CURRENCY WARS & CURRENCY CONTROLS

The U.S government is actively leading a global currency war. And until recently, the idea that the U.S government would restrict the outward flow of money across its borders was considered heresy. But now, even the International Monetary Fund endorses currency controls in the U.S. - the topic of our newsletter today....

Currency Wars and Currency Controls

 

But first, in a recent two part newsletter, we looked at steps that sovereign individuals are taking now to protect their assets, and the freedom that follows: here are the links to Part One and Part Two. As reported, a recent study disclosed the harsh reality that only 15% of all individuals with measurable wealth just 10 or 20 years ago still own those assets today. In other words - we learned - there is an 85% probability that you could lose your assets in coming years.

 

It used to be that protection from litigation threats and excessive-taxation were the major motivators for wealth preservation. But now, currency wars and currency controls are added to the list.

 

The good news is that the smart money has already been taking steps to avoid these threats, and so can you.

 

 

A currency war is where countries compete against each other to achieve a relatively lower exchange rate for their own currency, as compared to other currencies. As the local currency devalues, so too does the real price of exports, creating economic growth and jobs at home……but only in the short term. Beggar-thy-neighbor is an international trading policy that utilizes currency devaluations and protective barriers to alleviate a nation’s economic woes at the expense of others.

 

The flip side to this policy is that all imports become more expensive. And ultimately - long term - the price increases on imports harms local purchasing power and lowers the standard of living as imported items become more expensive. There simply aren't very many items built, assembled, or grown locally that aren’t directly or indirectly created without participation from imported goods or services.

 

A protectionism policy also triggers retaliatory action by other countries, which in turn leads to a general decline in international trade. The result is loss of jobs harming all countries.

 

A major contributor to global economic success during the past half century is attributed to free trade and open markets. Throughout much of history nations have generally preferred to maintain a high value for their currencies and allow market forces to work. An exception to open border policies was during the 1930s when protectionism and managed exchanged rates wreaked havoc on the global economy that drove struggling economies into deep depressions, and eventually World War II.

 

Currency Wars, by James Rickards, is an excellent book that documents the current global currency wars. Rickards rightfully points out that the debasement of the US$, bailouts in Greece and Ireland, and Chinese and Swiss currency manipulation, are all unmistakable signs that we are experiencing the start of a new era of currency wars. Fought as a series of competitive devaluations of one country's currency against others, currency wars are one of the most destructive and feared outcomes in international economics.

Left unchecked, the new currency wars could lead to a crisis worse than the panic of 2008.

 

And now another big gun has been mobilized. Prime Minister Shinzo Abe is back in control of Japan, the world’s third largest economy. His new government claims that they have a mandate to devalue the yen, and he makes no secret that he wants the Bank of Japan to up the stakes in the currency wars. The global currency wars intensify.

 

Another tool at a government’s disposal is controlling or restricting the free movement of capital across its borders. Currency controls – like currency wars – are a particularly discerning exercise of a government’s power.

 

 

Governments impose currency controls when individuals lose confidence in the local currency. There's a host of mechanisms that affect how much and what kind of cash you can get your hands on. The whole point is to prevent savers and investors from withdrawing their money from the banking system, or exchanging one currency for another.

For example, bank and ATM withdrawals can be limited or suspended. You may not be able to send money to an overseas bank or engage in a foreign exchange transaction. The ownership of precious metals can be made illegal. Your savings can be confiscated or converted into a new currency, or you may be made to purchase government bonds.

 

President Franklin Roosevelt issued Executive Order 6102, which required all individuals to deliver on or before May 1, 1933 all but a small amount of gold coin, gold bullion, and gold certificates owned by them to the Federal Reserve, in exchange for $20.67 per troy ounce (equivalent to roughly $370 today). Owning gold remained illegal until President Gerald Ford signed a bill in 1974 re-legalizing the owning of gold.

 

History is full of the best – or worst – examples of how individuals were forced into poverty when currency controls were implemented.

 

One of the more stark examples of how the U.S. financial crisis is reshaping the rules and economic thinking is the IMF’s (International Monetary Fund) recent position supporting currency controls as an important policy tool to help nations, like the U.S., to shield themselves from economic problems.

 

The IMF now argues that there is no presumption that “…full capital account liberalization is an appropriate goal for all countries at all times.” In fact, says the IMF, “capital controls can be used for supporting and safeguarding the financial system stability.” Does the IMF know something about our economic future that we don’t know?

 

The IMF’s position is to hell with individual rights and the free movement of currency: your government knows better.

 

While currently there is no one specific law restricting the free movement of currency across U.S. borders, take note that America already has ‘de facto’ currency controls.

 

These de facto currency controls serve the function of controlling or restricting the free movement of currency across borders, even though not an officially declared policy. In fact - and in reality - many restrictions and compliance regulations today already serve as currency controls, the very definition of ‘de facto.’

 

By comparison, prior to Margaret Thatcher’s election in 1979, English citizens were not permitted to transfer more than 2,500 pounds abroad (approximately US$3,500) per year. In recent memory, currency controls actively existed in the 1930s and 1940s in Nazi Germany; in 2003 in South Africa; and currently exists today in China and in thirteen other countries around the world.

 

These currency controls clearly restrict or prohibit movements of individual currency across national borders. With prohibited or restricted currency across borders, individuals become prisoners within their national boundaries since it’s difficult to survive without your money somewhere else. Foreigners with money are always treated better than those without.

 

And today, all across Europe, real people are making real decisions about how matter-of-fact they can afford to keep assets in Euros in the face of a persistent financial crisis across the Euro Zone. It's hard to keep calm and carry on when you see the Euro Zone discussing capital and currency controls like this.

 

In America, the following is the best example I’ve seen sizing up the current financial situation:

 

 

 

 

How long could your household possibly survive with the above budget?

 

There is strong motivation for the U.S. government to engage in more – not less – currency controls against money sitting in the U.S., as Washington continues to kick the can down the road.

 

Strict exchange controls can happen in America. Until recently, the US Dollar has been the prettiest girl at the ugly contest. But exchange controls could arise in the U.S. due to deficit spending and the worsening national debt, or some other problem du jour. 

 

In 2006, the U.S. was the number one nation across the globe as the trading partner of the world. The U.S. was the larger trading partner for 127 countries, versus 70 for China. In just six years, in 2012, the roles have reversed. China now is the larger trading partner for 124 countries, while the U.S. has slipped to just 76.

 

Governments worldwide are once again engaging in various forms of protectionism and capital controls in order to avoid taking necessary, but unpopular measures to fix internal economic problems. These are not prescriptions for stable currency valuations at home. It's already happening, just like I’ve been writing about over the last decade in our Past Newsletters.

 

 

Will the U.S. Dollar lose its reserve currency status?

 

All you have to do is ask anyone on the street across Asia, Belarus, Argentina, Russia, or Brazil. Each one of these countries have already signed currency swap agreements with China, which removes the US$ from the trade between China and these respective countries. And China is currently working on agreements with Australia, Japan and Korea, with indications that the Arab nations are also interested in swap agreements with China too.

 

Anyone in these countries would say 'yes' to the question as to whether the dollar has already begun to lose its reserve status.  And it will continue like this from here on out, until the dollar is no longer the reserve currency.

 

You might think that's no big deal.

 

But ask the people of the U.K. if it was a big deal after World War II, when they lost the reserve status for their currency. It certainly is a big deal when your money is worth less, or worthless.

 

 

In America, currency controls began with the Bank Secrecy Act. Then in 2001 came the Patriots Act and its progenies, and other federal banking laws that create stringent bank reporting requirements against customer activities. The early laws were designed to hinder money launderers - and later, terrorism - but ultimately acted as a disincentive to law-abiding citizens looking to legitimately invest offshore.

 

Out of fear of under reporting, banks today report a huge volume of banking transactions on the Suspicious Activities Report (SAR) and related forms. Failure to report questionable activities can result in a $25,000 fine and criminal charges against bank officers. Filing SARs and related forms provides a safe harbor for banks.

 

It may shock you to know the number of times in just one year that local banks reported their customers to the IRS.

 

In the last reported year alone, there were 15,449,549 Currency Transaction Reports, 733,543 Suspicious Activity Reports (SARs), 531,763 by money service businesses (SARM), 173,345 by businesses (Form 8300) and 11,162 by casinos (SARC), plus a smaller number of numerous other reports. All of these reported activities were in just one year. Over 17 million “suspicious” activities reported.

 

On average, according to the IRS information, every single banking day, over 46,000 suspicious activity reports and suspicious currency transactions were filed by money service businesses in America against Americans, by Americans. That’s an incredible number: 46,000 reports each and every day.

 

What’s worse, a bank employee is prohibited from disclosing to the customer that a report was filed with the IRS. Violations of the non-disclosure reporting requirement can lead to civil and criminal penalties, including fines as great as $250,000, and five years imprisonment.

 

The U.S. Federal Treasury already requires reporting of foreign bank accounts over $10,000 (the FBAR), which is burdensome enough (349,667 were filed in the last reported year), but now U.S. citizens living at home in the U.S. are also required to annually report all types of foreign owned assets above $50,000 with their personal tax returns (Form 8938).

 

Added to the many existing tax and compliance rules, the IRS creates huge disincentives and fear of investing or moving money offshore. The IRS rules and regulations, the compliance burdens when investing offshore, or owning property or a business entity offshore, can be stifling for even informed individuals.

 

Already these rules and regulations serve to discourage many individuals from investing or banking offshore to avoid inadvertently getting caught in IRS traps. As a result, these rules serve as de facto currency controls keeping money at home in the U.S.

 

Currency controls have all happened during past monetary crises. Financially strapped governments act in desperation to keep money at home where it can be controlled. The more the government screws with individual’s money - and the more public finances are intermingled with banks - the harder it is for ordinary people to preserve their hard-earned assets.

 

Yet the gullible are sucked into the day-to-day analysis of one policy initiative after another…..QE 4 ever, and another rescue plan kicking the can down the road. The government doesn't create wealth, jobs, investment, or prosperity. Not ever. It only takes from one party and gives to another.

 

And it gets worse.

 

 

The IRS has acquired indirect and discretionary control over financial and non-financial institutions everywhere in the world wishing to serve American taxpayers under the Foreign Account Tax Compliance Act (FATCA). Effective January 1, 2013, these far reaching burdens hinder more offshore banking and investment opportunities for U.S. citizens and U.S. companies. The newly adopted financial and compliance burdens, and the expenses impacting foreign banks dealing with Americans, are very dramatic, and all but the determined will be cut off from international financial markets.

 

These burdening combined rules and regulations clearly fit the definition of currency controls.

 

Today, your money in the U.S. is only another signed Executive Order away from absolute prohibition transferring it across U.S. borders. Here is President Obama's 2012 list of Executive Orders signed, none of which required Congressional approval. Like lemmings, Americans sit idly by as the U.S. only postpones going off the cliff. Only the most forward looking individuals will be able to withdraw their assets from the U.S. banking system, and protect their property - and themselves - somewhere else.

 

For individuals that believe in self-determination, and have respect for property rights and privacy, these are chilling steps. At a minimum, these measures should be strong motivation to take personal steps now before the door closes. Exits get crowded when everyone rushes to the doors at the same time. 

 

The world can change faster than you can react. Ask anyone from the former USSR how quickly things can change.

 

This is why many forwarding thinking, independent individuals have already taken steps to diversify offshore.

 

 

Today, there are no absolute restrictions to transferring funds abroad. Yes, you will encounter reporting requirements, and how many depends on offshore activities.
 

But once funds have been moved abroad, a country can almost never force an individual to repatriate them, particularly if owned through another entity. It is difficult for a country to enforce rules and regulations outside of its borders. But it’s easy to stop the outflow of money before it exits, simply by saying “You are forbidden.”

 

If you are considering investing by moving assets abroad through an international trust, now is the time. Better to be months (or even years) early, rather than a day late. Here are some tips to get started.

 

It is said there are three types of people: those who watch it happen, those who wonder what happened, and those who make it happen.

 

The smart money has already taken the necessary steps to protect a lifetime of hard earned savings, instead of just watching or wondering.  How to Legally Protect Your Assets and Offshore Living & Investing are two great books to help you learn more.

 

And if you are interested in a confidential review of your personal situation to look at planning options, use this link to get started.

 

Until next time....

 

David