Wednesday, January 22, 2014

Crouching Credit Threats, Hidden Tax Havens

I still remember the awesome movie Crouching Tiger, Hidden Dragon that took America by storm at the tail end of the dot-com era.  Americans were fascinated to see acrobatic Chinese martial arts and swordplay.  Well, there's none of that on display at my blog but I think it's a cute segue from this article's title into a couple of news items I noticed today about financial corruption.  I'm all about cheap thrills.

The first item up is a legal statement from the chairman of Standard and Poor's parent company alleging that a previous US Treasury Secretary threatened his firm for lowering its rating of the US's sovereign credit.  There was a lot of speculation in the blogosphere about hidden machinations around the US government's relationship with its credit agencies.  I blogged my own analysis of this subject last year, and this latest revelation from McGraw-Hill Financial puts another piece of confirming evidence into place.  Moody's escaped suffering while S&P got hammered.  Warren Buffet's Berkshire Hathaway owns Moody's and he is a major bundler of campaign contributions.  It all makes sense and I have every right to be cynical.

The second item is the continuing capital flight from China's ruling elite.  China's military and political leaders continue to move their families' wealth into offshore accounts.  Western financial institutions have played key roles in setting up the trusts and other legal mechanisms enabling this capital flight.  This isn't just about avoiding taxes in their home country.  The remaining China bull shills like Jim Rogers need to read this news and take a hard look at their own bets on China's future.  I have every right to question Western investors who tout China's prospects while China's own leaders move their wealth out of the country.

These two news items aren't directly related, but they do indicate the lengths to which financial and political elites will go to maintain untenable fictions.  The US sovereign credit rating should be an honest barometer of fiscal sanity.  China's elites should not fear transparency for their financial interests if they are truly optimistic about investing in their own country.  These are ideal conditions that unfortunately do not hold in the real world.  That's just too bad.