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Financial Slavery: A Price of Globalization Neither Presidential Candidate Is Talking About

Sellout of America

Foreigners Buying Up Big Chunks Our Soaring National Debt

Text Box:  PHOENIX, Oct 4 – America is for sale.  And has been for decades.  Yes, even our federal government is for sale.  Make that especially our federal government.  And especially in the last decade of globalization.

The fact that neither presidential candidate is even talking about it at the height of a heated presidential election campaign, proves that they are both working for the globalists who look at America and its 294 million citizens as just an asset to be milked for all its worth.

Not only are American jobs being outsourced to overseas countries with cheaper labor (and even on that subject the political rhetoric has all but died down since Howard Dean dropped out of the race).  Our very future is being mortgaged by our leaders - quietly, slyly, without our say-so or even awareness, for the most part. 

Did you know, for example, that every time you buy something made in China or in some other foreign country, you’re tightening the financial noose around our collective necks a little more?  That’s because our soaring trade deficit ($489 billion last year; 4.5% of GDP, up from 1.9% in 1990 – see China Follies Revisited, Mar 2004) is financed in part by credit from our trading partners.  This has pushed our current account deficit from an all-time high of $542 billion in 2003 (4.5% of GDP), to an even higher 5.7% of GDP in the second quarter. 

That’s like a corporation running up ever increasing negative cash flows.  Or like a homeowner paying for his monthly expenses out of his mortgage account.  The more they spend, the more they owe.  Prosperity based on ever-increasing indebtedness is an illusion of prosperity.  It is fools’ gold.

No responsible Board would allow a CEO to run a company that way.  No responsible household head would handle his family finances that way.  No responsible doctor would treat a hemorrhaging patient with only more blood transfusions. 

But that’s how the globalist bankers want it.  Citizens of no country and would-be masters of all, they have devised a global trading scheme so that they get paid coming and going (on our increased consumption and on our soaring debt). 

Illusion and Diversion Strategy

But first, they must create an illusion of prosperity.  Under the labels of “globalization” and “free trade,” they and their political stooges in Washington, are presenting the Sellout of America and our growing financial slavery as goodness. 

Second, they must create a diversion to keep us from seeing the con.  America’s government-led obsession with security since 9/11 has been a perfect cover.  That’s all one seems to hear these days from both globalist patsies who are running for President.  Iraq, Al Qaida, North Korea, Iran.... not national debt, trade deficits, weak dollar.

Spreading fear and uncertainty among the population is also good for business.  Defense and other government contractors get hundreds of billions of dollars in increased spending on security and foreign wars.  The globalist bankers get the interest payments.  The U.S. taxpayers get the bill for our $7.7 trillion national public debt. 

It’s an ingenious Ponzi scheme, albeit a devious one… to the core.

Which is why George W. Bush’s and John Kerry’s patriotism claims ring hollow.  During the first presidential debate on Sep 30, both candidates patted each other on the back for their alleged “patriotism,” and their “love of this country.”

But words are cheap.  Ask yourself a simple question: Would you lead someone you love into financial slavery? 

We suspect not. 

Well, successive Democratic and Republican administrations have done just that over the last several decades, especially in the last 10 years. 

So either our leaders “love this country” but are stupid, or they love money and power more than they “love this country” (the more likely choice).  Either way, they are leading us into ruin.  Either way, the only winners are the financial institutions that are funding our bulging debt.

How Long Can Global Ponzi Scheme Last?

As a result of our soaring trade deficits, funded in part by sellers’ loans and investments, foreign ownership of U.S. securities is up nearly four-fold since 1994 (from $1.25 trillion to $4.5 trillion).  It is up more than five-fold since 1989 ($847 million – see the charts and Table 1).

Text Box:

As of June 2003, the latest date for which the U.S. Treasury data is available, foreigners owned 46% of the $2.5 trillion of U.S. Treasury securities (vs. 19% in 1994m according to the latest U.S. Treasury August 2004 report).  They also held 11% of other U.S. government agencies’ debt ($5.2 trillion, up from $2 trillion or 5% in 1994 – see the chart).  

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A profile of foreign ownership by industry reveals that government and the financial sector are by far the largest holders of U.S. long-term securities.  The IT sector is the third-largest, followed by pharmaceuticals and media (see the chart and Table 3).

The foreign ownership of U.S. debt and securities is also quite concentrated.  Overall, the top 10 industries account for about three-quarters of the $4.5 trillion foreign holdings as of June 2003.

How long can this financial hemorrhaging last?  For as long as the globalists manage to keep their Ponzi scheme out of public limelight using their “illusion and diversion” strategy.

"I think in the long term what is happening is unsustainable, but it is very hard to predict a turning point in an unsustainable situation," Robert Blecker, an economist at American University, told the New York Times in a Sep 18 story “U.S. and Trade Partners Maintain Unhealthy Long-Term Relationship.”  "You can see why something cannot keep going, but you can also see why it keeps going."

Japan, China Biggest Foreign Holders

Well, the main reason an “unsustainable” system has been so sustainable is that the global bankers who lend the money to the U.S. government are the ones who are also funding the economic activities in China and other Asian countries.  They are doing it directly, or indirectly, through their multinational clients - the “domestic foreigners.”

As you have seen from our Annex Bulletin China Now Bigger Than the U.S.! (Jan 2004), China received about $67 billion in direct foreign investments in 2002 – more than double that of the U.S. ($30 billion).  That’s more money than all of Latin America received the same year ($56 billion), and more than the combined total of Eastern Europe (including Russia), and the Pacific, (including a surging Australia).  

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Cumulatively, China received nearly $600 billion in direct foreign investments between 1990 and 2002 – becoming the largest recipient of foreign investments in the world outside the U.S. (see the chart).

No wonder China (read its foreign multinationals operating in that country) can afford to fund the U.S. trade deficits.  To keep this Ponzi scheme going, China has to keep investing its money back into the U.S. debt instruments.  It’s both a symbiotic and an incestuous relationship.  The U.S.-based multinationals set up subsidiaries in China to make things for us - cheaper.  In turn, they invest their savings back in the U.S. public debt, earning interest off the U.S. taxpayers. 

The reason for it is simple.  It is in our trading partners’ best interests to stem the slide in the value of the U.S. dollar that the huge public debt is causing.  A lower U.S. dollar makes foreign-made goods more expensive at home, thus reducing consumer demand.  Investing in U.S. Treasury notes is a way of propping up the weak dollar.

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As a result, China and Japan – the two countries we’ve build up in the post-Cold War and post-WW II periods respectively - are now the largest foreign holders of the U.S. government securities (they held $254 billion and $636 billion respectively as of June 30, 2003).  That’s up from only $18 billion and $196 billion respectively as of 1994 (see the chart and Table 2).

U.S. Tax Avoidance

Okay, so one can see why our major trading partners are investing in the U.S. debt.  But how do you explain the presence of the tiny specks of the world’s geographic map – Cayman Islands, Luxembourg, Bermuda or Switzerland – among the top eight biggest holders of U.S. government securities?

Easy.  They represent the investments the multinationals have parked in the low or no tax overseas havens. 

Just as we pointed out that the Chinese holdings, for example, are in part the funds of our “domestic foreigners,” so are those of Luxembourg of Cayman Islands.  The world has become an oyster; a playpen of the global bankers and the largest multinational companies.  They shift their money around in order to minimize tax liabilities, and maximize profits.  The national governments are mere pawns in this Ponzi scheme, including the biggest of them all – ours.

The U.S. companies are earning record profits abroad -- and bringing them home at the slowest pace in five years, the Wall Street Journal said in a Sep 30 article: 

Last year, businesses added just over $119 billion to their undistributed foreign earnings, or 75% of profits earned abroad, according to a survey released this week by the Commerce Department's Bureau of Economic Analysis. These earnings, which show up in the footnotes of annual reports, are earned abroad and either banked or invested overseas.

To use these profits to retire U.S. debts, pay dividends to shareholders, buy back stock or fuel domestic growth, the cash has to come home, and the Commerce data show less of it is doing so.

Taxes are part of the reason: So-called repatriated earnings get taxed at the regular U.S. corporate tax rate of 35%. Some companies are lobbying Washington for a tax break that would ease this burden and lure cash back to the U.S. In 2003, companies brought back to the homeland nearly $40 billion in foreign earnings, down from $46.7 billion in 2002 and $61.1 billion in 1999.

The upshot is record amounts of undistributed foreign earnings on balance sheets. A J.P. Morgan analysis in June estimated U.S. companies held $650 billion in undistributed earnings overseas, up from about $550 billion in 2002.

Enter Cayman Islands, Luxembourg, Bermuda or Switzerland.

Individuals Pay Most Taxes

As a result of such foreign tax shelters, some of the largest U.S. companies pay small or no taxes at all.  The U.S. nominal corporate tax of 35% has become a “cash firewall” – keeping the money away from America.  It shows up on corporate financial statements as the “provision for taxes” line.  But few corporations, if any, actually pay it.

The overall effective tax rate for the 250 of largest U.S. companies was 17.2% in 2003 and 2002, down from 21.4% in 2001, according to a Forbes Sep 23 article. So the current effective rate is about half the 35% tax rate on profits of large companies.

Furthermore, the Institute on Taxation and Economic Policy, whose study is cited in the Forbes article, found that in 2003 alone, 46 of the 275 companies it reviewed paid no taxes at all, despite reporting a total of $42.6 billion in pre-tax profits.  In fact, these companies received $5.4 billion in tax rebates that year.

In the last three years, 82 of the country's largest profitable corporations paid no federal income tax at all.

The IRS data indicates that the overall share of federal taxes paid by corporations in 2003 was less than 10%, down from nearly 13% in 1997, according to the Forbes article.  Meanwhile, the individuals paid 50.6% of the total taxes, while the payroll taxes (Social Security and Medicare), accounted for 35.6% of the total (see the chart).

Text Box:

Since 1980, the percentage of taxes paid through individual returns has fluctuated between 49% in the low year (1992) and 56% (1982), according to this study. The corporate tax share has moved up and down within a 10% to 12% range during the last 24 years.

Whatever the annual percentages, the individual U.S. taxpayers bear by far the greatest tax burden (about five-fold bigger than that of corporations).

It wasn’t always that way.  "In the 1930s, the individuals' income taxes accounted for only 1.4% of the U.S. GDP,” this writer wrote in a Washington Times Aug 1998 column. “The corporations, on the other hand, bore a bigger 1.6% burden.”

And prior to 1913, for 137 years of this Republic’s history, there were no income taxes at all.  And even when the income tax was eventually instituted in 1913, the entire U.S. income tax law was 17-pages long.  Now, it has grown to over 3,000 pages.  More grist for the lawyers and accountants’ mills; more loopholes for tax evasion. 

Enron, for example, a company that has come to symbolize corporate evil and greed, paid no taxes at all in four of its last five years.  In fact, while fleecing its investors and employees, Enron was due $381 million in tax rebates by using more than 874 offshore accounts.

“Taxes for Suckers”-Era

“We seem to be entering a ‘taxes are for suckers’ era,” Molly Ivins, a syndicated columnist, wrote in a 2002 column.  “Perhaps we should call it the Leona Helmsley Movement, after the hotelier who observed, ‘Only little people pay taxes’.” (Annex Ed.: …before being whisked off to jail for tax evasion).

This brings back to mind something Solon (c. 630-c. 555 BC), a Greek philosopher, wrote a long time ago.  “Laws are like spider webs. If some poor weak creature comes up against them-it is caught.  But the bigger one can break through and get away.”

It makes you wonder, doesn’t it, how much mankind has really progressed in the last 27 centuries?  Especially considering that plutocracy[1], the real name for the political system in which we now live, is something the ancient Greeks had also figured out eons ago. (Incidentally, eons[2] is also of Greek origin).

“The more things change, the more they are the same” (Alphonse Karr, 1849).

Happy bargain hunting!

Bob Djurdjevic

[1] PLUTOCRACY: 1. Government by the wealthy. 2. A wealthy class that controls a government. 3. A government or state in which the wealthy rule.  Greek ploutokrati : ploutos, wealth;  -krati, -cracy.

[2] EON also AEON: 1. An indefinitely long period of time; an age. 2. T he longest division of geologic time, containing two or more eras.  From Greek ain.

For additional Annex Research reports, check out... 

2004 Global: Sellout of America (Oct 2004); China Follies Revisited (Mar 2004); A Passage FROM India (Mar 2004); IBM: Greed De-clawed (Feb 2004); China Now Bigger Than U.S.! (Jan 26);  IT Industry: Whither Goeth It? (Jan 20); Five Most and Least Likely Forecasts for 2004 (Jan 2004)

2003 Global: "A Passage to India" (July 22),  Exodus from Equities (May 27), Money CAN Buy Longer Life (May 6), Global Investments Plummet (Jan 23)

2002 Global: China: Real Cold War Winner (Mar 8, 2002); Bush League All-Stars (Jan 2002), SEC Launches Formal Probe of Wall Street Research (Apr 2002), Greed Bites Back (Nov 29, 2002)Salomon/Gutfreund: Wall Street Casino (June 21, 2002)

A selection from prior years: "Robber Baron" Era Is Back (Jan 2001), "A Cleaner, Neater World?  Hardly. Deadlier, for Sure" (Feb 2000), More, Cheaper Service Jobs in the U.S. (Mar 1999),  "From a Nation of Producers, to a Nation of Gamblers " (June 23, 1999), "When Will Wall Street's Bubble Burst?" (1998), "Wall St.'s Conquest of America" (1998), THE GREAT AMERICAN HOOVER (1997)

2004 IT: Sellout of America (Oct 2004); Spy Wars (Sep 2004); Outsourcing Boomerang (Sep 2004); EDS to Cut Up to 20,000 More Jobs (Sep 2004); Capgemini Stock Plummets on Unexpected Loss (Sep 2004) HP Savaged by Wall Street (Aug 2004); Moody's Lowers the Boon on EDS (July 2004); HP: Delivering Value Horizontally (June 2004); Accenture: Revving Up a Notch (June 2004); Beware Your CFO! (May 2004)IBM: Changing of the Guard (May 2004); Capgemini: Texas-size Home Run (May 2004); Following the Money (May 2004);  EDS: On a Wink and a Prayer (Apr 2004); HPS Wins by a Nose! (Octathlon 2004); Accenture: Burning the Track (Mar 2004);  IGS: "Crown Jewel" Restored? (Mar 2004); HP: Still No Cigar (Feb 2004); Cap Gemini: Another, Smaller Loss (Feb 2004); CSC: Good Quarter Gets Boos (Feb 2004); EDS: "Hot Air Jordan" Flaunts Flop as Feat (Feb 2004); IT Industry: Whither Goeth It? (Jan 2004); Cronyism Is Alive and Well at EDS" (Jan 2004)

Or just click on and use appropriate  keywords.

Volume XX, Annex Bulletin 2004-21
October 4, 2004

Bob Djurdjevic, Editor
(c) Copyright 2004 by Annex Research, Inc. All rights reserved.
e-mail: annex@djurdjevic.com

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