Cayman: Two Challenges

Presentation by Dr. Richard W. Rahnfor the panel

“US Regulation and Legislation - The Macro Picture”The International Funds Conference 2010

Ritz Carlton, George Town, Cayman IslandsJanuary 14, 2010

Cayman faces two major external threats to its future

prosperity A rising US government debt burden will cause a combination of

economic stagnation and inflation which is likely to have adverse consequences for the Cayman financial industry given its overwhelming dependence on the US. It is my belief that the official forecasts are far too optimistic because neither Congress nor the Obama administration give any indication of being serious about reducing the growth in spending. In fact, the opposite is taking place. The proposed health care and cap-and-trade bills alone will add many trillions of dollars to the debt burden over the next decade. These actions will lead to a depressed stock market and shift of business away from the US.

The efforts of the major economic powers to reduce the ability of both individuals and institutions to utilize Cayman (and other off-shore) financial services will continue. Cayman’s attempts to compromise with the EU, the UK, and the US will only be met with more demands. In this presentation, I have deliberately chosen the highly emotive term, “state sponsored terrorism,” to describe this situation.

The Stock Market and Government Spending

Time Period Change in Government Spending as Percentage Share of GDP

Stock Market Percentage Change in Real Dollars

1910-1919 +21.6 points -53%

1919-1929 -20.5 points +206%

1929-1945 +44.2 points -48%

1945-1953 -26.8 points +30%

1953-1965 -4.6 points +180%

1965-1982 +6.5 points -55%

1982-2000 -4.6 points +579%

2000-2009 +9.7 points -66%

US Federal Deficit

US Federal Debt-to-GDP

Spending Projections for Medicare/Medicaid and Social Security

Cayman’s Financial Service Industry Is Being Damaged

by State Sponsored Economic Terrorists

Their ultimate goal is to deny Cayman its comparative advantage of financial privacy, regulatory efficiency, and no direct taxation of capital.

In addition to directly threatening and implementing laws and regulations aimed at Cayman and other off-shore jurisdictions, the major state actors – France, Germany, the UK and the US – utilize international organizations, including the OECD/FATF, the UN, the IMF and others, and quasi-private organizations, such as the Tax Justice Network, in their efforts to destroy Cayman.

They Are Economic Terrorists Because:

Their intent and means result in not only economic misery in the targeted jurisdictions, but also an increase in global economic misery, including more misery in their home countries.

In sum, their actions result in a net destruction of global wealth, jobs and economic opportunity, and like the violent terrorists, even lives over the long run.

The Actions of These State Terrorists and Their Surrogates Are Premised on a Series of

Untruth, Including: Cayman and the other targeted jurisdictions are engaged in unfair tax competition – which

ignores the right of any sovereign people to establish whatever form of taxation they wish;

That the aggressor nations need more tax revenue – which ignores the fact that all of these countries have government sectors that are far in excess of the welfare-maximizing size for the benefit of their own citizens;

That increased taxation of global capital will have more benefits than costs – which ignores the fact that most tax economists, based on empirical evidence, list taxation of capital as the most destructive form of taxation;

That global financial sharing among governments is necessary to combat terrorism, drug dealing, assorted criminality and money laundering – which ignores the fact that most governments are unable or unwilling to keep sensitive information secret and are frequently engaged (or at least many state employees and officials) in misuse of such information for their own economic or political purposes;

And finally, the economic terrorists implicitly show through their statements and actions that they have little regard for the basic human rights of individual liberty and protection of property.

What Cayman Must Do to Protect Itself:FIRST

Get its own economic house in order.

In the last few years, Cayman has allowed its own government spending to grow faster than its GDP. If Cayman does not reduce spending growth so that the government sector ceases to grow as a percentage of GDP, all is lost. Cayman cannot tax its way out of this situation.

Fortunately, the new government has appointed a commission – the Miller Commission – to look at ways to solve the spending and revenue problems.

The Growth of Government Spending in Cayman

$0

$100

$200

$300

$400

$500

$600

$700

$800

Mill

ion

s C

I$

Source: CI Govt

Tax Burden in the Cayman Islands

A Modest Tax Burden in the Cayman Islands

0%

10%

20%

30%

40%

50%

60%

Hong Kong CaymanIslands

UnitedStates

Switzerland Germany France Sweden

Rev

enu

es a

s sh

are

of

GD

P,

2008

Source: OECD, IMF, CI Govt

Cayman Islands’ GDP(2004-2009)

2004 2005 2006 2007 2008 2009

Nominal GDP

(in millions CI$)

1,904 2,176 2,294 2,467 2,596 2,448

GDP Growths

in Real Terms (%)

0.90 6.50 4.60 4.40 1.10 -5.80

Cayman’s Debt-to-GDP Ratio(2004-2009)

Debt (Net)

as a % of GDP

2004 2005 2006 2007 2008 2009

Total Government 12.4 11.0 12.0 11.8 16.0 22.2

What Cayman Must Do to Protect Itself:SECOND

Conduct an economic study to estimate the value of the Cayman financial sector and what the loss of its key elements of financial and tax freedom would mean.

The financial industry provides most of the employment, wealth, and tax revenue either directly or indirectly for Cayman.

If Cayman lost all of its tax and regulatory competitive advantages, what would happen to the financial industry? How many jobs would be lost? How much tax revenue would be lost? How far would per capita income likely fall?

The answers to these questions are important, because they will give both the government and the private sector some understanding of how much it is worth spending to ensure the necessary competitive advantages for Cayman to continue to prosper.

What Cayman Must Do to Protect Itself:THIRD

Start being realistic about the real motives of the economic terrorists and realize that their demands will never stop until Cayman and its allies win the global public relations battle, which first requires an understanding of the motives of each of those engaged in the economic terrorism.

The real motives include: The desire for power and control by the global political class; Envy and jealousy by those who have seen Cayman succeed while they

have fallen behind; The need to find scapegoats by the politicians in Europe and the US to

explain their own failures; The perceived need for job preservation by those engaged in economic

terrorism, which requires them forever to devise new regulations and requirements for Cayman and the others, in order to justify continued employment;

Fear of competition from those entities that have fewer regulatory and tax impediments to doing business;

Philosophical or even religious convictions; Economic ignorance among the global political and media community.

What Cayman Must Do to Protect Itself:FOURTH

Develop a cost-effective plan for making sure that Cayman does not economically perish.

Such a plan will require resources from the government, the private sector, and from foundations and others who have a vested or philosophical interest in global economic growth and job creation.

To be successful, the plan will require identifying the motives of each economic terrorist (governments, organizations and individuals) and developing an approach to counteract each of their motives. The plan will also require a global multimedia approach, involving people in many countries, and will need to continue for years.

The good news is that the facts and the strong moral, economic, and legal

arguments are all on the side of Cayman and its allies. The bad news is that it is costly and time-consuming to make sure that enough opinion leaders and others of influence around the world know the facts and arguments, and will be willing to act against the base motives of the opponents.

The Burden of Government