US Dollar interest rates have started to come down in the Dominican Republic at most of the banking institutions.  While clients can still obtain anywhere from 2.5 percent up to 5 percent on US Dollar savings accounts, bank certificates of deposits will currently offer anywhere from about 6 percent to 7.5 percent (30, 60 or 90 day term).  This of course is a reduction from previous rates, which were slightly higher for time deposits.  Part of the explanation is that local banks are flush with US Dollar deposits at the moment, as Dominicans have shifted savings from Pesos into Dollars after having become fearful of the recent local currency devaluations.  In fact, statistics from the Central Bank show a drastic reduction in Pesos deposits at local banks and an overall increase in dollar deposits across the entire banking industry.

One survey finds that it doesn't much matter to many U.S. shoppers -- especially younger ones -- where the stuff they buy comes from Politicians may rail against Benedict Arnold CEOs shipping work abroad, and unions may bemoan the loss of U.S. factory jobs. But do Americans care where the stuff they buy was made? Not much, it turns out, and that apathy could hasten the offshore movement.

When shopping for home-improvement or home-decorating products at big-box retailers, 7 out of 10 people say they don't look at the country of origin, according to a new nationwide phone survey by pollster TeleNation. What's more, 57% say the national source has little or no effect on what they toss into their carts. The percentages are notably higher for those aged 18-24: Nearly 85% in that group don't know where products come from or care.  

EDITORS NOTE:  Lou Dobbs of the popular Money Line television program has been focusing on the outsourcing of America recently and for sure this has now become a political issue in the US as well (with many state governments cutting off business relationships with US firms that have shifted jobs outside of the US).  However, assuming the above study is accurate, Americans could care less (and American consumers certainly want to continue paying inexpensive prices for products - which cheap foreign labor makes possible).  So, on the one hand, there seems to be a hot political discussion about outsourcing, YET it also seems the American consumer is in reality dictating this (and probably wants to continue to be able to purchase less expensive foreign made products regardless).

Dr. Leonel Fernadez Reyna has recently won the May 16, 2004 Presidential elections by gaining more than 55 percent of votes at home and as much as 74 percent of votes from Dominicans living abroad, signaling an end to the previous government of Hipolito Mejia.  Reasons cited were lack of confidence in the Mejia government and hope that the conservative PLD party can improve the economic situation in the country.  Indeed under the previous Fernandez administration 1996-2000, the Dominican Republic was cited as having the fastest growing economy in Latin America.  The hope among many Dominicans is that this can be the case once again going forward.

We have noticed an upswing lately in both Americans and Europeans seeking to expatriate from their home countries.  Traditional thinking in the past was that many of these people were doing so to gain immediate tax benefits and perhaps to seek out a lower cost of living as well.  On the cost of living issue, to be sure this is the reason many retirees have opted to live in Panama, Ecuador, The Dominican Republic – and a host of other locations whereby their fixed pension income takes them farther (and more comfortably) than it would back home.  For Americans, it might also be the issue of gaining a second citizenship just so they can open a bank account or investment account - as many bankers (and brokers) outside of the US will no longer accept US Citizens as clients due to tremendous pressure from the American Internal Revenue Services and the US State Department.  On the general tax issue, while a bit more restrictive and less beneficially (at least officially) for Americans, Europeans can of course legally declare themselves non-resident for tax purposes and live a more, shall we say, a less taxing lifestyle.

However, while these might continue to be the motivation of some, many of our clients are very concerned, and in some cases very frightened, about the coming storm about to befall the developed countries within the next 10 years and beyond.  What storm are we referring to?  The massive pressures facing ALL developed countries in terms of their government run Social Pension and Healthcare programs, including those nations in order of the most severely effected:  Japan, The European Union and The United States.  How so you might be wondering?  Well, consider the following statistics, news article sections and commentary about the problem.  Also remember that ALL of these government programs operate as a pay as you go system, in effect, a government operated Ponzi Scheme, relying on current workers to pay in and support all those currently retired or drawing benefits.  But what IF, there were not enough workers in the future to pay in, and what IF the amount of people drawing benefits swelled exponentially?  In other words, what if, just as the problem Mr. Ponzi faced, there were not enough new people paying in (or paying in enough money regardless of the numbers of workers) to support all the withdrawals from the old?

Federal Reserve Chairman Alan Greenspan has urged Congress to cut future retirees' benefits. If not, research shows, Social Security may contribute to a larger crisis.  Budget Crisis at the Door released in late 2003, details how the steadily rising costs of Social Security, Medicare, and Medicaid will squeeze out other spending unless some promises are broken, tax burdens rise to unprecedented levels, or the deficit is allowed to race past the point of toleration.

EDITORS NOTE:  Many of our American clients have informed us they have recently received written notices in the mail from the Social Security Agency, extending the retirement age date to obtain full pension benefits – plus a written warning that benefits might be cut in the future AND that participants should NOT rely on the government run system as their sole source of retirement income.  We have not seen any such notices, but this does indeed fit in with the scenario outlined, and therefore it would seem – it has already begun.

Sitting in the eye of the storm, some tend to believe that these problems, if they exist at all, are merely for some distant future. Yet the number of years available to undertake a reasonable transition is quickly shrinking as the leading edge of the baby boom population reaches Social Security eligibility age around 2008. But even citing 2008 creates a misleading impression that the problem is not with us already and that procrastination is costless. Though baby boomers are still working in the years before 2008, public financial support for older Americans is already placing an enormous strain on the federal budget. And declining revenues in recent years have only added to the pressure. 

When the share of GDP or of total federal expenditures absorbed by elderly programs increases, the share spent on everything else must decline.  When elderly programs rise from 50 percent to 70 percent of federal spending, for instance, then everything else falls from 50 percent to 30 percent. It is not necessarily true that the share of GDP spent by the federal government on everything else must decline as the burden of supporting the elderly rises, since the government can start absorbing ever-greater shares of GDP through INCREASED TAXES. However, that has not happened to a significant degree for over 50 years. Later, we shall examine in more depth just how other federal spending has been declining relative to GDP.  For now, note that as a share of the budget, close to ONE-HALF of total spending outside defense and interest on the debt goes to people 65 and over. Social Security is the single biggest federal program, having surpassed defense in 1993. Medicare is growing so rapidly that it will eventually overtake both defense and Social Security, even without the addition of a new prescription drug program.

To put another spin on matters, consider the so-called working poor that make up about 25 per-cent of the US working population, which is to say 1 out of 4 Americans who work are indeed working – but are poor, or in the least slightly above the eligibility level for welfare entitlements.  Of this working poor group: 41 percent are over the age of 36, and 40 percent have attended college (of which 9 percent presumably have a college degree).  What is the point?  It is somewhat incredible to believe that in one of the so-called wealthiest nations on earth (although that term or title can be disputed) in the year 2004, so many working adults live (and work) just slightly above the poverty line (even with some higher education).  In fact, about 28 Million people to be exact.  The obstacle for these people to move up economically is education, but consider the ever-increasing costs of education today, never mind 20 years from now.  Ironically enough, Federal Reserve Chairman Greenspan argued for higher education as the answer when discussing the fallout of lost American jobs to outsourcing overseas.  Was he talking about the 25 percent of America’s working poor, or was he talking about America’s middle-class who could become new members of the working poor group?

WHAT IS THE SOLUTION?

The truth is, probably there is not any one solution that will not inflict economic pain or anger on someone, most likely the generation directly behind the so-called baby boomers.  The governments of these nations afflicted with this problem MUST raise taxes, they could print more money and inflate the money supply (which many claim is already happening with the US dollar and partially to blame for the declining value of the US Dollar in world currency markets), borrow more money, cut benefits or government spending or a combination of all these measures.  So, what is the end result?  For sure, one can expect some difficult economic times ahead, not to mention perhaps reduced government spending on education or infrastructure among other things (expect less help from the government, not more).

Is all this meant to paint a bleak and ominous picture of a social doomsday ahead?  That is not the intent - although the statistics do not lie (politicians lie, but that is another matter).  The initial part of solving a problem is - knowing there is a problem in the first place.  Stated more correctly, solving the government’s problem really is not even a consideration, because A. The politicians TODAY want to ignore it (they have been doing so for thirty years, so this is not a comment regarding any one political party or philosophy) and B. there is no easy policy solution simply because of the enormous size involved (in terms of money amount and percentage of GDP).

The solution then may be to hope for the best, but plan for the worse.  Stated another way, one never knows what politicians might do, but for sure, there will be changes coming that many will not like (higher taxes, etc.).  So, the idea is to plan or position your self for the worse case scenarios, which are as follows:

Possibility Number One:  Increased Taxes.  There are many who believe taxes WILL be increased across the board going forward, although obviously politicians would prefer to take other action instead (see The Printing Press in Action below).  So, it could be the case of higher income and government social welfare program deductions from your salary in the future, or there could be changes to taxation on existing retirement plans as well.  For example, it could be decided that if you have a private pension, annuity or personal IRA account, that you will not be eligible to receive a Social Security pension check from the government (because you already have a private pension, even though you have paid into the government system for 40 years).  Also, it could be decided that you are subject to say, a one time 20 per-cent tax on your private pension holdings.  Let’s face it, pension accounts total a vast majority of wealth for many middle class people and some say your pension account is a sitting duck waiting to be targeted.  Who knows, but when they asked the famous bank robber, Willy Sutton, why he robbed banks – he replied, because that is where the money is.  The idea of any government raiding your domestic pension plan for tax revenue sounds crazy, but no one thought former US President Roosevelt would force ALL Americans to turn over their gold to the government either as a quick income source for the government during the Great Depression.

Does this mean you should stop saving money for retirement?  No, not at all, but it could mean that saving money abroad is a worthy idea to consider (outside the reach of confiscators).  Consider the implications if you lived during the Great Depression and had gold bars in a Swiss Bank instead of a US based safe deposit box.  You might still have your gold rather than being forced to sell it to the government at a fixed price.  So, the point is, perhaps investment and or bank accounts located elsewhere may not be such a bad idea.  And to offer some additional protection, perhaps assets held inside a Trust Structure or Foundation Structure, so the assets are not even in your personal name.

Possibility Number Two: The Printing Press in Action.  A favored choice of politicians has often been to simply print more money.  As was quickly found out during the pre-nazi government in Germany, printing too much can lead to disaster (images of people bringing wheel barrels full of almost worthless cash to the grocer or bread-man come to mind).  However, it is not so unreasonable to think that a government might consider inflating the money supply by say 10 or 20 percent.  Perhaps we can call this: the calculated or thinking man’s inflation, if you prefer to see it that way.  Already we have seen the official US Government policy of a weak dollar as being one way out of the recent US recession.  What is a weak dollar?  It is one whereby the dollar has a lower value versus other world currencies.  How do you do it?  Simply print more money faster than the current domestic economy can support – also known as inflating the money supply.  What is the benefit from the politician’s point of view?  Well, for sure, US exports become cheaper or lower priced in overseas markets – very good for domestic companies that are exporting.  In addition, you get to pay off your debts to foreign nations with money that is worth less than the value of the money you previously borrowed – a way to stick it to foreigners and or foreign governments that may own your bonds or debt.  However, there is a backlash to all this, which is that first and foremost that the consumer suffers (and anyone else holding your currency).  Meaning, his cost of living goes up and his money is worth less and less.  In addition, foreigners and foreign governments will stop accepting your money, or in the least try and get rid of it.  Case in point, rumors that the Chinese are dumping dollars and buying gold, and the recent move by Russia to sell its oil for Euros and not US Dollars.

What can you do about it?  Well, converting your paper currency assets to hard or real assets is certainly one idea.  In other words, consider precious metals, such as Gold, other commodities such as oil (a mutual fund investing in commodities only is one sensible idea) or real estate.  On the issue of real estate, Andrew Carnegie once said:  Buy real estate, it is the one thing they are not making anymore.  But where do you buy?  Certainly purchasing some of the very overpriced real estate currently on the market in some places is not the answer.  Neither is taking on huge amounts of debt simply because mortgage interest rates are low.  Perhaps real estate is a growth market or a second home in another country?  Maybe a new luxury 3 or 4 bedroom apartment in Ecuador, Panama, Chile, or the Dominican Republic for about US$100,000 dollars is one plan.  Maybe farmland or a building lot for US$15,000 is another.  Maybe do both, paid for in cash and 100 per-cent debt free.

Before you commit to any of these ideas, considering mapping out the worse case scenario for yourself as the first step.  In other words, let us say you loose your job and cannot find another one for 12 months or more.  Let us say you can, but at half the salary.  Let us predict the government will increase income tax by 20 or 30 percent or even real estate property taxes as well.  Let us speculate your national currency looses value because the government decides to inflate it (print more money as the answer to it’s problems).  Maybe everyone runs for the exit doors at the last minute and your government freezes banking assets or prohibits transfers out of the country (consider that the US Government has recently announced taxation of foreign transfers for US foreign residents sending money home every month, the idea that they start taxing ALL non business related foreign transfers does not seem so far fetched – in other words, a financial fine or penalty for sending YOUR own money abroad).  Perhaps the bottom drops out of the real estate market and you are upside down (the term used to describe when your mortgage value is higher than the actual property value of your home).  Perhaps the pension you were counting on disappears or is greatly reduced (they government tells you that you are no longer eligible for the government run pension plan or your own retirement savings are taxed or even reduced due to bad investments).  What would you do?  What kind of action plan would you put in place?  What would you have to fall back on?  Buying some gold, banking or investing abroad, buying real estate in another country, maybe even pursuing a second citizenship sounds radical to some.  But as Moishe from Panama would say – What could it hurt?

Current US Government Public Debt:  As of May 27, 2004 was US$4,206,991,325,970.67 (debt purchased by the public, whomever that might be – including the Chinese Government), and US$2,984,395,481,176.00 borrowed from other government agencies or sources (Social Security Trust Fund) for a total of US$7,191,386,807,146.67.

According to the New York Federal Reserve Bank, as of December 2002, there was approximately US$675 Billion Dollars (Federal Reserve Paper Notes and Coins) in circulation.

EDITORS NOTE:  If the US Government has borrowed 7 Trillion Dollars and there is ONLY 675 Billion Dollars worth of so-called paper in coin money in circulation – Where will the other 6 Trillion Dollars come from to pay off the debt?  Meaning, if every single paper dollar and coin (regardless of denomination) were collected that actually physically exists in the world today, it would seem that there would not be enough money to pay off the borrowed money.  This being the case, does this mean the US Federal Government plans on simply PRINTING more paper money in the future to pay off this debt?

What was $1.00 in 1970 worth in 2002?  The Consumer Price Index was 4.64 times as high in 2002 as in 1970. That means that a market basket of items that cost $1.00 in 1970 cost $4.64 in 2002, or that the purchasing power of $1.00 shrank to 22 cents over the period.

TODAY in the year 2004 - Social Security, Medicaid and Medicare plus interest on the 7 Trillion Dollars of the US National Debt alone currently make up 53 Per-Cent of US Government expenses (or 53 cents of every tax dollar spent goes to cover these above mentioned costs today – and in 10 years it has been estimated this figure could approach 80 Per-Cent of government expenses).

TOP FIVE INFLATION FIGHTERS - By Linda Stern Wed. May 12, 2004   WASHINGTON, May 12 (Reuters) - The Fed is getting ready to take away the punchbowl, before the recovery party gets too hot. But a cynic might say we're due for an inflation hangover anyway, because of rising federal deficits and the impending retirement of many baby boomers.  This argument holds that the only way to make good on those long-term Social-Security promises and reduce the deficit is to pay it all off with cheaper money -- and that means inflation.   Inflation can kill the best-laid savings plans. Bonds and stocks both can get walloped during periods of rapidly rising prices. Maybe that's not happening this week or next -- some economists argue that the economy is still too weak to get inflationary and that heightened global competition will keep prices under control.  But, remember the 1970s? Low growth. Newly opened international markets. Drifting and falling stock prices - And, inflation through the roof.

NEW YORK (Reuters) - Peter Schiff is based in Newport Beach, California, but when it comes to investing his clients' money, he sends most of it as far away from U.S. shores as possible.  Why? The chief executive of investment brokerage Euro Pacific Capital, which manages about $300 million, is one of the daddy bears of U.S. markets.  Schiff says he believes the U.S. dollar's days as the world's dominant currency are numbered and advises his customers to take pre-emptive actions to preserve their wealth.  What makes him so bearish? For starters, Schiff fears the roughly $500 billion U.S. current account deficit -- a broad measure of the nation's global trade -- is unsustainable.  He says that if foreigners, especially Asian central banks, stop funding that deficit by buying U.S. debt and propping up the dollar, the U.S. currency will fall into a decline.  Schiff says he does not want his clients invested in U.S. assets if that happens. Rising U.S. inflation and the higher interest rates that many now predict only strengthen Schiff's bearish views.   The most important thing to do now is to preserve one's wealth, said Schiff.  Once you recognize the dollar is being debased and once you accept the only solution politicians can see to these problems is inflation -- then it's clear you have got to get rid of your dollars, he said.

Hi, John - From your comments in reply to a reader:  real wages in the US (and I suspect in Europe also) when adjusted for inflation have actually remained stagnant (or actually declined in some cases) during the last 20 years (for most people).

Actually, I think you'll find that this has been true for the last 30 years -- a point driven home by Harry Browne in an article on his website. He compares this directly to a chart of the rise of government expenditures, which have skyrocketed over the same period. Median American family income has been stagnant at about $50k (in constant 2002 dollars) ever since Nixon closed the gold window.  As to socialism, there seems to be an almost automatic assumption that it is driven by Marxist ideology. But we must remember the other virulent version manifested in Mr. Hitler's "National Socialism" -- Nazism, for short.

This information has been compiled and presented by John Schroder of Ascot Advisory Services, for the benefit of clients and readers. Ascot Advisory Services provides assistance with such matters as offshore company formation, Panama Foundations, offshore banking, and special services in the Dominican Republic regarding residency, free zone applications, etc. For more information:  

.... ....
Telephone 809-334-5387 or 809-756-1917 
Email: info@ascotadvisory.com
..