traction around 2005, and was followed (as predicted) by a financial crisis, the established order fought back for its survival, utilizing its remaining dwindling capital and the tremendous inertia of its own gigantic scale, to give the appearance of vitality at all costs.
At the heart of the matter was (and continues to be) the relationship between energy and economic growth. Without increasing supplies of cheap energy, economic growth — as we have known it for a couple of centuries — does not happen anymore. At the center of the economic growth question is credit. Without continued growth, credit can’t be repaid, and new credit cannot be issued honestly — that is, with reasonable assurance of repayment — making it worthless. So, old debt goes bad and the new debt is generated knowing that it is worthless. To complicate matters, the new worthless debt is issued to pay the interest on the old debt, to maintain the pretense that it is not going bad. And then all kinds of dishonest side rackets are run around this central credit racket — shadow banking, “innovative” securities (i.e. new kinds of frauds and swindles, CDOs CDSs, etc.), flash trading, insider flimflams, pump-and-dumps, naked shorts, etc. These games give the impression of an economy that seems to work. But the reported “growth” is phony, a concoction of overcooked statistics and wishful thinking. And the net effect moves the society as a whole in the direction of more destructive ultimate failure.
Now, a number of stories have been employed lately to keep all these rackets going — or, at least, keep up the morale of the swindled masses. They issue from the corporations, government agencies, and a lazy, wishful media. Their purpose is to prop up the lie that the dying economy of yesteryear is alive and well, and can continue “normal” operation indefinitely. Here are the favorites of the past year:
- Shale oil and gas amount to an “energy renaissance” that will keep supplies of affordable fossil fuels flowing indefinitely, will make us “energy independent,” and will make us “a bigger producer than Saudi Arabia.” This is all mendacious bullshit with a wishful thinking cherry on top. Here’s how shale oil is different from conventional oil:
- A “manufacturing renaissance” is underway in the US, especially in the “central corridor” running from Texas north to Minnesota. That hoopla is all about a few chemical plants and fertilizer factories that have reopened to take advantage of cheaper natural gas. Note, the shale gas story is much like the shale oil story in terms of drilling and production. The depletion rates are quick and epic. In a very few years, shale gas won’t be cheap anymore. Otherwise, current talk of new manufacturing for hard goods is all about robots. How many Americans will be employed in these factories? And what about the existing manufacturing over-capacity everywhere else in the world? Are we making enough sneakers and Justin Beiber dolls? File under complete fucking nonsense.
- The USA is “the cleanest shirt in the laundry basket,” “the best house in a bad neighborhood,” the safest harbor for international “liquidity,” making it a sure bet that both the equity and bond markets will continue to ratchet up as money seeking lower risk floods in to the Dow and S & P from other countries with dodgier economies and sicker banks. In a currency war, with all nations competitively depreciating their currencies, gaming interest rates, manipulating markets, falsely reporting numbers, hiding liabilities, backstopping bad banks, and failing to regulate banking crime, there are no safe harbors. The USA can pretend to be for a while and then that illusion will pop, along with the “asset” bubbles that inspire it.
- The USA is enjoying huge gains from fantastic new “efficiencies of technological innovation.” The truth is not so dazzling. Computer technology, produces diminishing returns and unanticipated consequences. The server farms are huge energy sinks. Online shopping corrodes the resilience of commercial networks when only a few giant companies remain standing; and so on. Problems like these recall the central collapse theory of Joseph Tainterwhich states that heaping additional complexity on dysfunctional hyper-complex societies tends to induce their collapse. Hence, my insistence that downscaling, simplifying, re-localizing and re-setting the systems we depend on are imperative to keep the project of civilization going. That is, if you prefer civilization to its known alternatives.
Notice that all of these stories want to put over the general impression that the status quo is alive and well. They’re based on the dumb idea that the stock markets are a proxy for the economy, so if the Standard & Poor’s 500 keeps on going up, it’s all good. The master wish running through the American zeitgeist these days is that we might be able to keep driving to Wal-Mart forever.
The truth is that we still have a huge, deadly energy problem. Shale oil is not cheap oil, and it will stop seeming abundant soon. If the price of oil goes much above $100 a barrel, which you’d think would be great for the oil companies, it will crash demand for oil. If it crashes demand, the price will go down, hurting the profitability of the shale oil companies. It’s quite a predicament. Right now, in the $90-100-a-barrel range, it’s just slowly bleeding the economy while barely allowing the shale oil producers to keep up all the drilling. Two-thirds of all the dollars invested (more than $120 billion a year) goes just to keep production levels flat. Blogger Mark Anthonysummarized it nicely:
…the shale oil and gas developers tend to use unreliable production models to project unrealistically high EURs (Estimated Ultimate Recovery) of their shale wells. They then use the over-estimated EURs to under-calculate the amortization costs of the capital spending, in order to report “profits”, despite of the fact that they have to keep borrowing more money to keep drilling new wells, and that capital spending routinely out paces revenue stream by several times… shale oil and gas producers tend to over-exaggerate productivity of their wells, under-estimate the well declines…in order to pitch their investment case to banks and investors, so they can keep borrowing more money to keep drilling shale wells.
As stated in the intro, these perversities reverberate in the investment sector. Non-cheap oil upsets the mechanisms of capital formation — financial growth is stymied — in a way that ultimately affects the financing of oil production itself. Old credit cannot be repaid, scaring off new credit (because it is even more unlikely to be repaid). At ZIRP interest, nobody saves. The capital pools dry up. So the Federal Reserve has to issue ersatz credit dollars on its computers. That credit will remain stillborn and mummified in depository institutions afraid of lending it to the likes of sharpies and hypesters in the shale gas industry.
But real, functioning capital (credit that can be paid back) is vanishing, and the coming scarcity of real capital makes it much more difficult to keep the stupendous number of rigs busy drilling and fracking new shale oil wells, which you have to do incessantly to keep production up, and as the investment in new drilling declines, and the “sweet spots” yield to the less-sweet spots or the not-sweet-at-all spots… then the Ponzis of shale oil and shale gas, too will be unmasked as the jive endeavors they are. And when people stop believing these cockamamie stories, the truth will dawn on them that we are in a predicament where further growth and wealth cannot be generated and the economy is actually in the early stages of a permanent contraction, and that will trigger an unholy host of nasty consequences proceeding from the loss of faith in these fairy tales, going so far as the meltdown of the banking system, social turmoil, and political upheaval.
The bottom line is that the “shale revolution” will be short-lived. 2014 may be the peak production year in the Bakken play of North Dakota. Eagle Ford in Texas is a little younger and may lag Bakken by a couple of years. If Federal Reserve policies create more disorder in the banking system this year, investment for shale will dry up, new drilling will nosedive, and shale oil production will go down substantially. Meanwhile. conventional oil production in the USA continues to decline remorselessly.
The End of Fed Cred
It must be scary to be a Federal Reserve governor. You have to pretend that you know what you’re doing when, in fact, Fed policy appears completely divorced from any sense of consequence, or cause-and-effect, or reality — and if it turns out you’re not so smart, and your policies and interventions undermine true economic resilience, then the scuttling of the most powerful civilization in the history of the world might be your fault — even if you went to Andover and wear tortoise-shell glasses that make you appear to be smart.
The Fed painted itself into a corner the last few years by making Quantitative Easing a permanent feature of the financial landscape. QE backstops everything now. Tragically, additional backdoor backstopping extends beyond the QE official figures (as of December 2013) of $85 billion a month. American money (or credit) is being shoveled into anything and everything, including foreign banks and probably foreign treasuries. It’s just another facet of the prevailing pervasive dishonesty infecting the system that we have no idea, really, how much money is being shoveled and sprinkled around. Anything goes and nothing matters. However, since there is an official consensus that you can’t keep QE money-pumping up forever, the Fed officially made a big show of seeking to begin ending it. So in the Spring of 2013 they announced their intention to “taper” their purchases of US Treasury paper and mortgage paper, possibly in the fall.
Well, it turned out they didn’t or couldn’t taper. As the fall equinox approached, with everyone keenly anticipating the first dose of taper, the equity markets wobbled and the interest rate on the 10-year treasury — the index for mortgage loans and car loans — climbed to 3.00 percent from its May low of 1.63 — well over 100 basis points — and the Fed chickened out. No September taper. Fake out. So, the markets relaxed, the interest rate on the 10-year went back down, and the equity markets resumed their grand ramp into the Christmas climax. However, the Fed’s credibility took a hit, especially after all their confabulating bullshit “forward guidance” in the spring and summer when they couldn’t get their taper story straight. And in the meantime, the Larry-Summers-for-Fed-Chair float unfloated, and Janet Yellen was officially picked to succeed Ben Bernanke, with her reputation as an extreme easy money softie (more QE, more ZIRP), and a bunch of hearings were staged to make the Bernanke-Yellen transition look more reassuring.
And then on December 18, outgoing chair Bernanke announced, with much fanfare, that the taper would happen after all, early in the first quarter of 2014 — after he is safely out of his office in the Eccles building and back in his bomb shelter on the Princeton campus. The Fed meant it this time, the public was given to understand.
The only catch here, as I write, after the latest taper announcement, is that interest on the 10-year treasury note has crept stealthily back up over 3 percent. Wuh-oh. Not a good sign, since it means more expensive mortgages and car loans, which happen to represent the two things that the current economy relies on to appear “normal.” (House sales and car sales = normal in a suburban sprawl economy.)
I think the truth is the Fed just did too darn much QE and ZIRP and they waited way too long to cut it out, and now they can’t end it without scuttling both the stock and bond markets. But they can’t really go forward with the taper, either. A rock and a hard place. So, my guess is that they’ll pretend to taper in March, and then they’ll just as quickly un-taper. Note the curious report out of the American Enterprise Institute ten days ago by John H. Makin saying that the Fed’s actual purchase of debt paper amounted to an average $94 billion a month through the year 2013, not $85 billion. Which would pretty much negate the proposed taper of $5 billion + $5 billion (Treasury paper + Mortgage paper).
And in so faking and so doing they may succeed in completely destroying the credibility of the Federal Reserve. When that happens, capital will be disappearing so efficiently that the USA will find itself in a compressive deflationary spiral — because that’s what happens when faith in the authority behind credit is destroyed, and new loans to cover the interest on old loans are no longer offered in the non-government banking system, and old loans can’t be serviced. At which point the Federal Reserve freaks out and announces new extra-special QE way above the former 2013 level of $85 billion a month, and the government chips in with currency controls. And that sets in motion the awful prospect of the dreaded “crack-up boom” into extraordinary inflation, when dollars turn into hot potatoes and people can’t get rid of them fast enough. Well, is that going to happen this year? It depends on how spooked the Fed gets. In any case, there is a difference between high inflation and hyper-inflation. High inflation is bad enough to provoke socio-political convulsion. I don’t really see how the Fed gets around this March taper bid without falling into the trap I’ve just outlined. It wouldn’t be a pretty situation for poor Ms. Janet Yellen, but nobody forced her to take the job, and she’s had the look all along of a chump, the perfect sucker to be left holding a big honking bag of flop.
We’re long overdue for a return to realistic pricing in all markets. The Government and its handmaiden, the Fed, have tweaked the machinery so strenuously for so long that these efforts have entered the wilderness of diminishing returns. Instead of propping up the markets, all they can accomplish now is further erosion of the credibility of the equity markets and the Fed itself — and that bodes darkly for a money system that is essentially run on faith. I think the indexes have topped. The “margin” (money borrowed to buy stock) in the system is at dangerous, historically unprecedented highs. There may be one final reach upward in the first quarter. Then the equities crater, if not sooner. I still think the Dow and S &P could oversell by 90 percent of their value if the falsehoods of the post-2008 interventions stopped working their hoodoo on the collective wishful consciousness.
The worldwide rise in interest rates holds every possibility for igniting a shitstorm in interest rate swaps and upsetting the whole apple-cart of shadow banking and derivatives. That would be a bullet in the head to the TBTF banks, and would therefore lead to a worldwide crisis. In that event, the eventual winners would be the largest holders of gold, who could claim to offer the world a trustworthy gold-backed currency, especially for transactions in vital resources like oil. That would, of course, be China. The process would be awfully disorderly and fraught with political animus. Given the fact that China’s own balance sheet is hopelessly non-transparent and part-and-parcel of a dishonest crony banking system, China would have to use some powerful smoke-and-mirrors to assume that kind of dominant authority. But in the end, it comes down to who has the real goods, and who screwed up (the USA, Europe, Japan) and China, for all its faults and perversities, has the gold.
The wholesale transfer of gold tonnage from the West to the East was one of the salient events of 2013. There were lots of conspiracy theories as to what drove the price of gold down by 28 percent. I do think the painful move was partly a cyclical correction following the decade-long run up to $1900 an ounce. Within that cyclical correction, there was a lot of room for the so-called “bullion banks” to pound the gold and silver prices down with their shorting orgy. Numerous times the past year, somebody had laid a fat finger on the “sell” key, like, at four o’clock in the morning New York time when no traders were in their offices, and the record of those weird transactions is plain to see in the daily charts. My own theory is that an effort was made — in effect, a policy — to suppress the gold price via collusion between the Fed, the US Treasury, the bullion banks, and China, as a way to allow China to accumulate gold to offset the anticipated loss of value in the US Treasury paper held by them, throwing China a big golden bone, so to speak — in other words, to keep China from getting hugely pissed off. The gold crash had the happy effect for the US Treasury of making the dollar appear strong at a time when many other nations were getting sick of US dollar domination, especially in the oil markets, and were threatening to instigate a new currency regime by hook or by crook. Throwing China the golden bone is also consistent with the USA’s official position that gold is a meaningless barbaric relic where national currencies are concerned, and therefore nobody but the barbaric yellow hordes of Asia would care about it.
Other nations don’t feel that way. Russia and Switzerland have been accumulating gold like crazy at bargain prices this year. Lat year, Germany requested its sovereign gold cache (300 tons) to be returned from the vaults in America, where it was stored through all the decades of the cold war, safe from the reach of the Soviets. But American officials told the Germans it would take seven years to accomplish the return. Seven years ! ! ! WTF? Is there a shortage of banana boats? The sentiment in goldville is that the USA long ago “leased” or sold off or rehypothecated or lost that gold. Anyway, Germany’s 300 tons was a small fraction of the 6,700 tons supposedly held in the Fed’s vaults. Who knows? No auditors have been allowed into the Fed vaults to actually see what’s up with the collateral. This in and of itself ought to make the prudent nervous.
I think we’re near the end of these reindeer games with gold, largely because so many vaults in the West have been emptied. That places constraints on further shenanigans in the paper gold (and silver) markets. In an environment where both the destructive forces of deflation and inflation can be unleashed in sequence, uncertainty is the greatest motivator, trumping the usual greed and fear seen in markets that can be fairly measured against stable currencies. In 2014, the public has become aware of the bank “bail-in” phenomenon which, along with rehypothication schemes, just amounts to the seizure of customer and client accounts — a really new wrinkle in contemporary banking relations. Nobody knows if it’s safe to park cash money anywhere except inside the mattress. The precedent set in Cyprus, and the MF Global affair, and other confiscation events, would tend to support an interest in precious metals held outside the institutional framework. Uncertainty rules.
I get a lot of email on the subject of Bitcoin. Here’s how I feel about it.
It’s an even more abstract form of “money” than fiat currencies or securities based on fiat currencies. Do we need more abstraction in our economic lives? I don’t think so. I believe the trend will be toward what is real. For the moment, Bitcoin seems to be enjoying some success as it beats back successive crashes. I’m not very comfortable with the idea of investing in an algorithm. I don’t see how it is impervious to government hacking. In fact, I’d bet that somewhere in the DOD or the NSA or the CIA right now some nerd is working on that. Bitcoin is provoking imitators, other new computer “currencies.” Why would Bitcoin necessarily enjoy dominance? And how many competing algorithmic currencies can the world stand? Wouldn’t that defeat the whole purpose of an alternative “go to” currency? All I can say is that I’m not buying Bitcoins.
Will ObamaCare crash and burn. It’s not doing very well so far. In fact, it’s a poster-child for Murphy’s Law (Anything that can go wrong, will go wrong). I suppose the primary question is whether they can enroll enough healthy young people to correct the actuarial nightmare that health insurance has become. That’s not looking so good either now. But really, how can anyone trust a law that was written by the insurance companies and the pharmaceutical industry? And how can it be repealed when so many individuals, groups, companies, have already lost their pre-ObamaCare policies? What is there to go back to? Therefore, I’d have to predict turmoil in the health care system for 2014. The failure to resolve the inadequacies of ObamaCare also may be a prime symptom of the increasing impotence of the federal government to accomplish anything. That failure would prompt an even faster downscaling of governance as states, counties, communities, and individuals realize that they are on their own.
Sorry to skip around, but a few stray words about the state of American culture. Outside the capitals of the “one percent” — Manhattan, San Francisco, Boston, Washington, etc. — American material culture is in spectacular disrepair. Car culture and chain store tyranny have destroyed the physical fabric of our communities and wrecked social relations. These days, a successful Main Street is one that has a wig shop and a check-cashing office. It is sickening to see what we have become. Our popular entertainments are just what you would design to produce a programmed population of criminals and sex offenders. The spectacle of the way our people look —overfed, tattooed, pierced, clothed in the raiment of clowns — suggests an end-of-empire zeitgeist more disturbing than a Fellini movie. The fact is, it simply mirrors the way we act, our gross, barbaric collective demeanor. A walk down any airport concourse makes the Barnum & Bailey freak shows of yore look quaint. In short, the rot throughout our national life is so conspicuous that a fair assessment would be that we are a wicked people who deserve to be punished.
Elsewhere in the World
Globalism, in the Tom Friedman euphoric sense, is unwinding. Currency wars are wearing down the players, conflicts and tensions are breaking out where before there were only Wal-Mart share price triumphs and Foxconn profits. Both American and European middle-classes are too exhausted financially to continue the consumer orgy of the early millennium. The trade imbalances are horrific. Unpayable debt saturates everything. Sick economies will weigh down commodity prices except for food-related things. The planet Earth has probably reached peak food production, including peak fertilizer. Supplies of grain will be inadequate in 2014 to feed the still-expanding masses of the poor places in the world.
The nervous calm in finance and economies since 2008 has its mirror in the relative calm of the political scene. Uprisings and skirmishes have broken out, but nothing that so far threatens the peace between great powers. There have been the now-historic revolts in Egypt, Libya, Syria, and other Middle East and North African (MENA) states. Iraq is once again disintegrating after a decade of American “nation-building.” Greece is falling apart. Spain and Italy should be falling apart but haven’t yet. France is sinking into bankruptcy. The UK is in on the grift with the USA and insulated from the Euro, but the British Isles are way over-populated with a volatile multi-ethnic mix and not much of an economy outside the financial district of London. There were riots in — of all places — Sweden this year. Turkey entered crisis just a few weeks ago along with Ukraine.
I predict more colorful political strife in Europe this year, boots in the street, barricades, gunfire, and bombs. The populations of these countries will want relief measures from their national governments, but the sad news is that these governments are broke, so austerity seems to be the order of the day no matter what. I think this will prod incipient revolts in a rightward nationalist direction. If it was up to Marine LePen’s rising National Front party, they would solve the employment problem by expelling all the recent immigrants — though the mere attempt would probably provoke widespread race war in France.
The quarrel between China and Japan over the Senkaku Islands is a diversion from the real action in the South China Sea, said to hold large underwater petroleum reserves. China is the world’s second greatest oil importer. Their economy and the credibility of its non-elected government depends on keeping the oil supply up. They are a long way from other places in the world where oil comes from, hence their eagerness to secure and dominate the South China Sea. The idea is that China would make a fuss over the Senkaku group, get Japan and the US to the negotiating table, and cede the dispute over them to Japan in exchange for Japan and the US supporting China’s claims in the South China Sea against the other neighbors there: Vietnam, Indonesia, Malaysia, and the Philippines.
The catch is that Japan may be going politically insane just now between the rigors of (Shinzo) Abenomics and the mystical horrors of Fukushima. Japan’s distress appears to be provoking a new mood of nationalist militarism of a kind not seen there since the 1940s. They’re talking about arming up, rewriting the pacifist articles in their constitution. Scary, if you have a memory of the mid-20th century. China should know something about national psychotic breaks, having not so long ago endured the insanity of Mao Zedong’s Cultural Revolution (1966-71). So they might want to handle Japan with care. On the other hand, China surely nurtures a deep, deadly grudge over the crimes perpetrated by Japan in the Second World War, and now has a disciplined, world-class military, and so maybe they would like to kick Japan’s ass. It’s a hard one to call. I suspect that in 2014, the ball is in Japan’s court. What will they do? If the US doesn’t stay out of the way of that action, then we are insane, too.
That said, I stick by my story from last year’s forecast: Japan’s ultimate destination is to “go medieval.” They’re never going to recover from Fukushima, their economy is unraveling, they have no fossil fuels of their own and have to import everything, and their balance of payments is completely out of whack. The best course for them will be to just throw in the towel on modernity. Everybody else is headed that way, too, eventually, so Japan might as well get there first and set a good example.
By “go medieval” I mean re-set to a pre-industrial World Made By Hand level of operation. I’m sure that outcome seems laughably implausible to most readers, but I maintain that both the human race and the planet Earth need a “time out” from the ravages of “progress,” and circumstances are going to force the issue anyway, so we might as well kick back and get with the program: go local, downscale, learn useful skills, cultivate our gardens, get to know our neighbors, learn how to play a musical instrument, work, dine, and dance with our friends.
As it happens, the third in the series of my World Made By Hand novels, set in upstate New York in the post-collapse economy, will be published in September by the Atlantic Monthly Press. It’s a ripping yarn. Whether anyone will have enough money to buy a copy, I can’t predict. Happy 2014, Everybody!
New Features this week at kunstler.com:
Jim’s Garden Report, 2013
Jim’s New Paintings, 2011-2013
Published as an E-book for the first time!
The 20th Anniversary edition
With an entertaining new introduction by the author
Though still a week shy of its centennial anniversary, the US Federal Reserve will hold a celebration this afternoon in Washington DC.
(They’re even live-streaming it… http://www.ustream.tv/federalreserve)
Just imagine the scene– a bunch of current and former central bankers slapping each other on the back, congratulating one another for a job well done over the last 100 years.
Of course, you and I know this is total nonsense… as is the concept of our modern monetary system in which we award total control of the money supply to a tiny central banking elite.
Human beings are fallible. We are not gods. Yet we practically deify central bankers and entrust them with the power to manipulate markets, control prices around the world, and effectively dominate the economy.
This system has proven to be foolish and destructive.
While the Fed engages in its self-aggrandizement this afternoon, there is another far more important anniversary today– the Boston Tea Party.
It was this day in 1773 that dozens of men dumped 342 chests of tea from 3 ships into the water. But what a lot of people don’t realize is that it started with bankers.
In 1771, London banker Alexander Fordyce of the banking house Neal, James, Fordyce and Down thought himself infallible too.
Fordyce had made a fortune as a speculator, and he enjoyed his opulent wealth. He held magnificent estates in Surrey, Roehampton, and Scotland, and once blew 14,000 pounds (several million dollars today) running for parliament.
There was only one problem: Fordyce began making his bets using other people’s money. And when his bet on the East India Company didn’t work out, Fordyce’s bank used customer deposits to cover their losses.
By June 1772, the bank could no longer keep up the charade. And within days their collapse caused a cascade of other bank failures as far as Edinburgh and Holland.
With a crisis unfolding, the government forced the central bank to intervene in a way that was eerily similar to the 2008 financial crisis.
Just like 2008, too-big-to-fail companies got bailed out… including the East India Company itself. The East India Company was a bit like General Motors a few years ago– it was obvious they were in financial straits.
And as part of the bailout, the British parliament soon passed the Tea Act– an attempt to flood the colonies with the East India Company’s stockpiles of excess tea.
The Tea Act had another purpose, though– to assert parliament’s right to tax the colonies. And this is what ultimately led to the Tea Party on December 16, 1773.
John Adams wrote in his diary that the destruction of the tea was ‘daring’ and ‘intrepid’, and that to ignore the Tea Act would be like submitting “to Egyptian taskmasters, to [burdens], Indignities, to Ignominy, Reproach and Contempt, to Desolation and Oppression, to Poverty and Servitude.”
Britain’s harsh reaction to the Tea Party further escalated tensions with the colonists, and it wasn’t long afterward that the first shots were fired.
Given the prominent role of bankers and bailouts in the American Revolution, it’s ironic that the Federal Reserve has chosen to hold its centennial celebration today.
And as they all slap each other on the back today extolling the Fed’s ‘successes’, one can only hope that the arrogance and pomposity of the current system will lead to a new revolution– this time a revolution of the monetary system and a return to the principles of sound money.
Special Report: How Germany’s taxman used stolen data to squeeze Switzerland
He put the notes in his briefcase and took them home, where he created an Excel spreadsheet which he called “Mappe1-test1.xls.” The spreadsheet held names, addresses, and amounts held by clients.
Despite trying to cover his tracks, Lapour was eventually convicted of economic espionage, among other crimes. According to a statement he made in a plea bargain, the data he stole gave details of as many as 2,500 clients with combined assets up to 2 billion Swiss francs ($2.2 billion). He sold it to a middleman, who then sold it to German tax inspectors. The information led to police raids in 2010 on Credit Suisse’s main offices in Germany.
Lapour’s spreadsheet was one of a half-dozen sets of stolen data for which Germany has paid millions of euros over the past five years. Those purchases pushed the boundaries of German law; Reuters’ inquiries have found Germany’s 16 federal states all cooperated in making them.
German parliament and court records, Swiss legal documents and interviews with bankers and politicians show the states and the central government in Berlin gradually constructed a system, partly funded by Germany’s federal finance ministry, to buy information on tax evaders. It’s a campaign which involves hundreds of Germany’s roughly 2,500 tax inspectors, includes a formula to calculate each state’s share of a purchase, and continues to this day, German tax officials say.
Some German politicians say buying stolen data added to pressure on Switzerland to share more information about tax evaders. Last month, Switzerland, which for decades has nurtured bank secrecy as a cornerstone of its offshore wealth industry, signed a convention to exchange some tax information with other countries. If approved by the Swiss parliament, it could be the end of a long and passionate battle.
Swiss officials accuse the Germans of breaking Swiss laws on banking secrecy and of committing economic espionage. According to arrest warrants seen by Reuters, the Swiss prosecutor is seeking the arrest of three German tax inspectors on these charges. Swiss finance minister Eveline Widmer-Schlumpf declined to comment, but a spokesman for her ministry said Germany’s handling of stolen goods “is highly questionable with respect to the rule of law.”
In June this year, Germany’s parliament received a draft law with a clause to exempt from prosecution civil servants who handle stolen data. As Berlin parties haggle over a new government, it has yet to be passed.
Nonetheless Norbert-Walter Borjans, finance minister for North Rhine-Westphalia, the state which bought the Lapour data, says he would support the purchase of such information “so long as there is data containing valuable tips to be bought.” His predecessor, who signed off on the Lapour deal, could not be reached. Switzerland has filed no charges against the politicians involved.
Buying stolen data is an “emergency remedy”, a spokesman for Germany’s federal finance ministry told Reuters: It was justified because Germany and Switzerland did not have a deal through which Germany could enforce its tax claims. None of the tax inspectors could be reached, and the state declined to comment on their behalf.
THE DECEASED WITNESS
The Swiss prosecutors suspect the German tax inspectors of more than handling stolen goods. They allege the taxmen even solicited the theft of specific information, according to an international request for legal assistance that Switzerland sent to Germany on the case.
In that confidential document, seen by Reuters, Lapour is quoted as saying a middleman showed him a text message in which tax inspectors allegedly requested specific information.
Tax inspectors in North Rhine-Westphalia say they don’t solicit data stealing. Ingrid Herden, a spokeswoman for the state’s finance ministry, said German tax authorities had not actively encouraged theft of client data from Swiss banks. “There is no evidence that tax inspectors from NRW did such a thing,” she added in a written statement to Reuters.
However, Herden added that she could not rule out that a middleman may have incited Lapour to steal information.
That go-between, named in the Swiss request as an Austrian graphic designer called Wolfgang Umfogl, committed suicide in prison in Switzerland in 2010, weeks after his arrest on suspicion of money-laundering, according to police in Berne, Switzerland.
Lapour, who was given a two-year jail sentence but spent less than six months in custody, could not be reached for comment. His lawyer declined to be interviewed. North Rhine-Westphalia declined to comment on the details of the case.
THE FITNESS CENTER
Lapour was born in 1983 in Tehran, Iran. By the mid-2000s he was working at Credit Suisse in Zurich and would meet up with Umfogl at the Banane Fitness Centre in Winterthur, according to the Swiss request for assistance, which is also based on Umfogl’s testimony and other material gathered by Swiss police. How the two got talking about stealing data is not revealed.
Lapour created a data file on March 2, 2008, containing names, addresses, net worth and contact details for clients, the request for assistance says; Umfogl flew to Duesseldorf to meet German tax inspectors at the end of that month to see what this information was worth. His opening price: 6.75 million euros ($9.13 million).
By that time, North Rhine-Westphalia already had experience of handling stolen information from other sources. In 2008, it emerged that the state’s tax inspectors had obtained data stolen from LGT Group, a Liechtenstein bank, from a thief who originally sold it to Germany’s federal intelligence service, the BND.
That year, North Rhine-Westphalia officials commissioned a legal opinion from the regional prosecutors to determine if they were within their rights to buy stolen data from Lapour. The prosecutors found in their report that for civil servants, dealing with LGT data did not amount to handling stolen goods – the theft happened in Liechtenstein, to a foreign company. They also said “emergency measures” are justified if tax claims cannot be enforced by other legal means: Authorities in Liechtenstein had not cooperated with requests for legal assistance.
Tax authorities at three German states would go ahead with deals, buying at least five sets of data since 2008 according to media announcements they made; the data was stolen frombanks including UBS, Julius Baer and HSBC. The banks declined further comment or said they had resolved the issues.
THE UPDATED FILE
In Switzerland, Lapour was busy. The Swiss prosecutor says his data file was updated on July 21, 2008, four months after Umfogl allegedly first met the German tax inspectors, to add the dates each account was opened.
This, the Swiss prosecutor asserts, suggests he was stealing to order: German tax authorities needed the dates to see how long a client had evaded taxes. In the request for legal assistance, Lapour is cited as saying Umfogl asked him to get that extra data: Umfogl had shown him a text message from June 24, 2008 in which the tax inspectors purportedly demanded more information. The alleged message’s exact contents are not described.
In May 2009, Umfogl and the German tax inspectors met again, at the Kronen Hotel in Stuttgart, the Swiss document says. There, prosecutors say, tax inspectors asked for a sample of the data and for information beyond names and dates.
According to the Swiss prosecutor, Lapour confessed he stole and sold a PowerPoint presentation that Credit Suisse made for staff on how to handle German clients who were “non compliant” – evading German tax. The presentation told staff how to avoid implicating themselves or the bank in aiding tax evasion. The Swiss say the Germans wanted to use it as evidence Swiss banks had a strategy to look after foreign tax-evading clients.
Credit Suisse would eventually pay 150 million euros to the state of North Rhine-Westphalia to end an investigation into allegations it helped German citizens evade taxes. Neither the bank nor North Rhine-Westphalia would comment further.
Back in 2009, after another meeting in the German lakeside city of Konstanz, Umfogl handed tax inspectors a USB stick containing a sample of 10 percent of the data, according to the Swiss request for assistance. In mid-July, he purportedly handed over the PowerPoint presentation. It’s not clear from the document when or how the rest of the information was handed over or paid for.
In all, Umfogl allegedly paid Lapour at least 65,000 euros for his information; Lapour later told Swiss prosecutors that he used most of the money to support his Czech girlfriend. He showered her with gifts including a car, paid for vacations to Italy, Spain and Egypt, and helped her to pay off a mortgage in the Czech Republic. She was not accused of wrongdoing and could not be reached for comment.
Germany’s legal machinery continued to gather opinions on how far tax inspectors could go. In 2010, the North Rhine-Westphalia inspectors got some legal reassurance.
A CHANGE OF VIEW
“With the LGT CD, many said it’s a one-off, but then came 2010,” said Borjans, the finance minister of North Rhine-Westphalia.
On February 23, representatives from the Federal Central Tax Office, an authority under the jurisdiction of the German Ministry of Finance, contacted officials from what is now Borjans’ ministry and decided to coordinate bank data purchases so different states would not all buy the same set, parliamentary questions show.
Days later, Borjans’ predecessor, a member of Chancellor Angela Merkel’s CDU party, announced he had struck a deal to buy a “client data CD” – the Lapour data – for 2.5 million euros.
In November, a legal opinion from Germany’s Federal Constitutional Court added weight to that plan. The court found that if data had been “received” rather than actively solicited, then those who used it were not guilty of abetting the theft. Whether it was legal to buy stolen data was a question it referred to other courts.
“It’s not like I commission a purchase, or people come directly to me,” Borjans told Reuters this year. Tax inspectors, not politicians, are in the driving seat, he said. They act on tips and then ask him for resources.
THE KEY OF KOENIGSTEIN
By 2010, all Germany’s tax collectors had reached agreement on how to split the cost if the federal ministry decided to join the states in funding a purchase, parliamentary questions show.
Acquisitions of taxpayer names are funded using a formula known as the “Koenigsteiner Schluessel,” which translates as “the key of Koenigstein.” The formula, named after a wealthy Frankfurt suburb, was devised after World War Two to work out how to spread the cost of funding scientific research in Germany.
“Should the Federal Ministry of Finance decide to make a purchase, it will contribute 50 percent of the acquisition costs,” a spokesman for the ministry told Reuters. All 16 states told Reuters they have helped pay for data: Berlin and Hamburg say these purchases led to the recovery of more than 100 million euros each.
But not all are convinced the system is legal. After initially joining in, one state – Brandenburg – said it was opting out because of such doubts. Last June, when the draft law on handling stolen data went to parliament, Brandenburg’s finance minister issued a news release saying it would “provide long overdue legal certainty for our finance officials.” The state which bought the material paid the shortfall, a spokesman for Brandenburg said.
Volker Kauder, head of the parliamentary group for the CDU, is still “highly critical” about buying such data, a spokesman told Reuters. “In doing so the state is in danger of slipping into the role of a dealer in stolen goods,” he said.
THE TELEVISION CABLE
In March 2010, Umfogl opened a bank account in Austria. According to the Swiss request for legal assistance, he was trying to divide the 2.5 million euros he had received between banks in Germany, Austria and the Czech Republic. Staff at a savings bank in Dornbirn, Austria, got suspicious about a deposit of 893,000 euros, and raised the alarm with police on March 25, 2010, believing Umfogl could be a money-launderer.
Austrian authorities froze Umfogl’s funds that September, said the prosecutor’s office in Feldkirch, Austria. Swiss Federal Police were notified because Umfogl lived in Switzerland. They arrested him at his work. A day later, Lapour was tracked down and arrested in the Czech Republic where he was visiting his girlfriend.
Lapour was convicted in Switzerland’s Federal Criminal Court of economic espionage, violating bank secrecy and violating trade secrecy, by passing client data outside the bank. Besides his 24-month sentence, he was fined 3,500 Swiss francs.
At a house in a suburb on the outskirts of Winterthur, given in the request for assistance as Lapour’s parents’ address, a man told a reporter he did “not know where Sina is.”
At about 6.30 a.m. on September 29 2010, just days after Umfogl was arrested, he was found dead in his police cell in Berne. He had left a note before hanging himself with a television cable, according to a joint statement issued by the coroner and police. Both declined to reveal the note’s contents.
That month, Switzerland’s government said it had agreed to resolve the problem of untaxed money stashed away by Germans in Swiss accounts.
North Rhine-Westphalia’s Borjans believes the purchase of stolen names was crucial to that. “You could tell this was not only a question of decency,” he told Reuters. “It was also about hardcore commercial interests. And that’s why Switzerland was suddenly willing to negotiate.”
The Swiss finance ministry said it had been Swiss financial market policy since 2009 to seek international tax agreements.
By August 2011, Switzerland and Germany had reached an outline deal on sharing tax information. But the pact failed to win political support within Germany and the upper house threw it out in November last year.
Borjans was one of the pact’s opponents. He said he felt Berlin had sold itself short. “It left the door open to bank secrecy and tax evasion,” he said.
Last month, Switzerland finally signed onto the international tax convention, giving Germany some of what it wanted. The Swiss request to Germany to arrest three tax inspectors has gone unanswered: Germany’s finance ministry said it is still evaluating it.
(Hosenball reported from Berne, Switzerland; Additional reporting by Andreas Rinke and Michelle Martin in Berlin and Jan Lopatka in Prague; Edited by Sara Ledwith)