Protect Your Cash from Coming Currency Controls
L: Doug, we recently talked about getting assets out of your home country, especially the U.S., where to take them and what to do with them. In so doing, you touched on the inevitability of currency controls just ahead, especially for Americans. Can you tell us more about that?
Doug: Yes, I’m quite serious about what I said about “the grim reality of impending currency controls.” As the global economy continues to deteriorate, governments will have to appear to be “doing something.” It’s going to become very fashionable to institute some sort of foreign exchange control.
Why might that be? Because obviously, people who are taking their money out of the country are unpatriotic…
L: Those bastards.
Doug: That’s right. Jingoistic Americans naturally, but stupidly, see taking money out of the country as being unpatriotic. They don’t understand that it’s mainly those prudent people who will be able to supply the capital to rebuild a devastated economy later. Besides, getting money abroad is obviously something that only rich people would do… and of course, it’s time to eat the rich, as well. For those two reasons, there won’t be much resistance to controls. And the state gets to appear to be “doing something.”
And when they do, more people – at least those with any sense – will get scared and really try to get their money out, which will exacerbate the run to the exits. The bottom line is that if you want to get your money out, the time to do it is now. Beat the last-minute rush.
I don’t know what form the exchange controls are going to take, but there are two general possibilities: regulation and taxation.
The regulations might take the form of a rule prohibiting you from taking more than X-thousands of dollars abroad per year without special permission. No expensive vacations, no foreign asset purchases without state approval.
As for the taxation, if you want to, say, buy foreign stocks or real estate, you might have to pay an “Interest Equalization Tax” or some such. So, you could do it, but it’d cost you a lot of money to do it.
Something like either of these, or both, is definitely in the cards.
L: But aren’t FX controls something from the past? I mean, where do they exist today?
Doug: Well, FX controls have been used since the days of the Roman Empire. A country debases its currency, raises taxes beyond a certain level, and makes regulations too onerous – and productive people naturally react by getting their capital, and then themselves, out of Dodge. But the government can’t have that, so it puts on FX controls. They’re almost inevitable at this point.
Almost every country – except for the U.S., Canada, Switzerland, and a few others –had them until at least the ‘70s. I remember leaving Britain once in the ‘60s, and a border guy searched me to see if I had more than 50 pounds on me. In those days currency violations in the Soviet Bloc countries could get you the death penalty. Things liberalized around the world with Reagan and Thatcher, and then the collapse of the USSR. But you have to remember that that was in the context of the Long Boom. Now, during the Greater Depression, things will become much stricter again.
Right now, the U.S. just has reporting requirements. But some places, like South Africa, make it very expensive and inconvenient to get money out. South Africa, perversely, may serve as a model for the U.S.
L: Okay, so, we talked last week about Americans at least setting up a Canadian bank account and safe deposit box, and better yet going in person to Panama, Uruguay, Malaysia, or a similar place to do the same. And once there, you advised getting with a lawyer, either referred by someone you trust or found through an interview process, to set up a corporation that can handle your assets and investments for you. This all needs to be reported but it’s wise to do it in advance of the higher costs or other limitations to come.
Doug: Yes. While U.S. persons must report foreign bank and brokerage accounts, safe deposit boxes are not – at least not yet – reportable. This leads me to the biggest and best “loophole” when it comes to potential foreign exchange controls, and that’s foreign real estate.
I’m of the opinion that, broadly speaking, real estate as an asset class is going to be a poor performer for a long time to come – but that won’t be equally true across all countries. Real estate in countries that rely on mortgage debt to buy and sell will continue to be the worst hit.
People don’t understand that buying property with a mortgage is just the same as buying stocks on margin. It’s caused speculative bubbles and malinvestment. Until the malinvestment in those countries is entirely liquidated, you don’t want to invest in real estate in them. But a lot of countries, especially in the third world, have no mortgage debt whatsoever. Zero mortgage debt. You want a piece of property, you pay for it in cash. That keeps prices down and the market much more stable. And it makes for more interesting speculations, because if a mortgage market develops in the future, it could light a fire under prices.
But, from the viewpoint of FX controls, the nice thing about real estate is that there is no way they can make you repatriate it. Other than owning a business abroad, real estate is the only sure way to legally keep your capital offshore.
L: I suppose it would be difficult for even Uncle Sam to seize your estancia in Argentina… not without starting a war.
Doug: Yes. Although I don’t doubt he’ll be starting more wars as well… [Laughs]
L: So, part of your thinking here isn’t just speculative. You’re talking about strategies for wealth preservation, not just in the face of foreign exchange controls, but more aggressive, predatory taxation and confiscation by the state – they can seize your assets, even real estate, in the U.S., but not abroad.
Doug: Exactly. Argentina is excellent from that point of view; rights to real property are, if anything, better than those in the U.S. In many ways, Argentina is culturally and demographically more like Europe than Europe. Uruguay is also excellent, although culturally it’s like a backward province of Argentina. Paraguay is quite secure – but a bit weird as a place to live.
I’m not currently up-to-date on the Chilean real estate market, but Chile is definitely now the richest and most advanced South American country, and an excellent choice. Brazil is fine. Colombia is improving greatly. Ecuador has a goofy president, but parts of it are very nice, and it’s about as cheap as Argentina. Eastern Bolivia is interesting, actually, despite Morales. Only Venezuela is out of the question in South America – but Chavez won’t last forever. It’s just a pity they have all that oil, which is always a corrupting influence.
L: Well, then, what about Central America? I know you prefer South America for speculative purposes, but what if someone wants to park a lot of wealth by buying a couple miles of beautiful beachfront property in Costa Rica, or some place like that?
Doug: I was a big fan of Costa Rica for many years… The first time I went down there was 35 years ago – but it’s a different place now. Then, it was very cheap, and now it’s very expensive. And it’s totally overrun with gringos. So, Costa Rica is not of that much interest to me at this point; it’s pleasant, but there’s limited upside.
I think an excellent place to be in Central America is Belize. Although culturally and ethnically, it’s not really part of Central America; it’s part of the Caribbean.
L: And they speak English there.
Doug: They do indeed, though things are changing. The Guatemalan government has always regarded British Honduras, which is what Belize used to be called, as part of Guatemala. There have actually been confrontations between Britain and Guatemala over this. But that’s in the past; now there’s a different problem. Guatemalans are rolling over the border in much the same way that Mexicans are in Texas, New Mexico, Arizona, and California.
So, the character of Belize is changing, but for the foreseeable future, it’s still going to be Belize, and I rather like it. Aside from Panama, Belize would be my first choice in Central America.
The problem with Central America, however, is that it’s a bunch of small countries that have historically been very unstable. And culturally backward. Most are under the thumb of the United States… there’s a long history of U.S. invasions, most recently in Panama with Noriega. There are Frito Banditos running around these places…
The most culturally advanced country in Central America, not counting Mexico, of course, since it’s in North America, is Guatemala. But Guatemala has had huge troubles with violence, which has only recently come to an end… I hate going through checkpoints at night, manned by jumpy, uneducated, heavily armed teenagers.
Nicaragua is the low-cost alternative, but it’s relatively backward. Panama is probably the best choice. It’s very international, very urban (in Panama City), and it’s very sophisticated, infrastructure-wise.
If I didn’t like Argentina and Uruguay so much, I would put Panama at the top of my shopping list.
L: Got it. Back to the exchange controls themselves. Do you think people will have any warning at all? It seems to me that this is the sort of thing the Powers That Be would want to spring on people.
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 – U.S. exports would go up. This would “stimulate” the domestic economy. Imports to the U.S. would go down, which would make for fewer dollars leaving the U.S. and adding to the $7 trillion overhang the U.S. already has.
L: 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 2010 possibility? 2011?
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 world views are totally unsound.
L: With all the problems the U.S. 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.
L: 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.
L: 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.
L: 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.
L: 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 U.S. 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 U.S. exports, and hence earnings of U.S. exporters, but also because all that money that can’t leave the U.S. 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.
L: 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.
L: This will be a development we’ll have to keep an eye out for in The Casey Report, then.
Doug: Yes, we will. The more politically controlled an environment, the more distortions are created. And the better it is for a speculator.
L: Thanks again, Doug – you’ve given us a lot to think about.
Doug: My pleasure.
April 5, 2010