The CFA Society of the Cayman Islands recently hosted John Tamny at an event at Casanova Restaurant. Tamny is senior economist with HC Wainright Economics in Washington, DC, and is also the editor of RealClearMarkets.com. He frequently writes about the securities markets along with tax, trade and policy issues that impact those markets for a variety of publications including the Wall Street Journal, National Review and the Washington Times. Gareth Pulman from the CFA reports. First in a two-part series.
Tamny’s chosen topic was twofold: “The Essential Role of Tax Havens in the Global Economy” and “How the Falling Dollar Caused the Financial Crisis”. He addressed the first issue, stating that he regarded the term “tax haven” as a pejorative one. He preferred to think of countries such as the Cayman Islands as nations that do not penalise work in order to raise revenue. He believed that they serve as a model for the rest of the world, and noted that there are many other ways for governments to raise revenues rather than taxing labour.
The presenter noted that there is a growing impetus for authorities onshore to make it difficult for companies to remain headquartered in places such as the Cayman Islands. He regarded this as a scary development and felt that it was important for offshore jurisdictions to push back and make known their important role in the global economy. He observed that without tax competition, governments would have the ability to push taxation to “nosebleed levels”. He referenced Google Inc. and said that while they were currently headquartered in California, as a company based upon human capital they had the ability to be based elsewhere if they so chose. His view was that it was essential for innovative companies such as Google to be able to move anywhere in the world if the US federal or state authorities attempted to tax them too heavily.
The main focus of Tamny’s presentation concerned the role of a falling US dollar in the global financial crisis. He explained his view of the US dollar as the single most important price in the world, with virtually every trade or transaction being impacted by its fluctuations. He commented that 90 per cent of all global currency trades have the dollar on at least one side, which two-thirds of global central bank reserves are held in US dollars. His belief was that if the US dollar had been stable in value over the past decade, there was no way that a financial crisis would have occurred.
While the presenter had a long-held belief that equity returns are linked to levels of taxation, his view was that the impact of currency was a more important factor. He noted that in the 1950s and 1960s, strong equity markets had been accompanied by high levels of taxation. However, at the same time the US dollar had been tied to the price of gold through the Gold Standard. In the 1970s, the dollar came off the Gold Standard sparking a commodity rally, with the S&P 500 Index only gaining 17 per cent over the decade. He added that during the two terms of George W. Bush, the US had adopted a “horrific” dollar policy and the equity market had declined by 34 per cent over that period.
Tamny also commented that the impact of currency policy was not limited to US markets. He felt that Japan’s “two lost decades” were a direct result of currency policy, with the U.S. instruction to Japanese authorities to strengthen the yen sparking a deflationary recession that has never been reversed. He gave other examples of the crises in Argentina and Russia also being related to currency actions.
Read about lost dollars next month in the concluding part of this series.