Protecting Your Cash, Part II

An Interview with Doug Casey from Cafayate, Argentina

[To read Part I of this interview, click here]

Interviewer: Concerning the risk of foreign exchange controls here in the US, do you think people will have any warning at all?

Doug: I think it’s going to come out of left field. It always does, with at most an official denial just before it happens. In August 1971, Nixon devalued the dollar, which immediately dropped against gold and all foreign currencies. I think there’s a reasonable probability that the government will do that again. Gold may not be part of the equation, but they may decide to put in some sort of fixed exchange rate between the dollar and various foreign currencies.

The reason for thinking this is simple: with all the dollars outside the United States devalued by that much, that much of a liability just vanishes into thin air. And in the short term – it’s never a long-term fix – US exports would go up. This would “stimulate” the domestic economy. Imports to the US would go down, which would make for fewer dollars leaving the US and adding to the $7 trillion overhang the US already has.

Interviewer: I know you hate making predictions, but can you tell us if your “guru sense” is tingling on this so strongly that you think it could happen this year? Or is this more of a 2011 possibility?

Doug: The timing on this is really unpredictable. These people don’t have a plan. They’re acting “ad hoc” to whatever seems most urgent. All the so-called “economists” around government today are really just political hacks. Their worldviews are totally unsound.

Interviewer: With all the problems the US has, do you think this could happen now? Could we be reading about new exchange controls on CNN.com this afternoon?

Doug: Sure. Although they typically pull these stunts over a weekend. I expect something of this nature to happen any time between tomorrow morning and two years from now. If some form of currency controls are not instituted within two years, I’m going to be genuinely surprised.

So, if you’re going to take action, you should start heading for the exits now. Not next month, and certainly not next year.

Interviewer: For those who don’t take action until it’s too late, under the scenarios you mentioned, they’ll still be able to get money out. It’s just that it might be more difficult, time consuming, humiliating, and certainly more expensive to do. For every $100,000 they move, only $90,000, or $70,000, or whatever will get to where it’s supposed to go. Can you foresee a more Stalinesque alternative, where they simply can’t get anything out at all?

Doug: Hopefully not. Anything is possible, and things can change so rapidly…but I’d hate to think of what conditions would be like if they ever became that draconian. It’d be so bad on other fronts that there would be all sorts of even more urgent things on your mind – Americans would get a very quick and unpleasant education in the real meaning of Maslow’s hierarchy.

Interviewer: Like the Mad Max-style neobarbarians at the door with a battering ram.

Doug: Exactly – that’s when you’ll definitely want to be in more pleasant climes. I’d want to be watching it on my wide-screen, in comfort, not out my front window.

Interviewer: We’re talking about extremes here…

Doug: You know, back in the 1970s there was a spate of books published on financial privacy. In those days, financial privacy was still possible. Now, it’s not only no longer truly possible, short of embracing a completely outlaw lifestyle, it’s very dangerous to write about it or even talk about it. I kid you not. These days, people who ask too many questions about privacy techniques may well be government stooges…

There’s lots of handwriting on the wall. All those books on financial privacy were published in the ’70s – if you look on Amazon, you can still find them. But there’s nothing really worth reading that’s been written on the subject in 20 years. It’s actively discouraged by the government. I could name – but I won’t – at least two authors that got themselves into a real jackpot this way. Forget about the First Amendment.

In fact, I even feel uncomfortable talking about it in this interview. So let me once again emphasize that I advise everyone to stay fully within the bounds of the law.

That’s not for moral reasons, of course; there is no morality to the law. It’s strictly for reasons of practicality. Risk-reward ratio.

Interviewer: Understood. Loud and clear. Any more investment implications, besides foreign real estate, that you want to draw attention to here?

Doug: Yes – and it’s another reason for those so very clever boys in Washington to embrace currency controls. They will be disastrous for the US economy, but there’s a very good chance that, in the short run, they’ll be very good for the stock market. That’s partly for the reasons I already mentioned about it temporarily boosting US exports, and hence earnings of US exporters, but also because all that money that can’t leave the US will have to go into something.

Investors will probably want to put it into equity, rather than debt, while the dollar is depreciating. Again, it’s disastrous over the long term, but as a short-term play, buying the blue chips the day the exchange controls are instituted could be a good move.

Interviewer: You’d buy the Dow?

Doug: I might, if I couldn’t think of anything more intelligent or original to do. We’ll just have to see what the situation is like.

Interviewer: Thanks again, Doug – you’ve given us a lot to think about.

Doug: My pleasure.

The Casey Research Team
for The Daily Reckoning