It's time to SERIOUSLY study capital controls!

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Erik T.'s picture
Erik T.
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It's time to SERIOUSLY study capital controls!

I'm posting this both to ask Chris Martenson to consider writing more about Capital Controls in the Martenson Insider, and also to ask the CM.com community overall for help finding relevant articles and information about the prospect of capital controls in the U.S. on the web.

I think the time has come for all of us to accept that capital controls are almost certainly in our future, and to start to seriously educate ourselves on what form they might take and how they will affect us. Specifically, it appears to me that the window of opportunity to expatriate financial assets to offshore financial accounts is going to close pretty soon, and it will behoove investors of all types and kinds to learn as quickly as they can about what might be coming and how it will affect them. I would not be surprised if a new law were passed requiring U.S. citizens to repatriate all financial assets held in offshore accounts, and I think that the side-effects of such an action on world financial markets is a subject that bears close scrutiny.

For anyone unfamiliar with the term, capital controls is a phrase used to describe policies of governments that restrict or completely outlaw the movement of assets acrosss international borders. In good times most countries realize that it benefits everyone to allow private parties to move their financial assets around the world freely. But when things get tough, countries start to fear flight of capital out of their country, so they impose laws that make it illegal to move money out of the country.

Personally, I am most interested to learn how capital controls have been imposed throughout history, with a particular focus on how these rules are applied to a country's citizens vs. outside foreign investors. I can easily see the rationale (even if I disagree strongly) where politicians might conclude that American Citizens should be prohibited from moving any financial assets out of the country. The logic goes something like we need capital to stay on our shores and it would be unpatriotic for an individual to try to protect themself from government incompetence by (for example) putting their money into gold bullion stored in a vault in Switzerland or Australia, so let's make that illegal... In this environment it would be an easy sell to the sheeple. I can just imagine Hilary going on about how unpatriotic rich fat cats are undermining national security by moving their assets offshore, and why it needs to be stopped. Most people would assume that the parties moving their investments offshore are probably the same wall street bad guys who got all those bonuses, so public sentiment could easily be developed to support a protectionist agenda of restriction on expatriation of all financial assets.

But what I really worry about most is how the U.S. will deal with foreign investors. Many Americans don't realize that the USA is the primary financial market center for THE WORLD, and that much of the money invested in U.S. markets is owned by foreigners who invest in the U.S. itself or in U.S. treasury securities because of their long-standing (even if flawed) reputation as the safest financial asset on earth. The U.S. economy is actually dependent on that foreign investment, but most citizens and sadly most politicians in Washington don't understand that relationship.

If the U.S. were ever to so much as HINT at the idea of not allowing foreigners to take their marbles and go home, (meaning threatening to impose capital controls that prohibit foreign capital from leaving), I think that such action could ignite a panic among foreign investors that could cause them all to suddenly withdraw all investment from U.S. markets, which could cripple the U.S. financial system. Policy makers ought to be smart enough to understand this risk, and they should not even think about doing something so stupid as to jeopardize loosing the very hand that is feeding the continuing U.S. financial charade: foreign investment. But they have been known to do pretty stupid things in the past, and foreign investors don't vote in the USA.

I am extremely keen to learn about how capital controls have been imposed both in USA and other countries throughout history, and specifically I want to learn as much as I possibly can about what U.S. capital controls might mean to foreign investors who currently invest in U.S. markets. References to articles in the blogosphere or better yet, a Martenson Insider piece, would be very much appreciated.

Thanks,

Erik

 

strabes's picture
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Re: It's time to SERIOUSLY study capital controls!

Erik, seems to me it's 100% certain capital controls are coming in terms of preventing expatriation of assets.  The difficult question is how they'll order repatriation and if it's avoidable.  Like, is the answer to be outside the banking system...annuity structures, LLCs, land/property? 

Sucks that "freedom" is just a word.

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Re: It's time to SERIOUSLY study capital controls!

The thing I find interesting is that I'm starting to hear a LOT more about capital controls - they are now frequently mentioned in the blogosphere. But always in the context "They could be coming to the United States!!!!!". Personally, I'd prefer one or two fewer exclamation points, and some serious discussion of the form they might take, how they have been applied throughout history, etc.

To me, this talk about "Capital controls" is akin to announcing "WE HAVE AN EMERGENCY!!!". Ok, what emergency? Where did it start and what is its current status, and what can we do about it?

Erik

 

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Re: It's time to SERIOUSLY study capital controls!

Excellent site, keep up the good work. I read a lot of forums on a daily basis and for the most part, people lack substance but, I just wanted to make a quick comment to say I’m glad I found your Forum. Thanks

==========

Shelly

mls

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Re: It's time to SERIOUSLY study capital controls!

The Sterling area had capital controls in post WWII Great Britain. There's a whole load of academic stuff on the web but don't know if anything is of value for the current situation.

One aspect of capital controls is the SWIFT data where the Europeans have not yet extended the agreement to make the data available to the US, primarily because of concerns about the privacy requirements not meeting the level required by European law for its citizens.

Another aspect is stocks that are interlisted on Toronto and US exchanges. I can buy in New York and sell in Toronto converting $US to $CDN. I suppose this ability is not restricted to Canadian citizens.  Since most of the major golds are listed in Toronto if you hold these stocks you should be able to convert then to $CAN. Maybe you'll need to pay extra to get registered portable stock certificates.

I'm sure you'll find out early enough before TPTB are able to block all the holes.

 

 

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Re: It's time to SERIOUSLY study capital controls!

Here is another link on the subject:

http://www.guardiancommodities.com/market-news/saab-stories/99-foreign-e...

As a US citizen living overseas I worry about the implications of capitol controls.  Do I move all my assets out of the US for fear of not being able to access them in my current country or do I leave some amount in the US as a hedge?  Should they stay liquid in bank accounts or are they safer in land/property where it is not so easily repatriated?  I'm not trying to act criminally, just keep my assets in the country in which I reside so they are available to me.  I think as economies and tax reciepts worldwide spiral downward there is going to be a lot of protective legislation and tax code written that will make life hard for expatriates and international investors.

Chip

 

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Re: It's time to SERIOUSLY study capital controls!

This is an area that greatly concerns me as we can see that increasingly, what we as private individuals have been able to accumulate and save are becoming targeted for theft.  The rules are changing quickly as safety nets are being cut.  Here is something new that may spread:

Greek FinMin unveils tax reform, wage policy

ATHENS, Feb 9 (Reuters) - Greece outlined on Tuesday its public sector incomes policy and a tax reform bill, as part of an EU-endorsed plan to increase state revenues and reduce its huge deficit.

"From 1. Jan. 2011, every transaction above 1,500 euros between natural persons and businesses, or between businesses, will not be considered legal if it is done in cash. Transactions will have to be done through debit or credit cards"

Greece is moving to a cashless society to kill the underground economy and to shake-down it's citizens.  Is this coming our way?

Larry


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Re: It's time to SERIOUSLY study capital controls!
DrKrbyLuv wrote:

Greece is moving to a cashless society to kill the underground economy and to shake-down it's citizens.  Is this coming our way?

Is it coming?  Indubitably!

I don't mind the kill-the-underground-economy so much as I mind the fact they're going to nickle-and-dime us for the 'privilege' of using their debit and credit cards.  Death of a thousand cuts...

Viva -- Sager

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Re: It's time to SERIOUSLY study capital controls!

 

Erik,

 

 

I'd like to mention as part of the study, the  interesting  case of Panama which does not have a central bank,   and how the country deals with capital controls.

     Fiscal policy has little room to maneuver since the treasury cannot monetize its deficit.      Plus, fiscal  policy does not influence the money supply;     if the government tries to raise the money supply during a contraction period by obtaining debt in international markets and pumping it into the system,   the banks compensate and take excess money out  of circulation and sending it offshore.   

There is no FDIC  and the absence of a central bank in Panama has created a completely market driven money supply.   Panama's market has chosen the US dollar as its defacto currency.

They must buy or obtain their dollars by producing  or exporting real goods or services.

Article 114 in the 1904 constitution reads ---

"There will be no forced fiat currency in the Republic.      Thus any individual can reject  any note that he may deem untrustworthy"

They did not return to a gold standard either.

 

Here is an example   of a country with No Central Bank,  No FDIC,    no Gold Standard,   and   no one can just print money . 

 

As a case study only  I think the situation in Panama can be a useful reference point.   

http://mises.org/story/2533

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Re: It's time to SERIOUSLY study capital controls!
Carl Veritas wrote:

Here is an example   of a country with No Central Bank,  No FDIC,    no Gold Standard,   and   no one can just print money . 

As a case study only  I think the situation in Panama can be a useful reference point.   

http://mises.org/story/2533

Carl,

Very interesting article.  I must admit it I like the sounds of it because it seems like freedom.   However, even if such a system works, I have no idea how we could get to there from here.   I wonder what the "wealth money brigade's" criticism of such a setup would be?

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Re: It's time to SERIOUSLY study capital controls!

just a small fact being missed in the Panama situation...it's basically a 51st state of the US since it's completely hostage to the $, can't engage in its own monetary policy, and is dominated by outside banks...precisely analogous to our states.

how could a country 100% depedent upon the $ and foreign bankers sound like freedom?  it's an illusion of freedom for now as long as the credit flows.  they'll learn along with Americans how unfree it is once credit stops and Soros, China, Japan attack the $.

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Re: It's time to SERIOUSLY study capital controls!

Strabes,

Do you have a real life case study for us to compare with,   one that is not an illusion and with even greater freedom? 

 

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Re: It's time to SERIOUSLY study capital controls!

Another side question to this thread for me is dual citizens, or in my case, being married to a green card holder. What I am getting at is how exactly will capital controll effect them?

I know the idea of dual citizenship to protect wealth and be used as a 'back door' has been brought up on the site before, but under the circumstance of capital controls would this be ruled out; and in everyones opinion, if someone is looking to gain dual citizenship is this something that you think should be done sooner than later?  <-- this second paragraph refers to me. I am looking into dual citizen ship to my wife's home country.

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Re: It's time to SERIOUSLY study capital controls!

that1guy-

If you're already a US citizen, I'm not sure becoming a citizen of another would help you out much as far as protecting financial assets.  Unless you renounce your US citizenship (and even that might have some special rules involving taxes), there is always the potential for the US gov't to tax, or worse sieze, your assets here or abroad. 

The primary benefit I see to having dual citizenship is simply having the right to live in that second country and not be subject to expiring visas or foreign resident restrictions.  One thing you want to look into beforehand... does the other country in question allow dual citizenship, or does it require you to formally renounce your citizenship in your old country?  The verbal oath required by naturalized citizens to the US I think involves a statement agreeing to abandon any allegiances to other nations, but you are not required to take formal action with said nations to renounce your citizenship there.  But other countries might be a different case.

My wife is a US permanent resident too, and while she wants to become a US citizen she does worry about any potential financial strings attached or difficulties should it be necessary to protect her assets overseas.  My understanding is that while you have a green card you have the exact same tax obligations as a US citizen regarding foreign income, but given the direction capital controls may go we fear it might be more difficult for a citizen to move assets.  On a related note, I think in one of Chris' podcasts he recalled a time when he inquired about opening an account at a bank in Canada.  But upon finding out he was a US citizen the bank did a 180 and said sorry; something along the lines of telling him it's more of a hassle than it's worth given the very demanding nature of US government agencies in keeping tabs on US citizens' foreign accounts.  So perhaps many capital controls will be in fact be more indirect in nature like with Chris' experience with the Canadian bank.

- Nickbert

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Re: It's time to SERIOUSLY study capital controls!

I believe it's quite straightforward for a US citizen and resident to open a bank account in Canada in either or both currencies. My informants indicate that there is a requirement to present yourself in person at a bank in Canada with your US passport (not sure whether SSN is also needed). Search US citizens accounts on any bank website.

Nickbert, just wanted to relate that my experience differed from yours.

 

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Re: It's time to SERIOUSLY study capital controls!

Here in Hong Kong is is next to impossible for U.S. citizens to open a bank account, and I have heard pretty consistently that this is the case throughout most of Asia. The situation may be different in Canada because of its proximity to the U.S. and the larger market of Americans the banks may not want to loose, but the worldwide trend is definitely moving toward foreign banks refusing business from Americans because they don't want the hassle of dealing with the US Gov't a la UBS.

I respectfully disagree with the earlier advice that it doesn't make sense to seek dual citizenship unless you intend to renounce U.S. citizenship. If at any time in the future you ever decided you wanted to give up U.S. citizenship, you would be unable to do so without becoming a stateless person, which is an extremely bad idea. Having dual citizenship would make it possible to give up your U.S. citizenship on short notice if for some reason it ever became desirable in the future to do so. And you can bet that if something changed that suddenly made you want to give up U.S. citizenship, there would probably be a very long delay seeking naturalization elsewhere because of all the other Americans reacting to whatever impetus caused you to consider the idea.

Erik

 

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Re: It's time to SERIOUSLY study capital controls!
ErikTownsend wrote:

I respectfully disagree with the earlier advice that it doesn't make sense to seek dual citizenship unless you intend to renounce U.S. citizenship. If at any time in the future you ever decided you wanted to give up U.S. citizenship, you would be unable to do so without becoming a stateless person, which is an extremely bad idea. Having dual citizenship would make it possible to give up your U.S. citizenship on short notice if for some reason it ever became desirable in the future to do so. And you can bet that if something changed that suddenly made you want to give up U.S. citizenship, there would probably be a very long delay seeking naturalization elsewhere because of all the other Americans reacting to whatever impetus caused you to consider the idea.

Erik-

If you're referring to my post, I was just saying it doesn't make sense to seek dual citizenship on the basis of financial reasons ALONE, because if you're already a US citizen then becoming a citizen of another country doesn't do anything to absolve you of any tax obligations on foreign income as you'd still be subject to it unless you renounce your citizenship.  But as far as other reasons... being able to live in another country without visa expiration concerns or immigrant resident restrictions or, as you mention, being able to relocate abroad on short notice.... I'm all for it.  Sorry if I was a little unclear. 

For those same reasons you gave I made sure my baby son had citizenship in both the US and his mother's home country.  I'm still generally optimistic about the very-long-term future of the US and am trying to do everything I can to make that future a good one, but in case things don't turn out that way (trying to be a realist here) I want to make sure he has other opportunities.  I certainly don't want to discourage any one from immigrating to another country if that's what they want; I only want to make sure they do so for the right reasons.

SteveW-

That wasn't my experience; like I said that was an anecdote Chris Martenson here mentioned on one of his podcasts.  I'm sure each bank has its own policy (formal or informal) and not all will react the same way, and I would not be the least bit surprised if he later found a Canadian bank across the street that would open an account for him.  I just figured it was worth mentioning given the recent heavy pressures from the US gov't on Swiss banks to give up account information belonging to US citizens, and that it may indicate a future trend towards an 'indirect' form of capital control, one based on heavy discouragement rather than straight-up criminalization or legal barriers.  But it is good to know that as a US citizen my business is still welcome in some banks there Smile

- Nickbert

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Re: It's time to SERIOUSLY study capital controls!
nickbert wrote:
ErikTownsend wrote:

I respectfully disagree with the earlier advice that it doesn't make sense to seek dual citizenship unless you intend to renounce U.S. citizenship. If at any time in the future you ever decided you wanted to give up U.S. citizenship, you would be unable to do so without becoming a stateless person, which is an extremely bad idea. Having dual citizenship would make it possible to give up your U.S. citizenship on short notice if for some reason it ever became desirable in the future to do so. And you can bet that if something changed that suddenly made you want to give up U.S. citizenship, there would probably be a very long delay seeking naturalization elsewhere because of all the other Americans reacting to whatever impetus caused you to consider the idea.

 

For those same reasons you gave I made sure my baby son had citizenship in both the US and his mother's home country.  I'm still generally optimistic about the very-long-term future of the US and am trying to do everything I can to make that future a good one, but in case things don't turn out that way (trying to be a realist here) I want to make sure he has other opportunities.  I certainly don't want to discourage any one from immigrating to another country if that's what they want; I only want to make sure they do so for the right reasons.

 

Thanks for the input. The bolded paragraph above is the main reason/reasons I was already looking into dual citizenship, but was wondering about the financial side of the house too. I guess you could say...."added bonus's" to getting dual citizenship. In the end, it boils down to my family. My wife loves her home, and frankly i cant blame her. If things keep going the way they are in the US then I would have absolutly no issues moving abroad, and if bad enough <--key words--renouncing my citizenship. Bottom line, if set up properly my family and I would potentially have a much better way of life outside the US than in......

 

Thanks for the input....

 

Mike

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Re: It's time to SERIOUSLY study capital controls!

A great topic and I am glad people are starting to think about these things.

In the halls of our firm we have had discussions over the possibilities of capital controls for years now.

The topics of dual citizenship have also come up.

It never hurts to have more than one option, even if you never excercise it.

Something to consider, is that a person who has more than just a US passport can open bank accounts outside the US under the second passport. This vastly improves your options as well when it comes to flexibility and liquidity in finances, especially if mixed with options in storing wealth outside your domicile country (an interesting side note, the US has a bit of a conundrum, in that it doesnt recognize gold bullion as a financial asset, according to the IRS gold is a "collectable" - if it were to recognize gold as a financial asset it would also have to admit that gold is actually money, and that is something the government is indeed loath to do)

Ultimately, capital controls hurts the little guy most, as he is then locked into a financial cell with little recourse. The wealthy always find ways around such obstacles, as we are currently seeing with wealthy citizens of Venezuela.

While you cannot expatriate funds out of Venezuela, it is possible, for example, to buy US Dollar denominated bonds through Venezuelan brokerage accounts, then sell those bonds in other markets to convert the currency, much as another poster stated in regards to stocks. I suspect this method will be locked down as well, but as with all things, if there is a demand for a particular product or service, regardless of whether its cocaine or financial services, there will always be a market regardless of how much a government protests to the contrary.

Of course at some point any action you conduct could be considered illegal by a government, so you must weigh each situation independantly.

I am certain there are many who would be branded criminals in Venezuela by their own government. It doesnt mean you would consider them criminals. When goverments start stripping freedoms, definitions of loyalty and patriotism also tend to change.

 

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Re: It's time to SERIOUSLY study capital controls!
nickbert wrote:

SteveW-

 I just figured it was worth mentioning given the recent heavy pressures from the US gov't on Swiss banks to give up account information belonging to US citizens, and that it may indicate a future trend towards an 'indirect' form of capital control, one based on heavy discouragement rather than straight-up criminalization or legal barriers.  But it is good to know that as a US citizen my business is still welcome in some banks there Smile

- Nickbert

Nickbert-

Swiss banks are secret but Canadian ones are not. Looking at the notice I got from the broker who holds my pension regarding when they will mail tax notices I found "all investors who are deemed a US citizen or US person under US law" will be issued 1099 forms for dividends, interest and proceeds of dispositions. Our banks presumably also supply the relevant forms and send electronic files to the IRS for US citizens or persons.

I also wonder how effective it would be to use our banks. I'm sure the US would annex Canada if it became necessary.

Steve

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Re: It's time to SERIOUSLY study capital controls!

Speak of the devil, I came across this today.  Most of the article talks about the hazards of hiding assets from taxes in general and isn't particularly noteworthy, but the last bit has a couple nuggets of info relevant for those moving out of the US for good:

The hazards of hiding money overseas

Quote:

You do have another option if you really don't want to pay U.S. taxes: Move abroad, take your money with you, and renounce your citizenship.

That's what some wealthy folks, including investment manager Mark Mobius, have done. They're no longer subject to U.S. taxes on most of their riches, although they are still subject to U.S. taxes on income that's generated in the United States. Along with their citizenship, they give up the right to travel freely to the States or to expect help from U.S. embassies or the U.S. military if things go wrong in their adoptive countries. The decision is irrevocable, which is why it's such a serious step.

You'll also need to come up with a reason why you moved that doesn't have to do with the IRS. If the government determines your primary reason for moving was to avoid taxes, it can tax you for up to 10 years after the move.

- Nickbert

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Re: It's time to SERIOUSLY study capital controls!

 An item about Greece imposing monetary controls was posted at Zero Hedge, by an apparently Canadian Tyler Durden (since he referenced curling), yesterday. If I understood it correctly it seemed particularly drastic by imposing taxes on both domestic and foreign bank accounts.

http://www.zerohedge.com/article/greeks-scramble-pull-out-%E2%82%AC8-billion-local-banks-greece-responds-money-control-measures

<blockquote>

Wealthy individuals may have good reasons to be concerned, however. Finance Minister George Papaconstantinou earlier this month urged Greeks with accounts abroad to repatriate their money and said the capital will be taxed at a 5% rate.  He said those who choose to keep their money abroad should declare their deposits and pay a tax of 8% for the first six months.

 

Thereafter he threatened that Greece will use all laws at its disposal, such as double-taxation agreements, to ask foreign banks for information on Greek account holders.

 

"For us this is the first step towards taxing all accounts in Greece," said the chief financial officer of a major Greek shipping company. "The line is minimum deposits here and moving all assets abroad,"

</blockquote>

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