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Copyright 2012 by John T. Reed
U.S. politicians are destroying the U.S. dollar and bankrupting the U.S. government. Our debt-to-GDP ratio is 107% and climbing like a rocket. Guidelines like the euro convergence criteria say you must not let your debt-to-GDP ratio go above 60%.
My book How to Protect Your Life Savings from Hyperinflation & Depression, 2nd edition
has a chapter titled “Government and institutional reaction to inflation/deflation.” It says that we can easily predict what governments and institutions like banks, stock exchanges, insurance companies, etc., will do when the value of the dollar plummets because of “printing” too many of them. It is easy to predict because the various governments and institutions around the world have done the same things over and over for 6,000 years. (The history time line in my book starts in 4,000 B.C.)
Stated in its most basic terms, government wants you to trade as many things of value, mainly your labor and savings, for U.S. dollars. They cannot raise your taxes politically, and cannot cut spending that voters benefit from politically, so they have to borrow to keep spending to buy votes. But eventually, the people who lend the government the money to cover its deficit spending—bond buyers around the world—recognize that they either will not get paid back or that they will be paid back in dollars that have become worthless, so they stop lending the U.S. government the money at all.
When that happens, to avoid raising taxes or cutting spending, the government “prints” money. That is legal counterfeiting. By paying the government’s bills with counterfeit money, they get to keep the game going. But the purchasing power of the dollar plummets. That’s called hyperinflation.
Your solution: trade your dollars for other things of real value namely well-managed foreign currency and hard assets.
But if people around the world do not accept the dollar, then the U.S. government cannot pay its monstrous bills with those dollars. Oil producers will refuse to ship oil to the U.S. unless they get paid in hard assets or foreign currency that is not yet hyperinflated. Eventually, Americans will refuse to get out of bed and go to work in the morning if they are paid in U.S. dollars. Manufacturers and retailers will refuse to trade hard assets for dollars. Service providers like doctors will refuse to provide services for dollars.
As the public starts to trade dollars for hard assets, the government’s ability to levy a hidden tax in the form of inflation diminishes. So they start to slam shut all the exits.
Here are a couple of examples from Obama’s 2012 State of the Union speech:
• Require U.S. companies with foreign corporations to pay a minimum tax on overseas profits.
This is to punish U.S. companies from sending hard assets abroad like factories and inventory and from paying their workers in foreign currency like Chinese yuan. Essentially, this is the beginning of the Berlin Wall behind which the capital of current U.S. companies is trapped.
• Ban companies from deducting as business expenses costs associated with shutting U.S. operations to move them abroad.
Ditto. This is another brick in the financial Berlin Wall that you are trapped behind.
• Create a new tax credit to cover moving expenses for companies that close production overseas and bring jobs back to the U.S.
This is a trick to try to get you to move back behind the wall if you previously put yourself on the outside of the wall.
These three State of the Union proposals will also discourage business people from starting, or investors from investing in, U.S. companies. They encourage Americans to start their new companies overseas. Or to move their U.S. companies overseas to beat this law or to get out before it gets worse.
There are already onerous requirements for Americans who work or own financial accounts overseas. You can have them, but there are forms to fill out, like TD F 90-22.12 and Form 8938. Penalties for failure to file these forms properly are extreme. Similar rules apply to working and living overseas. But the bottom line—at present—is you are allowed to have yourself or your money overseas. The forms and penalties are attempts to intimidate you out of taking your money or yourself out of dollars.
I recently put money in a Canadian bank account in Canada. That prevented me from keeping it my SEP. So I had to pay tax on removing it, because I avoided tax on it when I put it in. The income is now exposed to tax but nowadays, the fact that an IRA or 401(k) or SEP shelters your investment from income tax is close to meaningless because interest rates are so low. Dividends or capital gains on stocks would still benefit from the pension tax shelter feature. The main benefit of pension funds to me is bankruptcy exemption. Generally, your creditors cannot get your pension funds if you go bankrupt.
But again, with hyperinflation the fear is debts which are the main cause of bankruptcy. During hyperinflation, debts become a joke. When $3,000 is both your monthly mortgage payment and the price of a Big Mac, there are not many bankruptcies.
But there is one bank in the U.S. that allows individuals to hold their money in both a foreign currency and in their IRA, SEP, 401(k) and so on: Everbank of Jacksonville, FL. So I got their literature.
Are you holding onto your seat?
Here is a paragraph from it
Specific Foreign Currency and Foreign Bond Disclosures (“you” refers to Everbank; “I/us” to the person(s) who has the account in Everbank)
• Your ability to conduct a bond trade or a foreign currency exchange…is limited by conditions beyond your control. These conditions may include government restrictions … Foreign exchange controls could include severe limitations on the amount of foreign currency that could be removed from the foreign country and limitations or prohibitions on foreign exchange transactions. These exchange controls could prevent you from obtaining the foreign currency necessary to deliver to me(us). If this happens, you will use reasonable efforts to follow my (our) instructions, but may not be able to do so. Exchange controls also could require you to convert my (our) foreign currency to U.S. dollars without advance notice to me (us), even if we have asked you not to do so.
Here is another where “We/our” means Everbank:
We may close any of your Accounts , or convert them to U.S. dollars at anytime, if we believe such action is prudent, necessary or appropriate, in our sole discretion, in response to government restrictions…any other cause beyond our reasonable control
The financial Berlin Wall goes up around the U.S. borders. Everbank is within U.S. borders and regulated by the United States. In hyperinflation, the perpetrator of the theft of purchasing power is the U.S. government. If you want to move your assets outside of the financial Berlin Wall, you have to get them outside the U.S. borders and outside of banks or other institutions regulated by the U.S. government. Everbank is inside the financial Berlin Wall both physically and in terms of laws and regulations.
If you put your money in, say, Swiss francs, in an Everbank account to hedge against U.S. dollar hyperinflation, and the U.S. government orders Everbank to convert your francs to dollars, you have accomplished precisely nothing inflation hedgewise.
Furthermore, these forced conversions are typically required to be done at a below-market rate. For example, in 1933 when the U.S. government forced Americans to sell bullion (other than art, jewelry, and rare coins) gold to the Federal Reserve bank, the rate was $20.34 per ounce. At that time, the market rate was $36 per ounce, so the U.S. government stole $36 - $20.34 = $15.66 per ounce ($271 in 2011 dollars) from every American who complied with the federal order.
Generally, in the past, the financial Berlin Walls apply to gold, silver, and currency. However, they generally have not applied to other hard assets. They may apply export controls on American businesses, but they have not in the past confiscated hard assets other than monetary metals gold and silver within the U.S.
During the early 1920s hyperinflation in Austria, Germany, and Hungary, the people in those countries would have given their right arm for foreign currency. The governments of the inflated countries seized foreign currencies. Rioters in the streets demanded that the foreign currencies of all who had them be confiscated and redistributed. Subterfuges were resorted to like over and under-invoicing on export and import invoices to sneak money out of marks into other currencies. Playing games with export and import invoices has been standard illegal practice in all countries that experience high inflation.
Foreign visitors would go to Germany during the hyperinflation and laugh at the Germans while they purchased lavish meals, wine, and expensive goods, with their foreign currencies which were so prized by the Germans that foreigners could spend what took them maybe one hour to earn in their uninflated country and buy stuff that Germans would have to work, say, two weeks to buy.
Hyperinflation makes owners of the inflated currency poor and owners of uninflated foreign currency rich—within the inflated-currency country.
Can you trade your dollars for foreign currencies now? Yep. Can you put them into the currencies of countries that have low debt-to-GDP ratio like Australia, New Zealand, Canada? Yep. See my article on the best countries.
Would you be eternally grateful if you did and the U.S. dollar inflated but the foreign currency you bought did not? That would be the understatement of the year. It’s like asking would you be glad you put half your net worth into a safe deposit box in a bank when you left the other half on a table at a bank and it got stolen?
Will you still be able to convert your U.S. dollars into non-inflating currencies after the world and U.S. government perceive dollar hyperinflation has kicked in?
The owners of the other currencies will not want dollars or will charge an arm and a leg to convert and the U.S. government will slam all the exits shut with capital controls like those above or those the U.S. and other governments imposed in the past. They will literally outlaw converting your dollars to foreign currencies. They may force you to convert any foreign currency you own in the U.S. to U.S. dollars at a below-market exchange rate then they will sell your foreign exchange at market rates and pocket—for the U.S. government—the difference—jut like they did with gold in 1933.
There is a Wikipedia article on Foreign Exchange Controls, which are a subset of capital controls, at http://en.wikipedia.org/wiki/Foreign_exchange_controls. It lists five typical parts of foreign exchange controls namely:
Banning the use of foreign currency within the country
Banning locals from possessing foreign currency
Restricting currency exchange to government-approved exchangers
Fixed exchange rates
Restrictions on the amount of currency that may be imported or exported
They also have a list of so-called Article 14 countries. That means they are allowed by the IMF to have some capital controls because they are “in transition.” It is generally a list of countries run by jerks. All four of the highly-touted high-growth BRIC countries (Brazil, Russia, India, China) are on the list. I recommend that you not touch any of the countries on that list with a ten-foot pole when it comes to protecting yourself from hyperinflation and depression.
Unfortunately, I must add that that list will no doubt expand during a financial crisis. When the going gets tough, more national leaders around the world turn into foreign exchange control jerks, including those of the U.S.
Will the financial Berlin Wall prevent you as a person from leaving the U.S. the way the original Berlin Wall did?
But they will do as the East German government did before the Berlin Wall prohibited even removing your body. They will prevent you from taking anything of value with you when you leave.
If you feel compelled to leave the U.S. in the coming financial crisis, you will be allowed to leave personally, but you probably will not be allowed to take much of value. So wouldn’t it be nice if you previously put some money overseas? It need not be in the country to which you go. It only needs not be trapped in whatever country it is in and the country to which you go must not have new laws that prevent you from accessing your non-U.S. money
Are you thinking not letting you take things of value with you when you leave sounds like stuff they do in Latin America or Europe and Asia but not here. It’s un-American. True. But so is our 106% debt-to-GDP ratio.
Remember the driving force. Politicians do not want to raise taxes or cut spending and they can no longer borrow. So they confiscate bank accounts by hyperinflating the money within them. Now you come wanting to leave the country and take your money with you—which you plan to convert to foreign currency ASAP before it loses more purchasing power. The politicians will call you every name in the book, deserter, rat, traitor, hoarder, un-American, and have no qualms about prohibiting you from taking your money or other valuable things—and bragging about it.
Also, consider their alternative. There will be a run on the dollar. Everyone on earth who owns dollars or dollar-denominated assets will simultaneously try to convert them to foreign currency or hard assets. If the U.S. government just stands by and allows it, they will be the only ones stuck with worthless dollars.
Your currency says
This note is legal tender for all debts, public and private
That means you are forced to accept a dollar without discounting it one penny, no matter how lousy its purchasing power. Those legal tender laws can be enforced only within the borders of the U.S. If the U.S. government makes accepting a dollar unattractive, everyone will try to leave the place where they are forced to accept it. If everyone leaves, all the banks fail, there is no tax revenue, and the politicians are ruined. The U.S. dollar may be legal tender inside the U.S. But outside the U.S., it is worth whatever the market says it is worth. Foreigners can refuse it or discount it, precisely the behavior that is outlawed for those within the U.S.
So the U.S. politicians will not let you get out of the dollar.
As of 12/23/12, you can convert dollars at normal prices to foreign currencies and hold them in foreign banks or foreign safe deposit boxes. Will you be able to do that in the future? Probably in the near future. But in the next year or or two or three, the ’flation will probably hit the fan and the financial Berlin Wall will spring to completion as the original one did suddenly, after being preceded by lesser restrictions, on August 13, 1961.
I like Switzerland, although I have heard that the US IRS has jerked Switzerland around so much they now refuse to accept U.S. deposits and have unilaterally closed and returned existing U.S. citizen deposits. I bought Swiss francs in cash and put them into a Canadian safe deposit box becuse it is not only disadvantageous to have a Swiss bank acount (they charge negative interest), it is also impossible as far as I could tell to get one. Also, the Swiss franc has been experiencing deflation lately. That means cash in a mattress or safe deposit box gains in purchasing power over time. If you subtract negative inflation from the zero interest rate you get on cash you actually earn a positive real return on the cash during deflation!
To an extent, the Swiss banks brought IRS attention on themselves by the secret-numbered bank accounts and being bankers to every scumbag dictator on earth. But London banks apparently are also rejecting and closing American bank accounts because of Hiring Incentives to Restore Employment (HIRE) Act signed by President Barack Obama on 18 March 2010. (The number of American renonucing their citizenship more than quadrupled according to the 6/13/2010 Wall Street Journal online, mainly because of this law.)
The HIRE act is one of the bricks in this financial Berlin Wall.
Don’t say I didn’t warn you.
John T. Reed